Two states that have laws against prepayment penalties are Texas and Vermont. These are good laws considering that many homeowners who default on their loans do so as a result running into financial trouble and losing their home because they could not pay off their loan early when they had the chance. Prepayment penalties discourage homeowners from making sound financial decisions that can affect their future and long-term financial security.
The biggest problem with prepayment penalties are that many of them are nondisclosed. That is, the mortgage company doesn’t tell the borrower about the penalty during the document preparation process. As a result, many homeowners find themselves paying huge penalties when they sell their homes and that may cause them financial hardship to such a degree that they can’t afford another home.
If you find yourself trying to sell your home and have been notified of a prepayment penalty, request a forensic loan audit. If the mortgage company has violated any federal law it may be in their best interest to waive your prepayment penalty or modify your loan to lessen or do away with it altogether.
A pooling and servicing agreement outlines the rights and responsibilities of the trustee, servicer, and others involved in a pool of mortgage loans. So where do you find it? I’ll assume that you don’t know the name of the securitized pool of loans that you are looking for (otherwise it would quite simple).
Follow these steps to locate a pooling and servicing agreement:
- Go to http://www.sec.gov and look for a blue tab labeled “Filings & Forms”. Click on Search for Company Filings.
- Click the link labeled “Company or fund name, ticker symbol, CIK (Central Index Key), file number, state, country, or SIC (Standard Industrial Classification)”
- Type the name of the mortgage company in the Company Name field and click the Find Companies button>
- If you know the year your loan was serviced (and you should), look for an entry with that year in the title and click on that entry’s document number.
- Look for the document titled Prospectus and open it in HTML or Text.
- Look for the Pooling and Servicing Agreement section in the Table of Contents. In that section you’ll find information on closing dates and cut offs for the pool of loans in question. Other information in the Pooling and Services Agreement includes who has the right to modify a loan or negotiate with the homeowner. You’ll want to get to know that person.
- If this isn’t the right document for the loan you are attempting to modify, repeat these steps until you find the right Pooling and Servicing Agreement. It’s tedious work, but well worth it.
Get more information on the loan audit process at U.S. Lender Audit.
The Truth In Lending Act of 1968 gave every consumer of mortgage products a right to rescind their loan under certain conditions. A rescission is a voiding of your contract. Straight from the Act itself:
When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void, and the consumer shall not be liable for any amount, including any finance charge.
Your right to rescission is absolute. There are certain and specific conditions that allow a borrower to rescind their loan. Furthermore, your lender must include a right to rescind disclosure statement with your closing documents - two copies.
The only time you do not have a right to rescind your loan is when you waive that right. From the Act:
The consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency. To modify or waive the right, the consumer shall give the creditor a dated written statement that describes the emergency, specifically modifies or waives the right to rescind, and bears the signature of all the consumers entitled to rescind.
It’s important to realize that if you exercise this waiver then you are giving up any future rights to rescind your loan. That means if you have just cause to rescind then you can’t. Before you sign a waiver of your rights, get a forensic loan audit to determine if your lender has violated any local, state, or federal laws with regard to your loan. If so then you’ll want to rescind your loan and/or seek to modify it.