What is Churning in Mortgage?

Churning in mortgage refers to the unethical practice of mortgage lenders aggressively soliciting existing borrowers to refinance their current mortgage, often with little to no financial benefit to the borrower. It involves repeatedly refinancing a mortgage loan and charging the borrower extra fees and costs each time, without actually saving them money.

How Does Mortgage Churning Work?

There are a few common tactics lenders use to churn mortgages:

• Offering a lower interest rate: This may seem appealing, but the lender tacks on new closing costs and fees which can negate any savings from the lower rate.

• Promises cash back at closing: The cash often comes from the loan, which means the borrower is borrowing money to pay themselves back.

• High pressure sales tactics Aggressive lenders will try hard to convince borrowers to refinance, even when it is not in their best interest

After closing on a home loan, borrowers will start receiving calls and offers from other lenders to refinance their mortgage. The lenders will promote a new lower rate, but fail to mention the thousands of dollars in new origination fees and closing costs the borrower will have to pay all over again.

There may be some initial savings from the lower rate, but over the long run the additional costs outweigh any benefits. The borrower ends up deeper in debt with a higher loan balance.

Why is Mortgage Churning Bad?

There are several reasons why mortgage churning is predatory and harms borrowers

• More debt: Each refinance adds fees and closing costs to the loan balance, which makes the total amount of debt higher.

• Higher interest costs: Even if the rate is lower, extra fees can mean higher total interest paid over the loan term.

• Damaged credit score: Frequent refinances can hurt credit scores, making future loans more expensive.

• Loss of equity: Repeated refinances chip away at equity built up in the home.

• Prepayment penalties: Some loans have penalties for paying off the balance early.

Essentially, mortgage churning provides little benefit for the borrower while costing them more in fees and interest. Unethical lenders profit from the extra loan origination charges.

Examples of Mortgage Churning

Here are some examples of mortgage churning in practice:

• Jane takes a $200,000 30-year fixed rate mortgage at 4.5% interest. A month later, another lender offers to refinance her to a 4.25% rate but charges $5,000 in fees. Over the full term, Jane will not save much with the lower rate due to the fees.

• Bob refinanced his mortgage twice in one year because different lenders gave him better deals. Even though he paid $10,000 in closing costs, his rate only went down by 0. 25%.

• Sam was offered $2,000 cash back to refinance his mortgage, but the cash was built into the new loan amount, leaving him with higher debt.

• In two years, Mary’s lender got her to refinance twice, each time to a lower rate. The extra fees outweighed the temporary rate drops.

In each case, excessive refinancing resulted in higher costs without significantly helping the borrower.

How to Avoid Mortgage Churning

Borrowers can protect themselves from predatory mortgage churning by:

• Being wary of too good to be true offers and high pressure sales tactics.

• Considering the overall costs, not just the rate or upfront cash.

• Calculating the break even point to see if savings exceed fees.

• Reviewing loan terms to check for prepayment penalties.

• Refusing to refinance within the first year of a mortgage.

• Working with reputable lenders and being cautious of deals that seem rushed.

• Consulting with a financial advisor to determine if refinancing truly benefits their situation.

Refinancing can make sense in some cases, for instance if rates drop significantly or major life changes occur. But borrowers should be wary of lenders churning their loans solely for extra profits through repeat fees. Avoiding mortgage churning means saying no to refinancing that provides little clear financial advantage.

Is Mortgage Churning Illegal?

While mortgage churning is unethical, it is often not illegal per se. Lenders are usually careful to follow the letter of the law even if refinancing is not in the borrower’s best interests.

However, some practices related to churning may be illegal:

• Deceptive advertising: It is illegal to blatantly misrepresent potential savings from refinancing.

• Loan stacking: Adding fees onto a loan balance without the borrower’s knowledge is fraudulent.

• Kickbacks: Lenders cannot receive kickbacks for churning loans.

• Loan splitting: Separating one loan into multiple loans to increase fees is illegal.

So while churning itself is generally not explicitly illegal, lenders who engage in deception, fraud, or kickbacks may face legal consequences if caught and prosecuted.

How to Report Mortgage Churning

If borrowers feel they have been the victim of predatory churning, they can report the lender to several regulatory bodies:

• Consumer Financial Protection Bureau (CFPB): Federal agency that investigates lending abuses.

• State Attorney General: Local state authorities who pursue consumer protection cases.

• Better Business Bureau (BBB): Non-profit consumer watchdog group.

• Federal Trade Commission (FTC): Investigates unfair business practices.

• Financial Industry Regulatory Authority (FINRA): Regulates brokerages and exchanges.

While reporting churning is unlikely to recoup the borrower’s costs, it can help stop the lender from harming other consumers. With persistence and evidence, regulators may pursue enforcement actions against the worst actors.

The Bottom Line on Mortgage Churning

Mortgage churning provides little benefit for borrowers while costing them thousands in repeat fees and inflating their loan balances. Responsible borrowers should be cautious of aggressive refinance offers and calculate their overall costs before agreeing. While not always illegal, churning is a deceptive practice that consumers should avoid falling victim to. Being an informed borrower is the best way to defend against predatory mortgage churning.