Because lenders usually lock only the rate and points, the APR (which includes fixed-dollar fees as well as points), is never locked. The Federal Reserve could fix this problem by declaring that a rate lock is also an APR lock.

Why Isn't the APR Locked With the Rate?
December 6, 2004, Revised January 5, 2008, August 20, 2010, Reviewed February 6, 2011

Because mortgage lenders usually lock only the interest rate and points, the APR (which includes fixed-dollar fees as well as points), is never locked. The Federal Reserve could fix this problem by declaring that a rate lock is also an APR lock.

The APR Never Gets Locked


“Recently I locked my $100,000 mortgage at an interest rate of 5.75% and 1 point, with an APR of 5.94%. Now the rate is the same, but I’m told that the APR is 5.99%. I don’t understand this, how can the rate be locked but not the APR? When I asked the lender about it, he spoke to me like I was an idiot, he said yes, of course the APR can change…What good is the Truth in Lending statement if the APR can change all the way to closing? I close in 2 weeks, so I feel like I’m stuck.”

You are caught up in one of the most perplexing failures of our mortgage disclosure system, one the Federal Reserve could fix easily but doesn’t.

The annual percentage rate or APR is a single summary measure of the cost of the loan to the borrower. Think of it is as the interest rate adjusted upward for all upfront fees paid to the lender. (See Annual Percentage Rate Simplified). The APR of 5.94% quoted to you when you locked included fees of about $2,000, whereas the second APR of 5.99% included fees of about $2500. The lender jacked up the fees by about $500 after you locked.

Lender fees are of two types, those expressed as a percent of the loan, called points, and those stated in dollars. You paid 1 point, which on a $100,000 loan is $1,000. Points are locked with the rate, so that $1,000 did not change between the first APR and the second.

Fixed dollar fees, which were $1,000 at the time of the first quote, are not locked unless the lender elects to lock them, as some do (see below). Your lender does not lock fixed dollar fees, and raised them by $500 between the lock date and the date of your recent statement.

This is inexcusable, a stain on the Federal Reserve which administers Truth in Lending. It could fix the problem simply by ruling that a lender locking the price also locks the APR. It is also a stain on the mortgage banking trade groups, which don’t press the Federal Reserve to do this.

How to Avoid the Problem


Borrowers avoid the problem if they deal with a mortgage broker, because brokers won’t deal with lenders who play games with their fees. Brokers won’t tolerate a scam that puts money only in the lender’s pocket.

Borrowers can also avoid the problem by only dealing with lenders who guarantee their fees and show them on their web sites. This includes 7 Upfront Mortgage Lenders. Others will if borrowers insist.

With only two weeks before you close on a house purchase, it is too late to change lenders. However, you have one strong card to play: the real estate sales agent, who referred you to this lender.

Lenders often live and die through their referrals, or lack of referrals, from sales agents. The last thing a lender wants is a client who causes problems for the agents who refer customers to them. That could mean the end of the referrals.

If I were in your shoes, I would inform the lender that I expected a settlement statement at closing with the fees shown on the statement you received when you locked. If you don’t get it, you are going to demand that the sales agent who recommended the lender, pay the shortfall. Given the choice between losing $500 and losing a source of referrals, the lender will almost certainly give up the money. Odds are that the lender will also stop treating you like an idiot.

Help From a New Good Faith Estimate (GFE)

The GFE that became effective January 1, 2010 freezes the lender charges on the GFE. See The New GFE Will Help Borrowers. This should largely solve the problem of lender fee escalation. 

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