A New Jersey judge, who happens to have the last name of Escala, awarded an elderly borrower roughly $34,000 in damages and attorney fees over a refinance that only marginally dropped her payment and did little else. The woman was elderly and originally wanted to cash out some equity. As the loan process continued, what she got was a rate and term refinance (no cash to her) that dropped her payment a paltry $63.00 or about 3% off her prior payment and dropped her interest rate from 5.6% to 5%. The issue was that the lender earned more than $11,000 on the loan so in light of the evidence the judge decided that the lender acted mostly in their best interest and not in the interest of their client. Another key fact is that the borrower defaulted on the new loan after only 6 payments. The lender eventually did foreclose on the house and the judge didn’t reverse that but they did have to pay the borrower a penalty and her lawyer fees.
We are all for stopping lender and elder abuses but I’ve also had quite a few borrowers who entering their retirement years would want any payment reduction they could get to free up cash for living expenses. We caution strongly against refinancing when the relative gain is so small and would very hesitantly entered into this type of transaction. I don’t see this as a big victory for the homeowner. From the looks of it, she would have defaulted on her mortgage soon enough since she was not able to keep paying even a reduced mortgage. I think the biggest lesson here is to make sure the homeowner is well informed of the decision they are making and if the benefit seems marginal, make sure its what they really need and want. The lender in this case didn’t have a true relationship with the borrower, they “justified” their behavior and did put their interest ahead of the borrowers. You want a lender you meet face-to-face who, working together, can determine your best financial interests and how to meet them.