The Dual Loan Scam

December 4, 2000, Updated September 31, 2002

"We just built a house and arranged a 30-year fixed rate mortgage (FRM) for $350,000 at 7.875% (no points) with a bank. A mortgage broker has proposed that I scrap this deal and go with him. He will provide the same loan and rate, and give me $1500 in cash. To do this, he wants to write a 9.5% loan, which would be replaced by a 7.875% loan after two payments, with no closing costs. The extra payments amount to $400, so I would net $1100, and I would also save the closing costs of about $4,000. This seems too good to be true."

It’s too good to be honest. The broker wants to scam the lender and make you a party to it.

A lender who offers a 30-year FRM at 7.875% and zero points will pay about 4 points for a 9.5% loan. (One point is 1% of the loan amount paid upfront). Lenders know that 9.5% loans have relatively short lives because borrowers refinance them as soon as they can. Nonetheless, the lender will recover the 4 points through the above-market rate in less than 3 years, and most such loans last longer than that.

Or rather, they last longer unless there is a scam to pay off quickly by pre-arrangement, as in your case. The lender pays $14,000 (4% of $350,000) for this loan. If the loan is paid off in full after two monthly payments, the lender collects excess interest -- the interest on the 9.50% loan less the interest on a 7.875% loan -- of less than $1,000.

The broker gets the $14,000. From this, he pays you $1500 and absorbs your closing costs of $4,000, netting himself $8,500. If you participate, you are a party to the scam. And having read this, you can’t plead that you are an innocent party.

Update of September 31, 2002

I have recently run into a more elaborate version of this scam involving successive refinancings. A borrower agrees with the scamming broker to refinance every 4 months at a high rate, sharing the rebate from the lender. On a large loan, the rebate is substantial, and the borrower can spend it or use it to pay down the loan balance. The broker spreads the deals around among a number of lenders so that no one of them suspects what is going on.

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