The borrower is strongly advised to consult his/her loan servicer for any adverse findings that may be discovered in an examination of his/her loan modification agreement.
The Home Affordable Modification Agreement that is the subject of this examination was among the documents that were presented for chain of title examination on November 9, 2021. This report and the accompanying Amortization Spreadsheet were prepared on July 18, 2022.
SUMMARY
1. The subject loan was granted by America’s Wholesale Lender on March 15, 2007 for
$650,000.00 for 360 months.
2. The loan was modified with Bank of America, NA effective August 1, 2013 for $774,608.75
for 285 months with a graduated rate of interest starting at 2.000% p.a. for the first 36
months, 3.000% p.a. for the next 12 months and 3.375% p.a. for the remaining 237
months. Monthly payments for principal and interest are $2,345.71 starting on August 1,
2013, $2,744.51 starting on August 1, 2016, and $2,899.37 starting on August 1, 2017.
3. The lender has charged the borrower twice for interest for the period July 1 to 31, 2013
which amounted to $1,291.01; first, by compounding it with the new principal balance as
of August 1, 2013 and again, by making it a part of the first installment that was due also
on August 1, 2013.
4. There was a gap of six years and five months between the granting of the original loan
and the effectivity date of the modification, yet the balance of the modified loan represents
an increase of $124,608.75 or 19% over the original loan.
The modification agreement states that that the balance of $774,608.75 includes all
amounts and arrearages that will be past due as of the modification effectivity date. This
includes deferred interest, fees, charges, and other costs.
The balance of the loan prior to the modification is not stated in the agreement. A detailed
accounting of the items that are referred to as amounts and arrearages that will be past
due as of modification effectivity date that are included in the modified principal balance is
not part of or attached to the agreement.
5. The total amount that the borrower will have to pay under the modification agreement is
$1,239,259.31 or 160% of the modified principal balance. This total is not disclosed in the
agreement. It includes the balloon payment of $434,728.94.
6. The agreement contains a provision that signifies that this loan transaction does not
partake of the nature of a new loan or a refinancing which is believed to be the basis for
the lender for not furnishing the borrower a disclosure statement under the Truth-in-
Lending Act (Regulation Z).
No explanation was found as to why a loan transaction that is not a refinance and which
only involves a reduction in annual percentage rate does not fall within the scope of the
purpose of the law which is to “promote the informed use of consumer credit by requiring
disclosures about its terms and cost.”
MAIN REPORT
Premises
The subject loan was granted on March 15, 2007 by America’s Wholesale Lender for $650,000.00. The term was for 360 months to mature on April 1, 2037. The promissory note was not presented in the examination.
The borrower entered into a Loan Modification Agreement with Urban Settlement Services, LLC as Attorney-in-Fact for Bank of America, NA as successor by merger to BAC Home Loans Servicing, LP that took effect on August 1, 2013. The modified amount is $774,608.75 and the term is 285 months. The maturity date remains on April 1, 2037.
The modified balance was levied a graduated rate of interest at 2.000% p.a. for the first 36 months, 3.000% p.a. for the next 12 months and 3.375% p.a. for the remaining 237 months. Monthly payments for principal and interest are $2,345.71 starting on August 1, 2013, $2,744.51 starting on August 1, 2016, and $2,899.37 starting on August 1, 2017.
The mortgaged property is in Sherman Oaks, California. This agreement was recorded in Los Angeles County on March 27, 2007.
America’s Wholesale Lender was the trade name for Countrywide Home Loans, Inc., a subsidiary of Countrywide Financial.
Countrywide Financial was acquired by Bank of America, NA in 2008.
Basic Features
The parts of the agreement that contain provisions relevant to this examination are reproduced below.
Section 3 of the agreement states that the modification effectivity date is August 1, 2013 and the maturity date is April 1, 2037.
Section 3A states that the modified principal balance includes all amounts and arrearages that will be past due as of the modification effectivity date. This includes deferred interest, fees, charges, and other costs. The amount is $774,608.75.
The first paragraph of Section 3B states that interest at 2.000% p.a. will begin to accrue on July 1, 2013 and the first monthly payment is due on August 1, 2013.
The schedule in the second paragraph of Section 3B shows the stages of graduated interest rates, the corresponding amounts of monthly instalments and the number of payments and the due date for the first payment for each stage.
The third paragraph of Section 3B states that the amounts of monthly payments were computed based a period of 480 months whereas the term of the agreement is only for 284 months. This resulted in smaller amounts of monthly amortizations than what would have been had the computation was based on the actual term of the agreement.
The effect on payments is that a certain balance would be left unpaid on maturity date. The agreement states that the amount is $434,728.94 which is subject to a balloon payment.
Examiner’s Comments
Double-Charging of Interest
1. The First Instance
1.1. The Amount Charged
Section 3A of the agreement states that the new principal balance includes all
amounts and arrearages that will be past due as of the modification effectivity date
including unpaid and deferred interest, fees, charges, and other costs. The new
principal balance of $774,608.75 as of August 1, 2013 therefore includes interest for
the month of July, 2013.
Any unpaid interest that has been added to or compounded with the principal always
includes the interest for the month immediately prior to the compounding. This is
because payment for any arrears is applied first, to fees and/or costs and then to past
due interest and last, to past due principal. As for interest, payment is first applied to
the earliest period or month/s wherein interest is unpaid thereby leaving the interest
for the latter month/s still unpaid if the payment is not sufficient to cover all unpaid
interest. Thus, if any unpaid interest will be added to the principal, this interest will
always include that of the month immediately prior to the compounding. In this case,
that month is July, 2013.
The first paragraph of Section 3B of the agreement states that interest at 2.000% p.a.
will begin to accrue on July 1, 2013.
Thus, the amount of $774,608.75 is the sum of (a) the balance of the loan before the
interest for July, 2013 was added to it plus (b) the interest for July, 2013 which is
2.00% p.a. (0.1667% for one month; 0.001667 in decimal terms) of the balance
before the addition.
The above computation shows that the amount of $1,289.12 as unpaid interest for
the month of July, 2013 was added to the loan balance in order to arrive at the
balance as of August 1, 2013 of $774,608.75 (This computation assumes that the
balance of $773,319.63 already includes the unpaid fees, charges, and other costs).
1.2. The Date of Charging
The first instance of double-charging occurred on the effectivity date of the
agreement when the interest for the month of July, 2013 was added to the principal.
The agreement states that its effectivity date is August 1, 2013. It was signed by the
borrower on August 8, 2013 and by the lender’s representative on August 29, 2013.
1.3. The Date of Payment
By including all amounts and arrearages in the new principal balance, the status of
the loan is updated to “current”. The unpaid interest as of August 1, 2013 is now
considered paid, but instead of the borrower’s cash being depleted, his debt is
increased. This arrangement was initiated by the lender.
2. The Second Instance
2.1. The Amount Charged
Interest in the amount of $1,291.01 is the product of multiplying $774,608.75, the
amount of modified principal, by 2.00% (or 0.020), the rate of interest per annum and
dividing the result by 12 months. This amount is affirmed by the lender through the
Amortization Spreadsheet, as demonstrated below:
(This spreadsheet was prepared using the amounts specified by the lender in the
agreement. The application of these amounts carries the implication that the
payments will be made by the borrower as scheduled in the agreement.)
a. The amount of monthly installment of $2,345.71 as specified in the agreement,
includes the interest of $1,291.01 for the first month as computed above, leaving
$1,054.70 to reduce the principal. The payment of $1,054.70 is then deducted
from $774,608.75, the balance of the modified principal, leaving a balance of
$773,554.05 (see Amortization Spreadsheet, Month No. 1).
b. In the second month, the same amount of monthly installment of $2,345.71
includes the interest of $1,289.26 for the second month ($773,554.05 multiplied
by 0.020, divided by 12), leaving $1,056.45 to reduce the principal. The payment
of $1,056.45 is then deducted from $773,554.05, the balance from the first month,
leaving a balance of $772,497.60 (See Amortization Spreadsheet, Month No. 2).
c. The same procedure in paragraphs 2.1.a. and 2.1.b. above is repeated from
Month No. 3 until the end of the term of the agreement while taking into
consideration the changes in interest rate and amount of monthly instalments
which are 2.000% p.a. and $2,345.71, respectively for the first 36 months, 3.000%
p.a. and $2,744.51 starting August 1, 2016 and 3.375% p.a. and $2,899.37
starting August 1, 2017.
d. Finally, the affirmation by the lender of the amount of $1,291.01 comes at the end
of the amortization spreadsheet wherein, after the repeated application of the
procedures of computation stated in this paragraph on the amounts specified by
the lender in the agreement, the loan will retain a balance of $434,730.31 which,
as stated in the agreement is subject to balloon payment (see Amortization
Spreadsheet, Month No. 285).
The proof of the affirmation is that the loan will retain the balance of $434,730.31.
The agreement states that a balance of $434,728.94 is subject to balloon payment
on maturity date. (There is a rounding-off difference of $1.37.) There would not
have been such affirmation had this computation resulted in a lesser balance of
material amount. Thus, the lender really intended to include the interest for the
month of July, 2013 in the August 1, 2013 installment.
2.2. The Date Charged
The Amortization Schedule is based on the dates and amounts stated in the
agreement. Thus, the effectivity date stated in Paragraph 1.2. also applies.
2.3. The Date of Payment
The second payment occurred when the borrower paid the first monthly installment.
This installment is assumed to have been paid unless the lender can show proof that
its non-payment is one of the causes of its current collection efforts and/or action to
foreclose.
3. Conclusion
In the first instance of interest charging, interest for the month of July, 2013 in the amount
of $1,289.12 was added by the lender to the loan balance in order to arrive at the modified
balance of $774,608.75 as of August 1, 2013. This interest was paid by the borrower on
August 1, 2013 upon its addition.
In the second instance of interest charging, the lender made the interest for July, 2013
amounting to $1,291.01 part of the first installment that was due on August 1, 2013.
Payment occurred when the borrower paid the first monthly installment. The first
installment is assumed to have been paid because nine years have passed since the first
installment became due and the loan is still current.
In loan modifications, unpaid interest as of the effectivity date of the modification
agreement is added to the principal in order to arrive at the modified balance. A double-
charging of interest occurs when the first monthly payment is made to fall due on
modification effectivity date. The interest double-charged will be for the month immediately
preceding the effectivity date of the agreement.
This double-charging can therefore be avoided by moving the due date of the first
payment one month after effectivity date. In doing so, the interest component of the first
payment would be the interest covering the month starting from the date of loan
modification or loan granting up to the day immediately before the due date of the first
payment. This is the usual practice for new loans and some loan modifications and reflects
the fact that the lenders and servicers knew how to avoid double-charging their borrowers.
Comparison
The features of the modified loan are herein compared with those of the original loan.
Examiner’s Comments
There was a gap of six years and five months between the granting of the original loan and the effectivity date of the modification, yet the balance of the modified loan represents an increase of $124,608.75 or 19% over the original loan.
The modification agreement states that that the balance of $774,608.75 includes all amounts and arrearages that will be past due as of the modification effectivity date. This includes deferred interest, fees, charges, and other costs.
The balance of the loan prior to the modification is not stated in the agreement. A detailed accounting of the items that are referred to as amounts and arrearages that will be past due as of modification effectivity date, total amount not specified, that are included in the modified principal balance is not part of or attached to the agreement.
Payments
The total amount that the borrower will have to pay under the modification agreement is computed as follows.
Examiner’s Comments
The total amount that the borrower will have to pay under the modification agreement is $1,239,259.31 or 160% of the modified principal balance. This total is not disclosed in the agreement. It includes the balloon payment of $434,728.94 which accounts for 56%.
See Amortization Spreadsheet.
Disclosure
The following provision signifies that this loan transaction does not partake of the nature of a new loan or a refinancing which is believed to be the basis for the lender for not furnishing the borrower a disclosure under the Truth-in-Lending Act.
12 CFR § 226.20 on Subsequent Disclosure Requirements states that “a refinancing occurs when an existing obligation is satisfied and is replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer” and that “a reduction in the annual percentage rate with a corresponding change in the payment schedule” “shall not be treated as a refinancing” (abridged).
On the other hand, 12 CFR § 226.1 states that “the purpose of this regulation is to promote the informed use of consumer credit by requiring disclosures about its terms and cost.”
Examiner’s Comments
No explanation was found as to why a loan transaction that is not a refinance and which only involves a reduction in annual percentage rate does not fall within the purpose of the scope of the law which is “to promote the informed use of consumer credit by requiring disclosures about its terms and cost.”
Undeniably, some borrowers who are more familiar with ways of institutionalized lending would not need as much effort and assistance as others would in order to be fully informed of the costs of their respective uses of credit. In other words, the need to be furnished such quality of credit information as would inform a borrower about the terms and cost of his/her credit depends on the borrower. The need to be fully informed is not dictated by the type of credit, or whether a loan transaction is a refinance or a modification.
Moreover, the lack of disclosure could have left the borrower unaware that (a) the modification balance is 19% higher than the original loan despite the gap of six years and five months between the granting of the original loan and the effectivity date of the modification, and (b) the total amount that he will have to pay on the loan under the modification agreement is 160% of the modified balance. The balloon payment represents 56% of this total.
AMORTIZATION SPREADSHEET
Monthly amortizations based on the agreement are shown in detail in a spreadsheet. The amounts do not include payments intended for the escrow account. Selected pages of the spreadsheet are shown in the following pages. A complete copy is attached to the printed report.
Line 1 shows the start of monthly amortizations in equal amounts to be applied to interest based on the diminishing balance of the principal and the principal. The interest rate and amount of monthly instalments for the first 36 months are 2.000% p.a. and $2,345.71.
The first payment that became due on August 1, 2013 covered (a) interest for the period July 1 to 31, 2013, based on the balance of $774,608.75 at 2.000% p.a.; and (b) a reduction of the balance of $774,608.75 by the remainder of $2,345.71 minus (a).
Page 1 shows that, assuming the monthly instalments have been paid as scheduled, after the 30th payment, of the monthly instalments totalling $70,371.30, $37,953.75 or 53.93% has been applied to interest and $32,417.55 has reduced the balance by 4.19%.
Line 37, page 2 shows the start of monthly amortizations for the next 12 months starting on August 1, 2016. The interest rate and amount of monthly instalments are 3.000% p.a. and $2,744.51.
Line 49, page 2 shows the start of monthly amortizations for the remainder of the term starting on August 1, 2017. The interest rate and amount of monthly instalments are 3.375% p.a. and $2,899.37.
Page 2 also shows that, assuming the monthly instalments have been paid as scheduled, after the 60th payment, of the monthly instalments totalling $152,172.12, $91,552.64 or 60.16% has been applied to interest and $60,619.48 has reduced the balance by 7.83%.
Page 3 shows that, assuming the monthly instalments have been paid as scheduled, after the 90th payment, of the monthly instalments totalling $239,153.22, $150,675.89 or 63.00% has been applied to interest and $88,477.33 has reduced the balance by 11.42%.
Line 104, page 4 shows that, assuming the monthly instalments have been paid as scheduled, as of March 1, 2022, the loan had a balance of $672,305.69. As of this date, interest has been paid up to February 28, 2022.
Page 4 also shows that, assuming the monthly instalments have been or will be paid as scheduled, after the 120th payment, of the monthly instalments totalling $326,134.32, $207,350.22 or 63.58% has been or will be applied to interest and $118,784.10 will reduce the balance by 15.33%.
Page 7 shows that, assuming the monthly instalments have been or will be paid as scheduled, after the 210th payment, of the monthly instalments totalling $587,077.62, $360,430.53 or 61.39% has been or will be applied to interest and $226,647.09 will reduce the balance by 29.26%.
Page 10 shows that, assuming the monthly instalments have been or will be paid as scheduled, after the 285th payment on April 1, 2037, the maturity date, of the monthly instalments totalling $804,530.37, $464,651.93 or 57.75% has been or will be applied to interest and $339,878.44 will reduce the balance to $434,730.31, which, the agreement states, is subject to balloon payment. The agreement states that the balance is actually $434,728.94. There is a rounding-off difference of $1.37.
End of article.
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