Have you ever been contacted by a lender offering to refinance your mortgage, even though you haven’t requested it? If so, you may have been the target of a practice known as “loan churning.” This deceptive tactic can cost borrowers thousands of dollars in unnecessary fees and charges, leaving them in a worse financial position than before.
What is Loan Churning?
The practice of repeatedly refinancing a loan with little to no financial benefit to the borrower is known as “loan churning.” Usually, the lender adds additional closing costs and fees to the initial principle amount, increasing the borrower’s total debt.
How Does Loan Churning Work?
Lenders may use various tactics to convince borrowers to churn their loans:
- Offering a lower interest rate: This may seem like a good deal, but the new closing costs and fees can offset any savings from the lower rate.
- Promising cash back: Lenders may offer a cash incentive to refinance, but this cash comes from the loan proceeds, meaning you’re essentially borrowing money to pay yourself.
- Pressuring borrowers to refinance: Lenders may use aggressive sales tactics to convince borrowers to refinance, even if it’s not in their best interest.
Why is Loan Churning Bad?
Loan churning can have serious financial consequences for borrowers:
- Increased debt: Each time you refinance, you’re adding new closing costs and fees to your loan balance, increasing your overall debt.
- Higher interest costs: Even if the new interest rate is lower, the additional fees can result in higher interest costs over the life of the loan.
- Damaged credit score: Frequent refinancing can negatively impact your credit score, making it more difficult to qualify for future loans at favorable rates.
How to Avoid Loan Churning
If you’re considering refinancing your mortgage be cautious of the following red flags:
- High closing costs and fees: If the closing costs and fees are excessive, it’s a sign that the lender may be trying to churn your loan.
- Short-term benefits: If the refinance offer only provides short-term benefits, such as a lower interest rate for a limited time, it’s likely not a good deal.
- Pressure from the lender: If the lender is pressuring you to refinance, it’s best to walk away and consider other options.
Recall that you should only think about refinancing if it offers a definite financial advantage, like a lower interest rate, a shorter loan term, or access to equity. See a reputable financial advisor or mortgage expert if you’re not sure if a refinance offer is the best option for you.
Protect yourself from loan churning by being informed and cautious. Making educated financial decisions regarding your mortgage is possible if you are aware of the strategies employed by lenders and the warning signs to look out for.
Understanding Churning
Churning may result in substantial losses in the clients account. Even if the trades are profitable, they may generate a greater than necessary tax liability for the client.
In an effort to maximize commissions from transactions, a broker engages in overtrading by engaging in excessive buying and selling of stocks on behalf of investors.
A financial firm’s broker may occasionally be rewarded for placing recently issued securities that were guaranteed by the company’s investment banking division. For instance, brokers may be eligible for a bonus of 10% of the total amount purchased if they purchase a specific number of shares on behalf of their clients. Such incentives may not be offered with the investors best interests in mind.
Churning is hard to spot. When a broker’s frequency of trades becomes unproductive for a client’s investment goals, raising commission costs without producing noticeable results over time, an investor may conclude that the broker has been overtrading.
How to Prove Churning
Churning is serious financial misconduct, but its not easy to prove. Your best defense is to pay careful attention to your portfolio.
- You have the option to ask your broker to consult with you beforehand on any buy or sell transactions. When you first open the account, you have the option to expressly sign that, or you can choose not to.
- Regardless of whether you discuss transactions with your broker beforehand, all parties will send you a written notice. Thats a federal requirement. Should you receive notifications daily or weekly, you may be a victim of churning.
- This is especially true if annuities, insurance products, or mutual funds are being transacted in. It is not advisable to trade these kinds of investments often.
- Examine the amount of commissions you are paying when you go over your monthly statements. High total commissions mean less profit for you.
You can report your broker to the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC) if you believe they are churning.
What you need to know about mortgage churning
FAQ
What is churning in mortgage lending?
What is the practice of churning also known as mortgage?
What is chunking in mortgage?
What is considered a predatory mortgage loan?
What are the most common mortgage churning scenarios?
The most common churning scenario: Soon after a buyer closes on a home, rival lenders offer to refinance the mortgage. The poachers offer the unsuspecting borrower a lower interest rate, but they have to pay closing costs all over again, and perhaps some additional fees — so there is little or no real savings.
What is churning a mortgage?
The process whereby a lender solicits an existing borrower to refinance their current mortgage with little to no financial benefit to the borrower with a different or the same investor. Churning involves repeatedly refinancing a loan with additional closing costs and fees on top of the original principal amount. Is loan stacking a crime?
What is churning in brokerage?
Churning is excessive trading of assets in a client’s brokerage account in order to generate commissions. Churning is illegal and unethical and is subject to severe fines and sanctions. Brokerages may charge a commission on trades or a flat percentage fee for managed accounts.
What does churning mean?
Churning is the illegal and unethical practice by a broker of excessively trading assets in a client’s account in order to generate commissions. While there is no quantitative measure for churning, frequent buying and selling of stocks or any assets that do little to meet the client’s investment objectives may be evidence of churning.