In the world of mortgages, there are primarily three parties at work: the lender (usually a bank), the borrower (the individual who takes out the mortgage), and the broker (an intermediary who guides the borrower through the mortgage-obtaining process). While using a broker is not necessary to acquire a mortgage, more and more consumers are utilizing them because the mortgage industry can seem confusing and competitive at times. However, as with all businesses, the goal is usually to make a profit, and brokers are no different. While the vast majority of brokers operate legally and ethically and truly wish to aid their customers, some brokers are concerned only with attaining as much money as possible, and will do anything to drain the lender or the borrower of their money. This leads to many different types of mortgage scams, one of which being the "dual loan" scam.
In a dual loan scam, the borrower first arranges a mortgage with a lender, usually a bank. Shortly thereafter, the borrower will be approached by a broker, who claims to have a better deal: scrap the current mortgage and instead go through the broker, who will provide the same loan at the same interest rate, but also save the borrower thousands of dollars in closing costs and even give them up to several thousand dollars in cash. How would this work?
In this scenario, the broker would arrange a loan with the lender at a higher interest rate, and in exchange for the higher interest rate, the bank will pay "negative points:" a percentage of the total loan amount. The bank pays negative points because it knows it will eventually make more money back from the higher interest rate. For example, perhaps a bank will offer a loan of $200,000 at 7% with no negative points, or a $200,000 loan at 9% with 5 negative points. These five negative points (five percent of the total loan amount, or $10,000) will go to the broker who arranges the new loan with the higher interest rate. The broker will then pay off the entire $200,000 in only a few payments, meaning that the bank will collect excess interest of less than $1,000. The broker will then pay you a percentage of the negative point profit, cover the closing costs, and pocket the rest. That same broker will then rearrange the original, no-negative-point loan for you and, voila: The dual loan scam in action.
It may seem complicated, but the lesson is simple: be aware when a broker offers you a deal that sounds "too good to be true." Few things in life are truly "too good to be true," and this axiom is especially relevant when we are dealing with money, loans, and mortgages. While you may wish to save money and find the best deal possible, it is possible you might be an accomplice to the crime of fraud perpetrated by a broker. Consider all of your options and potential risks before agreeing to any vague, sketchy, or suspicious business deals.