Government study concludes 50%-60% of all adjustable rate mortgages contain errors.

It's true! Federal regulators from the FSLIC (Federal Savings & Loan Insurance Corporation) have discovered that consumers are overpaying on their adjustable rate mortgages by more than $8 billion as a result of interest rate miscalculations. Between 50%60% of all adjustable rate mortgages

Banks make two extremely serious mistakes in handling ARMs. One is failing to make proper initial disclosures on ARMs that feature discounted "teaser" rates. The second is some banks - reportedly a great many - are not making correct rate adjustments on outstanding ARMs.

The potential magnitude of both problems is daunting. With respect to inaccurate initial disclosures, there have been instances in the past several years of banks being required to reimburse customers hundreds of thousands of dollars for errors that arose out of innocent but careless mistakes.

Payment Adjustments

The second potentially huge error that banks make is failing to adjust the payment properly on outstanding ARMs.

This issue hit the front pages of newspapers last year when a former FSLIC employee conducted a study which found errors in 50% of the ARMs examined. He charged that lenders are requiring payments at rate adjustment time that exceed the amount called for by the initial disclosures and/or contracts.

Among the most common potential sources of trouble are ambiguous contract language, inadequate computer programs, incorrect completion of documents and calculation errors. In the last category, the mistakes include everything from clerical errors in data entry to carelessness in entering index values or rounding of results. For example, sometimes staffers use the wrong date in selecting the index value or use the wrong index altogether. Index values change frequently, sometimes by the hour! This makes it difficult to calculate the interest charges. Sometimes adjustment amounts are not rounded off in conformance with the method in the initial documents. And that's only the beginning!

The biggest problem for ARMs is the fact that loans are sold - often times more than once - into the secondary market - to other banks, Fannie Mae and investors. Overcharges develop as data is transferred between computer systems.

Small Errors, Big Overcharges