Question:

Definition of Contract Chicanery

Answer:

Contract chicanery is the practice of lenders and brokers to slip disadvantageous provisions to the borrowers in the mortgage contract without bringing them to the borrowers' attention. Few borrowers would examine their contract at closing and contract chicanery is easy to go unnoticed.

Two popular examples of contract chicanery include prepayment penalties and tricking on the ARMs.

For example, a prepayment penalty may say that the borrower owes a penalty of 5% of the loan amount should they decide to refinance. In the case with subprime loans, a borrower will want to refinance out of an 11.5% rate and the lender will simply make sure they don't. Another reason for brokers to use contract chicanery and slip in prepayment provisions is that a mortgage with a prepayment penalty clause brings additional percent of the loan amount to the broker when the loan is sold on the secondary market, doubling its gain.

Another popular example of contract chicanery are option ARMs, advertising a rate as low as 2% for limited time. Borrowers who took this offer found out this was a minimum payment rate and the difference between the regular interest-only payment and the minimum payment accrues on the principal.

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