Tom Kelly: BofA’s ‘soft prepay’ hard pill to swallow

Last week, we signed the closing documents on the home we had lived in for 22 years. The decision to sell was huge; one I once thought we would never make. It could have easily been our last home but the extra bedrooms, year-round maintenance and remote location now made little sense.

It was an emotional time, made more anxious, costly and frustrating by the inability of Bank of America to supply us with a timely, accurate pay-off figure -costing us an extra $72 a day.

When we signed – on a Thursday – the escrow agent presented us with the closing numbers that included approximately $10,500 in prepayment penalties for cashing-out our loan within five years of its origination.

The incorrect totals tweaked a tender nerve. I’d battled the prepayment penalty on three different occasions: first, when our government had bailed out the banks, again when generous loan modifications were offered to those in default, then finally when fixed-rate loans dipped below four percent for the first time in history.

When we refinanced four years ago, the mortgage contained a “prepayment addendum” commonly known as a “soft prepay penalty” – a requirement some lenders demanded to discourage borrowers from quickly refinancing their loans as soon as interest rates drop. The “soft” limitation allows the borrower to prepay the loan without penalty only if the home is sold. If the loan is refinanced, however during a specific period of time, typically three to five years, the borrower faced a prepayment penalty that could amount to thousands of dollars.

I thought this to be a reasonable request until the country starting funneling cash to banks for the purpose of making more loans for small business – money most banks chose to use elsewhere. Why should I pay a penalty for not performing while the lenders were not held to the same accountability? Long-term rates had dropped from six percent to five percent. Why not reduce my rate and keep me as a future customer?

I was told, there was no way that the investor that bought the mortgage (Bank of New York) would be willing to waive the pre-payment penalty. The reason given was that there was no incentive to do so – the home had plenty of equity and we defaulted, so the bank could sell the home and be repaid all of the outstanding mortgage, plus fees and expenses.

Eighteen months later, the government launched a campaign to promote how it was helping underwater homeowners stay in their home by reducing their interest rate. Some of these people had purchased at the peak of the market, bought more home than they knowingly could afford and had already failed on a government-sponsored bail-out plan. What about homeowners who have skated the lane, paid their taxes but simply wanted to remove a financial obstacle to a lower interest rate?

Again, Bank of America said there was no reason for the investor to remove the prepayment penalty.

Last year, when record foreclosures continued to increase and lenders assisting homeowners who were behind on their payments became the norm, I again approached BofA about influencing its investor to remove the prepayment penalty so that we could refinance into a four-percent loan. By doing so, BofA could retain us as future loan customers.

No dice. There was no “incentive” for the investor to drop the prepayment penalty – even though only one year remained on the penalty term. Regardless of our four perfect years of payments, ample assistance for countless underwater borrowers and credits for first-time buyers, there was no willingness whatsoever to remove the prepayment penalty.

Back to last week. We signed the closing documents on Thursday morning. We immediately pointed out to the escrow officer that there was no prepayment penalty if the home were sold (BoA’s own document). When the escrow officer contacted BofA’s payoff department, she was told the bank would need “24 to 48 hours” to review its own documentation. Telephone calls to the bank seeking a faster resolve proved fruitless.

On Monday morning, I was told by a BofA payoff person that the prepayment penalty had definitely been dropped and that proper documentation would be faxed to the escrow office and to the Realtors that afternoon. Did not happen, and the bank’s daily interest meter was still running.

On Tuesday, the escrow officer called, frustrated that the bank would not give her a timeline for an amended payoff. I called the person at the bank I spoke to on Monday (I did take her name and extension) only to be told there was no such person in that office. The person who took my call said only a “senior manager” could approve the removal of the prepayment penalty even though the original documents clearly showed no penalty was due when the property sold.

Seeking an advocate inside the bank, I then proceeded to my local Bank of America branch office. There, the manager told me she was having her own troubles getting her home loan closed but would ask her loan officer to look into my case.

On Wednesday afternoon, the escrow officer called.

“You won’t believe what just happened,” the escrow agent said. “A person from the branch just walked the pay-off figure in here. Never happened before.”

The supposed “soft prepay” turned out to be a long, hard, expensive pill to swallow. The BofA payoff department didn’t even have the courtesy to inform the escrow agency. And, all we were trying to do was repay our debt.

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