How to Check an ARM Rate

There are many ways for a lender to make a mistake on an ARM.

Errors can occur when lenders incorrectly round interest rates, choose the wrong rate index or select the wrong day to adjust the mortgage to the index. And since many ARMs are calculated by a company other than the lender or investor that holds the mortgage note, it can be difficult to resolve errors.

Mistakes can stem not only from miscalculation but also from the variety of indexes that adjustable-rate mortgages may be based on.

Many California banks peg their ARMs to the 11th District Cost of Funds. The rate, published by the Federal Home Loan Bank of San Francisco, is based on interest rates set by 155 Western thrifts.

But other financial institutions have used everything from the one-year Treasury bill rate, the London Interbank Offered rate and even more esoteric indexes. The Bennington Group, a San Diego consulting firm that conducts audits of ARMs on behalf of lenders and the federal government, has encountered 61 different types of rates.

The problem of inaccurate rates is widespread enough that a cottage industry of ARM auditors has arisen to help worried consumers determine if they are paying too much. For a fee of $40 or more, the firms offer to review loan documents, check the interest rate to which an ARM is tied and calculate the proper interest.

The companies, some of which also assist lenders in fixing their mistakes, include Loantech Inc. of Gaithersberg, Md.; Loancheck of San Diego; Momentum Technology Group Inc. of Baton Rouge, La.; Mortgage Watch of Farmington, Conn., and Consumer Loan Advocates of Chicago.