Mortgage churning is an unethical practice employed by some lenders to generate extra fees and commissions from borrowers. It involves convincing existing mortgage holders to refinance their loans frequently, often with no clear financial benefit.
Churning is illegal and unethical. But it still happens, often targeting less financially savvy borrowers. Read on to learn more about how mortgage churning works, how to spot it, and how to avoid being a victim.
What is Mortgage Churning?
Mortgage churning refers to when a lender encourages a borrower to repeatedly refinance their mortgage loan over a short period of time, generating fees and commissions for the lender without providing significant financial benefit to the borrower.
With each refinance, the lender charges origination fees and other closing costs. Meanwhile, the terms of the new loan are not much different than the old one The borrower takes on more debt with little gain
Some common signs of mortgage churning include
- Frequent refinancing over a short period of time (e.g. every 6 months)
- Refinancing when interest rates have not dropped significantly
- Charging origination fees and closing costs with each refinance
- Convincing borrowers to cash-out home equity with no clear need
Churning is an unethical form of “predatory lending” It involves taking advantage of borrowers lack of financial literacy for the sole benefit of generating more fees
Why Do Lenders Churn Loans?
Unethical lenders churn loans to make more money from fees and commissions. With each refinance they collect:
- Origination fees
- Closing costs
- Sometimes yield spread premiums
Origination fees are usually 1-2% of the total loan amount. On a $300,000 mortgage that’s $3,000-6,000 in fees per refinance.
Closing costs add another 2-5% in third party fees. That’s $6,000 to $15,000 extra per churn.
Meanwhile, the lender often sells the new loan to an investor for a premium above face value, known as a yield spread premium. More refis = more premiums.
Over a short period of time, churning the same borrowers can result in tens of thousands in fees for an unethical lender.
Examples of Mortgage Churning
Here are some examples of mortgage churning:
Refinancing with no rate change
Borrower has a 30-year fixed mortgage at 5.0% interest. 6 months later the lender convinces them to refinance to another 30-year fixed at 5.0% but charges a full 1% origination fee plus third party closing costs.
Refinancing with slightly better terms
Borrower has a 30-year fixed mortgage at 6.5% interest. The lender convinces them to refinance to a new 30-year fixed at 6.0% but charges high fees. While the new rate is better, the fees outweigh interest savings.
Serial refinancing
Borrower refinances their mortgage 4 times over 2 years. Each time the lender charges full origination fees and closing costs but the new loan terms are not much better.
Refinancing to reduce term only
Borrower has a 30-year fixed rate mortgage. The lender convinces them to refinance to a 15-year fixed to build equity faster by shortening the term only. This resets the clock and adds fees.
Cash-out refinancing
Borrower cashes out home equity with a refinance to pay unneeded expenses like vacations or credit card debt. The lender benefits from fees while the borrower increases total debt.
Signs of Mortgage Churning
How can you spot mortgage churning? Here are some red flags to look out for:
- You are frequently contacted by your lender about refinancing
- Refinancing sooner than 6 months after getting a new mortgage
- Refinancing when rates have not dropped at least 0.5%
- Being convinced to cash-out equity without a clear need
- Origination fees and closing costs charged with each refinance
If you notice some of these signs, you may be dealing with a lender attempting to churn your mortgage.
Is Mortgage Churning Illegal?
Yes, churning is considered an unethical and predatory lending practice. If an auditor can prove the lender intentionally churned a borrower’s loan to generate fees with no financial benefit, the lender is liable.
Specifically, mortgage churning is a violation of:
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TILA (Truth in Lending Act) – Which prohibits misleading lending practices and requires clear disclosure of all terms. Churning is inherently misleading.
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RESPA (Real Estate Settlement Procedures Act) – Which prohibits kickbacks for loan referrals. Churning commissions could fall under illegal kickbacks.
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Regulation Z – Which prohibits unethical lending practices.
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Dodd-Frank Act – Which prohibits predatory lending.
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State laws – Most states consider churning an illegal, unethical practice. Lenders can have their license revoked if found guilty.
So churning is against the law. But lenders sometimes get away with it because it’s hard to definitively prove ill intent. That’s why borrowers must be vigilant against unethical practices.
Who is Most at Risk of Mortgage Churning?
Certain borrowers are at higher risk of being churning victims:
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First-time homebuyers – Who may not understand how refinancing works or when it makes financial sense.
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Low income or credit borrowers – Who may have fewer financing options and depend more on their lender’s guidance.
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Seniors – Who are often on fixed incomes and less comfortable analyzing loan details.
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Non-native English speakers – Who may not fully understand loan terms and disclosures.
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Financially illiterate – Borrowers less knowledgeable about personal finance may not realize churning is happening.
Unethical lenders specifically target these demographics because they are less likely to realize they are being taken advantage of.
How Can You Avoid Mortgage Churning?
The best way to avoid churning is to recognize the signs and be a smart, informed borrower. Useful tips include:
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Compare mortgage refinance rates across multiple lenders, not just your current lender.
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Understand when refinancing makes financial sense: when closing costs are justified by interest savings.
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Be wary of refinancing too frequently; every 6-12 months may be excessive.
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Review detailed loan estimates and disclosures from lenders.
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Avoid cash-out refinancing without a clear purpose.
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Seek guidance from financial advisors or attorneys if unsure about refinancing.
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Report suspected churning to the CFPB or your state mortgage regulatory agency.
The more you educate yourself about the mortgage process, the less likely you are to fall victim to churning. Avoid putting full trust in any one lender.
The Bottom Line
Mortgage churning is an unethical practice that provides no real benefit to borrowers. Unfortunately, it still happens, especially when borrowers let their guard down.
Protect yourself by being an informed consumer. Learn the signs of churning. Shop mortgage offers from multiple lenders. And don’t be afraid to report suspicious activity.
With knowledge on your side, you can get the very best loan terms while avoiding the trap of mortgage churning.
What Is Churning?
Churning is the illegal and unethical practice by a broker of excessively trading assets in a clients account in order to generate commissions.
While there is no quantitative measure for churning, frequent buying and selling of stocks or any assets that do little to meet the clients investment objectives may be evidence of churning.
- Churning is excessive trading of assets in a clients brokerage account in order to generate commissions.
- Churning is illegal and unethical and is subject to severe fines and sanctions.
- Brokerages may charge a commission on trades or a flat percentage fee for managed accounts.
- Flat-fee accounts can be subjected to “reverse churning,” in which little or no trading is done in return for an annual slice of the assets.
- Investors can avoid churning and reverse churning by maintaining an active role in decision-making regarding their portfolios.
Types of Churning
At its most basic level, churning is defined by excessive trading by a broker to generate commissions. If a client is being charged frequent commissions with no noticeable portfolio gains, churning might be the problem.
Churning also applies to excessive or unnecessary trading of mutual funds and annuities. Mutual funds with an upfront load, the so-called A-shares, are intended to be long-term investments. Selling an A-share fund within five years and purchasing another A-share fund needs to be justified as a prudent investment decision.
Most mutual fund companies allow investors to switch into any fund within a fund family without incurring an upfront fee. A broker recommending an investment change should first consider funds within the fund family.
Deferred annuities are retirement savings accounts that usually do not have upfront fees like mutual funds. Instead, annuities typically have surrender charges, a type of penalty for early withdrawal of funds. Surrender charges vary from one to 10 years.
To prevent churning, many states have implemented exchange and replacement rules. These rules allow an investor to compare the new contract and highlight surrender penalties or fees.
To prevent churning, keep an eye on your account. Read every transaction notice, and review every monthly statement. Know how much commission youre paying.
What you need to know about mortgage churning
FAQ
What is churning in banking terms?
Churning refers to the unethical and excessive trading of securities in a customer’s account for the sole purpose of earning commissions or profits, without taking into account their investment objectives.
What is the definition of churning in finance?
At its most basic level, churning is defined by excessive trading by a broker to generate commissions. If a client is being charged frequent commissions with no noticeable portfolio gains, churning might be the problem. Churning also applies to excessive or unnecessary trading of mutual funds and annuities.
What is the practice of churning also known as mortgage?
Repeated refinancing: Be wary of any lender who tries to get you to refinance repeatedly. This practice, called “loan flipping” or “churning,” can vastly increase your overall debt and will get you a relatively small amount of cash compared to the refinanced amount.