Consumer complaint received 2022-07-10
Company: NAVY FEDERAL CREDIT UNION
State: DE
Product: Mortgage
Sub-product: Conventional home mortgage
Issue: Applying for a mortgage or refinancing an existing mortgage

Complaint:
Navy Federal Credit Union ( NFCU ) has misled us on our mortgage application for over 3 months. This deceptive practice is resulting in financial damages that we will suffer. Below is a synopsis with a full summary of events to follow. 
Navy Federal Credit Union ( NFCU ) knew we wanted to leverage a 1031 exchange from beginning of our mortgage application process for a second home ( XXXX ). 
NFCU notified us in XXXX that they would not accept a 1031 when there was never indication this would be an issue. Our application was always for a 2nd home and based on the documentation we have provided, it was evident that the 1031 was a result of selling investment properties as an investment exit strategy. Had this been communicated from the beginning, we would have gone with a different lender months ago. But given the economic environment, this would result in more substantial damages from an increased interest rate vs the capital gains tax from selling a property. 
Capital gains taxes will now be owed on two sold rental properties since the funds can not be used as 1031. 
Additional fees are owed and interest rate arbitrarily increased although NFCU was aware of our closing date and our intent to extend rate lock into XXXX. 
Summary of Events : XX/XX/XXXX We began mortgage application process with Navy Federal Credit Union ( NFCU ) to purchase a property in XXXX XXXX, CA as a secondary home, utilizing a 1031 exchange. We advised NFCU we were relinquishing two rental properties ( hereinafter will be referenced as Rental 1 and Rental 2 ) in exchange for the XXXX XXXX property. Loan officer stated she would make a note of the 1031 in the file. We included business tax returns for years XXXX and XXXX, clearly indicating both rental properties were investment properties. 
We intended to have 3 borrowers ( hereinafter will be called Borrower 1, Borrower 2 and Borrower 3 ) on the application however the online application does not offer this functionality, so we communicated to the loan officer of our intent. 
XX/XX/XXXX Mortgage application is sent to NFCU underwriting team. 
Loan officer included a note to underwriting team to add Borrower 3 to existing application. 
XX/XX/XXXX Conditional approval received Loan officer communicated to us that a new application needs to be submitted ( and that they would do it on our behalf ) to include all three borrowers and that we could not simply add third borrower to existing application. 
Because we would need to apply for a new loan application, the interest rate ( 5.125 % ) that we had locked into on the XX/XX/XXXX application would need to be given up and instead would need to accept current rates which had increased significantly. 
We question this and NFCU replies with I am hoping you will be under approval status after all these items are uploaded, and the underwriter will give us the OK to add a 3rd borrower to the current application with the rate of 5.125 %. IF you do not qualify and need the third borrower, then the backup application will be required to move forward and will reach out to our pricing team regarding that rate at that time. 
At this point we have two open applications. One application with Borrow 1 and Borrower 2 at 5.125 % rate. Second application with only third borrower at a much higher 6 % rate with XXXX points to pay down the rate. 
XX/XX/XXXX We received request to complete mortgage estimate, which third borrower not been added to loan terms yet. We again confirm to have third borrower added and extend rate lock to our original application. 
NFCU states we dont need third borrower to move forward with application, and that Borrower 1 and Borrower 2 can move forward alone. Second application was created in the event NFCU states that we must use the second application with the third borrower on it ( with the higher rate ) even though from the beginning of the application process, we intended to have three borrowers however NFCUs online application process limited to only two borrowers. 
We escalate for management exception We confirm that as of XX/XX/XXXX, Rental 1 and Rental 2 have been sold ( i.e. relinquished as part of 1031 exchange ). 
XX/XX/XXXX NFCU requests closing disclosures of relinquished properties XX/XX/XXXX XXXX re-submitted to underwriting with request to add Borrower 3 to application 1. 
XX/XX/XXXX Introduction with title company of XXXX XXXX property, NFCU team, buyers RE agent and buyers. Confirmed all three borrowers. Confirmed using a 1031 exchange. 
XX/XX/XXXX NFCU advises underwriting team is not allowing a 1031 exchange whereby investment properties are sold, and a secondary home is bought. 
We send NFCU specific IRS language articulating this is possible. As part of Revenue Procedure 2008-16, someone may buy a future primary residence, second home or vacation property ( personal use property ) as an exit strategy from investment real estate as long as certain criteria are met ( which we were intended to comply with ). Additionally, sent website of our 1031 intermediary to NFCU stating 1031 for investment property to personal use property is allowed. 
o We sell the investment property then purchase personal use replacement property ( i.e. vacation home ) o Rent property for minimum 14 days for two calendar years o Limit personal use to no more than 10 % of total rented days. 
30-day rate lock extension submitted with a fee of .125 %, good through XX/XX/XXXX. 
XX/XX/XXXX NFCU states underwriting still have not allowed 1031 funds to be used in purchase and request a letter from 1031 intermediary stating 1031 can be used for the purpose of purchasing a personal use property as an exit strategy from an investment property. 
XX/XX/XXXX NFCU submits final declaration to not allow the use of 1031 exchange funds to purchase XXXX XXXX property. 
They stated that because we can not sell an investment property and purchase a secondary property and that further this gives the illusion that we want to rent out the XXXX XXXX property and if we wanted XXXX XXXX property to be a rental, that we would have had to apply for a different mortgage product. 
XX/XX/XXXX Acknowledged we will no longer use 1031 exchange and move forward with loan process ( order appraisal, etc. ) XX/XX/XXXX We request new loan estimate with rate lock extended through XXXX XX/XX/XXXX NFCU stated we must wait until we get closer to end of the rate lock and will have to ask Pricing Desk to allow another extension. It must be within seven days of lock expiring. Once we get to that point, NFCU will send a request to our Pricing Desk for 30-day extension. 
XX/XX/XXXX NFCU states that the rate has expired and advised the rate would be increased to 5.50 % and locked for an additional 30 days with the onetime fee of the .125 % ( for the original 30 day rate lock extension ). 
Conclusion : Deceptive Practices leading to Financial Damages NFCU knew we wanted to leverage 1031 exchange from beginning of mortgage application process ( XXXX ) NFCU notified us in XXXX that they would not accept a 1031 when there was never indication this would be an issue. Otherwise, we would have gone with a different lender months ago. 
Capital gains taxes will now be owed on sold Rental XXXX and Rental XXXX since the funds can not be used as 1031 Additional fees owed and interest rate arbitrarily increased although NFCU was aware of our closing date and our intent to extend rate lock into XXXX.

Company public response: Company believes it acted appropriately as authorized by contract or law
Company response to consumer: Closed with explanation