ARM overcharges come to the fore, with cost to victims put in the billion


September 30, 1990|By Kenneth Harney | Kenneth Harney,1990 Washington Post Writers Group

WASHINGTON -- Controversy over alleged widespread overcharges on adjustable-rate mortgages intensified recently as attorneys filed two new class-action suits against federally chartered lenders.

The suits, part of what attorneys and lending-industry experts say will be a nationwide campaign of litigation this fall and into 1991, seek redress for all adjustable-rate mortgage borrowers at two Indiana-based savings institutions.

Officials at the S&Ls -- Permanent Federal Savings and Shelby Federal Savings -- were unavailable for comment on the suits.

Other class actions in New York and as many as a dozen other states, according to lawyers, are expected to be filed in the coming weeks. Last week's complaints, similar to a class action filed Aug. 10, allege patterns of extensive overcharges at the periodic adjustment intervals of borrowers' loans.

An estimated 12 million American homeowners hold adjustable-rate loans. Mortgage experts who have studied lenders' portfolios say anywhere from 25 percent to 50 percent of them carry incorrect computations. Total overcharges outstanding on the adjustable-rate loans, they say, could exceed $8 billion.

John M. Geddes, a computer consultant who studied 7,000 adjustable-rate mortgages for the Federal Savings and Loan Insurance Corp., said the monthly payments demanded by lenders were wrong in half of them.

Both the Federal Deposit Insurance Corp. and the Resolution Trust Corp. are studying adjustable-rate loans under their regulatory purview to determine how serious the overcharge problem is. Lending-industry officials dispute Geddes' figures and insist that the issue is being blown out of proportion.

M. Scott Barrett, a Bloomington, Ind., attorney who has been co-counsel on the first three class actions filed in his state, argues that banks and S&Ls have "plenty to gain" by facing up to the enormity of the problem and rectifying it.

"Half of the mistakes we've seen [by examining potential plaintiffs' loan files] result in undercharges to the homeowner," Barrett said. "They [the banks and S&Ls] are losing money on their ARM mistakes and they have no legal way to collect it."

Under federal truth-in-lending law, consumers may recover money from erroneous overcharges by lenders. But federal rules prohibit lenders from doing the same when their computations result in undercharges to mortgage customers.

Barrett, who has been investigating the adjustable-rate issue for clients for more than a year, listed the types of "commonplace" errors he has found by examining loan files at lending institutions in New York, California, Illinois, Oklahoma and Indiana, among others.

Tops on the list: improper use of loan indexes, including timing errors, substitutions of one index for another and improper selection of the index date for computing the new adjustment.

Innocuous-seeming index switches, according to Barrett, can skew rates in the lender's favor, and cost borrowers large sums -- sometimes $1,000 or more in overcharges over the course of a year.

The federal truth-in-lending law allows aggrieved consumers like Barrett's clients to band together as a class to sue for repayment of their overcharges, plus attorneys' fees and costs. The statute set a ceiling on the award per class action of $500,000 or 1 percent of the lender's net worth.

Among the tip-offs to possible over charges on your adjustable-rate mortgage:

* Any transfers of "servicing" or ownership of your loan from one lender to another during the past several years.

Many computer botch-ups apparently occur while moving data from the existing system to a new one.

* The index used on the loan is not a "garden" variety, regularly published in the financial press. An example provided by Barrett: One client's one-year ARM was indexed to the "2 1/2 -year average Treasury yield curve." Good luck finding that one in any financial publication, he said.

* Your adjustable loan is more than 5 years old. Analysts say the early generations of ARMs have the highest probabilities of payment computation errors.

* Your lender can't adequately explain the latest adjustment. When the loan-servicing staffers themselves haven't the foggiest as to how your monthly payment was arrived at, you know you're in shoal water.

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