U.S. probing alleged ARM overcharges

November 27, 1990|By American Banker

WASHINGTON -- Troubled by growing evidence that mortgage borrowers may have been overcharged by billions of dollars on adjustable-rate loans, federal regulators are taking a closer look at those loans in examinations of banks and thrifts.

The Office of the Comptroller of the Currency issued an advisory last month urging the approximately 4,000 national banks to conduct internal audits of the pricing of adjustable-rate mortgages before examiners arrive.

The Federal Reserve Board, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. have issued similar warnings and are gathering data to gauge the extent of the miscalculations of ARM rates.

The agencies are moving amid growing concerns that banks and thrifts -- including failed institutions now under government control -- could be on the hook for what one former thrift regulator estimates is as much as $8 billion in overcharges.

The issue came to light last year when the former regulator, John Geddes, a consultant who monitors interest rates for borrowers, found adjustable-rate mortgages in the Midwest riddled with errors.

Many lenders are said to have miscalculated the periodic resetting of interest rates on such mortgages, which became popular in the 1980s.

There are still no authoritative data on the extent of the problem nationwide, but a study released last week by the General Accounting Office hinted at it. Three analysts were quoted as estimating that 20 percent to 25 percent of the loans are incorrectly adjusted. A third expert put the error rate at 31 percent.

Hundreds of thousands of borrowers might be affected. Until about two years ago, the majority of new mortgages were being originated with adjustable rates; the proportion has since slipped to about 30 percent. The Mortgage Bankers Association of America estimates that nearly 4 million ARMs were originated by banks, thrifts and mortgage banks from 1987 to 1989.

"It's a serious problem," said David Ginsburg, president of Loantech Inc., a mortgage consulting firm in Gaithersburg, Md. "All I can say is that there are a lot of errors out there, and they are costing lenders and borrowers money."

Armed with data from Mr. Geddes, mortgage borrowers in Indiana and Ohio have filed a spate of lawsuits in recent months seeking damages from savings institutions as large as TransOhio Savings Bank in Cleveland, with $5 billion in assets.

Mr. Geddes, chief executive officer of Consumer Loan Advocates Inc. in Lake Bluff, Ill., says thrifts are not the only institutions guilty of overcharging.

"I know of problems in Florida, Kentucky, Oklahoma, and Texas," he said. The Southwest "has a wide-scale problem that nobody is talking about."

Mr. Geddes, a former employee of the Federal Savings and Loan Insurance Corp., blew the whistle on Midwestern S&Ls in 1989. He conducted a study of more than 7,000 adjustable-rate loans made by dozens of failed thrifts in that region and found that borrowers were overcharged nearly half of the time.

Mr. Geddes said an audit he has just completed of 300 loans made by an Indiana thrift revealed that interest rates had been calculated incorrectly for 90 percent of them and that customers were overcharged for 60 percent.

"This was an institution that cared," he said, suggesting that the thrift made honest mistakes.

Loantech also recently completed a study of 400 ARMs at banks and S&Ls and found errors in 28 percent of the loans.

"We see undercharges just as often as overcharges, and we see a lot of them," Mr. Ginsburg said.

He said the miscalculations in loans he has seen typically range from $300 to $1,200 and stem from miscalculations and mistakes on the loan documents.

Mr. Ginsburg said one client, who was either refinancing or selling her home, was overcharged $1,300 when the lender exceeded the interest-rate cap.

Regulators are not convinced that the problem is as large as Mr. Geddes' multibillion-dollar estimate, but they have warned institutions that ARM errors could violate truth-in-lending rules.

"We consider our advisory sort of a flashing yellow light," said Ronald Lindhart, deputy comptroller for compliance management at the comptroller's office. "Right now we are looking for facts."

The comptroller and the other regulators will survey institutions over the next two months in search of accurate data on adjustable-loan errors.

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