WASHINGTON -- Federal investigators say that if you have an adjustable-rate mortgage, there's a distinct possibility your lender is overcharging you every month and that you may have to turn to bank regulators -- or to the courts -- for restitution.
But there's also a distinct possibility you're paying your lender too little.
In the first congressional study of alleged lender overcharge on ARMs, the General Accounting Office found that although no one is certain what percentage of adjustable loans carry incorrect payments, the lowest estimates appear to be one out of five.
The highest estimate cited by the GAO is seven out of 10, based on a review of 7,000 ARMs conducted by a former federal regulatory agency official. But GAO investigators said they had no way of verifying the accuracy of that shockingly high error ratio.
Some of the GAO's observations that could have direct relevance for you and your mortgage financing:
* Whatever the actual error rate, the five major federal banking-industry regulatory agencies think it's a significant enough issue to take new steps to tighten up procedures at local banks, S&Ls and credit unions.
* Mortgage-banking firms unaffiliated with a bank or S&L may escape the tougher examinations on ARMs now being conducted by federally regulated lenders. The GAO's implicit message to consumers: Even if ARM computations are cleaned up elsewhere, don't assume the same improvements are under way for loans owned or serviced by mortgage companies. Homeowners will have to look to "state regulation, contract law, and the Federal Trade Commission" for redress on their loans.
* It is not yet clear whether pending class-action lawsuits against S&Ls over ARM computations will help consumers. That's because the federal truth-in-lending statute "probably does not require restitution by lenders [or servicers] to borrowers who have overpaid," according to federal regulators interviewed by the GAO.
* Federal bank regulators themselves may be the best line of attack for aggrieved borrowers who find they've been shelling out too much every month. Bank regulators "may be able to require restitution under general [statutory] provisions regarding safety and soundness." The reasoning here is that class-action lawsuits could lead to adverse judgments, thereby endangering the financial soundness of the banks and S&Ls.
* The main sources of ARM computation problems appear to be: misuse of the underlying rate index, and mathematical foul-ups by servicing firms handling the loan administration for the original lender.
Based on extensive interviews with regulators, lenders and mortgage consultants, the GAO reports that rate-adjustment problems are "usually accidental and not intentional." Equally important, the botch-ups are "as likely to favor the lender as they [are] to favor the borrower."
That means the odds that you're underpaying on your ARM are as good as the odds that you're overpaying. And if you are underpaying, could your lender come after you for repayment, plus interest? The GAO notes that the FDIC now urges banks to repay overcharges, but not to pursue repayment of undercharges of consumers on ARMs.
That advice may not necessarily be heeded. M. Scott Barrett, a Bloomington, Ind., attorney who's been co-counsel on four federal class-action suits against lenders for alleged overcharges, says he's been hired to represent a homeowner whose bank wants $2,000 in back payments on an ARM.
In the meantime, here's some good advice for anyone with an ARM: Complex as it may seem, pull out your mortgage documents and double-check your latest adjustment computations.