Regulators Target Errors in ARM Lenders’ Rates
Federal regulators are cracking down on banks, savings and loans and credit unions following allegations that widespread errors on adjustable-rate mortgage loans may have cost consumers billions of dollars in overcharges.
The Federal Reserve, the nation’s central bank, and the Office of Thrift Supervision, created last year as part of the savings and loan bailout, have urged banks and savings institutions to weed out errors on adjustable-rate mortgage (ARM) loans, home-equity loans and other consumer loans.
In addition, the Federal Deposit Insurance Corp. is due to start a review next month for possible errors in $100 million of adjustable-rate loans, mostly in the Midwest.
The actions come on the heels of a lawsuit filed in federal court in Indiana by three borrowers who claim that they were improperly overcharged because of errors in adjustments on their loans.
Filed Aug. 10 in U.S. District Court for the Southern District of Indiana, the suit names Workingmens Federal Savings Bank of Bloomington, Ind., as defendant.
Bill Richardson, a senior vice president at Workingmens, said Thursday that all mortgage accounts were being checked but declined to comment further.
Henry Price, an attorney for the plaintiffs, said he expects more suits to be filed against five or six lenders in the state next week. Lawyers from at least nine other states and the District of Columbia are interested in bringing legal action, he said.
Momentum is gathering in Congress to hold hearings on the issue, according to congressional aides.
Meanwhile, regulators have sent warnings to all U.S. savings institutions and state-chartered banks, even as they try to establish uniform guidelines for proper audit procedures.
“We are preparing to increase the scope of our compliance examination activity in this area,” the Cincinnati branch of the Office of Thrift Supervision said in an Aug. 14 bulletin to regional thrifts.
“All ARM loans are subject to Regulation Z,” or truth-in-lending law requirements, the New York Fed reminded banks in a similar memo dated Aug. 24.
Some critics charge that federal regulators have done little to protect consumers from abuses in disclosing information about ARMs and other loans.
Under existing law, lenders must provide borrowers with timely and accurate notices on adjustments in their mortgage payments, including details on interest rates, the amount of the new payment and indexes used as a basis for the changes.
ARMs, where the interest rate on the loan is adjusted under pre-agreed terms and intervals, typically insulate consumers and lenders from sharp swings in interest rates.
Geddes said consumers have already overpaid thrifts $8 billion because of errors in loan adjustments. In addition the thrifts might have to pay $7 billion in fines.
He said the problem, if uncorrected, could grow to over $65 billion by 1996.
Geddes, who worked for the defunct Federal Savings and Loan Insurance Corp., which insured the nation’s thrifts before the OTS was created, criticized the FDIC’s upcoming investigation into the Midwest loans.
“It appears the FDIC is doing the same thing” as FSLIC, said Geddes, who audited loans in FSLIC’s Chicago office until last October. “It is possible to make loans sellable and (still) be totally wrong on the interest,” he said in an interview.
One reason for the investigation was that the FDIC became concerned after inquiries from potential buyers about the quality of the ARMs the agency is trying to sell, sources familiar with the situation said. The loans were adopted from FSLIC, which had seized them from failed thrifts.
The Fed and other agencies also are conducting surveys among examiners to determine how widespread the problem is, said Michael Rouse, a senior review examiner at the central bank. “We’ll have a sense of how many banks have ARM programs” and the error rate, Rouse said.
“It’s not clear what the penalty is” for ARM errors, said Jerauld Kluckman, director of compliance programs at the Office of Thrift Supervision. Officials are waiting for recommendations from agency attorneys, he said.
But industry lawyers note that lenders may be fined up to $1,000 for each violation of the truth-in-lending law.
In its memo, the Fed warned that errors such as entering the wrong data into a computer or using the wrong index “may be considered breaches of contract and may expose the bank to legal action.”
In the Indiana lawsuit, the plaintiffs are seeking recovery of the amounts allegedly overcharged, as well as legal fees and other costs. They also ask for an injunction to block further violations of the federal Truth in Lending Act.