DiTech Offers to Pay $250,000 in Alleged Gouging

Under pressure from state regulators, high-profile mortgage lender DiTech Funding Corp. on Tuesday offered to pay a total of $250,000 to at least 2,000 customers who allegedly were overbilled for interest.

But the offer, which came hours after the state Department of Corporations ordered the Irvine lender to reimburse customers and stop violating state law, falls short of what regulators were seeking.

The department estimated that the company should pay at least $360,000, plus a 10% penalty, to up to 2,400 customers and set up a system to guard against future violations.

The charges come at a critical time for DiTech, which is hoping to launch an initial public stock offering.

The department accused DiTech last November of overcharging customers on first mortgages 29% of the time, and nearly 80% of the time on second mortgages.

But DiTech disagreed, saying it should be allowed to charge interest when events beyond its control, such as delays in recording loans with local governments, held up the funding of loans. The company said it was simply passing on costs it incurred to borrowers.

“We completely disagree with the Department of Corporations on this matter and had the option of challenging the order through legal channels but ultimately decided it didn’t make long-term sense to fight it,” said Dan Baren, DiTech’s vice president and general counsel.

In March, DiTech agreed to repay customers a total of $80,000 for overcharges on second mortgages, sending out checks ranging from $3 to $219, Baren said.

“We’ve made a good-faith process to comply with their interpretation of the rules and we will continue to do so,” Baren said. “As far as I’m concerned, [Tuesday’s offer] puts an end to our dispute with the Department of Corporations.”

But regulators said that to settle the case, the company would have to pay more.

“In no way does this resolve it, from our point of view,” said Bill McDonald, enforcement director at the Department of Corporations.

If the two sides cannot reach an agreement, the case would be handled by an administrative law judge.

During a routine audit in November, state examiners found between 2,000 and 2,400 DiTech customers had been wrongly charged. The company had begun charging interest two days to two weeks before customers received their mortgage loan funds, McDonald said.

“Our understanding is that no one in the industry interprets the day when interest starts the way they do,” said McDonald, adding that the money was held by an escrow company in which DiTech had an ownership interest. “People ought not pay interest on money they don’t have use of.”

The Santa Clara County district attorney’s office filed suit last year challenging DiTech’s claims that it offered the cheapest mortgage rates. That still-pending suit seeks more than $100,000 in penalties.

In June, DiTech filed for an initial public offering, planning to sell a minority stake that it hopes will raise more than $110 million. The company, in documents filed with the Securities and Exchange Commission, did not disclose how many shares it plans to sell or provide an estimated price for the stock. Although the company is proceeding with the offering, no sale date has been set, Baren said.

Formed three years ago, DiTech has experienced tremendous growth through an aggressive advertising campaign.

Loan values soared from $302 million in 1995 to $1.2 billion last year. Net income surged to $8 million from $536,000, and revenue reached $32.8 million, up from $911,000 in 1995.