Mortgage Interest Refunds Upheld

A federal appeals panel has ruled that California regulators can compel online mortgage specialist Quicken Loans Inc. to refund millions of dollars to consumers under a state law that banned charging interest until loans were officially recorded.

Quicken, the largest Internet-based direct mortgage lender to consumers, sued the state over refund demands in February 2003. It said Tuesday that it would not pay borrowers, arguing that the law -- which has since been changed -- required lenders to make “essentially an interest-free loan.”

The Livonia, Mich.-based lender said it would consider several options to challenge Monday’s ruling by the U.S. 9th Circuit Court of Appeals, including taking its case to the Supreme Court.

“I applaud California all day long for going after predatory lenders,” Quicken founder and Chairman Dan Gilbert said in an interview. “But no consumer in the world is complaining about this, and we’re not going to refund interest to borrowers who had the use of their funds.”

California’s Residential Mortgage Lending Act originally prevented lenders from charging interest until the day before a mortgage is officially logged by a county recorder, which may not happen for days or weeks after the loan is made.

In September 2003, the state Legislature amended the law so interest may begin accruing a day before loan proceeds are disbursed, bringing California in line with the other 49 states and federal law.

But the amendment was not retroactive, and the California Department of Corporations has continued to press Quicken to repay interest collected in violation of the old version of the law. The department said in filings related to the case that in a random audit of 12 Quicken loans, the interest overcharges averaged $2,168 per loan.

The agency doesn’t know how many borrowers are affected or whether the $2,168 average is valid for all loans, because Quicken has declined to tally the loans as the department had asked, said Susie Wong, a spokeswoman for the department. The agency is seeking refunds for loans made as far back as Oct. 14, 1999.

Wong said the ruling “reaffirms the principle of state regulation of state-chartered lenders.”

If the Department of Corporations prevails in the legal battle, she added, “we will require Quicken to follow the state law as it was on the books at the time.”

Gilbert said the potential repayments totaled “in the millions [of dollars], not the tens of millions,” but he added that “the money isn’t the issue here.”

He said the law was designed to prevent lenders from charging interest on loan funds that were tied up in escrow accounts. He said Quicken did not begin charging interest until the loan funds were paid out.

Gilbert said the company’s options, in addition to a Supreme Court appeal, included lobbying Gov. Arnold Schwarzenegger and the Legislature to change the lending law retroactively.

He also raised the possibility of mounting fresh challenges in the courts, contending that compelling refunds would be “arbitrary and capricious.”

Although Quicken complained that the law was fundamentally unfair, its lawsuit centered on the contention that federal lending laws override the state’s Residential Mortgage Lending Act.

In a similar challenge to the Department of Corporations, Wells Fargo & Co. argued successfully in federal court that state lending laws didn’t apply to it and other national banks, because their lending practices were regulated solely by the Treasury Department.

But the appeals court said that in the case of Quicken, which has no banking charter, the state laws prevailed.