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Home-Loan Pricing Suit Targets Lenders


WASHINGTON — Allegations of abusive home-loan pricing practices victimizing thousands of American veterans have triggered a class-action lawsuit and a nationwide probe by the federal Department of Veterans Affairs.

The focus of the controversy involves what some mortgage borrowers claim were excessive fees charged them by lenders who handled their refinancings in the past year. Rather than charging them one or two "points" on their VA mortgage refis, borrowers say, lenders hit them with five, six or more points at settlement. Each point represents 1% of the amount borrowed.

The VA published regulations Feb. 28 prohibiting mortgage lenders on so-called streamlined "rate-reduction" refinances from charging more than two points on the transaction. Anything above that is now considered "excessive." In an interview on March 7, Keith Pedigo, the director of the VA's home loan program, also disclosed that his agency is now studying the files of dozens of lenders nationwide that have made rate-reduction refis in the past two years.

Pedigo said the agency is seeking to identify those lenders who charged more than two points, and evaluate whether they were justified in doing so. Pedigo noted that under prior rules, lenders had no restrictions on the number of permissible points. In cases where extra points were levied to "buy down" the veteran's refinanced, fixed rate to less than the prevailing market rate at the time, charging the higher points might have been entirely appropriate. Similarly, he said, some adjustable-rate refis carried deep-discount starting rates, and may have justified higher points at closing.

But when a lender hits a veteran with five or six points and merely cuts the interest to market rate, according to Pedigo, "we think that is unreasonable." About 60 firms across the country have been identified thus far during the investigation as frequently charging higher than two points for streamlined refis. Only by making detailed reviews of individual loan files over the coming weeks, however, will the VA be able to pinpoint which--if any--firms engaged in abusive pricing.

A class-action suit filed in Florida appears to be the first to take the VA loan-pricing issue to federal court. A husband and wife in Pinellas Park, Fla., Paul and Annette Sepe, filed suit in U.S. district court in Tampa, charging that they--and other customers of two mortgage firms--were overcharged in their VA refinancing.

According to the suit, Mortgage Investors Corp. of St. Petersburg, Fla., and Apollo Mortgage and Financial Services of Jacksonville, Fla., charged the Sepes $4,355.70 in "loan discount" fees last Sept. 23, representing six points on their $72,595 refinancing. The Sepes charge that the fee "represents an amount in excess of the reasonable compensation for originating a loan," especially given the "nominal services" rendered in the transaction. Charging such fees violates the federal Real Estate Settlement Procedures Act (RESPA), according to the suit. An attorney for the Sepes, Daniel Edelman of Chicago, estimated that as many as 2,000 VA customers of the firms may be covered by the class action.

Attorneys for Mortgage Investors Corp. and Apollo say they "vehemently" deny the allegations, and are asking the district court to dismiss the suit. St. Petersburg attorney Steven C. Dupre said that during 1995 Mortgage Investors Corp. closed approximately 3,500 new VA rate-reduction loans, charging veterans an average 5 1/2 points. The typical refinancer obtained a rate of 6% to 6 1/2% and an average monthly payment decrease of $102, thereby justifying the high point-load, according to Dupre.

However, a St. Petersburg-area borrower who said she refinanced with Mortgage Investors Corp. last September argued in an interview that her payment decrease of $60 "certainly wasn't worth the six points" she was charged. Harriet Thompkins, a 20-year veteran of the Coast Guard reserves, said she refinanced her $57,000 VA loan at 8 1/2% into a 6% adjustable. Her monthly payment dropped from $490 to $430, she said. But because she was charged six points at closing and financed it, her new mortgage balance is $65,000--more than her house is worth on the resale market.

"My mortgage used to be $57,000 and now it's $65,000 with 30 more years to go," at a rate that could increase, said Thompkins. "The most I could sell my house for is $58,000," she said, based on estimates from local realty brokers.

Thompkins' complaint about post-refi debt in excess of market value parallels a key concern at VA headquarters. The agency's new regulation on streamlined refis points out that since the VA backs each loan with a guaranty, "any additional increase in the amount by which the (mortgage) balance exceeds the market value of the property would further increase VA's loss" if the loan goes bad or the borrower can't pay it off fully by selling.

Distributed by the Washington Post Writers Group.

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