A Call To Arms On Ar Ms

If the public should be able to trust banks for anything, it's probably to do arithmetic right. But that's not always possible these days. Thousands of homeowners have found themselves being overcharged on their adjustable-rate mortgages since the loans became popular. And instead of just getting mad, they're taking the banks to court--and they're starting to win.

Citicorp, First Nationwide Bank, Banc One, and others, while denying any wrongdoing, have paid millions to settle class actions filed on behalf of homeowners who claim they've been overcharged. Other suits are pending.

TWICE AS MANY. No one is saying that banks and thrifts are deliberately bilking their customers. But Richard Roll, president of Mortgage Monitor, a loan auditor in Norwalk, Conn. (box), says there is a "skew toward overcharges." And Consumer Loan Advocates, a Lake Bluff (Ill.) auditor that has reviewed more than 12,000 mortgages, says overcharges are about twice as prevalent as undercharges.

The problem first arose in the mid-1980s, when interest rates were high, home prices were rising, and adjustable-rate mortgages with low initial "teaser" rates hit the market. The rates on ARMs are typically based on many factors, including payment dates and rules for rounding off as well as the interest rate itself. And banks and thrifts were often calculating at least one of them incorrectly.

Many of the overcharges on consumer loans have run into thousands of dollars. David I. Ginsburg, president of Loantech, in Gaithersburg, Md., says he once helped a customer with a $125,000 mortgage uncover errors that stood to boost the cost by $38,000. The bank, which he declined to identify, calculated the customer's mortgage rate using the wrong index for seven years.

For a while, borrowers simply complained on their own. But as loan-auditing companies multiplied, auditors began detecting patterns of problems at specific banks and thrifts--and the lawsuits began. As many as a dozen companies have faced ARM litigation.

BAIT AND SWITCH. Today, those suits are proving costly to some well-known banks. Columbus (Ohio)-based Banc One recently settled a class action in Indianapolis charging that it set adjustable mortgage rates too high. In February, Citicorp agreed to pay $3.27 million to borrowers who had been overcharged. The Citi settlement came shortly after First Nationwide, a thrift owned by Ford Motor Co., settled similar suits. Gail Hillebrand, litigation counsel for Consumers Union, the plaintiff in one of the cases, says First Nationwide was adjusting the mortgages in line with the procedures described in actual loan documents, but its advertising promised a better deal. "It's hard for consumers to figure out what they're supposed to be paying

on an adjustable-rate mortgage, but you'd think the banks would know," she says.

More lawsuits are on the way. In New Hampshire, borrowers allege that a different problem is developing, and a civil action has been filed against Dime Savings Bank of New York, charging it with selling a kind of adjustable-rate mortgage that is banned by Granite State law. A Dime spokesperson says the New Hampshire charges are groundless because the state law on loans is superceded by a federal law.

New problems are cropping up as well. The refinancing boom, for example, has led thousands of consumers to pay off their mortgage loans early, thereby locking in any existing errors in their adjustable rates. And some homeowners who take the trouble and incur the expense of refinancing really don't need to. They decide to refinance only because they don't realize that they are being overcharged on their existing loan.

Sales of mortgages in the secondary market also take a toll. W. Joseph Yelder, who was overcharged to the tune of $21,000, says he first started having problems with his mortgage when his original lender sold his loan. He says the interest rate on his mortgage rose four percentage points in one year, even though the rate wasn't supposed to change more than two percentage points in any one year. Thomas Caughran, a holder of a $300,000 mortgage that was repeatedly sold, says he complained for more than three years before he got a rate adjustment. He says the third owner of his mortgage denied any liability

but sent him a check for more than $22,000 in interest payments.

Small-business borrowers are also at risk, experts say. Consumer Loan Advocates President John Geddes says 80% of the floating-rate commercial loans he has audited contain errors, in part because such loans are less uniform than consumer mortgages. He says excess charges average 0.6% of the loans' face value, or $12,000 on a $2 million loan, but he recently found a $200,000 error. To be sure, customers have more recourse today than they used to. The Cranston-Gonzalez Affordable Housing Act, passed in 1990, gives them the right to request a review of their mortgage, and banks are required by law to notify borrowers if their loans are sold. And there is a rapidly growing group of loan auditors who will review individual mortgages for a fee of $100 or so.

Experts agree that most of the mistakes are the result of understaffing and frequent turnover among mortgage-servicing employees. "These don't appear to be problems of purpose," says Robert Fryer, president of San Diego-based LoanChek. "They appear to be problems of competence."

Regardless of the motive, though, consumers are losing their patience almost as fast as they're losing money. And more and more, they're banking on the courts instead of their mortgage lenders.

      Consumers are banding together in lawsuits against 
      adjustable-rate-mortgage lenders who they believe are overcharging. All of the 
      lenders below deny liability but have been hit by suits: 
         BANC ONE The Ohio bank settled a class action 
      claiming that it charged excessive rates on adjustable-rate mortgages in 
      several states.
         CITICORP The bank agreed to set aside $3.27 million to repay mortgage 
      holders who were overcharged. A bank spokeswoman says approximately 16,000 
      customers will get refunds.
         DIME SAVINGS A civil action has been filed against the Dime in New 
      Hampshire, charging that the savings bank's ARM product violated a 1988 state 
      law. Civil suits have also been filed.
         FIRST NATIONWIDE Settled suits charging that it 
      misrepresented its terms in advertisements and calculated mortgage rates 
      incorrectly. More than 24,000 customers may have been affected.
Before it's here, it's on the Bloomberg Terminal.