For years it was widely considered a massive, government-sanctioned rip-off of home-mortgage borrowers. Then it was banned by the Consumer Financial Protection Bureau. And now it’s the subject of class-action suits that accuse four large banks of illegally collecting millions of dollars in excess mortgage-interest payments from their customers.The source of all the controversy: The Federal Housing Administration’s long-time policy of allowing banks to charge homeowners a full month’s worth of interest when they went to pay off their FHA-insured loans — even after they had paid back all the principal they owed.To illustrate: Say you were preparing to pay off your mortgage balance in full on May 3. Under the government’s policy, lenders were permitted to charge you interest on the paid balance though May 31, collecting it at the closing May 3. It was the equivalent of being charged for a full tank of gas, even though all you pumped was three gallons.The official rationale for the controversial policy was that mortgage-bond investors expected full months’ worth of interest payments on FHA loans, not partial payments.
By Kenneth R. Harney April 13, 2016
Among the grounds for new lawsuits that class-action lawyers routinely troll are regulations from the Federal Housing Authority (FHA) and the U.S. Department of Housing & Urban Development (HUD). Over time, those grounds have only grown more fertile for class actions.For example, a recent decision from a federal court in Florida affirmed that FHA regulations are as potent as ever in terms of spawning possible class liability. In the case, Dorado v. Bank of America (PDF), the borrower sued over a procedure that has been extinct for several years: the charging interest for the period after a mortgage has been completely paid off. That practice, which the FHA used to allow under certain circumstances, has since been banned for FHA loans.In Dorado, Bank of America tried to persuade the court that there are some circumstances in which FHA regulations will not serve as bases for a cause of action, in various suits over money for instance. The court rejected that argument, holding that prior California cases that suggest that were not persuasive or controlling.What is a conscientious mortgage lender (or servicer) to do? Of course, the obvious answer is to make compliance with FHA regulations as high a priority as anything. Regulations tend to be highly technical and easily translatable into “gotcha” violations. In Dorado, for example, the borrower claimed that Bank of America failed to use the correct form to tell her about post-payment interest.Another option is to inform borrowers about changes in FHA or other federal regulations that could impact their mortgage. By doing that, a lender or servicer can likely trigger the running of the applicable statute of limitations. If that occurs, and no lawsuit is filed during the limitations period, then the possible exposure has probably been dramatically reduced, if not completely eliminated.
By Derek Diaz on September 5, 2016
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