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Major Banks Sued Over Interest Charged on Paid-off Mortgages

April 4, 2016
Dena Aubin

(Reuters) - Major U.S. banks have collected hundreds of millions of dollars in extra interest without giving required disclosures to homeowners who paid off their mortgages early, lawsuits filed on Thursday in Atlanta and Miami alleged.

The proposed class actions accuse Wells Fargo Bank, Bank of America, U.S. Bank and SunTrust Mortgage of breach of contract for failing to properly explain final interest charges assessed on loans insured by the Federal Housing Administration (FHA). SunTrust Mortgage is part of regional bank SunTrust Banks Inc.

Until 2015, FHA rules allowed banks to charge the borrower interest for the full month the loan was repaid in full, if the payment was made any date after the first. But the lenders were required to provide borrowers with an approved FHA form explaining the charges and how to avoid them, the lawsuits said. The banks failed to do that, the complaints said.

The extra interest cost borrowers nationwide an estimated $449 million in 2012 alone, the lawsuit said, citing figures from the Department of Housing and Urban Development.

The charges, known as post-payment interest, were barred under regulations issued by the FHA in 2014, but the new rules apply only to loans issued after January 2015. Millions of outstanding loans issued before then are still subject to the interest, the lawsuits said.

"Consumers do need to be informed about the fact that they are being charged and how to avoid it," said plaintiffs' lawyer Naveen Ramachandrappa. The approved FHA form makes clear that consumers can avoid the interest charges if they make their final payment on the first day of the month, he said.

Spokesmen for the banks declined to comment.

The lawsuits said the banks breached mortgage contracts, which require that interest charges comply with FHA regulations. Those regulations bar post-payment interest unless the borrower is advised on an FHA-approved form.

FHA-insured mortgages do not carry explicit penalties for paying a mortgage early, but the lawsuits said the extra interest was akin to a prepayment penalty. The charges were in effect for FHA loans since 1985, the lawsuits said.

Penalties for paying a mortgage early were once common, though recent regulations have restricted their use.

Under rules issued by the Consumer Financial Protection Bureau in 2013, prepayment penalties can be charged only on certain fixed-rate loans with safer features and only during the first three years of the mortgage.

The CFPB rules stated that a post-payment interest charge after a loan was paid in full was the "functional equivalent" of a prepayment penalty.

The cases are Dorado v Bank of America, No. 16-cv-21147, Smith v. U.S. Bank, No 16-21146, and Miller v. Wells Fargo Bank, No. 16-21145, all in U.S. District Court in Florida's Southern District, and Felix v. SunTrust Mortgage, U.S. District Court, Northern District of Georgia, No. 16-cv-1052.

For the plaintiffs: Naveen Ramachandrappa and Steven Rosenwasser at Bondurant Mixson & Elmore, Brett Amron at Bast Amron and Adam Hoipkemier and Matthew Wetherington at the Werner Law Firm

For the defendants: Not immediately available

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