The mortgage division of Atlanta-based SunTrust Banks and five other major lenders have agreed to pay $162 million to settle a sweeping whistle-blower case alleging improper fees on home refinance loans for veterans, according to attorneys for the plaintiffs.
The lawsuit that prompted the case alleged the lenders profited from illicit fees. Moreover, because the improper loans were government-backed, taxpayers were on the hook for loans that defaulted, according to the lawsuit.
None of the lenders could be reached for comment Monday. The banks previously tried to have the case dismissed.
Lawyers for the whistle-blowers, a pair of metro Atlanta mortgage brokers, announced Monday that SunTrust Mortgage and four lenders recently settled for a combined $116.7 million. That follows a $45 million agreement in March to end litigation against Wall Street giant JPMorgan Chase.
The two whistle-blowers filed suit under seal in federal court in 2006 on behalf of the federal government, alleging the banks defrauded veterans and the government through loans guaranteed by the U.S. Department of Veterans Affairs.
The plaintiffs contend former service members with existing VA loans were overcharged closing costs under a program allowing them to refinance so they could take advantage of low interest rates.
Imposing allegedly improper fees would have violated terms that awarded the lenders government guarantees. When loans defaulted, lenders turned to the government to recoup some of their losses for loans that were improperly made, said Jim Butler, a Columbus-based attorney for the plaintiffs.
In a whistle-blower case a private citizen can sue on behalf of the government. The U.S. Justice Department can intervene to take over such a case but has not in this one.
The most recent settlements include: Countrywide Financial ($45 million), PNC Financial Services ($38 million), First Tennessee Bank ($16 million), SunTrust Mortgage ($10.2 million) and CitiMortgage ($7.5 million). Settlements appear to have been reached in September, according to court filings.
The vast majority of the settlement money will go to the government for the money lost from invalid loan guarantees. It’s unclear what form payments will take, however. The amount to be paid by SunTrust represents less than 2 percent of its 2011 net profit.
Because the suit was on behalf of the government, none of the settlement amount will go directly to veterans who refinanced.
Lawsuits will continue against two other prominent mortgage lenders – Wells Fargo and Mortgage Investors Corp., according to two rulings Monday in U.S. District Court in Atlanta.
The terms and conditions of the loans at issue, because of they were specifically for veterans and because of government guarantees of up to 25 percent of the loan value, included limitations on fees.
The loans, known as Interest Rate Reduction Refinancing Loans, cannot include attorneys fees. The whistleblowers allege the lenders hid attorneys fees under the heading “title examination fees.”
Federal code prohibits the government from guaranteeing loans with improper fees, but the plaintiffs allege the lenders deceived the government into backing the loans. When thousands of the loans tumbled into default, the government was on the hook for guarantees of up to 25 percent on the value of each loan.
The alleged fraud went on for more than a decade and involved loans made across the country, plaintiffs allege.
The lawsuit was originally filed by metro Atlanta mortgage brokers Victor Bibby, president of U.S. Financial Services, and Brian Donnelly, vice president of the firm.
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