The California Department of Business Oversight (DBO) reached a $1.4 million deal with a mortgage lender after taking action based on alleged overcharges of per diem interest to California borrowers.
A Michigan-based mortgage lender overcharged "thousands" of California residents, the regulator alleged, which was discovered during regulatory examinations conducted in 2011 and 2013. California law prohibits lenders from charging interest on mortgage loans prior to the business day that immediately precedes the day the loan proceeds are disbursed.
According to the DBO, during the exams, it found that the lender violated this prohibition on so-called per diem interest. The lender agreed to work with the regulator to avoid an enforcement action and conducted a series of self-audit reports during 2015 and 2016 of the 24,755 loans funded during the period of August 2011 to May 2015.
The audits identified a number of loans in which excess per diem interest had been charged or documentation was not available to determine whether an overcharge had occurred, according to the consent order. The lender provided refunds to approximately 3,400 affected borrowers totaling $293,126.54, including payment of the required 10 percent annual interest from the date of the overcharge.
In addition to the audits that already took place, the lender agreed to conduct self-audits using the same procedures and methods for loans funded from May 1, 2015, through Feb. 28, 2017, and promised to continue the self-audit process on new loans for one year following the execution date of the consent order. Each of the audit reports provided to the DBO must include the total number of loans, the number of loans with per diem interest charged, and a determination whether excess per diem interest was charged or the documentation makes it impossible to determine whether excess per diem was charged.
On top of the refunds already paid, the lender will pay $125 for each additional loan revealed in the self-audits where either the borrower was charged per diem interest in excess of that permitted by state law or the loan lacks the required documentation to determine whether excess per diem was charged.
The lender will also pay the DBO a $1.1 million penalty.
To read the consent order, click here.
Why it matters
The DBO continues to take actions against lenders for per diem interest violations. "I'm pleased we have reached this agreement," DBO Commissioner Jan Lynn Owen said in a statement. "It compensates borrowers for the financial harm they suffered, and requires the firm to continue following improved policies and procedures designed to prevent this from happening again."