PHOENIX (CN) – A federal class action claims The Lending Co., a mortgage broker, struck illegal deals with charities to “gift” up to 2.5 percent of borrowers’ down payments, and paid the charities a kickback equal to the amount of the “gift,” plus an administrative fee.
Lead plaintiff Margaret Galas claims that federal law requires a 3.5 percent down payment for a Federal Housing Administration loan, and that no one “financially benefiting from the loan (e.g., a seller, lender or real estate agent) may give funds to the borrower to help him come up with the down payment.”
A charity “may financially help the borrower, so long as a financially interested party does not reimburse the charity,” according to the complaint.
But Galas claims The Lending Company “struck deals with several charities to ‘gift’ up to 2.5 percent of the borrower’s down payment, creating what TLC called and heavily marketed as the ‘1 percent down’ FHA loan.”
For each loan, The Lending Co. “paid the charity a behind-the-scenes kickback equal to the amount of the ‘gift’ plus an ‘administrative fee’ as profit,” the complaint states.
To get money for the kickbacks, The Lending Co. raised “the borrower’s interest rate to obtain a premium price for the loan in the secondary market,” the complaint states.
The kickback and associated fees “amounted to hidden closing costs that TLC did not disclose to the borrower or HUD in either its initial GFE (‘good faith estimate’ of loan closing costs, provided at the loan application stage) or final HUD-1 Settlement Statement (provided shortly before closing, listing the actual closing costs, which ideally should match the GFE) as required by federal law,” the class claims.
For each loan, “the charities falsely certified to the borrower and HUD in a ‘gift letter’ that (i) the gift funds were not ‘made available’ to the charity ‘by any person or entity with an interest in the sale of the property’ (which TLC clearly had by virtue of profiting from the sale through origination of the loan for it), and (ii) the borrower ‘had no repayment obligation of any kind under any circumstances,'” according to the complaint.
Also named as defendants are Mark and Jennifer Nickel; Dave Johnson and Lauri-Serota Johnson; RJ Reynolds; Family Housing Resources; Affordable Housing Partners; Partners in Action; Curtis and Susan Cluff; Franklin American Mortgage Company; and Wells Fargo Funding.
These defendants are the “principals that conceived of and implemented the ‘1 percent down’ FHA loan program, (ii) the charities (and the head of one) that knowingly participated in the scheme, (iii) two of the secondary market buyers of the loans that also knowingly participated in it, and (iv) the current holders of the loans,” according to the complaint.
Galas seeks class certification, a declaration barring the investor mortgagees from collecting on the loans and exercising any rights under the deeds of trust, and damages for RICO fraud, RESPA violations, consumer fraud, breach of contract, and fraudulent misrepresentation and omission.
She is represented by Christopher LaVoy with Ridenour, Hienton, and Lewis, and Carlos Arboleda, with Arboleda Brechner.