The D.C. City Council has approved emergency legislation "clarifying" a 1984 law that the city's lawyers say limited fees borrowers can be charged for their home mortgages. The emergency measure left unclear, however, the question of whether those who may have been overcharged are entitled to refunds.
D.C. officials said they never intended to limit the number of points, or fees, lending institutions can charge borrowers. But a corporation counsel's opinion issued last month said the law, known as the Interest Rate Ceiling Amendment Act, does, in fact, have the effect of prohibiting lenders from charging borrowers more than one point.
The act, apparently unintentionally, overrides a federal law that preempts local point-limits on federally related loans. These loans include those guaranteed by federal agencies, such as Federal Housing Administration and the Veterans Administration; loans made by lenders regulated by any federal agency -- most banks and savings and loans in this area -- and loans that can be purchased by any of three federally chartered agencies -- definitions that encompass nearly every home mortgage loan made.
Framers of the interest-rate law "didn't have their eyes on the ball" when they drew up the provisions regarding points, said a city official. The language created confusion in the real estate industry, and some lenders, assured that the City Council didn't mean to restrict the points, continued to levy more than one on their borrowers.
Other lending institutions, however, were "clamping down on lending" because of the law's fuzziness, making necessary the emergency legislation passed last week to clarify the council's intent, according to Cindy Gist, clerk of the council's Finance and Revenue Committee. It will remain in force for 180 days, and is expected to be replaced by permanent legislation.
The issue that is giving the lending institutions a bad case of the jitters now is whether loans made after March 14, 1984, when the D.C. law went into effect, and which charged borrowers more than one point, were illegal. The emergency act passed last week "is silent as to whether it is intended to be retroactive or not," said Thomas Bastow, chief of the legislation and opinions section of the corporation counsel's office.
As a result, the question of whether borrowers are entitled to refunds may have to be decided by a court.
(The 1984 law refers only to borrowers, which apparently means that in sales where more points were charged and the seller paid them, there is no problem.)
Like several people asked if borrowers were entitled to refunds, Gist answered, "That's a good question." She added that borrowers "probably have a legal leg to stand on" if they decide to go to court.
Attorney Abraham J. Greenstein, who represents the Washington Board of Realtors, disagreed. He said there has never been a ruling that charging more than one point was illegal under the city law.
"The corporation counsel's letter saying the law did indeed limit points to one is an opinion, and I think that opinion serves to show the ambiguity" of the law, Greenstein said. "The opinion doesn't mean the law was different from what we think it is."
Greenstein "obtained written assurance from council member John Wilson's office" last year that it was not the intent of the law to override federal regulations permitting more than one point to be charged, according to a letter sent to board members last week by executive vice president David E. Strachan. The letter was dated July 9, according to Greenstein.
"We thought we had it solved," Strachan said this week, referring to the points question, "until the corporation counsel's memo."
Typical of the confusion are conflicting opinions cited by Robert Becker, president of Guaranty Mortgage Corp., who estimated his company made from "$30 million to $40 million" worth of loans to city residents last year.
Becker said, "to the best of my knowledge," Guaranty did not make any loans charging buyers more than one point, but added that "we got caught in the middle of this thing."
The Guaranty's attorney's "interpretation was that no more than one point could be charged," Becker said. "But we were hearing the opposite from the Washington Board of Realtors and others, that we could charge more than one. The industry listened to Greenstein and were making loans" with extra points.
Although Becker thinks Guaranty didn't make many questionable loans, he said "presumably excess points would be refundable."
If a Guaranty borrower asks for the return of excess fees, "first we would check with our counsel about what we should do. If counsel advised it, presumably we would give back the fees," Becker said. "There was no intent to defraud" on Guaranty's part, "and nobody but lawyers win if you go to court."
The D.C. law defines a point as "a fee, premium, bonus, loan origination fee, service charge, or any other charge equal to 1 percent or less of the principal amount of a loan which is charged by the lender at or before the time the loan is made as additional compensation for the loan." The disputed restriction on points applied to first trusts.
Points generally are equal to 1 percent of the loan amount, and in the past were sometimes charged by lenders to circumvent low interest-rate ceilings set by law. During recent periods of high interest rates, points were used by lenders to bring their yields from loans up to market value.
Attorney Greenstein feels confusion on how many of the points can be levied has now been cleared up the emergency legislation and praised the City Council for performing "a useful service here by clarifying its intent and avoiding the possibility of disputes."