Kansas-based Peoples Bank repeatedly misled borrowers about the fees they paid under the auspices of lowering the interest rate on their mortgages, the Federal Reserve Board said on Tuesday.
The Fed announced a consent order against Peoples Bank, claiming that the bank’s mortgage origination business engaged in “deceptive residential mortgage origination practices” by falsely telling borrowers that they could lower their interest rate by paying an upfront fee.
According to the Fed, Peoples’ loan officers often gave prospective mortgage borrowers the option to lower their interest rate by paying an amount at closing calculated as a percentage of the loan amount, called “discount points.”
The Fed’s complaint states that borrowers “regularly paid thousands of dollars” for the discount points. But the Fed claims that in many cases, Peoples did not lower the borrower’s interest rate as they were led to believe would be the case.
As part of the consent order, the Fed is requiring Peoples to refund all payments for discount points that did not reduce borrowers’ interest rates.
To that end, the consent order requires Peoples to pay approximately $2.8 million into an account to provide restitution to the affected borrowers.
The Fed consent order states that the bank did not have a specific, written policy involving the paying down of a borrower’s interest rate.
According to the Fed, the bank provided borrowers with several disclosures during the loan origination process that indicated the number of “Discount Points” involved in the transaction and the interest rate that the borrower had purchased through those Discount Points.
But, the Fed states that those disclosures were misleading.
“A borrower acting reasonably under the circumstances could have concluded based on the disclosures that the interest rate he or she was purchasing with the Discount Points was lower than what Peoples otherwise would make available to that borrower without the payment of Discount Points,” the Fed stated.
“Although Peoples’ disclosures gave an accurate quantitative picture of the loans’ costs, they mischaracterized the nature of those costs because they indicated that a specified portion of the fees paid at closing were being used to purchase a lower, discounted rate, but sometimes that was not accurate,” the Fed continued.
According to the Fed, “many” borrowers who paid for the Discount Points did not actually receive a reduced interest rate.
“The misrepresentations in the disclosures concerning Discount Points and interest rates are material because they relate to the cost of the loan paid by the borrowers,” the Fed stated.
According to the Fed, the conduct in question took place from Jan. 1, 2011 through March 5, 2015, when the bank ended the practice of charging borrowers Discount Points that they did not receive a benefit for.
While the bank continued originating mortgages from that point until now, going forward, it appears that Peoples is getting out of the mortgage business.
“Peoples has decided to terminate its national mortgage business, and the Peoples national mortgage business line has ceased taking new applications and expects all operations to cease by year-end 2017,” the Fed consent order states.
As it turns out, Peoples' exit from mortgage lending is part of a deal that will see the bank acquired by National Bank Holdings Corporation.
On Tuesday, just moments after announcing the enforcement action against Peoples, the Fed also announced that it approved National Bank Holdings’ acquisition of Peoples.
According to the companies, the deal is expected to close in January 2018.
As part of the deal, Peoples is wingding down its national mortgage business, which it operated out of its Kansas-based Peoples Bank.
The national mortgage business was operated separate and apart from the Peoples Bank community banking operations, and will not be operated by NBH.
According to NBH, Peoples’ shareholders agreed to indemnify NBH for all liabilities associated with the national mortgage business, including the restitution required by the Fed consent order. NBH is not a party to the consent order.