Lawsuit Challenges Novastar Lending

05/21/2007

Nationally, the deflating housing market has hit subprime borrowers the hardest Some Washington borrowers say they face an additional hardship: they say their lender Novastar paid their mortgage brokers hidden fees to give them higher-interest loans. Next month a federal class-action lawsuit in Tacoma will challenge Novastar's lending practices. KUOW's Amy Radil reports.

THE DECORATING STYLE IN LEROY AND VERNA WILLIAMS' MODEST BREMERTON HOME CAN ONLY BE DESCRIBED AS BAROQUE. THERE'S A FOUNTAIN, A SMALL ORGAN, A PIANO, AND WALL-TO-WALL ART ACQUIRED AT YARD SALES.

WILLIAMS: "This is my wife's stuff."

LEROY WILLIAMS JOKES, WITH SOME TRUTH, THAT HE HAS TO PAY HIS MORTGAGE BECAUSE HE CAN'T POSSIBLY MOVE. THEY OWNED THEIR HOUSE, BUT IN THE LAST FEW YEARS DECIDED TO REFINANCE FOR SOME EXTRA CASH. WILLIAMS GOT A REFERRAL TO THE KANSAS, CITY-BASED LENDER NOVASTAR, WHICH HE ONLY SPOKE TO OVER THE PHONE. HE PAID THE NOVASTAR BROKER A LOAN ORIGINATION FEE OF NEARLY $3,000. BUT HIDDEN IN THE PAPERWORK WAS ANOTHER COMMISSION FOR HIS BROKER, OF NEARLY $2000. WILLIAMS SAYS WHENEVER HE CALLED NOVASTAR WITH QUESTIONS, HE JUST GOT HANDED AROUND.

WILLIAMS: "I've never seen nothing like it. That you could never get ahold of somebody to really talk to, a real person that would give you the right information that you were asking for."

WILLIAMS WAS NOT A FINANCIALLY NAÏVE BORROWER, HE'S A FORMER AUDITOR FOR KING COUNTY. HE SAYS WHEN HE DECIDED TO LEAVE NOVASTAR, THE COMPANY DELAYED RELEASING HIS FINANCIAL INFORMATION AND TRIED TO MAKE HIM REFINANCE WITH THEM. WILLIAMS HAD TO PAY A NEARLY $5,000 PREPAYMENT PENALTY WHEN HE DID LEAVE.

WILLIAMS IS ONE OF 1900 WASHINGTON RESIDENTS INCLUDED IN THE UPCOMING CLASS ACTION LAWSUIT AGAINST NOVASTAR. ARI BROWN OF THE SEATTLE LAW FIRM BERGMAN AND FROCKT REPRESENTS THE PLAINTIFFS. HE SAYS THE HIDDEN COMMISSIONS AND HIGHER INTEREST RATES CONSTITUTE UNFAIR AND DECEPTIVE PRACTICES BY NOVASTAR. BROWN SAYS THE BORROWERS WERE ENTITLED TO AN HONEST EXPLANATION OF THE FEE.

BROWN: "Their first question would have been, 'What is this and why is it there?' And if they'd gotten an honest answer, the honest answer would have been, 'You're agreeing to pay more over the course of the loan, so the lender is going to pay me.'"

BROWN SAYS THE DEAL WORKED TO EVERYONE'S ADVANTAGE EXCEPT THE BORROWER'S, A FACT HE SAYS NOVASTAR EVEN TOUTED IN ITS ADVERTISING TO MORTGAGE BROKERS.

BROWN: "Because as a marketing tactic, Novastar tells the brokers, come work with us, you'll get paid double because we're not going to require that you disclose this fee on the good faith estimate. And our take is that that's just not honest."

BROWN WANTS NOVASTAR TO HAVE TO REPAY THE VALUE OF THE COMMISSIONS AND THE DIFFERENCE IN HIGHER INTEREST RATES. BUT JOHN LONG, AN ISSAQUAH-BASED ATTORNEY WHO REPRESENTS MORTGAGE BROKERS, SAYS NOVASTAR'S TACTICS ARE PROBABLY LEGAL. NOVASTAR EXTENDED A LINE OF CREDIT TO BROKERS, EFFECTIVELY TRANSFORMING THEM INTO "BANKS," WHICH AREN'T REQUIRED TO DISCLOSE THE SAME FEES TO BORROWERS.

LONG: "It's not a violation of the law to fail to disclose it. They didn't break any rules. You may not like it, and it may be something that we'd like to see different. But that comes through regulation, not court rule."

BUT LONG SAYS, IF NOVASTAR AND THE BROKERS EMPLOYED "BAIT AND SWITCH" TACTICS TO GIVE BORROWERS HIGHER INTEREST RATES, THAT WOULD BE A SERIOUS ISSUE. NOVASTAR DECLINED TO COMMENT FOR THIS STORY, BUT SAID IN A WRITTEN STATEMENT THAT THE COMPENSATION TO BROKERS DID NOT INCREASE NOVASTAR'S PROFITS, BUT INSTEAD REDUCED THE BORROWERS' UP-FRONT CLOSING COSTS. THE COMPANY SAYS IT WILL SHOW IN COURT THAT THE PAYMENTS WERE ADEQUATELY DISCLOSED.

MEANWHILE, NOVASTAR ITSELF HAS FALLEN ON HARD TIMES. THIS SPRING THE FIRM LAID OFF 17% OF ITS WORK FORCE, AND ANNOUNCED IT MAY NOT SHOW ANY INCOME THROUGH THE YEAR 2011. NOVASTAR SAYS IT'S LOOKING TO SELL THE COMPANY, BUT PLAINTIFF ATTORNEYS SAY THE CLOUD OF LITIGATION MAKES A SALE UNLIKELY.

THE CLASS ACTION CASE IS SCHEDULED TO BEGIN IN FEDERAL COURT IN TACOMA ON JUNE 11TH. AMY RADIL, KUOW NEWS.

© Copyright 2007, KUOW