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145712 1 (1990-10-30)

handle is hein.gao/gaobacwhp0001 and id is 1 raw text is: United States GAO General Accounting Office Washington, D.C. 20548 General Government Division GO-0236 October 30, 1990 The Honorable Richard G. Lugar RELEASED United States Senate Dear Senator Lugar: On October 10, 1990 we briefed your staff on the extent to which adjustable rate mortgages (ARMs) were being incorrectly adjusted as interest rates changed. This briefing was in response to your July 5, 1990 letter that expressed concern about the proportion of ARMs that were misadjusted and the consumer costs of misadjustments. Your letter asked us to review a study by John Geddes that estimated the extent of consumer overcharges on ARMs and to determine whether consumers can obtain restitution for ARM overcharges. In addition, it asked about the effects of incorrect ARM adjustments on the Resolution Trust Corporation and the federal budget. In subsequent discussions with Steve Fischer, we were also asked to review bank regulatory agency efforts to address these concerns. Our review of Mr. Geddes' study and our discussions with federal agencies and market participants indicate that the extent to which ARMs are misadjusted and the associated consumer overcharges were not well documented. Some industry respondents and agency officials criticized Geddes' study and suggested that it exaggerated the extent of misadjustments. Our review of the study indicated that its estimates included adjustable rate loans other than ARMs and that the data used in the study may not be representative of the nationwide situation. Due to the lack of good data on the extent of ARM misadjustments, we were unable to estimate the impact on the Resolution Trust Corporation or the more general budgetary impacts. Federal bank regulators are currently drafting examination procedures to determine the extent of ARM misadjustments. They expect to implement a consistent set of examination procedures for all federal bank regulators. Federal regulators told us that the Truth-in-Lending Act probably does not require financial institutions to reimburse consumers if they had been overcharging borrowers. They also stated that mortgage servicers and certain other categories of mortgage holders are not necessarily federally regulated. Finally they indicated that, in some cases, restitution for overcharges might be required by them on safety and soundness tdL -_ --%,, C'-, !,) s-

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