| NovaStar Lawsuit Comes on Heels of Critical HUD Audit
Suit claims thousands of loans used unlicensed brokers December 2, 2004 By PATRICK CROWLEY |
| Subprime lender NovaStar Financial, already facing the fallout from a tough government audit over its net branch structure, is now being sued for $200 million in a Georgia federal court for allegedly using unlicensed brokers.The suit alleges that Kansas City-based NovaStar processed thousands of mortgage loans using unlicensed brokers and then tried “to conceal the massive fraud,” according to a copy of the suit filed in U.S. District Court for the Southern of Georgia in Savannah.
Plaintiffs are seeking class-action status and $200 million in damages. NovaStar is accused of withholding information on U.S. Department of Housing and Urban Development (HUD) forms about the payment of settlement fees. The company allegedly told borrowers that settlement fees would be paid to NovaStar, when the fees were actually paid to unlicensed affiliate offices. Washington lawyer Mitchel Kider, who is representing NovaStar, told MortgageDaily.com in a brief interview that he could not discuss the case. Instead, Kider referred to an earlier written statement he released in which he said the affiliated mortgage brokers provided support and administrative services but were not paid settlement fees. Kider also said that the suit has no merit and that NovaStar will mount a vigorous defense. Others in the mortgage industry are watching the suit to see if the outcome has any impact on net branching operations. Meanwhile, NovaStar has been stung by a HUD audit that found fault with how the company operates it net branches. The audit, which was completed in September, found that NovaStar “was not fully complying with applicable (HUD) requirements in its use of net branching,” the agency said in a written synopsis of the audit. “We found the agreements used in its branch offices contained language prohibited by HUD,” the agency said. “We also determined that NovaStar improperly used independent contract loan officers in the origination of (FHA) mortgages. “As a result, HUD lacks assurance that NovaStar has the capability to successfully originate (FHA) insured loans and therefore assumes an increased risk,” according to the audit. NovaStar, which has denied any wrongdoing, could face sanctions and penalties from HUD. The company has moved to make changes “to correct these deficiencies by eliminating all limited liability company agreements, as well as removing the prohibited language” from its affiliation agreements, HUD said in the audit. “Also, as of June 1…NovaStar is no longer allowing the employment of independent loan officers,” HUD said. “These changes should help ensure that NovaStar complies with HUD requirements in its use of net branches.” HUD said the government will continue to monitor the company to ensure compliance with the recommendations made in the audit. |
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Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com |
