If you ever wonder why getting a mortgage is a complicated, expensive mess, you often don't have to look much further than the legal system. On the heels of a "
--which cost a group of banks $25 billion in fines--came the “LIBOR scandal,” where
Barclays bank was fined
around $450 million for attempting to manipulate the LIBOR rate. And now comes yet another LIBOR lawsuit, this one is a class-action suit on behalf of homeowners who allege that LIBOR-setting banks manipulated the 6-month LIBOR rate so that the value was higher on the first business day of the month, a date when the interest rate on their Adjustable Rate Mortgages (ARMs) reset. Ultimately proven or disproven, these things cost banks money to defend, and those costs are ultimately passed on to customers.
LIBOR class-action lawsuit
Annie Bell Adams, et al. v. Bank of America, et al, 12 Civ. 7461
--alleges that members of the rate-setting panel of the British Bankers' Association manipulated the LIBOR rate higher on or before January 2000 through at least February 2009 (referred to as the “Class Period” in the lawsuit) and "unjustly enriched themselves" as a result. The lawsuit alleges three separate LIBOR manipulations:
- “Throughout the Class Period, the LIBOR 6 month rates on the first business day of each month are, on average, more than two basis points higher than the average LIBOR 6 month rates throughout the Class Period.”
- “Additionally, from August, 2007 through February, 2009, the LIBOR 6 month rates on the first business day of each month are, on average, more than seven and one-half basis points higher than the average LIBOR 6 month rates.”
- “Finally, the LIBOR 6 month rates on the first business day of each month are, the great majority of the time, higher than the five-day running average of the LIBOR 6 month rate surrounding the first business day submissions throughout the Class Period."
What is LIBOR, anyway?
LIBOR is essentially an opinion of a price of money produced from a trade group of banks. The definition provided by the British Bankers' Association says LIBOR is “The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11am London time.”