UPDATE: In response to news of the lawsuit, Senator Sherrod Brown (D-OH), Chairman of the Banking Subcommittee on Financial Institutions and Consumer Protection, has called for action from the VA and the Department of Justice. Brown said, “No consumer should be forced to pay illegal fees, but it is particularly disgraceful to impose such extraction schemes on our veterans.” He asked the agencies to release full information on any internal investigations and responses to the suit.
Three law firms are seeking participants in a class action law suit seeking damages from 13 lenders for alleged fraud against borrowers seeking Veterans Administration (VA) home loans.  The suit charges that the lenders charged fees for their loans which were unallowable under VA mortgage rules, an action that technically, according to the suit, invalidated the VA guarantee.
The suit, U.S. ex rel, Victor E. Bibby & Brian J. Donnelly v the defendants listed below, was originally filed in 2006 by two "whistleblowers" who were also mortgage brokers.  The suit was refiled by the three law firms in the U.S. District Court for the Northern Division of Georgia this past June and is brought as a qui tam lawsuit, a civil proceeding that is used by whistleblowers to help the government stop many kinds of fraud such as Medicare or defense contractor fraud, and recover monies that have been stolen from the U.S. Treasury and taxpayers.  In a qui tam suit a whistleblower can win large rewards representing a portion of the civil recovery.
Listed as defendants are Wells Fargo Bank, Bank of America, JPMorgan Chase Bank, GMAC Mortgage, CitiMortgage, Suntrust Mortgage, Washington Mutual Bank, PNC Bank (which acquired National City Mortgage Co.), Countrywide Home Loans, Mortgage Investors Corp., First Tennessee Bank (which acquired First Horizon Home Loan Corp.), Irwin Mortgage Corp. and New Freedom Mortgage Corp.
The premise for the suit rests on a VA rule that certain fees typical to a real estate transaction i.e. attorneys' fees or settlement closing fees are not allowed in closing a VA loan for the purpose of refinancing.  The defendants allegedly charged these fees but disguised them as allowable fee entries on HUD settlement statements.  For example, the lender might charge a settlement fee of $400, but rather than entering that amount on the line provided in the statement where it would be disallowed it might be bundled into the fee for a title search, increasing what would normally be an allowable $150 charge to $550.    
The plaintiff's attorneys charge that veterans don't know what the usual and customary charges for those allowable fees are, and the VA relied upon the banks to comply with VA regulations, rather than digging into every loan transaction.  "The banks took advantage of that reliance to cheat veterans and taxpayers."
According to the court papers, in the last ten years, more than 1.2 million of these refinanced loans have been made to veterans and their families and up to 90 percent of them may have been affected by the alleged fraud. "By concealing the unallowable fees they charged, the banks benefited in two ways," said Mary Louise Cohen, a Washington, DC, attorney who is also representing the whistleblowers. "The banks collected the illegal fees from veterans, and they obtained hundreds of millions of dollars in loan guarantees they otherwise wouldn't have received."
They may have benefitted in a third way as well.  If the VA loans were sold to investors, it is probable that the VA guarantee allowed the lender to extract a better price for the loan than would be the case without the guarantee.
This type of fraud ultimately cheated taxpayers as well as the borrowers because charging an unallowable fee invalidates the VA guarantee which typically insures about 25 percent of the loan amount.   When the loans containing unallowable fees went into default and foreclosure they cost taxpayers hundreds of millions of dollars in reimbursements to the lender under the guarantee.