A lawsuit against one of the Web’s premier sites to shop for a mortgage underlines the difficulty consumers can have in locating reliable financial information online.

The lawsuit is against Bankrate Inc., the financial publisher behind the popular bankrate.com site that draws millions of visitors yearly through partnerships with Yahoo!, AOL and other top online companies. Bankrate provides advice, loan calculators and articles on financial topics. It supplies interest-rate data to eight of America’s 10 largest newspapers, including The Wall Street Journal. It also caters to lenders, who compete to attract borrowers by posting their deals on bankrate.com.

But the company’s reliability as a consumer tool is being challenged in the lawsuit, filed by a former advertiser, that accuses the company of allowing its Web site to become a haven for "bait-and-switch" loan pitches. Testimony and internal company documents filed with the court show Bankrate has fielded hundreds of complaints about mortgage lenders who fail to deliver the rates they advertise; one lender told a Bankrate employee a consumer would need "a direct pipeline to God" to qualify for its advertised rate. The legal battle, which began in 2002, is scheduled to come to trial this fall.

Bankrate says the lawsuit is "factually and legally without merit." Thomas Evans, Bankrate’s chief executive officer, says that since he took over in 2004, the company has stepped up efforts to make sure lenders stand behind their advertised rates and won’t hesitate to suspend advertisers who break the rules. Before, it was "like asking Barney Fife to monitor the town and not giving him a gun," he says. "It’s a much more aggressive policy today than it was two years ago."

The court battle illustrates the potential hazards in the fast-expanding world of online commerce and highlights the need for healthy skepticism about experts who provide data and advice while at the same time benefiting from the sale of financial products.

Residential mortgages taken out online have totaled $100 billion a year on average since 2003, estimates Inside Mortgage Finance, a trade publication that tracks home-loan data. Some financial experts recommend bankrate.com and other Internet sites, including LendingTree, a unit of IAC/InterActiveCorp, and E-Loan, owned by Popular Inc., as useful tools for comparing a wide range of deals on financial products, in addition to getting quotes from local lenders.

Bankrate’s legal battle traces back to 2002, when online mortgage lender American Interbanc Mortgage LLC, of Irvine, Calif., sued several lenders advertising on bankrate.com, accusing them of false advertising. It added Bankrate as a defendant a year later, alleging Bankrate ignored evidence of bait-and-switch advertising and yielded to pressure from other defendants to kick American Interbanc off its Web site. The suit, being heard in Orange County Superior Court, seeks $16.5 million in damages and a minimum $33 million in punitive damages, according to a Bankrate regulatory filing.

Bankrate says in court papers that it declined to renew American Interbanc’s contract in August 2002 after the relationship reached an intolerable "level of hostility."

At the center of the case is a bankrate.com feature that asks mortgage shoppers to enter information about the mortgage they want, including their location, the desired loan type and how much they want to borrow. The Web site provides a "rate table" that lists offers from a number of lenders advertising on the site.

Mike Dannelley, American Interbanc’s founder, alleges customers who click through to specific lenders often aren’t given the deals that are offered on the rate tables. Although borrowers aren’t required to take the more costly loan, the practice can waste time in booking a mortgage and leaves some consumers vulnerable to accepting a higher rate.

Mr. Dannelley’s lawyers claim their review of Bankrate records identified 529 complaints, from consumers and lenders, who claimed Bankrate’s advertisers weren’t playing fair. Most of the complaints were lodged before Mr. Evans took over as Bankrate chief in June 2004, though some date to late 2004 and 2005.

In one complaint last year, Steve Knerly, a federal law enforcement instructor in Glynco, Ga., says a bankrate.com lender failed to honor an offer for a 3.875% adjustable-rate mortgage, which it posted on the Web site and then reiterated after he went through a "pre-approval" process, according to court records. The lender said it was a mistake, but "I felt it was just a pure and simple bait-and-switch deal," Mr. Knerly said in an interview. Instead, he found an adjustable loan starting at 4.25% through a mortgage broker.

Bryan Snow, who wrote Bankrate to complain in late 2003, said in an interview that several lenders he found on bankrate.com quoted him rates and fees that were higher than what they had advertised on the site. "You start to pick a rate that’s a point higher than the lowest rate that’s listed, because you assume those are the more-credible companies," says Mr. Snow, who works as a communications director in Charlotte, N.C.

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Associated Press

Employees at mortgage giant Fannie Mae manipulated accounting so that executives could collect millions in bonuses as senior management deceived investors and stonewalled regulators at a company whose prestigious image was phony, a federal agency charged Tuesday.

The blistering report by the Office of Federal Housing Enterprise Oversight, the product of an extensive three-year investigation, was issued as the government-sponsored company struggles to emerge from an $11 billion accounting scandal.

Earlier, a person familiar with the situation said that Fannie Mae was being fined between $300 million and $500 million for the alleged manipulation of accounting to facilitate executives’ bonuses, in a settlement with the housing oversight agency.

‘’The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,'’ James B. Lockhart, the acting director of OFHEO, said in a statement as the report was released. ‘’Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing.'’

The report also faulted Fannie Mae’s board of directors for failing to exercise its oversight responsibilities and failing to discover ‘’a wide variety of unsafe and unsound practices'’ at the largest buyer and guarantor of home mortgages in the country.

The OFHEO review, involving nearly 8 million pages of documents, details what the agency calls an arrogant and unethical corporate culture. From 1998 to mid-2004, the smooth growth in profits and precisely-hit earnings targets each quarter reported by Fannie Mae were ‘’illusions'’ deliberately created by senior management using faulty accounting, the report says.

The accounting manipulation tied to executives’ bonuses occurred from 1998 to 2004, according to the report, a much longer period than was previously known.

Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.

‘’By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,'’ the report says. The manipulation ‘’made a significant contribution'’ to the compensation of former chairman and chief executive Franklin Raines, which totaled more than $90 million from 1998 to 2003, it says, including some $52 million directly tied to the company hitting earnings targets.

Fannie Mae employees falsified signatures on accounting transactions that helped the company meet the 1998 earnings targets, according to congressional testimony by the former director of OFHEO. The agency first discovered in 2004 the accounting-rule violations and alleged earnings manipulation by Fannie Mae to meet Wall Street targets — disclosures that stunned the financial markets.

In December 2004, the SEC ordered Fannie Mae to restate its earnings back to 2001 — a correction expected to reach an estimated $11 billion. The Justice Department has been pursuing a criminal investigation.

Raines and former chief financial officer Timothy Howard were swept out of office by Fannie Mae’s board in December 2004.

OFHEO levied a record $125 million fine in 2003 against Freddie Mac, Fannie Mae’s smaller rival in the multitrillion-dollar home mortgage market, for misstating earnings — mostly underreporting them — by $5 billion for 2000-2002.

On Friday, Fannie Mae said it was replacing the chairman of its board’s audit committee, a key position as the second-largest U.S. financial institution reworks its accounting and struggles to emerge from the scandal. The company said the board had named accounting professor Dennis Beresford to replace audit committee chairman Thomas Gerrity.

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WHEN THE ENRON CORPORATION scandal broke in late 2001, the mortgage banking industry braced for a problem. Enron, it seemed, had used special-purpose vehicles (SPVs) to achieve off-balance-sheet treatment. So do many mortgage companies. Would the regulators rush in to stop the use of SPVs by honest companies for legitimate purposes, or would they understand the difference between legitimate and abusive SPVs? Would the mortgage industry’s honorable participants lose this valuable tool of risk management because of what the Enron gang did?

To their credit, the Securities and Exchange Commission (SEC) and the Federal Accounting Standards Board (FASB) took the time to evaluate the SPV terrain before treading in with revised rules. And the revisions that have been promulgated and proposed to date do not run roughshod over this terrain. FASB Interpretation No. 46R (dealing with which entities must be consolidated for financial reporting) and the proposed revisions to FASB Statement 140 (tinkering with the requirements for treatment as a qualified special-purpose entity), both issued in 2003, reflect a nuanced understanding that there are legitimate transactions that use SPVs and that that should be accounted for as sales, moving assets off-balance-sheet. If FASB Interpretation No. 46R and the FAS 140 proposal move the goal posts, it is as much a response to changes in market practice as it is to changed sensibilities post-Enron.


Yet there are now two other phenomena–also accounting-related, and also an outgrowth of the Enron after-math–that have the potential to be more insidious for financial managers at mortgage companies.

You’re on your own

The first problem derives from the Sarbanes-Oxley Act of mid-2002, and the resulting changes in the accounting firms’ view of their own roles. That is an unwillingness, or inability, on the part of the accounting firm that audits a company to provide advisory services about structuring transactions. Where audit firms used to seek out opportunities to serve as consultants, helping to design transactions for intended accounting treatment, those firms now are wary of being too close to the company during the planning stages of a transaction.

At a Dec. 1, 2004, meeting of the FASB’s Small Business Advisory Committee, the chief executive officer of a top accounting firm himself is reported to have complained about auditors’ "inability to give answers." He blamed pressure from the SEC and the Public Accounting Oversight Board, and recognized that there’s now a sort of "Catch-22" situation, in which the fallout is the ability to conduct complicated transactions at all. Some audit firms are going so far as to say, in effect, "Please go to our competitors for …


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At the center of a federal inquiry into Representative Alan B. Mollohan, Democrat of West Virginia, is his real estate investment with a bankrupt distant cousin who touted his connections to one of Mr. Mollohan’s nonprofit organizations to win work, including a federal contract in his district.

The relative, Joseph L. Jarvis Jr., faced $1 million debts in a personal bankruptcy case when he partnered with Mr. Mollohan in 1996, a few years after his aerospace company failed to fulfill its federal contracts and also filed for bankruptcy.

The 1995 West Virginia deal in Mr. Mollohan’s district eventually soured too, and Mr. Jarvis walked away owing Mr. Mollohan’s nonprofit group $67,681.63 in rent.

Still, Mr. Jarvis, Mr. Mollohan and their wives enjoyed a lucrative real estate partnership managing condominium rentals at the Remington, a 52-unit building that bills itself as "Washington’s best kept secret." The couples own 27 Remington condos, which have more than tripled in value, to $8 million, over the decade.

Mr. Mollohan stepped down last month as the top Democrat on the House ethics committee amid an F.B.I. investigation into his personal finances and his handling of special federal appropriations known as earmarks. The Federal Bureau of Investigation has subpoenaed papers from the Remington partnership.

The inquiry was prompted by a 500-page complaint from a conservative Washington group accusing Mr. Mollohan of failing to properly report the Remington investment and questioning whether his relationship with Mr. Jarvis — whose lengthy list of creditors included the congressman’s father and the federal government — was appropriate.

The Remington is one of three of Mr. Mollohan’s real estate deals under scrutiny. The others are $2 million in beach property in North Carolina that he bought with the director of another earmark-dependent nonprofit he created, and a $900,000 farm purchased with a friend whose company got several federal contracts based on his earmarks.

Mr. Mollohan refused repeated requests to discuss the Remington and Mr. Jarvis, with a spokesman saying he was still compiling "documents necessary to answer questions" about his real estate transactions. Among the issues are why Mr. Mollohan and his wife borrowed $2.3 million from a bank on the same day in 1999 that they and the Jarvises loaned the partnership the same amount — both using the condominiums as collateral — and why these loans were not listed on the congressman’s financial disclosure forms.

Mr. Jarvis and his wife, Rosemary, also declined to comment.

There is no evidence that Mr. Mollohan, first elected in 1982 and now a senior member of the House Appropriations Committee, intervened to help Mr. Jarvis procure the $1 million subcontract in West Virginia from the Energy Department in 1995.

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