NovaStar, seeking a buyer, settles mortgage lawsuit

NEW YORK, June 21 Thu Jun 21, 2007 6:41pm EDT

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NEW YORK, June 21 (Reuters) - NovaStar Financial Inc. NFI.N, a subprime mortgage lender seeking a buyer, said on Thursday its residential lending unit agreed to pay $5.1 million to settle a federal class-action lawsuit accusing it of charging higher rates because of hidden fees it pays brokers.

The settlement removes a potential obstacle to a sale of NovaStar, an option the Kansas City, Missouri-based company said it was considering when it announced on April 11 that it would explore strategic alternatives.

In the settlement, NovaStar Mortgage Inc. agreed to includes $3.3 million to be paid to the roughly 1,600 class members, or just over $2,000 per person, plus $1.8 million for legal fees.

NovaStar said it did not admit wrongdoing, and settled to avoid further litigation costs.

In their December 2005 complaint filed with the U.S. district court in Tacoma, Washington, the plaintiffs argued that NovaStar hid "yield spread premiums" that it paid brokers for referring loans at higher rates than it might otherwise have charged.

The plaintiffs contended that NovaStar did not disclose these fees until closing, when it was too late for borrowers to seek out better rates.

NovaStar maintained that its disclosures were appropriate, and that borrowers were not harmed because absent the yield spread premiums, they would have had to pay higher broker fees.

NovaStar lost $39.8 million in the first quarter, excluding a one-time gain. Dozens of providers of home loans to people with poor credit histories have found buyers, quit the industry or gone bankrupt in the last year as losses and defaults mounted.

Shares of NovaStar have fallen by nearly three-quarters from their 52-week high of $35.97 set last August 7, but nearly tripled since bottoming at $3.25 on March 13. They closed Thursday down 23 cents at $9.43 on the New York Stock Exchange.

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