A wave of national class-action lawsuits against prominent lenders is focusing new attention on a widespread practice that few home loan applicants understand: The payment of extra money to mortgage companies that “upsell” the rates or fees on loans they originate.
The extra fees--known in the trade as overage or yield-spread premiums--typically are paid to local mortgage brokers by large lenders who purchase their home loans. The concept is straightforward:
If a mortgage company can deliver a loan at higher than the going rate, or with higher fees, the loan is worth more to the large lender who buys it. For every rate notch above “par"--the lender’s standard rate--the lender will pay a local originator a bonus.
For example, one lawsuit alleges that a lender distributed a rate sheet to local brokers describing its “rate booster” program. “Increase your profitability,” read the flier. “For each 25 basis points (which amounts to one quarter of 1%) that you boost our par rate, we’ll pay you one-half point (1/2% of 1% of the loan amount)--up to a maximum of three points.”
Another firm cited in a class-action suit touted its “bonus upsell” program. For a rate of 1 1/2 percentage points above the going level--either fixed or adjustable--the lender would pay a broker a maximum of five points. On a $100,000 loan, that would amount to a $5,000 cash premium. For lesser yield spreads, the broker would earn an extra three points.
The check for the premium typically is sent to the broker by the lender after delivery of the closed loan. Before 1993, according to industry experts, back-end compensation of this type rarely was disclosed to consumers. More recently, however, some brokers and lenders have sharply limited the size of the fees and disclosed them. They often appear as one or more line items on the standard HUD-1 settlement sheets used for closings nationwide.
But lawyers representing consumers say mortgage companies haven’t necessarily sought to explain to customers that the yield-spread premium from the lender itemized on the settlement document represents compensation for delivery of the loan at a rate higher than the lender’s best available at the time.
The firms named in the new class-action are virtually all well-known national or regional industry leaders: Countrywide Funding, GE Capital Mortgage Services, Citicorp Mortgage, Ford Consumer Finance Co., among others.
The Ford suit, filed in federal District Court in Massachusetts, charges that during 1990 to 1993, the mortgage finance subsidiary of the giant auto maker “secretly paid . . . brokers to induce their customers to sign for loans at rates and terms inflated well above the retail market rates actually approved by [Ford] and available” to the loan applicant plaintiffs.
The firm, according to the amended complaint filed in July, “offered illicit payments to the mortgage brokers even though it knew they had been engaged by the plaintiffs . . . to procure their loans at the best rate and terms available. . . .”
The suit details the loan terms and rates for a series of borrowers, alleging undisclosed “upsell” payments varying from $400 on a $27,000 loan to $5,441 on a $121,200 loan. Some of the extra money was paid for obtaining higher than standard loan fees from borrowers, according to the complaint. Others were paid for allegedly steering applicants to an adjustable-rate loan instead of a fixed-rate.
A spokesman for Dallas-based Ford, Fred Stern, declined to comment on the specifics of the suit. “This is an industrywide issue,” he said. “It affects many other firms besides ourselves. We believe we have operated in a proper manner, and we will provide a defense appropriately.”
A lawyer with extensive experience in the field who does not represent any of the defendant firms, said the issue of overage and similar fees “is an extremely difficult one.” Mary Burt, now a Dallas-based attorney but until recently head of the Washington office of the National Assn. of Mortgage Brokers, confirmed that payment of such fees from lenders to local brokers “has been a common practice,” whether disclosed or undisclosed.
Such compensation, she said, has been integral to the economics of local mortgage brokerages and “actually allows [national] lenders to deliver more competitive prices to consumers because they don’t need to set up expensive retail branches of their own everywhere.”
Burt added that the core issue is “whether mortgage brokers have a fiduciary duty” to their clients. If they do--a view Burt doesn’t accept--then “they should be held to that standard.” Their choice of financing for their customers, in other words, should not be influenced by the size of bonuses or premiums offered brokers by competing lenders. Otherwise, she said, brokers should be free to receive whatever “reasonable, disclosed compensation” that lenders operating in a competitive marketplace choose to pay them for originating loans.
All the suits claim violations of federal truth-in-lending, realty settlement and anti-racketeering laws, as well as various state mortgage and anti-fraud statutes. A spokeswoman for Countrywide Funding said the firm never comments on pending litigation. A GE Capital Mortgage Services spokesman also declined comment. A spokesman for Citicorp Mortgage was not available for comment.
Distributed by the Was h ington Post Writers Group.