Overages Settlement Will Affect All Borrowers

A Justice Department fair-lending settlement with a major mortgage company earlier this month has immediate, practical significance for cost-conscious home loan borrowers nationwide.

The issue that prompted the settlement with Fleet Mortgage Corp. was a widespread practice known as “overages.” Many banks and mortgage companies allow their loan officers to pocket extra money when they deliver borrowers at either higher than the lender’s standard interest rate or with more points. (A point equals 1% of the mortgage amount.)

Say, for example, that you’re looking for a $150,000 loan to finance a home. Your local lender’s internal rate sheet for your type of mortgage is 8% plus 1 1/2 points. The loan officer who signs you up for the standard deal could normally expect to pocket half a point--$750--as his or her fee.

But if the loan officer can squeeze an extra point out of you--simply by quoting you 8% plus 2 1/2 points upfront instead of the rate sheet standard of 1 1/2 points--the loan officer may get to keep the extra point. Instead of $750, the loan officer’s compensation might jump to $2,250. The extra cost comes out of your wallet, but you haven’t the slightest idea you’re paying more than the standard charge.

Although consumer advocates are critical of the practice, mortgage brokers and lenders staunchly defend it. They argue that it is necessary to provide sufficiently attractive incentives for loan officers to bring in borrowers and close profitable loans.

“It’s built into the system--just like the car salesman has an incentive to get the highest price out of you,” says mortgage industry consultant Allen Hardester Jr. of Columbia, Md. “Mortgage money is a commodity you shop for. As long as the [points] are fully disclosed to the borrower, there shouldn’t be a problem with them.”

Federal regulations require all fees that affect the cost of mortgage money to the consumer to be disclosed before settlement of the loan. They do not limit or ban overages. In last week’s settlement with Fleet Mortgage, however, the Justice Department laid down this key warning:

If lenders knowingly or unknowingly permit loan officers to charge certain classes of borrowers higher fees or rates--specifically minorities--then they are violating the Fair Housing Act and risk federal prosecution.

In the Fleet suit, the Justice Department charged that in two of the lender’s branch offices--one in New Jersey, the other in New York--African American and Latino borrowers in 1993 and 1994 were charged “higher prices in the form of greater overages” than were nonminority applicants. The allegedly discriminatory patterns had originally been spotted by Federal Reserve examiners doing a statistical analysis of the firm’s loan files.

Fleet Mortgage denied all charges of discriminatory pricing and said that it chose to settle the case to avoid the costs of long-term litigation. As part of the settlement, Fleet agreed to pay damages ranging from $2,000 to $15,000 to about 600 minority borrowers who allegedly were charged excess overages.

So what does the Fleet case mean to you as a borrower? Plenty.

For starters, whether you’re a minority borrower or not, the case shines a floodlight on a subject many borrowers may not understand and lenders have little incentive to educate them about:

Your loan officer’s or broker’s compensation may well be variable and depend on how many points or other fees get tacked onto your bill. The rate you’re quoted may be standard for the firm or the market that day, but the fees may include a half a point or more of fluff.

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You may not be able to get access to the internal pricing sheets lenders distribute to loan originators, but you can push and negotiate successfully for lower fees or a lower rate. It’s up to you as an informed shopper to cut the fluff.

Second, if you’re a minority borrower, be aware that the federal government has now jumped into the mortgage pricing arena in a forceful way. The Justice Department’s chief of housing and civil enforcement, Paul Hancock, emphasized in a recent interview that the department is committed for the long term to challenging overages “when they are used in a discriminatory manner.”

The message to mortgage lenders here is equally clear: If you pay your loan originators in part through variable overages, keep a sharp eye on who gets charged what, and why. If minority applicants pay more overages than other applicants with similar risk characteristics, you’ve got a serious legal problem.

Distributed by the Washington Post Writers Group.