Lender Agrees to Settle Suit on Hidden Fees

In a bellwether victory for consumer advocates, a prominent mortgage lender has agreed to settle a national class-action lawsuit challenging its funneling of undisclosed fees to local mortgage companies that persuade borrowers to pay higher than the prevailing rates or terms for their home loans.

A spokesman for Ford Consumer Finance Co., a mortgage subsidiary of the giant auto maker, confirmed that his company has decided to settle the year-old suit rather than incur additional litigation costs. The firm admitted no wrongdoing in the agreement but will pay customers a total of between $4 million and $20 million to settle their financial claims, according to lawyers for the plaintiffs.

The payouts will be higher for borrowers who can prove that they were not aware that local mortgage firms originating loans for Ford were receiving bonuses for delivering mortgages above Ford’s regular rates at the time. An estimated 70,000 to 80,000 borrowers will be eligible for compensation nationwide.

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The case is considered highly significant because it is the first of a 1995 wave of class actions challenging a practice widespread in the American mortgage industry but barely understood by borrowers: The payment of “overages” or “yield-spread premiums” by large lenders to mortgage brokers and bankers when they “up-sell” rates or fees to their clients.

For example, a national wholesale lender might pay local brokers a fee of two points--2% of the loan amount--for delivering a new mortgage at the going rate of 8 1/2%. But if the local retail originator could deliver the same customer at 8 3/4%, or with higher fees, the broker’s compensation might jump to three points--an extra $1,000 on a $100,000 mortgage.

Consumer advocates say such arrangements--whether disclosed or undisclosed on the settlement sheet--are inherently unfair to borrowers. Rather than loan officers searching for the lowest-cost mortgage available for their applicants, critics charge, the existence of bonus programs gives them an incentive to steer customers toward higher-cost loans from companies paying higher overage fees.

In the Ford case, a group of borrowers charged that the home loan firm “secretly paid [mortgage] brokers to induce their customers to sign for loans at rates and terms inflated above the retail rates actually approved” by Ford in its pricing sheets.

The suit detailed the loan rates and terms for a series of applicants, alleging undisclosed payments ranging from $400 on a $27,000 home loan to $5,441 on a $121,200 mortgage. Some of the extra money was paid for obtaining higher-than-standard interest rates or loan fees, according to the complaint. Other bonuses were paid for allegedly steering applicants to adjustable-rate loans instead of fixed-rate ones.

Although the final settlement documents won’t be filed until some time in July, a lawyer for the plaintiffs, Dan Edelman of Chicago, confirmed that the agreement provides for a “sliding scale” of compensation by Ford to customers covered by the suit. Borrowers who paid more than six points in fees and who can prove that the local mortgage originator concealed the up-sell fees may be eligible for a complete refund of the points paid.

Borrowers who paid lesser amounts in points and can prove they were misled by their mortgage broker will be eligible to recover a smaller percentage of their fees--anywhere from 25% to 50%.

Ford spokesman Fred Stern said the company believes it negotiated a “fair and equitable” resolution of the issue. He also noted that since 1993, compensation to local brokers by Ford has been fully disclosed to borrowers, as required by federal regulations. The loans in the class-action suit were made between 1990 and 1993, when federal disclosure rules were unclear on the issue, he said.

Other large mortgage lenders face class-action suits on overage payments, according to consumer attorneys active in the home loan arena. These include Countrywide, GE and Conti Mortgage.

“This sends a message. This is the first step,” said Edelman. “This will help bring the subject of overages out into the open, where consumers can begin to understand how they really work.”

How can you know whether a local mortgage company is pocketing overages at your expense? Edelman advises applicants to ask brokers about their compensation practices up front, before doing business.

Second, watch for--and challenge--fees at settlement that you don’t understand. Even though fully disclosed on the HUD-1 loan settlement form, they may signal that you’re paying more than you need to for your mortgage.

Distributed by the Washington Post Writers Group.