Is ‘Referral Fee’ Settlement Adequate?

SPECIAL TO THE TIMES; Distributed by the Washington Post Writers Group

One of the largest class-action settlements by a lender on behalf of mortgage borrowers nationwide could unravel in the coming months.

Consumer activists charge that the 1996 settlement by Ford Consumer Finance Corp. for alleged hidden referral fees in connection with 80,000 home loans would put too little money into borrowers’ pockets and give too much to their lawyers. They say the minimum $50-per-borrower compensation from Ford is unacceptable, while the $1 million fee to the class-action attorneys is excessive.

A federal judge in Boston recently rejected a motion to cancel the settlement outright but scheduled a “fairness” hearing later this year to hear borrowers’ criticisms of the agreement. Activists like Bruce Marks, president of the nonprofit Neighborhood Assistance Corp. of America, predict that “thousands” of Ford mortgage borrowers will decline to participate in the settlement, once details of it are mailed to them some time in the next two months.


The Ford case, which sent shock waves through the mortgage lending industry last summer, involves a total financial payout by the company of between $5 million and $20 million, depending on how many borrowers file claims. The attorneys who filed the case against Ford would receive $1 million, no matter how many borrowers seek more than the minimum $50 refund.

Ford Consumer Finance, a subsidiary of the giant auto-maker, admitted no wrongdoing in the preliminary settlement and opposes current efforts to undo the agreement. The firm was sued over its widespread use of so-called “back-end” incentive payments to local loan brokers who market and obtain mortgage applications from borrowers.

Also known as “overages” and “yield-spread premiums,” the fees have been used by many large lenders to compensate brokers who bring them applications at higher-than-standard interest rates. Generally, the higher the rate on the loan application above the going rate set by the lender, the higher the fees paid to the broker who brings in the business.

In the original suit against Ford, plaintiffs charged that the company “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.


As part of the settlement, 80,000 borrowers who obtained home mortgages through Ford between 1990 and 1993 would automatically receive either a $50 payment or a $250 credit against their next Ford Consumer Finance mortgage loan. Borrowers who paid extra-high fees--6% or more of the loan amount--and could prove that their loan brokers failed to disclose the “overage” fees received from Ford, could apply for a full refund of the extra fees.

Critics of the settlement say very few borrowers have the documentation necessary to prove that their brokers misled them years ago.


“This [settlement] is absolutely outrageous,” said Marks, whose group has battled banks and mortgage companies in several cities over alleged unfair lending practices. “Ford walks away paying almost nothing to the consumer, and the consumers’ lawyers get $1 million.”

One of the lead attorneys in the case, Edward K. O’Brien of Nashua, N.H., defended the fee, arguing that “at most, it represents 20%” of the settlement payout, “which is actually lower than is typical for this type of [class-action] litigation.” O’Brien did concede, however, that in hindsight, “Ford got off easy, basically,” because the case was the first of what now total more than 30 class-action lawsuits against mortgage lenders over alleged kickbacks to brokers.

“This was virgin turf,” said O’Brien. “If we thought we could have gotten more, we would have.”

Although O’Brien negotiated the settlement with Ford last summer, he and Chicago co-counsel Dan Edelman asked U.S. District Judge George A. O’Toole Jr. of Massachusetts on April 11 to allow the plaintiffs to withdraw from the deal. O’Brien argued that recent federal court decisions on overages had strengthened the plaintiffs’ case against Ford. O’Toole disagreed and scheduled a “fairness” hearing on the final settlement for mid-September.

Between now and then, according to Marks, his organization will seek to contact as many of the far-flung 80,000 Ford borrowers as possible, urging them to refuse to take part in the “paltry” $50 settlement. He also plans to bring large numbers of unhappy Ford borrowers to the fairness hearing and to use 1960s-style direct action techniques--picketing Ford Motor dealerships and picketing Ford Motor executives’ personal residences--to embarrass the company and bring it back to the settlement table with borrowers.

Distributed by the Washington Post Writers Group.