Consumers on Their Own in Fee Fight
WASHINGTON--A federal court has dealt what may be the fatal blow to a nationwide legal challenge against controversial fees collected by mortgage brokers in connection with home-loan settlements.
The fees are known as yield-spread premiums. Lenders routinely pay them to mortgage brokers for delivering loans that carry higher rates than the standard ones offered by the lender.
Though commonplace features in home-purchase and refinancing transactions, yield-spread premiums have a Jekyll-and-Hyde reputation. In some instances, the fees are integral parts of arrangements whereby a borrower agrees to pay a higher note rate in exchange for the broker paying all or some of the closing costs.
Such deals can be especially helpful to moderate-income and first-time buyers who may not have cash on hand to pay the required closing costs. Popular zero-cost refinancings also employ yield-spread premiums.
But when a broker leads an unsuspecting buyer into a mortgage with a higher-than-necessary interest rate and receives thousands of dollars from the lender for doing nothing but that, the borrower is being abused. More to the point: The lender and broker are violating federal law, which prohibits kickbacks and fees where no settlement-related services are rendered to the consumer.
But how does a home buyer or refinancer challenge a yield-spread premium he or she believes to violate the law? The recent precedent-setting decision by the 11th U.S. Circuit Court of Appeals effectively removed one of the most powerful legal tools available to consumers--class-action suits.
The court accepted guidelines laid down by the Department of Housing and Urban Development. In a policy statement last year, HUD said the only way to gauge the legality of a yield-spread premium is to examine whether goods and services were provided to the consumer by the mortgage broker, and then to evaluate whether the “total compensation paid to the broker is reasonably related” to the total value of the goods and services provided in the transaction.
HUD issued its guidelines after an explosion of yield-spread class-action suit filings in federal courts across the country. Nearly 200 suits alleged yield-spread premium abuses by dozens of mortgage companies and banks. Most of the cases were brought by trial attorneys who specialize in consumer class-action litigation and do their work on a contingency-fee basis.
The stakes in these cases were staggering. Large national lenders were the targets of many of the class actions. The number of potentially affected consumers ran into the hundreds of thousands, and the mortgage industry estimated the potential payout liability exceeded $100 billion.
Under federal rules, giant classes of plaintiffs must be “certified” before any action can proceed. One of the key tests for certification is that the alleged wrongdoing suffered by all class members must be roughly similar. An example would be a product with a design defect that caused similar injuries to hundreds of consumers.
But what about yield-spread premiums in mortgage transactions? Before HUD’s policy statement last year, some consumer advocates believed the agency’s rules would support class-action certifications. After all, if thousands of borrowers were lured into high-rate mortgages by brokers who received large fees from lenders, weren’t their financial injuries similar in nature?
The 11th Circuit did in fact certify one class action--Culpepper vs. Irwin Mortgage Corp.--based on that very rationale before the HUD policy statement. But now, in cases involving First Union Mortgage Corp., BankAmerica Corp. and Reliastar Mortgage Corp., the same court reversed field and said HUD’s policy deserves “deference” and should be followed.
That, in turn, makes class certifications difficult because the policy says, in effect: You have to look at every borrower’s situation individually. What services were rendered by the broker? How far out of line--if at all--was the broker’s total compensation?
Lawyers representing the mortgage industry were pleased with the recent decision. Washington attorney Phillip L. Schulman said the dozens of class-action suits were unfair “attempts to paint a long-standing and legitimate practice as nefarious” in all instances. San Francisco attorney Michael J. Agoglia called the decision “a sword in the heart” for trial attorneys trying to squeeze giant settlements out of lenders.
But Neil Pope of Columbus, Ga., one of the lead attorneys coordinating the class-action campaign, said the battle against the fees will continue--”somehow.”
“The mark of a warrior,” Pope said in a direct rejoinder to industry lawyers, “is that he can fight on even with a sword in his heart.”
The bottom line: You can still sue your lender and broker if you think you were victimized by a yield-spread premium. Just don’t expect to be part of a class action.
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Kenneth R. Harney’s e-mail address is kenharney@aol.com. Distributed by the Washington Post Writers Group.
