Home Lenders' Bond with Loan Brokers under Attack

By Timmons, Heather; Talley, Karen | American Banker, January 15, 1997 | Go to article overview

Home Lenders' Bond with Loan Brokers under Attack


Timmons, Heather, Talley, Karen, American Banker


The partnership between mortgage lenders and loan brokers - a mainstay of the modern mortgage market - is suddenly under siege in the courts.

More than 10 class actions are pending against lenders for the fees they pay brokers to bring in business. And in one case, a federal court last week came down firmly against the lenders.

A U.S. district court judge in Alexandria, Va., said consumers were being handed a "bad deal" when lenders pay brokers a common type of fee. He made the comment in rejecting a request for a dismissal of a class action against two lenders.

The ruling comes as banks and other lenders are relying heavily on brokers for new loans. By some estimates, nearly half of all mortgages are now made through brokers. Lenders are turning to brokers in response to shrinking profits on the loans they make directly to customers.

The complaints take aim at fees that lenders pay brokers for loans with above-market interest rates. Lenders pay these "yield spread premiums" in more than half of all transactions with brokers, experts say.

The mortgage industry is clearly alarmed by the class actions.

"They're growing like mushrooms in a monsoon," said Marc C. Smith, president of Crestar Mortgage. "This is the most substantive risk impacting housing finance today."

Crestar was one of the lenders targeted in the Virginia class action.

Ultimately, the burgeoning complaints could force lenders to cut brokers out of the lending chain, experts say. At the very least, a successful suit could sharply reduce broker earnings and cost lenders millions of dollars in restitution to borrowers.

Judge Albert Bryan of U.S. District Court in Alexandria, said Friday that fees paid by lenders to mortgage brokers for securing loans above market rates are "a referral, prohibited" by the Real Estate Settlement Procedures Act.

Yield spread premiums are by their nature "not compensation for services actually performed" for borrowers, Judge Bryan wrote.

Lawyers representing Crestar and Saxon Mortgage Inc. said the judge's refusal to dismiss the case, while a blow, was not the final word on the matter. Crestar will "vigorously defend" against it, said Leonard Bernstein, an outside lawyer representing Crestar.

But Daniel A. Ragland, one of the lawyers representing the borrowers, said he was confident the judge would not side with the lenders.

"This will be a big case," said Mr. Ragland, a partner with Robins, Kaplan, Miller & Ciresi, Atlanta. It will demonstrate that "yield spread premiums and the payment of them are illegal."

Damages could extend into the millions of dollars as more borrowers join the complaint, he said. …

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