Blow to Yield-Spread Suit Is Boon to Brokers
Williams, Jeffrey Ross, American Banker
If the mortgage brokerage industry has been more confident and productive lately, it can thank the Department of Housing and Urban Development and a midwestern federal appeals court.
In March the U.S. Court of Appeals for the Eighth Circuit in Minneapolis reversed a class certification in a lawsuit that challenged the legality of yield-spread premium fees paid to mortgage brokers. The case -- Glover v. Standard Federal Bank and Heartland Mortgage -- is a vitally important decision to the residential lending industry. At stake was the economic relationship between borrowers, mortgage brokers, and lenders.
HUD, which administers the Real Estate Settlement Procedures Act, estimates that mortgage brokers initiate about half of all home mortgages each year in the United States. Paying yield-spread premium fees is a longstanding practice in the residential mortgage brokerage industry.
Sometimes referred to as service release premiums, back-end compensation, or premium pricing, yield-spread premiums compensate brokers for providing services or facilities to the lender. These services include completing loan applications, ordering and obtaining reports and documents, advising the borrower, and participating in the closing.
Brokers get paid for these services through various arrangements. For example, the remuneration can be paid out-of-pocket by the borrower, financed by adding the amount of the fees to the principal balance of the loan, or paid indirectly by the borrower through a yield-spread premium that the lender pays to the broker.
The third option, which is most common, allows homebuyers to pay some or all of the up-front settlement costs over the life of the mortgage through a slightly higher interest rate.
In determining the amount of a yield-spread premium to pay, wholesale lenders establish a wholesale price for originating loans and communicate this pricing schedule to brokers through daily rate sheets. Rate sheets set the amount that the wholesale lender will pay brokers for various types of mortgage loans, taking into account a number of variables.
Rate sheets discuss loans in terms of "above par," "at par," and "below par." "Par rate" refers to the rate offered to the broker at which the lender will fund 100% of the loan with no premiums or discounts to the broker. If the mortgage carries a higher interest rate, the lender is able to sell it to an investor at a higher price. In turn, the lender pays the broker an amount reflective of this price difference.
Minimizing settlement costs through a yield-spread premium lets tens of thousands of homebuyers each year afford the settlement costs incident to buying a home. Increased homeownership provides substantial macroeconomic benefits to society as well as social and personal benefits to homeowners.
Yield-spread premiums are a substantial factor in annual increases in the rate of first-time residential home purchases. A court decision declaring these premiums illegal and contrary to Respa would jeopardize the ability of a substantial number of borrowers to meet the cash down payment requirement, significantly reduce borrowers' access to competitively priced loan funds through mortgage brokers, and require a complete restructuring of the broker-lender compensation system.
In the last decade more than 175 class actions were filed across the nation against brokers and lenders challenging the legality of yield-spread premium and other settlement-related fees. These suits claimed that yield-spread payments were disguised referral fees prohibited by Respa.
Many brokers and lenders -- concerned about the bottom-line costs to defend class actions, potential injury to the defendant lender's and/or broker's business reputation, and the possibility of being forced to substantially revise the broker-lender relationship -- chose to settle. As a result, few of these lawsuits ever reached the federal appeals courts. …