Loan Brokers Take Flak in Predator Dogfight

By Julavits, Robert | American Banker, September 5, 2000 | Go to article overview

Loan Brokers Take Flak in Predator Dogfight


Julavits, Robert, American Banker


The case of Teresa Lopez, who claims she was ripped off in a 1996 mortgage refinancing deal, spotlights a growing controversy over mortgage brokers' roles.

A lawsuit filed by Ms. Lopez names not only Delta Funding Corp., of Woodbury, N.Y., which provided the loan, but also All State Consultants Inc. of Plainview, N.Y., a broker she claims sold her a bill of goods when it got her to refinance.

In papers filed in U.S. District Court in Brooklyn, N.Y., Ms. Lopez, 71, says an All State mortgage broker told her he could reduce her monthly cost to $750 a month, from $973.74, with a new 30-year loan at 7% -- and that she would get $3,000 in cash at closing. The loan she wound up with, she charges, carried a base interest rate of 10.99% and an APR of more than 11%, came with no cash up front, and required monthly payments that eventually exceeded $1,100.

Ms. Lopez, who lives in Jam- aica, N.Y., ultimately defaulted.

Advocates opposing predatory lending are pressing for regulation of the fees charged by mortgage brokers, which the advocates claim create an incentive to sell loans without regard for the customer.

"The brokers are in essence acting as agents for the lenders," said John P. Relman, an attorney and owner of Relman & Associates in Washington. "The only thing the broker is interested in is getting the deal done -- there is absolutely no incentive for the broker to look out for the purchaser."

Attorneys such as Mr. Relman favor regulations that would hold lenders liable for the actions of mortgage brokers and put a ceiling on the fees and points brokers could receive from loan transactions. Allstate received a $5,800 fee, which was rolled into Ms. Lopez' loan, her suit says. "As long as there is no cap on what they can do, the situation is ripe for abuse," Mr. Relman said.

Kickbacks to brokers cost consumers $7 billion a year and disproportionately affect minority members and women, said Patricia Sturdevant, executive director and general counsel of the National Association of Consumer Advocates.

Brokers argue that no new laws or regulations are needed. In a statement issued Friday, the National Association of Mortgage Bankers said: "We believe abusive lending is the work of a tiny minority in the mortgage origination industry. The best solution is twofold: increased enforcement of existing laws and industry self-regulation."

Hugh Miller, president and chief executive of Delta Funding, acknowledged that his company did not pay enough attention to broker compensation in the past. Under an agreement with the New York State Banking Department last year, he said, Delta now monitors payments to brokers and other vendors and tests whether its borrowers can afford their loans and whether the loans are in their best interest.

"We have agreed to things that go well above what's required by the law and well beyond what anyone else is doing in the subprime industry to ensure we are offering the maximum in consumer protection," Mr. Miller said.

Lee Squitieri, a partner with Abbey, Gardy & Squitieri, which is representing Ms. Lopez, said that despite the assurances from Delta and other subprime lenders that oversight is in place, such loans are still being made.

"You're the lender, and if you're taking these loans, people will go out and make them," he said.

Mr. Squitieri said he plans to argue that when Ms. Lopez got her loan in 1996, the brokers knew Delta would make the loans and that Delta let the brokers know it would make them. …

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