Common Mortgage Lending Practice Found to Violate
Consumer Protections
In an important victory
for consumers, a federal Court of Appeals in Atlanta, Georgia has found a lender
liable for paying referral fees to a loan broker as an incentive for the broker
to jack up the interest rate in connection with the loan. Under the practice,
which is common in the industry, lenders pay fees known as "yield spread
premiums", to loan brokers in exchange for the broker finding borrowers
who will pay above market interest rates. Consumer advocates have long argued
that the practice is illegal under federal law and that it creates hidden incentives
for brokers to mislead consumers about the cheapest available loan. HUD estimates
that mortgage brokers handle about half of all home mortgage loans, or about
3 million mortgages per year totaling $333 billion.
According to Margot Saunders
of the National Consumer Law Center (NCLC) in Washington, "lenders have
argued that the fee is compensation for services rendered to the consumer. That
argument was always ridiculous and now an important Federal Court has said so."
She continued, "it is impossible to see how getting a borrower to pay a
higher interest rate could ever be a service which a consumer would knowingly
pay for."
The case, which is called
Culpepper vs. Inland Mortgage Co., was resolved in the Court of Appeals
for the Eleventh Circuit on Friday January 9. The court pointed out that the
Culpeppers had already made a separate payment to their loan broker for its
services. The Court found that the additional payment of the yield spread premium
by the lender was for referring business, a service which is not compensable
under a federal law known as the Real Estate Settlement Procedures Act ("RESPA").
According to Elizabeth Renuart,
also of NCLC, "this is a major victory for consumers. At a time when Congress
is being heavily lobbied by the lending community for additional deregulation,
this case is a reminder that the consumer protections remain necessary in order
to protect against practices designed to confuse and disadvantage borrowers."
Saunders says, "Congress will undoubtedly face heavy pressure from the
industry to legitimize this clearly abusive practice. Hopefully, Congress will
stand with consumers to protect them against being trapped and mislead into
paying above market prices for their loans."
The National Consumer Law Center serves as an advocate for low-income consumers
on consumer lending reforms being pressed by banks and other lenders. In addition,
NCLC publishes materials for lawyers and consumers, including the nationally
acclaimed book Surviving
Debt: A Guide for Consumers. NCLC has trained lawyers and counselors
nationwide on consumer protection issues relevant to low-income consumers.
