Suit challenges mortgage-broker bonus


October 30, 1994|By Kenneth R. Harney

WASHINGTON — Washington--In a class-action settlement with potential impact on borrowers in every state, a major mortgage company has agreed to refund to consumers undisclosed fees it paid loan brokers to bring in customers at higher than its standard rates. The refunds and penalties, estimated at $2.25 million, will go to homeowners who allegedly were charged excessive rates and fees on their mortgages.

The case involves approximately 300 loans made in Virginia by Georgia-based Fleet Financial Inc. The settlement is particularly significant, legal experts say, because it focuses on a practice that has been widespread throughout the industry for years: the payment of "yield-spread premiums" or "overages" to brokers when borrowers lock in or sign contracts at rates or terms that exceed what the lender would otherwise be willing to deliver.

A broker delivering a loan at 9 3/4 percent and two points, for example, might receive a premium payment from a lender buying the loan if the prevailing rate in the market was 9 1/4 percent and two points. A point is equal to 1 percent of the loan amount. Mortgage lenders and brokers confirm the existence of the practice, and defend it vigorously as an integral part of the economics of their business.

The Fleet settlement also opens the door to further legal challenges to mortgage brokers on the grounds that they breach their fiduciary duties to customers when they pocket overages. Under some interpretations of common law, mortgage brokers could be construed as having the primary duty to their clients of obtaining the most favorable terms and rates available.

The loans involved in the Fleet case were made to Virginia borrowers during the late 1980s and early 1990s. The borrowers generally had some minor problems in their credit histories and, therefore, were unlikely to obtain mortgage financing from local banks.

Instead they sought mortgage money through three Virginia-based mortgage brokerage firms that could access national lenders like Fleet, which specialize in "non-conforming" loans. The note rates on the mortgages were in the mid- to upper-teens -- high in today's rate environment but not extreme for applicants with subpar credit during that period of time.

What should consumers conclude from the Fleet class-action settlement? First, under federal regulations issued in December 1992, mortgage brokers must disclose to borrowers rate premium fees and other compensation. Second, any borrower seeking mortgage financing should shop for the package of rates, fees and services that's most advantageous.

Finally, as lawyers on both sides of this issue admit: The jury is still out as to whether loan brokers owe fiduciary duties to you. Keep in mind: Brokers themselves don't think they have a fiduciary relationship with you. Most genuinely want to help you but they don't think of their connection with you as that of doctor to patient.

Kenneth R. Harney is a syndicated columnist. Send letters car of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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