Mortgage bonus foes win a battle with Ford

Nation's Housing

June 30, 1996|By Kenneth R. Harney

WASHINGTON -- In a bellwether victory for consumer advocates, a prominent mortgage lender has agreed to settle a national class-action lawsuit challenging its funneling of undisclosed fees to local mortgage companies who persuade borrowers to pay higher than the prevailing rates or terms for their home loans.

A spokesman for Ford Consumer Finance Co., a mortgage subsidiary of the giant automaker, confirmed that his company has decided to settle the year-old suit rather than incur additional litigation costs. The firm admitted no wrongdoing in the agreement, but will pay customers a total of from $4 million to $20 million to settle their financial claims, according to lawyers for the plaintiffs.

The payouts will be higher for borrowers who can prove that they were not aware that local mortgage firms originating loans for Ford were receiving bonuses for delivering mortgages above Ford's regular rates at the time. An estimated 70,000 to 80,000 borrowers will be eligible for compensation nationwide.

The case is part of a wave of class actions challenging a practice widespread in the American mortgage industry: the payment of "overages" or "yield-spread premiums" by large lenders to mortgage brokers and bankers when they "up-sell" rates or fees to their clients.

For example, a national wholesale lender might pay local brokers a fee of two points -- 2 percent of the loan amount -- for delivering a new mortgage at the going rate of 8 1/2 percent. But, if the local retail originator could deliver the same customer at 8 3/4 percent, or with higher fees, the broker's compensation might jump to three points -- an extra $1,000 on a $100,000 mortgage.

Critics say such bonus programs give loan officers an incentive to steer customers toward higher-cost loans from companies paying higher overage fees.

In the Ford case, a group of borrowers charged that the home loan firm "secretly paid brokers to induce their customers to sign for loans at rates and terms inflated above the retail rates actually approved" by Ford in its pricing sheets. The suit detailed the loan rates and terms for a series of applicants, alleging undisclosed payments ranging from $400 on a $27,000 home loan to $5,441 on a $121,200 mortgage. Some of the extra money was paid for obtaining higher-than-standard interest rates or loan fees, according to the complaint.

Although the final settlement documents won't be filed until next month, a lawyer for the plaintiffs, Dan Edelman of Chicago, confirmed that the agreement provides for a "sliding scale" of compensation by Ford. Borrowers who paid more than six points in fees and who can prove that the local mortgage originator concealed the higher fees may be eligible for a complete refund.

Borrowers who paid lesser amounts of points and can prove that they were misled by their mortgage broker will be eligible to recover a smaller percentage of their fees -- from 25 percent to 50 percent. Spokesman Fred Stern said Ford believes that it negotiated a "fair and equitable" resolution of the issue.

Pub Date: 6/30/96

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