Mortgage broker's fee may buy you a rip-off Higher-interest loans, 'kickbacks' alleged

Nation's Housing

September 06, 1998|By Kenneth R. Harney

HERE'S A cautionary tale for homeowners looking to refinance. The tale is at the core of a class-action suit with national significance certified for trial recently by a federal judge in New Hampshire.

Two years ago, Michael Mulligan, a postal worker in Boston, and his wife, Patricia, sought to refinance their home in Marshfield, Mass. They contacted a mortgage brokerage firm, Choice Mortgage Corp., based in Nashua, N.H. Like many brokers, Choice routinely asked its clients to read and sign a disclosure document called a "broker fee agreement."

The disclosure read in part as follows: "We are a mortgage broker. We do not make mortgage loans. We cannot guarantee that you will be accepted into any particular loan program or promise you any specific terms or conditions." The agreement explained that Choice has brokerage arrangements with "many of the largest mortgage lenders." It also said that when the Mulligans signed the disclosure, they agreed to pay Choice Mortgage Corp. $3,750, or 3 percent of the loan amount, "as compensation for arranging a mortgage loan from a mortgage lender. We shall endeavor to provide you with the best loan program for your specific needs."

Those last two sentences are key to the Mulligans' complaint against Choice. According to the suit, instead of acting in the Mulligans'best interests, Choice obtained a mortgage at a higher interest rate than they qualified for from a California-based lender. The lender, in turn, according to the suit, paid Choice an additional $3,720 on the side for delivering the Mulligans at a "premium" interest rate. The payment from Long Beach Mortgage Co. to Choice was disclosed somewhat cryptically on the settlement sheet as a "Prem Yield Adj," "POC" (paid outside closing).

The Mulligans had no idea what the "Prem Yield Adj" (premium yield adjustment) reference meant, according to their attorney, Edward K. O'Brien. But since it was "paid outside closing," and didn't appear to affect their bottom line, they didn't object at the time.

But the suit alleges that the Mulligans -- and dozens of other borrowers who obtained loans through Choice -- were victimized by a practice that is widespread in the mortgage industry: Extra payments from lenders to local brokers when they originate new loans at interest rates above the lender's posted or "par" rates.

The suit quotes rate sheets distributed to brokers by lenders as examples of what happened to the Mulligans and other plaintiffs.

Say a borrower with a slightly imperfect (A-minus) credit rating wants a $100,000, adjustable-rate refinance. If the borrower's note rate is closed at (what was then) the "par" rate of 9.75 percent plus a 5 percent margin, the broker gets nothing extra. But if the broker can "induce his customers to sign at above-par pricing (a rate of 10.55 percent with a 5.5 percent margin)," according to the suit, "then the broker will get a side payment of $2,000 from [the lender] after the closing."

The Mulligans' class action charges that Choice's function under the brokerage agreement was to obtain the "best loan program" for applicants' "specific needs." O'Brien says that "under no circumstances does a borrower's 'specific needs' include a higher-than-necessary interest rate." The payments instead constituted kickbacks prohibited by federal law, for which no services were rendered by the broker on the borrower's behalf, according to the suit.

Choice's attorney, Steve Grill, does not contest the allegation that yield adjustment payments were made to the broker by lenders. Instead, Choice sought unsuccessfully to challenge the certification of the case as a class action involving 113 borrowers, each with differing situations. Grill also denies that Choice in any way violated federal anti-kickback rules or other statutes. Grill said the firm expects to file for a reconsideration of the decision.

In the meantime, what's the upshot of the Mulligans' case for homeowners and loan applicants? For starters, keep in mind that the case hasn't been decided or tried, so no legal judgment on the merits of making extra payments to brokers, or Choice's specific violation of any federal law, has been made.

But on a purely practical level, loan applicants need to understand that when dealing with a broker, you need to ask in detail about the firm's compensation practices. Many brokers jTC now use standard disclosures that note that the firm may receive fees from a lender, in addition to fees collected from the applicant.

Before signing up, however, you need to ask whether, under any circumstances, the broker expects to be paid by a lender for delivering your business -- your mortgage -- at a higher rate than you would otherwise qualify for from the same lender. If the answer is yes, you probably want to look for a different broker.

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

Pub Date: 9/06/98

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