In a major victory for mortgage lenders and brokers, a federal district court has thrown out a class action suit challenging brokers' fees in connection with Federal Housing Administration (FHA) home loans. The decision was the first to specifically cite the Housing and Urban Development's (HUD's) policy statement of October 15 permitting mortgage brokers to charge borrowers so-called "yield-spread premiums" under certain circumstances. The district court also rejected claims that borrowers cannot be charged more than 1 percent for originating popular, low-downpayment FHA mortgages.

The decision, Bjustrom v. Trust One Mortgage (No C00-1166P), handed down in Seattle October 26 in the U.S. District Court for the Western District of Washington, confirmed trial lawyers' worst fears about the impact HUD's October 15 policy statement on broker fees might have on the more than 150 class action suits pending around the country.

District court Judge Marsha J. Pechman's decision granted "deference" to HUD's latest policy pronouncement on broker fees, despite her lack of complete agreement with that policy. HUD has principal federal regulatory authority over the Real Estate Settlement Procedures Act (RESPA), a consumer protection law governing most home mortgage settlements.

In its October 15 policy statement, HUD said that yield-spread premiums -- paid to brokers by lenders when they deliver loans above a "par" rate -- are not illegal in and of themselves.

Instead, they are legal under RESPA when disclosed to the borrower, represent payment for goods or services rendered in connection with the loan, and are "reasonable" in the context of the total loan transaction.HUD's policy statement angered some consumer groups and class action lawyers because it essentially requires courts to examine complaints over loan broker fees on an individual, case by case,, "facts and circumstances" basis.

To attain class action certification by a federal court, by contrast, plaintiffs must demonstrate that the alleged violation of law by the defendant affects large groups of victims in identical ways. A facts and circumstances approach makes certification of a class virtually impossible.

Judge Pechman noted that "by effectively closing off class action litigation (over broker fees), HUD forces potentially thousands of consumers to individually litigate their claims regarding a few thousand dollars, an unlikely proposition."

But at the bottom line, said Pechman, HUD interprets the laws for which it retains regulatory authority, and that under HUD's policy statement October 15, "yield-spread and service-release premiums may be paid by lenders." Moreover, she added, the plaintiffs were not convincing in arguing that HUD itself prohibits payment of mortgage brokerage fees above 1 percent in connection with FHA loans.

The decision involved a $140,542 FHA loan at 8 percent made in 1999. The borrower, Mary E. Bjustrom, paid a $1,374 origination fee to a broker. The broker also collected a yield-spread premium of $702.71 and a service release premium of $1,786.78 from Trust One Mortgage Corp. of Irvine, Calif. All the fees were disclosed on Bjustrom's settlement documents.

The plainfiff challenged all brokerage fees beyond the 1 percent limit that she claimed HUD requires on all FHA loans.The court summarily rejected that argument, however, ruling that the agency's own regulations clearly permit other fees to be paid to brokers, beyond the 1 percent FHA origination fee. In fact, the judge noted, the agency routinely insures large numbers of FHA home loans with total fees --paid by the borrower and the lender to brokers --well in excess of 1 percent. That practice, said the decision, clearly connotes consent.

For more articles by Ken Harney, please press here.

Published: November 5, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.