The chairman of the Senate Banking Committee has put HUD Secretary Mel Martinez on notice that he plans to make sure consumers are not left unprotected under the Department of Housing and Urban Development's plan for the mandatory disclosure of yield spread premiums or YSPs.

Indeed, it appears the main purpose of last week's hearing -- unusual in that it was held when Congress was not in session -- was to put pressure on HUD to write significant consumer protections into any effort to rework disclosure laws.

Currently, borrowers must be given a good faith estimate of all loans costs within three days after applying for a loan. But when they get to the closing table, they frequently find that many of the fees have changed.

In a speech last October, Martinez said it is "unacceptable" that consumers often are "forced to make an impossible choice" at the closing table between handing over the extra cash to cover the unexpected charges or give up the house.

But Sen. Paul Sarbanes, D-Md., is particularly incensed because he believes that many borrowers are being taken advantage of by loan brokers who are paid yield spread premiums and other back-end fees by lenders for bringing in loans that are at above-market rates.

HUD recently reiterated its policy that YSPs are not illegal on their face; that while some borrowers may be getting raked, others find it valuable to pay the fees in exchange for the having some or all their closing costs covered by the lender.

Sarbanes, however, believes just the opposite, saying last week that the latest HUD policy statement "would contribute to on-going abuses of low and moderate income home-buyers and will facilitate the predatory practice of steering homeowners to higher interest rate loans without their knowledge, and without any redress"

To prove his point, the Maryland lawmaker took testimony from three women who said they were unknowingly steered to loans with higher rates.

One, a disabled great grandmother from West Virginia, charged she was "cheated" out of $10,000 and a lower interest rate by a mortgage broker who assured her he was getting her a good deal. "Had the broker not taken the kickback, I would have at least had a rate of 8.85%, maybe lower," she said. "Instead, I got a loan up near 10%."

Another accused her lender of making a "secret" payment to the broker, and of "ripping off unknowing consumers...with a catch-us-if-you-can attitude." And a third testified that she got a high-rate loan from a mortgage broker who earned a 3 percent fee from the very same lender which had qualified her for financing at a lower rate.

Sen. Sarbanes is worried, too, that HUD's policy statement will prevent borrowers from joining together to pursue their grievances under class action law suits. Lenders, who say the problem lies with unscrupulous brokers, not the companies which actually fund the loans, maintain such suits could bankrupt them.

Sen. Sarbanes agreed that brokers are at the crux of the issue, but is concerned that if consumers are denied the ability to file class actions, they will be left with little recourse and no muscle.

If "the only recourse to the courts is closed out because recovery in individual cases is so small, there will be no incentive to bring abusive practices under control," the Senator said. "If you take that out (class actions), what is left to protect consumers?"

The Mortgage Bankers Association and three other trade groups America's Community Bankers, American Bankers Association and the Consumer Mortgage Coalition favor a model disclosure that explains to consumers they have the option of paying the broker's fee in cash or by accepting a higher interest rate via a YSP.

"I want to make very clear that we consider it improper to abuse the yield-spread premium mechanism as a means to inflate interest rates in a way that defrauds consumers or as a means of concealing referral payments to brokers," MBA Chairman-Elect John Courson told the committee.

However, the National Association of Mortgage Brokers opposes the disclosure of total compensation, favoring tougher standards on good faith estimates instead. "Consumers need to know all the costs in order to properly shop for a loan," General Counsel Robert Lotstein told National Mortgage News. "You are not going to shop on a broker fee alone."

The brokerage business also believes it is unfairly being singled out, but Sen. Sarbanes thinks otherwise. "This is a broker problem," he said.

In his view, consumers have "clearly been taken advantage of" under the current system. While those who provide services are entitled to appropriate compensation, he said, the net effect of the current use of YSPs have been "exploitive."

Meanwhile, the MBA and ACB have filed amicus curiae briefs asking the U.S. Supreme Court to hear the yield spread premium case (Culpepper vs. Irwin Mortgage) which the 11th Circuit Court of Appeals certified as a class action. That ruling is contrary to more than 50 other district court decisions.

For more articles by Lew Sichelman, please press here.

Published: January 16, 2002

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