A "cottage industry" of small, individual law suits charging mortgage brokers with violating the Real Estate Settlement Procedures Act is taking shape in Texas. And if the tactic proves successful, brokers fear it could spread to other states.

That's the word from Russell Chase of Golden Financial Services in Houston, who is the defendant in one such case and says three of his Houston colleagues also have been sued by the same firm.

Chase, who is president of the Texas Association of Mortgage Brokers, said he never worried about class action law suits over yield spread premiums because he figured the big law firms which handle such cases would never go after such small potatoes.

But now he's involved in a case he says was brought by a one-attorney law firm which is going after him and others on an individual basis rather than attempting to go after a big bucks class action case. So far, Chase has spent $10,000 to defend himself -- "and we're just in round one."

Suits like the one Chase is fighting are "something we haven't been thinking about" as the industry has concentrated on class actions and "could be slipping under our radar screen," said Washington attorney Robert Lotstein. His firm, Lotstein Buckman, is general counsel for the National Association of Mortgage Brokers.

Chase said the customer who is suing him wasn't unhappy. "In fact, we was very happy with us," he said. "No one was mad, no one thought we did a bad job."

But while visiting with a lawyer on another matter, the topic came up and a "boiler plate" law suit was born, he said, because the plaintiff was told "he might could get some money" from it.

The suit charges that yield spread premiums are "a pay back" under RESPA and therefore violate the consumer protection law, Chase said. "It's based on a pure legal issue; that's how these lawyers make their money."

Indeed, the law allows consumers to recover three times the amount of their actual damages plus attorney's fees. In Chase's case, that's three times $11,000 and then some.

But even though RESPA is a federal statute, the suit was filed in a state court. The reason, the mortgage brokers believes, is two fold:

First, he said, "most lawyers don't want to set foot in a federal court." But second, and perhaps most important, in a state court, lawyers "can drag state issues" into the equation.

In his case, Chase said, he's also been charged with fraud for violating Texas' deceptive trade practices act.

The case has gone to summary judgement, with Chase's side arguing that the plaintiff waited too long to file and the case should be dismissed because it violates the state's statute of limitations.

But even if he wins the case on that point, the mortgage broker said the bad news is he had to hire a lawyer and is already out what he considers big money. And if he loses, he figures the cost could easily run $40,000.

Chase cautioned his fellow brokers that if they don't have a good errors and omissions insurance policy, they should obtain one. "On any given loan, a lawyer can sue you," he warned. "And if he does, it gets expensive quick."

He also advised those brokers who already have E&O coverage to read their policies carefully. "You need a policy that also pays for defending you" in a law suit, he said.

Meanwhile, Lotstein Buckman now counts more than 100 state and local initiatives aimed curbing abusive loan practices.

For the most part, the bills being offered at the state and local level are "spot" measures aimed at addressing a particular item, the firm's Stephanie Shaw reports. For example, West Virginia passed a bill this year to deal solely with loan flipping. However, 33 are comprehensive measures that address numerous issues.

Of the four all-encompassing, multi-faceted bills which were passed this year, the "least egregious," at least from the lending business's point of view, was the one enacted in Florida. But the "polar opposite" of the Florida measure was cleared in Georgia, according to Ms. Shaw.

Georgia's legislation, which takes effect Oct. 1, is "now the worst written and enforceable predatory lending act in the country," agrees Robert Armbruster of Armbruster Mortgage Services in Lawrenceville, Ga., who fears it could replace the North Carolina law as the new national model.

"I think you will be see some lenders pulling out of Georgia if something doesn't happen" before the bill takes effect," said Armbruster, who is NAMB's Treasurer.

The legislative news isn't all bad, however. In what she called "great news," Shaw said she sees a trend developing in which states are pre-empting local initiatives.

Florida, Maryland and Georgia are among those states which have acted to prevent what otherwise would be "a compliance nightmare," she reported.

The attorney also believes lawmakers are taking "more interest" in legislative proposals instead of just voting "yea" or "nay" without taking the time to understand what their votes mean. And she says states are making it tougher on employees of brokers and bankers.

Georgia, for example, will require background checks on anyone with the power to change information on a loan application. And Michigan now requires that anyone who works for more than one lender to be licensed.

Published: July 31, 2002

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.