Mortgage Fees: Payment For Services Rendered, Or Rip Off?

WASHINGTON - Mortgage lenders are asking the Clinton administration for just one Christmas present this year: Get the Grinch - a New England class-action lawyer named Ed O'Brien.

O'Brien, a Nashua, N.H.-based class-action attorney, has spearheaded a national legal effort to rid home-loan borrowers of what he sees as a multibillion-dollar rip-off: Extra fees paid by consumers when they go to close on their mortgages.

In recent weeks O'Brien and colleagues have filed federal class-action suits against seven major mortgage companies for alleged illegal referral payments to local loan brokers. Earlier this year, he and other lawyers won a settlement estimated at $4 million to $20 million over a similar issue from Ford Consumer Finance, a large home-equity mortgage lender.

Now O'Brien is upping the ante: He's encouraging consumers to take on their lenders directly. Last week he called for homeowners to pull out their settlement sheets, "look for any fees paid by a lender to your mortgage broker with names like `yield spread premium' or `servicing release premium,' and demand that they be refunded to you. Those fees probably are illegal."

The lending industry is outraged by O'Brien's tactics, including his direct-mail solicitations of borrowers who've closed loans with lenders he plans to sue. O'Brien confirmed in an interview that he obtains the names from commercial vendors of public-records data.

"It's absolutely irresponsible," said Kay Kinney, government relations director of the National Association of Mortgage Brokers. "The fees he's telling consumers are illegal are completely legitimate compensation for services rendered, and they're disclosed (on settlement sheets)."

Kinney's group has asked the federal agency with regulatory jurisdiction, the department of Housing and Urban Development (HUD), to urgently issue new rules that clarify what types of home-loan fees are legal and what fees are not. Otherwise, said a Dec. 4 letter from the trade group to HUD, "the mortgage industry cannot defend itself from this type of attack without a clear and decisive position from this administration stating that lender-paid mortgage broker fees are legitimate compensation. . . ."

At issue is a practice that has mushroomed in the past decade, and has helped transform how millions of Americans obtain home mortgages.

During the 1950s, '60s and '70s, the vast bulk of home loans came from local banks or from savings-and-loan associations. During the 1980s and '90s, however, this system was changed by two phenomena: The 1980s crisis of the S&Ls, and the explosive growth of Fannie Mae and Freddie Mac - congressionally chartered superinvestors that buy home loans from mortgage bankers.

Mortgage bankers, in turn, have found it cost-effective to use small, locally based loan brokers as a major source of their loans. Rather than build expensive, staffed retail branch offices in multiple states, national mortgage bankers instead buy from local brokerage firms. Mortgage brokers, who themselves generally lack the capital to function as direct lenders, now account for an estimated 40 percent to 50 percent of all new home-loan originations nationally, according to industry data. For their compensation, brokers typically charge borrowers an agreed-upon fee, and often also receive a "back-end" fee from the mortgage banker who buys the loan from them at or after closing.

Critics such as O'Brien say the negotiated fee paid by the loan applicant to the mortgage broker is not the problem. But the "fee that the borrower doesn't know anything about upfront" that the wholesale mortgage banker pays the local broker violates the federal anti-kickback law, according to O'Brien.

In one of his pending federal suits, O'Brien cited the example of a homeowner who agreed to pay $2,500 to a local loan broker in connection with a $50,050 new mortgage. What the borrower didn't understand, O'Brien charged, was that another $1,001 was paid to the broker by the California-based mortgage lender for "inducing (the borrower) to sign for a mortgage loan" at what O'Brien claims was an above-market rate.

The fee was disclosed on the applicant's settlement sheet as a lender-paid "Yield Spread Premium." All of O'Brien's suits charge that such payments are illegal, unearned "referral fees" that are paid by the consumer in the form of higher monthly interest payments.

Mortgage brokers disagree. In their Dec. 4 appeal to the Clinton administration, the brokers argued that such fees are essential to the economics of the 1990s' system of housing finance, and are beneficial to consumers by allowing brokers to connect them with diverse, competitive lenders across the country.

In effect, said the brokers, lender-paid fees represent "compensation for the services and facilities of a branch office" that wholesale mortgage bankers, and consumers, otherwise don't have to pay for.

Ed O'Brien's response to that: Humbug. I'll see you all in court.

HUD's response: We're studying the issue. Look for a ruling in the new year.