Copyright 2002 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
January 8, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 1010 words
COMMITTEE:
SENATE BANKING HOUSING AND URBAN AFFAIRS
HEADLINE: PREDATORY LENDING PRACTICES
TESTIMONY-BY: MS. SUSAN M. JOHNSON, A PRIVATE CITIZEN
FROM
AFFILIATION: MINNESOTA
BODY: Hearing on "Predatory Mortgage Lending
Practices: Abusive Uses of Yield Spread Premiums."
Prepared Statement of
Ms. Susan M. Johnson A Private Citizen from Minnesota
Tuesday, January
8, 2002
My name is Susan Johnson and I am from Cottage Grove, Minnesota.
I am pleased to have the opportunity to be able to address the Senate Banking
Committee today about the $1620 "yield spread premium" that was secretly paid by
my lender, ABN AMRO Mortgage Group, to my mortgage broker, Allstate Mortgage, at
my expense.
In April, 2000 my husband David and I had just moved back to
the Twin Cities from Colorado Springs and were looking to buy a house. Through a
real estate agent, we were introduced to David Schultz, owner of Allstate
Mortgage, a mortgage broker in Plymouth, Minnesota. After meeting Mr. Schultz at
a local restaurant, we hired him to find us a mortgage loan. From the outset, we
were told by Mr. Schultz that he would find us a loan with the best possible
interest rate. Mr. Schultz specifically told us that the fee for processing the
loan would be 1% of the loan amount. We signed a written broker agreement with
Mr. Schultz which allowed for a 1% broker fee. (See, Exhibit 1, Loan Origination
Agreement) No other fees were ever demanded by Mr. Schultz, disclosed, or agreed
to.
When the closing occurred on May 23, 2000, to our surprise, the
interest rate was higher than we understood it would be and the fees were far
greater than the 1% fee we had agreed to. (See, Exhibit 2, HUD-1 Settlement
Statement at lines 801-812) In fact, the total fees were nearly four times that
amount! ( $5242.00) This included what we only later came to learn after the
closing was a "yield spread premium" - a $1620 payment from the lender to our
broker that was really paid by us since it was tied to an inflated interest rate
on our loan.
While we were upset about the fees, we had no choice but to
go through with the closing or risk losing the house; being found in default of
the Purchase Agreement; and forfeiting the $5000 earnest money we had already
given the sellers. While we objected to the fees and higher interest rate, there
was no way for us to find another loan and still close on time. We were stuck
and the broker knew it.
As our HUD-1 Settlement Statement shows, we were
charged the following fees at closing, none of which were disclosed, or agreed
to beyond the initial 1% origination fee:
$1296 (1%) Loan Origination
Fee
$1296 (1%) Loan Discount Fee
$395 Processing Fee
$200 Underwriting Fee
$150 Doc Prep Fee
$40 Funding Fee
$350 Commitment Fee
$285 Admin Fee
Only after the
closing did we discover the significance of the $1620 "yield spread premium"
(1.25%) which was assessed to us through an inflated above-par interest rate of
8.75%. At the time of the closing we had no idea what this "premium" was because
it was only vaguely disclosed on our HUD-1 Settlement Statement as a "Deferred
Premium POC"(1). In sum:
- The $1620 yield spread premium was not
disclosed, discussed or agreed to before the closing;
- My husband and I
were never informed that our loan had an above- par interest rate because of the
premium payment from AMN AMRO to the broker;
- The broker never
explained how the yield spread premium affected our interest rate or that our
monthly mortgage payments would be any higher because of the premium;
-
No rate sheet or other document showing the direct relationship between the
inflated interest rate and the yield spread premium payment from the lender to
the broker was ever shown to us;
- The yield spread premium did not
offset or reduce any fee we ever owed to the broker;
- The broker
received all fees that we owed and agreed to (and far more) directly in cash
from us at the closing.
After the closing I wrote to the State of
Minnesota Department of Commerce complaining about the transaction. After
reviewing my letter, the Department of Commerce advised us to seek private legal
counsel. The matter remains pending in Court in Minnesota. In that case, we have
agreed to be representatives of other borrowers whose loans had yield spread
premiums paid by the same lender in the same manner as ours.
In
conclusion, the $1620 yield spread premium on our loan was nothing more than a
bonus paid by the lender to the broker for securing a bad deal for my husband
and me, and referring a better deal to the lender. This conduct should be
illegal because:
(1.) the yield spread premium was not paid in exchange
for any "service" fee we owed the broker;
(2.) we received no benefit
from the premium the lender paid at our expense, such as an offsetting credit
against any closing fees or costs we actually owed, and;
(3.) the money
was simply a kickback to the broker referring our loan to the lender with a
higher interest rate.
The standard for evaluating the legality of this
practice should not merely be whether the broker's "total compensation",
including the yield spread premium and other fees we never agreed to, is somehow
"reasonable" based on the broker's after-the-fact attempt to justify the higher
fees he has already taken. Rather, the true nature of the disputed premium
should be evaluated: that is, what was the premium actually paid in exchange
for.
To allow as lax a standard as "reasonableness" of total broker
compensation to govern these transactions will only allow lenders and brokers
like ABN AMRO and Mr. Schultz to continue ripping-off unknowing consumers like
us, with a catch-us-if-you-can attitude. It will encourage brokers and lenders
to continue to try to slip additional bonus fees into mortgage transactions
regardless of what was agreed and without providing any actual credit to the
consumer bearing the cost. If lenders are paying bonuses and incentives to
brokers simply for referring high-rate loans to them, that should be illegal
without concern for whether the broker or lender thought the secret referral fee
was "reasonable". Thank you.
LOAD-DATE: January
9, 2002