Copyright 2002 The Washington Post


The Washington Post
January 8, 2002 Tuesday
Final Edition
SECTION: FINANCIAL; Pg. E01

LENGTH: 837 words

HEADLINE: Sarbanes to Air Concerns About HUD Loan Reforms

BYLINE: Sandra Fleishman, Washington Post Staff Writer

BODY:


For the past year, Housing and Urban Development Secretary Mel R. Martinez has pledged publicly to fight abusive mortgage lending, zeroing in on excessive and unexpected fees that hit borrowers at closing. But a key senator says HUD is about to issue rules that do exactly the opposite.

Senate Banking Chairman Paul S. Sarbanes (D-Md.) has scheduled a hearing today to highlight his concerns that HUD is hurting, not helping, borrowers with its new policy on what are known as yield-spread premiums.

Yield-spread premiums are fees paid by lenders to mortgage brokers for signing up borrowers at interest rates higher than they would normally qualify for.

The premiums are nothing new, and neither are lawsuits that claim they're abusive. But a ruling last summer in one of those cases led HUD to issue an Oct. 15 "clarification" of when the fees are legal; the agency also said yield-spread premium complaints should be explored individually rather than as class-action suits.

HUD plans to issue new rules supporting the statement this month. Sarbanes has called his hearing because he says it's important to discuss the issue before the rules are formalized.

Yield-spread premiums can be legitimate, Sarbanes said, but only if a borrower chooses to pay broker fees through the higher-interest loans.

But in many cases, the borrower doesn't know about or understand the fee, Sarbanes and consumer groups say. Instead the borrower often both pays the broker's fees directly and gets the higher interest rate that brings the broker a premium, they say.

The premiums in these cases are simply payments for referrals, Sarbanes claims. And referral fees are outlawed under the Real Estate Settlement Procedures Act of 1974 (RESPA).

Though there's no data on how many people pay yield-spread premiums, consumer groups say they are widespread.

Harvard University law professor Howell E. Jackson, who will testify today, studied 3,000 mortgages as an expert witness in one lawsuit. Jackson found the premiums are costing home buyers, particularly the less educated, billions of dollars a year.

Jackson found that rather than being used to finance settlement costs for those who are short on cash, the premiums simply allow brokers to get more money.

Sarbanes said HUD's proposal "will facilitate the predatory practice of steering homeowners to higher-interest-rate loans without their knowledge, and without any redress."

HUD disagrees, contending its steps are part of an effort to reform the confusing mortgage settlement process. "The Department's reform efforts will ensure better protections for new home buyers and those who refinance, offer clarity for the mortgage lending industry about their disclosure responsibilities, and provide an additional tool to fight predatory lending," the agency said in a statement yesterday.

The mortgage industry, which has billions of dollars at stake in about 150 lawsuits, claims HUD is simply reiterating a 1999 policy and addressing questions of "ambiguity" raised in a recent court ruling that favored borrowers.

The industry has argued that the federal appeals court ruling last summer certifying a class-action class of plaintiffs in Culpepper v. Irwin Mortgage Corp. opened lenders up to $ 50 billion in liability suits. Lenders have warned that the ruling could be crippling if widely applied.

"We believe that the statement is the right one to maintain the [financing] tools for consumers and to give clarity to lenders and consumers about what the rules are," said John Courson, chairman-elect of the Mortgage Bankers Association.

Consumer advocates strongly disagree.

Ira Rheingold, executive director of the National Association of Consumer Advocates, is among those who claim HUD issued the clarification specifically to block progress on the lawsuit.

The new policy undermines class-action lawsuits, say critics, because it says each loan must be judged on its merits.

"The lending industry has known that these fees are illegal for many years, but they always thought they could beat the suits at the class-certification phase," Rheingold said. "Once they lost that, they brought pressure on HUD to change the rules of the game."

There are 40,000 borrowers nationally covered by the Culpepper suit. One of them, Beatrice Hiers, 43, of Fort Washington, will testify at today's hearing. The federal employee said she was "inexperienced" when she bought her first house in 1997. After turning down a 7 percent fixed-rate loan from one lender, Hiers said she turned to a broker. The broker at the last minute said the best deal available was a 7 percent adjustable-rate FHA-insured loan.

Hiers took the loan "reluctantly, believing that I had no other options," and then found that the lender paid her broker a $ 4,538 yield-spread premium, on top of the $ 1,544 origination fee and $ 4,736 in loan discount points she paid directly.

Hiers later found that she could have qualified for the same loan at about 5.5 percent with no yield-spread premium.

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