Jan. 18, 2002

After being inactive on predatory lending in its first year, the Bush Administration could take its first substantive policy step on the issue any day - but the step it's considering would condone and legitimize a highly abusive practice that costs individual homeowners tens of thousands of dollars in extra charges. Not surprisingly, the step is strongly supported by industry players who profit by putting borrowers in loans at higher rates than those they actually qualify for.

The policy involves yield-spread premiums, or kickbacks, bonus payments that lenders make to mortgage brokers for putting a borrower in a higher interest rate loan than the loan they actually qualified for. "Unless HUD radically shifts its position, its final policy statement will give a free pass to brokers and lenders conspiring against borrowers to charge higher rates. Borrowers think they are paying brokers fees for help in getting a loan at a good rate; now HUD is proposing to shield brokers for also taking kickbacks to jack up borrowers' loan costs," said ACORN National President Maude Hurd.

"And the data show that the people who end up losing the most to yield-spread premiums are disproportionately minority, low-income, female, and elderly. HUD is on the verge of encouraging that discrimination and predation by permitting brokers and lenders to conspire against borrowers," continued Hurd.

ACORN has encountered numerous cases of abusive yield-spread premiums. In June 1999, a St. Paul (MN) homeowner with good credit (they just refinanced their mortgage into an 'A' loan) received through a mortgage broker a $57,600 home loan with a variable interest rate that could only increase from its starting rate of 9.8%. On that loan, the broker received direct fees of $3,900, almost 7% of the loan amount, while the borrower paid the lender $850 in processing fees. On top of the $3,900, the lender provided the broker with a yield-spread premium of $1,152 for putting the homeowner in a higher rate than the lender would have otherwise charged. The loan's pricing was clearly not driven by the borrower's credit history or financial situation, but by the broker's desire to generate fee income however it could and the lender's desire to take as much money from the borrower as possible, even if it meant giving a little of that money to the broker.

Another example involves a Los Angeles homeowner whose broker lied to her about several different aspects of the $136,000 home loan she received in September 1999. At the final closing, she paid the broker $6,761 in financed fees, plus another $725 in lender fees. The broker told the borrower she was getting a fixed-rate loan at 5% interest, but the loan's interest rate actually jumped to over 10% after two months. For putting the borrower in this high rate, the broker received a yield-spread premium of $2,380 from the lender. The borrower was also locked into the high rate by a two-year prepayment penalty for over $6,000.

The federal Real Estate Settlement and Procedures Act (RESPA) currently prohibits most kickbacks to brokers, but yield-spread premiums may be provided for services actually rendered, according to a 1998 federal court interpretation (Culpepper vs. Irwin Mortgage). However, in the examples cited above and in the vast majority of loans with YSP's, the broker had already been very well compensated for its services. HUD's policy statement would "clarify" RESPA by overruling the court decision and requiring only that YSP's be "reasonable." But HUD knows that it has no capacity to monitor loans for abuses while this policy change would short-circuit class-action lawsuits, which are the only independent remedy available.

"This is not a clarification of policy but a gutting of consumer protections, and one HUD ought to be ashamed of for even considering," said Hurd. "A final endorsement of the proposed policy statement would mark another cynical nod by the Administration to powerful corporate interests. It's especially outrageous at a time when so many families are struggling to keep up with their mortgage payments because of the current recession."

For more information, or to get in touch with victims of these practices, contact the director of ACORN's Financial Justice Center Lisa Donner at 718-246-7900 or ACORN's Legislative Director Chris Saffert at 202-547-2500.