Mortgage brokers and yield spread premiums: legitimate fees or illegal kickbacks?

• Author: Schiff, Michael P.

The majority of consumers initially consult a mortgage broker regarding financing their home purchase. In fact, it's estimated that mortgage brokers were involved in handling approximately half of the $333 billion in home mortgages transacted in 1996.[1] Borrowers look to their brokers as their advisors in obtaining the best rates available. Moreover, case law has interpreted this relationship as a fiduciary one.[2] Unfortunately, many borrowers don't seek independent legal advice regarding their imminent purchase, incorrectly assuming that the mortgage broker or title company's attorney represents them.

The result is at closing they first learn of various junk charges which they don't understand and are hestitant to pay However, at this point, it is usually too late to challenge the broker and lender due to the parties' urgent wish to close and potential contractual liabilities if closing doesn't occur. An example of such junk charges are yield spread premiums (YSPs), a method for some lenders to compensate mortgage brokers for steering business their way, with the broker retaining a percentage of the loan interest without clear disclosure to borrowers. Specifically, a lender may offer a seven percent interest rate but will allow a broker to charge and keep anything over seven percent including points up to a maximum rate. This payment may be entered on the closing statement as "YSP" or simply not divulged to the borrower. As such, are these premiums illegal kickbacks or legitimate fees under federal and state law?

The applicable federal law, the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. [subsections] 2601 et seq., was enacted in 1974 to protect consumers by requiring disclosures of fees and costs connected with receiving a federally related mortgage transaction. Violations may result in both criminal and civil penalties, including treble damages.[3] The enforcing agency is the U.S. Department of Housing and Urban Development (HUD).

Private actions are allowed with attorneys' fees awarded to the prevailing party at the court's discretion.[4] Under [sections] 8 of RESPA, it is illegal to give or accept any fee, kickback, or thing of value for referrals or fee-splitting in connection with a real estate closing. Yet, payment for goods furnished or services actually performed is allowed as long as it bears a reasonable relationship to the market value of the goods/services.[5] Therein lies the argument of whether this premium can be defined as a service and therefore exempt or an illegal unearned fee.

HUD has not taken a position on the illegality of these payments but has proposed a rule clarifying when under RESPA a broker must disclose the payment...