Politicians and trade groups are criticizing a recent court ruling which they say could open the floodgates for class actions in the mortgage industry.
This month the U.S. District Court in New Hampshire granted class certification to Mulligan v. Choice Mortgage Corp., which alleges that mortgage broker Choice improperly charged borrowers for loans.
It was the first time class certification has been granted in such a case, and could mark a turning point in a battle that has raged for several years over how brokers are compensated.
The regulations that govern how lenders and their affiliates can be compensated, deriving from the Real Estate Settlement Procedures Act, or Respa, do not clearly spell out lenders' responsibilities, some say, leaving room for lawsuits.
More than 140 suits seeking class certification over mortgage broker compensation are pending nationwide, according to the National Association of Mortgage Brokers. Similar suits that named lenders as defendants have been denied class-action certification in recent months, and industry groups say plaintiffs' attorneys are now going after brokers instead.
Rep. Ronald Robert Ehrlich Jr., R-Md., used the occasion to tout a bill he introduced to Congress this year that would put a moratorium on such suits. "The Choice Mortgage case is the most recent and strongest evidence in support of our bill," Mr. Ehrlich said in a press conference Monday.
The bill has more than 130 sponsors in the House, the association said.
Rep. Ehrlich blamed the Department of Housing and Urban Development for the spate of lawsuits. "HUD's unwillingness" to clarify Respa regulations has led to "frivolous lawsuits against innocent small businesspeople," he said.
A HUD spokesman defended the agency's actions. HUD "has been undertaking a serious effort to address this problem for several years," he said.
The department most recently proposed a related rule in the fall of 1997 that drew 9,000 comments from industry and consumer representatives, he said.
The plaintiff's attorneys say Choice Mortgage's activities may be illegal even without considering Respa. Choice, based in Nashua, N.H., had borrowers agree to pay a fee for the "loan best suited to their needs," said plaintiff's attorney Edward O'Brien.
Instead, Choice brokers secured loans at interest rates that were higher than those that homeowners qualified for, Mr. O'Brien said. In return, lenders that made the loans gave Choice bonuses for the high-rate loans. These bonuses, known as yield-spread premiums, have been a bone of contention in the lending industry for years.
Choice Mortgage contends that the case is just another example of an overeager class-action bar. "These suits are driven by plaintiff's attorneys," said Steve Grill, a lawyer representing Choice.
The initial plaintiffs, the Mulligans, even returned to Choice after the suit was filed to refinance their loan, Mr. Grill said.
Mr. O'Brien, who has been the lead attorney on several suits against mortgage lenders and their associates in the past, said that this case could be the last of its kind for his firm. "I'm sick of the mortgage industry," he said. Mr. O'Brien will be setting his sights next on real estate brokers.
