Capital Briefs: Court Rules Broker Premium Violates Law

A federal appeals court ruling last week is expected to spark more lawsuits over a type of fee that many mortgage lenders pay brokers.

Reversing a lower court ruling, a three-judge panel from the U.S. Court of Appeals for the 11th Circuit in Atlanta said Friday that Indianapolis- based Inland Mortgage Corp. violated mortgage disclosure rules when it paid a "yield spread premium" fee to a broker in 1995. The decision-the first by an appeals court on this issue-is a serious setback for lenders, who had been winning most of these cases in the lower courts, experts said.

"Lenders and brokers are going to be inundated with new lawsuits" by borrowers, predicted Robert A. Cook, a partner with the law firm Hudson Cook LLP in Crofton, Md., who specializes in consumer financial issues.

The appeals court sent the case back to the lower court in Birmingham, Ala., for rehearing and reopened the chance that it could be granted class- action status.

Lenders commonly pay yield spread premiums to brokers who refer them mortgages with higher interest rates, experts said. Financial services firms argue that charging the higher rates allows them to reduce up-front costs for the borrower and pays for a bona fide service.

The fee that Inland paid to mortgage broker Premiere Mortgage Co. raised the cost of the loan to homebuyers John R. and Patricia S. Culpepper by $1,263.61. It was illegal because it was for referring a higher-priced loan and was not compensation for services provided to the borrowers or the lender, Circuit Judge Frank M. Hull wrote.