The 11th Circuit's decision last week in Culpepper v. Inland Mortgage Co. demonstrates the continuing uncertainty regarding the circumstances under which the Real Estate Settlement Procedures Act permits yield spread premiums.
In this first circuit court decision regarding the legal status of yield spread premiums, the 11th Circuit rejected the district court's conclusion that a table-funded mortgage is a "good" that can be sold by a broker to a lender. The court reasoned that the right to direct a mortgage loan to one of several alternative lenders does not constitute ownership of that loan.
The Culpepper decision does not address the circumstances under which a yield spread premium can be used to compensate a broker for services performed.
Indeed, the court's analysis specifically noted Inland's interrogatory responses conceding that payment of the yield spread premium was not compensation for services provided. Thus, the court's decision stands for the limited proposition that a yield spread premium is not permissible as payment to a broker for a loan where the lender is itself funding the credit.
Given this decision, there continues to be great uncertainty concerning the circumstances under which lenders may properly pay a yield spread premium to brokers. What is clear is that these payments will continue to attract class actions until such time as there is clarifying legislation, reasoned regulatory guidance comes from HUD, or a consensus emerges in the case law as to what Respa permits.
Recent efforts to forge acceptable legislative or regulatory guidance have been largely unsuccessful.
The principal reason reform has failed is that Respa litigation is only one issue in an emerging public policy debate involving the lending industry, consumer interests, and government regulatory and enforcement agencies concerning the circumstances under which borrowers who are similar credit risks may be charged different amounts for similar loans.
The Justice Department, for example, has been aggressively pursuing premium pricing ("overage") cases against mortgage lenders under the Equal Credit Opportunity Act and Fair Housing Act. Since its landmark settlement with Long Beach Mortgage Co., the Justice Department has adopted the view that any difference in the magnitude or frequency of overages paid by members of a protected class constitutes discrimination. The department has taken this view even when all loan negotiations are conducted by brokers or other independent third parties.
Other federal and state enforcement and regulatory agencies also are pursuing premium-pricing investigations using consumer protection legislation such as Section 5 of the FTC Act as well as discrimination laws to attack loan pricing practices perceived to be unfair.
Under these circumstances, Respa class actions and related consumer litigation and enforcement activity likely will continue to represent a significant business expense for the mortgage industry. Accordingly, lenders are well-advised to consider strategies to reduce their litigation risks with respect to broker compensation and related loan-pricing issues.
With respect to yield spread premiums, clear and timely disclosure to borrowers of payments to the broker from the lender can reduce lender exposure. Such disclosures should be both "meaningful" and "clear and conspicuous" to ensure they are deemed sufficient.
In addition, where yield spread premiums are intended to pay brokers compensation that otherwise would be obtained by the broker from the borrower, the borrower should be required to provide written acknowledgment of the benefits of this compensation arrangement. Most importantly, lenders should reevaluate their loan pricing practices in expectation of increased scrutiny by governmental agencies and consumer class-action lawyers.