The mortgage industry is watching closely as corporate and plaintiffs' lawyers hammer out a settlement of a nationwide class action with a unit of Ford Motor Co.
The talks center on claims that Ford Consumer Finance Co. improperly encouraged brokers to steer borrowers toward the highest-cost loans. The settlement could result in a string of costly payouts to borrowers, industry observers said.
Similar claims are pending against Countrywide Funding Inc. (now Countrywide Home Loans), Pasadena, Calif.; Contimortgage Corp. in Horsham, Pa.; and GE Capital Mortgage in Raleigh, N.C. Brokers in all the cases were paid steep fees, known as "overages," to drum up high-interest rate loans.
A settlement wouldn't have the binding effect of a court ruling, "but it would set a precedent," said Paul Mondor, director of regulatory compliance for the Mortgage Bankers Association of America.
Details of the settlement are expected to be made public Monday, said Daniel Edelman, a Chicago-based attorney for some of the plaintiffs. Talks have been under way for several months.
A spokesman for Ford Consumer Finance said the company decided to settle rather than incur additional litigation costs.
A settlement by the Dallas-based company, which makes home loans to people with blemished credit records, would end a 1995 lawsuit brought on behalf of 50,000 to 80,000 borrowers.
The proposed settlement will allow for a $50 payout or $250 discount on a refinanced loan to any borrower, sources say.
In addition, if customers can prove that their broker promised to work in the client's best interests, they may be eligible for a larger rebate, which will be determined on a sliding scale, Mr. Edelman said.
Observers estimate that the settlement will cost Ford from $4 million to $20 million.
But the real cost of the suit may be felt, several years down the line, by the mortgage brokers who funnel loans into wholesale lenders.
"These lawsuits are pitting brokers against lenders, and brokers will be the victims," said Kay Kinney, executive vice president for the National Association of Mortgage Brokers.
Ms. Kinney said that while large wholesale lenders have stressed to her group their commitment to mortgage brokers, an increase in similar lawsuits may mean they will reconsider.
"When bull elephants fight, the grass loses," Ms. Kinney said. "And mortgage brokers are the grass here."
Many lenders blame the suit on the Department of Housing and Urban Development, citing its nebulous definition of broker responsibility. HUD is due to publish a definitive ruling in the fall, following an extensive negotiating process with consumer advocates, lenders, and brokers.
Whatever the fallout from the Ford settlement, the volume of class actions filed in the past two years is creating a rising resentment in the mortgage industry toward plaintiffs' lawyers. Lenders, trade associations, and brokers increasingly complain that the lawyers - not borrowers - are reaping the profits.