The case of Teresa Lopez, who claims she was ripped off in a 1996 mortgage refinancing deal, spotlights a growing controversy over mortgage brokers' roles.
A lawsuit filed by Ms. Lopez names not only Delta Funding Corp., of Woodbury, N.Y., which provided the loan, but also All State Consultants Inc. of Plainview, N.Y., a broker she claims sold her a bill of goods when it got her to refinance.
In papers filed in U.S. District Court in Brooklyn, N.Y., Ms. Lopez, 71, says an All State mortgage broker told her he could reduce her monthly cost to $750 a month, from $973.74, with a new 30-year loan at 7% - and that she would get $3,000 in cash at closing. The loan she wound up with, she charges, carried a base interest rate of 10.99% and an APR of more than 11%, came with no cash up front, and required monthly payments that eventually exceeded $1,100.
Ms. Lopez, who lives in Jamaica, N.Y., ultimately defaulted.
Advocates opposing predatory lending are pressing for regulation of the fees charged by mortgage brokers, which the advocates claim create an incentive to sell loans without regard for the customer.
"The brokers are in essence acting as agents for the lenders," said John P. Relman, an attorney and owner of Relman & Associates in Washington. "The only thing the broker is interested in is getting the deal done - there is absolutely no incentive for the broker to look out for the purchaser."
Attorneys such as Mr. Relman favor regulations that would hold lenders liable for the actions of mortgage brokers and put a ceiling on the fees and points brokers could receive from loan transactions. Allstate received a $5,800 fee, which was rolled into Ms. Lopez' loan, her suit says. "As long as there is no cap on what they can do, the situation is ripe for abuse," Mr. Relman said.
Kickbacks to brokers cost consumers $7 billion a year and disproportionately affect minority members and women, said Patricia Sturdevant, executive director and general counsel of the National Association of Consumer Advocates.
Brokers argue that no new laws or regulations are needed. In a statement issued Friday, the National Association of Mortgage Bankers said: "We believe abusive lending is the work of a tiny minority in the mortgage origination industry. The best solution is twofold: increased enforcement of existing laws and industry self-regulation."
Hugh Miller, president and chief executive of Delta Funding, acknowledged that his company did not pay enough attention to broker compensation in the past. Under an agreement with the New York State Banking Department last year, he said, Delta now monitors payments to brokers and other vendors and tests whether its borrowers can afford their loans and whether the loans are in their best interest.
"We have agreed to things that go well above what's required by the law and well beyond what anyone else is doing in the subprime industry to ensure we are offering the maximum in consumer protection," Mr. Miller said.
Lee Squitieri, a partner with Abbey, Gardy & Squitieri, which is representing Ms. Lopez, said that despite the assurances from Delta and other subprime lenders that oversight is in place, such loans are still being made.
"You're the lender, and if you're taking these loans, people will go out and make them," he said.
Mr. Squitieri said he plans to argue that when Ms. Lopez got her loan in 1996, the brokers knew Delta would make the loans and that Delta let the brokers know it would make them. "So don't tell me, 'I didn't do anything because I don't have a sales force,' because how did you become a magnet for all these loans?" he said.
The suit, which is awaiting a decision on class-action status, also names Bankers Trust Company of California, in Redwood City, and Norwest Bank Minnesota in Minneapolis, which acted as trustees for Delta.
Though current case law and federal regulations are unclear on the legality of yield spread premiums - which reward brokers for bringing in higher rate loans - decisions have been going against lenders in cases that assert lenders to be culpable for brokers' actions.
In June the North Carolina Business Court - a trial-level tribunal created in 1994 on the recommendation of the North Carolina Commission on Business Laws and the Economy to handle complex business litigation - denied a motion to dismiss filed by two subprime lenders named in a suit over a broker's activities.
The case, Tomlin v. Dylan Mortgage Inc., names The Associates Financial Services and EquiCredit Corp. as defendants along with Dylan, the broker. The decision found sufficient grounds for asserting liability against Associates and EquiCredit: "Though the Court reserves judgement on the question of whether Associates and EquiCredit are holders in due course, the Court finds that, as assignees, they are subject to liability under" the Home Owner Equity Protection Act. The decision allows the lawsuit to go forward.
Another case decided in early 1998, Culpepper v. Inland Mortgage, reversed a district court's ruling that the yield spread premium paid to Inland Mortgage did not violate the anti-kickback provision of the Real Estate Settlement Procedures Act.
Several lenders say they are in a Catch 22: They move too slow for borrowers before loans are written and then get all the blame when people cannot meet their obligations. Further, lenders say, borrowers by law receive terms of the loan before closing and should know what conditions apply.
But more important, lenders contend, the heightened scrutiny of subprime lending coupled with the dismal market conditions of the last two years have purged predatory brokers and lenders.
"Fortunately, with the shakeout in the mortgage business since 1998, most of those guys have disappeared," said Scott McAfee, president and chief executive of WMC Mortgage Corp., a subprime lender in Woodland Hills, Calif. "There will always be the rotten apple in every barrel, but with interest rates going up and the fanatic focus on predatory lending, there's not much room for excessive fees or rates."
Mr. Miller argues that the fuss over subprime lending is hurting those the advocates purport to help. "At the end of the day, this is adversely restricting the ability for credit to homeowners who legitimately need it, and it's a shame," he said.
The lenders defended mortgage brokers as hard-working independent businesspeople who provide a valuable service and should not be tarred because of a few rogue brokers.
But consumer advocates say otherwise. "If you reform the lenders but not the brokers, the lenders will put their efforts into papering over their end so that they can still accept these loans," Mr. Squitieri said.