Mortgage lenders are worried that they may be held liable for a broker's failure to disclose settlement fees to borrowers.

They fear that the courts could set policy governing liability for the fees while the government decides how to implement the Real Estate Settlement Procedures Act.

A suit filed by borrowers in Atlanta accused a mortgage broker of failing to disclose a referral fee that the broker received from the lender originating the loan. The borrowers' suit contended the failure to disclose the fee violated Respa regulations.

The case has been broadened into a class-action suit on behalf of 189 borrowers, seeking damages from 17 lenders that purchased mortgages from and paid fees to the same broker.

"It's a very dangerous case for the mortgage lending industry," said Joe Lefkoff, counsel for the National Home Equity Mortgage Association."It's providing the opportunity for a federal judge to clarify provisions of Respa, which should have been done by the Department of Housing and Urban Development."

Industry representatives are particularly concerned that liability is being transferred from the mortgage broker, which has declared bankruptcy, to companies that purchased the loans.

"If it's a secondary market sale, it just doesn't apply to Respa," said Bill Cumberland, general counsel for the Mortgage Bankers Association of America.

But lawyers for the plaintiffs contend that because the transactions were table-funded, or funded by the lenders, the loans fall under Respa guidelines.

Originally filed as McDermott vs. Mercury Capital Services and Express America Mortgage Corp., the suit now involves all lenders who did business with the Atlanta-based Mercury Capital mortgage brokerage firm from 1993 to July 1994.

During that time, the brokerage made 189 loans, involving lenders varying in size from Countrywide Funding Corp. to small lender Washenaw Mortgage Co.

The original plaintiffs, Sean S. and Elizabeth M. McDermott, received a good faith estimate for a $275,000 loan in September 1993 from Mercury Capital Services.

The estimate included over $3,000 in itemized closing fees, but did not show a $2,380 charge that appeared on the settlement statement the following month as "Svc. Release Prem. to Mercury."

The McDermotts argue that the 'service release premium' is actually an illegal kickback. Additionally, they charge they were not provided with a Respa booklet or with a second good faith estimate.

Respa requires lenders to provide good faith estimates within three days after a loan application is submitted.

The suit was originally filed in July 1995, and received class-action status from U.S. District Court Judge Marvin Shoob in early August.

Lawyers representing lenders expressed surprise at how quickly class- action status was conferred on the case, and said Judge Shoob is regarded as a pro-consumer jurist.

Mr. Cumberland of the Mortgage Bankers Association said the only question in the case that should be before the court is whether the borrowers understood what fees they were paying. He also expressed concern that class-action suits are "probably a good idea that's being abused."

Observers are also worried that the case will set unfair precedents for Respa violations.

Lenders always need to be aware of the origination practices of the brokers they are involved with, Mr. Cumberland added. "If a broker is not properly following (Respa) procedures, they are probably not following good underwriting procedures. They're going to be making bad loans."

Mortgage lenders are worried that any publicity may generate additional cases. "When you defend lenders, you get so many copycat cases," said one lawyer who is representing several of the defendants.

The case is still in its early stage, said lawyers for the plaintiffs. Defendants are just returning written requests for information.

All defendants deny any wrongdoing, according to one of their lawyers.

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