Bjustrom v. Trust One MortgageBjustrom v. Trust One Mortgage
ORDER GRANTING SUMMARY JUDGMENT FOR DEFENDANT
Ms. Bjustrom, as a representative class member, alleges that defendant Trust One Mortgage Corporation (“Trust One”) has engaged in a uniform business practice of charging, collecting, and exchanging excessive closing fees with sponsored mortgage brokers on Federal Housing Administration (“FHA”) mortgage loans. Plaintiffs have asserted causes of action for breach of contract, violation of the Real Estate Settlement Procedures Act,
Background
Trust One is a mortgage lender based
in
Irvine, California, which funds FHA loans it originates as well as those processed by mortgage brokers who refer the loans to Trust One for funding. These mortgage brokers, formally termed “loan correspondents,” are sponsored by Trust One, who by law is responsible for the acts of the
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mortgage brokers in originating loans.
If there exists a 1% origination fee cap, by defendant’s admission Trust One and the mortgage brokers it sponsors will be in violation HUD rules. In addition to the 1% origination fee, collected directly from the borrower, mortgage brokers also receive payments from the lender, Trust One, in the form of “yield spread premiums” and “service release premiums.” “Yield spread premiums” are payments by the lender to the mortgage broker on an “above par” loan brought to the lender by the broker. An “above par” loan is one above the “wholesale” rate, the lowest rate a lender will offer without charging the borrower by assessing discount points. The higher the loan is above par, the higher the yield spread premium that Trust One pays the mortgage broker. This higher payment is not for any particular work that the mortgage broker has done, but rather depends on the daily “rate sheets” published by Trust One that disclose to the mortgage broker its par rate and its yield spread premiums. Similarly, Trust One pays “service release premiums” to mortgage brokers based on the amount of the loan referred to Trust One to “service.” A larger loan has more valuable “servicing rights” because the interest paid by the borrower will be greater. Again, the premium does not depend necessarily on work performed by the mortgage broker, but instead is a flat rate that increases as the mortgage broker refers larger loans. Mortgage brokers do not, as a practice, disclose information relating to how their income increases with the referral of larger and higher interest loans, but both yield spread and service release premiums are disclosed on the borrower’ HUD-1 Settlement Statement. (See, e.g., Compl. Ex. A at 1).
The details of Ms. Bjustrom’s loans illustrate the contested payments to mortgage brokers at issue in this case. Ms. Bjus-trom’s FHA loan to purchase a residence was processed by mortgage broker Mortgage Specialists Inc. in 1999. She closed on the FHA loan transaction with Trust One, obtaining a loan for $140,542.00 at 8%. (Compl. at Ex. B). According to the HUD-1 Settlement Statement laying out the charges in the mortgage, Ms. Bjustrom paid $7,478.27 in settlement charges. (Compl. at Ex. A). Among these charges were a $1,374.00 origination fee to Mortgage Specialists, Inc., as well as various other appraisal fees, insurance, taxes, and recording fees. Id Both the yield spread premium of $702.71 and the service release premium of $1,786.78 are included on the HUD-1. They are, however, listed in a separate category and not included under the category of services paid by the borrower. Plaintiffs challenge the fees paid to the mortgage broker in excess of the 1% origination fee.
This Court granted class certification to review the 1% fee cap issue. (Dkt. No. 109). First, the Court certified a class of persons who were charged more than 1% of the principle of their loan for the originating and processing of the loan. Specifically, the class consists of:
All persons residing in the United States who, dating back the length of the applicable statute of limitations for a breach *1187 of contract claim, from the date the Complaint was filed through and including the present:
1. Obtained an FHA mortgage loan funded by Trust One;
2. Written on a standard FHA mortgage contract similar to Plaintiffs in limiting the fees and charges collected to those authorized by the Secretary of HUD;
3. Where the loan was registered with Trust One for funding by a mortgage broker or loan correspondent;
4. Where the aggregate fees charged and collected for originating and processing the loan by way of direct or indirect fees (including, any loan original fee or yield spread premium tied to the interest rate on the loan, however denominated) exceeded 1% of the aggregate loan amount.
This Court also certified a RESPA subclass that includes:
All persons who, within one year from the date the Complaint was filed through and including the present:
1. Obtained an FHA mortgage loan funded by Trust One;
2. Where the loan was registered with Trust One for funding by a mortgage broker or loan correspondent;
3. Where a yield spread premium, service release premium and/or lender paid broker fee, however denominated, was paid by Trust One to the mortgage broker or loan correspondent;
4. Where aggregate loan origination fees (all fees for loan origination and processing services, however denominated), equal to or exceeding 1% of the loan amount, were also charged.
The parties agree on the facts, leaving only issues of law. There is no dispute that plaintiffs are charged more than 1% of their total loan amount in compensation to the broker. There is no dispute that the payment of yield spread and service release premiums, specifically, raise mortgage broker compensation above the alleged 1% cap.
Analysis
Three dispositive matters of law are raised by the certified class and subclass:
1. Does a 1% “origination fee” cap broker compensation?
2. Do yield spread and service release premiums equal to or exceeding the 1% cap violate HUD regulations?
3. Do yield spread and service release premiums violate RE SPA?
In accord with the certified class, defendant admits that it pays yield spread and service release premiums that raise payments to mortgage brokers above the alleged 1% cap. Since the only disputed issues are matters of law, and there are no material issues of fact, this case is appropriately decided on summary judgment.
I. 1% Fee Cap
The 1% fee cap plaintiffs allege is not a statutory provision, but a HUD regulation. Analysis shows that HUD could promulgate such a rule under the authority Congress has granted to administer the mortgage insurance program. However, an examination of the regulation does not show HUD’s intent to limit permissible fees to a 1% origination fee.
The mortgage insurance program fits closely with HUD’s congressional mandate to realize “the goal of a decent home and a suitable living environment for every American family.”
Although Congress itself did not set the 1% cap, it did grant HUD the authority to pass such legislation. The statute governing mortgage insurance gives HUD considerable authority to manage the details of eligible mortgages, for example by setting permissible charges and fees. While the exact authorizing provision for the 1% cap is not clear, a number of statutory provisions might allow HUD to set a 1% cap on mortgage broker fees. First, HUD is given authority to promulgate rules and regulations to carry out the statutory provisions of the mortgage insurance program.
“The Secretary is authorized, upon application by the mortgagee, to insure as hereinafter provided any mortgage offered to him which is eligible for insurance as hereinafter provided, and, wpon such terms as the Secretary may prescribe, to make commitments for the insuring of such mortgages prior to the date of their execution or disbursement thereon.”Id. § 1709(a) (emphasis added).
“While the principle loaned (the “principle obligation”) is more closely regulated, HUD has more discretion regarding miscellaneous fees and charges. HUD may “establish the terms of insurance under this section and approve the initial service charges, appraisal, inspection and other fees.”
Plaintiffs find the 1% cap in their reading of the HUD rule regarding single family mortgage insurance currently codified as
“(a) The mortgagee may collect from the mortgagor the following charges, fees, or discounts; ... (2) A charge to compensate the mortgagee for expenses incurred in originating and closing the loan, the charge not to exceed; (i) $20 dollars or one percent of the original principle of the mortgage.” Id. (emphasis added).
Plaintiffs contend that this rule limits compensation to mortgage brokers for services and expenses incurred in originating and closing an FHA loan to one percent of the original principal amount of the mortgage. Apparently this is an issue of first impression, with no court as of yet ruling on whether or not the 1% cap exists. Because of the novelty of the claim, and the parties’ indication that this decision will be appealed regardless of the outcome, the Court issues a more detailed analysis.
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Although not immediately obvious from the language of the statute,
A plain reading of
The conclusion that
II. Yield spread and service release premiums above the 1% origination fee
The above analysis, however, does not answer the question of the legality of yield spread and service release premiums when, added to any origination fee, they amount to more than
1%
of the principle of the loan. If these premiums are to be categorized under
The parties offer two alternative readings of the rule that a lender or mortgage broker may “collect” from the borrower a charge not to exceed “$20 or one percent of the original principal amount of the mortgage” in compensation for “expenses incurred in originating and closing the loan.”
This Court concludes that defendants’ interpretation of the regulatory language is more compelling. A plain reading of the rule should understand the phrase “collect from the mortgagor [borrower]” to mean collect
directly
from the borrower.
The exclusion of interest rates from
Reading
The language of
The Court is further convinced of this interpretation of the rule by HUD documents commenting on yield spread and service release premiums. Although HUD by all accounts consistently approves mortgages that contain yield spread and service release premiums above the alleged
1%
cap, neither party has produced a definitive position statement of HUD on the issue. Given HUD’s consistent approval of these loans, as well as the absence of the mention of any alleged
1%
cap in the various policy statements regarding the extensive litigation of yield spread premiums, the Court concludes that HUD’s interpretation of
HUD’s position on the
1%
origination fee cap is demonstrated through their regular approval of yield spread and service release premiums above the cap. The very
“Before the insurance of any mortgage, the mortgagee shall furnish to the Secretary a signed statement in a form satisfactory to the Secretary listing any charge, fee or discount collected by the mortgagee from the mortgagor. All charges, fees or discounts are subject to review by the Secretary both before and after endorsement under § 203.255.”24 C.F.R. § 203.27(d) (2001).
There can be no doubt that HUD is aware of the yield spread and service release premiums paid to the mortgage brokers, as they are listed on the HUD-1 and form a significant part of broker payment. Premiums are also significant payments, not likely to be simply overlooked consistently. Every loan in the class exceeded the alleged cap, and every loan was approved by HUD on these points. Extensive litigation on yield spread premiums, even though not necessarily alleging a 1% cap, has brought the issue of potentially excessive premiums to HUD’s attention. “Since 1996, more than 150 class action cases are believed to have been filed around the country challenging the legality of YSPs [yield service premiums] as violative of Real Estate Settlement Procedures Act (RESPA) section 8.” Robert M. Jaworski, RESPA Section 8: The YSP Waiting Game Continues, 56 Bus. Law. 1207, 1208 (May 2001). Consistent approval shows HUD policy has been to accept yield spread and service release premiums as separate from the 1% “origination fee” charge, unless violative of RESPA.
HUD has accepted yield spread and service release premiums by explicitly stating that the premiums do not violate RE SPA per se and by establishing a total compensation test. In 1989, HUD considered removing the 1% “origination fee.” Deregulation of Mortgagor Income Requirements, 54 Fed.Reg. 38646 (Sept. 20, 1989). HUD decided not to, explicitly referencing the ability of lenders to make up costs through interest rates,
“Since a shortfall in mortgage origination costs can easily be recovered through adjustments to the mortgage loan interest rate, mortgagors are currently bearing loan origination costs (directly through loan origination fees and indirectly through mortgage interest rates) at the competitive level set in the marketplace. Therefore, the elimination of the loan origination fee cap would be expected to cause no change in the total origination cost for mortgagors.” Id. at 38646-7.
*1193 Now that mortgage brokers occupy approximately 50% of the market, yield spread and service release premiums are the method that lenders use to shift profit from interest rates to mortgage brokers. Real Estate Settlement Procedures Act (RESPA) Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, 64 Fed.Reg. 10080, 10080-81 (March 1,1999). Recent policy statements have accepted yield spread and service release premiums as a way of compensating mortgage brokers, so long as they do not violate the provisions of RESPA:
“In a given transaction, a broker may receive compensation directly from the borrower, indirectly in fees paid by the wholesaler or lender providing the mortgage loan funds, or through a combination of both. Where a broker receives direct compensation from a borrower, the broker’s fee is likely charged to the borrower at or before closing, as a percentage of the loan amount (e.g., 1% of the loan amount) and through direct fees (such as an application fee, document preparation fee, processing fee, etc.). Brokers may also receive indirect compensation from lenders or wholesalers. Such indirect fees may be referred to as “back funded payments,” “servicing release premiums,” or “yield spread premiums.” Id. at 10081.”
Nowhere in this 1999 policy statement, nor the most recent 2001 policy statement, does HUD address a 1% cap. Rather, in stating that premiums are not “illegal per se,” HUD directs an inquiry to see if the premiums violate RE SPA. 64 Fed.Reg. at 10082-83. This Court concludes that these statements indicate that HUD does not believe that the premiums should be analyzed under
Certainly, evidence of HUD’s interpretation of the rule in question is entitled to some deference.
See U.S. West, Comm., Inc. v. Washington Util. and Transp. Comm.,
As a regulation promulgated by HUD, where the plain language of the regulation agrees with the agency’s interpretation, this Court defers to the reasonable agency interpretation.
Ill RESPA
Two RE SPA issues are before the Court. Primarily, the Court granted certi
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fication of a class to determine whether yield spread and service release premiums above the
1%
origination fee violate RES-PA
per se.
Secondarily, the Court could rule on the issue of whether yield spread and service release premiums violate RES-PA regardless of the amount. The first issue is resolved in favor of the defendant by the analysis above finding that yield spread premiums and service release premiums are not included in the 1% “origination fee” cap of
Plaintiffs contend that yield spread premiums are kickbacks or referral fees under RESPA Section 2607. Section 8(a) of RESPA prohibits referral fees: “No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
The language regarding “services
actually
performed,” however, led to litigation over whether or not yield spread premiums violated RESPA. In response to litigation on the issue of yield spread premiums, HUD issued a policy statement in 1999 intended to clarify the regulation and its interpretation of the statute. 64 Fed. Reg. 10080. HUD failed to unify the courts, and two opposing interpretations of the statute, regulations, and policy statements continued. The
Culpepper
interpretation required that specific services provided be linked to the yield spread premium paid.
Culpepper III,
On the day this Court heard oral argument in the case, HUD issued a clarification of its 1999 policy statement, explicitly rejecting Culpepper’s analysis. RES-PA Statement of Policy 2001 at 11 (“HUD was not a party to the case and disagrees with the judicial interpretation regarding Section 8 of RESPA and the 1999 Statement of Policy.”). Clearly trying to eliminate the possibility of class actions in RESPA cases, HUD states that “it is necessary to look at each transaction individually, including examining all of the goods or facilities provided or services performed by the broker in the transaction.”
Id.
at 11-12. The first step of HUD’s two-part test to interpret RE SPA, then, is to apply this individual determination to see if com
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pensation is paid for goods or facilities provided or services performed.
Id.
Essentially, it appears that the first step will be passed if some goods or services are provided.
See Schmitz,
This Court is concerned that HUD’s test will not effectively protect borrowers from mortgage brokers inflating interest rates. HUD does recognize the risk:
“HUD also recognizes, however, that in some cases less scrupulous brokers and lenders take advantage of the complexity of the settlement transaction and use yield spread premiums as a way to enhance the profitability of the mortgage transactions without offering the borrower lower up front fees. In these cases, yield spread premiums serve to increase the borrower’s interest rate and the broker’s overall compensation, without lowering up front cash requirements for the borrower.” RESPA Statement of Policy 2001 at 9.
HUD is confident that the reasonable relation to total compensation test will sufficiently protect consumers. Id. Nonetheless, this Court is skeptical. By effectively closing off class action litigation, HUD forces potentially thousands of consumers to individually litigate their claims regarding a few thousand dollars, an unlikely proposition. HUD’s apparent policy of looking to the market mortgage rates in an area may effectively mask cases where a higher interest rate has been charged without a corresponding decrease in upfront costs. This Court believes that a test closer to Culpepper’s, where HUD looks to see if consumers are actually receiving something for potentially higher interest rates, would be more effective. Nonetheless, the Court concludes that disagreement over effective policy is not enough to overcome the deference due to HUD’s policy statement.
In reviewing an agency’s construction of a statute, the Court must reject those constructions that are contrary to clear congressional intent or frustrate the policy that Congress sought to implement.
See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
While the Court is skeptical of HUD’s policy preference, HUD’s interpretation is nonetheless a permissible interpretation of the statute. Certainly, an investigation of whether total compensation is reasonably related to services provided is consistent with the purpose and language of RE SPA in determining whether a referral fee or kickback was paid. In the words of another District Court, “by simply ensuring that the broker’s total compensation is reasonably related to the goods or services the broker actually furnishes, the [1999] Policy Statement serves RESPA’s primary goal of preventing kickbacks or referral fees that unnecessarily and unreasonably increase the costs of settlement services.”
Levine,
This Court cannot conclude that the 2001 policy statement is an impermissible interpretation of RESPA. Consequently, the Court defers to HUD in considering that yield spread premiums and service release premiums be examined through an individualized determination of whether total compensation is reasonably related to services provided. The Court refrains from examining the generally legality of yield spread and service release premiums on a class basis.
Conclusion
The Court concludes that there is no general
1%
origination fee cap on mortgage broker compensation. Additionally, the Court concludes that yield spread and service release premiums may be paid by lenders to mortgage brokers in addition to a 1% origination fee charged to borrowers. Therefore, defendant’s Motion for Summary Judgment on the breach of contract claim, RESPA, and Washington State Unfair and Deceptive Trade Practices Act is GRANTED. The 1% fee cap and RESPA issues are likely to continue to be litigated across the country and within this Circuit. Before more funds are expended in this case, the Court feels the contested questions of law are best decided on immediate appeal for a clear statement of the law. This Court believes that an immediate appeal from this order to clarify a controlling question of law would materially advance the ultimate termination of the litigation.
The Clerk is directed to send copies of this order to all counsel of record.