This case study talks about the difference between legal fees and illegal kickbacks between mortgage barrower, broker, and lender. Bettina J. Scheutz (the barrower) thought it was unfair that she had to pay an additional $516.00 to Home Mortgage Financial Corporation (the mortgage broker) for the yield spread premium. She already paid them $1,661 in direct fees, consisting of $688.00 for loan origination, $688.00 for loan discount, and $285.00 for processing, but Banc One (the mortgage lender) also gave Home Mortgage Financial Corporation a yield spread premium of $516.00 which is paid by the barrower through a higher interest rate.
This payment was identified on Schuetz’s HUD-I Settlement Statement as “Mortgage Broker fee to Home Mortgage from BANC ONE.” Since Schustz’s already paid Home Mortgage Financial Corporation $1,661 in direct fees. Schustz’s argued in court that the yield spread premium of $516.00 was a kickback from Banc One to Home Mortgage Financial Corporation and kickbacks are a violation of the Real Estate Settlement Procedures Act. Bettina J. Scheutz was unsuccessful in her arguments to the district courts and the district granted the summary judgment in favor of Banc One.
The district courts sided with Banc One because of The Department of Housing and Urban Development’s Statement of Policy, 64 Fed.Reg. at 10084 that was issued in March 1, 1999. The 1999 Statement of Policy basically states that yield spread premium payments may be legal or illegal depending on why a yield spread premium is charged to the barrower. A payment from a mortgage lender to a broker is permissible under Section 8 of RESPA if goods or facilities were actually furnished or services were actually performed for the compensation paid and if the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.
The Department of Housing and Urban Development test for the validity of a yield spread premium under Real Estate Settlement Procedures Act focuses on whether compensable services are provided and if they are, then on whether the total compensation (without regards to whether it comes from the barrower, the lender, or both) is reasonably related to the services provided. That test was applied to the Schuetz v Banc One Mortg Corp case and it found that there is substantial evidence that Schuetz’s mortgage broker provided her a host of compensable goods, facilities, and services.
The record demonstrates that Home Financial offered Schuetz the best interest rate it could base upon her situation, the rates available at the time, and its need to be compensated. Home Mortgage Financial Corporation would also not have originated her loan only for the direct fees that she personally paid up front. Therefore, the evidence shows that the broker’s total compensation that consisted of direct fees and indirect fees, was consistent with local practice and it was permissible under Section 8 of RESPA.
I feel that although yield spread premiums may seem unfair, they actually help a lot of mortgage borrowers. By allowing lenders to pay mortgage brokers yield spread premiums, prospective homeowner that don’t have very much cash at the time of settlement can pay less money up front and the rest of the money for their mortgage broker’s services over time. I believe that district courts and The Department of Housing and Urban Development made the right decision in the case of Schuetz v Banc One Mortg Corp. I would however recommend that mortgage brokers be upfront about yield spread premiums. A mortgage barrower should be notified about the total amount of fees they will be paying their broker, whether they’re direct or indirect. I think it would’ve saved Bettina J. Scheutz, Home Mortgage Financial Corporation, and Banc One the time and money they spent in court if Scheutz’s was notified about the additional $516.00 for the yield spread premium before she signed the contract.
292 F. 3d 1004 – Schuetz v. Banc One Mortgage Corporation. Retrieved from http://openjurist.org/292/f3d/1004/schuetz-v-banc-one-mortgage-corporation
Colin Robertson. Yield Spread Premium. Retrieved from http://www.thetruthaboutmortgage.com/mortgage-dictionary/yield-spread-premium/
RESPA – Real Estate Settlement Procedures Act. Retrieved from http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/respa_hm
SCHUETZ v. BANC ONE MORTGAGE CORPORATION. Retrieved from http://caselaw.findlaw.com/us-9th-circuit/1375952.html