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<p>WASHINGTON-The Senate Banking Committee held hearings on predatory lending Jan. 8, specifically addressing yield spread premiums, and their effect on consumers’ mortgage rates. Yield spread premiums are basically incentives paid by lenders to mortgage brokers for getting a client to accept a higher interest rate loan than they qualify for. Sometimes they are useful tools for borrowers to pay less closing costs upfront, but consumer advocates say they are often abused by not passing on the initial savings to the borrower. Three women homeowners, representing prime, subprime, and FHA borrowers, testified to being ripped off for thousands of dollars at closing by mortgage brokers. Beatrice Hiers of Maryland said that she was forced to accept a loan 1.5% higher than necessary because the broker told her the funding was not definite up until the scheduled day of settlement. Rita Herrod of West Virginia claimed she refinanced her home based on a false appraisal significantly overstating the value of the property and is now stuck with an even higher payment than before. Susan Johnson of Minnesota alleged that the fees heaped on her at settlement were far higher than those originally agreed to. The Department of Housing and Urban Development (HUD) recently issued a policy statement making it more difficult for borrowers to win class action status for lawsuits charging lenders or brokers with accepting or receiving kickbacks, outlawed under the Real Estate Settlement Procedures Act, rather than legitimate yield spread premiums. Senate Banking Committee Chairman Paul Sarbanes expressed disagreement with the new policy. Harvard Professor of Law Howell Jackson told the committee that recent research he has performed indicates that yield spread premiums do more harm than good for borrowers and that HUD’s policy statement was based on incorrect factual assumptions. Jackson said that he agrees with HUD’s statement “that real estate settlement practices are an area in which governmental intervention is necessary both to protect consumers and to ensure the efficient operation of market forces.” However, he said that the department’s analysis was flawed in several ways. “An initial problem with the Department’s understanding of yield spread premiums is its notion that these payments represent an option that consumers voluntarily choose. Consumers are given no such choice,” he advocated. He said in his experience mortgage brokers “never” present the premiums as an optional method for financing settlement costs. He stated further that HUD assumes few borrowers who can not afford closing costs pay these premiums, while Jackson found that 85% to 90% of all borrowers pay yield spread premiums. Additionally, mortgage brokers make an average of $1,046 more on loans including yield spread premiums, he said. And these numbers get worse for minorities. National Association of Consumer Advocates Executive Director Ira Rheingold supported Jackson’s stance. He too said that “not one” homeowner he had spoken too knew that a yield spread premium was paid on their loan or that the payment increased the interest rate they received on the loan. While the hearing included consumer advocates opposed to yield spread premiums, Mortgage Bankers Association of America (MBAA) Chairman-elect John Courson, president and CEO of Central Pacific Mortgage Company in California, defended the practice, noting “the important role that this financing tool plays in mortgage transactions.” He clarified that the yield spread premium should be restricted to solely restricted to helping the consumer to be able to afford upfront settlement costs. Courson added that those who abuse the system “should be dealt with appropriately.” “I want to make clear that we do not consider it appropriate to use the yield spread premium mechanism as a means to inflate interest rates in a way that defrauds the consumer into higher loan prices. Nor do we consider it appropriate to use the yield spread premium as a means of concealing referral payments to brokers,” he explained. David Olson, managing director of Wholesale Access Mortgage Research and Consulting, Inc., supported Courson’s remarks. He asserted that eliminating yield spread premiums would result in fewer mortgage originations, particularly for the middle and lower economic classes; higher out-of-pocket expenses for homebuyers and homeowners; fewer mortgage originators; and reduced national income and gross domestic product. Still, consumer advocates, like David R. Donaldson of Donaldson & Guin, LLC, fired back that HUD’s new policy statement did nothing to curb abusive yield spread premium payments. He accused groups, like the National Association of Mortgage Brokers, also testifying, of supporting the concealment of yield spread premiums from borrowers. “While the Culpepper court’s `fee for services’ approach would help curb these nefarious `bait and switch’ tactics, HUD’s `reasonableness’ test encourages brokers to tack on additional charges at closing,” Donaldson criticized. Hiers, one of the private citizens testifying, is party to the Culpepper v. Irwin Mortgage Corporation lawsuit, which the U.S. Supreme Court is currently determining whether it should become involved in the matter. On appeal in the 11th Circuit Court of the U.S., the court decided that Culpepper could be granted class action status. America’s Community Bankers and the MBAA have submitted an amicus curiae brief to the Court urging the Justices to accept the case for review and overturn the judgment of the appeals court, which granted class action status. Sarbanes was the only lawmaker attending the hearing. Because the Senate is in recess, many Senators are still in their districts. [email protected]</p>

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