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Borrowers Win YSP Appeal

Wholesale lender accused of conspiring with broker to hide cost of YSP

Aug. 13, 2012

By staff

An Ohio appeals court overturned a judgment in favor of a wholesale lender that paid a yield spread premium to the originating mortgage broker but allegedly conspired with the broker to hide from the borrower that the interest rate was higher as a result of the premium. The borrowers' attempt to rescind the loan, however, was unsuccessful.

Raymond L. Lee Jr. and his wife Janet M. Lee contacted mortgage broker Stonefire Mortgage in 2006 about refinancing their mortgage outstanding with Sky Bank and pulling out $20,000 to pay off credit cards. The new loan amount was $162,000, and the adjustable-rate mortgage had a start rate of 9.25 percent with a ceiling of 10.875 percent.

The interest rate on the new loan was 5 percent higher than their old rate.

A mortgage brokerage business disclosure reflected a $7,000 broker fee plus a $995 processing fee. The disclosure also indicated that the exact amount of additional compensation would be disclosed at the time of closing. The additional compensation turned out to be a 3.5 percent YSP that worked out to $5,670.

Countrywide Home Loans Inc. funded the loan at a rate that was 2.75 percent higher as a result of the premium.

Countrywide allegedly defrauded the borrowers over the improper disclosure of YSPs because it raised their interest rate but didn't inform them of resulting higher payments. The former lending giant allegedly conspired with the mortgage broker to conceal the YSP and only cryptically disclosed the lender-paid fee on the HUD I closing statement. Supporting that allegation were instructions to the closing agent from Countrywide that the YSP be disclosed as "premium paid to broker by lender" and that there be "no exceptions" from the wording.

"A juror could infer that Countrywide conspired to prevent the Lees from understanding that they were paying a higher interest rate on their loan to reimburse the lender for a payment to Stonefire," the decision stated.

The Lees sued Countrywide in 2009 in the Court of Common Pleas, Wood County Ohio, and Countrywide removed the case to an Ohio federal court. Also named as defendants were Stonefire and loan originators Kim Deal and Jeff Winke -- though all three were subsequently dismissed as defendants as a result of a settlement with the plaintiffs. Bank of America, N.A., was later added as a defendant.

Countrywide is accused of conspiring with Stonefire to advance the broker's breach of its fiduciary duty.

A summary judgment was granted on April 13, 2010, to Countrywide by the trial court on both the civil and fraud claims. In addition, the district court ruled in favor of Countrywide on the plaintiffs' federal claim asserting that they are entitled to rescind the loan under a statutory provision in the Truth in Lending Act.

The appeals court affirmed the decision on the fraud claim and on the rescission. But it reversed the trial court's decision on civil conspiracy because Ohio case law prohibits lenders from knowingly conspiring with brokers to conceal YSPs or other mortgage costs from borrowers.

The decision indicated that because YSPs are not illegal, the plaintiffs had to show that Countrywide aided in Stonefire breaching its duty. Because Countrywide was given a copy of the broker's disclosure, it was aware about the YSP compensation that it would be disclosed at closing even though Ohio law requires YSP disclosures up front.

"The Lees themselves also swear that they were not told prior to the closing about the yield spread premium," the decision stated. "Thus, a juror could infer that Stonefire concealed the yield spread premium prior to closing and that Countrywide knew of this early concealment."

Case No. 10-3777, decided Aug. 13, 2012 (U.S. Court of Appeals for the Sixth Circuit).
Case No. 09-00766, Feb. 27, 2009 (U.S. District Court for the Northern District of Ohio).

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