In Re. Heimmermann vs First Union

HUD’s October clarification restated that excessive and unreasonable fees are illegal under the Real Estate Settlement Procedures Act (RESPA) because they are unreasonable and not a payment for a bona fide service. This meant that YSP payments to brokers, who do provide a bona fide service, were not illegal.

YSP’s enable mortgage brokers the ability to offer their customers lower out-of-pocket fees in exchange for a higher interest rate. However, it is not uncommon for brokers to use YSP’s as a way to increase the total fees they earn — charging a higher rate with no concession in fees.

Consumer advocates argue that a mortgage broker’s role is to find the loan with the best terms for the borrower, implying that the broker’s total compensation is fixed regardless of the loan program they close on.

On the other hand, some brokers believe that the interest rate and fees should be determined by market forces — especially since borrowers are free to compare fees and rates at multiple lenders. These brokers argue that it shouldn’t matter how much they make on a transaction, as long as they stick to the terms offered when the borrower decided to go with them.

In addition, the loan process is dynamic, with no two transaction being identical. A broker can be faced with a time-consuming borrower and/or undisclosed personal expenses such as gasoline and telephone charges, causing the value of each broker’s services to vary. It is much harder for a high-volume direct lender to provide that level of service to individual borrowers.

In the Culpepper case, the plaintiffs argued that a YSP payment to the mortgage broker violated RESPA because no specific services performed by the broker were tied to the YSP payment. The appeals court, however, said “the lender and the broker need not be able to tie the YSP payment to specific services provided.”

According to the appellate court’s ruling, the district court in the Culpepper case abused “its discretion in granting class certification” and that HUD’s clarification, or Statement of Policy as it is also known, effectively overruled the district court’s decision. The appellate court concluded that a case-by-case analysis is necessary to determine whether YSP payments constitute unlawful referral fees under RESPA.

“Today’s decision by the 11th Circuit is a win-win,” said John A. Courson, chairman-elect of the Mortgage Bankers Association of America. “We are pleased that the legal uncertainties that have plagued consumers and lenders are behind us. Lenders can now safely offer, and consumers can take advantage of, a tool that will open more doors to homeownership.”