Senator: Some fees abusive to home buyers

Marcy Gordon

Wednesday, Jan. 9, 2002 | 9:53 a.m.

WASHINGTON -- Beatrice Hiers, a single working mother who struggled to buy her home in Fort Washington, Md., relied on a mortgage broker to find a good deal for her. But she ended up paying a higher interest rate than what she qualified for while the broker collected $10,800 in fees, including $4,538.87 from the lender for getting the higher rate.

The practice of brokers receiving special incentive fees from mortgage lenders, often not disclosed to borrowers, can be abusive and cost consumers thousands of dollars, Sen. Paul Sarbanes, D-Md., chairman of the Senate Banking Committee, said at a hearing Tuesday.

Minority home buyers like Hiers are hit especially hard, he said.

The fees often "are used to pad the profits of mortgage brokers, without regard to any services they may provide to borrowers," Sarbanes maintained.

Hiers will pay an extra $56,000 in interest over the 30-year life of the mortgage as a result of the increased rate, Senate investigators estimate.

Hiers and thousands of other home borrowers around the country are suing over the issue in a class action.

Sarbanes also warned that recent action by the Department of Housing and Urban Development regarding the fees "will open the door to new and ongoing abuses of low- and moderate-income home buyers and owners" by steering them to higher interest loans without their knowledge.

HUD issued a policy statement in October clarifying when the fees from lenders to brokers are legal and urging that borrowers' complaints about them be handled individually rather than in class-action lawsuits. The federal agency plans to propose rules regarding the fees by the end of the month.

The new rules would require "clear, meaningful disclosure" of fees, including those paid to mortgage brokers by lenders, HUD spokeswoman Nancy Segerdahl said.

The agency says it believes the fees are a "legitimate tool" to help people become homeowners but acknowledges they can be abused.

Joseph Falk, president of the National Association of Mortgage Brokers, said in testimony that the special fees, known as yield spread premiums, are appropriate when properly disclosed to borrowers and properly used.

It is important to consumers that their use continue "without the threat of class-action litigation that could seriously impede the efficient functioning of the market and damage the economy," Falk said.

Sarbanes noted that if a broker properly discloses his fee to the borrower, the borrower may then make an informed choice and the fee can help him offset some or all of the closing costs.