My name is Susan Johnson and I am from Cottage Grove, Minnesota. I am pleased to have the opportunity to be able to address the Senate Banking Committee today about the $1620 "yield spread premium" that was secretly paid by my lender, ABN AMRO Mortgage Group, to my mortgage broker, Allstate Mortgage, at my expense.
In April, 2000 my husband David and I had just moved back to the Twin Cities from Colorado Springs and were looking to buy a house. Through a real estate agent, we were introduced to David Schultz, owner of Allstate Mortgage, a mortgage broker in Plymouth, Minnesota. After meeting Mr. Schultz at a local restaurant, we hired him to find us a mortgage loan.
From the outset, we were told by Mr. Schultz that he would find us a loan with the best possible interest rate. Mr. Schultz specifically told us that the fee for processing the loan would be 1% of the loan amount. We signed a written broker agreement with Mr. Schultz which allowed for a 1% broker fee. (See, Exhibit 1, Loan Origination Agreement) No other fees were ever demanded by Mr. Schultz, disclosed, or agreed to.
When the closing occurred on May 23, 2000, to our surprise, the interest rate was higher than we understood it would be and the fees were far greater than the 1% fee we had agreed to. (See, Exhibit 2, HUD-1 Settlement Statement at lines 801-812) In fact, the total fees were nearly four times that amount! ($5242.00) This included what we only later came to learn after the closing was a "yield spread premium" - a $1620 payment from the lender to our broker that was really paid by us since it was tied to an inflated interest rate on our loan.
While we were upset about the fees, we had no choice but to go through with the closing or risk losing the house; being found in default of the Purchase Agreement; and forfeiting the $5000 earnest money we had already given the sellers. While we objected to the fees and higher interest rate, there was no way for us to find another loan and still close on time. We were stuck and the broker knew it.
As our HUD-1 Settlement Statement shows, we were charged the following fees at closing, none of which were disclosed, or agreed to beyond the initial 1% origination fee:
$1296 (1%) Loan Origination Fee
$1296 (1%) Loan Discount Fee
$395 Processing Fee
$200 Underwriting Fee
$150 Doc Prep Fee
$40 Funding Fee
$350 Commitment Fee
$285 Admin Fee
Only after the closing did we discover the significance of the $1620 "yield spread premium" (1.25%) which was assessed to us through an inflated above-par interest rate of 8.75%. At the time of the closing we had no idea what this "premium" was because it was only vaguely disclosed on our HUD-1 Settlement Statement as a "Deferred Premium POC"(1). In sum:
- The $1620 yield spread premium was not disclosed, discussed or agreed to before the closing;
- My husband and I were never informed that our loan had an above-par interest rate because of the premium payment from AMN AMRO to the broker;
- The broker never explained how the yield spread premium affected our interest rate or that our monthly mortgage payments would be any higher because of the premium;
- No rate sheet or other document showing the direct relationship between the inflated interest rate and the yield spread premium payment from the lender to the broker was ever shown to us;
- The yield spread premium did not offset or reduce any fee we ever owed to the broker;
- The broker received all fees that we owed and agreed to (and far more) directly in cash from us at the closing.
After the closing I wrote to the State of Minnesota Department of Commerce complaining about the transaction. After reviewing my letter, the Department of Commerce advised us to seek private legal counsel. The matter remains pending in Court in Minnesota. In that case, we have agreed to be representatives of other borrowers whose loans had yield spread premiums paid by the same lender in the same manner as ours.
In conclusion, the $1620 yield spread premium on our loan was nothing more than a bonus paid by the lender to the broker for securing a bad deal for my husband and me, and referring a better deal to the lender. This conduct should be illegal because:
(1.) the yield spread premium was not paid in exchange for any "service" fee we owed the broker;
(2.) we received no benefit from the premium the lender paid at our expense, such as an offsetting credit against any closing fees or costs we actually owed, and;
(3.) the money was simply a kickback to the broker referring our loan to the lender with a higher interest rate.
The standard for evaluating the legality of this practice should not merely be whether the broker's "total compensation", including the yield spread premium and other fees we never agreed to, is somehow "reasonable" based on the broker's after-the-fact attempt to justify the higher fees he has already taken. Rather, the true nature of the disputed premium should be evaluated: that is, what was the premium actually paid in exchange for.
To allow as lax a standard as "reasonableness" of total broker compensation to govern these transactions will only allow lenders and brokers like ABN AMRO and Mr. Schultz to continue ripping-off unknowing consumers like us, with a catch-us-if-you-can attitude. It will encourage brokers and lenders to continue to try to slip additional bonus fees into mortgage transactions regardless of what was agreed and without providing any actual credit to the consumer bearing the cost. If lenders are paying bonuses and incentives to brokers simply for referring high-rate loans to them, that should be illegal without concern for whether the broker or lender thought the secret referral fee was "reasonable". Thank you.
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