BROKERS; MORTGAGE BROKERS; YIELD SPREAD
PREMIUMS: California court rejects claim alleging yield spread
premium constitutes a deceptive trade practice by lender.

Byars v. SCME Mortgage Bankers, Inc. , 2003 Westlaw 21383831
(6/17/03)

A California Court of Appeals rejected the borrower's claim that (1) the
yield spread premium (YSP) paid to the broker by the lender was
excessive and violated RESPA, (2) the YSP violated HUD's 1% limit on
FHA loan origination fees, and (3) the lender's failure to disclose its rate
sheets and YSP schedule to the borrower was a deceptive trade practice.

The first issue was disposed of by the court in its citation of a string of
prior cases holding that a YSP is not per se illegal. The second issue was
disposed of when the court adopted the reasoning of an earlier decision
from the Federal Court of Appeals, Bjustrom v. Trust One Mortgage
Corp., 322 F. 2d 1201 (9th Cir. 3/20/03). Bjustrom ruled that the 1% cap
was not violated, even though the broker also charged a 1% loan fee,
because the YSP was not paid directly by the borrower, but rather by the
lender.

Turning to the issue of deceptive trade practice claim, the court rejected
the claim on the grounds that a YSP itself was not a hidden charge, and
that the duty to disclose the lender's rate sheet, the specific services
rendered by the broker, and the YSP paid for these services, rightfully
should fall on the broker, not the lender:

The court first concluded that the YSPs here were not "secretly charged."
The payments of the YSPs to the brokers showed on the HUD-1
Settlement Statements provided to Byars.

Byars alleged nevertheless that SCME engaged in deceptive business
practices. He relied on the the admission by an SCME vice-president
that SCME did not directly provide its wholesale rate sheets to
borrowers, did not directly inform borrowers whether their interest rate
was at an above par rate, and did not determine what services were
provided by the mortgage broker.

But the court here ruled that the fact that SCME did not provide Byars
with its wholesale rate sheet or inform Byars of the available interest
rates did not tend to establish a violation of Section 17200 by SCME
since the undisputed evidence showed that Byars dealt with a mortgage
broker and had no direct contact with SCME.

Further, the court held that SCME's ignorance of the specific services or
goods encompassed within the YSP or whether a YSP was offsetting
closing costs did not tend to establish a violation of Section 17200 by
SCME. As Andrews pointed out in her deposition, while there are
various guidelines as to what services should be provided by a mortgage
broker, the exact nature of the services provided and compensation to be
paid to the broker is a matter to be negotiated between the broker and the
borrower.

The court further note that HUD has indicated that payment of a YSP
will not be found illegal simply on the basis the YSP was calculated
based on a rate sheet and the lender does not exactly know what services
were provided by the mortgage broker to the buyer. In other words,
SCME's payment of the YSP without requiring a specification of the
services provided by the brokers was lawful and therefore could
constitute the basis of a Section 17200 claim.

Byars further asserted that the mortgage brokers never explained to him
the YSP or its effect on his interest rate. But the court ruled that this
evidence did not support a claim against SCME. If anything, the
evidence supported a claim against his brokers, who were not a party to
the suit.

As to the claim that SCME attempted to influence mortgage brokers to
self-deal through the enticement of YSPs "to be secretly charged" to
borrowers, the court again noted that the YSPs were not secret; they were
disclosed to Byars. It further noted that YSPs are widespread and
commonly used as a method to compensate mortgage brokers for
services provided to borrowers and the lender (citing Bankers Trust v.
McFarland, 743 N.Y.S.2d at p. 808 ["[YSPs] are accepted vehicles for
lenders to compensate mortgage brokers for services rendered in the
closing transaction"]) and there is no indication in this case that the YSP
offered by SCME differed from the YSPs offered by other lenders or that
Byars's brokers would have been willing to broker the loan only for the
origination fee.

Reporter's Comment: This decision clearly raises the bar that borrowers
must hurdle if they wish to sue the lender when the borrower is
dissatisfied with the services provided by their mortgage broker. This
decision infers that, absent some knowledge of the broker's actions or
omissions, a lender cannot be held liable for a breach of the contractual
relationship between a borrower and a mortgage broker.

The Reporter for this DD is Howard Lax, of the Michigan Bar, writing in
his Mortgage Banking Newsletter. The editor has significantly changed
the language, but not the content of Howard's report.

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