Mentecki v. Saxon Mortgage, Inc.: Yield Paid to Mortgage Broker an Unlawful Referral Fee Under RESPA

Note: This case is not published in an official reporter and may not be cited as authority. Consult with counsel before relying on this case.

In 1997 a Federal District Court in Virginia addressed whether a “yield spread premium” paid by a mortgage lender to a mortgage broker was a referral fee in violation of the Real Estate Settlement Procedures Act (RESPA). The court found that the premium was a prohibited referral fee, as its only purpose was to reward the broker for referring an above-par loan.

Saxon Mortgage (Saxon) and Crestar Mortgage (Crestar) were Virginia-based mortgage lenders. In December 1995, the Menteckis met with Infinity Mortgage Services (IMS) to discuss refinancing an existing mortgage on their home in Maryland. Sometime later, IMS arranged for Saxon to participate as the mortgage lender on the refinancing. The HUD form disclosed that IMS would receive over $2,000 from Saxon in the form of a yield spread premium. In May 1996, the Myers also met with IMS to discuss refinancing their residential mortgage. IMS arranged Crestar as the mortgage lender. The HUD form disclosed that IMS would receive a $331 yield spread premium from Crestar. Prior to the closings, neither the Menteckis nor the Myers were aware that such a fee would be paid by their respective mortgage lender to IMS.

The Menteckis sued Saxon alleging that it violated RESPA by paying a premium to IMS, failing to disclose fees, and by failing to provide a good faith estimate of all costs and fees which would be incurred for settlement services. The Myers sued Crestar alleging identical claims. Both plaintiffs sought class action status. The cases were combined because they were based on the same underlying facts and circumstances. The district court reviewed Crestar’s motion to dismiss and Saxon’s motions to sever and transfer.

The district court noted that RESPA was enacted to provide consumers with greater and more timely information about the real estate settlement process and to protect them from unnecessarily high settlement charges. The Act imposes disclosure requirements on certain settlement service providers and prohibits certain practices by such providers. The disclosure requirements include the “good faith estimate” and the HUD settlement statement. Lenders who make federally related mortgage loans must provide a borrower a booklet containing a good faith estimate of the amount or range of charges for specific settlement services the borrower is likely to incur. Also, the person conducting a settlement must complete and make available to the borrower at or before settlement the HUD settlement statement. Regarding prohibited practices, RESPA permits payment to a settlement service provider for services actually performed, but prohibits “kickbacks” that are purely compensation for a referral.

The district court addressed the yield spread premium by finding that it was a referral fee prohibited by RESPA. The court concluded that “[b]y their very nature, yield spread premiums are not compensation given for services actually performed by the broker.” The court found that the reality of the transaction was that the broker benefits by payment of the premium, the lender benefits by obtaining a higher than par loan, and the borrower pays. It stated” “Quite simply, the premium rewards the broker for referring the above-par loan.” Further, it found that a premium could not be defended as compensating the broker for actual services performed where the broker has already charged the borrower directly for all services provided. Thus, the court denied Crestar’s motion to dismiss.

Crestar then alleged that it had relied on HUD’s regulations and interpretations of RESPA in paying yield spread premiums. Section 2617(b) of RESPA provides: “No provision of this chapter . . . shall apply to any act done or omitted in good faith conformity with any rule, regulation or interpretation thereof . . . .” HUD had indicated that RESPA required that yield spread premiums must be disclosed but had never said whether or not they were permitted. The court stated that Crestar may be able to avoid liability through this safe harbor provision, but that it could not consider the matter on a motion to dismiss.

Mentecki v. Saxon Mortgage, Inc., 1997 WL 45088 (E.D. Va. 1997). [Note: This opinion was not published in an official reporter and therefore should not be cited as authority. Please consult counsel before relying on this opinion.]