Bjustrom v. Trust One Mortg., C00-1166P.

• Citation: 178 F.Supp.2d 1183
• Decision Date: 26 October 2001
• Docket Number: No. C00-1166P.,C00-1166P.
• Parties: Mary E. BJUSTROM, individually, and on behalf of all others similarly situated, Plaintiff, v. TRUST ONE MORTGAGE, Defendant.
• Court: U.S. District Court — Western District of Washington

178 F.Supp.2d 1183

Mary E. BJUSTROM, individually, and on behalf of all others similarly situated, Plaintiff, v. TRUST ONE MORTGAGE, Defendant.

No. C00-1166P.

United States District Court, W.D. Washington.

October 26, 2001.

COPYRIGHT MATERIAL OMITTED

Mark Adam Griffin, Keller Rohrback, Seattle, WA, Hart Robinovitch, Barry Reed, Zimmerman Reed, Scottsdale, AZ, for plaintiff.

Phillip R. Schenkenberg, Briggs & Morgan, St. Paul, MN, Henry C. Jameson, Deborah L. Best, Scott Roberts Weaver, Jameson Babbitt Stites & Lombard, Seattle, WA, Alan Maclin, Robert Pratte, Margaret Savage, Mark Schroede, Briggs & Morgan, Minneapolis, MN, for defendant.

ORDER GRANTING SUMMARY JUDGMENT FOR DEFENDANT

PECHMAN, District Judge.

Ms. Bjustrom, as a representative class member, alleges that defendant Trust One Mortgage Corporation ("Trust One") has engaged in a uniform business practice of charging, collecting, and exchanging excessive closing fees with sponsored mortgage brokers on Federal Housing Administration ("FHA") mortgage loans. Plaintiffs have asserted causes of action for breach of contract, violation of the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601, 2607 ("RESPA") (2001), and the Washington State Unfair and Deceptive Trade Practices Act, RCW § 19.86 (2001). Because the Court finds that there is no 1% cap on closing fees, as plaintiffs contend, defendant's Motion for Summary Judgment, (Dkt.No.118), is GRANTED.

Background

Trust One is a mortgage lender based in Irvine, California, which funds FHA loans it originates as well as those processed by mortgage brokers who refer the loans to Trust One for funding. These mortgage brokers, formally termed "loan correspondents," are sponsored by Trust One, who by law is responsible for the acts of the mortgage brokers in originating loans. 24 C.F.R. § 202.8(7) (2001). Mortgage brokers receive compensation for their work through numerous fees and charges, which are regulated by the Department of Housing and Urban Development ("HUD"), the agency that oversees the FHA. Conventionally, mortgage brokers will charge a 1% loan origination fee. Plaintiffs contend that, under HUD rules and RESPA, this 1% fee caps the amount of compensation that mortgage brokers may receive for services in originating and closing an FHA loan.

If there exists a 1% origination fee cap, by defendant's admission Trust One and the mortgage brokers it sponsors will be in violation HUD rules. In addition to the 1% origination fee, collected directly from the borrower, mortgage brokers also receive payments from the lender, Trust One, in the form of "yield spread premiums" and "service release premiums." "Yield spread premiums" are payments by the lender to the mortgage broker on an "above par" loan brought to the lender by the broker. An "above par" loan is one above the "wholesale" rate, the lowest rate a lender will offer without charging the borrower by assessing discount points. The higher the loan is above par, the higher the yield spread premium that Trust One pays the mortgage broker. This higher payment is not for any particular work that the mortgage broker has done, but rather depends on the daily "rate sheets" published by Trust One that disclose to the mortgage broker its par rate and its yield spread premiums. Similarly, Trust One pays "service release premiums" to mortgage brokers based on the amount of the loan referred to Trust One to "service." A larger loan has more valuable "servicing rights" because the interest paid by the borrower will be greater. Again, the premium does not depend necessarily on work performed by the mortgage broker, but instead is a flat rate that increases as the mortgage broker refers larger loans. Mortgage brokers do not, as a practice, disclose information relating to how their income increases with the referral of larger and higher interest loans, but both yield spread and service release premiums are disclosed on the borrower' HUD-1 Settlement Statement. (See, e.g., Compl. Ex. A at 1).

The details of Ms. Bjustrom's loans illustrate the contested payments to mortgage brokers at issue in this case. Ms. Bjustrom's FHA loan to purchase a residence was processed by mortgage broker Mortgage Specialists Inc. in 1999. She closed on the FHA loan transaction with Trust One, obtaining a loan for $140,542.00 at 8%. (Compl. at Ex. B). According to the HUD-1 Settlement Statement laying out the charges in the mortgage, Ms. Bjustrom paid $7,478.27 in settlement charges. (Compl. at Ex. A). Among these charges were a $1,374.00 origination fee to Mortgage Specialists, Inc., as well as various other appraisal fees, insurance, taxes, and recording fees. Id. Both the yield spread premium of $702.71 and the service release premium of $1,786.78 are included on the HUD-1. They are, however, listed in a separate category and not included under the category of services paid by the borrower. Plaintiffs challenge the fees paid to the mortgage broker in excess of the 1% origination fee.

This Court granted class certification to review the 1% fee cap issue. (Dkt. No. 109). First, the Court certified a class of persons who were charged more than 1% of the principle of their loan for the originating and processing of the loan. Specifically, the class consists of:

All persons residing in the United States who, dating back the length of the applicable statute of limitations for a breach of contract claim, from the date the Complaint was filed through and including the present:

1. Obtained an FHA mortgage loan funded by Trust One;

2. Written on a standard FHA mortgage contract similar to Plaintiff's in limiting the fees and charges collected to those authorized by the Secretary of HUD;

3. Where the loan was registered with Trust One for funding by a mortgage broker or loan correspondent;

4. Where the aggregate fees charged and collected for originating and processing the loan by way of direct or indirect fees (including, any loan original fee or yield spread premium tied to the interest rate on the loan, however denominated) exceeded 1% of the aggregate loan amount.

This Court also certified a RESPA subclass that includes:

All persons who, within one year from the date the Complaint was filed through and including the present:

1. Obtained an FHA mortgage loan funded by Trust One;

2. Where the loan was registered with Trust One for funding by a mortgage broker or loan correspondent;

3. Where a yield spread premium, service release premium and/or lender paid broker fee, however denominated, was paid by Trust One to the mortgage broker or loan correspondent;

4. Where aggregate loan origination fees (all fees for loan origination and processing services, however denominated), equal to or exceeding 1% of the loan amount, were also charged.

The parties agree on the facts, leaving only issues of law. There is no dispute that plaintiffs are charged more than 1% of their total loan amount in compensation to the broker. There is no dispute that the payment of yield spread and service release premiums, specifically, raise mortgage broker compensation above the alleged 1% cap.

Analysis

Three dispositive matters of law are raised by the certified class and subclass:

1. Does a 1% "origination fee" cap broker compensation?

2. Do yield spread and service release premiums equal to or exceeding the 1% cap violate HUD regulations?

3. Do yield spread and service release premiums violate RESPA?

In accord with the certified class, defendant admits that it pays yield spread and service release premiums that raise payments to mortgage brokers above the alleged 1% cap. Since the only disputed issues are matters of law, and there are no material issues of fact, this case is appropriately decided on summary judgment. Fed.R.Civ.P. 56(c).

I. 1% Fee Cap

The 1% fee cap plaintiffs allege is not a statutory provision, but a HUD regulation. Analysis shows that HUD could promulgate such a rule under the authority Congress has granted to administer the mortgage insurance program. However, an examination of the regulation does not show HUD's intent to limit permissible fees to a 1% origination fee.

The mortgage insurance program fits closely with HUD's congressional mandate to realize "the goal of a decent home and a suitable living environment for every American family." 42 U.S.C. § 1441 (2001). The mortgage insurance program was established with the creation of the Federal Housing Administration in 1934. National Housing Act of 1934, § 203, Pub.L. No. 73-479, 48 Stat. 1246 (codified as amended 12 U.S.C. §§ 1701 — 50), 12 U.S.C. § 1709 (2001). In the words of another District Court, the mortgage insurance program was passed: "in response to a perceived housing shortage for low income families." Brown v. Lynn, 385 F.Supp. 986, 989 (N.D.Ill.1974). The program, as the Court describes, "is designed to make homes more accessible to low income families by means of extensive mortgage insurance which will permit mortgagees to accept limited down payments, reduced interest rates, and longer maturities than are otherwise available in the market." Id.

Although Congress itself did not set the 1% cap, it did grant HUD the authority to pass such legislation. The statute governing mortgage insurance gives HUD considerable authority to manage the details of eligible mortgages, for example by setting permissible charges and fees. While the exact authorizing provision for the 1% cap is not clear, a number of statutory provisions might allow HUD to set a 1% cap on mortgage broker fees. First, HUD is given authority to promulgate rules and regulations to carry out the statutory provisions of the mortgage insurance program. 12 U.S.C. § 1715b (2001). Broadly, and within the limits of the statute, HUD is authorized to set the terms of the mortgages it insures:

"The Secretary is authorized, upon application by the mortgagee, to insure as hereinafter provided any mortgage offered to him which is eligible for...