Premium Paid to Mortgage Broker Violates RESPA

Culpepper v. Inland Mortgage Corp., 132 F.3d 692 (1998)

July 1, 1998

ATLANTA—Yield spread premiums paid by lenders to mortgage brokers violate the antikickback provisions of the Real Estate Settlement Procedures Act, the U.S. Court of Appeals for the 11th Circuit has ruled.

The ruling, the first at the federal appeals court level to deal with the issue of yield spread premiums, impacts mortgage brokers in the 11th Circuit—Alabama, Florida, and Georgia—including those affiliated with real estate brokerages or other settlement service providers.

The case involved a couple who accepted a 7.5 percent interest rate on a 30-year fixed-rate mortgage obtained through a mortgage broker. The buyers were not told that the mortgage company actually had loans available at 7.25 percent, which was the “par rate,” or the lowest interest rate before the lender charged the borrower discount points.

By quoting the higher interest rate, the mortgage broker obtained a yield spread premium of $1,263.61.

The borrowers filed suit claiming that the lender's payment of the yield spread premium was illegal under RESPA. According to RESPA, such referral fees are illegal, and settlement service fees can be charged only for actual goods or services.

A lower court ruled against the borrowers. The appeals court reversed, concluding that the yield spread premium was not payment for a service but rather payment for referring an above par loan to the lender and that it was therefore a RESPA violation.

Liability Release Not Always Valid

Johnson v. Maki and Associates Inc., 289 Ill.App.3d 1023, 682 N.E.2d 1196 (1997)

SPRINGFIELD, Ill.—Brokers can’t always protect themselves from lawsuits merely by having the seller sign a liability release.

The Appellate Court of Illinoisdecided recently that a release from liability that a real estate broker included in a sales cancellation agreement was unenforceable because it wasn't a contract. In order to be a contract, there has to be “consideration,” that is, something of value like money exchanged for something else.

The case involved a seller who listed with Maki & Associates Inc. The seller signed a sales contract with a couple, and the broker placed the buyers’ $2,000 earnest money deposit into an escrow account.

When the seller and the buyers couldn't reach agreement on repairs, the buyers asked for the return of their earnest money.

According to the sales contract, Maki was to return the earnest money upon written demand. The seller sent such a letter, but before the broker would return the money, the broker required the seller to sign a cancellation agreement that released the broker “from all claims, litigation, judgments, and costs arising from the cancellation of the contract.”

The seller signed, and the broker released the money.

Subsequently, the seller filed a lawsuit against Maki claiming, among other things, that the broker had breached fiduciary duty to the seller by making false representations regarding the buyers’ ability to obtain financing and by misrepresenting the operation and effect of the home inspection contingency.

The broker argued that the seller's lawsuit was barred by the release contained in the cancellation agreement. The trial court agreed and dismissed the case.

On appeal, the court decided that for the release to be enforceable, it required consideration, like any other contract, and that since the seller didn’t receive any consideration from Maki in exchange for her promise not to sue, the release was not enforceable.

The appellate court ruled that the lower court had erred by dismissing the seller's action, and it returned the case to the lower court for further proceedings.

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