The United States Department of Justice recently announced a settlement with WellsFargo over allegations that independent mortgage brokers who placed loans withWells steered Hispanic and African-American borrowers into high-interest loans. Theallegations stem from a practice called “yield spread premium” that put thousands ofdollars per loan in brokers’ pockets; but, has been denounced by consumer advocates andCongressional Democrats.
Although the practice is under heavy scrutiny, what a lot of people don’t know is that loan officers could mark up the interest rate on a loan in the same manner as a jeweler marks up a price of piece of jewelry or in the same way that some gas stations mark up the price of gas during a crisis. Under a concept called “yield spread premium (YSP),”brokers receive thousands of dollars in commissions for putting consumers into pricey mortgage loans. The higher the interest rate, the higher the broker’s commission. In addition, in the past, many lenders paid an additional fee for brokers who convinced consumers to take adjustable rate mortgages rather than fixed-rate mortgages. In several instances, rather than haggle, brokers simply told borrowers, “This is what I have for you,” and allowed consumers to believe there were no alternatives to the offered interest rate or fees.
Every day, via email, loan originators received rate sheets listing the bonuses – yieldspread premium — lenders were willing to pay and the interest rate and fees that had to beprocured to obtain that bonus.
Groups representing mortgage brokers have fought attempts by federal regulators tosharply limit the practice. However, at an industry conference in April 2012, RichardCordray, director of the Consumer Financial Protection Bureau, said the federal agency isassessing the loan officer compensation rule.
It’s important to note that not all mortgage brokers charged YSP.
Charm City residents will benefit from the Wells Fargo settlement. The agreement provides $125 million in compensation for borrowers who were steered into subprime mortgages or who paid higher fees and rates because of their race or national origin. Wells Fargo has also agreed to provide $50 million in down payment assistance to borrowers in communities especially hard-hit by the alleged discrimination. As a result,the city of Baltimore will receive $4.5 million plus $3 million for priority housing and foreclosure-related initiatives in exchange for a dismissal of a discrimination lawsuit filed in 2008.
The alleged discrimination occurred between 2004 and 2009 and involved about 34,000 African American and Hispanic consumers in 34 states as well as the District of Columbia.