Plaintiffs incorrectly assume that there is never a valid reason why a broker would receive
compensation for originating an above-par loan. They say that any informed borrower who could
not afford to pay closing costs would simply take out extra loans, rather than agreeing to a loan at
a higher interest rate. True enough for some borrowers, but there are plenty of others who may
not qualify for the extra $3000 or $4000 necessary to cover closing costs. For the borrower who
has a poor credit history, the YSP can foster homeownership by allowing her to finance
settlement costs through a higher interest rate.* In this situation the lender’s use of a rate sheet to
calculate the broker’s fee does not, on its own, signify an illegal transaction.

I must move on to the second prong — the “reasonableness” inquiry — and this kills the
motion for class certification. If liability could be established simply by the lender’s reliance on
the rate sheet, then very little inquiry into individual issues would be necessary. But to determine
whether a broker’s compensation is reasonable, I must analyze the interest rate on plaintiffs’
mortgage, plaintiffs’ credit histories, level of debt, employment history, whether the borrower
could have taken out more in loans to cover closing costs, and other factors. The legality of the
YSP is therefore highly dependent on the facts of each case, and not amenable to class resolution.

My decision to refuse class certification comports with the latest guidance from HUD:

[I]n order to discern whether a yield spread premium was for goods, facilities, or services

under the first part of the HUD test, it is necessary to look at each transaction

individually, including examining all of the goods or facilities provided or services

performed by the broker in the transaction, whether the goods, facilities or services are
paid for by the borrower, the lender, or partly by both. (emphasis added).°

4See Real Estate Settlement Procedures Act (RESPA) Statement of Policy 2001.

5See 66 Fed. Reg. 53051.


Count V — Inducement of Breach of Fiduciary Duty

Since liability will not be based on the uniform use of a rate sheet to calculate the YSP,
but rather on analysis of each individual mortgage transaction, plaintiffs’ remaining claim is no
more amenable to class resolution than the RESPA claim.

Conclusion

The motion for class certification is denied. The motion to dismiss Count II and Count

TV is granted. The motion to strike affidavits is denied as moot.

ENTER:

a Bho

James |B. Zagel ( snase
United States Distriot Judge’

DATE; December 3, 2001


It is bad for the borrower, but is it also illegal?

A 1999 HUD regulation suggests a two-part test to determine whether a YSP is an illegal
referral fee or a permissible fee for service rendered.' I must consider, first, whether the
plaintiffs’ broker provided goods or services for the compensation paid, and second, whether the
payments were reasonably related to the value of the goods or services actually provided. I must
consider both parts of the HUD test — whether compensation was paid for a service plus
“reasonableness” of the broker’s total fee.”

As for the first prong, there is a question of fact about whether the YSP in this case
should be characterized as “compensation given in exchange for goods or services received.”* It
is alleged that UMC never inquired into how much work CMS actually did in connection with
the Vargas mortgage, or any other mortgage, but instead relied exclusively on a “rate sheet” to
determine the amount of compensation due. Mr. and Mrs. Vargas urge me to find that the
inquiry ends here — that reliance on the “rate sheet” to calculate the YSP renders the YSP an
illegal referral fee, period. See Culpepper v. Irwin Mortg. Corp., 253 F.3d 1324 (1 1" Cir. 2001).
I respectfully disagree with plaintiffs’ theory of liability. HUD’s 2001 Policy Statement,
promulgated in response to Culpepper LIE, provides that use of a rate sheet to calculate the YSP is

not determinative of whether the fee was a referral fee. This makes sense.

‘See Real Estate Settlement Procedures Act (RESPA) Statement of Policy 1999-1 Regarding
Lender Payments to Mortgage Brokers, 64 Fed. Reg. 10080 (1999).

2S0e Real Estate Settlement Procedures Act (RESPA) Statement of Policy 2001-1: Clarification
of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, and Guidance
Concerning Unearned Fees Under Section 8(b), 66 Fed. Reg. 53051 (2001).

31 adopt Culpepper III’s interpretation of the phrase “for goods or services received” for the
reasons set forth at 253 F.3d at 1329-30.


Plaintiffs urge me to disregard the 2001 Statement on the ground that it improperly limits
the RESPA. | agree that the test is confusing and not very helpful, in my view, because it allows
for an easy post-hoc rationalization of any payment to a broker by a lender, so long as it is not
wildly excessive or explicitly termed a “referral fee.” At the same time, I believe that the test is
faithful to the language of the Act and that the Act compels a case-by-case analysis of individual
plaintiffs’ claims every bit as much as the HUD Statement. HUD’s “reasonableness
requirement” was not made out of whole cloth; it is implicit in § 2607(c) which authorizes
compensation for “services actually performed.”

Plaintiffs observe that HUD’s policy statements effectively disallow borrowers from ever
challenging broker premiums under § 8 as a class. See Golon v. Ohio Savings Bank, 1999 WL
965593 (N.D. Ill. 1999). This may be the case, but as Judge Pallmeyer has observed, alternatives
besides a class action may afford relief. RESPA allows for an award of treble damages and
attorneys’ fees and costs. See id. Moreover, a declaratory judgment finding that UMC’s policy
violated § 8 may deter the practice and bring relief to others besides the individual plaintiffs.

Count JI —- RESPA / Count IV — Consumer Fraud Act

Ido not reach the motion for certification as it applies to Count HI because J am granting
the motion to dismiss this claim. Count II alleges that in paying the YSP, defendant violated a
Federal Housing Administration (“FHA”) directive that limits the amount of a broker’s
“origination fee” to one percent of the original principal amount of the mortgage. See FHA’s
Mortgagee’s Handbook, Chapter 5 § 5-3; see also 24 C.E.R. § 203.27(a)(2){i)).

The claim is invalid on its face. The broker’s origination fee in this case was under 1% —

it was 0.98%. Plaintiff would have me aggregate the origination fee and the YSP, which together


Minute Onder Born (0407)

nited States District Court, Northern District of Illinois

Name of Assigned Judge
or Magistrate Judge

James B. Zagel

Sitting Judge if Other
than Assigned Judge

CASE NUMBER 01 C 87 DATE 12/3/2001

CASE VARGAS, ET AL vs. UNIVERSAL MORTGAGE, ET AL |

TITLE |

{In the following box (a) indicate the party filing the motion, ¢.g., plaintif¥, defendant. Sra party plant and tb) state brietly the nora
MOTION: ofthe motion being presented.
:

DOCKET ENTRY:
(1) im Filed motion of [ use listing in “Motion” box above.]
(2) oO Brief in support of motion due |
Q) Oo Answer brief to motion due___. Reply to answer brief due |
(4) oO Ruling/Hearingon_____sset for
(5) i] Status hearingfheld/continued to] [set for/re-set for] on __ set for at
(6) oa Pretrial conference[held/continued to] [set for/re-set for] on set for at
(7) a Trial[set for/re-set forfon at
(8) im (Bench/Jury trial] [Hearing] held/continued toa __ i
(9) oa This case is dismissed [with/without] prejudice and without costs(by/agreement’pursuant to| H

0 FRCP4(m)

ao if [Other docket entry]

O General Rule 21

OG FRCP41(a)(1)

(1) if (For further detail see order attached to the original minute order. |

O FRCP 1(ay(2).

Motion (36-1) to dismiss Counts II and {V is granted. Counts Hand IN
are dismissed. Motion (42-1) to strike affidavits is denied as moot.

No notices required

Notices maited by judge's stat?

Notified counsel by telephone

JY | Docketing to mail notices.

Mail AO 450 form

Copy to judge/magistrate judge.

courtroom
pw deputy’s
initials

No notices required, advised in open court

Document
Number

Date/time received in
central Clerk's Office

slate docheted

sng bey eta



constituted about 4% of the loan in question. I will not aggregate the payments. Plaintiffs’
argument is contrary to the plain language of the directive, which states:

“Customary and reasonable fees and charges that may be collected from the borrower by

the mortgagee include the following closing costs . . Origination fee: One percent of the

original principal amount of the mortgage . . ae
The directive puts an upper limit on “origination fee[s]” which are paid by the borrower to the
broker; it says nothing about YSPs which are paid by the lender. See Bjustrom v. Trust One
Mortgage, No. C00-1166P (W.D. Wash. October 26, 2001). Moreover, the payment of YSPs is
widespread in the industry. If the FHA meant to aggregate YSPs and loan origination fees under
its 1% cap, it would have said so.

To the extent that plaintiffs argue that the 4% of the loan is unreasonable under RESPA
because it was not compensation for services rendered, this claim is duplicative of Count I.
Since Mr. and Mrs. Vargas have not stated a claim under Count II, the motion to certify a class
based on Count II is denied.

It follows that Count IV must also fail as pleaded. The Consumer Fraud Act claim is
based upon the assumption that YSPs in excess of 1% of the loan are prohibited. Since I have

found that the defendants did not violate the FHA restriction, there can be no claim for failure “to

disclose to plaintiffs that the 1% FHA restriction was being evaded.” (Compl. J 63).

6 Similarly, 24 CFR. § 203.27(a)(2)(i) provides: “The mortgagee may collect from the
mortgagor the following charges, fees or discounts . . . [a] charge to compensate the mortgagee
for expenses incurred in originating and closing the loan, the charge not to exceed . . .$20 dollars
or one percent of the original principal amount of the mortgage . . . whichever is the greater . . ..”


UNITED STATES DISTRICT COURT Lp.»
NORTHERN DISTRICT OF ILLINOIS Deo PED
EASTERN DIVISION Oe,

RAFAELA VARGAS and
ARMANDO VARGAS,

Plaintiffs,
No. 01 C 0087
v. Judge James B. Zagel

UNIVERSAL MORTGAGE
CORPORATION,

Defendant.

MEMORANDUM OPINION AND ORDER

Plaintiffs Rafaela and Armando Vargas purchased a home in Palatine, Illinois with a loan
from Universal Mortgage Corporation (“UMC”) and with brokerage assistance from Country
Mortgage Services, Inc. (“CMS”). They allege that certain payments — yield spread premiums
(“YSPs”) — made by lender UMC to broker CMS in connection with the mortgage transaction
were illegal referral fees paid in violation of the Real Estate Settlement Procedures Act
(“RESPA”), 12 U.S.C. § 2601, ef seq. and the Illinois Consumer Fraud Act (815 ILCS § 505/2).
The facts of the case are set forth in my May 17, 2001 ruling on the motion to dismiss; J do not
repeat them here.

Before me is plaintiffs’ motion to certify a nationwide class of borrowers whose mortgage
brokers received YSPs from the defendant. While the Complaint may have merit (and I assume
it does for purposes of this motion), I will not certify the class. Even if plaintiffs can satisfy the
Fed. R. Civ. P. 23(a) requirements, certification is not warranted because questions affecting
individual class members predominate over questions common to the class. See Fed. R. Civ. P.

23(b)(3).

SO


Count I - RESPA

It is perfectly legal, under the RESPA, for a lender to pay a mortgage broker for services
the broker has performed in connection with a real estate transaction. See 12 U.S.C. §
2607(c)(1)(C). It is illegal, however, for a lender to pay a broker a referral fee for sending
business its way. See 12 U.S.C. § 2607(b).

The legality of yield spread premium payments under the RESPA has been the subject of
a flood of federal lawsuits. The general consensus, and the view endorsed by HUD, is that YSPs
are not per se illegal, but that certain unscrupulous lenders use the YSP payment improperly as a
means to compensate brokers for originating loans with sky-high interest rates. Mr. and Mrs.
Vargas allege that UMC is just such a lender, and that the YSP in this case was nothing more
than a reward from defendant to the plaintiffs’ broker for duping plaintiffs into purchasing a loan
at an excessive interest rate.

The scheme works like this: UMC distributes “rate sheets” to its brokers, listing the
terms of its loans and the interest rate applicable to certain classes of borrowers. If a broker
secures a Joan at below the “par rate” he gets no compensation from UMC. If the broker
orgininates a loan at higher than par, the broker gets a YSP, which is calculated by a formula that
includes the amount of the loan and the difference between the loan rate and the par rate. YSPs
are not linked to the services performed by the broker, but rather to the extent to which the
interest rate on the loan exceeded par. This fee arrangement is good for the broker, who receives
his payment up front, and for the lender who can then sell the above-par loan to its investors at a
higher price; but it can be very bad for the borrower — especially if he could have qualified for a

loan at a lower interest rate by paying his closing fees up front.