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It Pays to Negotiate Aggressively on Loan Fees

September 22, 1996|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — A $4-million Justice Department settlement with a large mortgage company recently highlights a lending industry practice that minority, female and senior-citizen loan applicants nationwide should know about--and avoid whenever possible.

The settlement, negotiated with California-based Long Beach Mortgage Co., alleged that not only employees of the firm but also its network of independent mortgage brokers routinely charged minorities, women and elderly applicants significantly higher fees or "overages" than they charged white male applicants.

An African American woman older than 55 was nearly four times more likely to be charged six points (6% of the loan amount) in fees by independent brokers selling loans to Long Beach than non-elderly white male applicants, according to the Justice Department's suit.

In settling with the government to avoid protracted litigation, Long Beach Mortgage denied that it intentionally charged any group of applicants higher fees. As part of the settlement, Long Beach agreed to pay $3 million to 1,200 borrowers identified by the Justice Department as victims of discriminatory mortgage pricing between 1991 and 1994.

It also agreed to provide $1 million to be used by public-interest groups to create programs to educate consumers about loan fee practices.

What's most unusual about the settlement, according to legal experts, is that the federal government appears to be targeting independent mortgage brokers--the source of an estimated 40% to 50% of new home loan originations nationwide--for alleged discriminatory pricing.

Rather than directly attacking individual small-scale mortgage brokers, however, the government is going after the larger companies that buy and fund local brokers' loans.

Known as "wholesale" mortgage lenders, such firms range from industry giants to modest-sized regional banks. By buying loans from local brokers, wholesale lenders avoid the costs of setting up and staffing their own retail branches.

Generally local brokers are expected to originate mortgages at a price--say 8 1/2% plus a one-point fee--set by the wholesaler that purchases the loan after closing. If the brokers can squeeze additional fees out of applicants--say, another two or three points--they are often permitted by the wholesaler to pocket them. These are known in the trade as "overages."

Some brokers were allowed by Long Beach to hit borrowers for as much as 12 points--$12,000 on a $100,000 mortgage, according to the government's complaint.

The suit didn't challenge the concept of overage fees per se but alleged that independent brokers as well as company-employed retail loan officers were sticking certain types of applicants--minorities, women and the elderly--with higher overages than those charged to whites or males.

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In the case of broker-originated loans, the Justice Department said, a mortgage lender like Long Beach has the responsibility to make certain that the brokers it does business with do not discriminate on the basis of race, sex or age. If white borrowers funded by a wholesaler through its broker network pay lower fees than nonwhite applicants--and there's no other credit-risk explanation for the disparity--that's a blatant violation of federal fair lending laws, the department said.

An attorney representing Long Beach Mortgage, Laurence Platt of the Washington, D.C., law firm of Kirkpatrick & Lockhart, called the issues raised by the case "complicated and very troubling." A wholesale lender like Long Beach deals with large numbers of far-flung small local brokers, according to Platt. Each broker has its own approach to marketing, pricing and negotiating fees with applicants.

In Long Beach's case, a central-city broker might charge all applicants--minority and nonminority, young and old--four points on top of the posted rate. Another broker in a predominantly white suburb might charge all applicants three points. Neither broker discriminates illegally, Platt said.

Yet to the extent that the first broker's clients are overwhelmingly minorities and the second broker's clients overwhelmingly white, the wholesale mortgage company's aggregate purchases from these brokers will exhibit an apparent racial disparity on pricing.

"At the end of the day," said Platt, "there might be differences in prices" between minority and nonminority applicants, "but they are not the result of illegal discrimination."

The upshot of the settlement for you?

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Negotiate aggressively on fees as well as rates when shopping for a loan, especially through a mortgage broker. In most cases, the broker has no fiduciary duty to you under state law to deliver the lowest possible combination of rate and fees. High-quality brokers disclose this to you clearly before the application process begins.

And if you are a minority group member, female or elderly, you should bear this in mind: The Justice Department has statistical evidence that you are at higher risk than others to pay more than you need to on your next home loan.

So don't.

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Distributed by the Washington Post Writers Group.

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