By Jonathan Foxx
Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.
As you may know, I have lectured extensively and written many articles relating to the Yield Spread Premium (YSP).
And I will continue to track issues involving the YSP.
- Service Release Premium vs Yield Spread Premium: Match or Mismatch?
- Saving the Yield Spread Premium
- Yield Spread Premiums: Compensation or Kickback?
During the course of this multi-year, ongoing review, I have been following litigation that affects the YSP.
Just such litigation that has national implications is the recent decision on November 30, 2010 by the Louisiana Supreme Court, which held that the YSP is excludable from the Home Ownership and Equity Protection Act (HOEPA) calculation.
On one side was The Bank of New York (Bank) and on the other side was Kathleen Johnson Parnell (Parnell) along with amici curiae such as the National Consumer Law Center, Center for Responsible Lending, and the Southeastern Louisiana Legal Services.
At risk was the interpretation of the FRB's Official Staff Commentary to the Truth in Lending Act as well as a public attempt to portray the lender in the worse possible light.
I thought you might find this recent decision of interest.
The Louisiana Supreme Court held that a YSP paid by a lender to a mortgage broker is not part of the "total points and fees payable by the consumer at or before closing," within the meaning of 15 U.S.C. § 1602(aa)(1)(B) of HOEPA.
To quote the ruling itself: "Because the YSP in this case was paid by the lender not the borrower/consumer, the YSP is not included in the calculation for determining the applicability of HOEPA."
The Court used the Truth In Lending Act as its source and relied on a provision in the Federal Reserve Board's Official Staff Commentary of Regulation Z to find that mortgage broker fees which are not paid by the consumer are not included in the HOEPA "points and fees" calculation.
Indeed, the Court cited the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) in its amending of 15 U.S.C. § 1602(aa)(1) replacing "points and fees payable by the consumer at or before closing" with "points and fees payable in connection with the transaction."
The Court decided that "the YSP in this case was not payable [by the consumer] at or before closing as required by the applicable version of 15 U.S.C. § 1602(aa)(1)(B)."
Some Case Facts
1) 2001: Kathleen Johnson Parnell (Parnell) executed an adjustable rate promissory note secured by her home.
2) Loan was originated through a mortgage broker.
3) HUD-1 Settlement Statement stated that the lender paid the mortgage broker a YSP in the amount of $1,264, which was paid outside closing.
4) 2003: Parnell attempted to rescind the security interest under the Truth In Lending Act claiming:
4-A) that her loan was governed by HOEPA (because points and fees exceeded 8% of the total loan amount), and
4-B) that she had not been given the requisite disclosures.
1) Parnell's rescission demand was denied because the threshold requirement of HOEPA was not met, being the total amount of points and fees of only 6.7%.
2) The difference between these calculations rested on the inclusion of the YSP.
1) Parnell defaulted on her note.
2) The Bank filed a petition for executory process seeking to seize and sell her home.
3) Parnell filed a petition to suspend the seizure and sale of her home, alleging, among other things, a violation of HOEPA for failing to provide statutorily-required disclosures.
4) The Bank filed a motion for summary judgment, seeking the dismissal of all claims asserted by Parnell primarily on the basis that Parnell's loan was not subject to HOEPA because a YSP paid by a lender is not included in the points and fees calculation.
5) Parnell opposed the Bank's motion arguing that the YSP was ultimately paid by her over the life of the loan and that "all compensation paid to mortgage brokers" constitute "points and fees" under HOEPA.
6) The trial court granted the Bank's motion for summary judgment.
7) Louisiana Court of Appeal for the Fifth Circuit reversed on appeal.
8) Louisiana Supreme Court decided that those portions of the appellate court decision that reversed the trial court's granting of summary judgment in favor of the Bank as to Parnell's HOEPA and wrongful seizure claims are reversed. And, with respect to these two claims, the judgment of the trial court was reinstated.
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