SafeAlert - October 2001

Yield Spread Premiums (YSP's) Beware!

On June 15, 2001, the 11th Circuit US Court of Appeals certified a class action in the case of Culpepper v. Irwin Mortgage Corporation. This case may open doors for a rash of class action suits against financial institutions involving Yield Spread Premiums (YSPs).

The Culpepper decision is expected to trigger a large number of class actions until HUD clarifies under what circumstances YSPs would be allowed under Section 8(c) of RESPA. Plaintiffs’ attorneys are already advertising for allegedly injured borrowers. At a minimum, defense costs for the banks will be significant.

Progressive recently received notification of two class actions being filed against a financial institution that paid a YSP to mortgage brokers.

In the class actions, the plaintiffs have challenged the payment of YSPs as being a referral fee or "kickback." The payment of referral fees and kickbacks are prohibited under Section 8 of the Real Estate Settlement Procedures Act ("RESPA"). The plaintiffs claim that the YSPs paid to the mortgage brokers were paid over and above the fees the brokers charged the borrowers for their services.

HUD has previously stated that YSPs are not illegal in and of themselves ("per se") and might be allowable under Section 8(c). Section 8(c) shelters from liability fees paid by the lender to the broker for services actually performed by the broker. In the claims against our insureds, the YSPs were allegedly paid for reasons other than services performed by the brokers. The brokers’ fees were disclosed to the borrower on the HUD-1 Settlement Statement given the borrower at the closing of the mortgage loan. However, the plaintiffs claim that the YSPs were only cryptically reflected on the HUD-1 Settlement Sheet given the borrower.

For more information on this topic, please contact Deborah Duvin, Senior Claims Attorney, at 1-800-274-5222, ext. 59599.

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