Yield Spread Premiums Not Governed by TILA

In its September 20, 2010 Opinion, the Third Circuit Court of Appeals affirmed the trial court’s holding that yield spread premiums do not form Truth-in-Lending Act, 15U.S.C. §1601, et seq. (“TILA”) “finance charges” nor inclusion in the annual percentage rate (“APR”) calculation. Abbott v. Washington Mutual. Finance, Inc., 2008 WL 756069 (E.D. Pa. 2008).

By way of background, Barbara Abbott borrowed $130,000 from loan originator Loan City, Inc. (“Loan City”) in a loan brokered by Priority Mortgage Group (“Loan”), the HUD 1 for which notes that Loan City paid Priority a $1596.60 “yield spread premium”, i.e., monies lenders pay mortgage brokers outside of the distribution of loan proceeds for originating a loan at an interest rate higher than the lender’s minimum.

Ms. Abbott filed a Complaint demanding TILA rescission for failing to disclose or include the $1,596.40 yield spread premium as a “finance charge” or as part of Truth in Lending Disclosure Statement’s APR.

Following a bench trial, the trial court entered judgment for the lender ruling that because the lender - - and not Ms. Abbott - - paid the $1,596.40 Yield Spread Premium, TILA disclosure was not required. 2008 WL 756069, *2.

Ms. Abbott appealed arguing that the Yield Spread Premium required disclosure beyond being set forth on HUD 1 and inclusion in finance charge calculation.

Yield Spread Premium Requires No Separate Disclosure Nor Finance Charge Inclusion

TILA, as implemented by Regulation Z, 12 C.F.R. §§ 226.1 et seq., requires creditors making loans secured by borrowers’ principal dwelling to provide "material disclosures" including “annual percentage rate”, “finance charge”, and “amount financed”. In re Community Bank of Northern Virginia, 418 F.3d 277, 304-305 (3d Cir. 2005); 12 C.F.R. §226.23. Both TILA and Regulation Z expressly excludes “bona fide”, “reasonable” and “real-estate related fees from the finance charge’s computation. Davis v. Deutsche Bank Nat. Trust Co., 2007 WL 3342398, at *4-5 (E.D. Pa. 2007) citing 15 U.S.C. §1605 (e) and 12 C.F.R. §226.4( c)(7)(1).

“Yield spread premiums” are defined as a bonus paid to a broker when it originates a loan at an interest rate higher than the minimum interest rate approved by the lender for a particular loan. Escher v. Decision One Mortg. Co., LLC, 2009 WL 3127753, *4 (E.D.Pa. 2009). As long as it is disclosed on the HUD-1, and because it is already included in the disclosed interest rate, TILA and its implementing regulations do not require lenders to disclose yield spread premiums as part of a loan's finance charge or explain its impact on the interest rate. Id., *4. District Courts have uniformly held that a yield spread premium need not be separately disclosed or included as a pre-paid finance charge because it is already included in the interest rate and should not be double counted. Id., *4-*5.

Charge Was a Yield Spread Premium and Disclosed on the HUD 1

Yield spread premiums are monies lenders pay mortgage brokers outside of the distribution of loan proceeds calculated by multiplying the loan’s principal amount by the “above par value”, i.e., the percentage amount above par for which the loan’s originator can sell the loan. The “yield spread” - - or amount above par that Loan City was able to sell the Loan - - was 1.228%. The 1.228% yield spread multiplied by the Loan’s $130,000 principal equals the $1,596.40 yield spread premium that Loan City paid to Priority.

Although on January 28, 2003, Ms. Abbott “locked in” at the 6% interest rate, on that day Loan City was offering rates between 5.625% and 6.375% and between January and February 2003 interest rates between 5% and 6.75%. Thus, because Ms. Abbott was eligible for a rate of interest as low as 5% (“Approved Minimum”), 6% was not her Approved Minimum.

Because Priority originated this Loan at an interest rate higher than Loan City’s minimum rate, i.e., Ms. Abbott’s 5% Approved Minimum, Loan City paid it a $1596.60 yield spread premium outside of the loan’s proceeds.

Mortgage Reform and Anti-Predatory Lending Act

Although the Third Circuit adopted in whole the trial court’s analysis, the recently enacted Mortgage Reform and Anti-Predatory Lending Act prohibits yield spread premiums payment for referral of a loan to a lender at a higher than par interest rate.

However, the Act but does not bar pre-enactment yield spread premiums or payments passed on to third parties for bona fide charges not retained by lender or broker or impact compensation that secondary market purchasers pay for closed loans.