The Supreme Court of Louisiana recently confirmed that a yield spread premium is not part of the "total points and fees payable by the consumer at or before closing" within the meaning of the Home Ownership and Equity Protection Act (HOEPA). A copy of the opinion is attached.
This case arises from an adjustable rate promissory note executed by Kathleen Johnson Parnell (Parnell), and secured by a mortgage on her home. The HUD-1 Settlement Statement prepared in connection with the loan closing noted that the lender paid the mortgage broker a YSP of $1,264. The HUD-1 stated that the YSP was "paid outside of closing."
On June 19, 2003, Parnell demanded rescission under the federal Truth in Lending Act. Parnell claimed that her loan was subject to HOEPA, as the "points and fees charged in connection with her loan exceeded eight percent of the total loan amount." She further claimed that she had not received certain disclosures required by HOEPA.
Following her demand, starting in September of 2003, Parnell stopped making the monthly payments due on her loan. The lender denied the demands made in Parnell's June letter, as her points and fees totaled only 6.7 percent of the total loan amount by its calculation. The owner of the loan sought to seize and sell Parnell's house in response to her failure to make payments on her promissory note. However, the note secured by the mortgage was later paid in full on June 26, 2006, from insurance proceeds following Hurricane Katrina.
In September of 2008, the loan owner filed a motion for summary judgment as to all claims asserted by Parnell in her June 2003 letter. The trial court held that the YSP paid by the lender to the mortgage broker "outside of closing" is "not included in HOEPA's "point and fees" calculation" because "it was not paid or payable by Parnell at the time of closing." Therefore, the trial court granted the Bank's motion for summary judgment, and dismissed Parnell's petition with prejudice. Parnell appealed this decision.
The court of appeals reversed the portion of the trial court's decision granting summary judgment relating to Parnell's HOEPA claim. The court of appeals "adopted a consumer-oriented view to HOEPA and a related regulation, Regulation Z." Under this interpretation, the court found that "payable", in relation to the YSP, meant "legally enforceable or obligated to pay rather than paid." Therefore, "Parnell was legally obligated to pay the yield spread amount at or before closing" because of her obligation to pay a higher rate of interest during the life of the loan. This inclusion of the YSP in the points and fees calculation made the loan subject to HOEPA's disclosure requirements.
The Louisiana Supreme Court reversed. The Court noted that "the phrase "points and fees" includes all compensation paid to mortgage brokers and excludes interest," but "all "points and fees" must be "payable by the consumer at or before closing."
Therefore, the Court held that while the statute itself and relevant case law sought to prevent "allowing lenders and financial institutions to manipulate the payment of points and fees . . . to avoid triggering the HOEPA protections", the Board's Official Staff Commentary clearly stated that "mortgage broker fees that are not paid by the consumer" are not included in calculating points and fees under HOEPA.
Thus, the Court held that, in cases where "the YSP is paid by the lender to the broker at the time of closing" and the borrower satisfies their obligation by paying a higher interest rate "over the course of the loan," the YSP should not be included "in the calculation of the eight percent trigger."
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com