Mentecki v. Saxon Mortgage, Inc., 1997 WL 45088 (E.D. Va.)

Appellee urges that the decision below should be upheld, even if the loan is not "goods" on the ground that Inland's payment to Premiere was reasonably related to the value of the services Premiere provided. Another court which has ruled on the payment of yield spread premiums has concluded:

"By their very nature, yield spread premiums are not compensation given for services actually performed by the broker." Mentecki v. Saxon Mortgage, Inc., 1997 WL 45088 (E.D. Va.)

(Order denying motion to dismiss, Appellants' Exhibit B at 5).

Consistent with this conclusion, the court concluded "that the payment of a yield spread premium is a referral prohibited by 12 U.S.C. ß2607(a) and denied the defendants' motion to dismiss. In a subsequent order on one of the defendants' motion for reconsideration, the court modified its ruling to read:

"The court concludes that [plaintiff has stated a sufficient claim that] the payment of a yield spread premium is a referral prohibited by 12 U.S.C. ß2607(a)." See copy of order dated February 7, 1997 attached hereto as Exhibit D.[6]

Blankensopp's testimony confirms that the payment was made for the referral of the loan at the 7.5% interest rate. [cite] It is also apparent from reviewing Inland's rate sheet that whether a yield spread premium is paid and what amount is paid are solely functions of whether and how far the interest rate on a given loan exceeds the par rate and the amount of the loan. Additionally, the rate sheets used by Inland do not make any adjustments to the yield spread premium according to the nature of the settlement services rendered. Thus, the yield spread premiums paid by Inland relate only to the value of the business referred to Inland by the broker, not to the value of the settlement services performed. This yield spread premium is purely and simply a referral fee; it is not earned by the performance of any service other than the referral of an above-par loan.

Counsel for the loan industry have recognized the difficulty of showing that a yield spread premium, also known as an "overage," is paid for services. Leonard A. Bernstein, who represents defendant Saxon Mortgage in the Mentecki case, stated as follows in an article published more than three years ago:

Some lenders pay an "overage" to a broker or dealer for "up-selling the rate." This refers to additional payments by an equity lender to a broker for a loan that has a higher-than-expected rate of interest. The extra payment from the equity lender is intended to compensate the broker for bringing to the lender such an attractive, high rate loan. If a RESPA Sec. 8 violation is asserted, it is debatable whether an equity lender can defend payment of the extra overage money as payment of a thing of value for services rendered.

Joseph Lefkoff Attorney

Yet another industry attorney, Joseph Lefkoff, has issued even stronger warnings that the practice of paying yield spread premiums in table funded loans such as the Culpeppers' violates the anti-kickback provisions of RESPA. Mr. Lefkoff, who practices law in Atlanta, is legal counsel to the National Second Mortgage Association (NMSA). He has been quoted as saying during a speech at an NSMA convention:

“It is my opinion that three compensation practices--back end points, yield spread differentials and service release fees--are prohibited and illegal . . . . Yield differentials in which pay is based upon the difference between the rate obtained by the broker and the rate at which the lender would otherwise be willing to make the loan can be even more "explosive" . . . . [T]he only bona fide way to base compensation on yield differentials, which are sometimes known as overages, is if the deal is clearly a secondary market transaction. If, on the other hand, the lender is table funding the loan, he is violating RESPA Sec 8 anti-kickback provisions.”