DATE: Saturday, March 1, 1997               TAG: 9702270321

SECTION: REAL ESTATE WEEKLY      PAGE: 26   EDITION: FINAL 

SOURCE: BY CAROL MARIE CROPPER, N.Y. TIMES NEWS SERVICE 

                                            LENGTH:   57 lines

MORTGAGE FEE RULING APPEALED

A Virginia case that had mortgage borrowers and consumer advocates celebrating only a few weeks ago was appealed last month, with the two banks accused of illegal practices asking that the suit be dismissed.

The 4th U.S. Circuit Court of Appeals, in Richmond, was expected to decide within weeks whether to accept the case.

If it does, it will take on a controversial question: Are banks breaking the law by paying certain fees to the independent mortgage brokers that refer loans to them?

At issue are the fees commonly paid by banks when a broker sends them a mortgage loan for a higher-than-normal interest rate. A bank might pay a broker the special fee, called a yield spread premium, if the broker writes a home loan at 9 percent that could have been written at a lower rate.

Banks say this is an accepted way to compensate brokers that generate loans for them. And they say it can reduce a home buyer's closing costs by shifting part of the broker's fee to the bank.

Borrowers who have sued call such payments kickbacks that result in higher interest payments. The plaintiffs argue that the payments are outlawed by the Federal Real Estate Settlement Procedures Act.

In January, Judge Albert V. Bryan Jr., of the federal district court for the eastern district of Virginia, sent shock waves through the mortgage industry by saying - in a ruling that denied the banks' motion to dismiss the suit - that the payments were prohibited by law. Although it was only an early ruling in the case, the statement was surprisingly definitive.

The Mortgage Bankers Association of America filed a brief on the side of the two banks, Saxon Mortgage Inc. and the Crestar Mortgage Corp. Those banks, both based in Richmond, won a stay of all further action in the suit while they sought an appeal of Bryan's refusal to dismiss.

In granting the stay, Bryan said he had not made a final decision in the case and that his earlier ruling meant only that the ``plaintiff has stated a sufficient claim'' that the payments were illegal.

Crestar's lawyer, Leonard Bernstein, said Bryan was backtracking. But Daniel A. Ragland, who represents the two couples suing the banks, said: ``He's not changing his mind here. He is still saying that under the facts as alleged it is illegal.''

Homeowners began suing in recent years as mortgage brokers became more prevalent. The early suits were settled without the lenders admitting wrongdoing. The Ford Consumer Finance Co., a subsidiary of the auto maker, agreed to pay $20 million in a settlement last August.

In cases that proceeded, different judges produced different outcomes. Three weeks after Bryan criticized fees in the Virginia case, a federal district judge in Alabama ruled that a yield spread premium was ``permissible as a matter of law.''

More than a dozen lawsuits dealing with the issue have been filed in federal courts across the country, Crestar argues in seeking an appeal. ``No court of appeals has yet spoken on the legal questions raised in these cases,'' the bank said. KEYWORDS: APPEAL MORTGAGE FEE RULING

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