Bank Faces Class Action Lawsuit Over Reverse Mortgage Practices

NewImage.jpgThe Puget Sound Business Journal is reporting that Seattle Mortgage Co., a unit of Seattle Bank, has been hit with a lawsuit in California that claims illegal activities in its reverse mortgage business.

According to court documents, the plaintiff, Mary Labrador alleges that Seattle Mortgage was illegally paying fees to its mortgage brokers and overcharging borrowers on the cost of loan origination.

When Ms. Labrador took out her reverse mortgage through Home Center, a correspondent fee of $490 was paid by Seattle Mortgage to the mortgage broker and alleges it was a “back-channel fee arrangement” used to induce mortgage brokers to steer mortgages to the company.


Court documents reveal that while Ms. Labrador was told the $490 fee was paid to Home Center for the servicing rights to the loan, but she contends that the fee was in fact an incentive fee designed to motivate brokers to steer mortgagors to Seattle Mortgage.

This fee, according to the plaintiff, created a “financial interest” and therefore should have prohibited Defendant from charging Plaintiff the “origination fee” of $7,255.80 due to federal regulation 24 C.F.R. § 206.31(a)(1).  The regulation states in part, that a mortgage broker’s fee may be included in the origination fee charged to the borrower only “if there is no financial interest between the mortgage broker and the mortgagee.”

Nance Becker, the lead attorney representing the plaintiff told Business Journal the lawsuit is intended to be a class action and claims reimbursement costs and damage which would likely total about $56 million,

“The bank cannot pay any portion of the origination fee to the broker when there’s a financial interest between the bank and mortgage broker,” she said.  “I believe the intent of the regulation is that we want mortgage brokers to give people financial advice based on what’s in their financial best interest and place them in loan products best suited for their needs,” said Becker, “not to be influenced by the fees they receive from the banks.”

If the ruling is favorable to the plaintiffs, it could mean that “common” lender-broker relationships are in fact, in violation of HUD rules, and subject to legal action.  Further, the suit is focused in California. Other states could discover the same practice exists there as well.

“It could affect other institutions,” said Becker. “The regulation applies nationally.”

RMD contacted Seattle Mortgage and was told the company couldn’t comment at this time.

Seattle Bank unit faces California class-action suit

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  • If you need an example of harebrained argument in service of a non-issue, this so-called correspondent-fee-as-inducement allegation is it. In the days when Fannie Mae was the sole reverse-mortgage secondary market investor and origination fee was the sole source of compensation for brokers, correspondent fee was a common industry practice. It was an additional compensation, an attempt by some enlightened lenders to share anticipated servicing income with brokers who do the grunt work of origination in wholesale lending.There was nothing sinister or illegal about it. Some brokers actually used their correspondent fee to reduce borrowers’ costs.It is absurd to argue that $490 is an inducement in a transaction where broker’s earned compensation is more than $7,000. Equally reckless is the suggestion that the correspondent fee predated the transaction, thus establishing a prior “financial interest” between lender and broker.This is litigation harassment. The suit has no legs to stand on.

  • How does this affect banks who had correspondents charging origination fees (especially before the price wars and 0 origination) and getting paid on the back end much more than $490.00?
    I might be confused but this sounds much worse than a $490.00 correspondent fee especially when seniors were being steered into a fixed rate that was not the appropriate product.

    • Your confusion is obvious and understandable. Allegations like these are designed to “sound much worse” than they really are. Unfortunately the defendant will bleed financially before the court throws out the suit.

    • treverse,

      While you have the right to your opinion about “steering,” I am certain the premise of your conclusions are the same as mine in this area, conjecture based on hearsay and incomplete information, unless you are admitting personal involvement or you have first hand information. While this may be a blog, careless accusations could prove detrimental. I certainly do not believe they serve our industry well.

  • critic,
    I understand your concern about how these comments may not serve our industry well but I would not be making them without first hand knowledge. I am not one to sweep the truth under the rug.
    I have originated many loans in the past several years. Since the fixed rate became available I have come across competitors who were obviously selling a fixed rate that was definitely the innapropriate product. Although there are a number of seniors who just feel comfortable with a fixed rate this was definitely not the case in a large number of cases. In many situations I ended up with the loan simply because I explained all options available completely and honestly. At that point the senior decided the HECM monthly was the right choice.
    In closing do not assume that another persons comments are ” conjecture based upon hearsay and incomplete information” and worse through your constant sarcasm assuming they are careless accusations. Maybe you should ask first because we all know what it means when you ASSUME!

    • treverse,

      I hope you reported your findings to NRMLA and HUD. Our industry does not need the caliber of originator you describe. These originators need to be reported.

      What I wanted is your response. Like I assumed, you gave it.

      Like most of life, some assumptions are right and some…. The important thing is they are labeled for what they are. More important is that the originators you reference get reported for what you accuse them of doing.

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