In Lee v. Countrywide Home Loans, Inc., the Sixth Circuit yesterday reversed a grant of summary judgment concerning disclosure of mortgage broker fees, holding that Ohio law prohibits lenders from knowingly conspiring with brokers to conceal “yield spread premiums” or other mortgage costs from borrowers. The case arose out of a refinancing in which the plaintiffs alleged that a mortgage broker misled them concerning the details of their loan. The particular aspect on which the Court focused attention was the so-called “yield spread premium,” a term that describes the expenses that a lender pays to a broker in order to lower the borrowers’ up-front closing costs and facilitate loan creation. The borrower essentially repays the lender through a higher interest rate over the life of the loan. After discovering that the yield spread premium in this instance was nearly $6,000, the plaintiffs filed suit, and the claim that attracted the Court’s attention was the common law civil conspiracy claim brought under Ohio law.
The Court, in an opinion by Judge Merritt, held that in order to sustain a civil conspiracy claim against Countrywide, the lender, the plaintiff must show that Countrywide was aware that the mortgage broker was breaching its duty by misrepresenting or concealing the yield spread premium and that Countryside aided this breach. The Court held that the mortgage broker was a fiduciary and therefore had an obligation to disclose all material terms of the mortgage, including the compensation mechanism. (This is the second notable Sixth Circuit case recently on fiduciary issues, see Max’s post below). Based on the evidence, the Court held that the plaintiffs presented question of fact on these issues, concluding “they have sufficiently alleged a malicious combination between [the broker] and Countrywide to extract a premium from the Lees without their knowledge.” The Court also dismissed concerns that recognizing this rule would create extensive new obligations for lenders, describing it essentially as a basic component of disclosure. It will remain to be seen how this decision impacts lenders, but certainly lenders and mortgage brokers from the Sixth Circuit should give this a careful read.