State Law Update: New York Bans Yield Spread Premiums, Expands Consumer Privacy Protections

On August 17, New York Governor Andrew Cuomo signed Senate Bill 886, which prohibits any compensation paid to a mortgage broker or lender that is based on the terms of a mortgage, except for compensation linked to the principal balance of the loan. This prohibition of so-called yield spread premiums is a change from existing state law that prohibited “abusive” yield spread premiums in connection with high-cost mortgages.

On August 14, New York enhanced consumer privacy protections when it enacted Assembly Bill 8992. Just as the Federal Privacy Act of 1974 applies to federal, state, and local government agencies, this bill prohibits private businesses from conditioning the provision of services on a consumer’s willingness to disclose his or her Social Security number upon request. The law provides several exceptions, including when the collection of the Social Security Number is (i) otherwise required by law, (ii) requested in connection with the opening of a deposit account or a credit transaction initiated by the consumer, or (iii) required for any business function allowed under the Gramm Leach Bliley Act.


Sixth Circuit Holds Lender May be Liable for Broker’s Failure to Disclose Commission

On August 13, the U.S. Court of Appeals for the Sixth Circuit held that a lender may be liable under state common law claims of civil conspiracy for failing to disclose fees paid to a mortgage broker. Lee v. Countrywide Home Loans, Inc., No. 10-3777, 2012 WL 3264064 (6th Cir. Aug. 13, 2012). In this case, the borrowers brought common law civil conspiracy and fraud claims against their lender, alleging that the lender defrauded the borrowers by failing to disclose a commission the lender paid to the broker (the Yield Spread Premium) and subsequently recouped by raising the interest rate on the borrowers’ loan over the life of the loan. The borrowers also brought a claim for rescission under TILA. The district court found no evidence that the lender had any knowledge that the broker failed to disclose the fee and granted summary judgment to the bank on both common law claims. The district court also granted summary judgment for the lender with regard to the borrowers’ federal TILA claim. The appeals court upheld the district court ruling on common law fraud and TILA rescission but reversed the district court’s holding with regard to civil conspiracy. The appeals court held that a jury could find the lender participated in a civil conspiracy if the borrowers could show that the lender was aware that the broker was breaching its fiduciary duty by misrepresenting or concealing the commission and that the lender aided in this breach.