Read the Fine Print on Rates

With mortgage rates at historic lows -- 4.75 percent from several lenders in mid-December -- a new legal settlement from the Federal Trade Commission offers a cautionary note for consumers, especially if they are members of minority groups: Watch out. The rates and fees you're quoted could violate federal law.

In a settlement agreement with a national mortgage company, the FTC alleged that minority refinancers and home buyers were charged higher fees and rates than white applicants with comparable credit scores and other risk factors. The excess costs ranged from hundreds of dollars in loan origination fees to potentially thousands of dollars in bloated principal and interest payments over the term of the loans.

Gateway Funding Diversified Mortgage Services and its general partner, Gateway Funding of Horsham, Pa., agreed to settle allegations that in-house mortgage officers charged African-American and Hispanic borrowers more in discretionary loan overages -- rates or fees above the company's baseline amounts -- than they charged white borrowers.

The settlement in U.S. District Court in Philadelphia imposed a $2.9 million judgment against Gateway for its alleged violations of the Equal Credit Opportunity Act. Because the company is in difficult financial circumstances and cannot afford to pay the government that amount, the FTC allowed all but $200,000 to be suspended.

Gateway admitted no wrongdoing as part of the settlement, and its lawyer, Leonard Bernstein of the law firm Reed Smith, said the firm never had a policy of charging minority borrowers higher costs. "These weren't bad people," Bernstein said, but like many other firms during the housing boom, the company "didn't invest in the computer systems [needed] to detect problems that were not overt." Those problems, according to the FTC, arose from a policy of allowing loan officers "nearly complete discretion" as to what fees and rates they charged individual applicants, for whatever reason.

The FTC's investigation covered home purchase and refinance originations during 2004 and 2005, using loan fee data submitted to the government by the company under the Home Mortgage Disclosure Act, plus examination of loan file information to compare factors such as credit scores, down payment amounts and other underwriting criteria. At the peak of the housing boom, Gateway reportedly had more than 750 employees, 58 offices in 41 states, and originated $3.5 billion in new mortgages a year.

Putting aside the specific allegations in the Gateway settlement, it underscores an important point that consumers looking to refinance or buy a home in 2009 need to remember. Unlike other products that have easy-to-understand price tags attached, mortgages come with multiple price components tucked away in a relatively complex package: the base rate, loan discount "points," plus a wide variety of fees associated with the loan origination -- all of which may be open to a loan officer's discretion as to how much you're charged.

Under federal civil rights laws, mortgage companies can set prices using specific underwriting factors related to the statistical probability of nonpayment, but under no circumstances can they charge applicants based on race, ethnicity, religion, age, sex or physical disability. If a white borrower with a 720 FICO credit score, a 20 percent down payment and long-term steady employment is charged 5.5 percent plus one point for a 30-year mortgage, an African-American or Hispanic applicant with identical or superior characteristics can't legally be charged 5.75 percent plus 1.5 points and higher loan processing fees. (A point is 1 percent of the loan amount, and typically is paid at closing.)

To Alice Saker Hrdy, FTC assistant director for financial practices and lead attorney on the Gateway case, the settlement has important lessons for refinancers and home buyers, whatever their race or ethnicity.

Because loan officers can earn extra compensation by subtly extracting higher fees from borrowers, Hrdy believes it's essential for applicants to get all the details of every mortgage quote down on paper upfront -- rate, points, all origination and processing fees, plus a good faith estimate of settlement charges. And require the loan officer to "break down the different items so you understand what you're being charged and why," she said. "You've got to ask, 'What's your commission on this, and where is it?' " Then take the answers and shop aggressively "and compare what different lenders are willing to offer you," she said.

Demand transparency on fees -- it's your legal right.

In the process, you will not only probably spot the best-priced, all-around deal, but also have a better chance to pick up on any evidence of discriminatory pricing that violates federal law. If so, you can file an equal credit opportunity complaint with the FTC at http://www.ftc.gov.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.