First Horizon National Corp. said it expects a $1 billion reduction in its mortgage originations in the third quarter, which will help drive earnings down $35 million compared to last quarter.

The Memphis-based lender said that in addition to reduced production, earnings are down because of lower gains on sale margins and increased costs to hedge the risk of servicing its loans. Margins, which were 122 basis points in the second quarter, are expected to range between 85 and 90 basis points this quarter. Hedging costs are up $5 million over the last quarter.

First Horizon, which ranks among the top 25 mortgage originators and top 15 servicers, also conducts retail and commercial banking and underwrites government securities.

“Although we currently expect some modest improvement in mortgage banking in the fourth quarter, the current operating environment suggests that mortgage banking operations will only be in the range of break-even in the fourth quarter while our other two businesses should continue to perform in line with expectations,” the company said in a statement.

First Horizon also announced it has agreed to pay up to $36 million to settle a class-action lawsuit over loan origination fees. The bank said the fees, charged on second-lien mortgage loans, by First Horizon Home Loans and its predecessor, McGuire Mortgage Co., are allowed under federal law and in Kansas. The lawsuit, which claimed the fees were not permitted in Missouri, was filed on behalf of borrowers in the Kansas City area, which straddles both states.

“We continue to believe that neither our predecessor, McGuire Mortgage, nor we acted contrary to applicable law. However, we agreed to this settlement to avoid the risks, and to end the ongoing expense associated with this protracted litigation,” Peter F. Makowiecki, president of mortgage banking for First Horizon, said in a statement.

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