| Brokers, Lenders at Odds Over RESPA Reforms
Closer look at YSP issue April 29, 2003 By MARSHALL TAYLOR |
| Mortgage brokers are strongly urging the U.S. Department of Housing and Urban Development (HUD) to revise the characterization of yield spread premiums (YSPs), the bread and butter of brokers’ revenue, in HUD’s proposed rule reforming the Real Estate Settlement Procedures Act (RESPA) that they say would unfairly harm their business. The proposal would redefine YSPs from indirect to direct compensation, thus limiting broker origination opportunities, among other changes that brokers deem would create an unlevel paying field with lenders.Ironically, brokers also oppose a major element in HUD’s proposed rule — the Guaranteed Mortgage Package agreement — that would essentially take yield spread premiums and their inclusion in the Good Faith Estimate off the table, providing both lenders and brokers a safe harbor from Section 8 violations under RESPA and class-action litigation.
The rule gives lenders, brokers and other settlement service providers the option of offering borrowers, in lieu of the Good Faith Estimate (which requires the itemized listing of the yield spread premium and other fees), a guaranteed fee package that lists a single price for the mortgage loan and the costs incurred in the originating, underwriting, processing and funding of the loan, including all settlement services. The single fee and the mortgage interest rate would be guaranteed for three days at the time of application to enable borrowers to shop around for the best package. If the package is accepted by the borrower, the up-front price is guaranteed at closing and no pricing discrepancies would be tolerated. So, if YSPs are no longer an issue – they aren’t even listed separately, but lumped into the single fee – in the Guaranteed Mortgage Package, what’s not to like? “The National Association of Mortgage Brokers (NAMB) can’t support the guaranteed package as contemplated by HUD,” said Joseph Falk, immediate past president of NAMB. “It unfairly benefits lender packagers over brokers, because it requires a lender signature for a broker package transaction. Brokers would become a disadvantaged channel of origination. They should be equal.” Rod Alba, director of government affairs for the Mortgage Bankers Association of America, pointed out that under the proposed rule if a non-lender offers a guaranteed fee package and puts out the actual disclosure, then the broker is required to get the package signed by the lender. The broker’s fee is then locked in up front. Under the Guaranteed Mortgage Package, brokers will lose the concept of “best execution”, the ability to continue shopping a mortgage after the Good Faith Estimate has been disclosed for a lower price and larger spreads, industry attorneys say. Brokers do not want their revenue options limited and thus find packaging unappetizing, the attorneys said. “Brokers gain equality and parity with lenders in disclosures under packaging,” Alba said. “Lender and broker disclosure is the same. All settlement fees go into the same black box. Anyway, brokers are already packaging loans and services today. I’m amazed that they say no to the packaging concept.” “In the Guaranteed Mortgage Package, it’s not disclosed how much is paid to the broker,” said Paul Mondor, a Washington attorney. “I don’t know why brokers complain about that. But, they dislike packaging for other reasons. They are worried like small lenders that the big lenders will beat them on costs, because of their larger volume and economies of scale. “But brokers can become a retail outlet for wholesale packages,” Mondor said. “I think packaging will become a cottage industry. Brokers will sell packages to consumers and not have to put them together. The rule doesn’t say that you have to build a package in order to sell it.” Alba said that big lenders will want to keep their broker channels under the new system, because brokers are already acting as their loan packagers. “The same old relationships will continue. It’s not going to be a revolutionary world under the HUD rule.” Falk, though, says NAMB also opposes packaging because such a combination of services will decrease disclosures for consumers at a time when investor confidence has been shaken in the financial markets by the lack of disclosures. “Packaging also will eliminate anti-kickback protections for consumers under Section 8 of RESPA,” he said. “It will enable packagers to hide fees.” Lenders say that packaging offers a self-enforcing, market-competitive disclosure regime. Consumers will be drawn to mortgage packages with lower costs. They add that consumers want simplified disclosure of total costs associated with the mortgage process up front and don’t want to be surprised with additional settlement costs at closing. In the end, mortgage brokers, title companies, settlement lawyers and others see the Guaranteed Mortgage Package as a threat to their streams of revenue and are lining up big names in Congress, including Sen. Richard Shelby (R-AL), chairman of the Senate Banking, Housing and Urban Affairs Committee, to protect their interests. It just so happens that Shelby is also chairman of a title insurance company in Alabama. Lenders, on the other hand, see packaging as a way to end the bloody class-action litigation over the legality of yield spread premiums. One industry attorney said that lenders are requesting regulatory change, because consumers are complaining about YSPs (i.e. brokers) and not lenders. |
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Marshall Taylor was the editor-in-chief for Real Estate Finance Today. In addition to more than twenty years in journalism, his background includes serving as a legislative assistant for U.S. Representative Jim Jeffries. |
