Unless Congress says otherwise, mortgage brokers will have to disclose rebates paid by lenders and credit them against borrowers’ closing costs beginning Jan. 1, following a judge’s dismissal of a trade group’s lawsuit challenging the new rules.
The ruling clears one potential obstacle to implementation of new loan disclosures and other changes to the Real Estate Settlement Procedures Act (RESPA) put forward last year by the Department of Housing and Urban Development (HUD).
HUD’s new RESPA rules mandates that loan originators begin using a standardized good faith estimate (GFE) on the first of the year that’s intended to help consumers shop for the best deal on a mortgage loan and settlement services.
Among other things, the GFE would require that mortgage brokers disclose "yield spread premiums" — rebates sometimes paid by lenders when borrowers take out loans at higher interest rates than they might otherwise qualify for — and credit them against a borrower’s closing costs.
In some cases, borrowers may want a higher interest rate loan that triggers a yield spread premium because a rebate can help them pay their closing costs. But critics say the rebates can also serve as an incentive for mortgage brokers to place borrowers in costlier loans, in some cases pocketing part or all of the rebate without their clients’ knowledge.
The National Association of Mortgage Brokers (NAMB) sued HUD in December, saying the new policy on yield-spread premiums would put mortgage brokers at a competitive disadvantage with originators working for direct lenders, such as bank loan officers, who may receive similar incentives but aren’t required to disclose them to consumers.
HUD’s "asymmetrical disclosure requirement" will place mortgage brokers "at a significant and permanent competitive disadvantage, impeding competition in the mortgage lending industry to the detriment of consumers," NAMB said in its Dec. 19 complaint.
"The rule presents a very real danger that a number of mortgage brokers will be forced to close their doors and, ultimately, that NAMB itself will cease to have reason to exist," attorneys for the group said.
In dismissing NAMB’s suit, U.S. District Judge James Robertson said he found HUD’s explanation of its proposed treatment of yield-spread premiums both "reasoned" and "compelling."
"Borrowers only benefit from (yield-spread premiums) if they can understand and make intelligent choices about the trade-offs between short-term settlement costs and long-term interest payments," Robertson said in an 18-page opinion.
HUD’s attempts to design a new GFE that would more clearly demonstrate the relationship between settlement fees and interest rates date back to 1995, Robertson noted. In consumer testing, HUD found that if yield-spread premiums are not disclosed on the GFE, consumers don’t understand that relationship as well, he said. …CONTINUED