Mortgage brokers sue to block RESPA
Treatment of yield-spread premiums at issue
By Inman News, Monday, December 22, 2008.The National Association of Mortgage Brokers is going to court to block implementation of changes to the Real Estate Settlement Procedures Act (RESPA), saying the Department of Housing and Urban Development failed to assess the impact on small businesses.
HUD's RESPA rule changes include a standardized Good Faith Estimate (GFE) form, which requires the disclosure of yield-spread premiums paid by lenders when borrowers take out loans with higher interest rates. The GFE also requires that the rebates be credited to borrowers.
Critics have said that mortgage brokers often pocket yield-spread premiums without the knowledge of borrowers, providing an incentive for them to place clients in higher-cost loans.
As long as brokers don't pocket the rebates, yield-spread premiums can help borrowers who choose to take out a higher-cost loan to cover their closing costs, HUD said in drafting the new rules. The new GFE doesn't identify yield-spread premiums by name, but would require mortgage brokers to disclose that borrowers are receiving a "credit" for the higher interest rate, and to calculate the corresponding reduction in total settlement charges.
NAMB maintains that bank loan officers charge consumers similar fees -- "service release premiums" -- that aren't disclosed to consumers. The new RESPA rule "discriminates against mortgage brokers" and puts them "at a permanent disadvantage in the marketplace," NAMB said in a press release announcing the lawsuit.
HUD maintains that service-release premiums aren't paid until loans are sold in the secondary market, and don't change a borrower's loan terms. The new GFE includes a disclaimer addressing the issue: "Some lenders may sell your loan after settlement. Any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement."
But mortgage brokers say the GFE's differing treatment of mortgage brokers and bank loan officers will confuse consumers, and "oftentimes cause them to choose a more expensive mortgage."
HUD says extensive consumer testing of the GFE showed borrowers were able to select the lowest-cost loan more than 90 percent of the time, regardless of whether it was originated by a mortgage broker or loan officer.
But the Federal Reserve, in updating its own rules for enforcement of the Truth in Lending Act (TILA) in July, backed down from a plan to require that mortgage brokers enter into written contracts with borrowers before collecting yield-spread premiums, citing potential confusion for consumers (see story).
In commenting on HUD's proposed RESPA rule changes, Fed staff members recommended that HUD coordinate with them to draft loan disclosures that could meet both RESPA and TILA requirements. In an Aug. 7 letter, 243 members of the House of Representatives asked HUD to withdraw its proposed RESPA rule changes -- which also include incentives for lenders to package settlement services like title insurance with loans -- and instead limit itself to working with the Federal Reserve on simplified disclosures.
HUD compromised on some issues raised by the industry in a final rule published Nov. 17, but left in place requirements that yield-spread premiums be credited to borrowers. Loan originators don't have to use the new standardized GFE and HUD-1 settlement statement until Jan. 1, 2010, but could choose to do so sooner during a 12-month transition period (see story).
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Submitted by Diane Cipa on December 22, 2008 - 5:39am.
What NAMB fails to understand is that the value of servicing is not the same as an above par price for a mortgage. Said another way, the Service Release Premium and Yield Spread Premium, though both are premiums, if you call it fruit, one is a cranberry and the other is a plum.
Every mortgage interest rate, regardless of whether the rate is above par [market] or not, includes the costs or the value of servicing.
Servicing is the collecting of the payment and all administrative functions of managing the mortgage until satisfaction.
Servicing is a cost to mortgage lenders who are servicing loans for their own portfolio. The interest rate the consumer pays has been increased to cover this servicing cost.
Seen another way, servicing is a profit center for mortgage lenders who perform that function for others. So when a mortgage loan is pooled with others and sold in the secondary market, someone has to service those loans. If the originating lender does the servicing, a portion of the interest is retained for that service with the remainder going to the investors. That is called "retained" servicing. The originating lender retains the servicing rights when they sell the mortgage.
Let's say the originating mortgage lender sells the mortgage in the secondary market and has no interest in the servicing, then the originating mortgage lender has no right to the portion of the interest that pays for servicing, right? It must move with the paper so that the investor can pay it to the servicer. In that case, the loan is sold servicing "released" and because most mortgages move servicing "retained" the pricing of "released" servicing is referred to as having a premium in the pricing which is referred to as the Servicing Release Premium.
Remember that the interest rates EVERY consumer pays for mortgages, including above and below par pricing, has this SERVICING value included.
On the other hand, only ABOVE PAR pricing includes a yield spread premium. The consumer is being charged an above market rate and HUD has taken the stance that the consumer should know that and have the benefit of the premium. I agree.
Submitted by Peter J. Pike on December 22, 2008 - 5:59am.
Can we all please be honest here? The YSP was the mortgage broker's way of getting paid (usually) a handsome commission for placing a loan. If their services are truly worth their cost, then they should have no issue with disclosing the true amount of the money that they will earn from placing the loan.
Peter J. Pike, Esq.
McNeese Title, LLC
Destin, Florida
Submitted by Byron Reid on December 22, 2008 - 9:20am.
If we're being completely honest, the same could be said of any company that makes a profit from the loan process. Title companies, Realtors, Lenders,Servicing companies, Investment houses and so on.
I believe the saying is "those who live in glass houses should not throw stones!"
The real issues are transparency and accountability for everyone including the consumer.
1st - Help the consumer truly understand their mortgage and how the process works. We've all seen both ends of the spectrum, with customers who didn't know what they were getting into as well as those who took advantage of the system and now claim ignorance.
2nd - Why stop at Brokers? If the concern is giving value for money, shouldn't customers have transparency for all costs associated with their loan?
- 6% to the Realtor. For what?...selling overpriced houses that no one could afford?
- Thousands to the title company. For What?... title errors made by someone else before they owned the property and policies that likely will never be used?
- Ten's or Hundred's of Thousands to the Lender or Servicer. For What... creating guidelines and providing loans to people who they knew couldn't afford them?
- We can't forget about a Government and those suppossed regulatory bodies who sat idly by and watched the whole thing blow up from the sidelines.
I know it's popular to pile on Brokers, because it makes everyone else feel better about themselves, but seriously there's enough blame to go around.
Submitted by Jon Boyd on December 22, 2008 - 10:07am.
As someone who has been negotiating with lenders on the buyer's behalf for 15 years, I totally agree with the NAMB on this.
Both YSP and SRP are income to the lender's side of the table. The idea that brokers bear more responsibility to disclose it than mortgage bankers doesn't make sense... unless, the intent is to make mortgage brokers seem less desirable to the consumer.
The fact is the banks have more influence on the RESPA language and want to steer it to their benefit. That is not the way it should be done.
The best thing for the consumer is to be able to compare apples to apples. Putting a YSP number on a GFE in one case and not another is just a distraction.
Jon Boyd
Broker / Manager
The Home Buyer's Agent of Ann Arbor, Inc.
http://buyersagentannarbor.com
Submitted by Joe Hildebrand on December 22, 2008 - 11:09am.
Wow Byron, why don't you tell us how you really feel about Realtors!
Selling over priced houses nobody wants? Get Real! Overpriced listings don't sell. I would assure you, your Realtor base reads this and will be more than happy to move their clients to a lender who is a little more optimistic and less cynical.
As for the mortgage brokers, they get what they deserve. They have fought regulation. Colorado barely regulated Mortgage Brokers and as of now, there really is no teeth in the regulation.
Realtors have been organized and transparent for a long time. Talk to me when you have your code of ethics, agency agreements with your clients, and have out of pocket costs to do business!
Joe Hildebrand
Denver, CO
Submitted by Byron Reid on December 22, 2008 - 11:14am.
Jon,
Beautifully said. IMHO, that is exactly the fraud that's being perpitrated here. As I see it, this is nothing more than a giant "Land Grab" by banks. Eliminate the competition in the form of brokers.
By vilifying brokers in the news, banks have taken the opportunity to eliminate wholesale lending operations and increase their retail presence.
We are in the process of returning to lending practices of the 80's and early 90's, pre-broker era, if you will. A few lenders, with limited product offerings, serving a limited segment of the market.
Can someone explain, how this is a good thing?
Submitted by Byron Reid on December 22, 2008 - 12:11pm.
Joe,
First, I agree completely with your comment about regulation (both State and Federal). It does none of us who operate ethically, any good to have fly-by-night operators giving us all a bad name.
Second, I don't have a problem with Realtors or Title Companies or Lenders. I don't believe I focused on Realtors specifically, although you may have.
But let's get serious! Cynical? You bet. That's the point!
Let's stop "passing the buck" and focus on a system that's broken right now. Are you suggesting that there's no room for improvement among the Realtor community? Does eliminating Brokers solve the problem? Do you honestly think that helps you and your customers?
Everyone has culpability here. Brokers, Realtors, the Consumer. Nothing like self-preservation is tough times!
Submitted by Bruno Skopinich on December 22, 2008 - 4:10pm.
HUD is thinking like lawyers...
First take something Simple and make it complicated.
Here is a simple solution...
Consumers should Only be concerned about 2 factors: what interest rate am I getting and what are my out-of-pocket closing costs...
THAT'S IT!
Now shop these 2 Simple figures.
The YSP is not the consumers business... the interest rate IS! And their closing costs are.
Is that too complicated?
So lenders with High YSP will have High rates.
Now we don't need a 4 page GFE and T&L that consumers never understand. Which only leads to more stupid disclosures and more regulations.
Lenders sell loans , Realtors sell property... politicians and lawyers sell laws and regulations.
Remember... those who can... DO, those who can't become politicians and lawyers.
Bruno
Submitted by Matt Carter on December 29, 2008 - 6:26pm.
Excerpt from NAMB's complaint: "One of the greatest barriers to homeownership is the upfront cost of obtaining a mortgage, a significant portion of which is closing costs and loan origination fees. For borrowers who cannot pay these fees out of pocket, or who seek an alternative means of dealing with closing costs, the yield spread premium (YSP) affords prospective homebuyers an option to address these costs in a practical manner that facilitates home buying. The YSP is a payment made to a mortgage broker by a lender for the purchase of a broker-originated mortgage loan. The YSP represents the premium a lender is willing to pay to purchase a loan with an interest rate that is above the lender's 'par rate.' "A YSP allows a borrower to pay some or all settlement costs over the life of a mortgage loan through a higher interest rate. HUD has expressly approved of YSPs as a way for borrowers assuming broker-originated mortgages to pay settlement costs, including compensation for heir broker for loan origination services, because significant settlement costs would otherwise prove an insurmountable obstacle for many aspiring homebuyers. "Mortgage originators other than brokers may provide the same benefit to borrowers -- that is, no or reduced upfront settlement costs in exchange for a higher interest rate on the borrower's mortgage loan -- but do not use YSPs to finance the benefit. Rather, those originators recoup the cost of fronting settlement costs by selling mortgage loans on the secondary market for a price that represents the difference between the interest rate on the lender-originated loan and the purchaser's 'par rate.' HUD has explicitly recognized that the sale of lender-originated loans on the secondary market achieves the same purpose as lender payments to mortgage brokers, or YSPs; the payments are functionally equivalent. "Mortgage markets have evolved rapidly in recent years, as have the roles of mortgage professionals and entities, who may work in multiple capacities. As noted by a December 2007 study by Richard Todd of the Federal Reserve Board of Minneapolis and Professor Morris Kleiner of the University of Minnesota, with the emergence of the 'originate to distribute' model of mortgage financing, under which loans, regardless of originator, are often promptly repackaged, sold and securitized, '[T]he actual roles of brokers, loan officers, lenders and others are not as rigidly bound and often blur.' "In today's loan origination marketplace, originators who in the past may have been distinguishable from mortgage brokers increasingly function as brokers. With the prevalence of the 'originate to distribute' model of mortgage financing, lenders often know at the time of closing that they will quickly sell the loan and can calculate how much they will make from the sale of the loan. Lenders also often enter into multiple contracts with various banks and other lenders to offer an array of products, and they receive underwriting approval from another funding source prior to funding mortgage loans. "Mortgage consumers are indifferent to the specific attributes of the loan originators with which they are dealing. Consumers focus, properly, on mortgage product and price. They should be given the means to readily compare those key criteria among all originators. The final rule would achieve the opposite result. "Consumers would benefit from receiving the same information about mortgage transactions regardless of the type of originator involved. The traditional distinction between brokers and lenders has become a distinction without a difference, and HUD's insistence on perpetuating this artificial distinction at the expense of the consumer is without any rational basis." HUD lawyers have not yet filed a response to the complaint. Statement from HUD spokesman on the lawsuit: "In this housing market, the nation is crying out for reasonable regulation to help families shop for and save money on the largest purchase of their lives. This rule is that reasonable regulation and it helps consumers to avoid getting into trouble in the first place. It’s mystifying why anyone would stand in the way of the kind of transparency this rule brings to the marketplace."