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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