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
Robertson also agreed with HUD’s conclusion that banks and other direct lenders can’t be required to disclose that they sometimes receive payments called "service release premiums" when they resell particularly desirable loans to secondary-market investors.
HUD argued that those premiums are paid after settlement, and depend on unknowns like when the loan is sold and market conditions.
"Direct lenders cannot be expected to disclose what they do not know," Robertson said in his decision.
Although HUD made "a persuasive case" for disclosure of yield-spread premiums and for exempting direct lenders from disclosing service release premiums, its "most difficult task" was to show that the GFE would not put mortgage brokers at an unfair disadvantage, Robertson said.
"If the new GFE distorts the marketplace by providing an artificial advantage to direct lenders, it would scuttle HUD’s reform effort, and run afoul" of the Administrative Procedures Act, as NAMB alleged, Robertson said.
But Robertson agreed with HUD’s conclusion that several rounds of consumer testing demonstrated that, nine times out of ten, the new GFE enabled consumers to pick the best loan — regardless of whether it was offered by a mortgage broker or a direct lender.
All other things being equal, a loan originated by a mortgage broker that carries a yield-spread premium will show a higher adjusted origination charge on the GFE than a loan made by a direct lender. But if the yield-spread premium is used to offset charges for settlement services, the mortgage broker and direct lender will both show the same amount for overall settlement charges on the first page of the GFE, Robertson noted.
A 2004 study conducted by the Federal Trade Commission found that an "asymmetric disclosure" policy could bias consumers against mortgage brokers. But the FTC study used a partial, earlier draft of the GFE, Robertson noted, and "does not directly undermine the study on which HUD bases the (final) GFE."
NAMB also argued that HUD acted in an "arbitrary and capricious" manner, and failed to consider alternatives to the new GFE.
In his opinion, Robertson rejected the idea of conducting further research, saying "the mass of academic studies and consumer testing that HUD has already compiled — six years of study and seven rounds of testing — is enough."
In a statement, NAMB President Jim Pair said the Robertson’s decision "effectively guarantees that the consumer will continue to be confused during the loan selection process." …CONTINUED
Pair said mortgage brokers have been disclosing yield-spread premiums since 1992, and that NAMB welcomed changes the Federal Reserve has announced to another set of disclosures that are required under the Truth in Lending Act (TILA).
The Fed this week proposed a ban on all incentive payments to mortgage originators that are based on a loan’s interest rate or other terms, regardless of whether the originators are working for direct lenders like banks or are employed as independent mortgage brokers (see story).
To help consumers understand the trade-offs between settlement fees and interest rates, the Fed said it would also revise TILA loan disclosures to factor the cost of most loan fees and settlement costs into the calculation of a loan’s annual percentage rate (APR).
NAMB is not the only real estate industry group to have raised objections to HUD’s proposed RESPA rule changes, which will also limits changes to fees quoted in the GFE before borrowers reach the closing table and provide incentives for loan originators to package settlement services like title insurance with loans.
NAMB, the Mortgage Bankers Association, the American Escrow Association and the American Bankers Association have all called on HUD to withdraw the rule changes and work with the Fed on developing a single set of loan disclosures that meet both RESPA and TILA requirements.
House lawmakers have been sympathetic to those complaints, and in a 300-114 vote May 7 approved a bill aimed at curbing predatory lending with an amendment that would delay HUD’s RESPA rule changes for one year. It’s uncertain whether the Senate will follow suit.
If the Fed and HUD don’t make progress in drawing up uniform loan disclosures, the Obama administration has said its proposed Consumer Financial Protection Agency would develop a uniform mortgage disclosure form and put it forward for public comment within a year of the agency’s creation (see story).
HUD has backed down from one aspect of the RESPA rule that was scheduled to go into place this year — a prohibition on incentives for new home purchases that require consumers to use homebuilders’ affiliated mortgage and title insurance companies.
After HUD was sued by the National Association of Home Builders over changes to the "required use" definition, it said it would go back to the drawing board and draw up a new defintion with the same goal in mind: "To help consumers shop effectively and safely for homes and mortgages, free from the influence of disingenuous discounts and incentives that steer consumers to the use of affiliated businesses" (see story).
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