[Federal Register: March 1, 1999 (Volume 64, Number 39)]
[Rules and Regulations]
[Page 10079-10087]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01mr99-23]
[[Page 10079]]
_______________________________________________________________________
Part IV
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 3500
Real Estate Settlement Procedures Act (RESPA) Statement of Policy 1999-
1 Regarding Lender Payments to Mortgage Brokers; Final Rule
[[Page 10080]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500
[Docket No. FR-4450-N-01]
RIN 2502-AH33
Real Estate Settlement Procedures Act (RESPA) Statement of Policy
1999-1 Regarding Lender Payments to Mortgage Brokers
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Statement of Policy 1999-1.
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SUMMARY: This Statement of Policy sets forth the Department of Housing
and Urban Development's position on the legality of lender payments to
mortgage brokers in connection with federally related mortgage loans
under the Real Estate Settlement Procedures Act (``RESPA'') and HUD's
implementing regulations. While this statement satisfies the Conferees'
directive in the Conference Report on the 1999 HUD Appropriations Act
that the Department clarify its position on this subject, HUD believes
that broad legislative reform along the lines specified in the HUD/
Federal Reserve Board Report remains the most effective way to resolve
the difficulties and legal uncertainties under RESPA and the Truth in
Lending Act (TILA) for industry and consumers alike. Statutory changes
like those recommended in the Report would, if adopted, provide the
most balanced approach to resolving these contentious issues by
providing consumers with better and firmer information about the costs
associated with home-secured credit transactions and providing
creditors and mortgage brokers with clearer rules. Such an approach is
far preferable to piecemeal actions.
EFFECTIVE DATE: This Statement of Policy is effective March 1, 1999.
FOR FURTHER INFORMATION CONTACT: Rebecca J. Holtz, Director RESPA/ILS
Division Room 9146, Department of Housing and Urban Development,
Washington, DC 20410; telephone 202-708-4560, or (for legal questions)
Kenneth A. Markison, Assistant General Counsel for GSE/RESPA or Rodrigo
Alba, Attorney for RESPA, Room 9262, Department of Housing and Urban
Development, Washington, DC 20410; telephone 202-708-3137 (these are
not toll free numbers). Hearing or speech-impaired individuals may
access these numbers via TTY by calling the toll-free Federal
Information Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION: This Preamble to the Statement of Policy
includes descriptions of current practices in the industry. It is not
intended to take positions with respect to the legality or illegality
of any practices; such positions are set forth in the Statement of
Policy itself.
I. Background
A. General Background
The Conference Report on the Departments of Veterans Affairs and
Housing and Urban Development, and Independent Agencies Appropriations
Act, 1999 (H.R. Conf. Rep. No. 105-769, 105th Cong., 2d Sess. 260
(1998)) (FY 1999 HUD Appropriations Act) directs HUD to clarify its
position on lender payments to mortgage brokers within 90 days after
the enactment of the FY 1999 HUD Appropriations Act on October 21,
1998. The Report states that ``Congress never intended payments by
lenders to mortgage brokers for goods or facilities actually furnished
or for services actually performed to be violations of [Sections 8](a)
or (b) of the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et
seq.) (RESPA)]'' (Id.). The Report also states that the Conferees ``are
concerned about the legal uncertainty that continues absent such a
policy statement'' and ``expect HUD to work with representatives of
industry, Federal agencies, consumer groups, and other interested
parties on this policy statement'' (Id.).
This issue of lender payments, or indirect fees, to mortgage
brokers has proven particularly troublesome for industry and consumers
alike. It has been the subject of litigation in more than 150 cases
nationwide (see additional discussion below). To understand the issue
and HUD's position regarding the legality of these payments requires
background information concerning the nature of the services provided
by mortgage brokers and their compensation, as well as the applicable
legal requirements under RESPA.
During the last seven years, HUD has conducted three rulemakings
respecting mortgage broker fees. These rulemakings first addressed
definitional issues and issues concerning disclosure of payments to
mortgage brokers in transactions covered under RESPA. (See 57 FR 49600
(November 2, 1992); 60 FR 47650 (September 13, 1995).) Most recently in
a regulatory negotiation (see 60 FR 54794 (October 25, 1995) and 60 FR
63008 (December 8, 1995)) and then a proposed rule (62 FR 53912
(October 16, 1997)), HUD addressed the issue of the legality of
payments to brokers under RESPA. In the latter, HUD proposed that
payments from lenders to mortgage brokers be presumed legal if the
mortgage broker met certain specified conditions, including disclosing
its role in the transaction and its total compensation through a
binding contract with the borrower. This rulemaking is pending.
In July 1998, HUD and the Board of Governors of the Federal Reserve
delivered to Congress a joint report containing legislative proposals
to reform RESPA and the Truth in Lending Act. If the proposals in this
reform package were to be adopted, the disclosure and legality issues
raised herein would be resolved for any mortgage broker following
certain of the proposed requirements, and consumers would be offered
significant new protections.
B. Mortgage Brokerage Industry
When RESPA was enacted in 1974, single family mortgages were
largely originated and held by savings and loans, commercial banks, and
mortgage bankers. During the 1980's and 1990's, the rise of secondary
mortgage market financing resulted in new wholesale and retail entities
to compete with the traditional funding entities to provide mortgage
financing. This made possible the origination of loans by retail
entities that worked with prospective borrowers, collected application
information, and otherwise processed the data required to complete the
mortgage transaction. These retail entities generally operated with the
intent of developing the origination package, and then immediately
transmitting it to a wholesale lender who funded the loan. The rise in
technology permitted much more effective and faster exchange of
information and funds between originators and lenders for the retail
transaction.
Entities that provide mortgage origination or retail services and
that bring a borrower and a lender together to obtain a loan (usually
without providing the funds for loans) are generally referred to as
``mortgage brokers.'' These entities serve as intermediaries between
the consumer and the entity funding the loan, and currently initiate an
estimated half of all home mortgages made each year in the United
States. Mortgage brokers generally fit into two broad categories: those
that hold themselves out as representing the borrower in shopping for a
loan, and those that simply offer loans as do other retailers of loans.
The first type may have an agency relationship with the borrower and,
in some states, may be found to owe a
[[Page 10081]]
responsibility to the borrower in connection with the agency
representation. The second type, while not representing the borrower,
may make loans available to consumers from any number of funding
sources with which the mortgage broker has a business relationship.
Mortgage brokers provide various services in processing mortgage
loans, such as filling out the application, ordering required reports
and documents, counseling the borrower and participating in the loan
closing. They may also offer goods and facilities, such as reports,
equipment, and office space to carry out their functions. The level of
services mortgage brokers provide in particular transactions depends on
the level of difficulty involved in qualifying applicants for
particular loan programs. For example, applicants have differences in
credit ratings, employment status, levels of debt, or experience that
will translate into various degrees of effort required for processing a
loan. Also, the mortgage broker may be required to perform various
levels of services under different servicing or processing arrangements
with wholesale lenders.
Mortgage brokers vary in their methods of collecting compensation
for their work in arranging, processing, and closing mortgage loans. In
a given transaction, a broker may receive compensation directly from
the borrower, indirectly in fees paid by the wholesaler or lender
providing the mortgage loan funds, or through a combination of both.
Where a broker receives direct compensation from a borrower, the
broker's fee is likely charged to the borrower at or before closing, as
a percentage of the loan amount (e.g., 1% of the loan amount) and
through direct fees (such as an application fee, document preparation
fee, processing fee, etc.).
Brokers also may receive indirect compensation from lenders or
wholesalers. Such indirect fees may be referred to as ``back funded
payments,'' ``servicing release premiums,'' or ``yield spread
premiums.'' These indirect fees paid to mortgage brokers may be based
upon the interest rate of each loan entered into by the broker with the
borrower. These fees have been the subject of much contention and
litigation. Another method of indirect compensation, also the subject
of significant controversy and uncertainty, is ``volume-based''
compensation. This generally involves compensation to a mortgage broker
by a lender based on the volume of loans that the mortgage broker
delivers to the lender in a fixed period of time. The compensation may
come in the form of: (1) a cash payment to the broker based on the
amount of loans the broker delivers to the lender in excess of a
``threshold'' or ``floor amount''; or (2) provision of a lower ``start
rate'' (often called a discount) for such loans; the compensation to
the broker results from the difference in yield between the ``start
rate'' and the loan rate. Volume based compensation may be received at
settlement or well after a particular loan has closed.
Payments to brokers by lenders, characterized as yield spread
premiums, are based on the interest rate and points of the loan entered
into as compared to the par rate offered by the lender to the mortgage
broker for that particular loan (e.g., a loan of 8% and no points where
the par rate is 7.50% will command a greater premium for the broker
than a loan with a par rate of 7.75% and no points).1 In
determining the price of a loan, mortgage brokers rely on rate quotes
issued by lenders, sometimes several times a day. When a lender agrees
to purchase a loan from a broker, the broker receives the then
applicable pricing for the loan based on the difference between the
rate reflected in the rate quote and the rate of the loan entered into
by the borrower. In some cases, the broker can increase its revenues by
arranging a loan with the consumer at a particular rate and then, based
on market changes or other factors which decrease the par rate,
increase his or her fees. Some consumers allege that the compensation
system for brokers results in higher loan rates for borrowers and/or
that this compensation system is illegal under RESPA.
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\1\ The term ``par rate'' refers to the rate offered to the
broker (through the lender's price sheets) at which the lender will
fund 100% of the loan with no premiums or discounts to the broker.
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Lender payments to mortgage brokers may reduce the up-front costs
to consumers. This allows consumers to obtain loans without paying
direct fees themselves.2 Where a broker is not compensated
by the consumer through a direct fee, or is partially compensated
through a direct fee, the interest rate of the loan is increased to
compensate the broker or the fee is added to principal. In any of the
compensation methods described, all costs are ultimately paid by the
consumer, whether through direct fees or through the interest rate.
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\2\ In many instances, these loans are called ``no cost'' or
``no fee'' loans. This terminology, however, may prove confusing
because in such cases the costs are still paid by the borrower
through a higher interest rate on the loan or by adding fees to
principal. HUD's regulations implementing RESPA use the name ``no
cost'' or ``no point'' loans consistent with industry practice.
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C. Coverage of This Policy Statement
HUD's RESPA rules, found at 24 CFR part 3500 (Regulation X), define
a mortgage broker to be ``a person (not an employee or exclusive agent
of a lender) who brings a borrower and lender together to obtain a
federally-related mortgage loan, and who renders * * * `settlement
services' '' (24 CFR 3500.2(b)). In table funding, mortgage brokers may
process and close loans in their own names. However, at or about the
time of settlement, they transfer these loans to the lender, and the
lender simultaneously advances the monies to fund the loan. In
transactions where mortgage brokers function as intermediaries, the
broker also provides loan origination services, but the loan funds are
provided by the lender and the loan is closed in the lender's name.
In other cases, mortgage brokers may originate and close loans in
their own name using their own funds or warehouse lines of credit, and
then sell the loans after settlement in the secondary market. In such
transactions, mortgage brokers effectively act as lenders under HUD's
RESPA rules. Accordingly, the transfer of the loan obligation by, and
payment to, these brokers after the initial funding is outside of
RESPA's coverage under the secondary market exemption, found at 24 CFR
3500.5(b)(7), which states that payments to and from other loan sources
following settlement are exempt from disclosure requirements and
Section 8 restrictions. HUD's rule provides that in determining what
constitutes a bona fide transfer in the secondary market, HUD considers
the real source of funding and the real interest of the funding lender.
(24 CFR 3500.5(b)(7).)
Because this Statement of Policy focuses on the legality of lender
payments to mortgage brokers in transactions subject to RESPA, the
coverage of this statement is restricted to payments to mortgage
brokers in table-funded and intermediary broker transactions. Lender
payments to mortgage brokers where mortgage brokers initially fund the
loan and then sell the loan after settlement are outside the coverage
of this statement as exempt from RESPA under the secondary market
exemption.
D. RESPA and Its Legislative History
In enacting RESPA, Congress sought to protect the American home-
buying public from unreasonably and unnecessarily inflated prices in
the home purchasing process (S. Rep. No. 93-866 (1974) reprinted in
1974
[[Page 10082]]
U.S.C.C.A.N. 6548). Section 2 of the Act provides:
``significant reforms in the real estate settlement process are
needed to insure that consumers throughout the Nation are provided
with greater and more timely information on the nature and costs of
the settlement process and are protected from unnecessarily high
settlement charges caused by certain abusive practices that have
developed in some areas of the country. * * * It is the purpose of
this act to effect certain changes in the settlement process for
residential real estate that will result--
in more effective advance disclosure to home buyers and sellers of
settlement costs; [and]
(2) In the elimination of kickbacks or referral fees that tend
to increase unnecessarily the costs of certain settlement services.
* * *'' 12 U.S.C. 2601.
Section 4(a) of RESPA requires the Secretary to create a uniform
settlement statement which ``shall conspicuously and clearly itemize
all charges imposed upon the borrower and all charges imposed upon the
seller in connection with the settlement'' (12 U.S.C. 2603(a)).
Section 5(c) of RESPA requires the provision of a ``good faith
estimate of the amount or range of charges for specific settlement
services the borrower is likely to incur in connection with the
settlement as prescribed by the Secretary'' (12 U.S.C. 2604(c)).
Section 8(a) of RESPA, prohibits any person from giving and any
person from accepting any fee, kickback, or other thing of value
pursuant to any agreement or understanding that business shall be
referred to any person. (See 12 U.S.C. 2607(a).) Section 8(b) also
prohibits anyone from giving or accepting any portion, split, or
percentage of any charge made or received for the rendering of a
settlement service other than for services actually performed. (12
U.S.C. 2607(b).) Section 8(c) of RESPA provides, however, that nothing
in Section 8 shall be construed as prohibiting the payment to any
person of a bona fide salary or compensation or other payment for goods
or facilities actually furnished or services actually performed. (12
U.S.C. 2607(c)(2).)
Under Section 19 of RESPA, HUD is authorized to issue rules,
establish exemptions, and make such interpretations as is necessary to
implement the law. (12 U.S.C. 2618(a).)
RESPA's legislative history refers to HUD-VA Reports and subsequent
hearings by the Housing Subcommittee as defining ``major problem areas
that [had to] be dealt with if settlement costs are to be kept within
reasonable bounds.'' (S. Rep. No. 93-866, at 6547.) One ``major problem
area'' identified was the ``[a]busive and unreasonable practices within
the real estate settlement process that increase settlement costs to
home buyers without providing any real benefits to them.'' Another
major concern was ``[t]he lack of understanding on the part of most
home buyers about the settlement process and its costs, which lack of
understanding makes it difficult for a free market for settlement
services to function at maximum efficiency.''
The legislative history reveals that Congress intended RESPA to
guard against these unreasonable and excessive settlement costs in two
ways. Under Section 4, Congress sought to ``mak[e] information on the
settlement process available to home buyers in advance of settlement
and requir[e] advance disclosures of settlement charges.'' (S. Rep. 93-
866, at 6548.) The Senate Report explained that ``home buyers who would
otherwise shop around for settlement services, and thereby reduce their
overall settlement costs, are prevented from doing so because
frequently they are not apprised of the costs of these services until
the settlement date or are not aware of the nature of the settlement
services that will be provided.''
Under Section 8, Congress sought to eliminate what it termed
``abusive practices''--kickbacks, referral fees, and unearned fees. In
enacting these prohibitions, Congress intended that ``the costs to the
American home buying public will not be unreasonably or unnecessarily
inflated.'' (S. Rep. 93-866 at 6548.) In describing the Section 8
provisions, the Senate Report explained that RESPA ``is intended to
prohibit all * * * referral fee arrangements whereby any payment is
made or `thing of value' is provided for the referral of real estate
settlement business.'' (S. Rep. 93-866, at 6551.)
The legislative history adds that ``[t]o the extent the payment is
in excess of the reasonable value of the goods provided or services
performed, the excess may be considered a kickback or referral fee
proscribed by Section [8].'' (S. Rep. 93-866, at 6551.) The Senate
Report states that ``reasonable payments in return for services
actually performed or goods actually furnished'' were not intended to
be prohibited (Id).3 It also provided that ``[t]hose persons
and companies that provide settlement services should therefore take
measures to ensure that any payments they make or commissions they give
are not out of line with the reasonable value of the services
received.'' (Id.)
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\3\ One of the examples of abusive activities listed in the
legislative history that RESPA was intended to remedy is ``a title
insurance company [that] may give 10% or more of the title insurance
premium to an attorney who may perform no services for the title
insurance company other than placing a telephone call to the company
or filling out a simple application.'' (S. Rep. 93-866, at 6551.)
Accordingly, where insufficient services are provided, RESPA is
intended to prohibit payment.
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The Department has consistently held that the prohibitions under
Section 8 of RESPA cover the activities of mortgage brokers, because
RESPA applies to the origination, processing, and funding of a
federally related mortgage loan. This became an issue when, in 1984,
the 6th Circuit Court of Appeals held that in applying Section 8 as a
criminal statute, the definition of settlement services did not clearly
extend to the making of a mortgage loan. (U.S. versus Graham Mortgage
Corp., 740 F.2d 414 (6th Cir. 1984).) In 1992, Congress responded by
amending RESPA to remove any doubt that, for purposes of RESPA, a
settlement service includes the origination and making of a mortgage
loan. (Section 908 of the Housing and Community Development Act of 1992
(Pub. L. 102-550, approved October 28, 1992; 104 Stat. 4413). At the
same time, Congress also specifically made RESPA applicable to second
mortgages and refinancings. (Id.)
E. HUD's RESPA Rules
On November 2, 1992 (57 FR 49600), the Department issued a major
revision of Regulation X, the rule interpreting RESPA. The rule defined
the term ``mortgage broker'' for the first time. Under the rule,
mortgage brokers are required to disclose direct and indirect payments
on the Good Faith Estimate (GFE) no later than 3 days after loan
application. (See 24 CFR 3500.7(a) and (c).) Such disclosure must also
be provided to consumers, as a final figure, at closing on the
settlement statement. (24 CFR 3500.8; 24 CFR part 3500, Appendix A
(Instructions for Filling Out the HUD-1 and HUD-1A).) On the GFE and
the settlement statement, lender-paid mortgage broker fees must be
shown as ``Paid Outside of Closing'' (P.O.C.), and not computed in
arriving at totals. (See 24 CFR 3500.7(a)(2) and 24 CFR part 3500,
Appendix A.) The 1992 rule treats mortgage brokers as settlement
service providers whose fees are disbursed at or before settlement,
akin to title agents, attorneys, appraisers, etc., whose fees are
subject to disclosure and otherwise subject to RESPA, including Section
8.
The 1992 rule did not explicitly take a position on whether yield
spread premiums or any other named class of back-funded or indirect
fees paid by lenders to brokers are per se legal or illegal. By
illustration, codified as Illustrations of Requirements of RESPA, Fact
Situations 5 and 12 in Appendix B
[[Page 10083]]
to 24 CFR part 3500, the 1992 rule specifically listed ``servicing
release premiums'' and ``yield spread premiums'' as fees required to be
itemized on the settlement statement. Although the 1992 rule
specifically acknowledged the existence of such fees and provided
illustrations of how they were to be denominated on HUD disclosure
forms, this requirement was intended to ensure their disclosure, but
not to create a presumption of per se legality or illegality.
The anti-kickback, anti-referral fee and unearned fee provisions of
RESPA are implemented by 24 CFR 3500.14. Regulation X repeats the
Section 8 prohibitions against compensation for the referral of
settlement service business and for the giving or accepting of any
portion, split or percentage of any charge other than for services
actually rendered. (24 CFR 3500.14(c).) Regulation X provides that a
charge by a person for which no or nominal services are performed or
for which duplicative fees are charged is an unearned fee and violates
the unearned fee prohibition. (See 24 CFR 3500.14(c).) Moreover, 24 CFR
3500.14(g)(1)(iv) clarifies that Section 8 of RESPA permits ``[a]
payment to any person of a bona fide salary or compensation or other
payment for goods or facilities actually furnished or for services
actually performed.''
The Department's regulations provide, under 24 CFR 3500.14(g)(2),
that:
The Department may investigate high prices to see if they are
the result of a referral fee or a split of a fee. If the payment of
a thing of value bears no reasonable relationship to the market
value of the goods or services provided, then the excess is not for
services or goods actually performed or provided. These facts may be
used as evidence of a violation of section 8 and may serve as a
basis for a RESPA investigation. High prices standing alone are not
proof of a RESPA violation. The value of a referral (i.e., the value
of any additional business obtained thereby) is not to be taken into
account in determining whether the payment exceeds the reasonable
value of such goods, facilities or services. * * * (emphasis
supplied).
In addition, Regulation X clarifies that ``[w]hen a person in a
position to refer settlement service business * * * receives a payment
for providing additional settlement services as part of a real estate
transaction, such payment must be for services that are actual,
necessary and distinct from the primary services provided by such
person.'' (24 CFR 3500.14(g)(3).)
Since 1992, HUD has provided various interpretations and other
issuances under these rules stating the Department's position that the
legality of a payment to a mortgage broker is not premised on the name
of the particular fee. Rather, HUD has consistently advised that the
issue under RESPA is whether the compensation to a mortgage broker in
covered transactions is reasonably related to the value of the goods or
facilities actually furnished or services actually performed. If the
compensation, or a portion thereof, is not reasonably related to the
goods or facilities actually furnished or the services actually
performed, there is a compensated referral or an unearned fee in
violation of Section 8(a) or 8(b) of RESPA, whether the compensation is
a direct or indirect payment or a combination thereof.
F. Recent HUD Rulemaking Efforts
The Department received comments on the 1992 rule's requirement
that mortgage brokers disclose indirect payments from lenders on the
GFE and the settlement statement. In response, the Department reviewed
whether the disclosure of indirect or back-funded fees is necessary or
in the borrower's interest and whether additional rulemaking was needed
to clarify the legality of fees to mortgage brokers. Brokers had
alleged that these disclosures were confusing to consumers and
disadvantaged brokers as compared to other originators who were within
the secondary market exemption and were not required to disclose their
compensation for the subsequent sale of the loan. Consumer
representatives said that consumers needed to understand the existence
of indirect fees and whether brokers represented consumers in shopping
for loans. On September 13, 1995, the Department issued a proposed rule
(60 FR 47650) and in December 1995 through May 1996, embarked on a
negotiated rulemaking on these subjects.
Although the negotiated rulemaking did not result in consensus, on
October 16, 1997, HUD published a proposed rule (62 FR 53912) that was
shaped by views from both industry and consumer representatives
provided during the negotiated rulemaking (as well as by comments
received from the September 13, 1995, proposed rule (60 FR 47650)). The
1997 proposed rule proposed a qualified ``safe harbor'' for payments to
mortgage brokers under Section 8. Under the proposal, if a broker
enters into a contract with consumers explaining the broker's functions
(whether or not it represented the consumer) and the total compensation
the broker would receive in the transaction, before the consumer
applied for a loan, HUD would presume the broker fees, both direct and
indirect, to be legal. The 1997 proposal also provided, however, that
this qualified safe harbor would only be available to those payments
that did not exceed a test, to be established in the rulemaking, to
preclude unreasonable fees. This proposal was intended, among other
things, to establish that yield spread premiums paid to brokers meeting
the rule's requirements were presumed legal when brokers provided
consumers with prescribed information concerning the functions and
compensation of mortgage brokers. The Department has received over
9,000 comments in response to this proposed rule.
G. Litigation
During the last several years, more than 150 lawsuits have been
brought seeking class action certification based in whole or in part on
the theory that the making of indirect payments from lenders to
mortgage brokers violates Section 8 of RESPA. In various cases,
plaintiffs have argued that yield spread premiums or other denominated
indirect payments to brokers, regardless of their amount, constitute
prohibited referral fees under Section 8(a). These plaintiffs generally
argue that yield spread premiums are payments based upon the broker's
ability to deliver a loan that is above the par rate. Some lawsuits
have alleged that such yield spread premiums or other indirect payments
are a split of fees between the lender and the broker, or are simply
unearned fees and, therefore, also violate Section 8(b) of RESPA. Other
challenges rely, in part, on the alleged unreasonableness of brokers'
fees. These complaints assert that under the RESPA regulations,
payments must bear a reasonable relationship to the market value of the
good or the service provided and that payments in excess of such
amounts must be regarded as forbidden referral fees.
Many of the lawsuits involve allegations that consumers were not
informed by mortgage brokers concerning the mortgage brokers' role and
compensation. A common element in many allegations is that borrowers
were not informed about the existence or the amount of the yield spread
premiums paid to the mortgage broker, and the relationship of the yield
spread premium to the direct fees that the borrower paid. The facts in
these cases suggest generally that even where there were proper
disclosures on the GFE and the settlement statement, borrowers allege
that they were unaware of, or did not understand, that a yield spread
premium was tied to the interest rate they agreed to pay, and that they
could have reduced this charge or their direct
[[Page 10084]]
payment to the broker either by further negotiation or by engaging in
additional shopping among mortgage loan providers.
Courts have been split in their decisions on these cases. Some of
the decisions have concluded that yield spread premiums may be
prohibited referral fees or duplicative fees in contravention of
Section 8 of RESPA under the specific facts of the case. Some have held
that the permissibility of yield spread premiums must be based on an
analysis of whether the premiums constitute a reasonable payment,
either alone or in combination with any direct fee paid by the
borrower, for either the goods, services or facilities actually
furnished. Because some courts have found that this necessitates an
individual analysis of the facts of each transaction, some courts have
denied plaintiffs' requests for class action certification. Some courts
have certified a class without reaching a conclusion on the RESPA
issues. Others have held that yield spread premiums constitute valid
consideration to the mortgage broker in exchange for the origination of
the loan and the sale of the loan to the lender. These courts have
found that the payment of yield spread premiums is one method among
many of compensating the broker for the origination services rendered.
H. Reform
In July 1998, the Department and the Federal Reserve Board
delivered a report to Congress recommending significant improvements to
streamline and simplify current RESPA and Truth In Lending Act
requirements. The Report proposed that along with a tighter and more
enforceable scheme for providing consumers with estimated costs for
settlements, an exemption from Section 8's prohibitions should be
established for those entities that offer a package of settlement
services and a mortgage loan at a guaranteed price, rate and points for
the package early in the consumer's process of shopping for a loan.
Such an approach, which also includes other additional consumer
protection recommendations, would largely resolve these issues for any
mortgage broker who chooses to abide by the requirements of this
exemption. The Report's consumer protection recommendations included,
among other items, that Congress consider establishment of an unfair
and deceptive acts and practices remedy.
Under the ``packaging'' proposal set forth in the Report,
settlement costs would be controlled more effectively by market forces.
Consumers would be better able to comparison-shop, thereby encouraging
creditors and others to operate efficiently and pass along discounts
and lower prices. In addition, the Report's recommendations would
greatly simplify compliance for the industry and clarify legal
uncertainties that create liability risks.
I. This Policy Statement
This policy statement provides HUD's views of the legality of fees
to mortgage brokers from lenders under existing law. In accordance with
the Conference Report, in developing this policy statement, HUD met
with representatives of government agencies, as well as a broad range
of consumer and industry groups, including the Office of Thrift
Supervision, the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Federal Reserve Board, the National
Association of Mortgage Brokers, the Mortgage Bankers Association of
America, the American Bankers Association, the Consumer Mortgage
Coalition, America's Community Bankers, the Consumer Bankers
Association, the Independent Bankers Association of America, AARP, the
National Consumer Law Center, Consumers Union, and the National
Association of Consumer Advocates.
II. RESPA Policy Statement 1999-1
A. Introduction
The Department hereby states its position on the legality of
payments by lenders to mortgage brokers under the Real Estate
Settlement Procedures Act (12 U.S.C. 2601 et seq.) (RESPA) and its
implementing regulations at 24 CFR part 3500 (Regulation X). This
Statement of Policy is issued pursuant to Section 19(a) of RESPA (12
U.S.C. 2617(a)) and 24 CFR 3500.4(a)(1)(ii). HUD is cognizant of the
Conferees' statement in the Conference Report on the FY 1999 HUD
Appropriations Act that ``Congress never intended payments by lenders
to mortgage brokers for goods or facilities actually furnished or for
services actually performed to be violations of [Sections 8](a) or (b)
(12 U.S.C. Sec. 2607) in its enactment of RESPA.'' (H. Rep. 105-769, at
260.) The Department is also cognizant of the congressional intent in
enacting RESPA of protecting consumers from unnecessarily high
settlement charges caused by abusive practices. (12 U.S.C. 2601.)
In transactions where lenders make payments to mortgage brokers,
HUD does not consider such payments (i.e., yield spread premiums or any
other class of named payments), to be illegal per se. HUD does not view
the name of the payment as the appropriate issue under RESPA. HUD's
position that lender payments to mortgage brokers are not illegal per
se does not imply, however, that yield spread premiums are legal in
individual cases or classes of transactions. The fees in cases or
classes of transactions are illegal if they violate the prohibitions of
Section 8 of RESPA.
In determining whether a payment from a lender to a mortgage broker
is permissible under Section 8 of RESPA, the first question is whether
goods or facilities were actually furnished or services were actually
performed for the compensation paid. The fact that goods or facilities
have been actually furnished or that services have been actually
performed by the mortgage broker does not by itself make the payment
legal. The second question is whether the payments are reasonably
related to the value of the goods or facilities that were actually
furnished or services that were actually performed.
In applying this test, HUD believes that total compensation should
be scrutinized to assure that it is reasonably related to goods,
facilities, or services furnished or performed to determine whether it
is legal under RESPA. Total compensation to a broker includes direct
origination and other fees paid by the borrower, indirect fees,
including those that are derived from the interest rate paid by the
borrower, or a combination of some or all. The Department considers
that higher interest rates alone cannot justify higher total fees to
mortgage brokers. All fees will be scrutinized as part of total
compensation to determine that total compensation is reasonably related
to the goods or facilities actually furnished or services actually
performed. HUD believes that total compensation should be carefully
considered in relation to price structures and practices in similar
transactions and in similar markets.
B. Scope
In light of 24 CFR Sec. 3500.5(b)(7), which exempts from RESPA
coverage bona fide transfers of loan obligations in the secondary
market, this policy statement encompasses only transactions where
mortgage brokers are not the real source of funds (i.e., table-funded
transactions or transactions involving ``intermediary'' brokers). In
table-funded transactions, the mortgage broker originates, processes
and closes the loan in the broker's own name and, at or about the time
of settlement, there is a simultaneous advance of the loan funds by the
lender and an assignment of the loan to that lender. (See 24 CFR 3500.2
(Definition of ``table funding'').) Likewise, in transactions where
[[Page 10085]]
mortgage brokers are intermediaries, the broker provides loan
origination services and the loan funds are provided by the lender; the
loan, however, is closed in the lender's name.
C. Payments Must Be for Goods, Facilities or Services
In the determination of whether payments from lenders to mortgage
brokers are permissible under Section 8 of RESPA, the threshold
question is whether there were goods or facilities actually furnished
or services actually performed for the total compensation paid to the
mortgage broker. In making the determination of whether compensable
services are performed, HUD's letter to the Independent Bankers
Association of America, dated February 14, 1995 (IBAA letter) may be
useful. In that letter, HUD identified the following services normally
performed in the origination of a loan:
(a) Taking information from the borrower and filling out the
application; 4
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\4\ In a subsequent informal interpretation, dated June 20,
1995, HUD stated that the filling out of a mortgage loan application
could be substituted by a comparable activity, such as the filling
out of a borrower's worksheet.
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(b) Analyzing the prospective borrower's income and debt and pre-
qualifying the prospective borrower to determine the maximum mortgage
that the prospective borrower can afford;
(c) Educating the prospective borrower in the home buying and
financing process, advising the borrower about the different types of
loan products available, and demonstrating how closing costs and
monthly payments could vary under each product;
(d) Collecting financial information (tax returns, bank statements)
and other related documents that are part of the application process;
(e) Initiating/ordering VOEs (verifications of employment) and VODs
(verifications of deposit);
(f) Initiating/ordering requests for mortgage and other loan
verifications;
(g) Initiating/ordering appraisals;
(h) Initiating/ordering inspections or engineering reports;
(i) Providing disclosures (truth in lending, good faith estimate,
others) to the borrower;
(j) Assisting the borrower in understanding and clearing credit
problems;
(k) Maintaining regular contact with the borrower, realtors,
lender, between application and closing to appraise them of the status
of the application and gather any additional information as needed;
(l) Ordering legal documents;
(m) Determining whether the property was located in a flood zone or
ordering such service; and
(n) Participating in the loan closing.
While this list does not exhaust all possible settlement services,
and while the advent of computer technology has, in some cases, changed
how a broker's settlement services are performed, HUD believes that the
letter still represents a generally accurate description of the
mortgage origination process. For other services to be acknowledged as
compensable under RESPA, they should be identifiable and meaningful
services akin to those identified in the IBAA letter including, for
example, the operation of a computer loan origination system (CLO) or
an automated underwriting system (AUS).
The IBAA letter provided guidance on whether HUD would take an
enforcement action under RESPA. In the context of the letter's
particular facts and subject to the reasonableness test which is
discussed below, HUD articulated that it generally would be satisfied
that sufficient origination work was performed to justify compensation
if it found that:
The lender's agent or contractor took the application
information (under item (a)); and
The lender's agent or contractor performed at least five
additional items on the list above.
In the letter and in the context of its facts, HUD also pointed out
that it is concerned that a fee for steering a customer to a particular
lender could be disguised as compensation for ``counseling-type''
activities. Therefore, the letter states that if an agent or contractor
is relying on taking the application and performing only ``counseling
type'' services--(b), (c), (d), (j), and (k) on the list above--to
justify its fee, HUD would also look to see that meaningful
counseling--not steering--is provided. In analyzing transactions
addressed in the IBAA letter, HUD said it would be satisfied that no
steering occurred if it found that:
Counseling gave the borrower the opportunity to consider
products from at least three different lenders;
The entity performing the counseling would receive the
same compensation regardless of which lender's products were ultimately
selected; and
Any payment made for the ``counseling-type'' services is
reasonably related to the services performed and not based on the
amount of loan business referred to a particular lender.
In examining services provided by mortgage brokers and payments to
mortgage brokers, HUD will look at the types of origination services
listed in the IBAA letter to help determine whether compensable
services are performed.5 However, the IBAA letter responded
to a program where a relatively small fee was to be provided for
limited services by lenders that were brokering loans.6
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\5\ In the June 20, 1995 letter, the Department clarified that
the counseling test in the IBAA letter would not apply if an entity
performed only non-counseling services (a, e, f, g, h, i, l, m, n)
or a mix of counseling and non-counseling services (but did not rely
only on the five counseling services (b, c, d, j, and k)).
\6\ In the particular program reviewed by HUD in the IBAA
letter, the average total compensation for performing six of the
origination services listed above was below $200.
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Accordingly, the formulation in the IBAA letter of the number of
origination services which may be required to be performed for
compensation is not dispositive in analyzing more costly mortgage
broker transactions where more comprehensive services are provided. The
determinative test under RESPA is the relationship of the services,
goods or facilities furnished to the total compensation received by the
broker (discussed below). In addition to services, mortgage brokers may
furnish goods or facilities to the lender. For example, appraisals,
credit reports, and other documents required for a complete loan file
may be regarded as goods, and a reasonable portion of the broker's
retail or ``store-front'' operation may generally be regarded as a
facility for which a lender may compensate a broker. However, while a
broker may be compensated for goods or facilities actually furnished or
services actually performed, the loan itself, which is arranged by the
mortgage broker, cannot be regarded as a ``good'' that the broker may
sell to the lender and that the lender may pay for based upon the
loan's yield's relation to market value, reasonable or otherwise. In
other words, in the context of a non-secondary market mortgage broker
transaction, under HUD's rules, it is not proper to argue that a loan
is a ``good,'' in the sense of an instrument bearing a particular
yield, thus justifying any yield spread premium to the mortgage broker,
however great, on the grounds that such yield spread premium is the
``market value'' of the good.
D. Compensation Must Be Reasonably Related to Value of Goods,
Facilities or Services
The fact that goods or facilities have been actually furnished or
that services have been actually performed by the mortgage broker, as
described in the IBAA letter, does not by itself make a payment by a
lender to a mortgage
[[Page 10086]]
broker legal. The next inquiry is whether the payment is reasonably
related to the value of the goods or facilities that were actually
furnished or services that were actually performed. Although RESPA is
not a rate-making statute, HUD is authorized to ensure that payments
from lenders to mortgage brokers are reasonably related to the value of
the goods or facilities actually furnished or services actually
performed, and are not compensation for the referrals of business,
splits of fees or unearned fees.
In analyzing whether a particular payment or fee bears a reasonable
relationship to the value of the goods or facilities actually furnished
or services actually performed, HUD believes that payments must be
commensurate with that amount normally charged for similar services,
goods or facilities. This analysis requires careful consideration of
fees paid in relation to price structures and practices in similar
transactions and in similar markets.7 If the payment or a
portion thereof bears no reasonable relationship to the market value of
the goods, facilities or services provided, the excess over the market
rate may be used as evidence of a compensated referral or an unearned
fee in violation of Section 8(a) or (b) of RESPA. (See 24 CFR
3500.14(g)(2).) Moreover, HUD also believes that the market price used
to determine whether a particular payment meets the reasonableness test
may not include a referral fee or unearned fee, because such fees are
prohibited by RESPA. Congress was clear that for payments to be legal
under Section 8, they must bear a reasonable relationship to the value
received by the person or company making the payment. (S. Rep. 93-866,
at 6551.)
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\7\ HUD recognizes that settlement costs may vary in different
markets. The cost of a specific service in Omaha, Nebraska, for
example, may bear little resemblance to the cost of a similar
service in Los Angeles, California.
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The Department recognizes that some of the goods or facilities
actually furnished or services actually performed by the broker in
originating a loan are ``for'' the lender and other goods or facilities
actually furnished or services actually performed are ``for'' the
borrower. HUD does not believe that it is necessary or even feasible to
identify or allocate which facilities, goods or services are performed
or provided for the lender, for the consumer, or as a function of State
or Federal law. All services, goods and facilities inure to the benefit
of both the borrower and the lender in the sense that they make the
loan transaction possible (e.g., an appraisal is necessary to assure
that the lender has adequate security, as well as to advise the
borrower of the value of the property and to complete the borrower's
loan).
The consumer is ultimately purchasing the total loan and is
ultimately paying for all the services needed to create the loan. All
compensation to the broker either is paid by the borrower in the form
of fees or points, directly or by addition to principal, or is derived
from the interest rate of the loan paid by the borrower. Accordingly,
in analyzing whether lender payments to mortgage brokers comport with
the requirements of Section 8 of RESPA, HUD believes that the totality
of the compensation to the mortgage broker for the loan must be
examined. For example, if the lender pays the mortgage broker $600 and
the borrower pays the mortgage broker $500, the total compensation of
$1,100 would be examined to determine whether it is reasonably related
to the goods or facilities actually furnished or services actually
performed by the broker.
Therefore, in applying this test, HUD believes that total
compensation should be scrutinized to assure that it is reasonably
related to goods, facilities, or services furnished or performed to
determine whether total compensation is legal under RESPA. Total
compensation to a broker includes direct origination and other fees
paid by the borrower, indirect fees, including those that are derived
from the interest rate paid by the borrower, or a combination of some
or all. All payments, including payments based upon a percentage of the
loan amount, are subject to the reasonableness test defined above. In
applying this test, the Department considers that higher interest rates
alone cannot justify higher total fees to mortgage brokers. All fees
will be scrutinized as part of total compensation to determine that
total compensation is reasonably related to the goods or facilities
actually furnished or services actually performed.
In so-called ``no-cost'' loans, borrowers accept a higher interest
rate in order to reduce direct fees, and the absence of direct payments
to the mortgage broker is made up by higher indirect fees (e.g., yield
spread premiums). Higher indirect fees in such arrangements are legal
if, and only if, the total compensation is reasonably related to the
goods or facilities actually furnished or services actually performed.
In determining whether the compensation paid to a mortgage broker
is reasonably related to the goods or facilities actually furnished or
services actually performed, HUD will consider all compensation,
including any volume based compensation. In this analysis, there may be
no payments merely for referrals of business under Section 8 of RESPA.
(See 24 CFR 3500.14.) 8
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\8\ The Department generally has held that when the payment is
based on the volume or value of business transacted, it is evidence
of an agreement for the referral of business (unless, for example,
it is shown that payments are for legitimate business reasons
unrelated to the value of the referrals). (See 24 CFR 3500.14(e).)
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Under HUD's rules, when a person in a position to refer settlement
service business receives a payment for providing additional settlement
services as part of the transaction, such payment must be for services
that are actual, necessary and distinct from the primary services
provided by the person. (24 CFR 3500.14(g)(3).) While mortgage brokers
may receive part of their compensation from a lender, where the lender
payment duplicates direct compensation paid by the borrower for goods
or facilities actually furnished or services actually performed,
Section 8 is violated. In light of the fact that the borrower and the
lender may both contribute to some items, HUD believes that it is best
to evaluate seemingly duplicative fees by analyzing total compensation
under the reasonableness test described above.
E. Information Provided to Borrower
Under current RESPA rules mortgage brokers are required to disclose
estimated direct and indirect fees on the Good Faith Estimate (GFE) no
later than 3 days after loan application. (See 24 CFR 3500.7(a) and
(b).) Such disclosure must also be provided to consumers, as a final
exact figure, at closing on the settlement statement. (24 CFR 3500.8;
24 CFR part 3500, Appendix A.) On the GFE and the settlement statement,
lender payments to mortgage brokers must be shown as ``Paid Outside of
Closing'' (P.O.C.), and are not computed in arriving at totals. (24 CFR
3500.7(a)(2).) The requirement that all fees be disclosed on the GFE is
intended to assure that consumers are shown the full amount of
compensation to brokers and others early in the transaction.
The Department has always indicated that any fees charged in
settlement transactions should be clearly disclosed so that the
consumer can understand the nature and recipient of the payment. Code-
like abbreviations like ``YSP to DBG, POC'', for instance, have been
noted.9 Also, the Department has seen
[[Page 10087]]
examples on the GFE and/or the settlement statement where the identity
and/or purpose of the fees are not clearly disclosed.
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\9\ This is an example only. HUD recognizes that current
practices may leave borrowers confused. However, the use of any
particular terms, including abbreviations, may not, by itself,
violate RESPA. Nevertheless, going forward, HUD recommends that the
disclosures on the GFE and the settlement statement be as described
in the text. HUD recognizes that system changes may require time for
lenders and brokers to implement.
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The Department considers unclear and confusing disclosures to be
contrary to the statute's and the regulation's purposes of making
RESPA-covered transactions understandable to the consumer. At a
minimum, all fees to the mortgage broker are to be clearly labeled and
properly estimated on the GFE. On the settlement statement, the name of
the recipient of the fee (in this case, the mortgage broker) is to be
clearly labeled and listed, and the fee received from a lender is to be
clearly labeled and listed in the interest of clarity. For example, a
fee would be appropriately disclosed as ``Mortgage broker fee from
lender to XYZ Corporation (P.O.C.).'' In the interest of clarity, other
fees or payments from the borrower to the mortgage broker should
identify that they are mortgage broker fees from the
borrower.10
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\10\ HUD recognizes that current software may not currently
accommodate these additional disclosures. Both industry and
consumers would be better served if these additional disclosures
were included in future forms.
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There is no requirement under existing law that consumers be fully
informed of the broker's services and compensation prior to the GFE.
Nevertheless, HUD believes that the broker should provide the consumer
with information about the broker's services and compensation, and
agreement by the consumer to the arrangement should occur as early as
possible in the process. Mortgage brokers and lenders can improve their
ability to demonstrate the reasonableness of their fees if the broker
discloses the nature of the broker's services and the various methods
of compensation at the time the consumer first discusses the
possibility of a loan with the broker.
The legislative history makes clear that RESPA was not intended to
be a rate-setting statute and that Congress instead favored a market-
based approach. (S. Rep. No. 93-866 at 6546 (1974).) In making the
determination of whether a payment is bona fide compensation for goods
or facilities actually furnished or services actually performed, HUD
has, in the past, indicated that it would examine whether the price
paid for the goods, facilities or services is truly a market price;
that is, if in an arm's length transaction a purchaser would buy the
services at or near the amount charged. If the fee the consumer pays is
disclosed and agreed to, along with its relationship to the interest
rate and points for the loan and any lender-paid fees to the broker, a
market price for the services, goods or facilities could be attained.
HUD believes that for the market to work effectively, borrowers should
be afforded a meaningful opportunity to select the most appropriate
product and determine what price they are willing to pay for the loan
based on disclosures which provide clear and understandable
information.
The Department reiterates its long-standing view that disclosure
alone does not make illegal fees legal under RESPA. On the other hand,
while under current law, pre-application disclosure to the consumer is
not required, HUD believes that fuller information provided at the
earliest possible moment in the shopping process would increase
consumer satisfaction and reduce the possibility of misunderstanding.
HUD commends the National Association of Mortgage Brokers and the
Mortgage Bankers Association of America for strongly suggesting that
their members furnish consumers with a form describing the function of
mortgage brokers and stating that a mortgage broker may receive a fee
in the transaction from a lender.
Although this statement of policy does not mandate disclosures
beyond those currently required by RESPA and Regulation X, the most
effective approach to disclosure would allow a prospective borrower to
properly evaluate the nature of the services and all costs for a broker
transaction, and to agree to such services and costs before applying
for a loan. Under such an approach, the broker would make the borrower
aware of whether the broker is or is not serving as the consumer's
agent to shop for a loan, and the total compensation to be paid to the
mortgage broker, including the amounts of each of the fees making up
that compensation. If indirect fees are paid, the consumer would be
made aware of the amount of these fees and their relationship to direct
fees and an increased interest rate. If the consumer may reduce the
interest rate through increased fees or points, this option also would
be explained. HUD recognizes that in many cases, the industry has not
been using this approach because it has not been required. Moreover,
new methods may require time to implement. HUD encourages these efforts
going forward and believes that if these desirable disclosure practices
were adhered to by all industry participants, the need for more
prescriptive regulatory or legislative actions concerning this specific
problem could be tempered or even made unnecessary.
While the Department is issuing this statement of policy to comply
with a Congressional directive that HUD clarify its position on the
legality of lender payments to mortgage brokers, HUD agrees with
segments of the mortgage lending and settlement service industries and
consumer representatives that legislation to improve RESPA is needed.
HUD believes that broad legislative reform along the lines specified in
the HUD/Federal Reserve Board Report remains the most effective way to
resolve the difficulties and legal uncertainties under RESPA and TILA
for industry and consumers alike. Statutory changes like those
recommended in the Report would, if adopted, provide the most balanced
approach to resolving these contentious issues by providing consumers
with better and firmer information about the costs associated with
home-secured credit transactions and providing creditors and mortgage
brokers with clearer rules.
III. Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this Statement
of Policy under Executive Order 12866, Regulatory Planning and Review.
OMB determined that this Statement of Policy is a ``significant
regulatory action,'' as defined in section 3(f) of the Order (although
not economically significant, as provided in section 3(f)(1) of the
Order). Any changes made to the Statement of Policy subsequent to its
submission to OMB are identified in the docket file, which is available
for public inspection in the office of the Department's Rules Docket
Clerk, Room 10276, 451 Seventh Street, SW, Washington, DC 20410-0500.
Dated: February 22, 1999.
William C. Apgar,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 99-4921 Filed 2-26-99; 8:45 am]
BILLING CODE 4210-27-P