HUD Proposes Broker-Fee Disclosure

As many as half of all American home mortgage applicants could receive a new consumer-friendly disclosure explaining their financing, particularly the nature, amount and sources of up-front fees received by their mortgage companies.

Under a proposed rule being reviewed on Capitol Hill, the Department of Housing and Urban Development would encourage mortgage brokers nationwide to provide loan applicants with “contracts” governing their financing arrangements.

In exchange for complete disclosure of the amounts and sources of fees in advance, the government would provide brokers with a “safe harbor,” insulating them from federal legal attacks over their fees.

Mortgage brokers--generally small local firms that connect loan applicants with lending institutions--originate an estimated 40% to 50% of home loans in the United States.

Although home buyers frequently assume that brokers are actual lenders, they are in fact middlemen with little or no capital to lend on their own. Brokers typically work with dozens of lenders across the country, enabling them to provide a wide selection of loan options for borrowers, far wider than any one lender would be able to offer.

For their services, brokers charge borrowers fees; they sometimes also receive fees from the lenders to whom they deliver qualified borrowers.

The size and sources of brokers’ fees, however, have become major points of controversy in the last three years.

Unaware of the Fees

In individual lawsuits and class-action litigation, borrowers have charged that they were unaware of the fees being received by their brokers from lenders. Some suits have challenged the legality of what are known as “yield spread premiums” or “overage” fees paid to brokers by lenders for delivering borrowers at higher than prevailing rates.

In one case, a large lender--Ford Consumer Finance Corp.--agreed to make monetary refunds to 53,000 borrowers who used brokers to obtain home mortgages. Ford allegedly paid brokers extra fees for delivering borrowers at above-market rates.

At the root of the issue, say mortgage industry executives, is a misunderstanding by many borrowers about what brokers do.

In most states--California is an exception--brokers do not legally represent the interests of borrowers. They are not duty-bound to obtain loan applicants the very best financing package of rates and fees available in the marketplace. They merely have to help clients obtain financing that is appropriate to their needs.

HUD’s proposed nationally uniform contract focuses on the services the broker would provide for the applicant and the fees the broker would receive.

Regarding services on behalf of the borrower, the broker can check one of three boxes:

Box No. 1 requires the broker to shop the market for the very best deal for the borrower and to function as the borrower’s agent. The broker warrants that he or she “will not receive any fee for your mortgage loan from a lender.”

Box No. 2 pledges the broker to get the best deal for the customer but allows the broker to accept extra fees from the lender who funds the loan.

Box No. 3 states bluntly, “I do not represent you. I am not your agent,” and “I can receive money from a lender as well as charge you the borrower.”

The contract then details the total fees the broker will probably receive in the transaction, including the money paid by the borrower and fees like yield-spread premiums from the lender.

HUD Secretary Andrew Cuomo called the new broker contract “an important consumer-protection measure. . . . It will enable [mortgage borrowers] to make more informed decisions.”

A ‘Safe Harbor’

To induce brokers to use the contract, Cuomo offered an incentive. For those who provide the contract to applicants “and abide by it,” HUD said it is willing to offer a “safe harbor” from federal legal attack over their fees, provided the total fees disclosed are not “excessive.”

The proposal did not provide details of the test HUD will use to conclude that a broker’s fees are excessive, but the standard is not expected to affect most broker-assisted transactions in the market.

Brokers who don’t use the new contract, on the other hand, expose themselves to scrutiny by regulators for possible violations of federal anti-kickback and referral-fee rules.

“Such scrutiny subjects a broker not using the form to litigation and possible HUD enforcement action,” according to the new proposal.

Mortgage industry groups were still studying the HUD proposal and had no immediate reaction. But Lawrence E. Platt, a Washington, D.C., lawyer who represents mortgage firms, said the concept sounds like “an attempt by the government to fix prices” in one segment of the mortgage business.

After congressional committees review the new proposals this month, they will be open to public comment before final adoption early next year.

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Distributed by the Washington Post Writers Group.