Mr. Chairman and Members of the Committee:
I am President of the National Association of Mortgage Brokers (NAMB), the nation’s largest organization exclusively representing the interests of the mortgage brokerage industry. We appreciate the opportunity to address the Committee today on behalf of the nation’s mortgage brokers on the subject of yield spread premiums.
NAMB currently has more than 13,000 members and 41 affiliated State associations nationwide. NAMB provides education, certification, industry representation, and publications for the mortgage broker industry. NAMB members subscribe to a strict code of ethics and a set of best business practices that promote integrity, confidentiality, and above all, the highest levels of professional service to the consumer.
The Committee has asked for NAMB’s views on the recent Statement of Policy 2001-1 issued by the Department of Housing and Urban Development concerning yield spread premiums, and our views concerning what HUD should do going forward to prevent the "abusive use" of yield spread premiums. Before discussing these two issues in detail, we would first like to review the important role mortgage brokers play in our mortgage market and our nation’s economy, and why yield spread premiums are so important to the effective functioning of the market. We will then discuss why NAMB believes the Statement of Policy issued by HUD was both necessary and correct, and offer NAMB’s views regarding HUD’s actions going forward.
The Importance of Mortgage Brokers in Today’s Economy
Today, our nation enjoys an all-time record rate of homeownership. While many factors have contributed to this record of success, one of the principal factors has been the rise of wholesale lending through mortgage brokers. Mortgage brokers have brought consumers more choices and diversity in loan programs and products than they can obtain from a branch office of even the largest national retail lender. Brokers also offer consumers superior expertise and assistance in getting through the tedious and complicated loan process, often finding loans for borrowers that may have been turned down by other lenders. Meanwhile, mortgage brokers offer lenders a far less expensive alternative for nationwide product distribution without huge investments in "brick and mortar."
In light of these realities, it is no surprise that consumers have increasingly turned to mortgage brokers. Today, mortgage brokers originate approximately 65 percent of all residential mortgages in America. In Florida alone, there are over 23,000 licensed mortgage brokers. The rise of the mortgage broker has also significantly increased competition in the mortgage industry, resulting in a decline in mortgage interest rates and closing costs and an explosion in the number of mortgage products available to consumers. These positive developments are not mere coincidences. They would not have been possible without the advent of wholesale lending through mortgage brokers.
Mortgage brokers play an extremely important role in our economy. Following the collapse of the savings and loan industry in the 1980s, and then the rapid consolidation of mortgage banking firms in the 1990s, we now find that in many communities, particularly in central cities and small towns, people may have a difficult time finding a retail bank branch or retail mortgage lending branch. If they do find a retail lender, their mortgage choices are limited to the products and services offered by that lender, which often are very few. But almost any consumer can find a mortgage broker right in their community that can provide access to many loan programs, assist in clearing up credit problems, help clear title defects, and provide other assistance to help the consumer obtain a loan that suits his or her financial needs and objectives.
Mortgage brokers are generally small business owners. The average mortgage broker employs fewer than 10 people. Mortgage brokers know their neighbors, build their businesses primarily through referrals from satisfied customers, and succeed by becoming active members of their communities. The fact that small mortgage brokerages originate well over half of all mortgages, indicates that mortgage brokers are effectively meeting consumers’ desires for convenience, service, and competitive prices.
Since the middle of 2000, the nation’s economy has been experiencing a slowdown, with increasing unemployment and business failures, declining consumer spending, and other negative economic indicators. The one bright spot in this cloudy picture has been the housing and mortgage finance sector. Mortgage originations increased in 2000 from 1999, and again increased in 2001. Many mortgage lenders and mortgage brokers experienced record volumes of business in 2001. Mortgage lending has been a vital counterweight as the rest of the economy entered a recession.
Even in today’s weakened and uncertain economy, home sales and new home construction continue to increase. This creates and sustains hundreds of thousands of jobs in real estate, construction, and ancillary industries. Mortgage refinances have benefited many homeowners, allowing them to reduce their monthly payments, convert to shorter term loans to save thousands of dollars in total interest, or access their home equity to improve their financial situation. Today, total home equity held by American households once again exceeds the total value of other investments. When properly used, access to home equity has become a lifeline for many seniors whose retirement funds have been dramatically reduced by the decline in the stock market, and for families who face layoffs or uncertain employment prospects in the next several months.
Mortgage brokers provide the flexibility and capacity for the market to absorb a huge volume of new originations, as has occurred in the last few months. This capacity allows consumers to immediately take advantage of interest rate declines and to access their home equity if needed. If mortgage brokers did not exist, lenders with brick-and-mortar offices would not have been able to handle the surge of purchase and refinance business that has been so helpful to consumers and to our economy in the last year.
It is thus vitally important to America’s homeowners and to the economy as a whole that we avoid any new regulations, legislation, or legal decisions that could impede the efficient and effective functioning of the wholesale mortgage market.
Yield Spread Premiums and Their Importance
One of the major barriers to homeownership is insufficient cash for a downpayment or to pay closing costs. Mortgage brokers have originated hundreds of thousands of loans for people who were able to buy a home, refinance an existing mortgage at a lower interest rate, or obtain a home equity loan with little or no cash required for upfront closing costs or broker fees. These costs are financed through a slightly higher interest rate than the borrower would pay if he or she paid the closing costs in cash. Most retail lenders (e.g. commercial banks, thrifts, credit unions, and retail mortgage companies) also offer "no- or low-cost" loans at slightly higher rates.
The ability of consumers to obtain loans with little or no upfront costs is critical in today’s economy. In uncertain times such as these, people want to conserve and build up their cash reserves and reduce monthly payments. Interest rates have fallen in the last year to the extent that homeowners can still often reduce the rate on their existing mortgage through a refinance and save thousands of dollars in interest payments, lower the payments, and conserve cash, by paying some or all closing costs through a higher interest rate. When a mortgage broker arranges such a loan, the broker receives most or all of its compensation indirectly from the lender – a yield spread premium.
Such indirect compensation paid by lenders to mortgage brokers is legal under the applicable federal law, the Real Estate Settlement Procedures Act or RESPA, so long as the total compensation to the broker is reasonably related to services actually performed, goods actually provided, or facilities actually furnished. In all loans originated by mortgage brokers, the broker is providing a facility to the wholesale lender, in effect serving as the lender’s branch office. The broker also does most, if not all of the work in assembling the loan package, which is creating a good, and which can often require a great deal of time and expense. Brokers typically take the application, order the appraisal and credit report, verify the borrower’s income and employment, and perform many other aspects of loan origination that benefit the lender and enable it to underwrite and approve the loan.
Mortgage brokers also perform services directly for borrowers that are legally compensable. These may include advising the borrower about various loan programs and options to assist the borrower in selecting a loan program that meets his or her financial situation and objectives; helping the borrower improve his or her credit rating in order to qualify for a lower interest rate or better loan terms, and other assistance. Many brokers work late into the evenings and on weekends taking applications, gathering documents, and meeting borrowers at their homes and offices. Such personal and convenient service is one reason mortgage brokers are preferred by many consumers.
Mortgage brokers clearly provide legally compensable services, goods, and facilities to both wholesale lenders and to borrowers. These services, goods, and facilities all ultimately benefit the borrower, by enabling the borrower to qualify for and receive the loan the borrower wants. Retail lenders perform similar origination functions and earn similar fees when they sell mortgages into the secondary market, as they do with the vast majority of loans they originate. However, retail lenders do not disclose to borrowers their income on loans that are subsequently sold in the secondary market. Mortgage brokers do.
We want to emphasize this. There is nothing fundamentally different about the way retail lenders and mortgage brokers earn income. The only difference is that consumers know how much the originator is being paid only when the originator is a mortgage broker. This is because HUD requires the disclosure and itemization of all such "indirect compensation" by lenders to mortgage brokers, on both the Good Faith Estimate and the HUD-1 settlement statement. Loan sales by retail lenders are considered secondary market transactions, which are not subject to RESPA.
Mortgage interest rates are highly competitive. Consumers today are more sophisticated than ever in researching and shopping rates. A mortgage broker determines the fee on a particular loan based on a number of factors, including the work required to arrange the loan, such as assisting the borrower in improving his or her credit rating. Fees may also be determined based on the loan program, market competition, and many other factors. The flexibility of indirect compensation allows mortgage brokers to stay competitive with, and often beat, retail lenders on price while still earning a reasonable profit.
It is also important to note that in most cases involving payments of yield spread premiums, the mortgage broker receives nothing until the loan closes. Mortgage brokers often do a great deal of work to arrange loans that never get to closing, for a variety of reasons. They receive no compensation for this work.
HUD Statements of Policy 1999-1 and 2001-1
Despite the clear advantages of mortgages involving yield spread premiums, the clear legality of such payments, and the clear choices being made every day by consumers to obtain their mortgages through mortgage brokers, the wholesale mortgage market is under assault in the courts. Trial lawyers across America have continued to file and pursue class action lawsuits claiming that all yield spread premiums are illegal under Section 8 of RESPA. Over 150 such class action lawsuits are active in courts across the country against virtually every major wholesale mortgage lender. Some of these suits were first filed in 1996.
Many courts have dismissed such suits, rightfully in our view. Others have been withdrawn after courts refused class certification. However, some courts have allowed these suits to continue, and trial lawyers continue to venue-shop and file new suits, in search of one court that will agree with their inaccurate portrayal of the wholesale mortgage market. This flood of litigation, and differing opinions of various courts, has caused a great deal of uncertainty and anxiety in the mortgage industry. The cost of defending these class actions is staggering, already running into millions of dollars each for the largest lenders involved. These costs are, of course, passed on to consumers. The potential liability for the industry is tens of billions of dollars. Lenders could be forced to cease all wholesale lending if a judgment goes against even one lender, or if a major settlement occurs.
The only real winners here are the class action attorneys who stand to win millions of dollars in contingency fees. Their clients stand to receive only small refunds, or a few dollars off the cost of their next loan. The real impact will be the exit from wholesale lending of most, if not all, major mortgage lenders. The potential liability for them will simply be too great to justify staying in the business. The real losers will then be tomorrow’s first time homebuyers, tomorrow’s working families, and tomorrow’s entrepreneurs who will not be able to get a mortgage without paying hundreds of dollars up front – which, for low-income people without cash, will mean no mortgages at all.
Many small businessmen and women may not be able to stay in business as mortgage brokers without being able to offer consumers low- or no-cost loans. As competition decreases, all potential mortgage borrowers will experience higher costs and fewer choices – and in some cases, no choices at all. The ripple effect on the overall economy, as mortgage borrowing declines and employment in the housing and mortgage finance sector falls, could be substantial.
In 1998, Congress made its views clear on this issue. In the Conference Report accompanying the VA-HUD and Independent Agencies Appropriations Act of 1999 [H.R. Conf. Rep. No. 105-769, 105th Congress, 2d sess. 260] Congress explicitly stated that it was "concerned about the legal uncertainty [regarding indirect compensation] that continues absent such a policy statement." Congress further stated that it "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 USC 2601 et.seq.) Congress directed the Department of Housing and Urban Development (HUD) to issue a statement of policy clarifying the legality of mortgage broker compensation paid by lenders. Congress further directed HUD to consult with all interested parties in developing this policy statement.
HUD followed the directive of Congress with the release of Statement of Policy 1999-1 [FR Vol. 64, No. 39, pp. 10080-10087] on March 1, 1999. The policy statement says that:
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.
NAMB participated in the development of this Statement of Policy, along with many other industry groups as well as major consumer advocacy organizations. HUD, to its credit, insisted that a consensus of all the participating groups be reached. All who participated agreed that Statement of Policy 1999-1 correctly interpreted RESPA as it relates to mortgage broker compensation. The policy statement enjoyed bipartisan approval from both the Clinton Administration and Congress.
When Statement of Policy 1999-1 was released, most of us in the mortgage industry believed the litigation crisis had been resolved. Using the "two-part test" set forth in the statement meant that the legality of any mortgage broker compensation would have to be judged on a case by case basis, not as a class action. It is important to note here that this test allows individual cases of abuse to be addressed and remedied in court, while limiting inappropriate class actions. Following the publication of the statement, the number of new class action lawsuits dwindled. Several existing lawsuits were dismissed, and class certification was denied, by courts that agreed with HUD’s interpretation of RESPA and agreed that broker compensation must be judged on a case by case basis. However, other lawsuits continued to proceed with the hope by the trial lawyers that a court might interpret Statement of Policy 1999-1 in such a way that a class action could still go forward.
Unfortunately, this occurred in June 2001, when the 11th Circuit Court of Appeals affirmed certification of a class by the U.S. District Court of Alabama in Culpepper v. Irwin Mortgage Corp. The 11th Circuit found an ambiguity in Statement of Policy 1999-1, and failed to complete its analysis of yield spread premiums by only applying the first test. The Court also implied that a lower court could, in fact, find that all yield spread premiums are illegal, thereby justifying certification of the class. Not surprisingly, NAMB believes this was a misinterpretation of both RESPA and Statement of Policy 1999-1. It left the industry once again facing billions of dollars in liability. It also left HUD in contravention of the 1998 Congressional directive to provide definitive guidance to the industry and clarify any legal ambiguities surrounding mortgage broker compensation. Dozens of new lawsuits have been filed since the 11th Circuit decision. Clearly this is not because of a sudden rampant wave of abuse in the mortgage market, but because class action attorneys see an opportunity for multi-million dollar fees.
HUD immediately recognized the potential disaster created by this decision, and recognized its responsibility to remove the ambiguity found by the 11th Circuit by clarifying its existing policy. In the process of developing its response, HUD once again met with a wide range of interested parties, including NAMB, and including consumer advocacy groups. On October 15th, 2001, HUD issued Statement of Policy 2001-1 [Fed. Reg. 66, No. 202, pp.53052 -53059]. HUD states in the preamble to this policy statement that:
This Statement of Policy is being issued to eliminate any ambiguity concerning the Department’s position with respect to those lender payments to mortgage brokers characterized as yield spread premiums… In issuing this Statement of Policy, the Department clarifies its interpretation of Section 8 of the Real Estate Settlement Procedures Act (RESPA) in Statement of Policy 1999–1 Regarding Lender Payments to Mortgage Brokers (the 1999 Statement of Policy)….Today’s Statement of Policy reiterates the Department’s position that yield spread premiums are not per se legal or illegal, and clarifies the test for the legality of such payments set forth in HUD’s 1999 Statement of Policy. As stated there, 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 legality of yield spread premiums turns on the application of HUD’s test in the 1999 Statement of Policy as clarified today.
HUD is to be congratulated for Statement of Policy 2001-1. The statement is simply a clarification of existing policy and the existing views of HUD concerning yield spread premiums. As the regulator of RESPA, HUD has a responsibility to provide all parties affected by RESPA with clear rules and guidance so that the law can be effectively understood and implemented nationwide, and so that nationwide lenders can comply with the law. Continued ambiguity, whether created by court decisions, market changes, or other factors, creates unnecessary and costly uncertainty for both business and consumers. The only parties that benefit from ambiguity are trial lawyers.
Statement of Policy 2001-1 has also been accepted by the courts in two important court rulings in class action lawsuits, Vargas v. Universal Mortgage Corp. and Bjustrom v. Trust One Mortgage Corp. In Bjustrom, U.S. District Judge Marsha J. Pechman of the Western District Court of Washington granted summary judgment to the defendant, Trust One Mortgage Corp. Judge Pechman applied the new policy statement to find that yield spread premiums are not illegal per se even though there may be no "tie" between the premium and particular services performed by the broker. The Court found that the Statement of Policy is a permissible interpretation of RESPA and therefore must be given deference.
In Vargas, Judge James B. Zagel of the U.S. District Court, Northern District of Illinois, denied certification of a class. Judge Zagel agreed with HUD that the fact that yield spread premiums are calculated based on a rate sheet does not make them per se illegal referral fees. He also found that there are legitimate reasons why a borrower would choose to pay a higher interest rate on a loan that included a yield spread premium. Importantly, Judge Zagel also found that HUD’s two-part test to determine legality of a yield spread premium is faithful to the RESPA statute, and that:
…the Act [RESPA] compels a case-by-case analysis of individual plaintiffs’ claims every bit as much as the HUD Statement. HUD’s "reasonableness requirement" was not made out of whole cloth; it is implicit in §2607(c) which authorizes compensation for "services actually performed."
We expect other courts to agree with these two decisions. Yield spread premiums that are properly disclosed and meet the HUD test should be considered legal and not abusive. Any yield spread premium that does not meet this test may be illegal, and HUD’s policy statement clearly allows consumers who believe their loan has included an illegal yield spread premium to seek legal remedy. With the legal uncertainty removed, our industry can now move forward and HUD can move forward to address the real problems in the mortgage market.
HUD’s Actions Going Forward
The other issue on which the Committee has asked us to comment is what HUD should do going forward to address "abusive use" of yield spread premiums. We fully agree that illegal uses of yield spread premiums should be prosecuted to the full extent of the law. Any compensation that does not meet the HUD test is illegal, and those paying or receiving illegal payments should be punished. NAMB believes such abuses are rare, and we believe that HUD is moving forward appropriately in two ways.
First, HUD is moving to more aggressively enforce RESPA and punish violators. It is devoting more resources, reorganizing, and refocusing to dramatically improve its historically poor record in enforcing RESPA. Our industry has long been frustrated with the lack of RESPA enforcement by HUD. Even a little enforcement can go a long way in serving notice to all settlement service providers that there will be a high price for violating the law. This includes the payment or receipt of illegal yield spread premiums or any other fees that are paid to any industry participant in violation of RESPA. NAMB applauds HUD’s new enforcement effort and hopes Congress will support it with increased funding and personnel allocations.
The other way HUD is moving to address abuses is with a new RESPA regulation. In Statement of Policy 2001-1, HUD announced:
This Statement of Policy also reiterates the importance of disclosure so that borrowers can choose the best loan for themselves, and it describes disclosures HUD considers best practices. The Secretary is also announcing that he intends to make full use of his regulatory authority to establish clear requirements for disclosure of mortgage broker fees and to improve the settlement process for lenders, mortgage brokers, and consumers.
Secretary Martinez, in remarks before this Committee on December 13, 2001, further stated his commitment to RESPA reform:
To ensure that homebuyers have the information they need in order to make an informed purchase, I have undertaken comprehensive reform of the Real Estate Settlement Procedures Act (RESPA). In addition to preserving yield spread premiums as a valuable tool for opening the doors of homeownership, reform will: (1) ensure better protections for new homebuyers and those who refinance; (2) offer clarity for the mortgage lending industry about their disclosure responsibilities, and; (3) provide an additional tool to fight predatory lending.
The need for RESPA reform is even more urgent during times of economic uncertainty. Homeownership helps create financial stability for families, and in return brings economic stability to our communities.
NAMB fully agrees with Secretary Martinez and we support a new rulemaking to improve the disclosures provided to consumers. Mortgage brokers are confronted every day with the frustrations of our customers about the many confusing, and largely useless, disclosures and paperwork we thrust at them. Consumers who may be desperate for cash or credit may not always fully investigate their loan options or closely examine the many disclosures they receive.
Consumers are entitled to better, simpler disclosures provided earlier in the process, so they can more effectively compare loans. Consumers should have simple disclosures without a lot of fine print. They should easily be able to question and change terms and fees with which they do not agree, well before closing. These improvements could reduce compliance burdens and costs for originators, and the savings would be passed on to consumers. Consumers would be in a stronger position with more information, thereby decreasing the incidence of abusive lending practices of all kinds – including, but of course not limited to, any illegal yield spread premiums.
NAMB has developed detailed proposals for this rulemaking, and we have shared these with HUD and with this Committee. NAMB supports a new, mandatory disclosure to be required of all originators at or before application, that clearly defines what the originator will do in the transaction, how its compensation will be earned, and the choices available that could affect both the way the originator is compensated and whether the consumer will have to pay any fees upfront at closing. NAMB also supports establishing tolerances for the Good Faith Estimate and requiring redisclosure if the tolerances are exceeded, in order to prevent surprise additional costs to consumers at closing, including inappropriate increases in yield spread premiums.
This new disclosure would build upon the successful Model Loan Origination Agreement that NAMB and MBA jointly developed in 1998, and which both associations encourage our members to use. We believe this new agreement will help consumers better understand the process, while not adding significantly to the complexity of that process.
Wholesale mortgage lending through mortgage brokers, and particularly the wide availability of loans requiring the borrower to pay little or no cash at closing, is a key element in sustaining America’s economy through this period of great uncertainty and difficulty. Used properly, yield spread premiums are an important part of this market, and it is therefore important to consumers that the use of legal yield spread premiums continue, without the threat of class action litigation that could seriously impede the efficient functioning of the market and damage the economy. When yield spread premiums are properly disclosed and properly used, they are not illegal.
NAMB believes that HUD has acted responsibly as the regulator under RESPA: first, by issuing Statement of Policy 2001-1 to clarify existing policy concerning yield spread premiums, provide certainty to the mortgage industry, and reduce the threat of class action litigation; second, by significantly increasing and improving its investigation and enforcement of RESPA violations; and third, by developing new and improved disclosures that will help consumers avoid illegal and abusive fees. NAMB supports a new, mandatory disclosure to be provided at the earliest possible time by all originators that fully informs consumers about the loan origination process. NAMB also supports improving the Good Faith Estimate by establishing tolerances and requiring redisclosure.
Thank you again for this opportunity to share NAMB’s views with the Committee.
Home | Menu | Links | Info | Chairman's Page