The National Association of Mortgage Brokers (NAMB) is pleased to comment on the necessity for legislative action to achieve realignment with the original goals and objectives of the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). NAMB believes that streamlining RESPA and TILA disclosures is not enough. The entire statutory and regulatory framework of these two acts requires fundamental overhaul. Only with the replacement of the mortgage provisions of these two acts with a National Mortgage Reform Act can there be a true return to these original goals and objectives.
The National Association of Mortgage Brokers is the voice of the mortgage broker industry with over 5,000 members and 39 chapters throughout the country. NAMB provides education, certification, industry representation, and publications for the mortgage broker industry, which originates more than half of all residential loans in the United States. NAMB members subscribe to a code of ethics which promotes integrity, professionalism, and confidentiality. Most mortgage brokerages are small businesses, with an average of two to six employees. The brokerage industry plays a significant role in the mortgage lending process and American economy by increasing competittion and driving down costs.
The mortgage industry is primarily regulated by the Department of Housing and Urban Development (HUD), the Board of Governors of the Federal Reserve (the Fed), and the Federal Trade Commission (FTC), in addition to various state authorities. Mortgage brokers struggle daily to comply with both TILA's and RESPA's complex and sometimes conflicting disclosure requirements. NAMB believes that the fundamental goals of existing federal disclosure requirements -- providing better information to consumers and giving them the ability to comparison shop -- remainem largely unmet under the present system. Rather the disclosure requirements confuse consumers and highlight information most do not use when comparing loans.
Neither TILA nor RESPA was originally drafted with mortgage lending as its primary focus. Buying a home is fundamentally different from other consumer financing. Moreover, current statutory legislation has not kept pace with this dynamic marketplace. Major changes and technological innovations have fundamentally altered the mortgage delivery system since TILA and RESPA were first enacted.
The disclosure rules and prohibitions of RESPA and TILA were developed separately by the regulatory agencies and Congress without effective regard for the overlapping effects on the industry that has to comply with both. The two statutes are regulated by different agencies that have different philosophies and methods of providing guidance to the industry. Even different Congressional Subcommittees provide oversight of these statutes. This has created a regulatory and legislative gridlock which has prevented rational amendment and updating of the statutes to reflect the realities of today's mortgage industry.
In June of 1996 NAMB formed a task force to examine the scope and value of comprehensive reform. We believed such an effort was worthwhile, and we continue to build consensus with consumer and other industry organizations on how best to pursue reform. Our model solution is to take mortgage lending from TILA and RESPA and create a new and separate federal statutory framework specifically for it. In fact NAMB has been working with other industry groups to develop an industry-wide consensus on mortgage reform.
Derived from HUD's early 1996 Negotiated Rulemaking on broker compensation, NAMB has adopted a set of principles upon which to build such a statute. NAMB believes that the principles stated below are critical to the success of a new mortgage lending framework for both consumers and industry. They are as follows:
A. Consistency with other laws
B. Consumer education
1. Enable informed decisions
2. Provide relevant disclosures
a. Clear and concise
b. Written in understandable terms
c. Contain logically presented examples & calculations
d. Uniform (to facilitate comparison shopping)
e. Not be excessive
C. Foster the principles of a competitive market 1. Provide fair and equitable treatment for all participants in the market
D. Facilitate compliance 1. Contain clear, measurable, and testable standards 2. Achievable at minimum cost with maximum benefit to consumers 3. Provide reasonable and appropriate penalties for violations 4. Enforceable
A new statute should provide meaningful disclosures and should ensure that the mortgage industry knows with certainty how to comply. These two elements are directly related. Without certainty in compliance there is little to no uniformity in disclosure. Without uniformity, a disclosure cannot meet the test of clarity or be an effective tool for comparison shopping.
NAMB strongly encourages the formation of a Task Force or other appropriate forum wherein industry, government, and consumer representatives can discuss the issues and concerns surrounding the current deficiencies in the existing framework, and the benefits and approaches to a replacement.
RESPA fails to recognize the changes that have taken place in the mortgage delivery system. For example, fees paid by real estate brokers to real estate agents, and fees paid by title insurance companies to title insurance agents, are specifically exempt from RESPA's Section 8 prohibition of referral fees. However, there are no specific exemptions for the same type of vertical payments by mortgage lenders to mortgage brokers. Over the past ten years, the development of wholesale mortgage lending has increased dramatically and has, in turn, increased competition in the mortgage market. RESPA has never been adequately amended to acknowledge the magnitude of these market changes. This lack of amendment has led to unnecessary and costly litigation, as well as continued confusion within the industry as to the application of RESPA to wholesale mortgage transactions.
The HUD proposed rule of May 1988 which contemplated an exemption for lender paid mortgage broker fees was not published as a final rule until November of 1992. During this period wholesale lending and mortgage brokering flourished to the point where today it dominates the mortgage origination marketplace, accounting for an estimated 52% of all residential loans made. In the 1992 final rule the exemption for mortgage broker fees was removed, but a requirement to disclose lender paid compensation remained.
The compensation paid by lenders to mortgage brokers is often called a "yield spread premium" or a "service release premium" and is the subject of great misunderstanding and controversy, including over 50 pending class action lawsuits. The names used have little relevance to the issue; the fact is mortgage loans are financial instruments, and they are traded as such. The value of such a commodity is relative to its yield -- higher yielding instruments obtain a higher price. The interest rate is one component of pricing of a loan. A loan with a higher interest rate is worth more to the secondary market than a loan with a lower interest rate.
It is important to note that mortgage loans also have servicing value. The servicing value is derived from the income maintained by the mortgage company that collects the payments on behalf of the investor to whom it sells the asset. Often the secondary market investor is Fannie Mae or Freddie Mac. These investors require that a minimum of 0.25% of the loan amount be retained for servicing. Thus a servicer will earn $250 per year for each $100,000 of loans serviced, making the value of servicing an asset in its own right. Mortgage lenders have been willing to pay for the servicing rights of loans for years, resulting in lower closing costs to consumers as the cost of origination is in part subsidized by the income of servicing. With the explosive growth of wholesale lending, market forces have dictated that the servicing value of loans reduce origination costs throughout the wholesale channel, as they have in retail.
While HUD has not issued a rule that completely clarifies the issue of fees paid by wholesale lenders to mortgage brokers, on a number of occasions HUD has published documents implying that these fees are not per se illegal.
Many of the discussions surrounding the issue during HUD's negotiated rulemaking revolved around the broker-borrower relationship. As an independent contractor, the broker allows wholesale lenders to cut origination costs by providing such services as preparing the borrower's loan package, loan application, funding process, and counseling the borrower. Brokers help keep loan rates low due to their minimal overhead and setup costs. Furthermore, the broker can get the loan which suits the borrower's financial circumstances, needs, and goals. From the consumer perspective, with rare exception, the broker does not get paid unless and until the loan closes. Thus the broker has the ultimate incentive to provide the best possible customer service to the consumer. In fact, NAMB and the Mortgage Bankers Association of America (MBA) have developed a sample borrower-broker disclosure describing the nature of the relationship and the manner in which mortgage brokers are compensated. This disclosure is attached as exhibit N. The disclosure has received NAMB board approval; MBA formal approval is pending their October board meeting. Provided as Exhibit O is an article titled 5 Myths of Up-selling from the May 1997 National Mortgage Broker magazine.
While the intent of RESPA and TILA are similar, each have very different disclosure
requirements. When taken together, the overlapping requirements create a very large and
confusing number of disclosures that have to be made in multiple formats at various times
during the mortgage process. This creates an unusually heavy regulatory burden on the
lending industry and confuses rather than informs consumers, and in fact, adds unnecessary
costs for lenders which are ultimately passed on to consumers. Disclosures include:
RESPA 24 CFR 3500
|Affiliated Business Arrangement Disclosure||At or before refferal|
|Special Information Booklet||Within 3 days of application|
|Good Faith Estimate||Within 3 days of application|
|Required Providers||Within 3 days of application|
|Initial Transfer of Servicing Disclosure||Within 3 days of application|
|Right to Inspect HUD-1 or HUD-1A||1 day before closing/consummation|
|HUD-1 or HUD-1A||At closing/consummation|
|Initial Escrow Account Statement||At closing/consummation|
|Home Equity Line of Credit Booklet and Disclosure||At or before application|
|Adjustable Rate Booklet and Disclosure||At or before application|
|TILA disclosure (including APR and finance charge)||Within 3 days of application|
|Section 32 Disclosures||3 days before closing/consummation|
|Reverse Mortgage Disclosures||3 days before closing/consummation|
|TILA Disclosure||At closing/consummation|
|Rescission Notice||At closing/consummation|
The myriad of RESPA and TILA disclosures, while possibly useful if considered individually, are together simply too confusing to be of real value to consumers. Even the most knowledgeable mortgage broker has difficulty explaining to a consumer in an understandable manner the difference between the Amount Financed and the loan amount, or between the Finance Charge and the closing costs of the loan. Most consumers understand the Good Faith Estimate and Uniform Settlement Statement, and may read some or all of HUD's Special Information Booklet; but few if any understand the Truth in Lending disclosures. An excess of disclosures is intimidating to consumers and may appear to be simply too much "fine print," implying that the lender or broker is trying to hide something. Providing consumers with essential information about the costs they will incur in obtaining a mortgage can enable effective shopping among different providers.
Among the most glaring and confusing inconsistencies in disclosures required by RESPA and TILA is the treatment of lender-paid mortgage broker fees. The provisions of TILA and the Fed's position on disclosure of lender-paid mortgage broker fees is clear that lender-paid fees, sometimes referred to as "yield-spread premiums" and "service-release premiums", should not be double-counted or separately disclosed, since these fees are derived from the interest rate which is already included in the disclosed Finance Charge.
HUD has taken an entirely different position in interpreting RESPA. The agency believes lender-paid mortgage broker fees must be separately disclosed on the Good Faith Estimate and the Uniform Settlement Statement. This position is not required by the statutory language of RESPA, which only requires disclosure of fees paid by the borrower or seller, not the lender. HUD's inclusion of indirect fees double discloses the cost since the interest rate is already disclosed to the borrower. NAMB believes HUD's broad interpretation and failure to explicitly exempt mortgage broker fees from Section 8 of RESPA is a primary contributor to the current wave of lawsuits now besieging the mortgage industry.
Current disclosures do not adequately inform consumers of the true role of a mortgage broker or give consumers information that will help them understand the "trade-off" between rate and points when choosing a mortgage. While most competent mortgage originators provide this information to borrowers in some form, ensuring that all consumers receive this information would help end some of the confusion surrounding the compensation of mortgage brokers. This information would be far more useful to the consumer than simply including the fee on the Settlement Statement with no explanation.
Likewise, current TILA disclosures fail to provide information that helps a consumer compare the relative merits of loans with different terms (e.g. a 30-year and 15-year), or to accurately compare a variable-rate loan with a fixed-rate loan.
The Truth in Lending disclosure is difficult to complete accurately. Even using sophisticated computer software that has been developed specifically to calculate APR, it is still possible to ask several people to compute an APR on the same loan and to receive different answers. Even experienced practitioners and attorneys are often confused about which fees go into the APR and which do not.
NAMB and other industry groups have held numerous seminars and produced educational courses and publications to help practitioners understand TILA and RESPA. But despite these efforts, these rules are still extremely complex for most brokers and loan officers to understand and therefore be in compliance. This confusion and lack of clarity is especially burdensome given the enormous liability that still exists for relatively minor errors in disclosures. The TILA Amendments of 1995 provided only for a higher allowance for errors in the TILA disclosures, but did not provide any relief from the paperwork burden or the difficult calculations involved in these disclosures.
One disclosure requirement that is proving to be especially burdensome is the requirement established by the Home Ownership and Equity Protection Act (HOEPA), that the Section 32 disclosure for refinance be given three days before consummation. Brokers and lenders find this requirement difficult to comply with, and consumers are often frustrated by it. For example, if a borrower of a HOEPA loan decides just before closing that he wants to change the amount of closing costs he pays, or the amount of cash he takes out on a refinance, the lender must revise the disclosure and the borrower must wait another three days before the loan can close.
Current disclosure rules are applied differently to different types of mortgage originators. Under current HUD rules, only mortgage brokers must disclose their gross profit on each loan. If the APR and closing costs are comparable between two different loans, how is it helpful for brokers to disclose their margins when retail lenders are not required to do so? The Fed has stated in two separate rulings that lender-paid fees do not have to be separately disclosed as part of the Finance Charge, because the fees are already incorporated in the note rate and the APR.
RESPA and TILA also carry vastly different penalties and enforcement mechanisms. Under TILA, loans that are refinances, home equity loans, loans in foreclosure or section 32 loans, can be rescinded outright for very minor and unintentional errors in disclosure. Given the complexity of the calculations and disclosures required, mistakes are frequent. But giving back all interest and costs in connection with the transaction for a $36 error, as required by rescission when a loan is in foreclosure, is a retaliatory approach to preventing fraud and abuse by lenders and is frequently abused by borrowers and attorneys. RESPA carries a potential criminal penalty of one year in jail and a $10,000 fine per violation, and triple damages. It is no wonder that suing mortgage lenders and brokers is a growth industry today. The costs of this litigation are staggering and are directly passed on to the consumer in higher rates and fees.
NAMB believes major problems exist with the current laws and only comprehensive reform will solve them. Bringing certainty to the market place is critical in order to allow the industry to know how to comply with the laws enacted which will bring about uniformity in disclosure. This in turn allows consumers to know the terms of their mortgage when they buy or refinance a home.
In conclusion, NAMB believes that streamlining RESPA and TILA disclosures is not enough.
The entire statutory and regulatory framework of these two acts requires fundamental
overhaul. Only with the replacement of the mortgage provisions of these two acts with a
National Mortgage Reform Act can there be a true return to these original goals and
objectives. We applaud the Senate's efforts in pursuing comprehensive legislative reform
rather than limited regulatory revision.
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