FTC Says Broker YSP Disclosures Bad

As part of the Real Estate Settlement Procedures Act (RESPA) reform proposal, mortgage brokers are required to disclose certain compensation information. But according to the analysis by the Federal Trade Commission, the requirement will harm, rather than help consumers.

Brokers have long contended that the additional disclosures required of them give mortgage bankers, who do not have the same disclosure requirements, an unfair advantage.

The mortgage broker compensation disclosure proposed by HUD, or the U.S. Department of Housing and Urban Development, requires that brokers — but not other mortgage providers — disclose yield spread premium information to consumers to comply with RESPA. While HUD, which enforces RESPA, says the act is designed to help consumers be better shoppers in the homebuying process, the FTC said its study, The Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment, shows just the opposite occurs.

“Disclosures confuse consumers, are likely to lead a significant number of consumers to choose more expensive loans by mistake, and create a substantial consumer bias against broker loans, even when the broker loans cost the same or less than direct lender loans, which could lead to reduced market competition and increase the cost of all mortgages,” said the FTC.

Consumers mistakenly paying more for their mortgages could overspend by $400-$800 million per year, according to the study.

The Commission noted that the focal point of the proposed disclosure is any YSP paid by the lender — a major part of a broker’s compensation — for a loan originated at an above-par (premium) interest rate. However, under HUD’s proposed policy, lenders making loans directly to consumers would not be required to provide compensation disclosures, even though they may charge the same interest rate and earn the same compensation as a mortgage broker.

The controlled experiment consisted of more than 500 recent mortgage customers divided into five groups, said the agency. Each group was shown cost information about two hypothetical mortgage loans — one loan was treated as a broker loan and one as a direct lender loan — and was asked to identify the less expensive loan, and which loan they would choose if they were shopping for a mortgage.

Three groups were shown cost information that included a broker compensation disclosure, said FTC. A YSP amount was disclosed in the broker loan, but not in the direct lender loan. Collectively, between 63% to 72% of the respondents correctly identified the less expensive loan. Asked which loan they would choose if they were shopping for a mortgage — between 60% to 70% chose the less expensive loan and between 16% to 27% picked the more expensive loan, the report said.

The remaining two groups were shown cost information that did not include a broker compensation disclosure and about 90 percent of the respondents in each group correctly identified the less expensive loan, said the FTC. Asked which loan they would choose if they were shopping for a mortgage, 85% and 94% identified the less expensive loan and only 3% of the respondents in one of the groups identified the more expensive loan, according to the study.

In tests in which both loans cost the same, between 40% to 50% of the respondents in the three group sector mistakenly believed that one loan was less expensive than the other, and of these, 75% to 90% believed that the direct lender loan (that had no YSP disclosure) was less expensive than the broker loan, said the Commission. Similar results, but with an even larger bias against the broker loan, were found when the respondents were asked which loan they would pick if shopping for a mortgage.

In the two groups who were not shown broker compensation disclosures, 95% and 99% of the respondents recognized that both loans cost equal. Meanwhile, 78% and 83% percent said they would choose “either loan, both cost the same,” if they were shopping for a mortgage.

“The HUD rule as proposed is not good for consumers or the mortgage industry,” said A.W. Pickel, president of the National Association of Mortgage Brokers, in a written statement. “It needs to be sent back to HUD for re-proposal, so that the final rule is one that helps educate consumers and treats all segments of the housing markets equally.”

The FTC holds that disclosures to consumers should be the same for mortgage brokers and direct lenders, and says the study concludes that a better way to help consumers obtain less expensive mortgages would be to encourage and facilitate comparison shopping on loan costs.

In an e-mailed statement to MortgageDaily.com, HUD said it welcomed FTC’s analysis, but was quick to point out that its proposed reforms have undergone “substantive” refinement since they were first introduced in July 2002.

“The Office of Management and Budget is currently reviewing a refined RESPA rule, which is a product of record public comment, more than 60 meetings with industry and consumer groups, several Congressional hearings and multiple discussions with the FTC and Small Business Administration,” HUD added.

The OMB should have a decision on the RESPA reform proposal by March 16, said HUD.