Proposed GFE Revisions Negative for Brokers

NAMB lobbying HUD for Congressional compromise

April 21, 2003

By MARSHALL TAYLOR

But, mortgage industry attorneys involved in the rulemaking process pointed out that HUD has been continuously talking with all the trade associations affected by the proposed reform rule. “After discussions with HUD, most come away saying, ‘HUD is interested in addressing our specific concerns,'” one said. “That’s nothing new.”

NAMB says that HUD’s recharacterization of YSP in the proposed rule as a “lender payment to the borrower for higher interest rate” on the Good Faith Estimate from the current standard of a lender payment to the mortgage broker for goods and services rendered in the origination of a loan will lead to greater confusion among consumers and possible litigation. HUD’s proposed definition of YSP “creates an ambiguity in the marketplace that will lead to a new round of class action litigation as consumers ask, ‘Where is my check?'” at settlement, according to a NAMB statement.

However, Rod Alba, director of government affairs of the Mortgage Bankers Association of America, pointed out that HUD, in the proposed rule, listed the yield spread premium as a credit, or payment, to the borrower on the Good Faith Estimate and the HUD-1 settlement sheet to enable the borrower to finance the YSP. “In effect, it would be a direct payment from the lender to the broker,” he said.

And, that’s another rub in the proposed rule for NAMB. HUD, by redefining the YSP from indirect compensation to a mortgage broker into direct compensation in the form of a lender payment to the broker, will create a competitive disadvantage to brokers. For example, brokers would be severely handicapped in originating FHA and VA loans under the proposed rule, because of the one-percent direct compensation cap on these loans, which would be easily exceeded by the YSP.

Sen, Shelby recently floated the idea that lenders should disclose upfront their servicing-release premiums in the Good Faith Estimate, in a similar fashion to the upfront YSP disclosure in HUD’s proposed rule. This has given NAMB some momentum in pressing HUD to level the rule’s playing field and require lenders to disclose their secondary market compensation in the GFE. “This is the new paradigm in the discussion,” Falk said. “Unless there is some form of disclosure in the GFE at the beginning of the mortgage transaction for other fees, including secondary market gains, earned by lenders, then it would seem to consumers that brokers would be a more expensive option. That is unfair.”

Regulating lenders’ secondary market income is too complicated to undertake, HUD says in the proposed rule. Falk admits that it will be difficult, but not impossible. “One wonders how HUD is going to accomplish this because of the multiple forms of secondary market payments,” he said. Alba said, “All elements in a transaction tell you that secondary market disclosure would be impossible and HUD knows that.” Sometimes lenders sell the loan right away and know their gains quickly. But, sometimes lenders hold loans for one or two months or even a year before selling them servicing-released or servicing-retained and would not be able to calculate their secondary market income upfront.

“Most would agree that HUD’s proposed GFE revision is very negative for brokers,” said Paul Mondor, a Washington attorney. “It aggravates unequal treatment. But, the big issue is that brokers do not want their fee, the YSP, locked in up front as HUD proposes.”

Attorneys pointed out that brokers would lose the concept of “best execution” under the HUD proposal, the ability to continue to shop the loan after the GFE is presented to borrowers to get even a lower price and make a larger spread.

Marshall Taylor was the editor-in-chief for Real Estate Finance Today. In addition to more than twenty years in journalism, his background includes serving as a legislative assistant for U.S. Representative Jim Jeffries.