Home buyers nationwide can expect to get important new financial disclosures as the result of a controversial ruling by the federal government.
The ruling requires mortgage brokers to itemize all fees they receive in connection with the home loans they originate and close. Under current practices, billions of dollars of fees, "rate premiums" and other forms of compensation paid annually to brokers escape disclosure to consumers.
A standard loan settlement sheet, for instance, may indicate that zero "points" were paid by the borrower. A point equals 1% of the loan amount. In fact, however, $2,000 to $3,000 in fees may have been paid to the mortgage company originating the loan by the large investor who is the actual lender. The lender may or may not be identified, but the fees paid to the broker are not.
This lack of full disclosure, according to federal officials, limits borrowers' ability to evaluate loan quotes they receive from competing mortgage firms. It's also illegal, the officials say, and it has to stop.
The new full-disclosure policy was outlined in late August in a legal opinion from Frano Keating, general counsel of the federal Department of Housing and Urban Development (HUD). A subsequent letter Sept. 3 from Keating to federal banking regulators set a Jan. 1, 1993, date for full operation of the toughened disclosure standards. Until then, according to Keating, mortgage firms will be encouraged to adopt the new disclosure format, but regulators will not take action against them for failure to do so.
The primary targets of the new policy are an estimated 15,000 mortgage broker firms across the country. Mortgage brokers have played an increasingly large role in originating home loans, and now account for between 42% and 48% of all volume, according to the National Assn. of Mortgage Brokers.
Though many consumers pay scant attention to distinctions between mortgage bankers and mortgage brokers, there are important differences when it comes to disclosure of loan fees. Mortgage bankers generally use their own capital sources, such as bank lines of credit, to fund the mortgages they originate. They then sell their loans to large "secondary market" investors, like Fannie Mae (the Federal National Mortgage Assn.) and Freddie Mac (the Federal Home Loan Mortgage Corp.).
Mortgage brokers, by contrast, do not directly fund loans with their own capital. They either originate mortgages in the name of a specific investor or lender, or they use funds advanced by an investor for the express purpose of funding a particular home mortgage.
Mortgage brokers have become the grass-roots origination specialists in the home mortgage market, filling gaps left by cost-cutting banks, S&Ls; and mortgage bankers. Their ability to connect local borrowers with a wide variety of loan packages and rates offered by lenders nationwide has been the key to their rapid expansion since the 1980s.
But federal officials complain that brokers' compensation is often poorly understood by their own customers. When they originate a mortgage with a rate higher than the prevailing market, for example, they are paid "yield spread" premiums in cash by the investor purchasing the loan. Depending upon the size and rate of the loan, the premiums can easily run $1,000 to $2,000.
Brokers may also receive fees for delivering loans with the servicing or loan administration rights attached. Servicing rights are bought and sold in the marketplace, and can merit attractive fees.
Typically, according to Keating, the borrower receives no disclosure of these items from a broker, before or at settlement. Yet federal law requires written itemization of "all charges imposed upon the borrower" in home loan transactions. The disclosure comes initially in a standardized "good faith estimate" of costs provided by the mortgage company within three working days following application, and the "HUD-1" settlement sheet used in virtually all residential first mortgage closings.
The National Assn. of Mortgage Brokers, the principal industry group representing loan brokers, plans to challenge Keating's ruling by seeking a federal court injunction. Executive Director Michael J. Hoogendyk said the suit will ask that HUD be required to issue formal regulations on disclosures, allowing further congressional and general public scrutiny of the policy.
Hoogendyk said Keating's rule creates "an instantly unlevel playing field" for mortgage brokers in comparison with mortgage bankers. While brokers will now have to disclose every dollar of compensation they earn on a loan, he argued, mortgage bankers will not. Mortgage bankers often "receive the identical fees" as brokers for rate premiums and servicing rights when they sell loans to investors, according to Hoogendyk. Yet under Keating's rule, mortgage bankers are treated as part of the "secondary market"--exempt from full disclosure--while competing mortgage brokers have to bare all in public.
The upshot of this for home loan borrowers? Between now and Jan. 1, you should ask for voluntary full disclosure of all brokerage fees and compensation from whatever lender you're dealing with. After Jan. 1, you can bank on getting full disclosure under the new federal mandate.
Distributed by the Washington Post Writers Group .