New Fee Disclosures at Hand

Millions of American home buyers and refinancers who use mortgage brokers to obtain loans could be in line for important new federal consumer protections.

Lending and brokerage trade groups have signaled their willingness to divulge far more about their compensation and services to their customers.

In negotiations with the Bush administration, representatives of the groups have said that after years of resisting mandatory federal disclosures on fees and services as part of the standard mortgage application process, they now won’t oppose them.

Mortgage brokers have offered to provide all borrowers a uniform disclosure on brokers’ duties and services, to be handed out at application.

Mortgage lenders--banks and others who fund the loans originated by brokers--have offered to go further.

They support new, legally binding disclosures requiring brokers to commit to a specified maximum charge for their fees at application, plus explanations of where the fees come from, and the legal nature of their duties to the consumer.

An estimated 80,000-plus brokers nationwide originate 60% to 70% of all home mortgages.

Though their customers frequently believe they are lenders, brokers normally have no independent capital to make loans.

Instead, they assign or sell their loans to so-called “wholesale” lenders. They receive compensation from the lender, the borrower, or both.

Brokers’ fees are at the center of a major controversy within the mortgage industry.

Consumer advocates and trial attorneys charge that many brokers put their unsuspecting customers into mortgages carrying higher rates than their clients need to pay.

In exchange for delivering borrowers at inflated rates, these critics contend, wholesale lenders reward the brokers with extra fees, known as “yield-spread premiums.”

The fees sometimes run into the thousands of dollars.

Such payments represent illegal kickbacks, consumer advocates say.

The mortgage industry disagrees emphatically.

Lending groups defend the use of these fees, arguing that they violate no federal law and represent a portion of the compensation that brokers need to keep their businesses functioning.

The industry also points out that many types of transactions--from popular “zero-cost” refinancings to innovative low down payment mortgages for first-time buyers--employ lender premiums and slightly elevated interest rates.

An estimated 150 class-action suits are pending in federal courts around the country, pitting groups of borrowers against lenders who paid yield-spread fees to brokers.

The most prominent case, Culpepper vs. Irwin Mortgage Corp., is about to go to trial. The borrowers in the Culpepper case number about 30,000.

Their lawyers estimate that on average, the lender paid brokers $1,500 per borrower in exchange for inflated-rate loans.

If the court rules against the lender, it could owe $135 million to its customers and their lawyers.

If numerous decisions go against lenders, say legal experts, the home-loan industry could face multibillion-dollar judgments and settlements.

Faced with potential disaster, lenders have urged the Department of Housing and Urban Development to clarify its position on yield-spread premiums to guide federal courts.

In 1999, HUD issued a policy statement holding that the premiums are not illegal kickbacks, provided they are fully disclosed to the borrower and represent reasonable compensation for services rendered by the broker.

As part of a negotiated compromise with consumer advocates and HUD, lenders now say they want to beef up disclosures on broker fees. They also want to create a new, legally binding contract for use nationwide in most home-loan transactions.

Drafts of the proposed contract spell out brokers’ duties to the borrower, maximum fees and “points” to be paid to the broker by the borrower or the wholesale lender.

The form would have to be signed by the applicants and the broker, and would insulate the disclosed fees from legal challenge.

The contract, enforceable under federal and local laws, would effectively require brokers to spell out mortgage alternatives to their clients.

For example, a broker might explain that if the applicant wanted to minimize out-of-pocket fees at closing, he or she could pay an extra one-quarter of a percent on the note rate.

The broker would receive a fee from the lender--a yield-spread premium--in compensation for the higher rate.

Alternatively, applicants who want a low rate from the lender might be charged higher fees at closing, fully disclosed in advance in the contract.

The new approach, lenders believe, would eliminate misunderstandings about fees and rates that have led to the bumper crop of class-action suits.

Borrowers would be handed the fee and rate disclosures early in the process, and would sign them with the broker, but would be permitted to shop for better deals before committing to the mortgage.

HUD is likely to include some form of additional protections like these in its new policy statement on broker fees, expected to be issued shortly.

*

Distributed by the Washington Post Writers Group.