Disclosure of broker fees is likely soon

Nation's Housing

October 14, 2001|By KENNETH HARNEY

MILLIONS OF AMERICAN homebuyers and those refinancing who use mortgage brokers to obtain their 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.

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 finance 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 percent to 70 percent 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 the 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 allege.

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 brokers need to keep their businesses functioning. The industry also points out that many types of transactions - from popular "zero-cost" refinancing 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 pitting groups of borrowers against lenders who paid yield-spread fees to brokers.

The most prominent case, Culpepper v. Irwin Mortgage Corp., is about to go to trial. The affected 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 per se, provided they are fully disclosed to the borrower and represent reasonable compensation for the broker's services.

As part of a negotiated compromise with consumer advocates and HUD, lenders now say they want to beef up disclosures on broker fees and even 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. 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.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington D.C., 20071. Or e-mail him at kenharney@aol.com.

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