Mortgage brokers sue over HUD rule on disclosure of yield spread premiums

Posted by: Peter Coy on December 23, 2008

Guest blog from BusinessWeek Banking and Finance Editor Mara Der Hovanesian:

The mortgage brokers and the government are at each other’s throats again. As soon as the Department of Housing and Urban Development issued rules on Nov. 17 about disclosing how brokers are compensated, the brokers’ main trade group cried foul and filed a lawsuit.

A copy of the mortgage brokers’ lawsuit can be found here, embedded in the National Association of Mortgage Brokers’ Dec. 19 press release.

The gist of the new ruling is disclosure: As part of a slew of mortgage reforms, HUD wants third-party brokers to reveal to homeowners just what their broker is getting paid for helping them with the loan. And the gist of the lawsuit is that brokers don’t want to operate under different rules from those for other lending officers that are employed directly by the bank. For a copy of the HUD rule look here.

This battle has been going on for a decade. Brokers claim that they do lots of heavy lifting for potential homeowners to get them into a home—especially those with few resources to pull together for down payments and closing costs. Brokers can help finance these costs through what the industry calls “yield spread premiums,” or commissions they earn that are paid by the ultimate lender or financer of the loan, either a traditional bank (or in the boom years, Wall Street). These sorts of commissions and deals are not struck with employees of the firms and so bank employees are not subject to HUD’s new disclosure rule.

In many of the interest-only and other wildly popular low-cost loans of the last housing boom, almost all of a mortgage broker’s commission compensation came from the YSP. But some officials and class-action lawyers think that the YSP is a violation of lending laws because it constitutes a kickback, which is illegal. Brokers say that the fees they get are permissible because they are earned for hard work.

The problem is that many of the low-cost loans that mortgage brokers helped to originate in the past few years are exactly the loans that are in the worst shape these days. NAMB president Marc Savitt argues that the new ruling hampers small business in America because it will be onerous for these independent agents to comply with the law.

The mortgage brokers and Savitt need to get with the program. Everybody under the sun associated with the mortgage lending business will be under far more scrutiny and regulation going forward, and for obvious good reason.

Reader Comments

eyedoc812

December 23, 2008 6:48 PM

The brokers had no "skin" in the game so their aim was to originate as many loans as possible and to hell the consequences! If there was any fairness to this debacle, the brokers would be made to disgorge the profits that they "earned" from their mortgages that went belly up. But instead, they are fighting to maintain the status quo and the cost of the cleanup is being borne by the taxpayer.

Myka1007

December 23, 2008 10:10 PM

Awwww....poor brokers. almost Everyone in this country is complaining about the high cost of UAW pay now the brokers salaries are going to be revealed and Boy are they going to be ashamed at how much they Overcharge for their services. Hahahaha get ready for hate comment guys...unless you win your lawsuit to hide and continue to rip people off.

Marc Savitt

December 24, 2008 12:14 PM

I'm disappointed that Peter Coy would comment on such an important issue without knowing all the facts. Let's set the record straight, mortgage brokers have been FULLY disclosing all their compensation since 1992-including YSP. Other originators, such as banks and lenders, who receive the exact same type of in-direct compensation, but call it by a different name, do not disclose their total compensation. With respect to YSP being legal, it's not just brokers making this claim. In 1999 and again in 2001, HUD stated this form of compensation was legal and provided a benefit to consumers. Both the FTC, who's primary function is consumer protection and the Fed, conducted consumer testing, with the results supporting the broker's position. That being, consumers are confused when only brokers disclose. Why would Peter Coy be opposed to all orginators, including banks and lenders from disclosing all costs associated with a real estate transaction? Brokers aren't trying to hide costs. Brokers are trying to level the playing field for consumers by having EVERYONE disclose everything! That's true consumer protection. Peter should take his own advice and "get with the program." In the future Peter, should you wish to learn more about these or other issues, please call me anytime.

Jeff Lazerson

December 29, 2008 10:08 AM

California mortgage brokers have been required to disclose all of our compensation since 1993. The transparency of disclosing yield spread premium has not caused us to lose business. My hunch is that California mortgage brokers have originated more loans over all of these years than any other state.

Barbara

February 5, 2009 12:13 AM

Well Said Marc! The issue is the unfair playing field between banks and mortgage brokers. Peter needs to check the facts.

Steve

March 26, 2009 6:54 PM

Does disclosure include an explanation to the client? Did you explain to the client the serious down sided effects from the interest-only and option arms? No. You said, " Based on your income this is the best plan available."

Did you explain why you were using stated income? No. You said, " Just bring me your tax returns and bank statements. Will do the rest."

Did you say,"I'm placing you in this type of loan because this lender will give me the highest kick back" No. You said, " These are the closing fees. There common."

YES. You disclosed everything on paper. But what you explain verbaly is a whole lot differ'nt. You knew the average person did'nt have the education or the time to learn all about your business. We placed our savings and our lives in your hands. WE TRUSTED YOU! And this mortgage crisis proves it.
All you had to do was say we don't qualify or it wont work. We made the mistake. Bank vaults do'nt need to be under surveilance. It's you!

Rich

August 11, 2009 7:17 PM

The problem with Steves statement is that the you probably like most people don't realize the difference between banker and broker. Most of the predatory lending was done by so called banks like Washington Mutual's and Coutrywides option ARM they actually had people thinking they were getting 1% interest rates and Ameriquest 2 year fixed rate 3 year prepayment penalty. To try to blame brokers for the economic meltdown is exactly what the big banks want you to do. Eliminating competition is going to reduce choices and raise prices and of course raise profits for the few big banks left. What should make you mad is the real culprits of the meltdown, the ones with all the money power are going to be more profitable than ever once the government is able to help them squeeze out all the competition. Blaming the brokers is what they want you to do to deflect blame from themselves.

Pamela

April 9, 2010 1:38 PM

Level the playing field is ludicrous! YSP was not originally intended to help line originators' pockets with a "kickback"; yes, that is what it is. For those of you who do not have a license, go to the Department of Real Estate to learn about the YSP. The YSP was and still is an option to assist the homeowners to finance what would normally be out-of-pocket costs thereby increasing what they pay in interest overall. Somewhere along the line, originators and banks saw a way to steal from their clients. Steal is right because it is designed to help the client, not the banker. I doubt if clients were told that the extra few thousand dollars they were pocketing was really intended to help them. And what do you call disclosure when folks don't understand that you are taking money you haven't earned. When you charge point(s) which are hefty enough for the consumer, you've made your commission; the rest is a bonus for duping your client.

Mike P

April 17, 2010 9:43 PM

Big banks and Congress have rigged the system so now banks make more and more money each day while the honest mortgage broker (yes sheeple, they DO exist alongside the 'honest' banker who sold the same crappy loans and made huge commissions during the boom at the expense of all of us). The major distinction here is now small-business mortgage brokers can't compete against the banks anymore. The loss is for the consumer who pays thousands to rich guys and thousands of mortgage brokers lose their businesses. Many have lost everything, collapsed marriages, suicide. Imagine you're a 20 industry veteran in the mortgage business... Where do you go??? There's always two sides here.

Post a comment

 

About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

BW Mall - Sponsored Links

Buy a link now!