[Federal Register Volume 60, Number 177 (Wednesday, September 13, 1995)]
[Proposed Rules]
[Pages 47650-47656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22691]
[[Page 47649]]
_______________________________________________________________________
Part III
Department of Housing and Urban Development
_______________________________________________________________________
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner
_______________________________________________________________________
24 CFR Part 3500
Real Estate Settlement Procedures Act (RESPA): Disclosure of Fees Paid
to Mortgage Brokers (Retail Lenders), and Notice of Consideration of
Negotiated Rulemaking; Proposed Rule
Federal Register / Vol. 60, No. 177 / Wednesday, September 13, 1995 /
Proposed Rules
[[Page 47650]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner
24 CFR Part 3500
[Docket No. FR 3780-P-01]
RIN 2502-AG40
Real Estate Settlement Procedures Act (RESPA): Disclosure of Fees
Paid to Mortgage Brokers (Retail Lenders), and Notice of Consideration
of Negotiated Rulemaking
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Proposed rule and notice of consideration of negotiated
rulemaking process.
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SUMMARY: The Department has developed a proposed rule presenting
alternative approaches to the disclosure of fees to retail lenders and
other matters relating to such fees that are addressed in HUD's current
regulations implementing the Real Estate Settlement Procedures Act
(RESPA). Under this proposed rule, the Department specifically seeks
comments on whether the disclosure of indirect fees paid to mortgage
brokers is useful to the consumer and should continue to be required.
Disclosure of direct charges imposed upon the borrower or seller is
clearly required under Section 4 of RESPA and is not the subject of
this proposed rule.
The Department also has commenced the convening process to
determine whether to establish a committee for negotiated rulemaking on
this proposed rule. If negotiated rulemaking appears desirable and
feasible, then the Department expects to undertake the establishment of
such a committee by publication of a separate notice in the Federal
Register. If a negotiated rulemaking committee is formed, the public
comments concerning the substance of this proposed rule will be given
to the committee for consideration in its deliberations. If it is
determined that a committee is not appropriate, the comments submitted
on this proposed rule will be used by the Department in promulgating a
final rule.
DATES: Comment due date: November 13, 1995.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule, the feasibility of forming a negotiated rulemaking
committee, and suggestions for committee participation to the Rules
Docket Clerk, Office of General Counsel, Room 10276, Department of
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC
20410-0500. Communications should refer to the above docket number and
title. Facsimile (FAX) comments are not acceptable. A copy of each
communication submitted will be available for public inspection and
copying between 7:30 a.m. and 5:30 p.m. weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, RESPA
Enforcement, Room 5241, Department of Housing and Urban Development,
Washington, DC 20410; telephone 202-708-4560; or (for legal questions)
Grant E. Mitchell, Senior Attorney for RESPA, Room 10252, Department of
Housing and Urban Development, Washington, DC 20410; telephone 202-708-
1552 (these are not toll free numbers). Hearing or speech-impaired
individuals may call 1-800-877-8339 (Federal Information Relay Service
TDD, which is a toll-free number).
SUPPLEMENTARY INFORMATION: The current RESPA regulations make clear
that ``secondary market transactions'' are not covered by most
provisions of RESPA: ``a bona fide transfer of a loan obligation in the
secondary market is not covered by RESPA and this part, except as set
forth in section 6 of RESPA and Sec. 3500.21 [mortgage servicing
transfers].'' The current rule details certain tests for what does or
does not constitute a secondary market transaction. The Department
seeks comments on its classifications of mortgage loan transactions
under the current rule as ``primary funding'' or ``secondary market''
transactions and, in particular, on whether the Department has drawn
the line in the appropriate place between a primary funding and a
secondary market transaction.
The Department also seeks comments on aspects of its current
regulations that provide, inter alia, that all fees paid to mortgage
brokers, either directly or indirectly, must be disclosed on the Good
Faith Estimate and the HUD-1 or HUD-1A, which are furnished to
borrowers/consumers. Specifically, the Department seeks comments on its
determination that the disclosure requirement for ``all charges imposed
on the borrower'' includes fees paid to the mortgage broker by the
lender, because all charges are ultimately borne by the borrower.
Finally, the Department, in this proposed rule, also requests comments
regarding a related issue: whether certain compensation by lenders to
mortgage brokers normally paid after settlement, based on the volume of
loans produced, should be permitted and disclosed under RESPA.
I. Certain Definitions in Proposed Rule
In this proposed rule, mortgage brokers 1 and certain other
mortgage originators are frequently referred to as ``retail lenders.''
Entities that purchase mortgage loans are frequently referred to as
``wholesale lenders.'' In any event, the description of the lender is
not dispositive of whether the transaction is covered by the rule. The
proposed rule would apply to a transaction based on the characteristics
of that transaction, rather than on whether the lender generally
functions in a retail or a wholesale capacity.
\1\ The historical discussion in this proposed rule uses the
term ``mortgage broker'' because this is the terminology that the
Department used in addressing the issue in both the informal opinion
and regulatory context. Section 3500.4(d) of the current RESPA rule
withdrew all previous informal legal opinions, in particular a
letter of August 14, 1992, issued by a former General Counsel of
HUD, which dealt extensively with the disclosure of mortgage broker
fees and the manner in which such fees should be disclosed on the
HUD-1. This preamble uses the term ``retail lender'' whenver
feasible in discussing the proposed rule and when the discussion
does not clearly require the use of the term ``mortgage broker.''
II. RESPA Coverage
A. Background
The Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601
et seq.) (RESPA) was enacted for several purposes, ``including insuring
that a consumer engaged in a real estate settlement is afforded
effective information about the transaction in a timely manner.'' In
addition, the Congress sought to address specific abusive settlement
practices that had developed in certain areas of the country. In this
proposed rule, HUD is seeking public input on specific disclosure-
related issues, including where the lines should be drawn to determine
whether RESPA applies.
Since 1974 the mortgage lending industry has experienced a rapid
evolution. This industry has experienced major technological advances--
new and different kinds of business entities have entered the field,
and new business relationships have emerged among the various entities
that serve the consumer in a single lending transaction. Much of the
change that has occurred is attributable to the growth of the secondary
market during the 1980s.
Prior to the 1980's, a mortgage loan transaction was relatively
easy to understand. A lender (e.g., a savings and loan, mortgage bank,
or commercial bank) typically processed a loan from
[[Page 47651]]
start to finish. The loan application was processed, evaluated, and
underwritten by the lender's own employees. The loan was funded by and
closed in the lender's name. The loan was usually held in the lender's
portfolio of loans, and any activities regarding the loan (receiving
and crediting the payments, paying out monies from an escrow account,
etc.--sometimes called ``servicing'') were handled by that lender.
Sometimes the loan was sold to another entity, in a ``secondary
market'' transaction that was a precursor of today's more sophisticated
secondary market transactions.
By the end of the 1970s and into the early 1980s, two Government-
sponsored enterprises (Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)) had
developed into major purchasers of mortgages from original lenders. By
the early 1980s, these secondary market entities not only bought
mortgage loans, but repackaged many of these loans and sold them as
mortgage-backed securities and, with the liquidity created, were able
to be even greater purchasers of lenders' mortgage loans. By 1994,
Fannie Mae and Freddie Mac were purchasing or otherwise dealing in more
than 70 percent of all the conventional 1- to 4-family residential
mortgage loans originated in the United States.
Today, the retail lender that works with the consumer to process
and close a mortgage loan often is not the entity that will hold or
service the loan. Rather, the retail lender serves as an intermediary
between the consumer and the entity purchasing or servicing the loan
(or ``wholesale lender''). Many loans are purchased by, or servicing is
transferred to, a wholesale lender at, or shortly after, closing. When
a retail lender serves as an intermediary, it may perform services for
which it is compensated in processing the loan. Compensation paid to a
retail lender therefore may be ``direct'' and ``indirect.'' Direct
payments are fees paid directly by the consumer and must be disclosed
under Section 4 of RESPA; indirect payments are fees paid by the
wholesale lender to the retail lender. The issue arises over whether
the amount and nature of indirect compensation should be disclosed to
the consumer. HUD has been presented with arguments that the current
RESPA rule, which requires disclosure of all indirect payments to
mortgage brokers, focuses too narrowly on this particular class of
retail lenders or intermediaries. These arguments suggest that the
underlying issues for discussion should be how RESPA's fee disclosure
requirements should apply to compensation of mortgage brokers, mortgage
bankers, and other financial institutions that originate mortgages
(retail lenders) by entities that purchase their mortgages (wholesale
lenders).
B. Legal Analysis Under the Current Regulation
Section 4(a) of RESPA (12 U.S.C. 2603(a)) requires the Secretary to
create a uniform settlement statement that ``shall conspicuously and
clearly itemize all charges imposed on the borrower * * * and the
seller in connection with the settlement.'' The stated purposes of the
statute include the provision of ``greater and more timely information
as to the nature and costs of the settlement process'' by ``more
effective advance disclosure to homebuyers and sellers of settlement
costs * * *'' (12 U.S.C. 2601). Section 5(c) (12 U.S.C. 2604(c)) of
RESPA requires the provision of a ``good faith estimate of the amount
or range of charges for specific settlement services the borrower is
likely to incur in connection with the settlement. * * *''
Under HUD's current rules, the disclosure of all fees paid to
retail lenders, including all compensation from wholesale lenders, is
required when the retail lender is being compensated as part of the
settlement transaction. This position is set out, inter alia, at 24 CFR
3500.5(b)(7); in the Instructions for filling out the HUD-1 and HUD-1A
in Appendix A; and in Illustrations of Requirements of RESPA, Fact
Situations 5 and 12 in Appendix B. This same disclosure requirement has
not been applied to subsequent purchases of loans by wholesale lenders,
on the theory that Congress only intended to cover costs related to the
initial settlement transactions. The Department's current regulations,
therefore, treat compensation to the retail lender under three
settlement situations somewhat differently, depending upon how the
loans are funded at settlement.
(1) Loan Closing and Subsequent Assignment of the Loan. This is a
transaction in which a retail lender processes the loan from start to
finish, funds the loan, and closes the loan in its own name. The
current RESPA regulation requires that such retail lenders disclose the
fees paid by the consumer. At a later point in time, the retail lender
may sell the loan to a wholesale lender. The Department has not
required that the terms of this subsequent secondary market
transaction, including compensation paid to the retail lender by a
wholesale lender, be disclosed to the consumer.
(2) Loan Closing in the Wholesale Lender's Name Using the Wholesale
Lender's Funds. For this arrangement, the retail lender originates the
loan, but is functioning solely in the capacity of an intermediary. The
loan funds are provided by the wholesale lender and the loan is closed
in the wholesale lender's name. The wholesale lender typically sets the
underwriting criteria and makes the underwriting decision. In this
instance, the current RESPA regulation applies to the entire fee
arrangement between the retail lender and the wholesale lender. The
Department regards the retail lender as being compensated as part of
the settlement transaction. Indirect, as well as direct, payments to
the retail lender must be disclosed under the current RESPA
regulations.
(3) Table-funding. For this arrangement, the loan is processed by
the retail lender and is closed in the name of the retail lender. There
is, however, at or about the time of settlement, a simultaneous advance
of loan funds to the retail lender by the wholesale lender and an
assignment of the loan and servicing rights to the wholesale lender.
Table-funding is therefore somewhat a hybrid of the two arrangements
described above. As in situation (1), where the Department requires
disclosure of the compensation at settlement, the loan is closed in the
name of the retail lender. There is a subsequent assignment of the loan
to the wholesaler. Thus, an argument could be made that the assignment
constitutes a secondary market transaction, for which the terms (i.e.,
concerning the retail lender's indirect compensation) are not required
to be disclosed under the RESPA regulations. On the other hand, because
the mortgage broker assigns the loan simultaneously with closing, it
may be asserted that the mortgage broker acts only as an intermediary,
as in situation (2).
HUD has consistently determined, in opinions of the General Counsel
going back to 1986 and in the final RESPA rule published on November 2,
1992 (57 FR 49600, and restated on February 10, 1994 (59 FR 6506)),
that compensation received by a mortgage broker in a table-funded
transaction is subject to disclosure. This interpretation treats
mortgage brokers in table-funded transactions as settlement service
providers ancillary to the loan, akin to title agents, attorneys,
appraisers, etc., whose fees are subject to disclosure. This
interpretation does not view a mortgage broker as the functional
equivalent of a mortgage lender. Unlike a mortgage lender, the mortgage
broker in a table-funded transaction does not
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close the loan with its own funds. Conversely, a mortgage broker using
its own funds, or with a ``warehouse'' line of credit for which it is
liable, is not viewed as a mortgage broker, but rather as a mortgage
lender under the extant HUD interpretation. The salient criterion for
this conclusion is the source of funds. HUD's interpretation, embodied
in the current RESPA regulations, has given rise to some controversy,
as set forth in Section C of this preamble. In light of this
controversy, the Department has elected to revisit and invite public
comment on these issues. However, the Department wishes to stress to
all concerned parties, and particularly to Federal and State
regulators, that the Department's willingness to reexamine the issue
does not affect the provisions of the current rule as now effective,
unless and until modified. All affected parties should continue to make
full disclosure of all direct and indirect compensation, as required by
the current RESPA rule.
C. Criticism of Existing Policy
(1) HUD's Interpretation of the RESPA Statute is Incorrect.
Opponents argue that the Department's interpretation of RESPA's
disclosure requirements (``all charges imposed upon the borrower * *
*'') to include indirect charges and payments from the borrower funds
is too expansive and beyond the scope of the statute. They argue that
all charges imposed on the borrower are fully included in direct
charges. Indirect compensation need not be separately enumerated
because it is already reflected in those direct charges. For example,
the wholesale lender pays a retail lender fees from income received
from the interest rate, points and other direct fees. Separate
enumeration constitutes a redundancy, and combining direct and indirect
costs overstates the total cost of the loan. Moreover, since the
borrower is aware of the borrower's cost for the mortgage loan, no
useful purpose is served by disclosing indirect charges reflected in
points, interest rate, etc.
Second, opponents argue that a table-funded loan should be treated
as a secondary market transaction. They maintain that such a
transaction is the functional equivalent of a loan made by another type
of lender, e.g., a mortgage banker, who has an advance commitment to
sell the loan shortly after settlement.
(2) HUD's Interpretation of the Statute Treats One Class of
Participants Unfairly. First, mortgage brokers argue that an unlevel
playing field is created, because mortgage bankers need not disclose
the terms of a subsequent sale of the loan (although they do disclose
origination fees and points, as well as other direct costs); mortgage
brokers must effectively do so for table-funded transactions.
Second, by concluding that mortgage brokers engaged in table-funded
transactions are not subject to the secondary market exemption, the
Department has put an additional burden of scrutiny on these mortgage
broker fees by making them subject to requirements of Section 8 of
RESPA, which requires that all compensation be reasonably related to
goods or services provided. The same scrutiny does not apply to the
sales transactions of other originators that sell their loans to
wholesale lenders following settlement.
(3) HUD's Interpretation of the RESPA Statute is Poor Public
Policy. Opponents argue that retail lenders (particularly mortgage
brokers) play an important role in making financing more available to
``nontraditional'' borrowers. They argue that HUD's interpretation,
insofar as it places retail lenders at a competitive disadvantage, is
not consistent with public policy designed to expand access to mortgage
credit for such nontraditional borrowers.
Opponents also suggest that HUD's policy often requires retail
lenders to spend added time and resources explaining the nature of
indirect fees to a consumer. Occasionally, a consumer, or even an
employee of a retail lender, will attempt to negotiate for a share of
the fees paid to the retail lender.
D. Other Considerations and Concerns
(1) The fundamental premise underlying RESPA is that disclosure of
information empowers the consumer to shop for better services and lower
costs. All fees and charges, other than seller contributions, are
ultimately borne by the borrower, whether by direct payments, such as
points, or by indirect payments through a higher interest rate that the
borrower pays over time. However, the seller also has a fundamental
interest in this process, because the seller, particularly in difficult
markets, is asked to absorb an increasingly greater part of the
settlement costs. Knowledge of all fees, including those paid to a
retail lender, may allow consumers to negotiate reductions in overall
costs of the transaction.
(2) The Housing and Community Development Act of 1992 (Pub. L. 102-
550; 106 Stat. 3672, at 3874) extended RESPA to junior lien
transactions and confirmed the Department's position that refinancing
transactions were covered by RESPA. As of August 9, 1994, the same
principles of disclosure of indirect fees paid to mortgage brokers were
extended to junior lien transactions. Refinancing and junior lien
transactions are frequently advertised on a ``no point'' or ``no cost''
basis, which effectively means that all or much of the ancillary costs
and charges of making the loan are contained in the interest rate or in
a combination of the interest rate and the points. The consumer
typically has a somewhat lesser interest in points and mortgage broker
fees, in part because, unlike a purchase money transaction, points may
only be amortized and deducted for Federal and State tax purposes over
the life of the loan.
The high level of competitiveness through advertising and other
publicity in the first mortgage industry, aided by the borrowers'
interest in being able to make full IRS deductions, have helped assure
that many of the costs of making a mortgage loan have been highly
visible. However, while the Department has had extensive experience
with purchase money and other first mortgage 1- to 4-family residential
loans, because RESPA has only covered junior lien transactions since
August 9, 1994, the Department has no comparable range of experience
respecting junior lien transactions, which frequently are regulated and
limited under different Federal or State laws and are funded by
different institutions or branches of institutions. Therefore, the
Department welcomes policy or legal commentary regarding the
possibility of having one provision for first mortgage transactions and
a second provision for junior lien transactions, or whether the
Department should treat junior lien transactions made by retail lenders
in the same manner as first lien purchase money and refinancing
transactions.
(3) Under the statutory or judicial interpretations of the laws of
several States, mortgage brokers are treated as agents of the consumer
and are considered to have a fiduciary duty to disclose all fees that
the mortgage broker obtains from the transaction. In Virginia, a case
brought by the Virginia Poverty Law Center was settled when the major
mortgage company agreed to restitution of certain fees collected by
mortgage brokers, but without answering the fiduciary question. In
California, where the courts have adopted the agency theory, the
Department of Real Estate has implemented this requirement by creating
a combined good faith estimate and mortgage broker disclosure form,
thereby requiring all mortgage brokers (who close as many as 50 to 60
percent of all loans in the State) to disclose all direct, indirect, or
anticipated mortgage
[[Page 47653]]
broker compensation. Because RESPA defers to State laws that provide
more benefits to the consumer, any new interpretation by the Department
will arguably not affect State provisions that provide for such direct
and indirect mortgage broker fee disclosures. Also, while the
Department has been informed that several class action law suits have
been filed regarding the issue of payment of ``overages'' to mortgage
brokers, the Department is not a party to these suits and is unaware of
any effect an interpretation by the Department might have on the
actions.
E. Possible Results of This Rulemaking
As a result of this rulemaking, HUD could establish uniform
disclosure requirements for all retail lenders, either: (1) to require
the disclosure of all direct fees paid to retail lenders by borrowers
and to require disclosure of all indirect fees paid to retail lenders
by wholesale lenders; or (2) to require the disclosure of all direct
fees paid to retail lenders by borrowers only. In addition to, or
instead of, modifying the rules on disclosure of fees in loan
transactions, as a result of this rulemaking HUD may redefine what
constitutes a ``secondary market transaction''. As set forth above,
such transactions are exempt from RESPA, including, inter alia, its
disclosure requirements, its prohibitions against kickbacks and
referral fees, and its requirement that all compensation be reasonably
related to the goods or services provided. HUD could define a
``secondary market transaction'' as a loan transaction involving: (1)
the sale of a loan by a retail lender to a wholesale lender occurring
after settlement (the position in the current regulations); (2) the
sale of a loan by a retail lender at any time--before, contemporaneous
with, or after settlement; or (3) the sale of a loan on some other
date, such as after the first accrual date for the loan following
settlement; i.e., the date the first payment is due from the borrower
under the loan.
Combining the two options of requiring either disclosure of direct
and indirect fees, or disclosure of direct fees only, with the three
possibilities for defining the secondary market transaction results in
six alternative approaches to regulating settlement transactions under
RESPA. Each of these six alternatives would have a different effect on
each of the major types of loan transactions described above,
including: (1) Loan closing and subsequent assignment of the loan; (2)
loan closing in the wholesale lender's name using the wholesale
lender's funds; and (3) table-funding. None of these alternatives will
affect a fourth type of transaction--a portfolio transaction in which a
retail lender processes, funds, and closes a loan in its own name for
its own portfolio and the lender then holds the loan (if the loan is
sold at all, the sale occurs long after settlement). Each of these
alternatives or combinations of requirements is discussed below, along
with its effect on each type of loan transaction. The public is
specifically invited to comment on these six alternatives, as well as
other approaches.
Alternative 1: The regulations would require the disclosure of
direct and indirect fees at settlement, and a loan sale is classified
as a ``secondary market transaction'' only if it occurs after
settlement. This is the approach in the current RESPA rule. Under this
alternative, the direct fees for a portfolio lender at settlement must
be disclosed and the settlement transaction is subject to RESPA, there
are no indirect fees, and any subsequent loan sale by the lender when
indirect fees are paid is a secondary market transaction not subject to
RESPA. Likewise, the direct fees for a retail lender at settlement, in
other transactions involving a loan closing and subsequent assignment
of the loan, must be disclosed, but any loan sale after settlement is a
secondary market transaction not subject to RESPA (any indirect fees
need not be disclosed and RESPA's other restrictions do not apply). In
a table-funded transaction, the advance of loan funds to the borrower
and the sale of the loan by the retail lender to a wholesale lender are
contemporaneous with settlement. Accordingly, all direct and indirect
fees to the retail lender must be disclosed under RESPA and the entire
transaction--the making of the loan to the borrower and the loan sale--
are subject to RESPA. Similarly, in a settlement transaction in the
name of a wholesale lender--where there is no sale following
settlement--all direct and indirect fees to and from the retail lender
and the wholesale lender must be disclosed, and the entire transaction
is otherwise subject to RESPA.
Alternative 2: The regulations would require the disclosure of
direct and indirect fees at settlement, and any loan sale--before,
contemporaneous with, or after settlement--is classified as a
``secondary market transaction''. Under this alternative, although
disclosure of direct and indirect fees would be required for RESPA-
covered transactions, more loan sales would be treated as ``secondary
market transactions'' exempt from RESPA's coverage. As in Alternative
1, the direct fees to a portfolio lender at settlement must be
disclosed, but any subsequent loan sale would be a secondary market
transaction exempt from RESPA's disclosure and other requirements.
Also, as in Alternative 1, the direct fees for other transactions
involving a loan closing and subsequent assignment of the loan would
have to be disclosed, but a subsequent loan sale would be a secondary
market transaction exempt from RESPA. Unlike Alternative 1, the sale at
settlement of a table-funded loan would also become a secondary market
transaction exempt from RESPA's requirements and prohibitions. Indirect
fees would not have to be reported and would not be covered by RESPA.
Under a settlement transaction in the name of a wholesale lender,
however, all direct and indirect fees to and from the retail lender and
the wholesale lender would require disclosure, because there is no loan
sale or secondary market transaction involved.
Alternative 3: Regulations require the disclosure of direct and
indirect fees at settlement, and only loan sales following the first
accrual--the date the first payment is due from the borrower under the
loan--are ``secondary market transactions''. Under this alternative,
RESPA's disclosure and other requirements would cover more
transactions; only loan sales transactions that occur relatively long
after settlement would be regarded as secondary market transactions
exempt from RESPA's requirements. Under this alternative, loan sales by
a portfolio lender--coming, if at all, well after the first loan
payment--would be regarded as secondary market transactions. RESPA's
disclosure requirements and restrictions would apply to a loan closing
and subsequent assignment of the loan, unless the loan is sold after
the first accrual date (currently, in most transactions the loans are
sold much earlier). RESPA's prohibitions would apply to table-funded
transactions when the loan is sold at settlement and transactions when
a loan is closed in the name of a wholesale lender and there is no
subsequent loan sale.
Alternative 4: Regulations require the disclosure of only direct
(not indirect) fees at settlement, and a loan sale is classified as a
``secondary market transaction'' only if it occurs after settlement.
This alternative differs from the current rule in requiring the
disclosure only of direct fees from borrowers to retail lenders. Under
this alternative, because there is no requirement for the disclosure of
any indirect fees to retail lenders for loan sales, the classification
of such sales as secondary market transactions is only determinative of
whether RESPA's
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requirements and prohibitions (other than disclosure) apply to the
transaction. Under this alternative, direct fees to retail lenders must
be disclosed in portfolio transactions, other transactions involving a
loan closing and subsequent assignment of the loan, table-funding
transactions, and transactions in which a retail lender closes in the
name of a wholesale lender (including any direct fees to the wholesale
lender). Because retail lenders in portfolio transactions and other
transactions involving a loan closing and subsequent assignment of the
loan sell their loans after settlement, such sales would be subject to
the secondary market exemption and outside of RESPA. Because loan sales
in table-funded transactions occur at and not after settlement, under
this alternative, such sales transactions would not be secondary market
transactions and would be subject to RESPA (although indirect fees need
not be disclosed). Also, because a loan in the name of a wholesale
lender occurs at settlement and there is no subsequent sale, the retail
and wholesale lender's transaction would be subject to RESPA's
prohibitions.
Alternative 5: Regulations require the disclosure of only direct
(not indirect) fees at settlement, and a loan sale, at any time, is
classified as a ``secondary market transaction''. Under this
alternative, direct fees to retail lenders must be disclosed in
portfolio transactions, other transactions involving a loan closing and
subsequent assignment of the loan, and table-funding transactions, as
well as transactions in which retail lenders close in the name of a
wholesale lender. Any loan sales (following settlement) by portfolio
lenders, or under another transaction involving a loan closing and
subsequent assignment of the loan, would be secondary market
transactions outside of RESPA's coverage. Under this alternative, a
loan sale (at settlement) in a table-funded transaction would also be a
secondary market transaction. However, settlement in the name of the
wholesale lender not involving a sale, would not be subject to the
exemption--RESPA would apply to the entire transaction although
indirect fees need not be disclosed.
Alternative 6: Regulations require the disclosure of only direct
(not indirect) fees at settlement, and a loan sale is classified as a
``secondary market transaction'' only if it occurs after the first
accrual date. Under this alternative, direct fees to a retail lender
must be disclosed in a portfolio transaction; a transaction involving a
loan closing and subsequent assignment of the loan; a table-funding
transaction; and a transaction in which a lender closes in the name of
another lender. Although indirect fees need not be disclosed, RESPA's
other requirements would cover more transactions, because fewer
transactions would be regarded as secondary market transactions. The
exception is a loan sale by a portfolio lender, which, when it occurs,
would follow the first accrual date and would, therefore, still be
regarded as a secondary market transaction. Loan sales transactions by
retail lenders in other transactions involving a loan closing and
subsequent assignment of the loan and in table-funded transactions
would not be regarded as secondary market transactions and would be
subject to RESPA. Settlement in the name of the wholesale lender,
because it does not involve a sale, would not be subject to the
exemption and RESPA's provisions would also apply to the entire
transaction.
HUD seeks comments from the public on which, if any, of these
alternative approaches should result from this rulemaking, or whether
other approaches that would be permissible under RESPA would better
serve the interests of the public and the intent of the statute.
II. Volume-Based Compensation
Volume-based compensation is a payment of money or any other thing
of value, as defined by 24 CFR 3500.14(d), that a wholesale lender
provides to a retail lender and is based on a number or dollar value of
loans that the retail lender sells to the wholesale lender in a fixed
period of time.
Volume compensation also encompasses volume discounts, in which a
retail lender that is to provide a stated volume of loans is given a
lower ``start-rate'' than the wholesale lender's advertised rate and
the retail lender keeps a differential between the start rate and the
advertised rate as part of its compensation at settlement.
The Department believes that volume-based compensation is a fairly
widespread practice, particularly in California. As noted above,
California regulatory requirements provide for disclosure to borrowers
of this compensation (the amount, if known, or its potential for
receipt by the mortgage broker). HUD has never enunciated a formal
policy on whether volume-based compensation is permissible under RESPA.
If the Department concludes that it is allowable, the issue also arises
as to whether and how the payment should be disclosed on the Good Faith
Estimate and the HUD-1 and HUD-1A.
A. Should Volume-Based Compensation be Permitted?
Critics argue that volume-based compensation may lead to loan-
steering. Arguably the consumer's interest (in seeing a range of loan
options) may be subordinated to the interest of the retail lender in
receiving greater compensation from a particular wholesale
lender.2 Also, as discussed earlier in this preamble, Section 8 of
RESPA prohibits payments in the absence of ``goods or facilities
furnished or for services actually performed.'' Therefore, awarding
additional compensation for loans closed above a threshold number,
where no added services are provided, could, standing alone, violate
RESPA.
\2\ Retail lenders who fail to present a full range of loan
options to all consumers may risk charges of discriminatory
treatment on a prohibited basis, which is unlawful under the Fair
Housing Act.
On the other hand, others argue that volume-based compensation may
be an appropriate payment for goods or services actually performed.
Wholesale lenders must exercise careful oversight over retail lenders,
because decisions by the retail lender can expose the wholesale lender
to default risk. For this reason, wholesale lenders typically perform
some underwriting review for each mortgage. There also must be a good
working relationship between the staffs of the retail and wholesale
lender to ensure that important matters, such as document transfer and
the handling of escrow funds, are accomplished smoothly and punctually.
Establishing this working relationship and oversight involves some
fixed costs to the wholesaler, which decrease on a per loan basis as
the volume of business increases. The wholesale lender's variable costs
may also decrease with increased volume, because the retail lender
becomes more familiar with the requirements of the wholesale lender and
the wholesale lender's staff is more familiar with the product and
practices of the retail lender. Declining per-unit costs may justify
volume compensation.
The consumer may benefit from volume-based compensation. In
competitive markets, price concessions from wholesale lenders to high-
volume retail lenders generally get passed along to the consumers. To
obtain the volume of business needed to obtain price concessions and to
benefit from volume-based compensation, the retail lender may pass
along part of the high-volume benefits to the consumer, through lower
points or other cost savings.
Critics argue that if the retail lender originates in its own name,
the consumer is generally unaware that the
[[Page 47655]]
retail lender has wholesale options available and may not even be
consciously aware of the retail lender's intention to sell the
mortgage. In this context, steering does not exist in the typical
sense, that is, advising the consumer to choose lender A over lender B
when lender B's prices are as good as, or better than, lender A's
prices. It is also conceivable that wholesale lender X may not offer a
loan product that wholesale lender Y offers, such as a 15-year
adjustable rate mortgage (ARM). The retail lender may influence the
consumer not to select the 15-year ARM so that the retail lender can
increase its business with lender X, which offers volume compensation.
However, most wholesale lenders offer a comparable range of products.
In addressing the policy issues of whether and how volume-based
compensation should be permitted and, if so, disclosed, a commenter may
offer legal arguments as to whether RESPA prohibits the practice.
B. Is Volume-Based Compensation Subject to Disclosure?
A retail lender required to make disclosure could argue that HUD
has created an ``uneven playing field'' between mortgage bankers and
other retail lenders, inasmuch as the issue of volume-based
compensation is not relevant for mortgage banker transactions. (See
Section II.C.(2) of this preamble.)
If HUD decides to allow this kind of compensation, practical
questions are raised about how to disclose this information--what
numbers should be disclosed? At the time of a given closing, a retail
lender may not know whether a volume-based payment will be received or
how much it will be. As noted above, the California standard Good Faith
Estimate and Mortgage Broker Fee Disclosure form requires the
disclosure of the compensation, if known, or an indication that a
mortgage broker will receive additional compensation.
III. Other Compensation
In addition to volume-based compensation, retail lenders also
receive compensation from wholesale lenders under a variety of names,
the most common of which are ``servicing release premiums'' and ``yield
spread premiums'' (which are cited by name in the current RESPA
regulation as compensation to be disclosed; 24 CFR part 3500, Appendix
A, Fact Situation 12.) Such compensation is also included in ``rate
differentials,'' ``indirect payments,'' or ``back-funded payments''
(occasionally called ``back-end points'') in Appendix A instructions
for filling out the HUD-1A. A ``yield spread premium'' or ``yield
spread differential'' or ``overage'' means any compensation paid to or
retained by a retail lender based upon the difference in the interest
rate provided in the sold loan and some other benchmark interest rate.
It compensates the retail lender for a loan priced at a rate higher
than the rate at which the wholesale lender would otherwise have been
willing to accept the loan. A ``servicing release premium'' is any
compensation paid to a retail lender for the release of rights to
service the loan.
The names of the fees (those cited in the previous paragraph may
vary) are not definitive or dispositive. The concerns of the Department
regarding such forms of compensation are similar to those expressed
regarding volume-based compensation; that is, do those fees constitute
kickbacks or fee-splitting for delivery of the loans. Commenters are
invited to address: (a) whether any such types of compensation should
be permissible under RESPA; and (b) what would be the effect of
requiring disclosure of such payments.
IV. Proposed Amendments to 24 CFR Part 3500
In this proposed rulemaking HUD is requesting comment on several
questions that may lead to new regulatory language in 24 CFR part 3500.
For example, several new definitions are proposed for inclusion in
Sec. 3500.2. In addition, Sec. 3500.14(g) would be revised to address
explicitly the applicability of RESPA to volume-based compensation, and
Appendix B, Fact Situation 12, could be modified. HUD may also need to
modify the HUD-1 and HUD-1A instructions regarding payments to mortgage
brokers. If new definitions are adopted, other definitions may need to
be modified for consistency. While the Department has set forth
illustrative changes in the definitions, it has not attempted to
provide alternative regulatory text for every possible amendment that
might result from this rulemaking. Instead commenters are invited to
comment on the questions raised in this preamble and provide input on
the direction they believe the Department should take on these matters.
If a determination is made that regulatory changes should be
developed through a negotiated rulemaking process, the Department
expects to publish another proposed rule at the conclusion of the
negotiation process and will provide the negotiating committee with the
comments submitted in response to today's proposed rule. If negotiated
rulemaking is not used, the Department will formulate its final rule
after reviewing the comments received in response to this proposed
rule.
V. Other Relevant Issues
(a) Recent Legislation. In 1994 Congress enacted the Riegle
Community Development and Regulatory Improvement Act of 1994 (Pub. L.
103-325, 108 Stat. 2160, September 23, 1994) (the Act), which includes,
as Subtitle B, the Homeownership and Equity Protection Act of 1994.
Subtitle B requires the Federal Reserve Board to require additional
levels of disclosure in certain circumstances, and requires for its
computations inclusion of all compensation paid to mortgage brokers,
including both direct and indirect payments, in order to determine if
the loan will be a ``high-rate mortgage.'' (See section 152(a)(4)(B) of
the Act.) If HUD ultimately determines that indirect fees need not be
disclosed in a final rule, the Federal Reserve Board (which relies on
information contained in HUD's Good Faith Estimate and the HUD-1 or
HUD-1A forms) might have to require its own cost disclosure form in
order to determine coverage. Accordingly, HUD plans to invite staff of
the Board to comment on the proposed rule. The public is also welcome
to address this matter.
(b) Impact of Regulation on State Laws. Whatever HUD determines in
final rulemaking, it is possible that a State may have more stringent
disclosure requirements than HUD. Under RESPA, State laws that provide
greater protection to the consumer would prevail and would not be
preempted by HUD requirements. Of course, a salient issue embraced
within this proposed rulemaking is whether more disclosure is, in fact,
beneficial to consumers. In addressing the alternative proposals in
this rulemaking, a basic question for commenters is whether disclosure
of the terms of a mortgage loan (e.g., interest rates and points) alone
is sufficient consumer information.
VI. Other Matters
Executive Order 12866
This proposed rule was reviewed by the Office of Management and
Budget under Executive Order 12866, Regulatory Planning and Review. Any
changes made to the proposed rule as a result of that review are
clearly identified in the docket file, which is available for public
inspection in the Office of the Rules Docket Clerk, Room
[[Page 47656]]
10276, 451 Seventh Street, SW, Washington, DC.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this proposed rule before publication and
by approving it certifies that this proposed rule does not have
significant economic impact on a substantial number of small entities.
There are no anticompetitive discriminatory aspects of this proposed
rule with regard to small entities, nor are there any unusual
procedures that would need to be complied with by small entities. The
requirements of the Real Estate Settlement Procedures Act must be
uniformly adhered to by all lenders and servicers.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations in 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969 (U.S.C. 4332). The finding is available for public inspection
during regular business hours in the Office of the General Counsel,
Rules Docket Clerk, room 10276, 451 Seventh Street, SW., Washington, DC
20410.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in this proposed rule will not have substantial direct
effects on States or their political subdivisions, or the relationship
between the Federal government and the States, or on the distribution
of power and responsibilities among the various levels of government.
As a result, the proposed rule is not subject to review under the
Order. Promulgation of this rule clarifies the coverage of the
applicable regulatory requirements.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this proposed rule does
not have potential for significant impact on family formation,
maintenance, and general well-being, and, thus, is not subject to
review under the order. No significant change in existing HUD policies
or programs will result from promulgation of this rule, as those
policies and programs relate to family concerns.
List of Subjects in 24 CFR Part 3500
Consumer protection, Condominiums, Housing, Mortgages, Mortgage
servicing, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, 24 CFR part 3500 is
proposed to be amended to address the regulatory questions raised in
the preamble and as follows:
PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT
1. The authority citation for Part 3500 continues to read as
follows:
Authority: 12 U.S.C. 2601 et seq.
2. Section 3500.2 is amended by adding in alphabetical order
definitions for ``Direct fee'', ``Indirect fee'', ``Retail lender'',
``Secondary market transaction'', ``Volume-based compensation'', and
``Wholesale lender'', to read as follows:
Sec. 3500.2 Definitions.
* * * * *
Direct fee means any payment made by a borrower to a lender or any
other settlement service provider or to a third party, to be
transmitted to a lender or any other settlement service provider, in
connection with a settlement of a federally related mortgage loan.
* * * * *
Indirect fee means any payment made by a wholesale lender to a
retail lender for services rendered in connection with a federally
related mortgage loan origination. [Indirect loan fees are not subject
to disclosure on the Good Faith Estimate or the HUD-1 or HUD-1A.]
* * * * *
Retail lender means a person who originates and sells a federally
related mortgage loan to a wholesale lender.
Secondary market transaction means a sale of a federally related
mortgage loan. A secondary market transaction [as defined by one of the
alternatives set out in the preamble of this proposed rule] [is/is not]
covered by RESPA and this part, except as set forth in Section 6 of
RESPA (12 U.S.C. 2605) and Sec. 3500.21.
* * * * *
Volume-based loan compensation means any added payment or
additional thing of value provided by a wholesale lender to a retail
lender to a retail lender based on the number or dollar value of loans
originated.
Wholesale lender means a person who purchases a mortgage loan from
a retail lender.
Dated: August 11, 1995.
Jeanne K. Engel,
General Deputy Assistant Secretary for Housing--Federal Housing
Commissioner
[FR Doc. 95-22691 Filed 9-12-95; 8:45 am]
BILLING CODE 4210-27-P
