New HUD RESPA Policy on Payments

by Mary Beth Guard, BOL Guru

In connection with a loan covered by the Real Estate Settlement Procedures Act (RESPA), what can you pay and to whom? A new Statement of Policy 2001-1 issued by HUD attempts to answer that question, at least so far as payments to mortgage brokers are concerned.

Here are the highlights of the new policy statement:

Whether a yield spread premium is legal or not must be determined by looking at the facts of the individual case or >
HUD reiterates that the following may be violations of Section 8(b) of RESPA and HUD's implementing regulations. [Section 8(b) prohibits anyone from giving or accepting "any portion, split, or percentage of any charge made or received for the rending of a real estate settlement service?other than for services actually performed."]:

Where two or more persons split a fee for settlement services and any portion of the fee is unearned;
Where one settlement service provider marks up the costs of the services performed or goods provided by another settlement service provider without providing additional actual, necessary, and distinct services, goods, or facilities to justify the additional charge; or
Where a settlement service provider charges the consumer a fee when no work, nominal work, or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed.

The policy statement covers only payments to mortgage brokers in table funded and intermediary broker transactions. Lender payments to mortgage brokers where mortgage brokers initially fund the loan and then sell the loan after settlement are outside the coverage because they are exempt from RESPA under the secondary market exception.

HUD's view remains that yield spread premiums are legal if the broker actually performs services for the homebuyer, and if the total compensation the broker receives is reasonably related to the total value of the services the broker performs.

Excessive and unreasonable fees, however, are illegal under RESPA because they are unreasonable and not a payment for a bona fide service, in HUD's opinion. HUD's policy statement makes clear that it is illegal for a lender to mark up a charge when it is making a payment to another settlement service provider, unless it provides value to the homebuyer in the process, or when a lender splits an unearned fee with another settlement service provider, or when no work is done for the fee.

To determine legality, HUD will:

Look at each transaction individually, including examining all the goods or facilities provided or services performed by the broker in the transaction, whether the goods, facilities or services are paid for by the borrower, the lender, or partly by both.
Determine whether compensable loan origination services were performed and compensation was received which was reasonable. Policy Statement 1999-1 can still be looked to for a list of compensable origination services. HUD says that while the list is not exhaustive, it is still a generally accurate description of settlement services.
Consider the total compensation paid to the mortgage broker, including fees paid by a borrower and any yield spread premium paid by a lender, rather than just looking at the yield spread premium alone. The total compensation paid to the broker must be reasonably related to the total value of goods or facilities provided or services performed by the broker. Among the factors HUD will take into consideration in determining the level of services a mortgage broker provides are:

The level of difficulty involved in qualifying applicants for particular loan programs;
Fees paid in relation to price structures and practices in similar transactions and in similar markets;
Various levels of services the mortgage broker may be required to perform under different servicing or processing arrangements with wholesale lenders;
A comparison of total compensation for loans of similar size and similar characteristics within similar geographic markets.

HUD believes disclosures are key to borrowers choosing the best loan for themselves and it asserts the current disclosures framework is inadequate. The Good Faith Estimate is not required to be given until after the consumer has applied for the loan and may have paid a significant fee. The HUD-1 Settlement statement is only given at closing. The policy statement clarifies the importance of disclosure, describes best practices for disclosures, indicates HUD intends to promulgate a rule on the subject, and asks the industry to voluntarily utilize additional disclosures in the interim.

Full disclosure would include:

a description of the specific services to be performed by the broker;
a statement of whether the broker is acting as an agent for the borrower; and
the amount of the total compensation to the broker, including any yield spread premium paid by a lender.

HUD also believes the broker should explain the various loan options. The borrower should be informed that he may pay higher upfront costs for a mortgage with a lower interest rate, or conversely pay a higher interest rate in return for lower upfront costs. In the latter case, the broker may be receiving a yield spread premium. The disclosure should identify the specific trade-off between the amount of the increase in the borrower's monthly payment (and also the increase in the interest rate) and the amount by which up front costs are reduced. Ideally, HUD would like to see lenders not only disclose this information early in the transaction, but also obtain written acknowledgment from the borrower that he has received the information. By furnishing this disclosure early on, the prospective borrower is in a better position to comparison shop for his loan.

Currently, yield spread premiums are required to be shown on the "800" series part of the HUD-1 form as "Items Payable in Connection with Loan." It is suggested that since this does not disclose the purpose of the yield spread premium, the premium should be reported as a credit to the borrower in the "200" series, among the "Amounts Paid by or in Behalf of Borrowers" to enable the borrower to see that the yield spread premium is reducing closing costs and to see the extent of the reduction.

Even in transactions where no mortgage broker is involved, HUD believes that similar information on the trade-off between lower up front costs and higher interest rates and monthly payments should be disclosed to borrowers.

HUD's new policy statement also deals with the subject of unearned fees. It states that a settlement service provider may not levy an additional charge upon a borrower for another settlement service provider's services without providing additional services that are bona fide and justify the increased charge.

A settlement service provider cannot add a mark-up to the cost of another provider's services without providing additional settlement services that are actual, necessary and distinct services to justify the charge.
A settlement service provider cannot serve in two capacities and be paid twice for the same service.
A service provider cannot charge a fee that exceeds the reasonable value of goods, services, or facilities provided.
The prohibition against unearned fees, in HUD's view, is not limited to cases where the fee is split.

First published on BankersOnline.com 4/8/02

Originally appeared in the Oklahoma Bankers Association Compliance Informer.