Industry in talks with HUD to prevent disclosure requirements for secondary market profits
By SAM GARCIA
12/6/2001

In the 1990's, hundreds of class-action lawsuits resulted from the lack of a clear, definitive HUD pronouncement about yield spread premiums (YSP's) paid to mortgage brokers. As a result, HUD issued a statement that appeared to resolve the legal uncertainties and end most of the class action challenges in a way that was favorable to the industry. The statement included a two-part test that required the mortgage broker to furnish valuable goods or services or perform actual services and required total fees to be reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.

However, in June 2001, the Eleventh Circuit Court of Appeals upheld class certification in Culpepper vs. Irwin Mortgage Corp. Howard Glaser, who recently held the position of Senior Vice President for Government Affairs at the Mortgage Bankers Association of America (MBA), said "at that point, the Eleventh Circuit was, and I believe is, the highest court to address the yield spread premium issue." The court put HUD's statement aside because it believed HUD's statement was ambiguous, and formed its own standard of liability.

This decision posed a catastrophic threat to the mortgage industry. In emergency meetings held between industry advocates and HUD's top brass, the two parties spent several months going back and forth. The result of those meetings was a statement of policy issued by HUD on October 15.

The policy statement had three pieces:

1. Clarification and elimination of ambiguity in the restoration of legal certainty.
2. Disclosure
3. Section 8B of RESPA involving payments for settlement services and the relationship of the value of those settlement services to the price

Clarification and Elimination of Ambiguity
HUD clarified its policy by restating that excessive and unreasonable fees are illegal under RESPA because they are unreasonable and not a payment for a bona fide service. HUD indicated that its previous position was that consumer payments are not legal if they are overcharges, or if no service is provided. In addition, it unambiguously declares that the Culpepper case was wrongly decided in HUD's view.

Glaser said that there has been at least one district court that has reversed its own position and defer to the HUD policy statement, even though they disagreed with the policy statement.

Michael Agoglia -- a partner with Morrison & Foerster and an expert on YSP's and class actions -- said that in its statement, HUD explained what it envisions as the lawful, legitimate use of yield spread premiums. "And very simply it is contained in the first four paragraphs of the discussion of yield spread premiums," said Agoglia. "That yield spread premiums are a perfectly legitimate mechanism for borrowers to finance through a higher interest rate some of the up front closing costs they would otherwise have to pay out of pocket or through principal."

Agoglia added, "HUD has explained in this new policy statement that it's illegitimate to base a liability finding on the fact that the yield spread premiums are published on rate sheets and derived from a higher interest rate."

Disclosure
Agoglia said that HUD admonishes lenders to improve the quality of their disclosures. HUD also wants it made clear to borrowers that YSP's are one of their options.

Rod Alba, who is the Director of Regulatory Compliance for MBA, said that HUD is pushing for -- but not requiring -- new disclosures that are separate and apart from current RESPA disclosure requirements. "In fact, HUD hints to the fact that appropriate disclosures of yield spread premiums and other payments will go a long way in establishing that a fee is appropriate and reasonable under the Section 8 analysis," Mr. Alba said.

However, Mr. Alba noted that the language in the statement of policy describing the new disclosure is not precise. "HUD merely says that brokers should give this new disclosure early in the transaction," the Compliance Director said. "It is my guess -- and only my guess -- that HUD may be aiming at a disclosure that comes at first contact between the broker and the consumer."

Alba said that HUD didn't provide a model disclosure but considers a disclosure to be adequate and meaningful if it includes the following six items:

1. The services performed by the mortgage broker.
2. The amount of the broker's total compensation -- including YSP's -- from all sources for performing those services.
3. State whether or not the broker has an agency or other fiduciary relationship with the borrower.
4. Explanation by all retail lenders of tradeoff between higher up front costs in return for lower interest rates, or higher interest rates presumably through a yield spread premium mechanism in return for lower up front costs.
5. The specific amounts in terms of monthly payments, costs and rates that are involved in this tradeoff.
6. Consumer's written acknowledgement.

HUD is also recomending that YSP's should be shown on the HUD-1 Settlement Statement as "lender credits."

Alba speculates that HUD is also asking that lenders disclose estimated secondary market profits, which are exempt from disclosure requiresments under RESPA. The mortgage industry will be working with HUD on this wide-reaching issue.

Section 8B of RESPA
In HUD's statement of policy, the following situations may now violate Section 8B of RESPA:

1. Splitting unearned portions of settlement services fees between two or more persons.
2. Marking up fees provided by a third party settlement service provider.
3. Settlement service provider charges the consumer a fee where no nominal or duplicative services are done, or the fee is in excess of the reasonable value of the goods or facilities provided or the services actually performed.

Alba says that the courts have consistently found that Section 8B of RESPA cannot be violated unless there is an actual splitting of fees. HUD disagrees and now officially says that all that is needed is a markup of a fee or the collection of a fee for no services rendered, regardless who paid it or whether or not it was actually split so long as the person collected an unearned fee to violate Section 8B of the statute.

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