HUD STATEMENT OF POLICY 1999-1
REGARDING LENDER PAYMENTS TO MORTGAGE BROKERS
HUD has finally issued its policy regarding lender payments to mortgage brokers. The Policy was published in the Federal Register on March 1, 1999 and was effective on that date. The Policy was issued as a result of the directive of Congress in connection with the 1999 HUD Appropriations Act. It applies to transactions subject to RESPA; accordingly, payments to mortgage brokers in table-funded and intermediary broker transactions are covered, but lender payments to brokers who fund the loans themselves (using, for example, their own warehouse line) and then sell the loan after settlement are outside the coverage of the Policy. The basic principles of the Policy are as follows:
- Lender payments (i.e., yield spread premiums or any other class of named payments) to mortgage brokers are not illegal per se.
- In determining whether such payments are permissible under Section 8 of RESPA, two basic questions must be asked: (1) Whether goods and facilities were actually furnished or services were actually performed for the compensation paid, and (2) Whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.
- In applying these tests, total compensation (direct and indirect) must be considered.
In determining whether compensable services are being performed, HUD will look at the types of services listed in its 1995 IBAA letters. However, the analysis of origination services in the IBAA letters may not be sufficient for more costly mortgage broker transactions where more comprehensive services are provided. In addition to services, mortgage brokers may furnish "goods" (such as appraisals, credit reports and other documents) or "facilities" (such as a reasonable portion of a broker's retail or store- front operation). However, the loan itself cannot be regarded as a "good" under this analysis. Payments must be commensurate with the amount normally charged for similar services, goods or facilities. In order to make this determination, consideration is to be given to fees paid in relation to price structures and practices in similar transactions and in similar markets.
While there is no requirement under existing federal laws that the consumer is to be fully informed of the broker services and compensation prior to the Good Faith Estimate, HUD believes that the broker should provide the consumer with information about the broker's services and compensation, and agreement by the consumer to the arrangement should occur as early as possible in the process. Indeed, HUD believes that a broker and lender can improve their ability to demonstrate the "reasonableness of their fees" by giving such disclosures.
Please call us if you would like to discuss the Policy and its consequences in greater detail.
FFIEC FAIR LENDING EXAMINATION PROCEDURES
The Federal Financial Institutions Examination Counsel ("FFIEC"), the umbrella group of all bank regulatory agencies, published in January 1999 new guidelines for determining fair lending compliance. FFIEC stated that the courts have recognized three methods of proof of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act:
- Overt evidence of disparate treatment
- Comparative evidence of disparate treatment
- Evidence of disparate impact
With respect to disparate treatment, FFIEC states that it "may more likely occur in the treatment of applicants who are neither clearly well qualified nor clearly unqualified." With respect to disparate impact, FFIEC indicates that when a lender's policy or practice has a disparate impact, the next step is to determine whether the policy or practice is justified by "business necessity". However, even if a policy or practice that has a disparate impact on a prohibited basis can be justified by business necessity, it still may be found to be in violation if an alternative policy or practice could serve the same purpose with less discriminatory effect. In addition to setting forth these basic principles, the FFIEC Examination Procedures list various indicators an examiner should look for in determining fair lending compliance:
- Overt discrimination;
- Disparate treatment in underwriting;
- Disparate treatment in pricing;
- Disparate treatment by steering;
- Discriminatory redlining; and
- Disparate treatment in marketing of residential products.
Whether or not your institution is regulated by one of the FFIEC agencies, the Examination Procedures are a good source of guidelines to consult in ensuring fair lending compliance. There are many specific indicators for each of these topics identified in the Examination Procedures. Please let us know if you would like additional information.