The legality of indirect fees to mortgage brokers from lenders

[Moe Bedard]

Views on Mortgage Broker Compensation The legality of indirect fees to mortgage brokers from lenders has been the subject of much debate and recent litigation. Section 8(a) of RESPA prohibits compensation for the referral of settlement service business; section 8(b) prohibits unearned fees. Section 8(c)(2) of RESPA, however, provides that payment may be made for "goods or facilities actually furnished or for services actually performed."


Some have argued that any indirect fees paid by lenders to mortgage brokers are simply referral fees in violation of section 8(a) and 8(b) of RESPA. Others have argued that indirect fees violate section 8(a) and 8(b) and are not permitted under section 8(c)(2) except when they reflect the actual cost for the provision of such services, allowing margins for reasonable profit. Still others have argued that to the extent fees are reasonably related to the value of the goods, facilities, and services provided by mortgage brokers to lenders or borrowers, they are permitted under section 8(c)(2) of RESPA.

Those taking the position that fees are permitted if they are reasonably related to the value of the goods, facilities, and services have in the past disagreed on how to apply this test.

Some argue that the test should include consideration of the value of the good (i.e., the mortgage loan) to the lender, subsuming or in addition to the value of the services performed and facilities provided by the broker (e.g., providing a retail outlet for the loan). Others would only allow consideration of the value of the services performed and facilities provided, arguing that the loan is not a "good," or that the mortgage broker does not provide a loan, only a referral.

Others would only allow consideration of the value of the services and facilities to the borrower, not their value to the lender; under this approach yield spread premiums may be permissible if they are solely for the benefit of, and are effectively regarded as owned by the borrower, e.g., when these amounts serve only to offset or decrease the borrower's closing costs. Finally, some argue that the bringing together of the borrower and the lender is a service, not a referral, and therefore may be compensated.
Among those who agree that fees are permitted under section 8(c)(2) of RESPA if they are reasonably related to the value of the goods, facilities, and services provided, there has been disagreement over how to value the goods, facilities, and services.

Some suggest that the standard for determining the price of the good should be the price that the market would bear; others criticize this approach because it does not separate out any price that the market may pay for a referral from the price of goods, facilities, and services provided.

Some suggest that the standard should be the actual cost for the provision of the goods, facilities, and/or services provided, allowing specific margins for reasonable profit; others criticize this approach as contrary to RESPA's legislative history, asserting that this was not intended to be a rate-setting statute. See S. Rep. No. 93-866, at 3-4 (1974), reprinted in 1974 U.S.C.C.A.N. 6546, 6548-49. Others maintain that HUD must at all times retain some degree of authority over the aggregate of payments to mortgage brokers to deter exorbitant total fees. HUD has been mindful of this debate in shaping this proposed rule.

HUD RESPA Disclosure of Fees Paid to Mortgage Brokers;

[stanlaywallace]

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