Disclosure of Mortgage Broker Fees

[Moe Bedard]

The 1992 rule required the disclosure of all compensation paid to lenders and mortgage brokers as part of the settlement transaction. This was a codification of HUD's position under sections 4 and 5 of RESPA (12 U.S.C. 2603-2604) that all charges imposed on borrowers at settlement must be disclosed.

This meant that lenders and mortgage brokers both had to disclose direct compensation (i.e., fees and points paid by borrower). In addition, when mortgage brokers were acting as intermediaries or were using table funding, they had to disclose their indirect fees from lenders, which were shown as "P.O.C." (paid outside of closing) on the HUD-1 or HUD-1A settlement statement.

In contrast bankers, mortgage bankers and thrifts, as well as mortgage brokers that funded loans with their own funds or a warehouse line of credit for which they were responsible, did not have to disclose the compensation they might receive for a subsequent sale of mortgage loans in the secondary market.
The 1992 rule therefore had the effect of treating mortgage brokers serving as intermediaries or using table funding differently from brokers who used a warehouse line of credit or their own funds. The reasoning has been that mortgage brokers who used a warehouse line of credit or their own funds were acting as lenders and transferring their loans in the secondary market. A bona fide transfer of a loan obligation by them after the initial funding is a secondary market transaction exempt from RESPA. 24 CFR 3500.5(b)(7).

RESPA does not require disclosure of fees paid in secondary market transactions. In determining what constitutes a bona fide transfer, HUD considers the real source of funding and the real interest of the funding lender. Id. The 1992 rule's requirements for disclosing fees on the Good Faith Estimate (GFE), HUD- 1, and HUD-1A also made no distinction between those mortgage brokers that represent themselves as agents of the consumer and those that function like other retail lenders providing loans from various lending sources available to them.

[Moe Bedard]

As indicated above, complaints about the difference in disclosure requirements for mortgage brokers serving as intermediaries or using table funding, as compared to disclosure requirements applicable to other loan providers, led HUD to re-examine whether, and if so to what extent, the disclosure of indirect fees, also known as "back-funded fees," paid to mortgage brokers should continue to be required under section 4 of RESPA.

For this purpose, HUD issued the 1995 proposed rule.
In the 1995 proposed rule, HUD sought comments on its requirements (reflected in the 1992 rule) that disclosure of "all charges imposed on the borrower" shall include fees paid to the mortgage broker by the "wholesale" lender, because all charges are ultimately borne by the borrower.

HUD also indicated it would consider how all indirect fees should be treated under section 8 of RESPA. HUD sought comments regarding the related issue of whether "volume-based compensation" is legal under RESPA and whether it should be required to be disclosed.
The 1992 rule also reiterated HUD's position that "a bona fide transfer of a loan obligation in the secondary market is not covered by RESPA and this part [24 CFR part 3500], except as set forth in section 6 of RESPA and § 3500.21 [mortgage servicing transfers]." The 1995 proposed rule offered various alternative approaches for determining what does or does not constitute a secondary market transaction.

HUD RESPA Disclosure of Fees Paid to Mortgage Brokers;

[Moe Bedard]

A. Alternative Regulatory Structures
In the 1995 proposed rule, HUD offered six alternative approaches to regulating the disclosure of fees paid to mortgage brokers (60 FR 47650, 47653-54) as follows:

Alternative 1: (1) Retaining the current RESPA regulation's approach of requiring disclosure of both direct and indirect fees at settlement for transactions not in the secondary market; (2) classifying mortgage loan sales after settlement as "secondary market transactions" not requiring disclosure of direct or indirect fees and exempt from RESPA, including its prohibitions against kickbacks and referral fees; (3) continuing to require disclosure of direct and indirect fees for table-funded transactions and making such transactions subject to RESPA (the loan sale is not a secondary market transaction, it is contemporaneous with and not after settlement); and (4) requiring disclosure of direct and indirect fees for loans closed in the name of the wholesale lender (not involving a sale).
Alternative 2: (1) Continuing to require disclosure of direct and indirect fees at settlement for transactions not in the secondary market; (2) classifying any mortgage loan sale--before, contemporaneous with, or after settlement--as a "secondary market transaction"; (3) requiring disclosure of direct fees at settlement but exempting the sale at settlement of a table- funded mortgage loan from RESPA as a "secondary market transaction," and making unnecessary the disclosure of "indirect fees" associated with the table-funded loan sale; and (4) requiring disclosure of direct and indirect fees for loans closed in the name of the wholesale lender (not involving a sale).

Alternative 3: (1) Continuing to require disclosure of direct and indirect fees at settlement for transactions not in the secondary market; (2) classifying a sale of a mortgage loan following the date of first accrual (the date the first payment is due from the borrower) as a "secondary market transaction"; (3) requiring disclosure of direct and indirect fees and applying other RESPA restrictions to table-funded transactions (the loan is sold at settlement, before the first accrual date); and (4) requiring disclosure of direct and indirect fees and applying other RESPA requirements to loans closed in the name of a wholesale lender (not involving a loan sale). Under Alternative 3, RESPA disclosure and other restrictions would cover more loan sales transactions (before the first accrual date) between retail lenders and wholesale lenders in addition to sales in table-funded transactions.

Alternative 4: (1) Requiring disclosure only of direct (not indirect) fees at settlement for transactions not in the secondary market (since indirect fees need not be disclosed, the secondary market exemption determines whether other RESPA prohibitions apply); (2) continuing to classify mortgage loan sales as "secondary market transactions" not subject to RESPA only if they occur after settlement; (3) requiring disclosure only of direct (not indirect) fees for table-funded transactions, such transactions would not be "secondary market transactions" and would be subject to RESPA (the loan sale is contemporaneous with and not after settlement); and (4) requiring disclosure of only direct (not indirect) fees for loans closed in the name of a wholesale lender with such transactions subject to RESPA's other restrictions.

Alternative 5: (1) Requiring disclosure only of direct (not indirect) fees at settlement; (2) classifying a mortgage loan sale, at any time, even simultaneously with loan funding (as in a table-funded transaction) as a secondary market transaction; (3) requiring disclosure of direct fees at settlement but exempting the sale at settlement of a table-funded mortgage loan from RESPA as a "secondary market transaction"; and (4) requiring disclosure of only direct (not indirect) fees for loans closed in the name of the wholesale lender (not involving a sale) with such transactions subject to RESPA's other restrictions.

Alternative 6: (1) Requiring disclosure only of direct (not indirect) fees at settlement; and (2) classifying a loan sale as a secondary market transaction only if it occurred after the first accrual date. Under Alternative 6, RESPA disclosure and other requirements would cover more transactions than are currently covered, except that indirect fees would not have to be disclosed.

HUD RESPA Disclosure of Fees Paid to Mortgage Brokers;