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252fmortgage Quote Mortagagemortgagelender T Mortgage Lender Lender Ar 1 Mortgage Mortgage Lender HUD and Yield Spread Premiums - Mortgage Professor

252fmortgage Quote Mortagagemortgagelender T Mortgage Lender Lender Ar 1 Mortgage Mortgage Lender


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This decision has put the industry in a dither. Wholesale lenders feel that unless it is reversed or counteracted in some way, they are vulnerable to potential claims on existing loans where brokers retained YSPs, and they will be forced to stop offering YSPs through most brokers in the future.

They are now looking to HUD for relief.

What Would Be the Consequences If Wholesale Lenders Stopped Offering YSPs to Brokers?


Not good. A major class of loan provider, and the borrowers who use them, would be deprived of a valuable option. The option would not disappear from the market, however. Business would shift from brokers to retail lenders, where the abuses would disappear from sight, even though they would still be there.

In addition, many brokers would join “net branches” of small retail lenders as loan officer employees. Since net branches allow their loan officers to maintain their operating independence, the predators among them could abuse borrowers just as they did before. But because their employers are lenders who are not required to disclose their income from loans the way brokers are, their abuses would be invisible.

The only positive would be that wholesale lenders would continue offering YSPs to Upfront Mortgage Brokers (UMBs). Since UMBs credit YSPs to borrowers, they avoid abuses that might generate legal liability for lenders. Long-term, the growth of UMBs would be encouraged, which would be good for borrowers. Right now, however, there are only a handful of UMBs, so in the short-term, this would be far outweighed by the shift of brokers to net branches.

What Should HUD Do Now?


Making the Reasonable Compensation Rule Enforceable: There is a simple way that HUD could make its rule, that YSPs are legal if they constitute “reasonable compensation” for broker services, enforceable. HUD could define “reasonable compensation” as any compensation that borrowers have explicitly agreed to in advance.

More concretely, HUD should declare a broker to be in compliance if borrowers on whose account the broker receives YSPs acknowledge the broker’s total compensation, in writing, before the broker has submitted an application to a lender. Total compensation is the amount paid the broker by the borrower and the lender.

Suppose, for example, the borrower agrees to total compensation of $4500, and the broker estimates the YSP at $3000, leaving a direct borrower-paid fee of $1500. If the YSP turns out to be $4000 when the terms are locked instead of $3000, the direct fee is cut to $500.

HUD could provide brokers with a standard form. The form I developed in collaboration with Upfront Mortgage Brokers (UMBs), who voluntarily follow the compensation rule proposed above, is appended to this paper.

Enforcement by Lenders: HUD’s rule will be enforced by wholesale lenders. Since lenders will be safe in offering YSPs only to brokers who comply, they have an incentive to monitor broker compliance. Wholesalers should welcome this. For the first time they will have a way of constraining broker pricing, without the danger of losing business to other lenders. If they wish, lenders can delegate responsibility to the Upfront Mortgage Brokers Association, a non-profit corporation set up for the express purpose of certifying and monitoring UMBs.

Enforcement by Borrowers: Borrowers will also do their part to constrain broker pricing -- in the time-honored way, by shopping and haggling. For the first time, borrowers will become aware of how much brokers are making at an early enough stage to do something about it.

Leveling the Playing Field: For purposes of this rule, HUD should define “mortgage broker” to include loan providers who fund loans but have price commitments from wholesale lenders. They receive the equivalent of YSPs from their lenders, and should be subject to the same rules. Otherwise, brokers who don’t want to comply with HUD’s rule will begin funding loans, or become employees of firms that do. The problem will disappear from sight, but it won’t go away.

Portfolio lenders and large mortgage banks that sell directly into the secondary market would escape the enforcement net described above. A simple way to subject them to comparable market discipline is to require a new item on the Good Faith Estimate of Settlement: the par interest rate. It should be placed right next to the actual interest rate. A par rate below the actual rate will capture borrowers’ attention and put them on their guard.
What Not to Do

The danger is that HUD, under political pressure, will take the path of least resistance, enacting a disclosure rule acceptable to brokers and lenders but worthless to borrowers. Such rules abound at the state level.

Warning Rules: The largest group of states has enacted warning rules. These require that brokers disclose exactly how they can take advantage of the borrower, without doing anything to prevent it. California falls into this group. The California borrower learns that:



· The retail price a mortgage broker offers you—your interest rate, total points and fees—will include the broker’s compensation.

· In some cases, either you or the lender may pay the mortgage broker all of its compensation.

· Alternatively, both you and the lender may pay the mortgage broker a portion of its compensation. For example, in some cases, if you would rather pay a lower interest rate, you may pay higher upfront points and fees.

· Also, in some cases, if you would rather pay less upfront, you may wish to have some or all of our fees paid directly by the lender, which will result in a higher interest rate and higher monthly loan payments than you would otherwise be required to pay.

· The mortgage broker also may be paid by the lender based on (i) the value of the mortgage loan or related servicing rights in the marketplace or (ii) other services, goods or facilities performed or provided by the mortgage broker to the lender.

Among the states, California requires the largest number of words to say that the broker may be paid both by the borrower and the lender. But even when the point is made concisely, it doesn’t help the borrower who is trying to compare broker fees. Knowing that the broker may be paid by the lender helps only if the borrower knows what that payment is, and he doesn’t learn that until the loan closes, if then.

Range of Compensation: An alternative approach requires brokers to specify the range of total compensation from both borrower and lender. In Florida, for example, the required disclosure states that “Business will receive a sum in range of % to % of the total loan amount…the exact amount of which will be disclosed at closing…”
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