MORE THAN half of all American home mortgage applicants are likely to be affected by a new federal policy statement designed to clarify when certain loan fees routinely charged borrowers are legal, and when they are not.
The policy statement is expected to be released shortly by the Department of Housing and Urban Development (HUD). It tackles one of the most controversial consumer protection issues in home lending -- the collection of fees by mortgage brokers that can add thousands of dollars to the cost of a mortgage.
The fees go by various names: "yield spread premiums," "overages," and "back-funded payments" are among the most common.
Typically, they are paid by a lender to a mortgage broker for originating and delivering a home loan at an interest rate higher than the lender's minimum posted or "par" rate. The fees often are pocketed by the broker in addition to the regular fees directly charged to the applicants.
For example, a broker might charge a consumer $1,500 at settlement for originating the loan, but also receive another $2,500 from the lender who actually funds the mortgage after settlement.
The existence of side payments to brokers has outraged some borrowers and has led to the filing of lawsuits against lenders and brokers nationwide in the past several years. Some consumers have charged that they knew nothing about the extra payments, and were unhappy that they paid higher-than-necessary interest rates. Some borrowers complained that brokers deliberately cloaked the fees on settlement sheets with confusing abbreviations like "YSP-P.O.C. (paid outside closing)."
Brokers and lenders have argued in defense that such fees are an integral part of the economics of today's mortgage market. Instead of national lenders having to set up retail offices across the country, they can work through networks of small local brokers, who bear the overhead costs of running loan origination operations.
They also argue that some loan programs that are popular with borrowers -- particularly the "zero-point" mortgages that require minimal out-of-pocket expenses at closing -- involve premium interest rates, which are higher than the lender's standard, posted rates.
Last year, Congress ordered HUD to clear up the controversy over broker fees by issuing a definitive "statement of policy" that consumers, courts and lenders could look to for guidance. HUD's resulting 27-page pronouncement boils down to this:
Like it or not, back-end fees from lenders to brokers are not illegal in and of themselves. However, they can't amount to referral fees to the broker for steering business to a particular lender. That violates federal anti-kickback rules. And they can't be solely for delivering customers at higher-than- prevailing rates.
Instead, according to HUD, they have to be for goods, facilities or services "actually performed" or furnished by the broker. Their size has to be "reasonably related" to the value of the goods, facilities or services provided or performed. In other words, a brokerage firm can't receive $4,000 from a lender simply because it ordered a credit report and took the application.
Similarly, HUD says it will scrutinize the "total compensation" involved in a transaction to determine if the back-end fees are so far out of line as to constitute an illegal kickback.
If a broker charges a borrower $1,500 for brokerage services on a $100,000 loan and receives $4,500 on the back end from a lender for doing nothing more than taking the application and shuffling papers, then it may well be open to legal challenge.
What does all this mean to homebuyers and those refinancing a home? If you're one of the estimated 55 percent of all borrowers who use a local broker to get a mortgage, keep these points in mind: Reputable brokers will tell you upfront whether they are functioning as your agent -- dedicated to getting you the best loan deal available -- or whether they simply agree to connect you with one or more lenders, who may or may not give you the best price around.
Demand early disclosure by the broker of all transaction fees -- direct and indirect -- and the specific services earning those fees. Ideally, you should be able to shop from broker to broker, compare total fees and rates, and borrow intelligently. Federal law doesn't currently require brokers to make such disclosures before or at application, but reputable industry groups all recommend that their members do so.
Take hard, critical looks at the "good faith estimate" loan-cost disclosures your broker is required to provide three days after application and challenge anything you didn't expect to see or don't understand. Do the same thing at closing. You don't have to meekly assent to mystery fees that appear out of nowhere. And you don't have to pay inflated rates. That's the law.
Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.
Pub Date: 2/28/99