53912 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR 3780–P–08]

RIN 2502–AG40

Real Estate Settlement Procedures Act

(RESPA) Disclosure of Fees Paid to

Mortgage Brokers; Proposed Rule and

Notice of Proposed Information

Collection Requirements

AGENCY: Office of the Assistant

Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Proposed rule.

SUMMARY: This proposed rule would

provide consumers with more

meaningful disclosures concerning the

functions and fees of mortgage brokers

while protecting consumers from fees

which are illegal under the Real Estate

Settlement Procedures Act (RESPA). At

the same time, the rule would provide

mortgage brokers with greater clarity

regarding the application of RESPA to

their fees. Under this rule, mortgage

brokers who seek clarity regarding

RESPA’s applicability to their fees

would enter into binding contracts with

borrowers prior to the borrowers’

applications for mortgage loans. For

each particular loan transaction the

broker would explain in the contract the

services the broker would provide and

the broker’s duties to the borrower, how

the broker’s compensation is derived,

and the maximum amount of

compensation the broker would earn

(based on the loan’s interest rate and

points). Under the contract, the broker

would also disclose the components of

its compensation including the direct

fees to be paid to the broker by the

borrower and the potential maximum

amount of indirect compensation to be

received by the broker from a lender

providing mortgage loan funds.

Because compensation to the broker

may differ under various combinations

of rates and points, the contract would

also advise the borrower that the broker

has information on other loans with

different combinations of rates and

points which the broker will display for

the borrower. (HUD will facilitate the

development of software to help brokers

provide this information.) The broker

will give the borrower a contract or a

contract amendment covering each type

of loan product for which the borrower

may apply. The contract also requires

that the broker provide its State license

or other identification number in those

States that require licenses.

For those transactions in which

mortgage broker contracts are entered

into and adhered to, and other

requirements of the rule are satisfied,

the direct fees received from the

borrower, as well as the indirect fees

paid to the broker from a lender for the

transaction, will be covered by a

‘‘qualified safe harbor’’ and presumed to

be legal and permissible under section

8 of RESPA. The presumption of

permissibility and legality would not

apply, however, if one or more of the

requirements for the safe harbor is not

met. Moreover, even if all of the

requirements for the safe harbor are met,

the presumption may be rebutted if the

total compensation does not pass a test

that will be established by HUD through

this rulemaking and incorporated into

the final rule. There are numerous

possibilities for such a test that could

result from this rulemaking, including

defining the outer boundaries of

permissible or legal total compensation

in terms of ranges or amounts of dollars

that could vary based on the size of a

loan or other factors; a test comparing

the total compensation for a loan to the

total compensation for similar loans by

mortgage brokers and lenders; a test

establishing the parameters of

permissible and impermissible

compensation based upon plain and

straightforward criteria; or such other

test or tests that would provide a clear

line between compensation presumed

legal and compensation that would not

enjoy such presumption. Any test

established through this rulemaking will

allow brokers, lenders, and consumers

alike to determine with certainty

whether the total compensation to a

broker is or is not legal. HUD is

requesting comments from the public on

an appropriate test or tests. Mortgage

brokers that fail to enter into and adhere

to the contract, and fail to meet the

other requirements in the rule, will be

presumed to be in violation of section

8 of RESPA. This presumption can be

overcome if the total compensation is

reasonably related to the value of the

goods or services provided.

DATES: Comment Due Date: Deadline for

comments on this proposed rule,

including comments on the proposed

information collection requirements:

December 15, 1997.

ADDRESSES: Interested persons are

invited to submit comments regarding

this proposed rule to the Rules Docket

Clerk, Office of General Counsel, Room

10276, Department of Housing and

Urban Development, 451 Seventh Street,

SW, Washington, DC 20410–0500.

Communications should refer to the

above docket number and title.

Facsimile (FAX) comments are not

acceptable. A copy of each

communication submitted will be

available for public inspection and

copying between 7:30 a.m. and 5:30

p.m. weekdays at the above address.

HUD also invites interested persons to

submit comments on the proposed

information collection requirements of

this proposed rule. Comments should

refer to the above docket number and

title, and should be sent to the Office of

Information and Regulatory Affairs,

Office of Management and Budget,

Attention: Desk Officer for HUD,

Washington, DC 20503.

FOR FURTHER INFORMATION CONTACT:

David R. Williamson, Director, Office of

Consumer and Regulatory Affairs, Room

9146, Department of Housing and Urban

Development, Washington, DC 20410;

telephone (202) 708–4560; or (for legal

questions) Kenneth A. Markison,

Assistant General Counsel for GSE/

RESPA, or Grant E. Mitchell, Senior

Attorney for RESPA, Room 9262,

Department of Housing and Urban

Development, Washington, DC 20410;

telephone (202) 708–1550. (These are

not toll free numbers). Persons with

hearing or speech impairments may

access this number via TTY by calling

the Federal Information Relay Service at

(800) 877–8339, which is a toll-free

number.

SUPPLEMENTARY INFORMATION:

I. Introduction

In 1974, when the Real Estate

Settlement Procedures Act (RESPA) (12

U.S.C. 2601–2617) was first enacted, the

housing finance delivery system was

very different than it is today. Much of

today’s technology and many of its

lending sources and financing

mechanisms did not exist. The

secondary market for mortgage loans

was still undeveloped, the present

variety of loan products were rarely

available (including the ‘‘no fee, no

point’’ loan), and there were few types

of providers of mortgage financing.

Those few that were known as mortgage

brokers generally operated differently

than many mortgage brokers operate

today. Today, mortgage brokers

reportedly arrange financing for nearly

half of all home mortgages. Some

brokers serve as agents and fiduciaries

of borrowers and others simply serve as

conduits to provide borrowers mortgage

funds as do other mortgage loan

providers (such as mortgage bankers,

thrift institutions, credit unions, and

banks).

Late in 1992, HUD codified a previous

legal opinion that mortgage brokers

must disclose to borrowers direct and
Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules 53913

1 Mentecki v. Saxon Mortgage, No. 96–1629–A,

slip op. (E.D. Va. Jan. 10, 1997). However,

subsequently, in an order and opinion dated July

11, 1997, the court refused to certify the class.

2Culpepper v. Inland Mortgage Corp., 953

F.Supp. 367 (N.D. Ala. 1997).

3Barbosa v. Target Mortgage, No. 94–1938,

U.S.D.C., Southern District of Florida, Martinez v.

Weyerhauser Mortgage, No. 94–160, U.S.D.C.,

Southern District of Florida, Monoz v. Crossland

Mortgage Company, Civil Action No. 96–12260,

U.S.D.C. for the District of Massachusetts.

indirect fees that brokers received at

settlement (November 2, 1992; 57 FR

49600). In 1995, as a result of concerns

that this requirement placed mortgage

brokers on an unequal footing with

other mortgage loan providers and that

information on indirect fees was

confusing to borrowers, HUD issued a

proposed rule (September 13, 1995; 60

FR 47650) to obtain the public’s views

on the disclosures of broker fees and on

the legality of certain indirect fees to

brokers from lenders (which were

referred to in that rule as ‘‘wholesale

lenders’’ and are referred to simply as

lenders in this proposed rule). Shortly

afterwards, HUD embarked on a

negotiated rulemaking on these subjects

(see notices published on October 25,

1995 (60 FR 54794) and December 8,

1995 (60 FR 63008)).

The 1995–1996 rulemaking activities

on mortgage broker fees did not result

in a final rule. Nonetheless, these prior

efforts informed HUD and helped shape

today’s proposal. The earlier activities

resulted in a clear consensus that there

is confusion in the minds of consumers

on the functions of mortgage brokers

and the sources of their fees. This

confusion may translate into a borrower

failing to compare services and fees and

thereby paying higher settlement costs.

The rulemaking activities also indicated

that HUD should consider which

mortgage broker fees are or are not

permissible, and/or consider

establishing a regulatory framework for

disclosure and a safe harbor for fees.

Recent judicial action has further

underscored the need for guidance from

HUD.

For their services, mortgage brokers

may receive ‘‘indirect fees’’ from lenders

and/or direct fees from borrowers.

Indirect fees to mortgage brokers are

called a variety of terms, including

‘‘volume based compensation,’’

‘‘servicing release premiums,’’

‘‘overages,’’ or ‘‘yield spread premiums

(or differentials).’’ This last term, ‘‘yield

spread premiums (or differentials),’’ has

been used to refer to that portion of the

price that a lender would pay a

mortgage broker for a loan at a particular

rate and point combination; this type of

compensation has been particularly

controversial. In specific transactions,

indirect fees may comprise a large part

or even all of the compensation to

mortgage brokers for services. Mortgage

brokers indicate that various financing

options and products available to

borrowers, including ‘‘no fee, no point’’

loans, depend for their feasibility on the

payment of indirect fees by lenders.

Several lawsuits have been brought

recently seeking class action

certification that are based in whole or

in part on the theory that certain of the

fees paid by lenders to mortgage

brokers, particularly from lenders, are

fees for the referral of business in

violation of section 8 of RESPA. In early

1997, two Federal district courts

considered cases involving mortgage

broker fees and reached different

conclusions. One held initially that

indirect fees to mortgage brokers in the

form of ‘‘yield spread premiums’’

violated section 8(a) of RESPA as

referral fees.1 The other court held that

a payment for a loan above market was

permissible under section 8(c) of RESPA

as payment for a ‘‘good.’’ 2 In June 1997,

two other Federal district courts

concluded that yield spread premiums

(or differentials) were not per se

violations of RESPA and therefore

refused to certify class actions on this

issue.3

HUD has never taken the position that

yield spread premiums or any other

named class of back-funded or indirect

fees are per se legal. The Illustrations of

the Requirements of RESPA, contained

in the 1992 RESPA rule and codified as

Appendix B to 24 CFR part 3500,

specifically listed ‘‘servicing release

premiums’’ and ‘‘yield spread

premiums’’ as fees to be itemized on the

HUD–1 Settlement Statement. More

recently, on June 11, 1997 (62 FR

31982), HUD issued a revised

Settlement Costs Booklet. In that

booklet, HUD explained to the borrower:

‘‘Your mortgage broker may be paid by

the lender, you as the borrower, or

both.’’ Both of these issuances

recognized how settlement service

business is commonly transacted, but

neither provision was intended to create

a presumption of per se legality of any

such fees, because HUD does not view

the name of the fee as the appropriate

issue under RESPA. The RESPA issue is

whether the total compensation to a

broker in a particular covered

transaction is or is not reasonably

related to the value of the goods

furnished or services performed. If the

compensation, or a portion thereof, is

not reasonably related to the goods

furnished or the services performed,

there is a compensated referral or an

unearned fee in violation of section 8(a)

or 8(b) of RESPA, whether it is a direct

or indirect payment.

This proposed rule seeks to address

these matters by providing a framework

for furthering consumer understanding

of mortgage broker functions and fees.

This framework will allow brokers to

continue to offer borrowers beneficial

loan products, so long as the broker’s

compensation is consistent with

RESPA’s requirements. In carrying out

this purpose, this proposed rule remains

true to and preserves RESPA’s enduring

consumer protections against unearned

fees. Such fees only serve to increase the

costs of homeownership.

Under this proposed rule, the

Secretary of HUD proposes to establish

a new mortgage broker contract to

provide essential information to

consumers concerning the functions and

compensation of mortgage brokers. This

contract is to permit consumers to

understand a broker’s functions and fees

before becoming obligated to use the

broker’s services. To maximize use of

this contract in brokered transactions,

the rule would provide that when a

broker enters into the contract

prescribed under the rule, and meets

other criteria designed to protect the

consumer, the direct fees paid by the

borrower and the indirect fees paid to

the broker in the transaction would be

presumed to be legal and permissible

under section 8 of RESPA. In such cases

the fees will fall within a ‘‘qualified safe

harbor.’’ The presumption of

permissibility and legality will not

apply, however, if one or more of the

requirements for the safe harbor is not

met. Moreover, even if all of the

requirements for the safe harbor are met,

the presumption may be rebutted if the

total compensation does not pass a test

to be established by HUD. The purpose

of the test is to distinguish between

those fees that are acceptable under

section 8 of RESPA and those that are

not. A major purpose of soliciting public

comments under this rulemaking is to

assist HUD in developing this test,

which will be established in the final

rule. Any test to be incorporated into

the final rule must allow brokers,

lenders, and consumers to determine

with certainty whether total

compensation to a broker in a loan

transaction is or is not legal.

Compensation outside of the safe harbor

is presumed to violate section 8, but this

presumption can be overcome if the

total compensation is reasonably related

to the value of the goods or services

provided.

This preamble begins with a

background discussion of the various

roles and functions of mortgage brokers

today, how mortgage brokers originate
53914 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

4HUD issued a February 10, 1994 rule (59 FR

6506) that clarified that an ‘‘exclusive agent of a

lender’’ as well as an employee of a lender were not

included in the definition of mortgage broker.

5This proposed rule has generally abandoned the

use of the terms ‘‘retail lender’’ and ‘‘wholesale

lender’’ inasmuch as HUD concluded that neither

created clarity for the consumer. This proposed rule

uses the term ‘‘lender’’ (rather than referring to

‘‘wholesale lender’’) and ‘‘retail lender,’’ except

when discussing provisions of earlier rulemakings

that use the terms.

loans, how they are compensated, and

how RESPA’s prohibitions and

disclosure requirements apply to their

fees. Following this background

discussion, this preamble discusses the

comments and information learned

through HUD’s prior regulatory

initiatives on this subject—the 1995

proposed rule and the 1995-1996

negotiated rulemaking—which helped

shape today’s proposal. Finally, this

preamble describes and explains the

provisions of this proposed rule.

The regulatory record, as well as

recent differences in legal interpretation

of these issues in the courts, exemplify

that this subject involves difficult and

contentious issues that are not easy to

resolve. This proposed rule seeks to

move beyond this controversy to a fair

resolution consistent with applicable

law. Any proposal on this subject will

be controversial. This proposal,

however, is an attempt to take a fair and

balanced approach to competing

interests. Public comment on this rule

will be critically important to refining

this approach and formulating a final

rule that will be consistent with

RESPA’s purpose, that will be workable

in the market place, and that will

address the financing needs of

Americans.

In crafting a final rule, the Secretary

will be guided by the following

principles:

1. Protect consumers while

recognizing the settlement services

industry is changing. Although the

settlement services industry is changing,

RESPA’s purposes—protecting

consumers against inflated, burdensome

settlement costs through meaningful

disclosure and its prohibition against

unearned fees—are as important today

as when the statute was first enacted.

2. Include meaningful and timely

disclosures to consumers. Consumers

must have full information on

settlement services provided and fees

received for these services at a time

when they can make meaningful

choices. Clear, concise disclosures

ensure that consumers are not misled

about the role settlement service

providers play in mortgage transactions

and encourage consumers to

comparison shop.

3. Protect against illegal fees;

disclosure does not make illegal fees

legal. While there may be debate about

RESPA’s specific applicability to

mortgage broker fees, HUD cannot and

will not sanction fees that are illegal

under RESPA. Illegal and exorbitant

payments for settlement services make

the dream of homeownership more

difficult for families to achieve.

4. Encourage innovative products to

aid homeownership. Requirements

established under RESPA should not

impede the availability of innovative

financing products, such as ‘‘no fee, no

point’’ loans. If properly understood,

these products can expand choice and

lessen the costs of homeownership.

5. Not impede lending to underserved

areas and borrowers. Requirements

established under RESPA should not

impede the efforts of settlement service

providers to offer beneficial, reasonably

priced services to underserved areas and

borrowers.

6. Involve consumer and mortgage

industry groups. HUD must give utmost

attention in the rulemaking process to

the comments of those affected by

RESPA’s requirements—including

representatives of consumers and

regulated industries—in fashioning an

effective, workable regulatory structure

under the law.

7. Provide clear rules for affected

industries and consumers. Rules

developed to implement RESPA’s

requirements must provide clear and

certain guidance to the settlement

services industry and consumers alike.

Predictability in HUD’s regulation will

encourage innovation and discourage

violations.

II. Background

On November 2, 1992 (57 FR 49600),

HUD issued a rule revising Regulation X

(24 CFR part 3500), the regulations

interpreting RESPA. While primarily

addressing other issues, the November

2, 1992 rule also codified certain

previous informal interpretations of

HUD and attempted to deal with

changes in the real estate settlement

services business since the original

RESPA rule was issued in 1976. In

particular, the 1992 rule defined the

term ‘‘mortgage broker’’ since, by 1992,

mortgage brokers were initiating a large

proportion of the mortgage loans made.

The rule required the disclosure of all

fees, direct and indirect, to mortgage

brokers at settlement, thereby codifying

a 1992 opinion of HUD’s General

Counsel. Under the rule, payments to

other loan sources following settlement

were exempt from disclosure as

‘‘secondary market’’ transactions. As

indicated above, largely because of

concerns expressed about this disparity,

on September 13, 1995 HUD issued a

proposed rule (60 FR 47650) (1995

proposed rule) offering alternative

approaches to disclosure of mortgage

broker fees and fees to other lenders.

Subsequently, after public notice, (60

FR 54794 (October 25, 1995) and 60 FR

63008 (December 8, 1995)), HUD

conducted a negotiated rulemaking on

this subject from December 1995 to May

1996. Although the negotiation process

did not lead to consensus on a final

rule, it was particularly useful in

informing HUD and other participants

on the roles and functions of mortgage

brokers, and clarifying compensation

and disclosure issues.

A. The Varied Roles of Mortgage Brokers

in Lending

Under the 1992 rule, HUD defined a

mortgage broker as ‘‘a person (not an

employee of a lender) who brings a

borrower and a lender together to obtain

a federally-related mortgage loan,’’ and

who renders settlement services.4 In its

1995 proposed rule, HUD categorized

mortgage brokers as a type of ‘‘retail

lender,’’ which was identified as the

entity that serves as an intermediary

between the consumer and the

‘‘wholesale lender.’’ 60 FR 47650–

47651. The proposed rule identified the

‘‘wholesale lender’’ as the entity

purchasing or servicing the loan. 60 FR

47651.5

Today there are two main types of

mortgage brokers—those that represent

the borrower and those that do not.

Mortgage brokers may fill one role in

one transaction and a different role in

another. The first type of mortgage

broker represents the borrower and

generally has an agency relationship

with, and a fiduciary duty to, the

borrower. This type of broker has two

variants: a mortgage broker that does not

receive fees from any source other than

the consumer, and a mortgage broker

that does receive fees from a source

other than the consumer, namely, the

lender. An agency relationship may

arise under State law or may be created

by agreement between the mortgage

broker and borrower. Although State

law is largely undeveloped in this area,

in some States mortgage brokers may be

found to have a fiduciary responsibility

to the borrower even in the absence of

a contract provision.

The second type of mortgage broker

does not represent the borrower. This

type of mortgage broker makes mortgage

loans available to borrowers either from

one or a number of sources of funds

with which the mortgage broker has a

business relationship. This type of
Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules 53915

6With respect to a mortgage broker that is the

agent of a lender, section 8(c)(1) may also apply to

the analysis. Section 8(c)(1) provides that nothing

in section 8 shall be construed as prohibiting the

payment of a fee by a lender to its duly appointed

agent for services actually performed in the making

of a loan. See also 24 CFR 3500.14(g)(1)(iii).

mortgage broker is not the borrower’s

agent; rather, brokers of this type

present themselves as entities that try to

sell borrowers mortgage loans as would

other mortgage loan providers in the

market. If this type of mortgage broker

only makes mortgage loans available

from one source of funds, the mortgage

broker may or may not be functioning as

the lender’s agent.

B. Differing Methods of Mortgage

Brokers in Originating Mortgage Loans

Some mortgage brokers process loans

and close loans in their own names.

However, at or about the time of

settlement, they transfer these loans to

lenders that simultaneously advance

funds for the loans. This transaction is

known in the lending industry as ‘‘table

funding.’’ In table-funded transactions,

the mortgage broker does not furnish the

capital for the loans. Instead the lender

provides the capital and, immediately

after the loan is consummated, the

mortgage broker delivers the loan

package to that lender, including the

promissory note, mortgage, evidence of

insurance, and assignments of all rights

the mortgage broker held.

In some transactions, mortgage

brokers originate loans that are closed in

the mortgage brokers’ names, fund the

loans temporarily using their own funds

or a warehouse line of credit, and sell

the loans after closing. These mortgage

brokers function similarly to mortgage

bankers, but they do not service loans.

Still other mortgage brokers function

purely as intermediaries between

borrowers and lending sources. They

originate loans by providing loan

processing and arranging for the

provision of funds by lenders. The loans

are closed in the names of the funding

lenders.

C. Mortgage Broker Compensation

Compensation for the services of

mortgage brokers frequently comes from

fees paid by the borrower.

Compensation may or may not also

come from ‘‘indirect’’ fees paid by the

lender providing the mortgage loan

funds. Frequently, mortgage brokers

offer the following payment methods for

the fees or points the borrower pays

directly: (1) The borrower may pay from

his or her own funds at closing, (2) the

mortgage loan amount may be increased

to finance the mortgage broker fees or

points (which increases the amount the

borrower borrows), or (3) some

combination of (1) and (2).

Frequently, mortgage brokers offer

payment options that enable the

borrower to pay lower fees and points,

or even no fees and/or points, in

exchange for a higher interest rate, or

higher points and fees for a lower

interest rate. If the borrower pays lower

fees and points and agrees to a higher

interest rate, then the lender will pay

the mortgage broker a fee that reflects

the higher interest payments the lender

will receive from the borrower. In other

words, indirect fees paid by lenders to

mortgage brokers are largely based on

the interest rate of the loan entered into

by the borrower and the amount of

points and direct fees paid by the

borrower. Typically, one or more times

a day, lenders set prices that they are

willing to pay to mortgage brokers for

loans delivered to them. The price to be

paid for a loan is generally expressed as

a percentage of the loan amount. These

prices are based on the interest rate of

the loan arranged by the mortgage

broker and the points and fees for the

loan as compared to the price (a

combination of an interest rate and

points) that the lender would purchase

the loan for that day.

The price that the lender will pay is,

in turn, based on the value of the loan

in the secondary mortgage market (i.e.,

the market price). Generally, the greater

the difference between the rate a loan is

entered into with the consumer and the

market price for the loan, the greater the

total compensation that will be paid to

the broker. The price may also reflect

factors such as the type of loan, the

‘‘lock-in’’ period, and the

creditworthiness of the borrower. The

price that the lender pays the mortgage

broker, therefore, is based on the

differential between the combination of

rate and points that is the par or market

rate for a loan at a given time, and the

combination of rate and points at which

the loan is entered into with the

borrower. The lender may also make

additional payments to the mortgage

broker at or after settlement attributable

to the number of loans provided over a

given period. These additional

payments constitute a ‘‘volume-based

discount.’’

The following represents an example

of the fee structure of a typical 30-year

fixed rate loan involving a mortgage

broker:

Rate available from lender to mortgage broker* (rate plus

points)

Price charged by mortgage broker to borrower* (rate plus

points) Broker’s total

compensation* Rate (percent) Points Rate (percent) Points

8.00 .......... 2.00, paid to broker .............................................. 8.00 ......... None ..................................................................... 2.00 points.

7.75 .......... 1.00, paid to broker .............................................. 7.75 ......... 1.00 ...................................................................... 2.00 points.

7.50 .......... None ..................................................................... 7.50 ......... 2.00 ...................................................................... 2.00 points.

7.25 .......... 1.00, paid by broker ............................................. 7.25 ......... 3.00 ...................................................................... 2.00 points.

*These rates and fees are offered for illustrative purposes only, not as an indication of HUD’s approval of the legality of any particular fee.

D. 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.’’ 6

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
53916 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

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.

E. Disclosure of Mortgage Broker Fees

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.

III. Re-Examination of Disclosure of

Mortgage Broker Fees

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.

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
Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules 53917

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.

B. Overview of the Public Comments

HUD received 836 comments in

response to the 1995 proposed rule.

Most commenters were mortgage

brokers or employees of brokerage

organizations, although many were

lenders. Consumer representatives also

submitted comments. HUD also

received comments from credit unions,

banks, attorneys, or other persons and

organizations in real-estate-related

occupations.

Several national organizations

submitted comments—including

counsel for the National Association of

Mortgage Brokers (NAMB), the Mortgage

Bankers Association (MBA), the Real

Estate Services Providers Council

(RESPRO), the National Association of

Realtors (NAR), the National

Association of Federal Credit Unions

(NAFCU), the American Bankers

Association (ABA), the National Home

Equity Mortgage Association, the Title I

Home Improvement Lenders

Association, and the Independent

Bankers Association of America (IBAA).

Additionally, several State associations

representing mortgage brokers

submitted comments. The Board of

Governors of the Federal Reserve

System, the Federal National Mortgage

Association (Fannie Mae), and the

Federal Home Loan Mortgage

Corporation (Freddie Mac) also

commented.

C. Summary of Public Comments on

Alternative Regulatory Structures

The preponderance of commenters,

primarily industry members and

representatives, favored Alternative 5,

requiring only disclosure of direct fees

and classifying a transfer of a tablefunded loan as a secondary market

transaction. The NAMB characterized

the fees in question as ‘‘fees in the

nature of secondary market fees (e.g.,

service release premiums, excess yield

differentials or volume discounts).’’

NAMB also argued strenuously that

these fees were legitimate and earned,

and that their disclosure should not be

required because ‘‘they are not fees,

points, or charges collected from the

mortgagor or seller.’’

NAMB and individual mortgage

brokers urged that fees of the kind at

issue were essential to the continued

competitiveness of mortgage brokerage

firms, and that their elimination would

stifle competition in the mortgage

lending industry. While their disclosure

to the affected consumer was thought by

these commenters to be unnecessary, a

determination of their legality was the

commenters’ paramount concern. Many

industry commenters expressed their

belief that HUD needed to declare the

legitimacy of these fees under RESPA.

The Board of Governors of the Federal

Reserve System expressed some concern

regarding HUD’s proposal to eliminate

disclosure of indirect fees paid to

mortgage brokers, as that might impact

on its determination of coverage under

section 32 of the Riegle Community

Development and Regulatory

Improvement Act of 1994 (Pub. L. 103–

325; approved September 23, 1994).

That section prescribes special rules for

high cost mortgage loans, loans which

have rates and fees above a certain level.

The Board, however, subsequently

adopted a regulation that based its

calculation on direct (borrower-paid)

fees only. Under this circumstance, the

Board’s originally expressed concern is

no longer relevant.

Most, but not all, of the comments

adverse to positions taken by mortgage

brokers and brokers’ organizations came

from consumer groups. Five consumer

or legal service organizations responded

to the proposed rule. Commenting

consumer organizations, taking a

different view than mortgage brokers,

favored Alternative 1, the status quo,

among the offered options.

Additionally, however, they asked for

further strengthening of the existing

regulation to require greater disclosure,

to cover a larger array of transactions,

and to outlaw certain lender payments.

Some consumer organizations

characterized certain lender payments

to mortgage brokers as ‘‘kickbacks,’’

impermissible under RESPA whether or

not they are disclosed. These

commenters urged HUD to issue a

blanket prohibition against certain

lender-paid fees.

A scattering of industry commenters

also supported Alternative 1, the status

quo. These included: Travelers Group,

New Jersey Savings League, and First

Commerce Corporation. These

commenters took the view that the

current RESPA regulation resulted in

the most informative disclosure to

consumers while still allowing bona
53918 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

fide secondary market transactions to

proceed outside the scrutiny of

consumers or others involved in the

settlement.

Some other industry commenters

supported Alternative 2 (continuing to

require disclosure of indirect fees, but

expanding the definition of ‘‘secondary

market transaction’’). These included:

McDonnell Douglas West Federal Credit

Union, Comerica Inc., The Money Store

of Sacramento, California, and the

Michigan Bankers’ Association.

Similarly, Alternative 4 (which

required disclosure only of direct fees,

but with no change in the current

definition of secondary market

transaction) attracted only a few

commenters. Four commenters,

including the MBA, opted for this

structure. The MBA said it favored a

‘‘modified’’ Alternative 4. It disagreed

that in a table-funded transaction a

mortgage loan sale occurs at settlement.

Because these sales ‘‘effectively occur

after settlement,’’ MBA said, it favored

Alternative 4 with the recommendation

that the final rule conform to MBA’s

understanding of the table-funding

issue.

American Federal Bank of Greenville,

SC, PNC Mortgage Corporation of

Vernon Hills, IL, and a PNC-affiliated

company, The Home Mortgage Network,

also favored Alternative 4. PNC

Mortgage Corporation went on to

suggest that, despite favoring the

elimination of a recitation of ‘‘indirect’’

fees as the current rule requires, it

would be useful for the RESPA

regulation both to clarify that other

forms of compensation are permitted

and to require actual notice to borrowers

when the retail lender is being paid

‘‘servicing release premiums’’ or ‘‘yield

spread premiums.’’

There were no industry commenters

that favored Alternatives 3 or 6. One

consumer organization, Illinois

Consumer Justice Council, Inc.,

supported, in essence, Alternative 3,

although the commenter advocated

outright prohibitions on specific forms

of lender compensation to mortgage

brokers.

Both Fannie Mae and Freddie Mac

(Government-Sponsored Enterprises or

GSEs) cautioned against the adoption,

without clarifications, of Alternatives 3

or 6. At the least, Freddie Mac said,

‘‘further elaboration of the concept’’

would be necessary were HUD to adopt

a definition providing that only

mortgage loan sales that occur relatively

long after settlement would be regarded

as exempt secondary market

transactions.

Similarly, Fannie Mae pointed out

that narrowing the secondary market

exemption could hamper the speed of

mortgage financing and adversely affect

mortgage lenders’ ability to take

advantage of technological innovations.

Neither GSE registered an outright

objection to a narrowing of the

secondary market exemption. Each

made clear that Alternatives 3 and 6

were not preferred, and, if adopted,

would disrupt current practices. Neither

GSE expressed a positive preference for

any of the alternatives outlined in the

proposed rule.

On the issue of volume-based

compensation, the commenters were

divided. Commercial Credit advocated

permitting the payment of volume-based

fees. NAMB specifically objected to

HUD’s questioning the ‘‘propriety of

paying volume discounts under

RESPA.’’ NAMB urged that such

payments were a standard industry

practice, that the issue should not be

addressed ‘‘piecemeal,’’ but that HUD

should ‘‘articulate a simple standard of

what may be paid.’’

American Federal Bank, PNC

Mortgage Corporation, and The Home

Mortgage Network indicated that

volume-based compensation should be

permitted, but that a ‘‘general’’ form of

disclosure should be required—to the

effect that the retail lender ‘‘may receive

additional compensation in connection

with the transaction.’’ McDonnell

Douglas West Federal Credit Union

advocated disclosure of this form of

compensation to borrowers.

Michigan Bankers Association and

Comerica (in identical comments) stated

that volume-based compensation could

lead to loan steering. Arguing that

disclosure of such compensation was

too complex a matter, these commenters

appeared to be suggesting that this form

of compensation to brokers should be

prohibited altogether. In addition,

Travelers Group opposed it as being a

form of kickback not tied to actual

services rendered and also said that

volume-based compensation almost

always results in ‘‘loan steering.’’

IV. Negotiated Rulemaking

After issuing the 1995 proposed rule,

HUD concluded that the issues in the

rulemaking might be better understood

and perhaps resolved by involving

representatives of interested parties in a

negotiated rulemaking process. In

appropriate circumstances, this process

brings together agency representatives

with all parties substantially affected by

the subject matter in order to negotiate

the terms of a needed rule.

On October 25, 1995, HUD published

a Notice of Intent to Establish a

Negotiated Rulemaking Advisory

Committee (60 FR 54794) to address

mortgage broker fees and volume-based

compensation. HUD received nine

comments in response to the notice,

most of which favored negotiated

rulemaking.

On December 8, 1995 (60 FR 63008),

HUD published a notice announcing the

establishment of an Advisory

Committee. HUD charged the Advisory

Committee with: (1) Determining

whether the amount and nature of

indirect payments to mortgage brokers

and certain other mortgage originators

should be disclosed to the consumer;

and (2) resolving whether volume-based

compensation from wholesale lenders to

mortgage brokers is permissible under

RESPA (and implicitly, whether other

payments from wholesale lenders to

mortgage brokers are permissible, an

issue mentioned explicitly in the

October 25, 1995 notice), and whether

and how the compensation should be

disclosed. The notice set forth HUD’s

conclusion that, in view of the degree of

controversy and in the interest of

fashioning the best possible rule, the

negotiated rulemaking process offered

the best means of generating

information and resolving the difficult

issues involved.

The Advisory Committee was

composed of parties possessing a

definable interest in the outcome of a

proposed rule—representatives of

mortgage brokers, lenders, the

Government-Sponsored Enterprises,

State government, and consumer

advocates. In addition to HUD, the

following were members of the

Advisory Committee: AARP/Legal

Counsel for the Elderly, America’s

Community Bankers, American

Association of Residential Mortgage

Regulators, ABA, American Financial

Services Association, Citizen Action,

Freddie Mac, Fannie Mae, IBAA, the

MBA, National Association of Consumer

Advocates, National Association of

Federal Credit Unions, NAMB, NAR,

Office of the Attorney General of the

State of Texas, RESPRO, and The

Mortgage Capital Group.

A. Advisory Committee Activities and

Approach

From December 1995 to May 1996,

the Advisory Committee met for six 2-

day negotiation sessions that were

facilitated by HUD’s Chief

Administrative Law Judge, Alan W.

Heifetz. The Advisory Committee began

its deliberations with presentations by

participants and industry experts

regarding the functioning of the

mortgage lending industry. The

consumer representatives presented the

group with their concerns and their

perceptions of areas in which
Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules 53919

consumers were in need of increased

protection. The Advisory Committee

then framed the points in question and

engaged in substantive discussion of the

issues presented.

The Advisory Committee spent a large

portion of its time on the issue of the

appropriate scrutiny of indirect fees

under section 8. Committee members

were adamant that the starting point

should be resolution of the

permissibility of indirect fees. In

analyzing fees, the participants

recognized that there were different

types of fees from lenders to mortgage

brokers: (1) fees reflecting payment for

a loan delivered at or near the par price,

and (2) payments to a mortgage broker

for a loan delivered considerably above

the par price.

While nearly all participants

recognized that mortgage brokers

perform valuable services in brokering

loans for consumers, they disagreed

considerably over the appropriate

means of analyzing the legality of

mortgage broker fees under RESPA. One

representative initially argued that all

indirect fees are illegal under section

8(a) and 8(b) of RESPA. Other members

of the Committee agreed that the

standard RESPA test would apply. As

discussed above, that test provides that

although fees cannot be paid for the

referral of business as proscribed in

section 8(a) and 8(b), if fees are

reasonably related to the value of the

goods, facilities, and services provided,

they are permissible under section

8(c)(2) of RESPA.

The Committee attempted to find a

workable formula for applying the

standard RESPA test to lender payments

to mortgage brokers, but it did not reach

consensus on how to apply the test to

those payments. Advisory Committee

members conferred on the options and

considered that, if the value of the

services was deemed to be the

appropriate point of scrutiny, then there

would be a further need to define the

proper method for determining the

value of such services. Others focused

on the facilities a mortgage broker

provides (which allow lenders to

function without ‘‘bricks and mortar’’),

and argued the value of these facilities

should be analyzed in considering

whether the broker’s compensation was

reasonable. Each of these approaches

received criticism, however, as it would

require establishing a level of

appropriate payment for itemized

services or facilities. That task would,

however, be unworkable and

inconsistent with RESPA’s legislative

history against price-setting.

Some believed that the loan provided

by a broker to a lender could be

regarded as a ‘‘good’’ under section

8(c)(2) with the compensation analyzed

in terms of the loan’s value to the

lender. That approach was criticized,

however, as undermining any meaning

of RESPA’s section 8, since it would

allow the lender to pay for the value of

the referral as part of the bundled value

of the good.

Some suggested defining indirect fees

to mortgage brokers as fees in the

secondary market outside the scope of

RESPA. The Committee addressed the

possibility of altering the current

definition of what constitutes a

secondary market transaction. Although

various alternatives were proposed and

considered, the group could not agree

on any particular approach. Likewise,

on the permissibility of particular types

of lender payments to mortgage brokers,

including volume-based compensation,

the participants suggested differing

interpretations of the statute’s meaning

and intent, thus causing an impasse on

this issue as well.

All agreed as a general principle that

exorbitant rates and points should not

be extracted from consumers and that

mortgage brokers should not be paid

total compensation that greatly exceeds

the comparable compensation for

comparable borrowers and loan

programs. Most agreed that it is difficult

to develop a workable test for the proper

amount of this compensation. They also

recognized the extent of public

confusion over the role of mortgage

brokers, particularly where the mortgage

broker receives compensation from the

lender. The participants struggled with

the diversity of ways mortgage brokers

operate for borrowers. For example,

certain mortgage brokers act as the

borrower’s agent arranging the most

favorable loan for the borrower. Certain

mortgage brokers offer various loan

products in a manner similar to retail

lenders. Some offer the loan products of

only one lender. Consumer advocates

were particularly critical of mortgage

brokers who asserted their role to be to

place loans with one of several lenders

with which they do business, yet took

advantage of the consumer’s perception

that they were acting as the consumer’s

agent, although they were not, in fact,

doing so.

The diverse views of the participants

as to how mortgage brokers function and

what types of fees they receive resulted

in diverse views of the legality of the

fees mortgage brokers receive and the

extent to which they should be required

to disclose their fees to borrowers. Some

argued that limiting a mortgage broker

acting as a retail lender to a fee for

services (and ignoring the value of the

good delivered) effectively forced the

mortgage broker to act as the borrower’s

agent without an indication such a step

was intended by Congress in enacting

RESPA. Mortgage brokers, they argued,

should be able to charge consumers

whatever price they can obtain for a

loan in the market, even if the price is

above that at which the lender would

have been willing to make the loan. In

a competitive market where consumers

shop, they claimed, such a broker would

be limited by market competition.

On the other hand, when the broker

is acting as the borrower’s agent, most

agreed that the mortgage broker is

obligated to shop around for the

consumer to obtain the best deal for the

consumer. This kind of mortgage broker

should not be compensated by a lender

based simply on the value of the loan,

most agreed, without disclosing such

compensation to the borrower.

Few agreed on what circumstances

would require mortgage brokers to serve

as the borrower’s agent. Most, however,

concurred on the point that a great

many consumers perceive the role of a

mortgage broker to be their agent, which

is different from how the mortgage

brokers perceive themselves.

There was consensus on one point:

that a rule should clear up this

confusion and require that mortgage

brokers inform borrowers of the role the

mortgage broker is serving early enough

in the transaction to allow the consumer

to shop effectively for alternatives.

B. Advisory Committee Views on a Safe

Harbor

As a result of the divisions among the

negotiators concerning the appropriate

analysis, most of the participants

endorsed creating a ‘‘safe harbor’’ that

would exempt from section 8 fees to

mortgage brokers in circumstances in

which the participants could be

confident that the consumer is

adequately protected. Most of the

participants concluded that creating a

safe harbor for mortgage broker fees was

the only reasonable means of allowing

fee payments while ensuring the

consumer was protected. The

participants, however, differed on the

specific requirements for the safe

harbor. Participants suggested differing

types and levels of disclosures,

depending upon the interests and views

of the proponent.

One participant favored a safe harbor

involving the execution of a binding

mortgage broker contract between the

mortgage broker and the borrower. First,

this mortgage broker contract would

provide terms of the relationship

between the borrower and the broker.

Second, the broker would disclose

direct fees, and the disclosure would
53920 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

7A ‘‘high cost mortgage loan’’ is an owneroccupied residential mortgage loan in which the

annual percentage rate of interest (APR) will exceed

by more than 10 percentage points the yield on

Treasury securities of comparable maturity. A high

cost mortgage loan is also a mortgage loan in which

the total points and fees paid by the consumer will

exceed the greater of 8 percent of the mortgage loan

amount, or $400 (adjusted annually by the Federal

Reserve Board—$412 in 1996), whichever is larger.

15 U.S.C. 1602(aa); Regulation Z, 12 CFR 226.32.

notify borrowers that the mortgage

broker may receive additional (indirect)

fees from a lender pursuant to that

transaction. Third, the disclosure would

notify the borrower that the broker does

not distribute the products of all

lenders, and that the products

distributed may not represent the lowest

price or the best terms available. Fourth,

the mortgage broker contract would

incorporate additional items that were

required as a matter of State law.

One group of the participants

proposed a safe harbor involving a

borrower-broker contract detailing all

the elements of the aforementioned

proposal and adding two significant

elements. First, the contract would

require the broker to disclose the

maximum total compensation

(including indirect fees) it would

receive from all sources (in terms of

dollars and/or percentage of total

mortgage loan amount). Second, once

disclosed, this maximum amount would

serve to limit the compensation paid to

the broker. A variant of this option,

proposed by another participant, would

also require that the borrower be

explicitly granted the option of paying

the broker directly, either through

points or from mortgage loan proceeds.

Another participant offered a proposal

under which the broker would disclose

only the relationship of the broker to the

borrower and the broker’s direct fees.

Yet another participant supported

establishment of a safe harbor requiring:

(1) Disclosure of the relationship

between the borrower and the broker,

(2) a statement that the broker does not

offer the products of all lenders and that

the products offered do not reflect the

broker’s having shopped for the

consumer to ensure the best price

available, and (3) disclosure of the fees

from the lender and the borrower. In

addition, use of this safe harbor

approach would only be available in a

competitive mortgage market in which

multiple services were not being

provided by a single entity or affiliated

entities. Another participant supported

a similar proposal and suggested that a

competitive market might be shown by

such means as collecting comparable

advertised prices by competitors,

disclosing average national rates to the

borrower, and complying with

standards for ‘‘high cost mortgages’’

under section 32 of the Riegle

Community Development and

Regulatory Improvement Act of 1994

(section 103(aa) of the Truth in Lending

Act, 15 U.S.C. 1602(aa)).7

On May 21, 1996, the Committee

concluded its negotiations without

reaching consensus on a proposed rule.

On July 19, 1996, the Committee

Facilitator submitted his final report on

the negotiated rulemaking to HUD. That

final report summarized the negotiated

rulemaking proceedings and detailed

the approaches discussed by the

participants during the negotiations. In

the report, the Facilitator observed that

the numerous interests represented in

the Committee conflicted and aligned

along various permutations. The report

noted the Committee’s inability to reach

consensus and stated that no party

would be bound by discussions or

particular positions taken during the

negotiations.

Although there was a failure to reach

consensus, it is significant that the

Advisory Committee’s deliberations

resulted in almost unanimous support

for the creation of a safe harbor

approach to resolve issues relating to

mortgage broker fees. This safe harbor

would include the disclosure of the

mortgage broker’s relationship with the

borrower and information about the

mortgage broker’s fees in the loan

transaction. Such a safe harbor was

believed to secure a level of consumer

protection that would fulfill section 8’s

purpose. Indirect fees to mortgage

brokers that complied with these

specific disclosure requirements would

be exempt under section 8 of RESPA. In

light of the absence of consensus on any

one safe harbor approach, HUD was

presented with the task of creating

acceptable criteria for a safe harbor, if it

decided to adopt that approach.

V. This Proposed Rule

Following review of all of the

comments and the results of the

negotiated rulemaking, HUD is

proposing a rule to encourage the use of

mortgage broker contracts that will

clearly establish the role of the mortgage

broker, the mortgage broker’s duties,

and the mortgage broker’s

compensation. This proposed rule

strives to protect consumers better by

providing them the information they

need to be better shoppers and by

making the information disclosed to

them in the mortgage broker contracts

binding. This proposal seeks to

discourage practices that give financial

incentives to mortgage brokers that offer

higher priced loans than what are

generally available in the marketplace

for the particular mortgage applicant.

This proposed rule is premised on the

following facts and policy

considerations:

1. Under current rules, there are

reported cases in which exorbitant

payments have been made to mortgage

brokers by lenders. In these examples,

the cost of the loans is significantly

more than what the consumers could

have obtained from other loan providers

in the marketplace, and these additional

costs have undoubtedly contributed to

foreclosures.

2. Under the current RESPA rule,

consumers are not provided sufficient

information about the mortgage broker’s

role in the transaction. On the other

hand, consumers are sometimes

overloaded with more information about

the home financing process than the

consumers can use and receive

confusing information about the

mortgage brokers’ fees.

3. The borrower would benefit from a

useful mortgage broker contract

specifying the mortgage broker’s

functions and compensation so that the

borrower is not misled as to the role the

mortgage broker plays in the transaction

and does not fail to comparison shop.

4. Borrowers use interest rates, points,

and closing costs to shop for mortgages.

With this information, the borrower can

make informed choices about loan

services, provided the borrower is also

aware of the mortgage broker’s function

and the extent and sources of its

compensation.

5. The disclosure of mortgage broker

fees paid by the lender on the GFE,

HUD–1, and HUD–1A without further

explanation is frequently confusing to

borrowers. In particular, the fact that

these fees are listed as ‘‘P.O.C.’’ (paid

outside of closing) but are paid by the

lender, rather than the borrower, is

confusing.

6. Mortgage brokers should agree with

borrowers by contract as to how they

function, provide appropriate

information about their fees, and be

required to adhere to the terms of the

contract.

7. The disclosure requirement in the

1992 rule may have caused mortgage

brokers to establish warehouse lines of

credit simply to avoid the disclosure

requirement, thereby incurring

unnecessary costs passed on to

borrowers.

8. The industry requires certainty

about the permissibility of payment

practices.

9. Fees from lenders to brokers allow

the borrower to have an array of choices

in trading off interest rate and points,
Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules 53921

8A mortgage broker that does not represent the

borrower and that deals with only one mortgage

lender’s products might operate, for example, in an

affiliated business arrangement. A Federal Housing

Administration (FHA) correspondent could also fall

in this category.

including ‘‘no fee, no point’’ loans. The

borrower actually will pay these fees

over time as reflected in the interest

rate. However, if properly understood

by the borrower, this pricing mechanism

can expand choice and lessen the

closing costs of loans to the homebuyer,

making homeownership more affordable

and facilitating refinancings to take

advantage of lower rates.

10. Under appropriate circumstances

it may be possible to recognize a class

of compensation to mortgage brokers

presumed to be legal. When establishing

a class of compensation presumed legal,

it is essential to identify any

compensation that should not enjoy

such a presumption.

11. Mortgage brokers reportedly

originate approximately half of all

mortgages. This volume of activity

would not be possible if the majority of

loans obtained through mortgage

brokers did not have terms competitive

with those of mortgages from other

lending sources.

A. Department’s Overall Approach to a

Safe Harbor

This proposal offers a qualified safe

harbor that affords limited protection for

fees to mortgage brokers. The mortgage

broker contracts required to qualify for

the safe harbor proposed in this rule

tackle two issues that are potentially

controversial concerning mortgage

broker fees: (1) How the role of the

mortgage broker should be characterized

for the consumer/borrower, and (2) how

the consumer/borrower should be made

aware of the total amount of

compensation to the mortgage broker.

The contracts proposed under this rule

require the broker to specify whether or

not the broker is acting as a

representative of the borrower to shop

for a mortgage loan, or whether the

broker does not represent the borrower

and serves only to arrange loans. If the

broker indicates it acts as a

representative, the broker must disclose

whether or not it is receiving indirect

fees from a lender. To qualify under the

safe harbor, mortgage brokers must

disclose whether the mortgage broker

deals with one or more than one lender

so that the consumer can understand the

extent to which the broker will shop. 8

The contract requires the broker to

disclose the maximum amount of

compensation the broker will receive in

the loan transaction, distinguishing the

fees coming from the borrower and the

fees coming from the lender. Mortgage

brokers also will continue to be required

to disclose their direct fees as well as

their indirect fees paid to them by

lenders on the GFE, the HUD–1, or

HUD–1A in transactions covered by the

exemption.

For those transactions in which the

proposed mortgage broker contracts are

entered into and adhered to, and other

requirements of the rule are satisfied,

compensation to brokers will be

regarded as having been paid within a

‘‘qualified safe harbor’’ within which

fees paid to mortgage brokers from

lenders will be presumed legal. This

presumption of permissibility and

legality would not apply, however, if

one or more of the requirements for the

safe harbor is not met. Moreover, even

if all of the requirements for the safe

harbor are met, the presumption may be

rebutted if the total compensation does

not pass a test to be established by HUD

and incorporated in the final rule. When

the fees do not pass this test, they are

presumed to violate section 8 of RESPA.

This presumption can be overcome if

the total compensation is reasonably

related to the value of the goods or

services provided. By providing that the

safe harbor is ‘‘qualified,’’ HUD

preserves the ability to protect

consumers against illegal fees, as

determined by the test to be established

in the final rule following public

comment. A qualified safe harbor will

ease the difficulty and uncertainty

involved in applying section 8(a), 8(b),

and 8(c)(2) to total mortgage broker fees.

HUD is specifically soliciting comments

on the elements of this test.

In order to establish the ‘‘qualified

safe harbor,’’ HUD is proposing to

exercise its exemption authority under

section 19(a) of RESPA (12 U.S.C.

2617(a)) to add a new, limited

exemption to RESPA’s prohibition

against kickbacks and unearned fees. In

addition, under section 8(c)(5) of

RESPA, the Secretary may create

regulatory exemptions for ‘‘such other

payments or classes of payments,’’ after

consulting with various Federal

agencies (12 U.S.C. 2607(c)(5)). The

exemption proposed is limited in that it

creates a presumption of legality for

compensation that meets the

requirements of the exemption.

Regarding lender payments of indirect

fees, mortgage brokers and lenders

should be aware that, in addition to

RESPA, they are also subject to the

requirements of the Fair Housing Act

and other fair lending laws.

Discretionary pricing of loans is a major

fair lending concern of HUD and the

Department of Justice because of the

possibility of disparate treatment of

similarly qualified borrowers. Yield

spread premiums or servicing release

fees that are consistently higher for a

minority population, for example, than

they are for a similarly qualified

nonminority population could be

unlawful under the Fair Housing Act.

While mathematical precision is not

required between the premiums and

fees associated with borrowers grouped

by racial or other categories, the larger

the differences, the closer enforcement

agencies will look for possible disparate

treatment.

Monitoring of such fees by mortgage

brokers and lenders can help preclude

unlawful conduct under the Fair

Housing Act and other fair lending laws.

HUD itself will monitor the number and

type of fair lending complaints

involving such fees and premiums upon

implementation of the final RESPA rule

regarding payments to mortgage brokers,

and will, if necessary, revisit the issue

if it appears that consumers are being

subjected to discrimination in this area

and would benefit from additional

disclosures or additional contract terms.

For mortgage brokers meeting the

requirements of the qualified safe

harbor, volume-based compensation

would be presumed legal (subject to

application of the test developed for the

final rule); outside of the safe harbor,

volume-based compensation will be

presumed to violate section 8(a) or 8(b)

of RESPA. In making the representation

regarding the maximum amount of fees

from the lender in the mortgage broker

contract, the mortgage broker is to state

an amount that reflects expected

volume-based compensation for the

loan.

This rule does not propose to change

the secondary market line. HUD

concluded that there was little benefit to

shifting the line.

B. Elements of the Safe Harbor Provision

In this proposed rule, HUD would

amend 24 CFR 3500.14(g)(2) to provide

that lender payments to mortgage

brokers are presumed legal and

permissible under section 8 if the

following conditions are met:

1. Mortgage Broker Contracts

The mortgage broker and the

prospective borrower(s) execute a

mortgage broker contract for each loan

transaction. The form of the mortgage

broker contract that would be used

would be set forth in Appendix F to part

3500 to facilitate mortgage broker

compliance with the safe harbor

requirements. The instructions for

completing the form would be provided

with the form.
53922 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

HUD is proposing a binding mortgage

broker contract rather than a simple

disclosure, because a binding contract

creates an enforceable remedy for the

borrower and ensures that the terms

indicated cannot be changed or

superseded unilaterally by the mortgage

broker. The mortgage broker contract

would provide meaningful terms

regarding the broker’s functions in the

transaction, its duty to the borrower

(whether it does or does not represent

the borrower), the potential maximum

amount of compensation to be received

in the transaction including the

amounts paid by the borrower and by

the lender, and the mortgage broker’s

State license number, if applicable.

The contract would clarify for the

borrower the differing functions of

mortgage brokers and the role of the

mortgage broker in the particular

transaction. The contract would

describe two main types of mortgage

brokers, those that represent the

borrower (including the two different

variants of mortgage brokers that

represent the borrower—those that do

and those that do not receive indirect

fees), and those that do not represent the

borrower. Borrowers would be told

whether the mortgage broker represents

them and will shop for the most

favorable mortgage loan that meets the

borrower’s stated objectives from the

lenders the broker does business with,

or whether the broker does not represent

the borrower and merely arranges loans.

Under the contract, the broker must

disclose how many sources the broker

will shop from or may use for a

borrower’s loan.

The mortgage broker is to check the

appropriate box regarding how it will

function in the particular anticipated

transaction. The first box is for use by

a mortgage broker that represents the

borrower and does not receive a fee

from the source of mortgage funds. The

second box is for use by a mortgage

broker that represents the borrower but

may receive a fee from the lender. Both

the first and second box are for the type

of mortgage broker that, by operation of

State law, is a borrower’s agent, or that

represents itself as a borrower’s agent in

arranging a mortgage loan in the

transaction. Mortgage brokers that are

agents of the borrower would be

allowed to represent themselves to the

consumer as an entity that is required to

obtain the most favorable mortgage loan

for the borrower from the sources with

which they do business. The disclosure

of the mortgage broker’s function and

whether the mortgage broker is

receiving fees from the lender will assist

the borrower in assessing whether the

mortgage broker works only for the

borrower, has competing interests, or

may be receiving indirect fees.

The third box is for use by a mortgage

broker that does not represent the

borrower and does not represent itself as

a borrower’s agent in arranging a

mortgage loan in the transaction. This

type of mortgage broker may deal with

one or more than one source of funds

and may receive a fee from the source

of funds. This type of mortgage broker

would be required under the contract

clearly to inform the borrower that it is

not the borrower’s agent and that it

arranges loans from lender(s), and to

state the number of lenders with which

it brokers loans. Borrowers would not be

lulled into paying more than necessary

to obtain the loan they want on the

assumption that this type of mortgage

broker is shopping for the borrower to

obtain the best price available. Thus,

mortgage brokers that are not the

borrowers’ agents would not be able to

take advantage of borrower confusion

over the role of the mortgage broker to

obtain a price that exceeds what

informed borrowers would pay. The

rule is designed to help ensure that

‘‘what the market will bear’’ is not

inflated by the borrower’s

misimpression as to the service actually

being provided.

The contract then describes how

brokers are compensated. It also

indicates to borrowers that if a borrower

would rather pay a lower interest rate,

the borrower may pay higher upfront

points and/or fees. The contract

specifies the maximum points and other

compensation and the maximum total

compensation the broker will earn in

the transaction for a loan up to a

particular amount and at the rate offered

by the broker. The contract discloses the

source of the compensation—the

amount of fees that are to be paid by the

borrower and the fees paid by the

lender.

Because the compensation may differ

under various combinations of rates and

points, the contract advises the

borrower that the broker has alternative

loan arrangements that the broker will

display for the borrower. (HUD plans to

develop or to facilitate the development

of software for use by brokers for this

purpose that will be distributed in

conjunction with the final rule.)

The contract cautions that the broker’s

commitment to the amounts disclosed

applies only if the borrower qualifies for

the loan.

The back of the contract form would

include a useful, preprinted summary

for the borrower of his or her rights in

shopping for a mortgage loan, including

rights under RESPA and the mortgage

broker contract.

Those mortgage brokers seeking to

qualify for the safe harbor in

§ 3500.14(g)(2) would, at the time a

consumer expresses serious interest in

obtaining a loan from the broker and

prior to application or before receipt of

any payment (whichever is earlier),

determine which of the categories fits its

functions respecting the consumer in

the particular transaction. The mortgage

broker would, before application or

before receipt of any payment,

whichever is earlier, complete and

execute the mortgage broker contract in

Appendix F, deliver a copy to the

prospective borrower(s), obtain the

borrower’s or borrowers’ signature(s),

and retain a copy of the contract. Of

course, a mortgage broker could check

one box on the form for one transaction

and a different box in a different

transaction, depending upon the

mortgage broker’s function in the

transaction. However, a mortgage broker

would only check one box and complete

and execute one form per transaction.

For all transactions in which the

mortgage broker wishes to qualify for

the safe harbor, the mortgage broker

would be required to use the form

provided and comply with the terms

applicable to the box checked. This will

ensure consistency in the mortgage

broker contracts provided to consumers.

If an applicant wants the mortgage

broker to shop for more than one type

of loan with different rates and fees,

then a separate contract would be

executed for each possible loan.

Mortgage brokers not wishing to

qualify for the safe harbor would not be

required to use the form.

2. Performance and Representations

Consistent With Contract

During the course of dealings with the

prospective borrower(s), the mortgage

broker would have to perform in

accordance with the terms of the

mortgage broker contract and not make

representations inconsistent with such

contract. The terms of the mortgage

broker contract could only be changed

through mutual written agreement

between the mortgage broker and the

borrower. A mortgage broker who

indicates on the mortgage broker

contract that ‘‘I am your agent and I will

get you the most favorable mortgage

loan that meets your stated objectives,’’

is required to get the borrower the most

favorable mortgage loan that meets the

borrower’s stated objectives from among

the sources of funds with which the

mortgage broker discloses it will shop.

3. Disclosure of Fees

In addition to the disclosures of fees

in the contract, the mortgage broker
Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules 53923

would have to disclose fees on the GFE

and the HUD–1 or HUD–1A in a manner

consistent with §§ 3500.7 and 3500.8 of

the regulations, as do all mortgage

brokers whether qualifying for the safe

harbor or not.

4. Mortgage Broker Licenses

If the State in which the property for

which the mortgage loan is sought has

licensing or registration requirements,

the mortgage broker must have a valid

license or registration and identify the

license or registration number on the

mortgage broker contract. A large

proportion of States require, or are in

the process of requiring, that mortgage

brokers be licensed by a State regulatory

body. This provision would make the

borrower aware of State regulations and

might assist an aggrieved borrower in

pursuing an action under State law

against a mortgage broker. All of the

members of the Advisory Committee

supported including this information on

the contract.

C. Effect on State Law

Section 18 of RESPA (12 U.S.C. 2616)

preempts State law that is inconsistent

with its provisions, unless such law

provides greater protection to the

consumer. However, the RESPA

regulations in § 3500.13 provide, in part,

that RESPA and the RESPA regulations

do not annul, alter, affect, or exempt any

person subject to their provisions from

complying with the laws of any State

with respect to settlement practices,

except to the extent of the

inconsistency. Therefore, in accordance

with § 3500.13, mortgage brokers must

comply with relevant State laws

regarding disclosure of mortgage broker

fees and related issues, except when

inconsistent with RESPA or the

implementing regulations. HUD, to the

extent feasible, will work with

interested State regulatory bodies to

determine if applicable disclosure terms

or requirements may be combined in a

single form.

D. Definition of Mortgage Broker

HUD’s current definition of ‘‘mortgage

broker’’ specifically excludes an

‘‘exclusive agent of a lender’’ from the

definition of ‘‘mortgage broker.’’ This

rule proposes to revise the definition to

include an ‘‘exclusive agent of a lender’’

and thereby enable such an entity to

qualify for the safe harbor. A mortgage

broker that deals with only one lender

may still perform the functions of a

mortgage broker, regardless of whether

he or she is the lender’s exclusive agent.

Such a mortgage broker could take

advantage of the safe harbor if all

applicable criteria are met. This rule

proposes a similar conforming

amendment to § 3500.17(b).

E. Questions for Commenters

HUD invites comment on all aspects

of today’s proposal. In particular, HUD

is interested in the public’s view

regarding the following questions:

1. As proposed, the new safe harbor

may be rebutted if the total

compensation does not pass a test to be

established by HUD. HUD is specifically

requesting comments on an appropriate

test or tests to determine with certainty

what, if any, portion of compensation to

a mortgage broker should be

impermissible under RESPA. There are

numerous possibilities for such a test

that could result from this rulemaking.

Any test established for the final rule

must allow brokers, lenders, and

borrowers alike to determine with

certainty whether the total

compensation to a broker is or is not

legal. Accordingly, commenters are

requested to suggest a quantifiable or

otherwise objective test or tests for

examining a broker’s total

compensation. Suggestions may

include, without limitation, defining the

outer boundaries of permissible or legal

total payments in terms of ranges or

amounts such as a specified dollar

amount that could vary based on the

size of the loan or as a fixed percentage

of the loan amount; if compensation

exceeds a specified range or amount, the

excess could rebut the presumption of

legality under section 8. A test also

could be based on comparing the total

compensation for a broker’s loan to the

total compensation for similar loans by

mortgage brokers and lenders to

borrowers of similar credit quality in the

broker’s area. This could be

accomplished by establishing a baseline

of the average market compensation for

comparable loans for an immediately

preceding time period. Any

compensation for a loan that exceeds

the baseline average by more than a

specific amount could be used to rebut

the presumption of legality.

Additionally, a test could establish

the parameters of permissible

compensation through plain and

straightforward criteria. This could be

accomplished, for example, by

providing that a yield spread premium

is impermissible unless it is considered

owned by, under the control of, and for

the benefit of the borrower, or such a

premium is impermissible based upon

other fixed criteria. Compensation that

does not meet the established criteria

would rebut the presumption of legality.

In this proposed rule, if the mortgage

broker does not enter into the specified

contract, any mortgage broker

compensation is presumed to violate

section 8(a) or 8(b) of RESPA. This

presumption can be overcome if the

total compensation is reasonably related

to the value of the goods or services

provided. Commenters are urged to

provide any other formulations that also

would provide a clear line between

compensation presumed legal and

compensation that would not enjoy

such presumption. HUD requests

commenters to provide rule language to

accompany any suggested test(s).

2. As proposed, the rule offers a

qualified safe harbor under which there

is a presumption of legality regarding

fees to ‘‘mortgage brokers’’ that use the

prescribed contract. Is the definition of

‘‘mortgage broker’’ under this proposal

adequate to avoid the possibility that

settlement service providers or others

that do not provide any real services

could take advantage of the exemption

to charge fees? Specifically, should this

definition be changed, or should the

final rule also require that a mortgage

broker perform certain core services to

qualify for the exemption? In a letter

dated February 14, 1995 from Assistant

Secretary Retsinas to the Independent

Bankers Association, HUD described

certain core services in connection with

mortgage lending. To what, if any,

extent should the substance of that letter

be included in this rule? Those favoring

additional requirements should provide

their views on what these requirements

should be.

3. As proposed, mortgage brokers

wishing to qualify for the safe harbor

would check a box on a form,

depending upon which of the

alternatives fits the mortgage broker’s

function in the particular transaction.

HUD seeks comments on alternative

approaches or alternative language for

the form explaining the broker’s

function. Does the language proposed

adequately distinguish the various

categories of mortgage brokers? Would

the language proposed unduly influence

the consumer to prefer one type of

mortgage broker over another? What

revisions, if any, should be made to the

form?

4. As proposed, mortgage brokers

wishing to qualify for the safe harbor

must complete and execute the

mortgage broker contract ‘‘before

application or before receipt of any

payment.’’ HUD seeks comments on

whether the final rule should maintain

this general requirement respecting the

timing of the disclosure, or whether the

rule should specify a more precise time

or occasion when the form should be

provided. HUD also seeks comments on

what, if any, requirements should be

included in the rule to address a
53924 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

situation in which a broker takes an

application over the telephone or by

other electronic means, including

through the Internet. HUD believes the

contract should be provided to the

borrower as early in the process as

possible, but recognizes that

information that is provided too early

can be so imprecise that it is not useful

to the consumer.

5. As proposed, the safe harbor would

only appear useful to mortgage brokers

that are using table funding or that are

acting as intermediaries; those brokers

that lend their own funds or use a

warehouse line of credit would still

qualify for the secondary market

exemption. HUD invites comments on

whether it should require mortgage

brokers that lend their own funds or use

a warehouse line of credit to disclose

their relationship with the borrower. If

so, what would be the basis to impose

such a requirement? Should HUD

structure a safe harbor that would

encourage mortgage brokers in these

other circumstances and other loan

providers to enter into mortgage broker

contracts with borrowers? If so, how

would it be structured and what would

be its legal basis?

6. As proposed, mortgage brokers that

make available the loan products of only

one source of funds must disclose on

the mortgage broker contract the name

of the one lender with which it does

business. Is this a fair burden to impose

on such mortgage brokers as a part of

qualifying for the safe harbor? Does it

put such mortgage brokers at a

competitive disadvantage?

7. HUD’s intent is that the mortgage

broker contract would be binding. HUD

seeks views concerning the adequacy of

consideration of each party under the

contract.

8. As proposed, if the amounts of the

compensation change, it is anticipated

that the broker and the borrower will

execute a new contract or amend the

contract. HUD seeks public comments

concerning the most practical methods

to be incorporated into the final rule for

affecting changes to the contract. HUD

also seeks comments concerning what,

if any, restrictions there should be on

changes under the contract.

9. As proposed, the contract form

provides that total compensation can be

disclosed as a dollar amount or as a

percentage of the loan. Would it be

preferable to require for purposes of

comparison that all compensation be

disclosed in dollar amounts only? What

if any problems would be presented by

such a requirement?

10. Should either the contract or

regulations address situations in which

the borrower chooses not to ‘‘lock in’’

the interest rate and chooses instead to

allow the rate to ‘‘float’’ until the

borrower locks in? Should the contract

provide that unless the particular loan

is applied for by the borrower by a

specified date that the broker’s

commitment to the fees set forth in the

contract will expire? Those favoring

such provisions should explain what

rules, if any, should be added to address

these situations. What, if any, rules

would be needed to protect borrowers?

For example, should the broker be

required to provide a new contract

detailing the terms of the loan at the

lock-in rate? If the contract were to

include an expiration date for the fees

disclosed, can the borrower be protected

from entering into an arrangement too

hastily?

11. As proposed, the rule would allow

mortgage brokers that represent the

borrower and qualify for the safe harbor

to collect fees from lenders if such

compensation is disclosed and meets

the other elements of the safe harbor.

Should borrower’s-representative

mortgage brokers be permitted to receive

such compensation, or should such

compensation be prohibited? If such

compensation were forbidden, how

could such mortgage brokers offer ‘‘no

fee, no point’’ loans? Does the benefit of

allowing the flexibility to fund broker

fees from interest rate offsets outweigh

the disadvantage of creating a possible

conflict of interest to the mortgage

broker’s fiduciary duty to the borrower?

12. As proposed, the rule obligates the

mortgage broker—in those instances in

which the broker checks the form to

indicate that it represents the

borrower—to obtain ‘‘the most favorable

mortgage loan that meets [the

borrower’s] stated objectives.’’ The form

also provides that the broker will

identify how many lenders from which

it will shop. Are these statements of the

borrower’s-representative duty to the

borrower appropriate? Should the term

‘‘most favorable’’ include factors other

than price, including, for example,

quality or processing time of the lender,

and should the rule so provide? Should

the rule and the form simply obligate

the borrower to obtain the lowest priced

loan for the borrower from among the

sources it uses?

13. While the market for purchase

money loans and most first mortgage

refinances is well advertised and highly

competitive, this is not necessarily the

case for reverse mortgages, as well as

home equity, home improvement, high

LTV, Alt A, and other less common

types of loans. What are the arguments

for or against limiting the safe harbor to

purchase money and first lien

refinancing loans? Should there be any

different requirements for so-called B, C,

and D credit?

Findings and Certifications

Paperwork Reduction Act

The proposed information collection

requirements contained at § 3500.14 and

Appendix F of this proposed rule have

been submitted to the Office of

Management and Budget (OMB) for

review, under section 3507(d) of the

Paperwork Reduction Act of 1995 (44

U.S.C. Chapter 35). An agency may not

conduct or sponsor, and a person is not

required to respond to, a collection of

information unless the collection

displays a valid control number.

The public reporting burden for each

of these collections of information is

estimated to include the time for

reviewing and instructions, searching

existing data sources, gathering and

maintaining the data needed, and

completing and reviewing the collection

of information. Information on the

estimated public reporting burden is

provided in the following table.

MORTGAGE BROKER CONTRACT

Information collection Number of

respondents

Responses

per

respondent

Total annual

responses

Hours per

response Total hours Regulatoryreference

Disclosure to the borrower .............................................. 10,000 400 4mil. ............ .033 132,000 3500.14

(b) In accordance with 5 CFR

1320.8(d)(1), HUD is soliciting

comments from members of the public

and affected agencies concerning the

proposed collection of information to:

(1) Evaluate whether the proposed

collection of information is necessary

for the proper performance of the
Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules 53925

functions of the agency, including

whether the information will have

practical utility;

(2) Evaluate the accuracy of the

agency’s estimate of the burden of the

proposed collection of information;

(3) Enhance the quality, utility, and

clarity of the information to be

collected; and

(4) Minimize the burden of the

collection of information on those who

are to respond; including through the

use of appropriate automated collection

techniques or other forms of information

technology, e.g., permitting electronic

submission of responses.

Interested persons are invited to

submit comments regarding the

information collection requirements in

this proposal. Comments must be

received within sixty (60) days from the

date of this proposal. Comments must

refer to the proposal by name and

docket number (FR–3780) and must be

sent to the Office of Information and

Regulatory Affairs of the Office of

Management and Budget (OMB), at the

address provided in the ADDRESSES

section of this preamble.

Environmental Impact

In accordance with 24 CFR 50.19(c)(1)

of HUD’s regulations, this proposed rule

does not direct, provide for assistance or

loan and mortgage insurance for, or

otherwise govern or regulate property

acquisition, disposition, lease,

rehabilitation, alteration, demolition, or

new construction, or set out or provide

for standards for construction or

construction materials, manufactured

housing, or occupancy. Therefore, this

proposed rule is categorically excluded

from the requirements of the National

Environmental Policy Act (42 U.S.C.

4321).

Executive Order 12866

The Office of Management and Budget

(OMB) reviewed this proposed rule

under Executive Order 12866,

Regulatory Planning and Review. OMB

determined that this proposed rule is a

‘‘significant regulatory action,’’ as

defined in section 3(f) of the Order. Any

changes made to this proposed rule as

a result of that review are clearly

identified in the docket file. The docket

file and the Economic Analysis

prepared for this proposed rule are

available for public inspection between

7:30 a.m. and 5:30 p.m. in the Office of

the Rules Docket Clerk, Department of

Housing and Urban Development, Room

10276, 451 Seventh Street, S.W.,

Washington, DC 20410.

Congressional Review of Major Rules

This proposed rule is a ‘‘major rule’’

as defined by 5 U.S.C. 804(2) of the

Administrative Procedure Act, and will

be reviewed by the Congress at the final

rule stage.

Regulatory Flexibility Act

The Secretary, in accordance with the

Regulatory Flexibility Act (5 U.S.C.

605(b)), has reviewed this proposed rule

before publication and by approving it

certifies that this proposed rule would

not have a significant economic impact

on a substantial number of small

entities. This proposed rule would

provide a ‘‘safe harbor’’ from scrutiny

under section 8 of RESPA for certain

fees paid to a mortgage broker, so long

as the mortgage broker complies with

the requirements of the proposed rule.

HUD strives to provide flexible

requirements in order to reduce any

burden on small entities. Small entities

are specifically invited, however, to

comment on whether and how this

proposed rule will significantly affect

them, and to provide any alternatives

for less burdensome compliance.

Executive Order 12612, Federalism

The General Counsel, as the

Designated Official under section 6(a) of

Executive Order 12612, Federalism, has

determined that the policies contained

in this proposed rule would not have

substantial direct effects on States or

their political subdivisions, or the

relationship between the Federal

Government and the States, or on the

distribution of power and

responsibilities among the various

levels of government. As a result, the

proposed rule is not subject to review

under the Order. The requirements of

the proposed rule are directed toward

the disclosure to borrowers of fees paid

to mortgage brokers.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates

Reform Act of 1995 (UMRA) (Pub. L.

104–4; approved March 22, 1995),

establishes requirements for Federal

agencies to assess the effects of their

regulatory actions on State, local, and

tribal governments, and on the private

sector. This proposed rule would not

impose any Federal mandates on any

State, local, or tribal governments, or on

the private sector, within the meaning of

the UMRA.

List of Subjects in 24 CFR Part 3500

Consumer protection, Condominiums,

Housing, Mortgage servicing, Mortgages,

Reporting and recordkeeping

requirements.

Accordingly, for the reasons set out in

the preamble, part 3500 of title 24 of the

Code of Federal Regulations is proposed

to be amended as follows:

1. The authority citation shall

continue to read as follows:

Authority: 12 U.S.C. 2601 et seq.; 42 U.S.C.

3535(d).

2. In § 3500.2, paragraph (b) is

amended by revising the definition of

‘‘Mortgage broker’’ to read as follows:

§ 3500.2 Definitions.

* * * * *

(b) * * *

Mortgage broker means a person (not

an employee of a lender) who brings a

borrower and lender together to obtain

a federally related mortgage loan, and

who renders services as described in

paragraphs (1) or (2) of the definition of

‘‘Settlement service’’ in paragraph (b) of

this section. A loan correspondent

meeting the requirements of the Federal

Housing Administration under

§ 202.2(b) or § 202.15(a) of this title is a

mortgage broker for purposes of this

part.

* * * * *

§ 3500.7 Amended

3. In § 3500.7, the first sentence of

paragraph (b) is revised by removing the

phrase ‘‘who is not an exclusive agent

of the lender’’.

4. In § 3500.14, paragraphs (g)(2) and

(g)(3) are redesignated as paragraphs

(g)(3) and (g)(4), respectively; and a new

paragraph (g)(2) is added, to read as

follows:

§ 3500.14 Prohibition against kickbacks

and unearned fees.

* * * * *

(g)(2)(i) A direct payment from a

borrower to a mortgage broker or a

payment from a lender to a mortgage

broker in a particular mortgage loan

transaction is presumed to be legal,

provided that the following

requirements are met:

(A) Prior to the time of mortgage loan

application or receipt of any payment,

whichever is first, the mortgage broker

and the prospective borrower(s)

complete and execute a mortgage broker

contract, in the form of appendix F to

this part, as appropriate for the

particular transaction.

(B) The mortgage broker represents

himself or herself to the prospective

borrower(s) and acts with regard to such

borrower(s) in a manner consistent with

the applicable terms of the mortgage

broker contract executed by the

mortgage broker, and the mortgage

broker makes no representations to the

prospective borrower(s) that are

inconsistent with, and does not act in a
53926 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

manner that is inconsistent with, the

terms of the mortgage broker contract. A

mortgage broker that indicates on the

mortgage broker contract that ‘‘I am your

agent and I will get you the most

favorable mortgage loan that meets your

stated objectives’’ is required to get the

borrower the most favorable mortgage

loan that meets the borrower’s stated

objectives from among the sources of

funds from which the broker states in

the mortgage broker contract that it will

shop.

(C) The mortgage broker discloses its

maximum total compensation along

with the amounts of fees from the

borrower and the lender for the

transaction in accordance with

appendix A to this part 3500, §§ 3500.7

and 3500.8, and the mortgage broker

contract in the form of appendix F to

this part and the instructions thereto.

(D) If the State in which the property

(for which the mortgage loan is to be

obtained in the particular transaction) is

located licenses or registers mortgage

brokers, the mortgage broker has a valid

license or registration.

(ii) The terms of the mortgage broker

contract referred to in paragraph (g)(2)(i)

of this section can only be changed

through mutual agreement between the

mortgage broker and the borrower(s)

executed in writing.

(iii) The presumption established

under paragraph (g)(2)(i) of this section

may be rebutted if the total

compensation does not pass the

following test: [Test will be published

with final rule].

(iv) If the requirements in paragraphs

(g)(2)(i) and (g)(2)(ii) of this section are

not satisfied, or if the presumption

established under paragraph (g)(2)(i) of

this section is rebutted in accordance

with paragraph (g)(2)(iii) of this section,

payments to a mortgage broker from a

lender are presumed to violate section

8(a) or 8(b) of RESPA. This presumption

can be overcome if the total

compensation is reasonably related to

the value of the goods or services

provided.

* * * * *

5. A new Appendix F to part 3500 is

added, to read as follows:

Appendix F to Part 3500—Mortgage

Broker Contract

BILLING CODE 4210–27–P
Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules 53927
53928 Federal Register / Vol. 62, No. 200 / Thursday, October 16, 1997 / Proposed Rules

Dated: September 17, 1997.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal

Housing Administrator.

[FR Doc. 97–27343 Filed 10–15–97; 8:45 am]

BILLING CODE 4210–27–C