`[Federal Register Volume 62, Number 200 (Thursday, October 16, 1997)]
[Proposed Rules]
[Pages 53912-53928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27343]



[[Page 53911]]

_______________________________________________________________________

Part IV





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 3500



Real Estate Settlement Procedures Act (RESPA) Disclosure of Fees Paid 
to Mortgage Brokers; Proposed Rule and Notice of Proposed Information 
Collection Requirements

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

[[Page 53912]]



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.

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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

[[Page 53913]]

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
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    \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.
    \2\ Culpepper v. Inland Mortgage Corp., 953 F.Supp. 367 (N.D. 
Ala. 1997).
    \3\ Barbosa 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.
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    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

[[Page 53914]]

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
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    \4\ HUD 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.
    \5\ This 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.
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    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

[[Page 53915]]

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        Price charged by mortgage broker to                            
         broker* (rate plus points)                 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
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    \6\ With 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).
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    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

[[Page 53916]]

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 Sec. 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

[[Page 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 table-funded 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

[[Page 53918]]

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

[[Page 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

[[Page 53920]]

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
---------------------------------------------------------------------------

    \7\ A ``high cost mortgage loan'' is an owner-occupied 
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.
---------------------------------------------------------------------------

    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,

[[Page 53921]]

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
---------------------------------------------------------------------------

    \8\ A 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.
---------------------------------------------------------------------------

    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.

[[Page 53922]]

    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 
Sec. 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

[[Page 53923]]

would have to disclose fees on the GFE and the HUD-1 or HUD-1A in a 
manner consistent with Secs. 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 
Sec. 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 Sec. 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 Sec. 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

[[Page 53924]]

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 
Sec. 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                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Responses                                                                               
            Information collection                Number of        per            Total annual responses          Hours per    Total hours   Regulatory 
                                                 respondents   respondent                                         response                    reference 
--------------------------------------------------------------------------------------------------------------------------------------------------------
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

[[Page 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 Sec. 3500.2, paragraph (b) is amended by revising the 
definition of ``Mortgage broker'' to read as follows:


Sec. 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 Sec. 202.2(b) or Sec. 202.15(a) of 
this title is a mortgage broker for purposes of this part.
* * * * *


Sec. 3500.7  Amended

    3. In Sec. 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 Sec. 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:


Sec. 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

[[Page 53926]]

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, 
Secs. 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

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    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`