Mortgage Broker Fee Disclosure Rule: Intent to Establish a Negotiated Rulemaking Advisory Committee and Notice of First Meeting

SUMMARY: The Department is considering the establishment of a

Negotiated Rulemaking Advisory Committee under the Federal Advisory

Committee Act (FACA). The first objective of the Committee would be to

determine whether or not the amount and nature of indirect payments to

mortgage brokers and certain other mortgage originators (retail

lenders) should be disclosed to consumers. Second, the Committee will

seek to resolve whether the Real Estate Settlement Procedures Act

(RESPA) permits volume-based compensation from wholesale lenders,

entities that purchase mortgage loans, to mortgage brokers and, if such

compensation is found permissible, whether and how the compensation

should be disclosed. The Committee would consist of representatives

with a definable interest in the outcome of a proposed rule. HUD has

prepared a charter and has initiated the requisite consultation process

pursuant to the FACA, Executive Order 12838, and the implementing

regulations. If the charter is approved and a final determination is

made to form the Committee, the first meeting will take place in late

1995 or early 1996, after the close of the comment period, in

Washington, D.C.; the exact date of the meeting will be announced when

it has been finalized.

The Department also recently published a proposed rule on this same

subject (60 FR 47650, September 13, 1995). Public comments received on

that proposed rule will be given to the members of the committee for

their consideration as they are negotiating a new proposed rule.

DATES: Comments must be received by November 24, 1995. The exact date

of the first meeting in late 1995 or early 1996, in Washington, D.C.,

will be announced in a subsequent Federal Register document. Interested

persons may also contact David Williamson, at the telephone number

listed under For Further Information Contact, for this information.

ADDRESSES: Interested persons are invited to submit comments regarding

the proposed Committee and membership 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.

Comments or any other communications submitted should consist of an

original and four copies and refer to the above docket number and

title. Facsimile (FAX) comments are not acceptable. The docket will be

available for public inspection and copying between 7:30 a.m. and 5:30

p.m. weekdays at the above address.

The location for the first meeting in late 1995 or early 1996 will

be: the Office of Administrative Law Judges, Washington Office Center,

409 3rd Street SW., Suite 320, Washington, D.C. 20024.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, RESPA

Enforcement Unit, Department of Housing and Urban Development, Room

5241, 451 Seventh Street SW., Washington, DC 20410-0500; telephone

(202) 708-4560, or on e-mail through Internet at [email protected].

The TDD number for persons who are hearing- or speech-impaired is (202)

708-4594 (TDD). (These telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

Background

Issue 1: Mortgage Broker Fee Disclosure

Since the enactment of the RESPA (12 U.S.C. 2601 et seq.) in 1974,

the mortgage lending industry has experienced a rapid evolution due, in

part, to major technological advances, innovative business entities,

and new types of business relationships that serve consumers in single

lending transactions. Much of the change that has occurred is

attributable to the impressive growth of the secondary mortgage market.

By the early 1980s, secondary market entities, such as the Federal

National Mortgage Association (Fannie Mae) and the Federal Home Loan

Mortgage Corporation (Freddie Mac), not only bought major amounts of

mortgage loans, but repackaged many of these loans and sold them as

mortgage-backed securities, allowing them to purchase even greater

numbers of lenders' mortgage loans.

A further industry development since the passage of RESPA is that

many loans are purchased by, or servicing is transferred to, a

wholesale lender at, or shortly after, closing, with the retail lender

serving as the intermediary between the consumer and the purchasing

entity. When a retail lender serves as an intermediary, it may perform

services in processing the loan for which it is compensated. Such

compensation may be ``direct'', where the fees are paid directly by the

consumer, or ``indirect'', where fees are paid by the wholesale lender

to the retail lender. The issue arises over whether under RESPA, the

amount and the nature of indirect compensation must be disclosed to the

consumer, and if so, in what form.

The Congress enacted RESPA in order to avoid unnecessarily high

prices and to ensure that consumers were afforded timely and effective

information as to the nature and costs of real estate settlement

service transactions. To this end, Section 4 of RESPA (12 U.S.C. 2603)

requires the Secretary to create a uniform settlement statement that

``shall conspicuously and clearly itemize all charges imposed on the

borrower * * * and the seller in connection with the settlement''

(Section 4(a)). Section 5(c) of RESPA further requires the provision of

a ``good faith estimate of the amount or range of charges for specific

settlement services the borrower is likely to incur in connection with

the settlement * * *.'' 12 U.S.C. 2604(c).

Under HUD's current rules, the disclosure of all fees paid to

retail lenders, including all compensation from wholesale lenders, is

required where the retail lender is being compensated as part of the

settlement transaction. 24 CFR 3500.5(b)(7); Appendix B, Fact

Situations 5 and 11. This same disclosure requirement has not been

applied to subsequent purchases of loans by wholesale lenders on the

theory that Congress only intended to cover costs related to the

initial settlement transactions.

The Department's current regulations, therefore, treat compensation

to the retail lender under three settlement situations somewhat

differently, depending upon how the loans are funded at settlement.

First, there must be a disclosure of any fees paid by consumers where

the retail lender processes the loan from start to finish, funds the

loan, and closes the loan in its own name. Subsequent sales of the loan

to a wholesale lender, however, would require no further disclosures.

Second, where loan funds are provided by the

[[Page 54795]]

wholesale lender and the loan is closed in the wholesale lender's name,

current RESPA regulations require that indirect, as well as direct,

payments to the retail lender and the wholesale lender be disclosed.

Under the third method of origination, a loan is processed by, and

closed in the name of, the retail lender with a simultaneous advance of

loan funds to the retail lender by the wholesale lender, and an

assignment of the loan and servicing rights to that wholesale lender

(``table-funding''). The Department has determined that all

compensation received by a mortgage broker in such a table-funded

transaction is subject to disclosure.

The Department's current rules treat mortgage brokers in table-

funded transactions as settlement service providers ancillary to the

loan, akin to title agents, attorneys, appraisers, etc., whose fees are

subject to disclosure. This interpretation does not view a mortgage

broker as the functional equivalent of a mortgage lender. The salient

criterion for this conclusion is the source of funds--unlike a mortgage

lender, the mortgage broker in a table-funded transaction does not

close the loan with its own funds. Conversely, a mortgage broker using

its own funds, or with a ``warehouse'' line of credit for which it is

liable, is not viewed as a mortgage broker but rather as a mortgage

lender under the extant HUD interpretation.

HUD's interpretation has given rise to some controversy. Opponents

contend that the Department's reading of RESPA's disclosure

requirements to include indirect charges and payments that the borrower

funds is too expansive. First, they argue that indirect compensation

need not be separately enumerated since it is already reflected in

direct charges. They further assert that all the consumer needs to know

is enough to compare the ultimate cost to the consumer of competing

products. Second, critics argue that such loans are akin to, and should

thus be treated as, secondary market transactions. Mortgage brokers

further complain that an unlevel playing field is created since

mortgage bankers do not bear the burden of disclosing the terms of a

subsequent sale of the loan. They argue that the competitive

disadvantage is amplified by the fact that the Department makes

mortgage brokers subject to the requirements of Section 8 of RESPA,

adding a level of scrutiny that does not apply to transactions of other

originators who sell their loans to wholesale lenders following

settlement. They also assert that HUD's interpretation, insofar as it

places retail lenders at a competitive disadvantage, deters the

expansion of access to mortgage credit for ``non-traditional''

borrowers.

Issue 2: Volume-Based Compensation

Volume-based compensation is a payment of money or any other thing

of value, as defined by the RESPA regulation, Sec. 3500.14(d), that a

wholesale lender provides to a retail lender, based on a number or

dollar value of loans that the retail lender sells to the wholesale

lender in a fixed period of time. Volume compensation also encompasses

volume discounts, wherein a retail lender, who is to provide a stated

volume of loans, is given a lower ``start-rate'' than the wholesale

lender's advertised rate, and the retail lender keeps a differential

between the start rate and the advertised rate as part of its

compensation at settlement.

HUD has never enunciated a formal policy on whether volume-based

compensations are permissible under RESPA. Critics of volume-based

compensation argue that permitting such payments may lead to loan-

steering. Arguably, the consumer's interest (in seeing a range of loan

options) may be subordinated to the interest of the retail lender in

receiving greater compensation from a particular wholesale lender.

Moreover, additional compensation for loans closed above a threshold

number, where no added services are provided, could, standing alone,

violate Section 8 of RESPA.

Other critics argue that, if the retail lender originates in its

own name, the consumer is generally unaware that the retail lender has

wholesale options available and may not even be consciously aware of

the retail lender's intention to sell the mortgage. It is also

conceivable that the retail lender may influence the consumer not to

select a favorable loan package so that the retail lender can increase

its volume of business with a lender which offers volume compensation.

Consumers may, however, benefit from volume-based compensation. A

retail lender will strive to obtain the higher price available from

volume compensation. To obtain the needed volume of business, the

retail lender may pass along part of the higher price to the consumer

in terms of lower points or other cost savings. Retail lenders required

to make disclosure could also argue that HUD has created an ``uneven

playing field'' between mortgage bankers and other retail lenders,

inasmuch as the issue of volume-based compensation is not relevant for

mortgage banker transactions.

In addition to volume-based compensation, retail lenders also

receive compensation from wholesale lenders under a variety of names,

the most common of which are ``servicing release premiums'', ``yield

spread premiums'', ``yield spread differentials'' or ``overage''. These

terms generally refer to any compensation paid to or retained by a

retail lender based upon the difference in the interest rate provided

in the sold loan and some other benchmark interest rate. It compensates

the retail lender for a loan priced at a rate higher than that at which

the wholesale lender would otherwise have been willing to accept the

loan. A ``servicing release premium'' is any compensation paid to a

retail lender for the release of rights to service the loan. The

concerns regarding such forms of compensation are similar to those

expressed regarding volume based compensation, that is, do they

constitute kickbacks or fee-splitting for delivery of the loans.

Regulatory Negotiation

Negotiated rulemaking has emerged in recent years as an alternative

to conventional procedures for drafting proposed regulations. The

essence of the concept is that, in appropriate circumstances, it is

possible and preferable to bring together agency representatives and

all parties substantially affected by the subject matter of the

regulation in order to negotiate the terms of the proposed rule. The

literature identifies two principal purposes of negotiated rulemaking:

to gather information so that agency regulation results in better-

informed and well-fashioned rules, and to attempt to reach consensus as

to the text of the rule by a process through which negotiators evaluate

their own priorities and make tradeoffs to achieve an acceptable

outcome on the issues of greatest importance to them. Each element is

an extremely valuable outcome of the regulatory negotiation process.

If a consensus is achieved, the resulting rule will likely be

easier to implement and less subject to subsequent litigation. Even if

consensus is not reached, the process may prove valuable as a means of

better informing the regulatory agency of the issues and the concerns

of the affected interests.

The final convening report was provided to HUD in September 1995,

and concludes that ``negotiated rulemaking would be appropriate and

feasible and that this process may offer the best means of

accommodating the difficult issues involved here.'' A copy of the

report, titled Convening Report for Regulatory Negotiations on Mortgage

[[Page 54796]]

Broker Fee Disclosures, is available in the office of the Rules Docket

Clerk at the above address.

Chartering of Reg-Neg Committee

As a general rule, an agency of the Federal Government is required

to comply with the requirements of the Federal Advisory Committee Act

(FACA) when it establishes or uses a group of non-Federal members as a

source of advice. Under FACA, HUD must receive a charter for this reg-

neg committee. HUD has prepared a charter and sent it to the Office of

Management and Budget for approval. If the charter is approved and

schedule changes are not necessary as a result of public comments, the

Committee will be convened in accordance with this notice.

Substantive Issues for Negotiation

The convening report noted that regulatory negotiation could lead

to uniform disclosure requirements for all retail lenders either: (1)

to require the disclosure of all direct fees paid to retail lenders by

borrowers and to require disclosure of all indirect fees paid to retail

lenders by wholesale lenders; or (2) to require the disclosure of all

direct fees paid to retail lenders by borrowers only. In addition to or

instead of modifying the rules on disclosure of fees in loan

transactions, HUD may choose to redefine what constitutes a ``secondary

market transaction''. As set forth above, such transactions are exempt

from RESPA including, inter alia, its disclosure requirements, its

prohibitions against kickbacks and referral fees, and its requirement

that all compensation be reasonably related to the goods or services

provided. A ``secondary market transaction'' could be defined as a loan

transaction involving: (1) The sale of a loan by a retail lender to a

wholesale lender occurring after settlement (the position in the

current regulations); (2) the sale of a loan by a retail lender at any

time--before, contemporaneous with, or after settlement; or (3) the

sale of a loan on some other date, such as after the first accrual date

for the loan following settlement, i.e., the date the first payment is

due from the borrower under the loan.

Combining various options for requiring disclosure of direct and

indirect fees, or disclosure of direct fees only, with the three

possibilities for defining the secondary market transaction, results in

at least six alternative approaches to regulating settlement

transactions under RESPA. Each of these six alternatives would have a

different effect on each of the major types of loan transactions

described above, including: (1) loan closing and subsequent assignment

of the loan; (2) loan closing in the wholesale lender's name using the

wholesale lender's funds; and (3) table-funding. None of these

alternatives will affect a fourth type of transaction--a portfolio

transaction where a retail lender processes, funds and closes a loan in

its own name for its own portfolio and the lender then holds the loan

(if the loan is sold at all, it occurs long after settlement). The

alternatives, or possible combination of requirements, available to the

Committee include requiring the:

(1) Disclosure of direct and indirect fees at settlement and

classification of a loan sale as a ``secondary market transaction''

only if it occurs after settlement;

(2) Disclosure of direct and indirect fees at settlement and the

classification of any loan sale--before, contemporaneous with, or after

settlement--as a ``secondary market transaction'';

(3) Disclosure of direct and indirect fees at settlement and the

classification of loan sales following the first accrual--the date the

first payment is due from the borrower under the loan--as ``secondary

market transactions'';

(4) Disclosure of only direct (not indirect) fees at settlement and

the classification of a loan sale as a ``secondary market transaction''

only if it occurs after settlement;

(5) Disclosure of only direct (not indirect) fees at settlement and

the classification of a loan sale, at any time, as a ``secondary market

transaction''; and

(6) Disclosure of only direct (not indirect) fees at settlement and

the classification of a loan sale as a ``secondary market transaction''

only if it occurs after the first accrual date.

As to volume-based compensation, those arguments identified in the

``Issue 2'' section above define the issues likely to arise in

negotiations. Additionally, if negotiated rulemaking leads to a

conclusion that such compensation is allowable under RESPA, the

question also arises as to whether and how the payment should be

disclosed on the Good Faith Estimate and the HUD-1 and HUD-1A forms.

Committee Membership

The convener consulted and interviewed over 30 officials of various

organizations interested and affected by the mortgage fee disclosure

rule. These include the National Association of Mortgage Brokers, the

Mortgage Bankers Association of America, the Mortgage Capitol Group,

the American Bankers Association, and America's Community Bankers. The

convener also concluded that it was essential that the Committee

include an appropriate number of consumer advocates. Moreover, the

convener felt that it was important to include participation from the

national group representing state financial regulators, the American

Association of Residential Mortgage Regulators, due to its active and

important role in consumer protection issues and its expertise,

especially in the real estate arena.

The convener recommended the inclusion of additional entities,

either because of their technical expertise in real estate settlement

issues or by virtue of their interests in issues ancillary to this

regulation. Those recommended by the convener included the National

Association of Realtors, because many of its member realtors are also

mortgage brokers and mortgage lenders, and RESPRO, whose members are

diversified affiliated real estate settlement service providers and

include large real estate companies, controlled businesses, and

mortgage providers.

Finally, the convener recommended two Government-Sponsored

Enterprises--the Federal National Mortgage Association (Fannie Mae) and

the Federal Home Loan Mortgage Corporation (Freddie Mac)--for

inclusion, because of their importance in determining what constitute

secondary mortgage market transactions for purposes of RESPA.

After reviewing the recommendations by the convener, HUD has

tentatively identified the following list of possible interests and

parties:

Tentative List of Regulatory Negotiations Committee Membership

National Industry Groups

1. Paul Reid, President, American Home Funding, Richmond, VA,

President-Elect, Mortgage Bankers Association of America, 1125 15th

Street, NW., Washington, DC 20005-2766

2. David Shirk, Member of Board of Directors, National Association of

Mortgage Brokers, 1735 N. Lynn Street, Suite 950, Arlington, VA 22209

3. John Rasmus, Esq., Senior Federal Administrative Counsel/Manager,

Agency Relations, American Bankers Association, 1120 Connecticut Avenue

NW., Washington, DC 20036

4. Glen Gimble, Esq., Program Manager and Counsel, Real Estate Lending

Compliance, America's Community Bankers, 900 19th Street, NW.,

Washington, D.C. 20006

[[Page 54797]]

5. Roy DeLoach, Policy Representative, Business Issues, National

Association of Realtors, 700 Eleventh Street NW., Washington, D.C.

20001-4507

6. Sue Johnson, President and Executive Director, RESPRO, 1800 M Street

NW., Suite 900 South, Washington, D.C. 20036

7. David Goldberg, The Mortgage Capitol Group, Senior Vice President,

Administration, PHH Mortgage Services Corporation, 6000 Atrium Way, Mt.

Laurel, NJ 08054

Consumer Groups

1. Robert Creamer, Citizen Action, 1730 Rhode Island Avenue NW.,

Washington, DC 20036

2. William J. Brennan, Jr., Esq. (Member, Board of Directors, National

Association of Consumer Advocates), Home Defense Program of the Atlanta

Legal Aid Society, 340 West Ponce De Leon Avenue, Decatur, Georgia

30030

3. Nina Simone, Esq., Jean Davis, Esq., Legal Counsel for the Elderly,

American Association of Retired Persons, 601 E Street NW., Washington,

DC 20049.

State Organizations

1. Craig Jordan, Esq., Assistant Attorney General for the State of

Texas, Consumer Affairs Division, 714 Jackson Street, Suite 800,

Dallas, Texas 75202

2. Daniel Muccia, President, American Association of Residential

Mortgage Regulators and Deputy Superintendent of Banks, State of New

York Banking Department, Two Rector Street, New York, New York 10006

Government-Sponsored Enterprises

1. Jim Newell, Esq., Associate General Counsel, Federal Home Loan

Mortgage Corporation, 8200 Jones Branch Drive, McLean, VA 22102-3107

2. JoAnn Carpenter, Esq., Vice President and Deputy General Counsel,

Federal National Mortgage Association, 3900 Wisconsin Avenue N.W.,

Washington, DC 20016-2899

Federal Government

Designated Federal Officer: Sarah X. Rosen, Esq., Special Assistant to

the Assistant Secretary for Housing, Room 9100, U.S. Department of

Housing and Urban Development, 451 7th Street S.W., Washington, D.C.

20410, (202) 708-3600

Comments and suggestions on this tentative list of Committee

members are invited. HUD does not believe that each potentially

affected organization or individual must necessarily have its own

representative. However, HUD must be satisfied that the group as a

whole reflects a proper balance and mix of interests. Negotiation

sessions will be open to members of the public, so individuals and

organizations that are not members of the Committee may attend all

sessions and communicate informally with members of the Committee.

Requests for Representation

If in response to this Notice, an additional individual or

representative of an interest requests membership or representation on

the Committee, HUD, in consultation with the convener, will determine

whether that individual or representative will be added to the

Committee. Each additional nomination for membership on the Committee

must include the name of the nominee and a description of the interests

the nominee would represent, evidence that the nominee is authorized to

represent relevant parties, a written commitment that the nominee shall

participate in good faith, and the reasons that the members proposed in

this notice do not adequately represent the interests of the person

submitting the nomination. HUD will make the decision on membership

based on whether the individual or interest would be substantially

affected by the proposed rule and whether the individual or interest is

already adequately represented on the Committee.

Final Notice Regarding Committee Establishment

After reviewing any comments on this Notice and any requests for

representation, HUD will issue a final notice. That notice will

announce the establishment of a Negotiated Rulemaking Advisory

Committee, unless HUD's charter request is disapproved, or HUD decides,

based on comments and other relevant considerations, that such action

is inappropriate.

Tentative Schedule

If HUD determines that the Committee should be formed and

negotiations started, HUD plans to hold the first meeting of the

Committee in late 1995 or early 1996, after the close of the 30-day

comment period on this notice and the approval of the Committee's

charter. The meeting will be for two and a half days, with the first

day starting at 10:00 a.m. and running until completion; the second day

starting at 9:00 a.m. and running until completion; and the last day

starting at 9:00 a.m. and running until approximately 1:00 p.m. The

exact dates of the meeting in Washington, D.C., will be announced in a

subsequent Federal Register notice. The location of the meeting will

be: the Office of Administrative Law Judges, Washington Office Center,

409 3rd Street, SW, Suite 320, Washington, D.C. 20024, (202) 708-5004.

The facilitator for the Committee will be the Honorable Alan W.

Heifetz, Chief Administrative Law Judge. The purpose of the first

meeting will be to orient members to the reg-neg process, establish a

basic set of understandings and ground rules (protocols) regarding the

process that will be followed in seeking a consensus, and begin to

address the issues. This meeting is open to the public.

Decisions with respect to future meetings will be made at the first

meeting and from time to time thereafter. Notices of future meetings

will be published in the Federal Register, if time permits.

To prevent delays that might postpone timely issuance of a proposed

rule, HUD intends to terminate the Committee's activities if the

Committee does not reach consensus within 5 months of the first

meeting. The process may end earlier if the facilitator believes that

sufficient progress cannot be made or that an impasse has developed

that cannot be resolved.

Authority: 42 U.S.C. 1437g, 3535(d).

Dated: September 29, 1995.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 95-26412 Filed 10-24-95; 8:45 am]

BILLING CODE 4210-27-P