Guest blog from BusinessWeek Banking and Finance Editor Mara Der Hovanesian:
The mortgage brokers and the government are at each other’s throats again. As soon as the Department of Housing and Urban Development issued rules on Nov. 17 about disclosing how brokers are compensated, the brokers’ main trade group cried foul and filed a lawsuit.
A copy of the mortgage brokers’ lawsuit can be found here, embedded in the National Association of Mortgage Brokers’ Dec. 19 press release.
The gist of the new ruling is disclosure: As part of a slew of mortgage reforms, HUD wants third-party brokers to reveal to homeowners just what their broker is getting paid for helping them with the loan. And the gist of the lawsuit is that brokers don’t want to operate under different rules from those for other lending officers that are employed directly by the bank. For a copy of the HUD rule look here.
This battle has been going on for a decade. Brokers claim that they do lots of heavy lifting for potential homeowners to get them into a home—especially those with few resources to pull together for down payments and closing costs. Brokers can help finance these costs through what the industry calls “yield spread premiums,” or commissions they earn that are paid by the ultimate lender or financer of the loan, either a traditional bank (or in the boom years, Wall Street). These sorts of commissions and deals are not struck with employees of the firms and so bank employees are not subject to HUD’s new disclosure rule.
In many of the interest-only and other wildly popular low-cost loans of the last housing boom, almost all of a mortgage broker’s commission compensation came from the YSP. But some officials and class-action lawyers think that the YSP is a violation of lending laws because it constitutes a kickback, which is illegal. Brokers say that the fees they get are permissible because they are earned for hard work.
The problem is that many of the low-cost loans that mortgage brokers helped to originate in the past few years are exactly the loans that are in the worst shape these days. NAMB president Marc Savitt argues that the new ruling hampers small business in America because it will be onerous for these independent agents to comply with the law.
The mortgage brokers and Savitt need to get with the program. Everybody under the sun associated with the mortgage lending business will be under far more scrutiny and regulation going forward, and for obvious good reason.