Copyright 2002 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
January 8, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2022 words
COMMITTEE:
SENATE BANKING HOUSING AND URBAN AFFAIRS
HEADLINE: PREDATORY LENDING PRACTICES
TESTIMONY-BY: MR. DAVID R. DONALDSON
AFFILIATION: DONALDSON & GUIN LLC.
BODY: Hearing on "Predatory Mortgage Lending
Practices: Abusive Uses of Yield Spread Premiums."
Prepared Statement of
Mr. David R. Donaldson Donaldson & Guin LLC.
Tuesday, January 8,
2002
Chairman Sarbanes, distinguished Members of the Committee, thank
you for inviting me to testify on the abusive uses of yield spread premiums. By
way of introduction, I am a lawyer in private practice in Birmingham, Alabama. I
represent the plaintiff class in Culpepper v. Irwin Mortgage Corporation, a
damages suit brought under the Real Estate Settlement and Procedures Act
(RESPA). A 1998 federal court of appeals decision in Culpepper led to HUD's 1999
Statement of Policy (SOP). Another decision by that same court in June of 2001
resulted in HUD's 2001 SOP that this Committee has asked me to discuss here
today. I would like to begin by expressing my deep appreciation to this
Committee for its efforts to examine and curb abusive and deceptive lending
practices. The mortgage industry's current yield spread premium practices that
are reflected in HUD's 2001 SOP Statement are an integral part of the
well-documented predatory problem that is crying out for examination and remedy.
Irwin and many other lenders currently offer brokers yield spread
premium payments whenever brokers are able to convince borrowers to accept
higher interest-rate loans. Consumers are, in effect, being encouraged to borrow
money that lenders use to bribe brokers to do business with them. Consequently,
brokers who have been fully compensated by loan origination fees and other
"direct" payments also receive unearned additional "compensation" that costs
homeowners thousands of additional dollars in mortgage payments over the
duration of their loans.
RESPA outlaws all kickbacks and referral fees.
Under Culpepper, a yield spread premium can be legal if the evidence
demonstrates that the yield spread premium was paid in exchange for the broker's
services. HUD's 2001 SOP seeks to delete the "for services" requirement and
thereby legalize "reasonable" referral fees even when no additional compensation
is owed to the broker. I believe HUD's recent actions to be misguided,
irrational and in direct conflict with Congress's express intent in passing
RESPA.
1. Yield Spread Premiums Are Not Being Used To Lower Closing
Costs.
HUD's ostensible reason for the 2001 SOP was its claim that
Culpepper might prevent borrowers from using yield spread premiums to lower
their up-front closing costs. The court's Culpepper decisions, however,
expressly allow borrowers to finance closing costs through yield spread
premiums. A yield spread premium could be legal under Culpepper III if the
lender's form contract with the mortgage broker required the broker to use the
yield spread premium payment to reduce borrowers' up-front closing costs. HUD's
and the industry's "consumer benefit" arguments are clearly "red herrings."
Under HUD's "reasonableness test,"YSPs are legal regardless of whether they are
used to lower closing costs. Moreover, lenders and brokers do not, in fact, use
yield spread premiums to lower borrowers' closing costs. At the outset of the
Culpepper litigation, Irwin claimed that "the yield spread premium was simply
the market-driven payment to [the broker] for an asset--the loan itself." It was
only after the courts rejected that argument that industry lawyers concocted the
idea that yield spread premiums were used to lower borrowers' closing costs. My
colleagues and I have examined thousands of Irwin's borrowers' loan documents,
and I have yet to find a single class member whose closing costs were reduced as
a result of yield spread premiums. Among class members in other cases, I am only
aware of a tiny handful of settlement statements reflecting credits against the
borrowers' obligations resulting from yield spread premiums.
If yield
spread premiums were actually being used to lower borrowers' closing costs, the
lenders could expect to prevail in the litigation. Indeed, if they are not
violating the law, they will prevail in court. But it is highly improper for HUD
to attempt to overrule the Courts, alter the plain meaning of Congress' statute,
and, indeed, interfere with both procedural and evidentiary issues in the
judicial system. HUD has no such power, nor should it.
2. HUD's 2001 SOP
Does Nothing To Curb Abusive YSP Payments.
HUD and mortgage industry
representatives have publicly admitted that mortgage brokers frequently tack on
unexpected charges at closing when it is too late for borrowers to obtain other
financing. This should come as no surprise since the National Association of
Mortgage Brokers (NAMB) takes the position that brokers should be allowed to
hide yield spread premiums from borrowers. While the Culpepper court's "fee for
services" approach would help curb these nefarious "bait and switch" tactics,
HUD's "reasonableness" test encourages brokers to tack on additional charges at
closing. Since the "reasonableness" of a charge is measured by what other
brokers charge, no referral fee or kickback can be illegal under HUD's test as
long as the practices are widespread.
3. HUD's "Reasonableness" Test
Amounts to Illegal Rate Regulation.
When Congress passed RESPA, it
expressly rejected HUD's proposals for authority to impose caps on settlement
charges. Congress chose to allow the market to set prices and rejected HUD's
request for a "large bureaucracy" within HUD to set rates for various types of
loans in various locales. Since HUD lacks the legal authority and the staff to
set caps on settlement charges for various loans, it surely cannot examine
millions of individual loan transactions to determine if individual broker
payments are "reasonable." HUD's "reasonableness" rule ignores the fact that
allowing the "market" to set prices is a two-way street. If brokers are free to
set their own charges, they must also be prohibited from collecting more than
borrowers agree to pay.
4. The 2001 SOP Test For Yield Spread Premium
Payments To Brokers Is Inconsistent With The Test For Other Types of Mark-Ups by
other Settlement Service Providers.
The 2001 SOP is also internally
inconsistent in the way it treats yield spread premium payments to mortgage
brokers as opposed to other types of mark-ups charged by other service
providers. While imposing a "reasonableness" test for YSP payments to brokers,
the 2001 SOP states that other settlement service providers violate RESPA
whenever they mark up the cost of a third party's services without providing
additional settlement services over and above the services for which the
provider has already been paid. For example, the 2001 SOP states that a RESPA
violation occurs when a lender collects $200 from the borrower for an appraisal
fee, pays an independent appraiser $175 and pockets the $25 mark-up. The
"reasonableness" of the $200 charge is presumably irrelevant. HUD has recently
(and with great fanfare) brought several RESPA enforcement actions arising from
a variety of contexts unrelated to yield spread premiums. None of these recent
enforcement actions would have been possible under HUD's "reasonableness" test
for yield spread premiums. Conversely, under the test applied to appraisals and
other settlement charges, if a broker charges a loan origination fee and then
marks up a borrower's interest rate a RESPA violation would occur. There is no
legal or logical basis for this inconsistent treatment.
5. HUD has
Tacitly Admitted That Its 2001 SOP is Inadequate to Protect Consumers.
HUD recognizes that its "reasonableness" test is inadequate to protect
borrowers. On the same day that HUD released its 2001 SOP, it also sent a letter
to all FHA approved lenders setting out HUD's views on "best practices"
regarding yield spread premiums. HUD urges lenders to disclose the total amount
of the broker's compensation, including the yield spread premium and to obtain a
written acknowledgment by the borrower. HUD also suggested that lenders reflect
yield spread premiums as credits on borrower's HUD-1s.
6. HUD's Claim
That The 2001 SOP is a "Clarification" Is Unsupportable.
HUD's claim
that the 2001 SOP reflects its earlier intent is disingenuous. In the 1999 SOP
and in correspondence between HUD's former General Counsel and members of
Congress, including a member of this Committee, HUD expressly stated that the
1999 SOP was not intended to change existing law, which was expressed in the
appellate court's previous Culpepper decisions.
Five years ago when the
Culpepper case was filed, Irwin did not even require brokers to disclose yield
spread premium amounts on borrowers' good-faith estimates. It was not until
after the 1998 Culpepper decision that Irwin began requiring brokers to disclose
yield spread premium amounts on GFEs. Although the industry has been forced by
the ongoing yield spread premium class action litigation to make at least
minimal yield spread premium disclosures to consumers, much more is needed if
consumers are to be able to have any hope of protecting themselves in mortgage
loan originations.
Obviously, HUD is correct in the view expressed in
its recent mortgagee letter that brokers should disclose their total
compensation and that borrowers should be given credit against whatever is owed
to the broker when the broker receives a yield spread premium. Even with that
disclosure, however, it is doubtful that any but even the most sophisticated
borrower could make an informed decision about yield spread premiums without
additional disclosures being required. To make an informed decision about yield
spread premiums, borrowers would also have to know how much their rates are
being increased to generate the yield spread premium and have to know how much
additional monthly interest payments they would incur as a result of the
mark-up. Moreover, in order to prevent unscrupulous brokers from overcharging
and to prevent borrowers from "bait and switch" tactics where yield spread
premiums are disclosed for the first time at closing on the HUD-1, HUD must
require the mortgage industry to use yield spread premiums to lower closing
costs as it now claims to be doing.
Finally, I would be remiss if I
failed to point out my personal opinion that current yield spread premium
practices encourage discrimination. After spending five years of looking at
numerous borrowers' closing documents it is clear to me that borrowers who are
black, female or Hispanic pay higher total broker "compensation" than white
males. That opinion is also supported by a recent Urban Institute Study financed
by HUD which found that "[t]here is no question that minorities are less likely
than whites to obtain mortgage financing and that, if successful, they receive
less generous loan amounts and terms." HUD News Release, No 99-191, New Reports
Document Discrimination Against Minorities by Mortgage Lending Institutions, at
1 (Sept. 15, 1999). The Urban Institute Study also found that African-Americans
and Hispanics tend to pay higher YSPs than whites and that women pay more than
men. Urban Institute Study at 95 n.11. One of the Culpepper plaintiffs, Beatrice
Hiers, is an African-American female from Baltimore whose broker received over
$10,000 for assisting in her origination of a $160,000 FHA mortgage. The $4,500
YSP would never have been paid under the Culpepper rule. According to Irwin,
that payment was legal because it was "reasonable."
Federal regulators
require banks and other depository institutions to implement safeguards to
prevent racial and other types of discrimination by their employees. Mortgage
brokers, however, are often nothing more than an individual or small group of
individuals acting as independent contractor loan officers. They are not
subjected to any oversight by institutional lenders or by regulators. Current
yield spread premium practices that base "compensation" on the broker's ability
to convince borrowers to accept higher interest rates encourage discrimination.
Thank you again for inviting me and for your attention to these
important issues.
LOAD-DATE: January 9, 2002