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Congressional Testimony
January 8, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 1130 words
COMMITTEE:
SENATE BANKING HOUSING AND URBAN AFFAIRS
HEADLINE: PREDATORY LENDING PRACTICES
TESTIMONY-BY: PAUL S. SARBANES D-MD, SENATOR
BODY: Statement of Senator Paul S. Sarbanes D-MD
Predatory Mortgage Lending Practices: Abusive Used of Yield Spread
Premiums
January 8, 2002
This morning the Committee will hold
its third hearing on the subject of
predatory lending. Our
previous two hearings on this topic focused largely on the predatory loans and
practices which resulted in stripping hard-earned equity away from many low
income home owners. These include folding high points and fees, as well as
products such as credit insurance, into the loan. We also looked at how
unscrupulous lenders and mortgage brokers target low income, elderly, and
uneducated borrowers as likely marks for predatory loans. Today's hearing will
focus more on the role of the broker in the lending process, specifically the
use and misuse of yield spread premiums.
Let me start by addressing how
yield spreads are used in the marketplace. Typically, a mortgage broker will
offer to shop for a mortgage on behalf of a consumer. In many cases, that broker
will promise to get the borrower a good deal, meaning low rates and fees.
Borrowers pay the broker a fee for this service, either out of their savings or
with the proceeds of the loan. Unbeknownst to them, however, that broker may
also be paid a yield spread premium if he can get the borrower to sign up for a
loan at a higher rate than the borrower qualifies for. The higher the mortgage
rate, the higher the payment. We will hear about of such cases this morning.
Yield spread premiums can be a legitimate tool in helping a home buyer
or home owner offset all or some of the closing costs associated with buying or
refinancing a home. When used properly, the broker discloses his total fee to
the consumer. The consumer may then choose to pay that fee, and, perhaps other
closing costs as well, by accepting a higher interest rate and having the lender
pay the fee to the broker. In such cases where the borrower makes an informed
choice the payment helps families overcome a barrier to homeownership- - the
lack of funds for closing costs.
However, it appears that in practice,
perhaps in widespread practice, yield spread premiums are not used to offset
closing costs or broker fees. Instead, these premiums are used to pad the
profits of mortgage brokers, without regard to any services they may provide to
borrowers. Let me quote from a report issued by the Financial Institutions
Center at the Wharton School of Business at the University of Pennsylvania.
Professor Emeritus Jack Guttentag, discussing the problem of "rebate pricing"
that is, payments by lenders to brokers of yield spread premiums, writes:
In most cases ... rebates can be pocketed by the broker, unless the
broker commits to credit them to the borrower, which very few do. Rebate pricing
[i.e. YSPs] has been growing in importance, and one of the reasons is that it
helps mortgage brokers conceal their profit on a transaction.
Moreover,
this does not just affect subprime borrowers, as do most of the other egregious
practices we heard about in our previous hearings. This misuse of yield spread
premiums affects prime borrowers, FHA borrowers, VA borrowers; but, because of
the lack of openness and competition in the subprime market, it hits subprime
borrowers hardest of all. Even for those with the best credit, the current use
of yield spread premiums can cost thousands of dollars in increased financing
costs.
Yield spread premiums, when they are misused in this way, fall
directly into the category of the kind of referral fees or kickbacks that were
so prevalent in the settlement business prior to the passage of RESPA.
After years of hearings and reports, the Congress passed the Real Estate
Settlement Procedures Act (RESPA) in 1974 specifically to outlaw side payments
of this kind because they increase the costs of homeownership for so many
Americans. Indeed, the plain language of the law, the regulations, the 1998
Congressional instructions to HUD to formulate a policy on the issue, and the
1999 HUD policy statement- particularly when taking the legislative history into
account- all make it clear that RESPA was intended to prohibit all payments that
are not demonstrably and specifically for actual services provided. That is to
say, each fee collected by the broker should be for a corresponding service
actually provided.
Because the majority of home loans are now originated
through brokers, lenders have less and less direct access to borrowers. This
means they must compete for the broker's attention to gain access to the
ultimate consumer - the borrower. This competition means that, too often,
lenders must pay yield spread premiums to the brokers simply for the referral of
business. As all of us know, this is prohibited under the law precisely because
it raises the costs of homeownership to the consumers.
Regrettably,
HUD's recent "clarification" of its 1999 policy statement on the issue of Yield
spread premiums will open the door to new and ongoing abuses of low and moderate
income home buyers and owners. Despite the Secretary's statement at his
confirmation hearing that he finds
predatory lending
"abhorrent," I fear that the new policy statement will facilitate the predatory
and racially discriminatory practice of steering homeowners to higher interest
rate loans without their knowledge, and, importantly, without any effective
means of redress.
Secretary Martinez has made increasing minority
homeownership a primary goal of his Administration. However, a study done by
Howell Jackson of Harvard Law School (who will testify on the 2nd panel) shows
that, while the current use of Yield spread premiums imposes extra costs on all
homebuyers, the burden falls especially hard on minorities. In other words,
yield spread premiums, when they are used in this abusive fashion, put the dream
of homeownership further out of reach for minority Americans. Those who still
manage to achieve this dream are forced to pay thousands of dollars in increased
interest costs over the life of their loans. Many find themselves in more
precarious financial positions than they should or could be, thereby putting
them more at greater risk of falling prey to the kind of repeated refinancings
that we have seen lead to equity stripping or even the loss of the home.
I recognize that it is unusual to have a hearing while the Congress is
in recess. HUD has indicated, both in testimony before this Committee in
December, and in the Federal Register, that it intends to publish a proposed
regulation on this matter by the end of this month. These issues are so
important that I wanted to make sure that there would be a public airing of the
issues for the consideration of the Department while their deliberations were
still ongoing.
LOAD-DATE: January 9, 2002