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February
2002
Senate Banking Committee Hearing
Examines Yield Spread Premiums
On Jan. 8, the Senate Banking Committee held a hearing on "Predatory
Mortgage Lending Practices: Abusive Uses of Yield Spread Premiums."
Committee Chairman Sen. Paul Sarbanes (D-MD), the only Senator in
attendance, opened the hearing by stating that he believes yield spread
premiums (YSPs), when properly used, are
beneficial tools for borrowers, but when they are improperly used, they
are in the category of kickbacks and referral fees that RESPA prohibits.
Sen. Sarbanes said he believes that the recent Statement of Policy 2001-1
issued by HUD will "open the door for abuse" of YSPs by facilitating the practice of mortgage brokers
steering borrowers into higher rate loans.
Sen.
Sarbanes then heard testimony from three borrowers who obtained loans
through mortgage brokers and alleged that their loans involved abusive
yield spread premiums. Sen. Sarbanes commented that in all three cases,
the borrowers did not appear to know that their loans involved a YSP until they reviewed the closing documents, they
all paid a higher interest rate than they could have qualified for, and
that in all three cases the YSP was not used to reduce the borrower's
cash outlay. Following the borrower panel, Sen. Sarbanes heard from a
panel of industry and consumer representatives and experts.
NAMB
President Joseph Falk, CMC, CRMS, testified that mortgage brokers
originate more than 65 percent of all mortgages today, and this indicates
that brokers are effective in providing consumers what they want. This
being: service, convenience, choice of products, and competitive prices.
He said that NAMB supports the new HUD policy statement as simply a
clarification of existing policy; that NAMB supports HUD's initiative to
improve enforcement of RESPA violations, including illegal YSPs, and that NAMB supports a new disclosure that
would be required of all originators, plus an enhanced Good Faith
Estimate with tolerances that could not be exceeded without a redisclosure well before closing. Falk also said that
the broker's compensation should be disclosed on the Good Faith Estimate,
and that brokers do provide services, goods, and facilities to lenders
for which they can be legally compensated.
Howell
Jackson, a professor at Harvard Law School, stated that he
reviewed over 3,000 loans funded by one wholesale lender, and most of the
loans involving a YSP did not reduce the
borrowers' up-front costs. He proposed that HUD require brokers to
present YSPs to borrowers up-front as an
option; that the YSP should be rebated to the borrower; that the practice
of charging discount points also be examined, because it is simply a
disguised form of a YSP; and that HUD should act
to further regulate YSPs. Jackson also said he
believes it still may be possible to carry a class action under the HUD
test in the 2001 policy statement.
John Courson, chairman-elect of the MBA, stated that
mortgage lenders want clarity of rules, in order to be able to operate
and comply with the law without the constant threat of litigation. He
said MBA supports a new broker disclosure and has already submitted a
prototype to HUD; and that HUD's policy statement was both necessary and
correct. Later, Courson said MBA believes a
mortgage broker's total compensation should be disclosed up-front and
that the total compensation to the broker should be the same no matter
how it is paid. He said MBA believes YSPs are
legitimately used only to allow the borrower to reduce up-front costs.
Ira
Rheingold of the National Association of Consumer Advocates, and David
Donaldson, partner at Donaldson and Guin, both testified that the 11th Circuit Court decision
in Culpepper v. Irwin Mortgage Corp was correct in concluding that YSPs based solely on the interest rate on the loan
are illegal. They said the 2001 HUD policy statement, which was issued in
response to the Culpepper decision, will allow the industry to continue
illegal practices. They said that only class action litigation presents
enough of a threat to the industry to force it to change its practices.
David
Olson, President of David Olson Research, testified that wholesale
lending is the lowest cost method of originating loans, and that mortgage
lending is actually not very profitable. He noted that many lenders have
exited the subprime lending market in recent
months due to extensive losses. He said his research shows that the average
cost to originate a mortgage is about 2 percent of the loan amount. He
said the best solution to problems in the market is to simplify the
process so that costs can be reduced and consumers can more effectively
shop for loan rates and terms.
In
concluding the hearing, Sen.Sarbanes expressed
continuing concern that HUD's 2001 policy statement allows illegal YSPs. He said he hopes HUD will act to stop abuses of
YSPs, and that he will submit the transcript of
the hearing to HUD for consideration in its upcoming rulemaking.
For a
copy of Falk's testimony before the Senate Banking Committee this week,
go to www.namb.org
New Federal Predatory Lending Bill
Introduced
On Dec. 20, Rep. Maxine Waters (D-CA) introduced HR 3607, called the
"Protecting Our Communities from Predatory Lending Practices
Act." The bill includes several amendments to the Truth In Lending
Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA) that
would outlaw or restrict certain mortgage terms and practices. The bill
would further expand the reach of HOEPA restrictions by significantly
reducing both the HOEPA APR and points-and-fees thresholds.
HR 3607
would amend TILA to prohibit engaging indirectly or directly in any
unfair or deceptive act or practice in connection with any consumer
credit transaction or any advertisement relating to any such transaction.
The bill would expand the reach of HOEPA by reducing the APR threshold
from 8 percent over the comparable term Treasury note to 4 percent, and
reducing the points-and-fees threshold from the greater
of 8 percent of the loan amount or $468, to the greater of 3 percent of
the loan amount or $1000. The bill would include indirect mortgage broker
compensation, including yield spread premiums, in the points and fees
test.
Fed Approves HOEPA Changes
The Federal Reserve Board met in December to take final action on
amendments to regulations under HOEPA. The Board approved a series of
changes that will capture more loans within the HOEPA restrictions, limit
refinancings, and expand the HOEPA disclosure.
Specific changes include:
·
Reducing the APR trigger from 10 percent above the comparable rate
Treasury security to 8 percent, for first lien loans. The trigger for
second lien loans remains at 10 percent.
·
Including upfront premiums for optional credit insurance in the
points-and-fees trigger for all HOEPA loans.
·
Prohibiting a lender from refinancing a HOEPA loan that it originated, holds, or services, into another HOEPA
loan within a year of the origination. Exceptions to this prohibition
are: If the refinancing is "in the borrower's interest;" or If
the refinancing is necessary to respond to a "bona fide personal
financial emergency."
·
Prohibiting a creditor from falsely documenting a closed-end loan as an
open-ended loan to avoid HOEPA coverage (HOEPA does not apply to
open-ended loans).
·
Requiring lenders to include the total loan amount in the pre-closing
HOEPA disclosure.
·
Prohibiting the exercise of call or due-on-demand provisions in HOEPA
loans unless it is in connection with a default.
·
Clarifying the provision prohibiting the pattern and practice of lending
without regard to the borrower's ability to repay the obligation. A
lender will now be presumed to be in violation of this provision if it
generally does not verify and document consumers' ability to repay the
loan. This can include a variety of means of documenting income.
www.federalreserve.gov/boarddocs/press/boardacts/
2001/20011212/default.htm
House and Senate Pass VA Guaranty Limit Hike
The House and Senate have approved final passage of a
bill to increase the Department of Veterans Affairs home loan guaranty
limit for the first time in seven years. HR 1291 raises the guaranty
limit to $60,000, allowing veterans to qualify for a no-downpayment loan of up to $240,000 in high-cost
areas. The Senate approved the House-passed bill late Dec. 13, and now it
goes to the President for his signature. Under the current guaranty limit
of $50,750, the maximum amount of a no-downpayment
loan is $203,000. The VA securitized 12,790 vendee loans totaling $1.05
billion in 2001. The last time the limit was raised was in 1994. Since
then, the Fannie Mae/Freddie Mac conforming loan limit has increased 48%
to $300,700.
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