October 8, 2001
"In
a recent column, you proposed that HUD impose new disclosure requirements on
mortgage broker fees. But California already has such requirements, and I think
many other states do as well. Do
these requirements do the job?�
No,
they don�t. In fact, they are
close to worthless.
The
acid test of whether a disclosure is useful is whether it helps a borrower of
average intelligence to compare broker fees.
That�s the test I will use.
The
state disclosure requirements that I have seen fall into two groups.
The largest group of states requires that brokers disclose exactly how
they can take advantage of the borrower, without doing anything to prevent it.
California falls into this group. The
California borrower learns that:
-
The
retail price a mortgage broker offers you�your interest rate, total points
and fees�will include the broker�s compensation.
-
In
some cases, either you or the lender may pay the mortgage broker all of its
compensation.
-
Alternatively,
both you and the lender may pay the mortgage broker a portion of its
compensation. For example, in
some cases, if you would rather pay a lower interest rate, you may pay
higher upfront points and fees.
-
Also,
in some cases, if you would rather pay less upfront, you may wish to have
some or all of our fees paid directly by the lender, which will result in a
higher interest rate and higher monthly loan payments than you would
otherwise be required to pay.
-
The
mortgage broker also may be paid by the lender based on (i) the value of the
mortgage loan or related servicing rights in the marketplace or (ii) other
services, goods or facilities performed or provided by the mortgage broker
to the lender.
Among
the states, California requires the largest number of words to say that the
broker may be paid both by the borrower and the lender.
But even when the point is made concisely, it doesn�t help the borrower
who is trying to compare broker fees. Knowing
that the broker may be paid by the lender helps only if the borrower knows what
that payment is, and he doesn�t learn that until the loan closes, if then.
An
alternative approach requires brokers to specify the range of total compensation
from both borrower and lender. In
Florida, for example, the broker must disclose that �Business will receive a
sum in range of
% to
% of the total loan amount�the exact amount of which will be disclosed
at closing��
This
may appears to protect the borrower, but appearances are deceiving.
The prevailing practice among brokers in Florida is to enter a range of
0% to 5%. One broker told me that
he was taught to do this in the course he took in mortgage brokerage.
This leaves the broker with complete freedom of action, while providing
the borrower with no usable information.
Nor
would it be any better to require disclosure of the maximum fee alone.
In that case, the brokers would all enter 5% and the result would be the
same.
The
only approach that will really help the borrower compare broker fees is to
require that the broker disclose total compensation from the borrower and the
lender. I hope that HUD grasps this
obvious truth in its forthcoming disclosure rule, and has the political courage
to adopt it. If it adopts one of
the half-baked approaches described above, it will create more paperwork but not
help borrowers a whit.
Copyright
Jack Guttentag 200
