Washington, DC Consumers Union, the nonprofit publisher of Consumer Reports magazine, applauded a proposal unveiled today by the Department of Housing and Urban Development (HUD) that will help protect consumers from price gouging and self-dealing among mortgage brokers. Although the details of the proposal were not made available, the consumer organization described the general approach proposed by HUD as a “giant step in the right direction.”
The proposed regulation is issued under the “anti-kickback” prohibition of the Real Estate Settlement Procedures Act (RESPA). That federal law prohibits lenders and brokers from giving or receiving a kickback for referring a homebuyer to a particular lender, title insurance company or other firm during the home financing process. Recognizing that consumers rely heavily on referrals from brokers and others during the complex homebuying process, the anti-kickback prohibition is intended to ensure that consumers are not steered to bad deals that can add thousands of dollars to the cost of homeownership.
The proposed regulation is intended to resolve the controversy over fees paid to mortgage brokers by mortgage lenders. These fees raise concerns about whether the broker is getting the consumer a fair mortgage deal or simply steering the consumer to the lender willing to give the broker the highest fee. The lender-paid fee can compensate the broker for the costs of facilitating the loan origination by supplementing or replacing payments from the consumer. On the other hand, when lenders pay brokers simply to steer business their way, the payment is an illegal kickback that inflates the price of the loan for the homebuyer. Lender payments have spawned a great deal of litigation in recent years.
The proposed regulation attempts to eliminate illegal payments and inflated loan rates by locking the broker into a specific loan rate and broker fee before taking a payment or application from the consumer. Brokers who agree to lock in these terms upfront, and disclose whether they are acting as an agent of the consumer, will receive a qualified “safe harbor” that will protect them from lawsuits under the anti-kickback rule.
This approach will help consumers by:
- Clarifying the role the mortgage broker is playing. Many consumers think the broker is acting as their agent when this is not usually the case at the present time. By requiring brokers to disclose whether they are acting as an agent of the consumer, the HUD proposal could encourage brokers to assume that role.
- Giving consumers the loan price information they need to know whether a better deal is available elsewhere. Currently brokers do not have to give any firm information about the loan terms until the loan goes to closing.
- Locking the broker into a contract that limits the broker’s total compensation amount. This sharply reduces the broker’s incentive to “shop” the loan to the lender willing to pay the broker the highest fee.
” HUD’s approach will give mortgage brokers a big incentive to treat consumers fairly. It should put an end to the behind the scenes shenanigans that line the pockets of brokers and pick the pockets of homebuyers,” said Michelle Meier, CU’s counsel for government affairs.
“It’s hard to know when a payment is a kickback rather than a legitimate payment for services. HUD’s approach tries to clarify the law in a way that maximizes consumer protection,” Meier said.
“The mortgage process is confusing, costly and full of traps for the homebuyer. This proposal is a giant step in the right direction toward making the process more consumer friendly. The details of the p roposal, which we haven’t seen yet, will be critical. But the general approach unveiled today is great news for American homebuyers,” Meier added.