Why Don’t The Same Rules Apply To All Lenders?

With the national mortgage industry on the forefront of the news today there has been much debate about the infamous yield spread premium (“YSP”). As you may now know, YSP is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale par rate that the borrower qualifies for. The YSP can be significant, sometimes reaching tens of thousands of dollars.

While a YSP may prove beneficial to borrowers who do not want to (or cannot) pay any points at closing, borrowers rarely understand the concept, and disclosure of the fee is often times overlooked by mortgage brokerage professionals. Just like mortgage brokerage professionals, financial institutions that fund their own loans can be compensated indirectly, too. These institutions receive indirect compensation in the form of what is known as a “service release premium” (“SRP”) and/or “gain on sale,” which is the name of the fee that the investor/secondary market pays the lender for the loan.

Essentially, the YSP and the SRP are one in the same – indirect compensation paid by the borrower in connection with the loan process.

However, there is one very conspicuous difference between YSP and SRP – disclosure. Currently, mortgage brokerage professionals must disclose the YSP to the borrower. However, financial institution professionals do not have a legal obligation to disclose SRP to the borrower. (See: RESPA Statement of Policy 2001-1: Clarification of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers and Guidance Concerning Unearned Fees Under Section 8(b).)

Basically, this means if a borrower obtains a loan through a third party mortgage broker, then that borrower is legally entitled to know the “indirect” compensation that the mortgage brokerage professional received. However, if that same borrower walks into Wells Fargo, for instance, and obtains that same loan, Wells Fargo has no legal obligation to disclose to the borrower the indirect compensation they receive. The question is simply, “why?”

Recently, Rep. Bradley Miller [D-NC] sponsored H.R. 3915: The Mortgage Reform and Anti-Predatory Lending Act of 2007. Among other things, H.R. 3915 addressed the topic of YSP. The proposed bill appeared to “outlaw” YSP -– as to mortgage brokers. Fearing the elimination of the YSP gravy train, the National Association of Mortgage Brokers (“NAMB”) fought hard and received Congress’ agreement “to insert language in the manager’s amendment that allows the financing of the broker’s fee, provided that the fee is ‘fully and clearly disclosed to the consumer early in the application process.’” (www.consumermortgagereports.com)

Conspicuously absent in the proposed legislation, however, is a requirement that financial institutions make any sort of disclosures to the borrowers regarding the SRP. Why do the financial institutions get to play by a different, and more lax, set of rules? Stronger lobbying, perhaps? Both the YSP and SRP are indirect compensation received by the lender/mortgage broker that are ultimately borne by the borrower. Ostensibly, the policy reasons favoring full disclosure of the YSP would evenly apply to full disclosure of the SRP.

Frankly, I find this loophole nonsensical and borderline preposterous. We need to be honest with ourselves — if Congress truly wants to clean up the mortgage industry, they need to address more than just the mortgage brokers.

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Attorney Jeffrey L. Hogue is a partner at the San Diego law firm of Hogue & Belong. Mr. Hogue is also a founder of the Mortgage Accountability Association.

This entry was posted on Tuesday, April 15th, 2008 at 4:37 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.