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C.
Robert Simpson of The Wolf Firm
(Mortgage Banking, Executive Essay, August 1997)
McCord testified before a Senate subcommittee seeking support from lawmakers for a comprehensive rewrite of the consumer disclosure laws applying to mortgage settlements. In his testimony, McCord said, "The RESPA-related class action suits that have been going on around the country represent to me an almost classic example of what's wrong with RESPA and why it's time to reform it. Class action lawsuits like the ones we've seen lately on yield spread premiums show just how RESPA has become so complicated even the regulators don't understand it." That assessment appears to be right on the money.
In January 1997 , HUD drafted a statement of policy, taking the position that HUD had never declared yield spread premiums (YSPs) to be illegal. To most of us in the industry, that pronouncement appeared damnation by faint praise.
The better and more accurate statement would have been for HUD to have declared publicly and explicitly that yield spread premiums and rebates have been at the heart of billions of dollars of loan originations, that by and through low and no-cost loans, many people have been able to purchase or refinance who otherwise would have been unable to do so. HUD should have, and could have, taken the opportunity to embrace the concept of rebate pricing as an integral part of the industry and a legitimate way to deliver creative loan products at a low cost.
In response to HUD's Statement of Policy, four congressmen wrote to HUD vehemently protesting any HUD position that was anticonsumer and which would place in jeopardy the "legitimate lawsuits" currently being brought by victims of abusive lenders. The congressmen took the position that YSPs are but a tool for unscrupulous mortgage brokers to deliver loans to consumers at inflated prices. With due respect to the congressmen, there is a better alternative to consumer protection than the abolition of YSPs and the low-cost mortgage products that are their progeny.
In an attempt to protect the consumer, HUD requires disclosure to the consumer of the costs associated with a real estate loan. Accepting that rebates are material and should be disclosed, there is a better way to protect the consumer than current regulations.
If Congress' aim is "meaningful disclosure," let us first examine what is ''meaningfill'' to consumers when obtaining a real estate loan. Upon signing loan documents, the most meaningful items to any borrower are:
Beyond these items, other matters pale in comparison
Very few consumers understand in any meaningful way the subtleties and nuances of loan pricing. The interplay of points and rebates and service release premiums is largely lost on even the most educated consumer. The Regulation Z Disclosure Statement is, in itself, so complicated that many industry professionals are at a loss to describe many significant parts of it. (For example, how many people can explain why the box marked "Amount Financed" does not equal the loan amount?) With everything else consumers have to consider at the time they are purchasing or refinancing a property, the subtleties of YSPs is not high on the list of concerns. If such things are the concern of HUD, then let's opt for meaningful disclosure, instead of disclosures that obfuscate issues that are already difficult to understand. To this end, there is a solution.
During my decade originating mortgage loans, my practice was to solicit all of the borrower's pertinent information, and then considering both the difficulty and the size of the loan, inform the borrower of the amount of my fee. If my fee for originating the mortgage was $3,000, I explained to the borrower that the fee could be any mixture of points and rebates. The decision of how to pay the fee was theirs. Regardless of the borrower's preference, my fee remained constant. This approach was an effective method of selling my services and used the required disclosures to benefit all parties. Despite interest rate fluctuations, my clients knew that my fees remained constant, and I was protected from claims that I had misrepresented rates
The solution to the rebate issue is twofold: First, HUD must strongly support YSPs as a method of pricing loans. Second, if Congress is intent on requiring loan brokers to disclose what they earn, then have them do just that. Require that they disclose what their total compensation will be and let the consumer decide if it will be paid through points or rebates.
If the attack on yield spread premiums is successful, wholesale rate sheets will begin with par pricing, and the consequences of that will be the disappearance of low-cost and no-cost loans, an alternative that benefits no one.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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