[Federal Register Volume 60, Number 177 (Wednesday, September 13, 1995)]
[Proposed Rules]
[Pages 47650-47656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22691]




[[Page 47649]]

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Part III





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner



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24 CFR Part 3500



Real Estate Settlement Procedures Act (RESPA): Disclosure of Fees Paid 
to Mortgage Brokers (Retail Lenders), and Notice of Consideration of 
Negotiated Rulemaking; Proposed Rule

  Federal Register / Vol. 60, No. 177 / Wednesday, September 13, 1995 / 
Proposed Rules   

[[Page 47650]]


DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner

24 CFR Part 3500

[Docket No. FR 3780-P-01]
RIN 2502-AG40


Real Estate Settlement Procedures Act (RESPA): Disclosure of Fees 
Paid to Mortgage Brokers (Retail Lenders), and Notice of Consideration 
of Negotiated Rulemaking

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Proposed rule and notice of consideration of negotiated 
rulemaking process.

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SUMMARY: The Department has developed a proposed rule presenting 
alternative approaches to the disclosure of fees to retail lenders and 
other matters relating to such fees that are addressed in HUD's current 
regulations implementing the Real Estate Settlement Procedures Act 
(RESPA). Under this proposed rule, the Department specifically seeks 
comments on whether the disclosure of indirect fees paid to mortgage 
brokers is useful to the consumer and should continue to be required. 
Disclosure of direct charges imposed upon the borrower or seller is 
clearly required under Section 4 of RESPA and is not the subject of 
this proposed rule.
    The Department also has commenced the convening process to 
determine whether to establish a committee for negotiated rulemaking on 
this proposed rule. If negotiated rulemaking appears desirable and 
feasible, then the Department expects to undertake the establishment of 
such a committee by publication of a separate notice in the Federal 
Register. If a negotiated rulemaking committee is formed, the public 
comments concerning the substance of this proposed rule will be given 
to the committee for consideration in its deliberations. If it is 
determined that a committee is not appropriate, the comments submitted 
on this proposed rule will be used by the Department in promulgating a 
final rule.

DATES: Comment due date: November 13, 1995.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule, the feasibility of forming a negotiated rulemaking 
committee, and suggestions for committee participation to the Rules 
Docket Clerk, Office of General Counsel, Room 10276, Department of 
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC 
20410-0500. Communications should refer to the above docket number and 
title. Facsimile (FAX) comments are not acceptable. A copy of each 
communication submitted will be available for public inspection and 
copying between 7:30 a.m. and 5:30 p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, RESPA 
Enforcement, Room 5241, Department of Housing and Urban Development, 
Washington, DC 20410; telephone 202-708-4560; or (for legal questions) 
Grant E. Mitchell, Senior Attorney for RESPA, Room 10252, Department of 
Housing and Urban Development, Washington, DC 20410; telephone 202-708-
1552 (these are not toll free numbers). Hearing or speech-impaired 
individuals may call 1-800-877-8339 (Federal Information Relay Service 
TDD, which is a toll-free number).

SUPPLEMENTARY INFORMATION: The current RESPA regulations make clear 
that ``secondary market transactions'' are not covered by most 
provisions of RESPA: ``a bona fide transfer of a loan obligation in the 
secondary market is not covered by RESPA and this part, except as set 
forth in section 6 of RESPA and Sec. 3500.21 [mortgage servicing 
transfers].'' The current rule details certain tests for what does or 
does not constitute a secondary market transaction. The Department 
seeks comments on its classifications of mortgage loan transactions 
under the current rule as ``primary funding'' or ``secondary market'' 
transactions and, in particular, on whether the Department has drawn 
the line in the appropriate place between a primary funding and a 
secondary market transaction.
    The Department also seeks comments on aspects of its current 
regulations that provide, inter alia, that all fees paid to mortgage 
brokers, either directly or indirectly, must be disclosed on the Good 
Faith Estimate and the HUD-1 or HUD-1A, which are furnished to 
borrowers/consumers. Specifically, the Department seeks comments on its 
determination that the disclosure requirement for ``all charges imposed 
on the borrower'' includes fees paid to the mortgage broker by the 
lender, because all charges are ultimately borne by the borrower. 
Finally, the Department, in this proposed rule, also requests comments 
regarding a related issue: whether certain compensation by lenders to 
mortgage brokers normally paid after settlement, based on the volume of 
loans produced, should be permitted and disclosed under RESPA.

I. Certain Definitions in Proposed Rule

    In this proposed rule, mortgage brokers 1 and certain other 
mortgage originators are frequently referred to as ``retail lenders.'' 
Entities that purchase mortgage loans are frequently referred to as 
``wholesale lenders.'' In any event, the description of the lender is 
not dispositive of whether the transaction is covered by the rule. The 
proposed rule would apply to a transaction based on the characteristics 
of that transaction, rather than on whether the lender generally 
functions in a retail or a wholesale capacity.

    \1\ The historical discussion in this proposed rule uses the 
term ``mortgage broker'' because this is the terminology that the 
Department used in addressing the issue in both the informal opinion 
and regulatory context. Section 3500.4(d) of the current RESPA rule 
withdrew all previous informal legal opinions, in particular a 
letter of August 14, 1992, issued by a former General Counsel of 
HUD, which dealt extensively with the disclosure of mortgage broker 
fees and the manner in which such fees should be disclosed on the 
HUD-1. This preamble uses the term ``retail lender'' whenver 
feasible in discussing the proposed rule and when the discussion 
does not clearly require the use of the term ``mortgage broker.''
II. RESPA Coverage

A. Background

    The Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601 
et seq.) (RESPA) was enacted for several purposes, ``including insuring 
that a consumer engaged in a real estate settlement is afforded 
effective information about the transaction in a timely manner.'' In 
addition, the Congress sought to address specific abusive settlement 
practices that had developed in certain areas of the country. In this 
proposed rule, HUD is seeking public input on specific disclosure-
related issues, including where the lines should be drawn to determine 
whether RESPA applies.
    Since 1974 the mortgage lending industry has experienced a rapid 
evolution. This industry has experienced major technological advances--
new and different kinds of business entities have entered the field, 
and new business relationships have emerged among the various entities 
that serve the consumer in a single lending transaction. Much of the 
change that has occurred is attributable to the growth of the secondary 
market during the 1980s.
    Prior to the 1980's, a mortgage loan transaction was relatively 
easy to understand. A lender (e.g., a savings and loan, mortgage bank, 
or commercial bank) typically processed a loan from 

[[Page 47651]]
start to finish. The loan application was processed, evaluated, and 
underwritten by the lender's own employees. The loan was funded by and 
closed in the lender's name. The loan was usually held in the lender's 
portfolio of loans, and any activities regarding the loan (receiving 
and crediting the payments, paying out monies from an escrow account, 
etc.--sometimes called ``servicing'') were handled by that lender. 
Sometimes the loan was sold to another entity, in a ``secondary 
market'' transaction that was a precursor of today's more sophisticated 
secondary market transactions.
    By the end of the 1970s and into the early 1980s, two Government-
sponsored enterprises (Federal National Mortgage Association (Fannie 
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)) had 
developed into major purchasers of mortgages from original lenders. By 
the early 1980s, these secondary market entities not only bought 
mortgage loans, but repackaged many of these loans and sold them as 
mortgage-backed securities and, with the liquidity created, were able 
to be even greater purchasers of lenders' mortgage loans. By 1994, 
Fannie Mae and Freddie Mac were purchasing or otherwise dealing in more 
than 70 percent of all the conventional 1- to 4-family residential 
mortgage loans originated in the United States.
    Today, the retail lender that works with the consumer to process 
and close a mortgage loan often is not the entity that will hold or 
service the loan. Rather, the retail lender serves as an intermediary 
between the consumer and the entity purchasing or servicing the loan 
(or ``wholesale lender''). Many loans are purchased by, or servicing is 
transferred to, a wholesale lender at, or shortly after, closing. When 
a retail lender serves as an intermediary, it may perform services for 
which it is compensated in processing the loan. Compensation paid to a 
retail lender therefore may be ``direct'' and ``indirect.'' Direct 
payments are fees paid directly by the consumer and must be disclosed 
under Section 4 of RESPA; indirect payments are fees paid by the 
wholesale lender to the retail lender. The issue arises over whether 
the amount and nature of indirect compensation should be disclosed to 
the consumer. HUD has been presented with arguments that the current 
RESPA rule, which requires disclosure of all indirect payments to 
mortgage brokers, focuses too narrowly on this particular class of 
retail lenders or intermediaries. These arguments suggest that the 
underlying issues for discussion should be how RESPA's fee disclosure 
requirements should apply to compensation of mortgage brokers, mortgage 
bankers, and other financial institutions that originate mortgages 
(retail lenders) by entities that purchase their mortgages (wholesale 
lenders).
B. Legal Analysis Under the Current Regulation

    Section 4(a) of RESPA (12 U.S.C. 2603(a)) requires the Secretary to 
create a uniform settlement statement that ``shall conspicuously and 
clearly itemize all charges imposed on the borrower * * * and the 
seller in connection with the settlement.'' The stated purposes of the 
statute include the provision of ``greater and more timely information 
as to the nature and costs of the settlement process'' by ``more 
effective advance disclosure to homebuyers and sellers of settlement 
costs * * *'' (12 U.S.C. 2601). Section 5(c) (12 U.S.C. 2604(c)) of 
RESPA requires the provision of a ``good faith estimate of the amount 
or range of charges for specific settlement services the borrower is 
likely to incur in connection with the settlement. * * *''
    Under HUD's current rules, the disclosure of all fees paid to 
retail lenders, including all compensation from wholesale lenders, is 
required when the retail lender is being compensated as part of the 
settlement transaction. This position is set out, inter alia, at 24 CFR 
3500.5(b)(7); in the Instructions for filling out the HUD-1 and HUD-1A 
in Appendix A; and in Illustrations of Requirements of RESPA, Fact 
Situations 5 and 12 in Appendix B. This same disclosure requirement has 
not been applied to subsequent purchases of loans by wholesale lenders, 
on the theory that Congress only intended to cover costs related to the 
initial settlement transactions. The Department's current regulations, 
therefore, treat compensation to the retail lender under three 
settlement situations somewhat differently, depending upon how the 
loans are funded at settlement.
    (1) Loan Closing and Subsequent Assignment of the Loan. This is a 
transaction in which a retail lender processes the loan from start to 
finish, funds the loan, and closes the loan in its own name. The 
current RESPA regulation requires that such retail lenders disclose the 
fees paid by the consumer. At a later point in time, the retail lender 
may sell the loan to a wholesale lender. The Department has not 
required that the terms of this subsequent secondary market 
transaction, including compensation paid to the retail lender by a 
wholesale lender, be disclosed to the consumer.
    (2) Loan Closing in the Wholesale Lender's Name Using the Wholesale 
Lender's Funds. For this arrangement, the retail lender originates the 
loan, but is functioning solely in the capacity of an intermediary. The 
loan funds are provided by the wholesale lender and the loan is closed 
in the wholesale lender's name. The wholesale lender typically sets the 
underwriting criteria and makes the underwriting decision. In this 
instance, the current RESPA regulation applies to the entire fee 
arrangement between the retail lender and the wholesale lender. The 
Department regards the retail lender as being compensated as part of 
the settlement transaction. Indirect, as well as direct, payments to 
the retail lender must be disclosed under the current RESPA 
regulations.
    (3) Table-funding. For this arrangement, the loan is processed by 
the retail lender and is closed in the name of the retail lender. There 
is, however, at or about the time of settlement, a simultaneous advance 
of loan funds to the retail lender by the wholesale lender and an 
assignment of the loan and servicing rights to the wholesale lender. 
Table-funding is therefore somewhat a hybrid of the two arrangements 
described above. As in situation (1), where the Department requires 
disclosure of the compensation at settlement, the loan is closed in the 
name of the retail lender. There is a subsequent assignment of the loan 
to the wholesaler. Thus, an argument could be made that the assignment 
constitutes a secondary market transaction, for which the terms (i.e., 
concerning the retail lender's indirect compensation) are not required 
to be disclosed under the RESPA regulations. On the other hand, because 
the mortgage broker assigns the loan simultaneously with closing, it 
may be asserted that the mortgage broker acts only as an intermediary, 
as in situation (2).
    HUD has consistently determined, in opinions of the General Counsel 
going back to 1986 and in the final RESPA rule published on November 2, 
1992 (57 FR 49600, and restated on February 10, 1994 (59 FR 6506)), 
that compensation received by a mortgage broker in a table-funded 
transaction is subject to disclosure. This interpretation treats 
mortgage brokers in table-funded transactions as settlement service 
providers ancillary to the loan, akin to title agents, attorneys, 
appraisers, etc., whose fees are subject to disclosure. This 
interpretation does not view a mortgage broker as the functional 
equivalent of a mortgage lender. Unlike a mortgage lender, the mortgage 
broker in a table-funded transaction does not 

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close the loan with its own funds. Conversely, a mortgage broker using 
its own funds, or with a ``warehouse'' line of credit for which it is 
liable, is not viewed as a mortgage broker, but rather as a mortgage 
lender under the extant HUD interpretation. The salient criterion for 
this conclusion is the source of funds. HUD's interpretation, embodied 
in the current RESPA regulations, has given rise to some controversy, 
as set forth in Section C of this preamble. In light of this 
controversy, the Department has elected to revisit and invite public 
comment on these issues. However, the Department wishes to stress to 
all concerned parties, and particularly to Federal and State 
regulators, that the Department's willingness to reexamine the issue 
does not affect the provisions of the current rule as now effective, 
unless and until modified. All affected parties should continue to make 
full disclosure of all direct and indirect compensation, as required by 
the current RESPA rule.

C. Criticism of Existing Policy

    (1) HUD's Interpretation of the RESPA Statute is Incorrect. 
Opponents argue that the Department's interpretation of RESPA's 
disclosure requirements (``all charges imposed upon the borrower * * 
*'') to include indirect charges and payments from the borrower funds 
is too expansive and beyond the scope of the statute. They argue that 
all charges imposed on the borrower are fully included in direct 
charges. Indirect compensation need not be separately enumerated 
because it is already reflected in those direct charges. For example, 
the wholesale lender pays a retail lender fees from income received 
from the interest rate, points and other direct fees. Separate 
enumeration constitutes a redundancy, and combining direct and indirect 
costs overstates the total cost of the loan. Moreover, since the 
borrower is aware of the borrower's cost for the mortgage loan, no 
useful purpose is served by disclosing indirect charges reflected in 
points, interest rate, etc.
    Second, opponents argue that a table-funded loan should be treated 
as a secondary market transaction. They maintain that such a 
transaction is the functional equivalent of a loan made by another type 
of lender, e.g., a mortgage banker, who has an advance commitment to 
sell the loan shortly after settlement.
    (2) HUD's Interpretation of the Statute Treats One Class of 
Participants Unfairly. First, mortgage brokers argue that an unlevel 
playing field is created, because mortgage bankers need not disclose 
the terms of a subsequent sale of the loan (although they do disclose 
origination fees and points, as well as other direct costs); mortgage 
brokers must effectively do so for table-funded transactions.
    Second, by concluding that mortgage brokers engaged in table-funded 
transactions are not subject to the secondary market exemption, the 
Department has put an additional burden of scrutiny on these mortgage 
broker fees by making them subject to requirements of Section 8 of 
RESPA, which requires that all compensation be reasonably related to 
goods or services provided. The same scrutiny does not apply to the 
sales transactions of other originators that sell their loans to 
wholesale lenders following settlement.
    (3) HUD's Interpretation of the RESPA Statute is Poor Public 
Policy. Opponents argue that retail lenders (particularly mortgage 
brokers) play an important role in making financing more available to 
``nontraditional'' borrowers. They argue that HUD's interpretation, 
insofar as it places retail lenders at a competitive disadvantage, is 
not consistent with public policy designed to expand access to mortgage 
credit for such nontraditional borrowers.
    Opponents also suggest that HUD's policy often requires retail 
lenders to spend added time and resources explaining the nature of 
indirect fees to a consumer. Occasionally, a consumer, or even an 
employee of a retail lender, will attempt to negotiate for a share of 
the fees paid to the retail lender.

D. Other Considerations and Concerns

    (1) The fundamental premise underlying RESPA is that disclosure of 
information empowers the consumer to shop for better services and lower 
costs. All fees and charges, other than seller contributions, are 
ultimately borne by the borrower, whether by direct payments, such as 
points, or by indirect payments through a higher interest rate that the 
borrower pays over time. However, the seller also has a fundamental 
interest in this process, because the seller, particularly in difficult 
markets, is asked to absorb an increasingly greater part of the 
settlement costs. Knowledge of all fees, including those paid to a 
retail lender, may allow consumers to negotiate reductions in overall 
costs of the transaction.
    (2) The Housing and Community Development Act of 1992 (Pub. L. 102-
550; 106 Stat. 3672, at 3874) extended RESPA to junior lien 
transactions and confirmed the Department's position that refinancing 
transactions were covered by RESPA. As of August 9, 1994, the same 
principles of disclosure of indirect fees paid to mortgage brokers were 
extended to junior lien transactions. Refinancing and junior lien 
transactions are frequently advertised on a ``no point'' or ``no cost'' 
basis, which effectively means that all or much of the ancillary costs 
and charges of making the loan are contained in the interest rate or in 
a combination of the interest rate and the points. The consumer 
typically has a somewhat lesser interest in points and mortgage broker 
fees, in part because, unlike a purchase money transaction, points may 
only be amortized and deducted for Federal and State tax purposes over 
the life of the loan.
    The high level of competitiveness through advertising and other 
publicity in the first mortgage industry, aided by the borrowers' 
interest in being able to make full IRS deductions, have helped assure 
that many of the costs of making a mortgage loan have been highly 
visible. However, while the Department has had extensive experience 
with purchase money and other first mortgage 1- to 4-family residential 
loans, because RESPA has only covered junior lien transactions since 
August 9, 1994, the Department has no comparable range of experience 
respecting junior lien transactions, which frequently are regulated and 
limited under different Federal or State laws and are funded by 
different institutions or branches of institutions. Therefore, the 
Department welcomes policy or legal commentary regarding the 
possibility of having one provision for first mortgage transactions and 
a second provision for junior lien transactions, or whether the 
Department should treat junior lien transactions made by retail lenders 
in the same manner as first lien purchase money and refinancing 
transactions.
    (3) Under the statutory or judicial interpretations of the laws of 
several States, mortgage brokers are treated as agents of the consumer 
and are considered to have a fiduciary duty to disclose all fees that 
the mortgage broker obtains from the transaction. In Virginia, a case 
brought by the Virginia Poverty Law Center was settled when the major 
mortgage company agreed to restitution of certain fees collected by 
mortgage brokers, but without answering the fiduciary question. In 
California, where the courts have adopted the agency theory, the 
Department of Real Estate has implemented this requirement by creating 
a combined good faith estimate and mortgage broker disclosure form, 
thereby requiring all mortgage brokers (who close as many as 50 to 60 
percent of all loans in the State) to disclose all direct, indirect, or 
anticipated mortgage 

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broker compensation. Because RESPA defers to State laws that provide 
more benefits to the consumer, any new interpretation by the Department 
will arguably not affect State provisions that provide for such direct 
and indirect mortgage broker fee disclosures. Also, while the 
Department has been informed that several class action law suits have 
been filed regarding the issue of payment of ``overages'' to mortgage 
brokers, the Department is not a party to these suits and is unaware of 
any effect an interpretation by the Department might have on the 
actions.
E. Possible Results of This Rulemaking

    As a result of this rulemaking, HUD could establish uniform 
disclosure requirements for all retail lenders, either: (1) to require 
the disclosure of all direct fees paid to retail lenders by borrowers 
and to require disclosure of all indirect fees paid to retail lenders 
by wholesale lenders; or (2) to require the disclosure of all direct 
fees paid to retail lenders by borrowers only. In addition to, or 
instead of, modifying the rules on disclosure of fees in loan 
transactions, as a result of this rulemaking HUD may redefine what 
constitutes a ``secondary market transaction''. As set forth above, 
such transactions are exempt from RESPA, including, inter alia, its 
disclosure requirements, its prohibitions against kickbacks and 
referral fees, and its requirement that all compensation be reasonably 
related to the goods or services provided. HUD could define a 
``secondary market transaction'' as a loan transaction involving: (1) 
the sale of a loan by a retail lender to a wholesale lender occurring 
after settlement (the position in the current regulations); (2) the 
sale of a loan by a retail lender at any time--before, contemporaneous 
with, or after settlement; or (3) the sale of a loan on some other 
date, such as after the first accrual date for the loan following 
settlement; i.e., the date the first payment is due from the borrower 
under the loan.
    Combining the two options of requiring either disclosure of direct 
and indirect fees, or disclosure of direct fees only, with the three 
possibilities for defining the secondary market transaction results in 
six alternative approaches to regulating settlement transactions under 
RESPA. Each of these six alternatives would have a different effect on 
each of the major types of loan transactions described above, 
including: (1) Loan closing and subsequent assignment of the loan; (2) 
loan closing in the wholesale lender's name using the wholesale 
lender's funds; and (3) table-funding. None of these alternatives will 
affect a fourth type of transaction--a portfolio transaction in which a 
retail lender processes, funds, and closes a loan in its own name for 
its own portfolio and the lender then holds the loan (if the loan is 
sold at all, the sale occurs long after settlement). Each of these 
alternatives or combinations of requirements is discussed below, along 
with its effect on each type of loan transaction. The public is 
specifically invited to comment on these six alternatives, as well as 
other approaches.
    Alternative 1: The regulations would require the disclosure of 
direct and indirect fees at settlement, and a loan sale is classified 
as a ``secondary market transaction'' only if it occurs after 
settlement. This is the approach in the current RESPA rule. Under this 
alternative, the direct fees for a portfolio lender at settlement must 
be disclosed and the settlement transaction is subject to RESPA, there 
are no indirect fees, and any subsequent loan sale by the lender when 
indirect fees are paid is a secondary market transaction not subject to 
RESPA. Likewise, the direct fees for a retail lender at settlement, in 
other transactions involving a loan closing and subsequent assignment 
of the loan, must be disclosed, but any loan sale after settlement is a 
secondary market transaction not subject to RESPA (any indirect fees 
need not be disclosed and RESPA's other restrictions do not apply). In 
a table-funded transaction, the advance of loan funds to the borrower 
and the sale of the loan by the retail lender to a wholesale lender are 
contemporaneous with settlement. Accordingly, all direct and indirect 
fees to the retail lender must be disclosed under RESPA and the entire 
transaction--the making of the loan to the borrower and the loan sale--
are subject to RESPA. Similarly, in a settlement transaction in the 
name of a wholesale lender--where there is no sale following 
settlement--all direct and indirect fees to and from the retail lender 
and the wholesale lender must be disclosed, and the entire transaction 
is otherwise subject to RESPA.
    Alternative 2: The regulations would require the disclosure of 
direct and indirect fees at settlement, and any loan sale--before, 
contemporaneous with, or after settlement--is classified as a 
``secondary market transaction''. Under this alternative, although 
disclosure of direct and indirect fees would be required for RESPA-
covered transactions, more loan sales would be treated as ``secondary 
market transactions'' exempt from RESPA's coverage. As in Alternative 
1, the direct fees to a portfolio lender at settlement must be 
disclosed, but any subsequent loan sale would be a secondary market 
transaction exempt from RESPA's disclosure and other requirements. 
Also, as in Alternative 1, the direct fees for other transactions 
involving a loan closing and subsequent assignment of the loan would 
have to be disclosed, but a subsequent loan sale would be a secondary 
market transaction exempt from RESPA. Unlike Alternative 1, the sale at 
settlement of a table-funded loan would also become a secondary market 
transaction exempt from RESPA's requirements and prohibitions. Indirect 
fees would not have to be reported and would not be covered by RESPA. 
Under a settlement transaction in the name of a wholesale lender, 
however, all direct and indirect fees to and from the retail lender and 
the wholesale lender would require disclosure, because there is no loan 
sale or secondary market transaction involved.
    Alternative 3: Regulations require the disclosure of direct and 
indirect fees at settlement, and only loan sales following the first 
accrual--the date the first payment is due from the borrower under the 
loan--are ``secondary market transactions''. Under this alternative, 
RESPA's disclosure and other requirements would cover more 
transactions; only loan sales transactions that occur relatively long 
after settlement would be regarded as secondary market transactions 
exempt from RESPA's requirements. Under this alternative, loan sales by 
a portfolio lender--coming, if at all, well after the first loan 
payment--would be regarded as secondary market transactions. RESPA's 
disclosure requirements and restrictions would apply to a loan closing 
and subsequent assignment of the loan, unless the loan is sold after 
the first accrual date (currently, in most transactions the loans are 
sold much earlier). RESPA's prohibitions would apply to table-funded 
transactions when the loan is sold at settlement and transactions when 
a loan is closed in the name of a wholesale lender and there is no 
subsequent loan sale.
    Alternative 4: Regulations require the disclosure of only direct 
(not indirect) fees at settlement, and a loan sale is classified as a 
``secondary market transaction'' only if it occurs after settlement. 
This alternative differs from the current rule in requiring the 
disclosure only of direct fees from borrowers to retail lenders. Under 
this alternative, because there is no requirement for the disclosure of 
any indirect fees to retail lenders for loan sales, the classification 
of such sales as secondary market transactions is only determinative of 
whether RESPA's 

[[Page 47654]]
requirements and prohibitions (other than disclosure) apply to the 
transaction. Under this alternative, direct fees to retail lenders must 
be disclosed in portfolio transactions, other transactions involving a 
loan closing and subsequent assignment of the loan, table-funding 
transactions, and transactions in which a retail lender closes in the 
name of a wholesale lender (including any direct fees to the wholesale 
lender). Because retail lenders in portfolio transactions and other 
transactions involving a loan closing and subsequent assignment of the 
loan sell their loans after settlement, such sales would be subject to 
the secondary market exemption and outside of RESPA. Because loan sales 
in table-funded transactions occur at and not after settlement, under 
this alternative, such sales transactions would not be secondary market 
transactions and would be subject to RESPA (although indirect fees need 
not be disclosed). Also, because a loan in the name of a wholesale 
lender occurs at settlement and there is no subsequent sale, the retail 
and wholesale lender's transaction would be subject to RESPA's 
prohibitions.
    Alternative 5: Regulations require the disclosure of only direct 
(not indirect) fees at settlement, and a loan sale, at any time, is 
classified as a ``secondary market transaction''. Under this 
alternative, direct fees to retail lenders must be disclosed in 
portfolio transactions, other transactions involving a loan closing and 
subsequent assignment of the loan, and table-funding transactions, as 
well as transactions in which retail lenders close in the name of a 
wholesale lender. Any loan sales (following settlement) by portfolio 
lenders, or under another transaction involving a loan closing and 
subsequent assignment of the loan, would be secondary market 
transactions outside of RESPA's coverage. Under this alternative, a 
loan sale (at settlement) in a table-funded transaction would also be a 
secondary market transaction. However, settlement in the name of the 
wholesale lender not involving a sale, would not be subject to the 
exemption--RESPA would apply to the entire transaction although 
indirect fees need not be disclosed.
    Alternative 6: Regulations require the disclosure of only direct 
(not indirect) fees at settlement, and a loan sale is classified as a 
``secondary market transaction'' only if it occurs after the first 
accrual date. Under this alternative, direct fees to a retail lender 
must be disclosed in a portfolio transaction; a transaction involving a 
loan closing and subsequent assignment of the loan; a table-funding 
transaction; and a transaction in which a lender closes in the name of 
another lender. Although indirect fees need not be disclosed, RESPA's 
other requirements would cover more transactions, because fewer 
transactions would be regarded as secondary market transactions. The 
exception is a loan sale by a portfolio lender, which, when it occurs, 
would follow the first accrual date and would, therefore, still be 
regarded as a secondary market transaction. Loan sales transactions by 
retail lenders in other transactions involving a loan closing and 
subsequent assignment of the loan and in table-funded transactions 
would not be regarded as secondary market transactions and would be 
subject to RESPA. Settlement in the name of the wholesale lender, 
because it does not involve a sale, would not be subject to the 
exemption and RESPA's provisions would also apply to the entire 
transaction.
    HUD seeks comments from the public on which, if any, of these 
alternative approaches should result from this rulemaking, or whether 
other approaches that would be permissible under RESPA would better 
serve the interests of the public and the intent of the statute.

II. Volume-Based Compensation

    Volume-based compensation is a payment of money or any other thing 
of value, as defined by 24 CFR 3500.14(d), that a wholesale lender 
provides to a retail lender and is based on a number or dollar value of 
loans that the retail lender sells to the wholesale lender in a fixed 
period of time.
    Volume compensation also encompasses volume discounts, in which a 
retail lender that is to provide a stated volume of loans is given a 
lower ``start-rate'' than the wholesale lender's advertised rate and 
the retail lender keeps a differential between the start rate and the 
advertised rate as part of its compensation at settlement.
    The Department believes that volume-based compensation is a fairly 
widespread practice, particularly in California. As noted above, 
California regulatory requirements provide for disclosure to borrowers 
of this compensation (the amount, if known, or its potential for 
receipt by the mortgage broker). HUD has never enunciated a formal 
policy on whether volume-based compensation is permissible under RESPA. 
If the Department concludes that it is allowable, the issue also arises 
as to whether and how the payment should be disclosed on the Good Faith 
Estimate and the HUD-1 and HUD-1A.

A. Should Volume-Based Compensation be Permitted?

    Critics argue that volume-based compensation may lead to loan-
steering. Arguably the consumer's interest (in seeing a range of loan 
options) may be subordinated to the interest of the retail lender in 
receiving greater compensation from a particular wholesale 
lender.2 Also, as discussed earlier in this preamble, Section 8 of 
RESPA prohibits payments in the absence of ``goods or facilities 
furnished or for services actually performed.'' Therefore, awarding 
additional compensation for loans closed above a threshold number, 
where no added services are provided, could, standing alone, violate 
RESPA.

    \2\ Retail lenders who fail to present a full range of loan 
options to all consumers may risk charges of discriminatory 
treatment on a prohibited basis, which is unlawful under the Fair 
Housing Act.
    On the other hand, others argue that volume-based compensation may 
be an appropriate payment for goods or services actually performed. 
Wholesale lenders must exercise careful oversight over retail lenders, 
because decisions by the retail lender can expose the wholesale lender 
to default risk. For this reason, wholesale lenders typically perform 
some underwriting review for each mortgage. There also must be a good 
working relationship between the staffs of the retail and wholesale 
lender to ensure that important matters, such as document transfer and 
the handling of escrow funds, are accomplished smoothly and punctually. 
Establishing this working relationship and oversight involves some 
fixed costs to the wholesaler, which decrease on a per loan basis as 
the volume of business increases. The wholesale lender's variable costs 
may also decrease with increased volume, because the retail lender 
becomes more familiar with the requirements of the wholesale lender and 
the wholesale lender's staff is more familiar with the product and 
practices of the retail lender. Declining per-unit costs may justify 
volume compensation.
    The consumer may benefit from volume-based compensation. In 
competitive markets, price concessions from wholesale lenders to high-
volume retail lenders generally get passed along to the consumers. To 
obtain the volume of business needed to obtain price concessions and to 
benefit from volume-based compensation, the retail lender may pass 
along part of the high-volume benefits to the consumer, through lower 
points or other cost savings.
    Critics argue that if the retail lender originates in its own name, 
the consumer is generally unaware that the 

[[Page 47655]]
retail lender has wholesale options available and may not even be 
consciously aware of the retail lender's intention to sell the 
mortgage. In this context, steering does not exist in the typical 
sense, that is, advising the consumer to choose lender A over lender B 
when lender B's prices are as good as, or better than, lender A's 
prices. It is also conceivable that wholesale lender X may not offer a 
loan product that wholesale lender Y offers, such as a 15-year 
adjustable rate mortgage (ARM). The retail lender may influence the 
consumer not to select the 15-year ARM so that the retail lender can 
increase its business with lender X, which offers volume compensation. 
However, most wholesale lenders offer a comparable range of products.
    In addressing the policy issues of whether and how volume-based 
compensation should be permitted and, if so, disclosed, a commenter may 
offer legal arguments as to whether RESPA prohibits the practice.

B. Is Volume-Based Compensation Subject to Disclosure?

    A retail lender required to make disclosure could argue that HUD 
has created an ``uneven playing field'' between mortgage bankers and 
other retail lenders, inasmuch as the issue of volume-based 
compensation is not relevant for mortgage banker transactions. (See 
Section II.C.(2) of this preamble.)
    If HUD decides to allow this kind of compensation, practical 
questions are raised about how to disclose this information--what 
numbers should be disclosed? At the time of a given closing, a retail 
lender may not know whether a volume-based payment will be received or 
how much it will be. As noted above, the California standard Good Faith 
Estimate and Mortgage Broker Fee Disclosure form requires the 
disclosure of the compensation, if known, or an indication that a 
mortgage broker will receive additional compensation.

III. Other Compensation

    In addition to volume-based compensation, retail lenders also 
receive compensation from wholesale lenders under a variety of names, 
the most common of which are ``servicing release premiums'' and ``yield 
spread premiums'' (which are cited by name in the current RESPA 
regulation as compensation to be disclosed; 24 CFR part 3500, Appendix 
A, Fact Situation 12.) Such compensation is also included in ``rate 
differentials,'' ``indirect payments,'' or ``back-funded payments'' 
(occasionally called ``back-end points'') in Appendix A instructions 
for filling out the HUD-1A. A ``yield spread premium'' or ``yield 
spread differential'' or ``overage'' means any compensation paid to or 
retained by a retail lender based upon the difference in the interest 
rate provided in the sold loan and some other benchmark interest rate. 
It compensates the retail lender for a loan priced at a rate higher 
than the rate at which the wholesale lender would otherwise have been 
willing to accept the loan. A ``servicing release premium'' is any 
compensation paid to a retail lender for the release of rights to 
service the loan.
    The names of the fees (those cited in the previous paragraph may 
vary) are not definitive or dispositive. The concerns of the Department 
regarding such forms of compensation are similar to those expressed 
regarding volume-based compensation; that is, do those fees constitute 
kickbacks or fee-splitting for delivery of the loans. Commenters are 
invited to address: (a) whether any such types of compensation should 
be permissible under RESPA; and (b) what would be the effect of 
requiring disclosure of such payments.

IV. Proposed Amendments to 24 CFR Part 3500

    In this proposed rulemaking HUD is requesting comment on several 
questions that may lead to new regulatory language in 24 CFR part 3500. 
For example, several new definitions are proposed for inclusion in 
Sec. 3500.2. In addition, Sec. 3500.14(g) would be revised to address 
explicitly the applicability of RESPA to volume-based compensation, and 
Appendix B, Fact Situation 12, could be modified. HUD may also need to 
modify the HUD-1 and HUD-1A instructions regarding payments to mortgage 
brokers. If new definitions are adopted, other definitions may need to 
be modified for consistency. While the Department has set forth 
illustrative changes in the definitions, it has not attempted to 
provide alternative regulatory text for every possible amendment that 
might result from this rulemaking. Instead commenters are invited to 
comment on the questions raised in this preamble and provide input on 
the direction they believe the Department should take on these matters.
    If a determination is made that regulatory changes should be 
developed through a negotiated rulemaking process, the Department 
expects to publish another proposed rule at the conclusion of the 
negotiation process and will provide the negotiating committee with the 
comments submitted in response to today's proposed rule. If negotiated 
rulemaking is not used, the Department will formulate its final rule 
after reviewing the comments received in response to this proposed 
rule.
V. Other Relevant Issues

    (a) Recent Legislation. In 1994 Congress enacted the Riegle 
Community Development and Regulatory Improvement Act of 1994 (Pub. L. 
103-325, 108 Stat. 2160, September 23, 1994) (the Act), which includes, 
as Subtitle B, the Homeownership and Equity Protection Act of 1994. 
Subtitle B requires the Federal Reserve Board to require additional 
levels of disclosure in certain circumstances, and requires for its 
computations inclusion of all compensation paid to mortgage brokers, 
including both direct and indirect payments, in order to determine if 
the loan will be a ``high-rate mortgage.'' (See section 152(a)(4)(B) of 
the Act.) If HUD ultimately determines that indirect fees need not be 
disclosed in a final rule, the Federal Reserve Board (which relies on 
information contained in HUD's Good Faith Estimate and the HUD-1 or 
HUD-1A forms) might have to require its own cost disclosure form in 
order to determine coverage. Accordingly, HUD plans to invite staff of 
the Board to comment on the proposed rule. The public is also welcome 
to address this matter.
    (b) Impact of Regulation on State Laws. Whatever HUD determines in 
final rulemaking, it is possible that a State may have more stringent 
disclosure requirements than HUD. Under RESPA, State laws that provide 
greater protection to the consumer would prevail and would not be 
preempted by HUD requirements. Of course, a salient issue embraced 
within this proposed rulemaking is whether more disclosure is, in fact, 
beneficial to consumers. In addressing the alternative proposals in 
this rulemaking, a basic question for commenters is whether disclosure 
of the terms of a mortgage loan (e.g., interest rates and points) alone 
is sufficient consumer information.

VI. Other Matters

Executive Order 12866

    This proposed rule was reviewed by the Office of Management and 
Budget under Executive Order 12866, Regulatory Planning and Review. Any 
changes made to the proposed rule as a result of that review are 
clearly identified in the docket file, which is available for public 
inspection in the Office of the Rules Docket Clerk, Room 

[[Page 47656]]
10276, 451 Seventh Street, SW, Washington, DC.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this proposed rule before publication and 
by approving it certifies that this proposed rule does not have 
significant economic impact on a substantial number of small entities. 
There are no anticompetitive discriminatory aspects of this proposed 
rule with regard to small entities, nor are there any unusual 
procedures that would need to be complied with by small entities. The 
requirements of the Real Estate Settlement Procedures Act must be 
uniformly adhered to by all lenders and servicers.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (U.S.C. 4332). The finding is available for public inspection 
during regular business hours in the Office of the General Counsel, 
Rules Docket Clerk, room 10276, 451 Seventh Street, SW., Washington, DC 
20410.

Executive Order 12612, Federalism

     The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this proposed rule will not have substantial direct 
effects on States or their political subdivisions, or the relationship 
between the Federal government and the States, or on the distribution 
of power and responsibilities among the various levels of government. 
As a result, the proposed rule is not subject to review under the 
Order. Promulgation of this rule clarifies the coverage of the 
applicable regulatory requirements.

Executive Order 12606, The Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that this proposed rule does 
not have potential for significant impact on family formation, 
maintenance, and general well-being, and, thus, is not subject to 
review under the order. No significant change in existing HUD policies 
or programs will result from promulgation of this rule, as those 
policies and programs relate to family concerns.

List of Subjects in 24 CFR Part 3500

    Consumer protection, Condominiums, Housing, Mortgages, Mortgage 
servicing, Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, 24 CFR part 3500 is 
proposed to be amended to address the regulatory questions raised in 
the preamble and as follows:

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

    1. The authority citation for Part 3500 continues to read as 
follows:

    Authority: 12 U.S.C. 2601 et seq.

    2. Section 3500.2 is amended by adding in alphabetical order 
definitions for ``Direct fee'', ``Indirect fee'', ``Retail lender'', 
``Secondary market transaction'', ``Volume-based compensation'', and 
``Wholesale lender'', to read as follows:


Sec. 3500.2  Definitions.

* * * * *
    Direct fee means any payment made by a borrower to a lender or any 
other settlement service provider or to a third party, to be 
transmitted to a lender or any other settlement service provider, in 
connection with a settlement of a federally related mortgage loan.
* * * * *
    Indirect fee means any payment made by a wholesale lender to a 
retail lender for services rendered in connection with a federally 
related mortgage loan origination. [Indirect loan fees are not subject 
to disclosure on the Good Faith Estimate or the HUD-1 or HUD-1A.]
* * * * *
    Retail lender means a person who originates and sells a federally 
related mortgage loan to a wholesale lender.
    Secondary market transaction means a sale of a federally related 
mortgage loan. A secondary market transaction [as defined by one of the 
alternatives set out in the preamble of this proposed rule] [is/is not] 
covered by RESPA and this part, except as set forth in Section 6 of 
RESPA (12 U.S.C. 2605) and Sec. 3500.21.
* * * * *
    Volume-based loan compensation means any added payment or 
additional thing of value provided by a wholesale lender to a retail 
lender to a retail lender based on the number or dollar value of loans 
originated.
    Wholesale lender means a person who purchases a mortgage loan from 
a retail lender.

    Dated: August 11, 1995.
Jeanne K. Engel,
General Deputy Assistant Secretary for Housing--Federal Housing 
Commissioner
[FR Doc. 95-22691 Filed 9-12-95; 8:45 am]
BILLING CODE 4210-27-P