[Federal Register Volume 60, Number 206 (Wednesday, October 25, 1995)]
[Proposed Rules]
[Pages 54794-54797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26412]




[[Page 54793]]

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Part III





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner



_______________________________________________________________________



24 CFR Part 3500



Mortgage Broker Fee Disclosure Rule: Intent to Establish a Negotiated 
Rulemaking Advisory Committee and Notice of First Meeting; Proposed 
Rule

  Federal Register / Vol. 60, No. 206 / Wednesday, October 25, 1995 / 
Proposed Rules   

[[Page 54794]]


DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Part 3500

[Docket No. FR-3780-N-02]
RIN 2502-AG40


Mortgage Broker Fee Disclosure Rule: Intent to Establish a 
Negotiated Rulemaking Advisory Committee and Notice of First Meeting

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

ACTION: Intent to establish committee and notice of first meeting.

-----------------------------------------------------------------------

SUMMARY: The Department is considering the establishment of a 
Negotiated Rulemaking Advisory Committee under the Federal Advisory 
Committee Act (FACA). The first objective of the Committee would be to 
determine whether or not the amount and nature of indirect payments to 
mortgage brokers and certain other mortgage originators (retail 
lenders) should be disclosed to consumers. Second, the Committee will 
seek to resolve whether the Real Estate Settlement Procedures Act 
(RESPA) permits volume-based compensation from wholesale lenders, 
entities that purchase mortgage loans, to mortgage brokers and, if such 
compensation is found permissible, whether and how the compensation 
should be disclosed. The Committee would consist of representatives 
with a definable interest in the outcome of a proposed rule. HUD has 
prepared a charter and has initiated the requisite consultation process 
pursuant to the FACA, Executive Order 12838, and the implementing 
regulations. If the charter is approved and a final determination is 
made to form the Committee, the first meeting will take place in late 
1995 or early 1996, after the close of the comment period, in 
Washington, D.C.; the exact date of the meeting will be announced when 
it has been finalized.
    The Department also recently published a proposed rule on this same 
subject (60 FR 47650, September 13, 1995). Public comments received on 
that proposed rule will be given to the members of the committee for 
their consideration as they are negotiating a new proposed rule.

DATES: Comments must be received by November 24, 1995. The exact date 
of the first meeting in late 1995 or early 1996, in Washington, D.C., 
will be announced in a subsequent Federal Register document. Interested 
persons may also contact David Williamson, at the telephone number 
listed under For Further Information Contact, for this information.

ADDRESSES: Interested persons are invited to submit comments regarding 
the proposed Committee and membership 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. 
Comments or any other communications submitted should consist of an 
original and four copies and refer to the above docket number and 
title. Facsimile (FAX) comments are not acceptable. The docket will be 
available for public inspection and copying between 7:30 a.m. and 5:30 
p.m. weekdays at the above address.
    The location for the first meeting in late 1995 or early 1996 will 
be: the Office of Administrative Law Judges, Washington Office Center, 
409 3rd Street SW., Suite 320, Washington, D.C. 20024.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, RESPA 
Enforcement Unit, Department of Housing and Urban Development, Room 
5241, 451 Seventh Street SW., Washington, DC 20410-0500; telephone 
(202) 708-4560, or on e-mail through Internet at [email protected]. 
The TDD number for persons who are hearing- or speech-impaired is (202) 
708-4594 (TDD). (These telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

Background

Issue 1: Mortgage Broker Fee Disclosure

    Since the enactment of the RESPA (12 U.S.C. 2601 et seq.) in 1974, 
the mortgage lending industry has experienced a rapid evolution due, in 
part, to major technological advances, innovative business entities, 
and new types of business relationships that serve consumers in single 
lending transactions. Much of the change that has occurred is 
attributable to the impressive growth of the secondary mortgage market. 
By the early 1980s, secondary market entities, such as the Federal 
National Mortgage Association (Fannie Mae) and the Federal Home Loan 
Mortgage Corporation (Freddie Mac), not only bought major amounts of 
mortgage loans, but repackaged many of these loans and sold them as 
mortgage-backed securities, allowing them to purchase even greater 
numbers of lenders' mortgage loans.
    A further industry development since the passage of RESPA is that 
many loans are purchased by, or servicing is transferred to, a 
wholesale lender at, or shortly after, closing, with the retail lender 
serving as the intermediary between the consumer and the purchasing 
entity. When a retail lender serves as an intermediary, it may perform 
services in processing the loan for which it is compensated. Such 
compensation may be ``direct'', where the fees are paid directly by the 
consumer, or ``indirect'', where fees are paid by the wholesale lender 
to the retail lender. The issue arises over whether under RESPA, the 
amount and the nature of indirect compensation must be disclosed to the 
consumer, and if so, in what form.
    The Congress enacted RESPA in order to avoid unnecessarily high 
prices and to ensure that consumers were afforded timely and effective 
information as to the nature and costs of real estate settlement 
service transactions. To this end, Section 4 of RESPA (12 U.S.C. 2603) 
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'' 
(Section 4(a)). Section 5(c) of RESPA further 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 * * *.'' 12 U.S.C. 2604(c).
    Under HUD's current rules, the disclosure of all fees paid to 
retail lenders, including all compensation from wholesale lenders, is 
required where the retail lender is being compensated as part of the 
settlement transaction. 24 CFR 3500.5(b)(7); Appendix B, Fact 
Situations 5 and 11. 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. 
First, there must be a disclosure of any fees paid by consumers where 
the retail lender processes the loan from start to finish, funds the 
loan, and closes the loan in its own name. Subsequent sales of the loan 
to a wholesale lender, however, would require no further disclosures. 
Second, where loan funds are provided by the 

[[Page 54795]]
wholesale lender and the loan is closed in the wholesale lender's name, 
current RESPA regulations require that indirect, as well as direct, 
payments to the retail lender and the wholesale lender be disclosed. 
Under the third method of origination, a loan is processed by, and 
closed in the name of, the retail lender with a simultaneous advance of 
loan funds to the retail lender by the wholesale lender, and an 
assignment of the loan and servicing rights to that wholesale lender 
(``table-funding''). The Department has determined that all 
compensation received by a mortgage broker in such a table-funded 
transaction is subject to disclosure.
    The Department's current rules treat 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. The salient 
criterion for this conclusion is the source of funds--unlike a mortgage 
lender, the mortgage broker in a table-funded transaction does not 
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.
    HUD's interpretation has given rise to some controversy. Opponents 
contend that the Department's reading of RESPA's disclosure 
requirements to include indirect charges and payments that the borrower 
funds is too expansive. First, they argue that indirect compensation 
need not be separately enumerated since it is already reflected in 
direct charges. They further assert that all the consumer needs to know 
is enough to compare the ultimate cost to the consumer of competing 
products. Second, critics argue that such loans are akin to, and should 
thus be treated as, secondary market transactions. Mortgage brokers 
further complain that an unlevel playing field is created since 
mortgage bankers do not bear the burden of disclosing the terms of a 
subsequent sale of the loan. They argue that the competitive 
disadvantage is amplified by the fact that the Department makes 
mortgage brokers subject to the requirements of Section 8 of RESPA, 
adding a level of scrutiny that does not apply to transactions of other 
originators who sell their loans to wholesale lenders following 
settlement. They also assert that HUD's interpretation, insofar as it 
places retail lenders at a competitive disadvantage, deters the 
expansion of access to mortgage credit for ``non-traditional'' 
borrowers.

Issue 2: Volume-Based Compensation

    Volume-based compensation is a payment of money or any other thing 
of value, as defined by the RESPA regulation, Sec. 3500.14(d), that a 
wholesale lender provides to a retail lender, 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, wherein a retail lender, who 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.
    HUD has never enunciated a formal policy on whether volume-based 
compensations are permissible under RESPA. Critics of volume-based 
compensation argue that permitting such payments 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. 
Moreover, additional compensation for loans closed above a threshold 
number, where no added services are provided, could, standing alone, 
violate Section 8 of RESPA.
    Other critics argue that, if the retail lender originates in its 
own name, the consumer is generally unaware that the retail lender has 
wholesale options available and may not even be consciously aware of 
the retail lender's intention to sell the mortgage. It is also 
conceivable that the retail lender may influence the consumer not to 
select a favorable loan package so that the retail lender can increase 
its volume of business with a lender which offers volume compensation.
    Consumers may, however, benefit from volume-based compensation. A 
retail lender will strive to obtain the higher price available from 
volume compensation. To obtain the needed volume of business, the 
retail lender may pass along part of the higher price to the consumer 
in terms of lower points or other cost savings. Retail lenders required 
to make disclosure could also 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.
    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'', ``yield 
spread premiums'', ``yield spread differentials'' or ``overage''. These 
terms generally refer to 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 that 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 
concerns regarding such forms of compensation are similar to those 
expressed regarding volume based compensation, that is, do they 
constitute kickbacks or fee-splitting for delivery of the loans.

Regulatory Negotiation

    Negotiated rulemaking has emerged in recent years as an alternative 
to conventional procedures for drafting proposed regulations. The 
essence of the concept is that, in appropriate circumstances, it is 
possible and preferable to bring together agency representatives and 
all parties substantially affected by the subject matter of the 
regulation in order to negotiate the terms of the proposed rule. The 
literature identifies two principal purposes of negotiated rulemaking: 
to gather information so that agency regulation results in better-
informed and well-fashioned rules, and to attempt to reach consensus as 
to the text of the rule by a process through which negotiators evaluate 
their own priorities and make tradeoffs to achieve an acceptable 
outcome on the issues of greatest importance to them. Each element is 
an extremely valuable outcome of the regulatory negotiation process.
    If a consensus is achieved, the resulting rule will likely be 
easier to implement and less subject to subsequent litigation. Even if 
consensus is not reached, the process may prove valuable as a means of 
better informing the regulatory agency of the issues and the concerns 
of the affected interests.
    The final convening report was provided to HUD in September 1995, 
and concludes that ``negotiated rulemaking would be appropriate and 
feasible and that this process may offer the best means of 
accommodating the difficult issues involved here.'' A copy of the 
report, titled Convening Report for Regulatory Negotiations on Mortgage 


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Broker Fee Disclosures, is available in the office of the Rules Docket 
Clerk at the above address.

Chartering of Reg-Neg Committee

    As a general rule, an agency of the Federal Government is required 
to comply with the requirements of the Federal Advisory Committee Act 
(FACA) when it establishes or uses a group of non-Federal members as a 
source of advice. Under FACA, HUD must receive a charter for this reg-
neg committee. HUD has prepared a charter and sent it to the Office of 
Management and Budget for approval. If the charter is approved and 
schedule changes are not necessary as a result of public comments, the 
Committee will be convened in accordance with this notice.

Substantive Issues for Negotiation

    The convening report noted that regulatory negotiation could lead 
to 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, HUD may choose to 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. A ``secondary market transaction'' could be defined 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 various options for requiring disclosure of direct and 
indirect fees, or disclosure of direct fees only, with the three 
possibilities for defining the secondary market transaction, results in 
at least 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 where 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, it occurs long after settlement). The 
alternatives, or possible combination of requirements, available to the 
Committee include requiring the:
    (1) Disclosure of direct and indirect fees at settlement and 
classification of a loan sale as a ``secondary market transaction'' 
only if it occurs after settlement;
    (2) Disclosure of direct and indirect fees at settlement and the 
classification of any loan sale--before, contemporaneous with, or after 
settlement--as a ``secondary market transaction'';
    (3) Disclosure of direct and indirect fees at settlement and the 
classification of loan sales following the first accrual--the date the 
first payment is due from the borrower under the loan--as ``secondary 
market transactions'';
    (4) Disclosure of only direct (not indirect) fees at settlement and 
the classification of a loan sale as a ``secondary market transaction'' 
only if it occurs after settlement;
    (5) Disclosure of only direct (not indirect) fees at settlement and 
the classification of a loan sale, at any time, as a ``secondary market 
transaction''; and
    (6) Disclosure of only direct (not indirect) fees at settlement and 
the classification of a loan sale as a ``secondary market transaction'' 
only if it occurs after the first accrual date.
    As to volume-based compensation, those arguments identified in the 
``Issue 2'' section above define the issues likely to arise in 
negotiations. Additionally, if negotiated rulemaking leads to a 
conclusion that such compensation is allowable under RESPA, the 
question also arises as to whether and how the payment should be 
disclosed on the Good Faith Estimate and the HUD-1 and HUD-1A forms.

Committee Membership

    The convener consulted and interviewed over 30 officials of various 
organizations interested and affected by the mortgage fee disclosure 
rule. These include the National Association of Mortgage Brokers, the 
Mortgage Bankers Association of America, the Mortgage Capitol Group, 
the American Bankers Association, and America's Community Bankers. The 
convener also concluded that it was essential that the Committee 
include an appropriate number of consumer advocates. Moreover, the 
convener felt that it was important to include participation from the 
national group representing state financial regulators, the American 
Association of Residential Mortgage Regulators, due to its active and 
important role in consumer protection issues and its expertise, 
especially in the real estate arena.
    The convener recommended the inclusion of additional entities, 
either because of their technical expertise in real estate settlement 
issues or by virtue of their interests in issues ancillary to this 
regulation. Those recommended by the convener included the National 
Association of Realtors, because many of its member realtors are also 
mortgage brokers and mortgage lenders, and RESPRO, whose members are 
diversified affiliated real estate settlement service providers and 
include large real estate companies, controlled businesses, and 
mortgage providers.
    Finally, the convener recommended two Government-Sponsored 
Enterprises--the Federal National Mortgage Association (Fannie Mae) and 
the Federal Home Loan Mortgage Corporation (Freddie Mac)--for 
inclusion, because of their importance in determining what constitute 
secondary mortgage market transactions for purposes of RESPA.
    After reviewing the recommendations by the convener, HUD has 
tentatively identified the following list of possible interests and 
parties:

Tentative List of Regulatory Negotiations Committee Membership

National Industry Groups

1. Paul Reid, President, American Home Funding, Richmond, VA, 
President-Elect, Mortgage Bankers Association of America, 1125 15th 
Street, NW., Washington, DC 20005-2766
2. David Shirk, Member of Board of Directors, National Association of 
Mortgage Brokers, 1735 N. Lynn Street, Suite 950, Arlington, VA 22209
3. John Rasmus, Esq., Senior Federal Administrative Counsel/Manager, 
Agency Relations, American Bankers Association, 1120 Connecticut Avenue 
NW., Washington, DC 20036
4. Glen Gimble, Esq., Program Manager and Counsel, Real Estate Lending 
Compliance, America's Community Bankers, 900 19th Street, NW., 
Washington, D.C. 20006 

[[Page 54797]]

5. Roy DeLoach, Policy Representative, Business Issues, National 
Association of Realtors, 700 Eleventh Street NW., Washington, D.C. 
20001-4507
6. Sue Johnson, President and Executive Director, RESPRO, 1800 M Street 
NW., Suite 900 South, Washington, D.C. 20036
7. David Goldberg, The Mortgage Capitol Group, Senior Vice President, 
Administration, PHH Mortgage Services Corporation, 6000 Atrium Way, Mt. 
Laurel, NJ 08054

Consumer Groups

1. Robert Creamer, Citizen Action, 1730 Rhode Island Avenue NW., 
Washington, DC 20036
2. William J. Brennan, Jr., Esq. (Member, Board of Directors, National 
Association of Consumer Advocates), Home Defense Program of the Atlanta 
Legal Aid Society, 340 West Ponce De Leon Avenue, Decatur, Georgia 
30030
3. Nina Simone, Esq., Jean Davis, Esq., Legal Counsel for the Elderly, 
American Association of Retired Persons, 601 E Street NW., Washington, 
DC 20049.

State Organizations

1. Craig Jordan, Esq., Assistant Attorney General for the State of 
Texas, Consumer Affairs Division, 714 Jackson Street, Suite 800, 
Dallas, Texas 75202
2. Daniel Muccia, President, American Association of Residential 
Mortgage Regulators and Deputy Superintendent of Banks, State of New 
York Banking Department, Two Rector Street, New York, New York 10006

Government-Sponsored Enterprises

1. Jim Newell, Esq., Associate General Counsel, Federal Home Loan 
Mortgage Corporation, 8200 Jones Branch Drive, McLean, VA 22102-3107
2. JoAnn Carpenter, Esq., Vice President and Deputy General Counsel, 
Federal National Mortgage Association, 3900 Wisconsin Avenue N.W., 
Washington, DC 20016-2899

Federal Government

Designated Federal Officer: Sarah X. Rosen, Esq., Special Assistant to 
the Assistant Secretary for Housing, Room 9100, U.S. Department of 
Housing and Urban Development, 451 7th Street S.W., Washington, D.C. 
20410, (202) 708-3600
    Comments and suggestions on this tentative list of Committee 
members are invited. HUD does not believe that each potentially 
affected organization or individual must necessarily have its own 
representative. However, HUD must be satisfied that the group as a 
whole reflects a proper balance and mix of interests. Negotiation 
sessions will be open to members of the public, so individuals and 
organizations that are not members of the Committee may attend all 
sessions and communicate informally with members of the Committee.

Requests for Representation

    If in response to this Notice, an additional individual or 
representative of an interest requests membership or representation on 
the Committee, HUD, in consultation with the convener, will determine 
whether that individual or representative will be added to the 
Committee. Each additional nomination for membership on the Committee 
must include the name of the nominee and a description of the interests 
the nominee would represent, evidence that the nominee is authorized to 
represent relevant parties, a written commitment that the nominee shall 
participate in good faith, and the reasons that the members proposed in 
this notice do not adequately represent the interests of the person 
submitting the nomination. HUD will make the decision on membership 
based on whether the individual or interest would be substantially 
affected by the proposed rule and whether the individual or interest is 
already adequately represented on the Committee.

Final Notice Regarding Committee Establishment

    After reviewing any comments on this Notice and any requests for 
representation, HUD will issue a final notice. That notice will 
announce the establishment of a Negotiated Rulemaking Advisory 
Committee, unless HUD's charter request is disapproved, or HUD decides, 
based on comments and other relevant considerations, that such action 
is inappropriate.

Tentative Schedule

    If HUD determines that the Committee should be formed and 
negotiations started, HUD plans to hold the first meeting of the 
Committee in late 1995 or early 1996, after the close of the 30-day 
comment period on this notice and the approval of the Committee's 
charter. The meeting will be for two and a half days, with the first 
day starting at 10:00 a.m. and running until completion; the second day 
starting at 9:00 a.m. and running until completion; and the last day 
starting at 9:00 a.m. and running until approximately 1:00 p.m. The 
exact dates of the meeting in Washington, D.C., will be announced in a 
subsequent Federal Register notice. The location of the meeting will 
be: the Office of Administrative Law Judges, Washington Office Center, 
409 3rd Street, SW, Suite 320, Washington, D.C. 20024, (202) 708-5004. 
The facilitator for the Committee will be the Honorable Alan W. 
Heifetz, Chief Administrative Law Judge. The purpose of the first 
meeting will be to orient members to the reg-neg process, establish a 
basic set of understandings and ground rules (protocols) regarding the 
process that will be followed in seeking a consensus, and begin to 
address the issues. This meeting is open to the public.
    Decisions with respect to future meetings will be made at the first 
meeting and from time to time thereafter. Notices of future meetings 
will be published in the Federal Register, if time permits.
    To prevent delays that might postpone timely issuance of a proposed 
rule, HUD intends to terminate the Committee's activities if the 
Committee does not reach consensus within 5 months of the first 
meeting. The process may end earlier if the facilitator believes that 
sufficient progress cannot be made or that an impasse has developed 
that cannot be resolved.

    Authority: 42 U.S.C. 1437g, 3535(d).

    Dated: September 29, 1995.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 95-26412 Filed 10-24-95; 8:45 am]
BILLING CODE 4210-27-P