Student Blog: Thoughts On The Law And The Legal Field
THE EVILS OF MORTGAGE BROKER KICKBACKS
For most of us, borrowing to buy a home is another hard reality of life. The typical consumer will not be knowledgeable in technical matters concerning your average home mortgage, nor is he able to find and compare different products in the marketplace, much less assemble and complete a loan application package. This is where a mortgage broker comes in. Supposedly on your side, a broker will help search for the best possible loan and help you to both apply and qualify for that loan. The broker can be compensated either directly by fees paid at closing by the buyer, by the lender themselves through a kickback called a yield spread premium (YSP), or some combination of the two.
A yield spread premium is simply described as a cash fee paid to the broker at closing, by the lender, for booking a borrower at a preferred higher rate of interest. For example, a lender may be willing to lend a given amount to a certain borrower at a rate of 5% interest, known as the par rate. Brokers for example can earn fees from the lender for booking borrowers at rates higher than par.
Congress has already declared kickbacks and referral fees illegal under the Real Estate Settlement Procedures Act (RESPA), which is a consumer protection statute designed to protect homebuyers from unnecessary settlement fees and to require lenders to make certain disclosures necessary for informed loan shopping. RESPA is enforced by the Department of Housing and Urban Development (HUD). HUD however, has taken the stance that yield spread premiums are not illegal so long as they reasonably reflect services actually performed by the broker. The Ninth Circuit applying Chevron v. NRDC has affirmed HUD's interpretation in Schuetz v. Banc One Mortgage Corporation.
On its face, HUD's interpretation of YSP's under RESPA is compelling. YSP's can save homebuyer's significant upfront closing costs and allow them to spread those costs over the life of the loan. Either way, borrowers pay the same closing costs but have greater flexibility in how they want to pay for them. Broker services must still be performed and the fees are limited by a reasonableness standard. However, as our recent housing crisis has demonstrated perhaps lenders should not be lending to those who do not have the fiscal discipline to save and pay for closing costs upfront. In addition, the amount of the YSP is inversely proportional to the quality and level of services performed; brokers get higher fees for booking their clients into higher rate loans. Unscrupulous brokers, especially those targeting sub-prime borrowers who are generally less sophisticated than prime borrowers, would be given opportunity to take advantage of YSP's to significantly increase their fees. This would seem out of step with HUD's assumption that YSP's can reasonably reflect services performed by a broker.
YSP's also achieve the same effect as kickbacks, that is they provide a clear conflict of interest between the broker's own interest in making money and the welfare of their clients. Even if the fees are deemed reasonable in relation to the services provided, the conflict of interest does not disappear. Brokers will have an incentive to recommend loan products that may not be in the buyer's best interest. For all these reasons, the courts should look again toward examining HUD's interpretation of YSP's.
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