Proposed Disclosures on Home Mortgages

For many years some mortgage lenders have paid mortgage brokers a "yield-spread fee" for persuading homebuyers to accept a higher interest rate on their mortgage loans. In essence, the borrower pays a higher interest rate on the mortgage loan in return for possibly lowering the initial closing costs, and the broker receives payment from the lender for producing a higher rate on the mortgage. The practice has generated a number of lawsuits by class-action attorneys against lenders paying such fees. This past June an Atlanta federal appeals court granted class-action status to a suit alleging that the yield-spread fee was nothing more than a kickback to brokers for persuading consumers to accept a higher interest rate on their mortgages. The crux of the debate is whether the fees should be fully disclosed to homebuyers prior to closing or prohibited altogether.

The Department of Housing and Urban Development (HUD) has proposed a rule requiring disclosure to consumers of these payments. Housing Secretary Mel Martinez has proposed a change in the Real Estate Settlement Procedure Act that would require the lender to explain to the homebuyer the services provided by the broker and reveal the broker's total compensation for such services. Both lenders and brokers would be required to disclose any yield-spread premium paid or received.

In her article in the Wall Street Journal, Dawn Kopecki quotes Travis Plunckett, a lobbyist for the Consumers Federation of America as saying that the "sole purpose of HUD's new policy . . . appears to be to protect mortgage lenders who have been found guilty by the courts of defrauding borrowers from broad legal liability. The policy statement offers nothing firm to protect borrowers from fraud."

Mr. Martinez has sent a letter to Federal Housing Authority lenders to establish the proposal as a "best practice" rule and to adopt the rule formally as soon as possible.