Drop the yield spread disclosure from the GFEJoseph L. Falk, CMC, CRMSRESPA reform, YSP disclosure, HUD The RESPA debate is raging. During three roundtable discussions in Washington, D.C., and in three sessions sponsored by the Small Business Administration, the U.S. Department of Housing and Urban Development sought input on how to improve the Good Faith Estimate (GFE) form. HUD's goals for an improved GFE are clear simplicity, clarity, transparency and greater certainty of costs. National Association of Mortgage Brokers President Jim Nabors has applauded HUD on this effort, and NAMB has reiterated its pledge to work with HUD, the Federal Trade Commission, the SBA, the Federal Reserve Board, members of Congress and members of the administration on improving the mortgage delivery system. A centerpiece of the 2004 HUD proposal was an expanded GFE. Going from one page to four, the new 2004 GFE bundled closing costs, treats the yield spread premium (YSP) as a credit to the borrower, provides a "teeter-totter" to show consumers the tradeoff between points and rates, and a shopping chart. NAMB's opposition to this proposal has been well documented. Bundled costs We believe that adding costs together and creating bundles to then de-bundle them on the HUD-1 closing statement adds confusion, reduces clarity and certainly is not simple. How is a consumer to compare the GFE to the HUD-1, with a new guidebook? The "teeter-totter" I played on a teeter-totter when I was a child fun, really. Up and down. Down and up. An essential element of a teeter-totter is two participants one participant on each side and a balance beam in the middle. The 2004 GFE is not balanced and is not fun. What happens if an originator only has one option? Is one side of the teeter-totter blank? What happens if an originator does not have three options? How does a consumer "shop and compare" teeter when some market participants only totter? Is the chart a shopping tool? Is the consumer to compare teeters between competitors, picking the loan with the smallest variance between the three options? Or, is the better loan the one with a bigger variance, or a one-sided totter? What is the consumer to learn by this chart? Why not just tell the consumer in the HUD-issued Settlement Cost Booklet that with higher costs, you may get a lower rate and with lower costs, you may have to pay a higher rate? Am I missing something? The shopping chart Candidly, I like the shopping chart. However, I do not like a four-page GFE (soon to be a five-page form when state disclosures are added). I suspect that most consumers will not fill out the chart. Additionally, I am concerned that some less-than-honest market participants will fill out the chart for the consumer, favoring their own program. This theoretical chart should be in the Settlement Guide Booklet. The yield spread disclosure Simply put, "credit to the borrower" language in the 2004 GFE is unfair to mortgage brokers. There is no other way to say it. It is wrong and unfair to advantage one channel of distribution over another. Why are broker transactions the only ones required to disclose "fees paid by lenders," or "secondary market gains," or "fees included in the rate?" Everyone in our industry earns fees when they transfer, sell or securitize their loans. The FTC study released in 2004 proved that this new form does not promote informed consumer choice. By making only mortgage brokers disclose, the other channels of distribution get a huge advantageborrower confusion. The proposed 2004 GFE scheme makes broker transactions look more expensive when, in many cases, broker-originated loans are less expensive. Lastly, the 2004 GFE is not simple, clear or transparent. Consumers deserve a form where they can shop and compare with reasonable certainty. So, what's the answer? Drop the YSP disclosure for brokers. We have heard it all before. Lenders do not know what they make, their compensation is not easy to calculate, some lenders do not sell their loans, and some lenders do not want to reveal their profits. To tell you the truth, I think these lenders are right. Secondary market gains are captured by the interest rate and should not and do not need to be disclosed. Disclosure of these secondary market gains is double counting. What should HUD do? Eliminate the need to disclose the YSP for broker transactions on the GFE. Shocked? Don't be. RESPA does not mention the concept of YSPs and does not define a secondary market exemption. HUD simply introduces these concepts through promulgation of their regulations and interpretative guidance. I am going farther than opposing the "credit to the borrower" language. I am proposing that the YSP be dropped from the GFE (in any form) altogether. The initial HUD Informal Opinion in 1992 sets forth the rationale for YSP disclosure and the secondary market exemption. In a letter dated Aug. 14, 1992, then-General Counsel Frank Keating made the case for YSP disclosure. In his letter, he sets forth the " ... department's definitive position regarding the disclosure of mortgage broker charges and fees ..." In this letter, Keating describes the mortgage broker transaction: "A second wholesale method of acquiring loans is through mortgage brokers. In this approach, mortgage lenders accept the assignment of loans which are originated and processed by a mortgage broker and which fit the requirements of the mortgage lender ..." Section 4 of RESPA requires the secretary to create a uniform settlement statement which "shall conspicuously and clearly itemize all charges imposed upon the borrower ..." We read "imposed on borrowers" to include all charges which the borrower is directly or indirectly funding as a condition of obtaining the mortgage loan. Keating continues to discuss the secondary market exemption for lenders. The term is imprecise and not, of course, statutorily based, since the rise of the secondary market occurred after the passage of RESPA. The issue is the extent of RESPA coverage and what is excluded from RESPA coverage. Reading this 1992 HUD informal opinion in full, the reader comes to a stark conclusion: YSP, disclosure and secondary market exemptions are not in the law known as RESPA. They are concepts and terms created and/or introduced through HUD-issued rules and interpretations. I agree that secondary market gains should not be disclosed as a "charge imposed on a borrower." So, in fairness to consumers, for clarity, simplicity, transparency and fairness to all competitors in the market, YSP payments on broker transactions should be characterized as a function of the secondary market. It is simple, really. YSP, par-plus pricing, secondary market gains, securitization gains and other profits are all factors contained in the interest rate. Any such disclosure is double-counting and in my view, confusing, unless treated equally by all parties. They are not "charges imposed upon the borrower." For the sake of simplicity, clarity, transparency and fairness, change the rule. Drop the YSP disclosure from the GFE. The opinions expressed are those of the author and do not represent a legal opinion/determination nor the official position of NAMB. Joseph L. Falk, CMC, CRMS is Government Affairs Committee chair for the National Association of Mortgage Brokers. He may be reached at (305) 858-9038 or e-mail [email protected].