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.
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?
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
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
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
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]