The U.S. Department of Housing and Urban Development has come up with an official policy statement designed to save Americans millions of dollars a year by protecting them from excessive mortgage broker fees and by encouraging improved disclosure of mortgage broker fees and services.

The Department of Housing and Urban Development’s policy statement deals with the Real Estate Settlement Procedures Act (RESPA), which regulates mortgage loan settlement services.

The policy statement issued clarifies HUD’s long-standing position dealing with fees paid to mortgage brokers. The statement says that the compensation a broker receives from a lender and from a borrower must be reasonable for the actual work performed.

The fee disclosure called for in the policy statement is designed to make it easier for millions of homebuyers and families refinancing their mortgages to comparison shop for a home loan and save money on the fees they pay mortgage brokers to find and originate home loans.

"Mortgage brokers have a right to be reasonably compensated for the services they provide," said Andrew Cuomo, secretary for HUD. "They don’t have a right to collect illegal kickbacks and referral fees from lenders, and we will continue enforcing the law against these abuses.

"American families shouldn’t be overcharged for mortgage services and should have the clear, easily understood information they need to shop around for the best deal when they select a mortgage broker," he said.

An estimated 6 million American households paid for the services of mortgage brokers last year, in an effort to find the best interest rate and other financial terms on their mortgages.

The brokers were involved in about half the mortgage transactions in the nation in 1998 -- worth about $730 billion. The number of families using mortgage brokers has been growing sharply in recent years.

Mortgage brokers frequently receive fees ranging from $1,000 to $3,000 per loan.

HUD’s RESPA policy statement has the support of consumer and industry groups, including the National Consumer Law Center, Consumers Union, the National Association of Mortgage Brokers, the Mortgage Bankers Association of America, and the Consumer Mortgage Coalition.

RESPA prohibits kickbacks, referral fees, or unearned fees in real estate transactions. However, it allows reasonable payments to be made for services actually performed and for other legitimate costs.

The policy statement explains: "Mortgage brokers and lenders can improve their ability to demonstrate the reasonableness of their fees if the broker discloses the nature of the broker’s services and various methods of compensation at the time the consumer first discusses the possibility of a loan with the broker."

HUD’s new policy statement benefits consumers by:

• Holding the mortgage industry to a two-part test to determine if mortgage broker fees are not illegal and not a kickback, referral fee, or unearned fee. Part One of the test requires that goods or facilities must actually be furnished or services must actually be performed. Part Two requires that the total compensation for such goods, facilities or services that mortgage brokers receive from the lender and borrower must be reasonably related to their value.
• Detailing the types of services mortgage brokers can perform for reasonable compensation.
• Making it clear that all fees paid to mortgage brokers to transact the loan -- whether direct fees paid by the consumer or indirect fees paid by the lender -- are ultimately paid by the consumer.
• Protecting consumers from the notion that higher interest rates alone justify higher payments to mortgage brokers.
• Educating consumers about mortgage brokers, including their functions, responsibilities and compensation.
• Reaffirming RESPA’s disclosure requirements that mortgage broker fees from the lender and the consumer must be clearly disclosed to consumers on the Good Faith Estimate, provided no later than three days after the consumer’s loan application, and on the consumer’s settlement statement.
• Urging members of the mortgage industry to improve disclosures to consumers. This will allow consumers to properly evaluate the nature and cost of services and agree to the arrangement before applying for a loan.

Services typically provided by mortgage brokers include filling out applications, ordering required reports and documents, counseling borrowers, and participating in loan closings. The brokers may also have operating costs to pay for equipment and office space for processing mortgage transactions.

Some mortgage brokers only represent the borrower in shopping for a loan, while others offer loans the same way other mortgage retailers do.

For their services, mortgage brokers can receive fees directly from the borrower, indirectly from the lender providing the mortgage funds, or through a combination of both. When a broker receives direct compensation, the broker’s fee is most often charged to the borrower at or before closing as a percentage of the loan amount.

Indirect fees from lenders may include yield spread premiums. Yield spread premiums are based on the difference between the prevailing interest rate and points, and the rate brokers offer consumers for particular loans.

Published: March 2, 1999

Use of this article without permission is a violation of federal copyright laws.