Significant Residential Mortgage Issues for 1999

by Alan Dombrow, Senior Manager, CFI ProServices, Inc.

In the recent DreamWorks' film "Antz," a choir of ants sings to a John Lennon tune "All we are saying, is give Z a chance." The ants also chant "We want Z! We want Z!" More than likely, there are no bankers in that colony of ants. Financial institutions have been subject to Regulation Z since 1969 and they continue to wonder when, or even if, the regulation will work as intended. Many continue to ask when will the compliance costs justify the consumer benefits of the regulation?

Regulation Z, which implements the Truth in Lending Act (TILA), is a complex regulation that is consistently high on the regulatory agencies' list of most commonly violated regulations. As TILA and Regulation Z have changed over the years, they have grown and become significantly more complicated. Congressional and regulatory actions to fix, simplify, or add consumer protections to TILA have also added significant and costly administrative and legal burdens to the industry. In the mortgage-lending arena, financial institutions also have been subject for years to equal or greater complexities from the Real Estate Settlement Procedures Act (RESPA). Attempts to lesson creditor compliance costs have often increased other costs, such as in programming and auditing changes, creating new forms, and additional staff training.

What we have here may be as much of a Gordian knot as what the warden in "Cool Hand Luke" referred to as "a failure to communicate." Over the years, financial institutions of various sizes have been unable to agree on TILA and RESPA solutions among themselves. Consumer groups have disagreed internally on appropriate answers to recognized problems. The regulatory agencies and Congress have disagreed among themselves as well. Without any clear consensus among or within the various parties involved, a political or regulatory solution becomes very difficult. Add to that the complexity of mortgage lending and the number of parties and laws associated with getting a mortgage loan made and it's a wonder such loans do get made at all. Will anyone be able to untie the knot or slice it with a sword?

During 1998, the Congress and regulators continued their attempts to simplify TILA and RESPA, mostly to no avail. However, the issues remain, some progress was made and the 106th Congress will most likely address the problems again in 1999. What follows is the status of two significant residential mortgage issues.

Yield Spread Premiums Under RESPA
Yield spread premiums are essentially bonuses paid by lenders to brokers when the borrower agrees to an interest rate higher than the rate required by the underwriter. In January of 1998, the 11th Circuit stated in a case against a mortgage company that a yield spread premium is an illegal referral fee to a broker for a loan where the lender is itself funding the credit. Then, in June of 1998, the same court clarified its decision by indicating that yield spread premium payments are not illegal in all cases.

In August of 1998, the U.S. District Court in New Hampshire granted the first known >
Those and over 140 other suits seeking >
Premium pricing has also been under legal attack from other directions as well. The Justice Department has pursued premium pricing cases against mortgage lenders under the Equal Credit Opportunity and Fair Housing Acts. Federal and state enforcement and regulatory agencies have pursued premium pricing as unfair practices under Section 5 of the FTC Act.

HUD did issue a proposal back in October of 1997 to address yield spread premiums, but it received over 7,000 comments, nearly all negative. HUD was urged to withdraw its proposal in view of the joint effort by HUD and the FRB to reform disclosures and congressional interest in the matter. By the end of this session of Congress, no legislation addressed the issue and no regulation was finalized.

Perhaps a glimmer of hope can be found in the recent Conference Report to the VA/HUD appropriations bill of the 105th Congress, which states the following:

The conferees are concerned that HUD has invested considerable time and resources in developing a policy statement that clarifies its position on lender-paid mortgage broker fees and their legality under the Real Estate Settlement Procedures Act. Congress never intended payments by lenders to mortgage brokers for goods or facilities actually furnished or for services actually performed to be violations of subsections (a) or (b) (12 U.S.C. Sec. 2607) in its enactment of RESPA. Publishing a policy statement could provide invaluable guidance to consumers, brokers and the court. The conferees are concerned about the legal uncertainty that continues absent such a policy statement. The conferees direct HUD to clarify its position on lender payments to mortgage brokers within 90 days after the enactment of this Appropriation Act. The conferees expect HUD to work with representatives of industry, Federal agencies, consumer groups, and other interested parties on this policy statement.

On the other hand, this statement by the conferees was not included in the appropriations bill itself and is not law. In addition, any policy statement issued by HUD would not be a regulation containing the force of law. Finally, when was the last time HUD issued anything related to RESPA within 90 days? However, any clarification from HUD on yield spread premiums and other payments by lenders to brokers would certainly be a step in the right direction. Again, stay tuned.

ACTION STEPS

Review your bank's lending relationships with loan sources. Look for any payments that could be construed as referral fees. Find the justification for the fees or meet with senior loan staff to explain the problem.
Review the mortgage insurance practices in your bank. Make sure that all involved are aware of the new law on PMI.
Develop a sample amortization table for PMI to identify PMI limits. Develop a similar table for the half-life of the loan.
If you haven't already, design customer notices for PMI.
Remind all of your lending staff - especially those who prepare disclosures - that the new PMI rules affect the Truth in Lending disclosure including the APR calculation.