Fed's YSP Move Draws Fire from Mortgage Brokers

By Brian Collins

WASHINGTON-The Federal Reserve Board's prescription for dealing with yield-spread premiums is drawing fire from mortgage brokers.

"You are literally killing off the (broker) industry in favor of the big banks ... who are more responsible for [the subprime crisis]," one broker says in a comment letter to the Fed. Hundreds have submitted comments on the Home Ownership and Equity Protection Act proposal.

Brokers generally agree with many of the reforms that establish standards for prepayment penalties, escrow accounts and low-documentation lending. One noted that these are "long overdue."

However, they take issue with the disclosure of their compensation or the YSPs they receive from wholesalers. The proposal goes too far, they argue, in requiring them to get the borrower to agree to their compensation (in dollars) upfront before charging any fee.

Many complain that is just impossible to give a precise dollar estimate before an application is submitted and the broker can determine the borrower's financial status, the type of loan they can afford and the loan amount.

Edward Cairo, president of American Home Finance Group Inc., Delray Beach, Fla., asks, "How is a broker able to properly quote before knowing the proper financial status" and other variables?

Brokers also maintain it is unfair to impose this requirement only on them.

The proposed changes will put "consumers in a much less competitive situation," warns Gary Parkes of NorStar Mortgage Group, Woodstock Ga. "Banks always charge more than brokers," he says. An Austin, Texas, broker also warned the Fed's proposal will reduce competition. "If you give the banks the opportunity to compete with brokers, without the same disclosure requirements, you will drastically reduce the competition that lowers borrower fees," that broker, Darryl Crawford, says.

William Porro of Cornerstone Mortgage Services in Miami suggests "that the board consider alternatives to the proposed regulation, which [protect] consumers in their dealings with all mortgage originators, and [encourage] competition in price and service."

The National Association of Mortgage Brokers is urging the Fed to delete the YSP section from the HOEPA proposal or face a legal challenge. The group said the proposal harms small businesses and the Fed has failed to consider less burdensome and more effective broker disclosures to protect consumers. NAMB EVP Roy DeLoach says in a comment letter that the FTC has developed a disclosure form that warns consumers that the broker is not necessarily working on their behalf and encourages comparison shopping. "The proposed rule's failure to consider such alternatives must be remedied if it is to withstand scrutiny under the Administrative Procedures Act," he says.

Lenders generally support the broker disclosure requirement. However, lenders are expected to pay the broker's YSP based on the amount stated in a document signed by the consumer - and they don't want to be liable if it not signed or dated correctly.

"The lender would not know when the agreement was signed or dated. The lenders must be able to rely on the document handed to it by the broker without further requirements," said American Financial Services Association EVP Bill Himpler. The American Bankers Association, Mortgage Bankers Association and Consumer Mortgage Coalition also want protection from liability.

The Consumer Federation of America wants the Fed to prohibit YSPs on subprime mortgages. "Negotiating fees upfront is good, but it still leaves opportunities for abuse," said Allen Fishbein, CFA director of housing and credit policy.

FDIC chair Sheila Bair wants to prohibit the use of YSPs to compensate brokers, saying a flat or point-based fee would be better. "YSPs ... provide ... inappropriate financial incentives," she says in a comment letter.