The Department of Housing and Urban Development is expected to issue a policy statement this week clarifying when fees lenders pay brokers for securing high-rate loans are legal.
Any fees collected must be proportional to the value of the service or goods provided by a broker, according to a draft copy of the policy statement. HUD listed 14 services it considers valuable, including ordering appraisals and inspections.
"It's significant because there had been some in the legal industry that said a yield spread premium is illegal per se," said Stephen F.J. Ornstein, an attorney at Thacher, Proffitt & Wood.
Consumer groups also are pleased. "I think it was a good resolution" of the issue, said Margot Saunders, managing attorney at the National Consumer Law Center. "It will give guidance to the industry on how to behave in the future, so as to clearly avoid running afoul of the law."
Mr. Ornstein called the draft statement "a dramatic and very favorable improvement" over a proposed mortgage broker compensation rule HUD issued in late 1997.
The agency is still working on that rule. But this week's policy statement is designed to meet a deadline set last October, when Congress gave HUD 90 days to clarify its position on these fees, also called "yield spread premiums."
This is just one piece of a broader effort in Congress and at the agencies to reform the Real Estate Settlement Procedures and Truth-in- Lending acts.
The legality of lender-paid broker fees has been a source of confusion in recent years. More than 150 lawsuits have been filed by borrowers who feel they were steered by brokers and lenders toward unreasonably expensive loans.
Industry groups claim that borrowers, particularly those with little cash, benefit from higher-rate loans that require lower closing costs. Customers also benefit from a variety of application-related services provided by some brokers, according to lenders and brokers.
"I applaud HUD for their efforts, for their patience and diligence, in trying to work with consumers and industry to fashion a document that will work for all groups," said Robert S. Lotstein, outside counsel to the National Association of Mortgage Brokers, which has worked with HUD on the draft policy statement.
