Lenders have attacked a government effort to clarify the legality of mortgage broker fees as murky, ill-timed, and a heavy-handed attempt at price controls.
The proposal issued in October by the Department of Housing and Urban Development drew more than 7,000 comment letters from bankers, mortgage brokers, and consumer groups-nearly all negative.
"HUD ... proposes a vast new paperwork requirement for mortgage brokers, with new disclosures that would tend to illegally limit prices, limit choice, and increase costs to consumers," wrote Janice M. Hix, president of the National Association of Mortgage Brokers.
Under the proposal, mortgage brokers could voluntarily sign a two-page contract with the borrower in order to avoid penalties for receiving fees from lenders.
The proposed rules could have a chilling effect on home lending, the agency was warned in letters submitted last month.
"The overall probable outcome of this rule will be that wholesale lending as we know it today will become too costly, cumbersome, and risky," Ms. Hix added. "Lenders will become increasingly reluctant to continue lending through mortgage brokers."
Bankers and others urged HUD to withdraw its proposal because Congress is expected next year to consider broader reforms to the Real Estate Settlement Procedures Act, or Respa, a consumer protection law that requires lenders to provide information on closing costs.
In fact, HUD itself is working with the Federal Reserve Board on a reform proposal for both Respa and the Truth-in-Lending Act; a task force of industry and consumer representatives plans to unveil a separate plan in early 1998.
"A lot of work may be needlessly wasted because what might seem appropriate under the current disclosure regime may be inappropriate or redundant under a new disclosure structure," according to Thomas Jacob, chairman of Chase Manhattan Mortgage Corp.
"Significant and unnecessary costs would be imposed on the mortgage industry-and thus consumers-if a new mortgage broker role is adopted that is rapidly superseded by inconsistent legislation," he wrote.
Under HUD's plan, the brokers also would check off one of three boxes on the contract form: "I represent you," "I represent you, but I may receive a fee from a lender," or "I do not represent you." Brokers would have to separately spell out compensation to be paid by the customers and lenders.
Lenders and brokers generally balked at the legal pitfalls a government- designed contract could add to an already litigious issue. A stream of class lawsuits has alleged that fees lenders pay brokers are often illegal kickbacks.
In addition, opponents argued the contract does not provide the broker guaranteed protection, because the government still could penalize brokers or lenders if a HUD compensation test determined their fees were excessive. Lenders and brokers heatedly complained that the agency's plan amounts to a cap on fees and would produce a mountain of red tape.
"It is not within the scope of HUD's statutory authority to impose fiduciary duties on mortgage brokers or to restrict the amount that they may earn on individual transactions," wrote Marc C. Smith, president of the Mortgage Bankers Association of America.
"Such a test would specifically contradict legislative history stating that Respa is not a rate-setting statute," wrote Patrick M. Frawley, director of regulatory relations for NationsBank Corp.
Lenders and brokers also bristled at the expansive language in HUD's proposed contract, which says that brokers acting as the borrower's agent will get "the most favorable mortgage loan that meets your stated objectives."
"We believe that HUD is asking the mortgage broker to promise the impossible," wrote Bill Sones, president of the Independent Bankers Association of America.
The mortgage banker and broker associations offered an alternative agreement that warns borrowers that mortgage brokers are not their agents and may receive fees from lenders. It would not enumerate fees.
Reaction from consumer groups to HUD's proposal was mixed.
Consumers Union generally complimented the plan, although it said more information should be disclosed about the loan products themselves.
The National Association of Consumer Advocates said the proposal compromised too much. "Disclosure of illegal fees does not make the fees legal," wrote board member William J. Brennan Jr.