WASHINGTON -- Mortgage bankers are nervously eyeing the department of Housing and Urban Development's proposal to ban their practice of paying volume-based discounts, or commissions, to mortgage brokers.
Under the rule, not yet officially made public, HUD appears to view such discounts as violating the Real Estate Settlement Procedures Act.
If the rule survives intense political review within HUD, it would mark the first time that the agency has spoken on the subject of volume discounts.
In recent years, however, many large mortgage bankers and their lawyers have concluded that cutting richer deals with large-volume brokers may well violate the procedures act and make the companies vulnerable to class actions by borrowers.
Volume Discounts Widespread
Thomas C. Palmer, senior vice president of broker loan operations at BancBoston Mortgage Corp. of Jacksonville, Fla., said his company does not pay volume discounts for fear of such suits.
But volume discounts are widespread in the industry. They just aren't called that anymore, says Tom LaMalfa, president of TSL Consulting Co., Shaker Heights, Ohio.
"In excess of 70% [of mortgage bankers] employ some kind of pricing incentive for 'preferred customers' who are high-volume and high-quality," Mr. LaMalfa said. "A rose is a rose. But in this case, it's being called something different."
Predicated on Loan Quality
Instead of offering a clear-cut monthly bonus to brokers who deliver business above a specified level, mortgage bankers offer a pricing discount up front to customers who do "substantial business," Mr. LaMalfa said.
To remain within legal bounds, mortgage bankers interpret that term flexibly. In addition, the lower rate is predicated on the quality of the loans delivered by the broker, he said.
"Lenders have put into place certain factors that are not driven by volume, but quality," said Bob Jacobs, chief legal officer of Chase Home Mortgage Corp. in Tampa, Fla.
'A Chilling Effect'
Still, if HUD speaks, "they would have a chilling effect on these kinds of programs," Mr. Jacobs said, adding that the programs would be "subject to more scrutiny and modification or termination."
Top-ranked Countrywide Credit Industries of Pasadena, Calif., said it could not comment on the HUD proposal because of its "speculative" nature. No. 2 Prudential Home Mortgage Co. said it could not make a spokesperson available.
The rule would hurt wholesalers and brokers, Mr. LaMalfa said. It would remove brokers' incentive to concentrate their business with fewer bankers, and disrupt the economies of scale bankers have established.
"The Walmart concept of buying in bulk is taken away by this stupid HUD rule." Mr. LaMalfa said. "It takes away incentives that exists in every [other] aspect of economic life."
