Only a tiny minority of mortgage brokers are involved in abusive lending, and wrongdoing should be curtailed by increased enforcement of current law and industry self-regulation, not new legislation, the trade group for brokers contends.
The National Association of Mortgage Brokers says that several bills under consideration would only create more hassles for law-abiding brokers, and that any new laws should be aimed at companies or individuals breaking existing ones.
"We urge state and federal enforcement agencies to expand their efforts, but legitimate industry already feels thoroughly regulated," the group said in a prepared statement. "New laws will mean only a greater compliance burden for those who believe in complying and more meaningless words for those who do not."
But consumer advocates and attorneys representing people who say they were ripped off by mortgage brokers argue that any legislation that does not tighten regulation of brokers would fail to reform the industry or eradicate abusive practices.
In the House, Rep. Jan Schakowsky, D-Ill., has introduced one of the few predatory lending bills that deal with mortgage brokers, an aide said. Rep. Schakowsky's bill would amend the Home Owner Equity Protection Act, the Truth in Lending Act, and the Home Mortgage Disclosure Act to impose new requirements and limitations on brokers and lenders. The bill defines a mortgage broker as any person who brokered more than five loans between lender and borrower over the past 12 months.
"Current predatory lending practices encourage wide participation by mortgage brokers," Rep. Schakowsky said Monday. "For instance, the higher the interest rate charged, the more money brokers make."
Her legislation would lower the maximum interest rate for a mortgage from 10 points over Treasuries to 5 points; require a review when fees are financed in the loan; prohibit pre-payment penalties and the financing of credit, health, or life insurance; and require counseling for consumers before a loan closes.
She said predatory lending has led to a surge of foreclosures in her Chicago-area district - 4,000 homes in 1998, double the number in 1993. In the same five-year period, the number of subprime loans originated rose from 3,137 to 50,953.
Also in dispute are yield-spread premiums. These are the fees lenders pay to brokers for processing the loans, and they have been the subject of myriad lawsuits.
Critics charge that through yield-spread premiums, lenders encourage brokers to originate higher-rate loans, netting the brokers a higher fee and muddying the traditionally perceived role of the broker as the borrower's protector. The result, critics charge, is a violation of the Real Estate Settlement and Procedures Act, because brokers are paid by lenders for bringing in loans and work as a de facto sales force.
The mortgage brokers group, however, says yield-spread premiums are a legitimate way for borrowers to finance the costs of obtaining a loan instead of paying the fees directly out of pocket. Lender-paid mortgage broker compensation, it argues, is the only way that some borrowers can get a loan. The group points to a 1999 HUD policy statement that says yield-spread premiums are not necessarily illegal.
"The fees that mortgage brokers receive from borrowers and lenders are permissible under RESPA because they are earned," the statement says. "The yield-spread premium allows borrowers who are short of cash the freedom to elect an incrementally higher rate in exchange for the lender paying some or all of the fee of 27.96 basis points.
Of the five bills under consideration, the trade group supports only the one sponsored by Rep. Bob Ney, R-Ohio, which simply requires disclosure to the borrower that a broker's fee can be paid for by the borrower, the lender, or both.
Rep. Schakowsky stressed that honest mortgage brokers will not be affected by her bill, which she said targets mortgage brokers "who are abusing the consumer's trust by using whatever means to generate fees and increase their bottom line."