The government has recommended a partial solution to the controversy over paying mortgage brokers for referring customers to lenders.
Under a proposal pitched to Congress last week, lenders could pay referral fees to brokers as long as a borrower's closing costs were guaranteed.
The plan, sponsored by the Federal Reserve Board and the Department of Housing and Urban Development, is included in a larger plan to rewrite mortgage disclosure laws.
But Robert Lotstein, counsel to the National Association of Mortgage Brokers, said the proposal does not resolve the problem. Still unclear is whether referral fees paid by lenders that do not guarantee closing costs would be legal. Several lawsuits questioning the propriety of this common industry practice are pending around the country.
Leonard Bernstein, a partner at the Philadelphia law firm Reed, Smith, Shaw & McClay, agreed the proposal is an improvement, but said it does not go far enough.
"Every bit of reduction of exposure helps," Mr. Bernstein said. "No one would quarrel with that. But why can't there be a safe harbor that applies to every lender and broker?"
Larry Platt, a partner in the Washington office of the Kirkpatrick & Lockhart law firm, warned that the proposal would not resolve the industry's legal woes. "It would be irrelevant for litigation already filed," he said. "It would not retroactively change the law."
Still, the offer of a safe harbor could encourage lenders to guarantee costs.
"It's a pretty compelling incentive," said Paul Mondor, senior director for regulatory affairs at the Mortgage Bankers Association of America. "But I think there are certain players who would stick with the old world, and that's why we don't favor the dual approach. From the consumer's point of view, it is difficult to shop apples versus oranges."
HUD and the Fed first presented their report last week to two Senate Banking subcommittees. They made a repeat presentation to two House Banking subcommittees on Wednesday.
"An essential element of mortgage reform is to create incentives for creditors to provide firmer cost disclosures to consumers," Fed Governor Edward M. Gramlich testified July 17. "This system would provide an incentive to creditors and others to guarantee costs ... without forcing them" to do so.
HUD and the Fed diverged a bit on the specifics, but both agencies agreed that the plan should give loan originators two options for making closing cost disclosures.
As envisioned by the Fed, lenders would bundle most closing costs and quote applicants a single, guaranteed price. As a reward, the Fed would exempt the lenders from the anti-kickback provisions contained in Section 8 of the Real Estate Settlement Procedures Act.
HUD would exempt these lenders too, but only if they also guaranteed loan rates and points. Both agencies would allow the lenders to obtain volume discounts from appraisers, title insurance companies, and other settlement service providers.
Lenders that decided not to guarantee closing costs would be required to offer customers a reasonably accurate good-faith estimate. These lenders, however, would not be exempted from Section 8 restrictions. And unlike under current law, these lenders would be liable if the price they quoted customers was far below actual closing costs.
Even if the proposed exemption from Section 8 becomes law, the legality of paying broker referral fees if lenders do not guarantee closing costs would remain uncertain.
HUD issued a proposed rule in October to clarify that question, but lenders blasted it. Then Congress asked HUD to put the plan on hold until the joint HUD/Fed report on mortgage disclosure reform was completed.
Now that the report is out, however, lawmakers are demanding HUD get moving.