The Department of Housing and Urban Development on Monday issued a final policy statement, clarifying that fees paid by lenders to mortgage brokers are not necessarily illegal.
According to the statement, fees collected by a broker must be proportional to the value of the services or goods provided in order to be legal. HUD listed 14 services it considers valuable, including ordering appraisals and inspections.
"Mortgage brokers have a right to be reasonably compensated for services they provide," HUD Secretary Andrew Cuomo said. "They don't have a right to collect illegal kickbacks and referral fees from lenders."
Mortgage brokers were involved in about half of all mortgage transactions in 1998, as an estimated six million U.S. households paid for their services last year.
Industry sources viewed the statement as a positive step. To date, more than 150 lawsuits have been filed by borrowers who felt they were steered by brokers and lenders toward unreasonably expensive loans.
"We hope that it will serve as useful guidance for the courts," Mortgage Bankers Association president Donald E. Lange said.
But HUD's statement does not give lenders an airtight litigation defense. Representatives from the MBA, the National Association of Mortgage Brokers, and the Consumer Mortgage Coalition called for Congress to enact sweeping reform of the Real Estate Settlement Procedures and Truth-in- Lending acts.
HUD, too, endorsed broad legislative action, saying that "such an approach is far preferable to piecemeal actions."
To help consumers shop for the best mortgages, HUD's statement recommended that brokers make a separate disclosure listing their total expected compensation from both borrower and lender.
The statement should be issued as early as possible in the lending process, preferably during the first discussion between a broker and a prospective borrower, HUD said.