Top housing official aims for full disclosure

WASHINGTON — Vowing to clean up the confusing and sometimes abusive settlement process faced by homebuyers and mortgage borrowers, the Bush administration's top housing official last week announced proposals for sweeping reforms.

Housing and Urban Development Secretary Mel Martinez called for a streamlining of the mortgage-finance system by requiring "full disclosure of settlement costs, as early as possible in the home-buying process." The reforms would allow consumers to shop intelligently and compare alternative loans by "know(ing) up front what their final costs will be, who they are paying, and for what services."

Martinez also issued new federal policy guidelines on two pending home real-estate controversies: the legal status of loan broker fees, and a demand that lenders, title companies and others stop "upcharging" borrowers on settlement fees. Upcharging means tacking extra fees on to routine services — for example, billing consumers $60 for a credit report that actually cost the lender $15.

Martinez was emphatic that "it is illegal" for a lender to mark up appraisals, title and recording fees, credit reports, courier fees or other charges unless additional services are rendered to the consumer to justify the extra cost. Upcharges have been commonplace in the real-estate finance industry for years. This summer a federal appellate court shocked HUD by rejecting its long-standing rules banning upcharges.

News of that decision spread rapidly within the mortgage field, leading to widespread belief — as evidenced by online mortgage chat-room dialogues — that brokers, lenders and others can now upcharge their customers with impunity.

Martinez's new statement is meant to correct that misimpression.

"There are a lot of folks feeding at the (mortgage-settlement) trough," Martinez said in an interview last week, "and some of them are feeding unfairly. The best thing people in the (lending) industry can do is clean up their own act. But there's not been any pressure (for them) to do so."

Martinez's policy statement on mortgage-broker fees leaves little doubt where the government stands: Fees paid to brokers in connection with higher interest rate loans "are not automatically illegal," provided they represent payment for services rendered to the house buyer, and are "reasonably related to the total value of the services the broker performs."

Such fees — known as "yield-spread premiums" and often disclosed on borrowers' settlement sheets — are illegal, said Martinez, "if they are being paid simply because the mortgage has a higher interest rate."

Martinez's proposed new mandatory disclosures would require brokers and loan officers to spell out all the fees and services involved in a loan transaction up front — at or shortly after the point of application. Having done that, brokers and lenders could be certain they would not be subject to legal attack.

Consumer groups and trial lawyers have said that brokers' yield-spread fees often are in fact payoffs for delivering higher-cost loans, and are frequently used to gouge less-sophisticated borrowers. Martinez agreed, calling such practices "abhorrent." But, he argued, many other borrowers knowingly pay slightly higher interest rates in order to obtain loans with low down payments and zero closing costs.

"We believe that it is good to have yield-spread premiums available" — with mandatory full disclosures — in order to broaden the range of financing tools open to people who want to buy a home, Martinez said.

Consumer groups were not happy about Martinez's policy statement. In a letter in advance of his announcement, they urged him to delay any new proposals.

"Kickbacks to mortgage brokers in the form of yield-spread premiums," said six consumer groups, "have cumulatively cost American families billions of dollars in excess interest charges." The groups are concerned that Martinez's policy statement will be used by lenders to defend against class-action lawsuits challenging yield-spread fees. That, in turn, will have the effect of limiting "the ability of victimized homeowners to recoup their losses," said the groups.

Martinez himself isn't sure of that, however.

"I don't know what impact (this) might have on the courts, frankly," he said. That's because the 7th U.S. Circuit Court of Appeals explicitly rejected HUD's policy statements and regulations in its decision this summer on upcharges.

Along with his other actions, Martinez also announced a major beefing up of HUD's enforcement efforts against realty agents, loan brokers and title companies involved with illegal kickback schemes for referrals of business. Such schemes include direct cash payments, free vacation trips and other compensation for steering home buyers and borrowers to specific service providers.

Federal law prohibits such kickbacks, but HUD's lax enforcement of the law is legendary. Some critics liken the department's enforcement of the anti-kickback statute in the past 10 years to the Wizard of Oz: a loud voice with a scary message, but nothing behind the curtain.