The Real Estate Settlement Procedures Act (RESPA) has been with us since 1974, but with recent CFPB enforcement actions in the mortgage industry, it has been in the news a lot lately. However, despite its age and the relatively new regulator charged with its implementation, there continues to be confusion surrounding the impact of this statute on mortgage broker compensation with reverse mortgages. The source of that confusion is perhaps twofold: new entrants into the reverse mortgage market without a full understanding about reverse mortgages, and an improper interpretation of RESPA as it applies to lender-paid mortgage broker compensation, due perhaps in part to HUD’s changes to the statute in 2010 and the more recent advent of loan originator compensation rules.
Let’s take the latter point first. RESPA does not place a dollar or percentage limit on lender-paid mortgage broker fees. Instead, it allows a “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” In HUD’s Statement of Policy 1999-1, the department outlined that, in determining whether a payment from a lender to a mortgage broker is permissible under Section 8 of RESPA, the first question is whether services were actually performed for the compensation paid. The second question is whether the payments are reasonably related to the value of the services performed. In analyzing whether lender payments to mortgage brokers comply with RESPA’s requirements, HUD believes that the totality of the compensation to the mortgage broker for the loan must be examined, including if the lender and the borrower both pay the mortgage broker for the same transaction.
Since this statement of policy was issued, a lot has happened on the mortgage front. HUD revised RESPA disclosures; the Loan Originator Compensation Rule took effect; Congress enacted the Dodd-Frank Act; and FHA modified the HECM program. As part of Dodd-Frank, authority over RESPA and the Loan Originator Compensation Rule transferred to the CFPB.
Under the revised RESPA guidelines, lender-paid mortgage broker compensation is disclosed as a “credit” to the borrower on the HUD-1. However, FHA stated in Mortgagee Letter 2009-53 that the figure in line 801 of the HUD-1 representing all compensation to the lender/broker for loan origination may exceed the origination fee cap set for government programs. Thus, regardless of the fact that the “origination charge” noted on the HUD-1 may be higher than a program limit on fees, such disclosure under revised RESPA math does not indicate a violation of the HECM origination fee limit. In other words, the “origination charge” under revised RESPA is not the same as an “origination fee” under HECM rules; an origination charge includes the credit of lender-paid mortgage broker fees, an origination fee does not.
Further, unlike RESPA, the Loan Originator Compensation Rule prohibits lender payments of yield spread premiums and so-called “dual compensation” (payment to the broker both by the consumer and the lender). However, the Loan Originator Compensation Rule only applies to closed-end credit. Most, if not all, fixed-rate HECMs are structured as closed-end credit, and variable-rate HECMs are structured as open-end credit.
In 2008, FHA published Mortgagee Letter 2008-34 to implement the HECM origination fee limits put into place by the Housing and Economic Recovery Act (HERA) of that same year. Prior to this time, there was a $6,000 overall regulatory cap on HECM origination fees. HERA included this cap and also added a “sliding scale” limit on HECM origination fees, so that loans with a maximum claim amount of less than $600,000 will have a lower origination fee cap. ML 08-34 states that a HECM’s origination fee, which may be fully financed with loan proceeds, includes fees paid to FHA-approved loan correspondents and covers a full array of origination services, which were listed in the letter. ML 08-34 also states that lenders may not charge the borrower any fees in addition to the origination fee to pay FHA-approved loan correspondents. In 2010, the agency did away with the FHA-approved loan correspondent category and allowed non-FHA-approved mortgage brokers to more fully participate in the origination of HECM loans. (See Mortgagee Letter 2010-20.) ML 08-34 does not state that lenders cannot pay mortgage broker compensation separate from fees (i.e., a HECM origination fee) directly charged to a HECM borrower. In fact, mortgage brokers are not mentioned in ML 08-34, indicating that the statute does not place limits on lender-paid mortgage broker fees that are not directly charged or assessed to a HECM borrower.
Where does this leave us today? On variable-rate HECM loans, which are structured as open-end credit, the dual compensation limit of the Loan Originator Compensation Rule does not directly apply. Thus, conceivably, a mortgage broker originating a HECM could be paid both an origination fee from the borrower, and receive lender-paid compensation. (Alternatively, a broker could be compensated only by the FHA lender without the broker charging the borrower an origination fee. Whether the lender charges the borrower an origination fee in these instances is not limited by the Loan Originator Compensation Rule.) ML 08-34 addressed FHA mortgagee lender payments to FHA-approved loan correspondents. FHA-approved loan correspondents no longer exist. HUD-1 disclosures continue to be required for reverse mortgages and origination charges as shown on line 801 may be higher than $6,000. This does not mean a RESPA violation has occurred.
If a mortgage broker is paid one fee on a closed-end HECM (for instance an origination fee, or lender-paid mortgage broker compensation, but not both) but paid from two sources on an open-end HECM (an origination fee and lender-paid mortgage broker compensation), this does not mean that a RESPA violation has occurred. As HUD stated in 1999, “Total compensation should be reviewed to assure that it is reasonably related to goods, facilities, or services furnished or performed to determine whether it is legal under RESPA,” including if the lender pays the mortgage broker and the borrower pays the mortgage broker in the same transaction.
The CFPB has inherited RESPA, and the bureau previously stated that it would follow prior agency guidance until it promulgated new rules. The CFPB promulgated TRID, which combined RESPA and TILA disclosures, but TRID does not apply to reverse mortgages. In recent enforcement actions, the bureau has shown disdain for some prior HUD RESPA statements of policy, but that is not rulemaking; it is enforcement. Pursuant to the Dodd-Frank Act, the CFPB also has other laws in its tool chest, such as unfair, deceptive, or abusive acts or practices.
In its old statement of policy, HUD stated, “To the extent the payment is in excess of the reasonable value of the goods provided or services performed, the excess may be considered a kickback or referral fee proscribed by Section [8]”, and that “those persons and companies that provide settlement services should therefore take measures to ensure that any payments they make or commissions they give are not out of line with the reasonable value of the services received.” However, what value is reasonable for the services received is a market-based determination, and HUD was clear to state that RESPA is not a rate-setting statute.
While there is a long, and sometimes convoluted and confusing, history to lender-paid mortgage broker compensation in the reverse mortgage industry, there is also a “new cop on the beat.” Not understanding that history could lead to incorrect conclusions. By the same token, not being mindful of the new regulatory environment could also lead to unfavorable results.
