Please note: the procedures described in this article are no longer the default procedures utilized within the DocMagic software and have been superseded by the procedures described in the article available here.  If you wish to use the procedures described in this article, please contact a DocMagic Customer Service Department representative for additional assistance.

It's clear that the new RESPA Rule, effective January 1, 2010, has changed the landscape with respect to the disclosure of mortgage loan originator fees and charges. The RESPA Rule has created great confusion regarding the treatment of yield spread premiums1 and other forms of back-end compensation (referred to in this article collectively as "YSP") for purposes of the good faith estimate ("GFE"). This article describes in greater detail the impact of the new RESPA Rule on the disclosure of YSPs in the context of the new GFE and DocMagic's creation of a new premium called "Lender Credit to Borrower" to accommodate certain pricing scenarios involving YSPs.

One of the most significant changes made by the new RESPA Rule is the binding nature of the GFE once it has been issued and before the interest rate has been locked.2 Of particular importance to mortgage brokers, the amount disclosed as "Our origination charge" in Block 1 on page 2 of the GFE includes all compensation that the mortgage broker is to receive, including any back-end compensation paid by the lender to the mortgage broker.3 As a consequence, mortgage brokers are put to the test early on in the loan origination process to determine what their total origination charge will be, whether it is all paid by the borrower or all or a portion of it is paid by the lender in the form of YSP. Once the mortgage broker has established their origination charge, any increase in the YSP thereafter will redound to the borrower's benefit and will not be paid ultimately to the mortgage broker. This is probably best exhibited by an example. For purposes of simplification, assume no lender charges.

Assume that the mortgage broker and borrower agree that on a $200,000 loan a mortgage broker origination charge of $3,500 is reasonable. Based on the initial terms of the loan program selected and for which the borrower has submitted an application, the borrower agrees to pay a $1,500 loan origination fee and the balance of the mortgage broker's origination charge will be paid by the lender in the form of a YSP. The borrower will be paying a slightly higher rate than par but is pleased with this arrangement, because the borrower can only afford to pay $1,500 out of pocket. Within DocMagic, the mortgage broker would enter in a loan origination fee of $1,500 and a YSP payable to broker of $2,000. The new GFE discloses $3,500 in Block 1 on page 2 of the GFE, a credit of $2,000 is reflected in Block 2 on page 2 of the GFE, and an adjusted origination charge of $1,500 in Block A on page 2 of the GFE. Note that Block A reflects the origination charge that only the borrower would be responsible to pay. Within DocMagic, the mortgage broker would enter in a loan origination fee of $1,500 or .75% and a yield spread premium payable to broker of $2,000 so that Blocks 1 and 2 and Block A on page 2 of the GFE would look like the below:

The DocMagic screens would look like so:

Now assume that prior to the expiration of the GFE, the borrower indicates a willingness to pay a higher interest rate, one so high in fact that instead of paying a $2,000 YSP, the lender is now paying a $4,000 YSP for the higher rate. In this new scenario, the revised GFE would disclose the same origination charge of $3,500 in Block 1 on page 2 of the GFE, a credit of $4,000 would now be shown in Block 2 on page 2 of the GFE, and an adjusted origination charge of -$500 would be shown in Block A on page 2 of the GFE. That is, under the new RESPA Rule the borrower now gets the full benefit of an increase in the YSP due to a higher interest rate.

In order to accommodate the above scenario and to ensure that the correct amount of YSP is included in Block 1 on page 2 of the GFE, we have created a new premium called "Lender Credit to Borrower." The Lender Credit to Borrower is designed to be used exclusively for circumstances where all or a portion of the YSP or other premium payable by the lender to broker must be credited to the borrower because of the constraints that the new RESPA Rule places on changes to the origination charge. In the scenario above, the DocMagic user would continue to enter in the loan origination fee of $1,500. Then, the DocMagic user will enter in the full amount of the YSP payable by the lender of $4,000 and a Lender Credit to Borrower of -$2,000.

A couple of points to remember: (1) always enter the full amount of the YSP paid by the lender; (2) the Lender Credit to Borrower is always the difference between the total YSP paid by the lender and the amount which the mortgage broker is permitted to retain, which, in this scenario is $2,000, and (3) the Lender Credit to Borrower is always reflected as a negative number.

Please contact DocMagic's Compliance Department if you have any questions regarding the information in this article.

1 There is a common misconception that the new RESPA Rule prohibits YSPs. The new RESPA Rule does not prohibit the payment of a YSP. Indeed, one of the stated purposes for these revisions to RESPA is to "improve disclosure of yield spread premiums (YSPs) to help borrowers understand how YSPs can affect borrowers' settlement charges." Furthermore, both HUD's "New RESPA Rule FAQs" (available here) and HUD's "RESPA Plain English" Powerpoint Presentation (available here) include information relative to the treatment of YSPs.

2 New RESPA Rule FAQs issued December 30, 2009, page 19:

Q: What charges can change before the interest rate is locked?
A: With the exception of interest rate-dependent charges and terms, the charges and terms for all settlement services on the GFE must be available for 10 business days from when the GFE is provided, or for such longer period of time as the loan originator provides in item 2 of the "Important dates" section of the GFE.... Interest rate-dependent charges and terms include: (1) "Your charge or credit (points) for the specific interest rate chosen," in Block 2 on page 2 of the GFE; (2) "Your adjusted origination charges" on Line A on page 2 of the GFE; (3) "Daily interest charges" in Block 10 of the GFE; and (4) interest rate-related loan terms, such as monthly amount owed.

3 Federal Register Vol. 73, page 68226 (emphasis added): "The final rule requires that in the case of loans originated by mortgage brokers, the amount in Block 1 must include all charges to be paid by the borrower that are to be received by the broker and any other originator for, or as a result of, the mortgage loan origination, including any payments from the lender to the broker for the origination." (Available here).