Residential Mortgage Lending Fees
January 23, 1996
TO THE INSTITUTION ADDRESSED:
RE: Referral Fees
Third Party Fees
Escrow Administration Fees
Payment of Interest on Escrow Accounts
Private Mortgage Insurance
Co-Brokered Mortgage Loans
The purpose of this bulletin is to remind you of the rules governing some of the fees commonly associated with residential mortgage lending. You should be aware that non-compliance with the items addressed in this letter will result in administrative actions being brought against you, which may include, among other things, monetary fines, the making of refunds to consumers and/or the suspension or revocation of the license or registration.
The paying or receiving of a fee, or other thing of value, for the mere referral of a loan or other settlement service is generally prohibited by Section 8 of the Real Estate Settlement Procedures Act ("RESPA"), 12 USC 2607. Such payments to real estate brokers, home improvement contractors and others in a position to refer mortgage applicants, when no actual services are performed, are clear violations of RESPA. Before entering into any type of referral arrangements, you are advised to seek the opinion of qualified counsel as to the legality of such arrangements under RESPA.
Due to the 1998 amendment to Part 38 the prohibition on a separate processing fee no longer exists. Please disregard this section.
A separate processing fee may not be charged. It is the position of the Banking Department that a mortgage banker, mortgage broker or exempt organization may not charge a processing fee on a residential mortgage transaction, regardless of whether or not an application fee is imposed. Part 38.1(b) of the General Regulations of the Banking Board (the "Regulations") defines the term application fee to be a charge for soliciting, processing, placing, or negotiating a mortgage loan. Part 38.3(b)(2)(i) of the Regulations states that the "application fee is to be denominated as such." Accordingly, any fee accepted by a mortgage broker, mortgage banker or exempt organization in connection with an application for a loan including any charge for soliciting, processing, placing or negotiating a mortgage loan must be called an application fee. A processing fee may not be listed on the Pre-Application Disclosure, Good Faith Estimate or Settlement/Closing Statements.
Only one application fee may be charged. A mortgage broker and a lender may not charge separate application fees on the same loan application. Lenders that originate mortgage loans through mortgage brokers should ensure that any application fee, whether it is imposed by the lender or the broker, is fully disclosed by the mortgage broker. This fee is to be disclosed by the mortgage broker in the pre-application disclosure, as required in Part 38.3 of the Regulations, as well as on the Good Faith Estimate and Settlement/Closing Statements.
THIRD PARTY FEES
Refunds must be made of third party fees collected in excess of the cost of the service provided. A number of mortgage brokers and lenders are collecting and retaining third party fees in excess of the actual cost of the service provided. Part 38 of the Regulations requires refunds to the consumer of any amount collected in excess of the actual cost of the credit report and appraisal report. In addition, Part 38 prohibits mortgage bankers, mortgage brokers and exempt organizations from accepting amounts in excess of the actual cost of a tax reporting service and from collecting attorney fees at closing in excess of the amount to be remitted to its attorney. Based on the restrictions contained in Part 38 of the Regulations and the general authority conferred in Section 589 of the New York Banking Law to ensure that the mortgage industry is operating free from deceptive practices, it is the opinion of the Banking Department that the collection of fees in excess of the actual cost of a third party service is prohibited. Furthermore, the taking of such fees may be in violation of RESPA since charging or accepting a fee, or part of a fee, where no service has actually been performed, is considered illegal under the Act.
ESCROW ADMINISTRATION FEES
No fee may be charged for establishing or maintaining an escrow account on any one-to-six family owner-occupied residence or on any property owned by a cooperative apartment corporation. This prohibition is contained in the New York State General Obligation Law Sections 5-601 and 5-602 and Part 38.7 of the Regulations.
No fee may be charged for waiving the establishment or maintenance of an escrow account. This prohibition is contained in the New York Real Property Law Section 254-d and Part 38.7 of the Regulations.
A one-time life-of-the loan fee may be charged to pay for the actual cost of an independent tax reporting service. Any amount collected in excess of the actual cost must be refunded at or before closing. This fee must be disclosed prior to or at commitment. Refer to Part 38.7 of the Regulations.
PAYMENT OF INTEREST ON ESCROW ACCOUNTS
Interest must be paid by any mortgage investing institution on funds held in escrow, including insurance loss drafts held in escrow, in connection with a mortgage on any one-to-six family owner occupied residence or any property owned by a cooperative apartment corporation. The rate of interest paid is not less than two percent per annum, credited quarterly. Refer to Section 14-b of the New York Banking Law and Part 10 of the Regulations.
PRIVATE MORTGAGE INSURANCE
A mortgagor can not be required to pay the cost of continuing mortgage guaranty insurance when the unpaid principal amount of the real estate loan represents seventy-five percent or less of the real estate's appraised value at the time the loan was made. Mortgage investors should ensure that their servicers have adequate procedures in place to monitor their portfolio for compliance. Refer to Section 6503 of the New York Insurance Law.
Mortgage brokers are reminded that they are required to submit a copy of any separate fee agreement (part of pre-application disclosure) made with the applicant for a mortgage loan to the lender or a written statement that there is no separate fee agreement, as required in Part 38.3(a)(2)(ix) of the Regulations. Lenders should be sure to receive the pre-application disclosure and/or a separate fee agreement from the mortgage brokers, in order to make the appropriate disclosure on the commitment to the applicant for a mortgage loan, as required in Part 38.4(a) (xvi) of the Regulations.
CO-BROKERED MORTGAGE LOANS
Fees divided between more than one mortgage broker and/or mortgage banker and/or exempt organization acting as a mortgage broker must be disclosed in writing to the applicant as required in Part 38.3(a)(1)(x). The parties must agree among themselves, as stipulated in Part 38.3(b)(2)(iv), as to who must comply with the disclosure and other requirements of Part 38.3. In the absence of an agreement, all entities are responsible. In addition, HUD's Regulation X, 24 CFR 3500.14, and Section 8 of RESPA, 12 USC 2607, require that actual work be performed by the respective co-brokering parties in order to justify the collection of a fee. The services rendered must be necessary to the transaction and cannot be duplicative of the services performed by others.
If you have any questions regarding this bulletin, you may call Supervising Bank Examiner John Nodalny at (212) 618-6681, Principal Examiner II Mildred Freel-Mackin at (212) 618-6688, or Senior Examiners Karl Blum at (212) 618-6992 or Eilif Aasbo at (212) 618-6956.
This letter is an official communication of the State of New York Banking Department. It is to be kept in a separate file available for our review at all times.
Peter L. Zanko
Deputy Superintendent of Banks
Mortgage Banking Division