Gen. Reg. of the BB Parts 38
November 5, 2004
You have asked for a legal opinion in connection with the disclosures under Parts 38.3 (a)(iv), and 38.3 (a)(vii) of the General Regulations of the Banking Board (collectively "Part 38"). We conclude that mortgage brokers must disclose to borrowers, as two separate amounts, the amount of yield spread premium to be paid by lenders lenders, and the total amount of fees or points, including yield spread premium, to be paid by borrowers. Accordingly, in the event these disclosures are not made, the mortgage brokers should be cited for violating Part 38.
In July of 1986, the Governor signed into law significant amendments to Article 12-D of the Banking Law, which among other important provisions consolidated regulation of the various entities involved in the mortgage lending in New York State, including mortgage brokers, mortgage bankers and banking organizations and their subsidiaries. The amendments included provisions that mandated that the Banking Board develop regulations governing the business activities of all of these entities, as well as define improper conduct for mortgage brokers and mortgage lenders operating in this state.
The Banking Board at its meeting held on March 12, 1987 adopted new General Regulations of the Banking Board, including Part 38. The new regulations became effective on April 3, 1987. Included in the new regulations was Part 38.3(a)(iv), which required that mortgage brokers in their disclosures make
"[a] statement to the effect that the rate, points, fees, and other terms quoted at commitment by or on behalf of the lender encompass the consideration to be received by the mortgage broker and that such amount will be disclosed upon request."
On November 1, 1990 amendments to Part 38 were adopted and became effective on December 5, 1990. The amendments resulted in changes to Part 38.3(a)(iv), and also addition of a new Part 38.3(a)(vii).
Part 38.3(a)(iv) was amended to require mortgage brokers to make "a statement to the effect that ... the consideration to be received by the mortgage broker from a lender for his services." Part 38.3(a)(iv) was also amended to require
mortgage brokers to "disclose the specific maximum amount of such consideration to be received."
Part 38.3(a)(vii) as added required that mortgage brokers disclose
"the maximum points payable by the lender to the mortgage broker and any fees or points to be paid by the applicant directly to the mortgage broker. In those instances where broker fees and points are not considered to be a cost of the credit, a statement in bold face type at least twelve point in size if printed and in upper case letters and underlined if typewritten must be included to the effect that such points and fees are costs of the loan which the borrower may be obligated to repay with interest over the term of the mortgage loan and/or that they are in addition to the amount which the borrower will actually receive from the loan."
Part 38.3(a)(vii) was amended on December 20, 1996 deleting the sentence "In those instances ... from the loan." The amendment was adopted as an emergency measure resulting from amendments to Regulation Z of the federal Truth-in-Lending Act ("Reg. Z"). For purposes of this opinion, Reg. Z was effectively amended to include as finance charges, broker fees, whether paid directly by the borrower or from the loan proceeds. The Banking Board in
adopting the amendment felt that the change was necessary in order "to prevent a situation in which consumers might [be] confused or mislead."
As you recognize the plain language of Part 38 requires that mortgage brokers provide disclosures as to the amount of fees lenders will pay (Par 38.3(a)(iv), and Part 38.3(a)(vii)), and also disclosures as to the amount of fees borrowers will pay (Part 38.3(a)(vii)). Note that this opinion in no way is intended to state the Department's position as to the legality of the practice of premium pricing, or the payment of yield spread premiums. Your Memorandum raises a problem that seems to result from the interpretation of Part 38.3(a)(vii) requiring one disclosure of the total maximum fees and points to be paid by the borrower and/or the lender. For purposes of this analysis "premium pricing" mentioned in Part 38.3(a)(vii) would be referred to as "yield spread premium" or simply "fees paid by the lender."
- The Statutory Language
The current disclosure requirements, relating to points and fees that mortgage brokers receive, are provided for generally in: (i) Part 38.3(a)(iv) of the General Regulations of the Banking Board, which requires that: "[mortgage brokers] shall disclose the specific maximum amount of consideration to be received [by mortgage brokers from lenders]," and (ii) Part 38.3(a)(vii) of the General Regulations of the Banking Board, which states: "[the broker shall disclose] the maximum points, including premium pricing, payable by the lender to the mortgage broker and any fees or points to be paid by the applicant directly to the mortgage broker."
The plain reading of the disclosure requirements under Part 38.3(a)(iv) and Part 38.3(a)(vii) clearly requires that mortgage brokers provide to borrowers separate disclosures as to amount to be paid by lenders, and amounts to be paid by borrowers. As described in your letter, there is an interpretation circulating, via industry practitioners, that mortgage brokers could possibly fulfill this disclosure requirement simply making a single disclosure as to the total amount of points and fees to be received from both the borrower and the lender. This interpretation is definitely in contravention of the plain reading of the regulations: These are two separate regulations requiring different disclosures.
Further, although Part 38.3(a)(vii) was written with a conjunctive - and -, the proper reading would be to require separate disclosures and not combine the amounts to be paid by lenders and borrowers. Again, the plain reading of Part 38.3(a)(vii) requires one disclosure be made as to the "maximum points ... payable by the lender to the mortgage broker," and "any fees or points to be paid by the applicant directly to the mortgage broker." Had it been that this regulation was requiring the mortgage broker to make one disclosure, then that end could have been achieved by simply including language such as "total," "sum," "all," etc. The drafters did not include any such language in Part 38.3(a)(vii), therefore it would be incorrect for us to impute such language.
- The Statute's Purpose
The regulation's purpose does not appear to allow for one disclosure. Instead, it appears to require the opposite: Separate disclosures for fees to be paid by the lender, and separate disclosures for fees and points to be paid by the borrower. As stated in the Notice of Adoption, dated March 12, 1987, Title 3 of Part 38 is adopted "to protect the consumer."
This purpose - protect the consumer - would certainly not be accomplished by providing "one" disclosure with the total amount of points. Instead this would serve the opposite purpose as the consumer would not know how much, if any, fees or points he/she will have to pay, and therefore not be able to compare different financial options. The borrowers' position could be further compromised in a "one" disclosure situation primarily because he/she would not be properly informed as to the amount of funds necessary to close their transaction, which could ultimately lead to the borrowers loosing their down payment in the event the transaction does not close. The intent of Part 38 would certainly not be advanced by making "one" disclosure.
Further, it is clear that the purpose of Part 38 is to have two separate disclosures: The drafters did not only amended Part 38.3(a)(iv) in 1990, they also added part 38.3(a)(vii). Had it been that the drafters felt that Part 38.3(a)(iv) could have accomplished the necessary disclosure requirements, they would not have added Part 38.3(a)(vii). The fact that Title 3 of Part 38 was added to "protect the consumer," and that the drafters added Part 38.3(a)(vii) rather than combining it with Part 38.3(a)(iv) unambiguously demonstrates that the drafters felt that the purpose of Title 3 of Part 38 would be best served by two disclosures.
- Prior Agency Interpretation
In the past the New York State Banking Department (the "Department") has interpreted Part 38.3(a) as requiring separate disclosures. In a cover letter by the Department sent to all mortgage brokers, attaching therewith a copy of a Pre-Application Disclosure and Fee Agreement for Use by New York Registered Mortgage Brokers (the "Pre-Application Disclosure"), the Department wrote that "If [mortgage brokers] use this form properly without alterations [they] may assume that [they] are in compliance with New York State Banking Department disclosure requirements as set forth in Part 38.3(a) of the General Regulations of the Banking Board." According to the Pre-Application Disclosure, the Department interpreted Part 38.3(a) as requiring separate disclosures, identifying what fees are to be paid by lenders and what fees are to be paid by borrowers, as follows:
"The lender will pay a fee of ____% of the loan amount or $_____. The compensation you will receive from the lender for your services is included in the rate, points, fees and terms of the loan as quoted by the lender I its commitment. The maximum points paid, including premium pricing payable by the lender to you, shall not exceed __________( ) points.
The fee the lender will pay you is not known at this time but will be disclosed to me at the time of lock-in or when the rate is set. The maximum points paid, including premium pricing payable by the lender to you, shall not exceed ____ ( ) points.
I will pay you, from the loan proceeds, a fee of ____ % of the loan amount or $ ____. I authorize the lender's attorney to collect this fee from me at closing.
I will pay you, directly, upon my signed acceptance of a commitment ____ or at closing ____, a fee of ____% of the loan amount or $______."
This seems to be the proper interpretation and is therefore entitled to deference. An agency's interpretation of a statute it is charged with implementing "is entitled to varying degrees of judicial deference depending upon the extent to which the interpretation relies upon the special competence the agency is presumed to have developed in its administration of the statute." Matter of Gruber, 89 N.Y.2d at 231. Where the question involves specialized "knowledge and understanding of underlying operational practices or entails an evaluation of factual data and inferences to be drawn therefrom, the courts should defer to the administrative agency's interpretation unless irrational or unreasonable." Matter of Dworman v. New York State Div. Of Hous. And Cmty. Renewal, 94 N.Y.2d 359, 371.
We conclude that under Part 38.3(a), mortgage brokers are required to separately disclose the amount of points or fees to be paid by the borrower, and the amount of points to be paid by the lender.