In the previous months, the National Association of Mortgage Brokers (NAMB) has gone toe-to-toe against the Mortgage Bankers Association (MBA) on a plethora of issues criss-crossing Capitol Hill. The issues fueling the debate are not only far from being resolved, but continue to trouble the relationship between the two major segments of the mortgage market.



Its obvious that both segments are more than willing to work with legislators to move toward greater consumer protections, but the pathway to those ends are often divergent.





The current criticisms of the growth of the subprime market and the expansion of nontraditional products have forced Congress and regulators to review the entire mortgage marketplace, said Joe Falk, legislative chair for NAMB. Because of the natural competition between big business which is arguably the Mortgage Bankers Association model and small business owners, which are primarily mortgage brokers and small lenders, the difference between the two trade groups would be accentuated. I think the highlighting of the subprime problems is causing some of our differences to be magnified out of proportion.



And clearly one of the major issues for mortgage brokers historically and a key sticking point in much of the legislation that is being proposed is the issue of whether or not a true level playing field exists between the segments to foster the best competitive environment for the benefit of consumers.



I dont think the disagreements between the MBA and the small business folks the mortgage brokers is personal, Falk said. However, underneath the surface, we are seeing the formulation of an undercurrent of competitive analysis. We are concerned that if one channel of distribution is over-burdened with regulatory concerns, if one channel of distribution is regulated differently than another, it creates competitive advantages.



So what are the main points of contention?



Good faith estimates



The debate over the disclosure of the yield spread premium a brokers disclosed fee and a service release premium a bankers hidden fee continues to fuel the tension.



Bankers believe they have the right to leave off SRP because it is not a settlement cost and it is difficult, if not impossible, to put down an SRP on a future sale to the secondary market, said Ken Markison, senior director and regulatory counsel for the Mortgage Bankers Association (MBA), during the RESPA reform roundtables in 2005.



The issue surfaced in a mammoth study of mortgage disclosures released in early June by the Federal Trade Commission (FTC). Notably, the FTC commented on the inclusion of the yield spread premium in its disclosures saying, Even with the significant improvement, however, a quarter of the prototype group did not correctly identify the less expensive loan, leaving room for further improvement of the disclosures, adding that in an earlier FTC study that used this same question and test procedure, 90 percent of the respondents correctly identified the less expensive loan. The higher level of accuracy is likely due to the simplicity of the disclosure forms tested in the earlier study. In one version tested, the form was only a half a page long, contained only nine cost figures (in contrast to several dozen in the forms tested here), and highlighted the one figure that differed between the two loans. In another version tested, the form spread across two pages but had no more than a half of page of information on each, contained only 12 cost figures across the two pages, and also highlighted the figure that differed between the loans. When information on the yield spread premium was added to these forms, the proportion of respondents correctly identifying the less expensive loan dropped to 63 to 72 percent.



The FTC added that the prototype form also performed better than the current forms, although by a smaller margin, in the follow-up question that asked which of the two loans respondents would choose if they were shopping for a mortgage. Seventy-six percent of the respondents viewing the current forms correctly chose the loan that was less expensive, compared to 84 percent of the respondents viewing the prototype form, a difference of 8 percentage points. The earlier FTC study also used this same question. In two versions of the disclosure form tested, 85 and 94 percent of the respondents correctly chose the loan that was less expensive. These figures fell to 65 to 70 percent when information on the yield spread premium was added to the forms.



Marc Savitt, vice president and president-elect of NAMB, noted that the findings validated NAMBs stance regarding the simplification of disclosures.



Whoever originates a loan should disclose on the exact same forms in the exact same manner. As the report shows, the way it is done now confuses the consumer, and when it confuses the consumer, they make mistakes, and they are costly mistakes, he said.



State licensing database



Another source of competitive conflict arose when The Conference of State Bank Supervisors (CSBS) and the American Association for Residential Mortgage Regulators (AARMR) recently launched a nationwide mortgage licensing system that would use a uniform license application to create a database of licensing information that can be used by state regulators.



NAMB, while it supports licensing requirements, believes the registry falls short.



On the associations Web site, it voiced its concern over exempting many in the mortgage industry from meeting the requirements. NAMB has long-advocated a national licensing standard that is evenly applied to government-regulated unions, mortgage bankers, lenders, brokers and all employees of the entities.



If the goal of this registry is to protect consumers by standardizing license requirements and tracking bad behavior then it should apply to all mortgage originators, Dinham said. As it stands today, thousands of loan originators who work at banks and other financial institutions would not be required to register. This approach puts consumers at risk.



This flawed system will create a false sense of security for consumers and government agencies because many bad actors will continue to be able to move freely from bank to lender and back again without fear of being detected by the proposed registry.



MBA also thinks the system needs tweaking before its launch, however, for different reasons.



Bankers believe the system will put them at a competitive disadvantage because it automatically favors employee licensing, and does not recognize the difference between large lenders and brokers.



There are fundamental differences between mortgage bankers and mortgage brokers and those differences must be recognized and incorporated into any processes that the project creates, the site said.



The system, available January 2008, already has 30 state agencies on board.



Modernizing FHA



Today, brokers are not allowed to originate loans insured by the Federal Housing Administration (FHA) without having a net worth of $75,000 in addition to an annual audit which can cost brokers anywhere from $4,000 to $10,000 a pop.



NAMB supports the amendment to HR 1852, The Expanding American Homeownership Act of 2007, which would, among other things, allow brokers (who originate at least 70 percent of mortgage loans) to offer FHA loans, thus revitalizing the program.



At a hearing on the issue April 20, immediate past NAMB president Harry Dinham exclusively told Broker Newswire that its important brokers be a part of whatever FHA reform happens.



They need to take the audit (requirement) out and put the surety bond in so theyre assured of being able to do that business through the broker channel, he said. If its not on the shelf, (brokers are) not going to offer it so its not going to increase the broker volume of FHA loans.



Bankers, however, believe the FHA requirements for originating loans are right on target and shouldnt change to incorporate brokers.



Most important is safety and soundness of the mutual insurance fund, said MBA Chairman John Robbins. The system is ideal today, because loans that have to be repurchased are repurchased by companies that have deep financial pockets.



For instance, a broker would not be able to cover the repurchase cost of an $80,000 loan with a $75,000 surety bond.



In a markup by the U.S. House of Financial Service Committee May 2, the committee agreed to allow brokers the option of posting a $75,000 surety bond or satisfy the current audit and net worth requirements.



HR 1852 is scheduled for debate on the House floor.



Overall, both brokers and bankers believe the disagreements are far from open warfare and more than anything, they want to educate and protect the consumer.



All consumers deserve the same level of protection, the same guidelines, the same disclosures, Falk said. Congress and public policy should not be picking winners and losers between competing distribution channels. Let the market dictate who is giving the best combination of price, product and service.