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[Federal Register: March 1, 1999 (Volume 64, Number 39)]

[Rules and Regulations]

[Page 10080-10087]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr01mr99-23]





 

_______________________________________________________________________


 

Part IV






 

Department of Housing and Urban Development






 

_______________________________________________________________________




 

24 CFR Part 3500



 

Real Estate Settlement Procedures Act (RESPA) Statement of Policy 1999-

1 Regarding Lender Payments to Mortgage Brokers; Final Rule



 

[[Page 10080]]




 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


 

24 CFR Part 3500


 

[Docket No. FR-4450-N-01]

RIN 2502-AH33


 

 

Real Estate Settlement Procedures Act (RESPA) Statement of Policy

1999-1 Regarding Lender Payments to Mortgage Brokers


 

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing

Commissioner, HUD.


 

ACTION: Statement of Policy 1999-1.


 

-----------------------------------------------------------------------


 

SUMMARY: This Statement of Policy sets forth the Department of Housing

and Urban Development's position on the legality of lender payments to

mortgage brokers in connection with federally related mortgage loans

under the Real Estate Settlement Procedures Act (``RESPA'') and HUD's

implementing regulations. While this statement satisfies the Conferees'

directive in the Conference Report on the 1999 HUD Appropriations Act

that the Department clarify its position on this subject, HUD believes

that broad legislative reform along the lines specified in the HUD/

Federal Reserve Board Report remains the most effective way to resolve

the difficulties and legal uncertainties under RESPA and the Truth in

Lending Act (TILA) for industry and consumers alike. Statutory changes

like those recommended in the Report would, if adopted, provide the

most balanced approach to resolving these contentious issues by

providing consumers with better and firmer information about the costs

associated with home-secured credit transactions and providing

creditors and mortgage brokers with clearer rules. Such an approach is

far preferable to piecemeal actions.


 

EFFECTIVE DATE: This Statement of Policy is effective March 1, 1999.


 

FOR FURTHER INFORMATION CONTACT: Rebecca J. Holtz, Director RESPA/ILS

Division Room 9146, Department of Housing and Urban Development,

Washington, DC 20410; telephone 202-708-4560, or (for legal questions)

Kenneth A. Markison, Assistant General Counsel for GSE/RESPA or Rodrigo

Alba, Attorney for RESPA, Room 9262, Department of Housing and Urban

Development, Washington, DC 20410; telephone 202-708-3137 (these are

not toll free numbers). Hearing or speech-impaired individuals may

access these numbers via TTY by calling the toll-free Federal

Information Relay Service at 1-800-877-8339.


 

SUPPLEMENTARY INFORMATION: This Preamble to the Statement of Policy

includes descriptions of current practices in the industry. It is not

intended to take positions with respect to the legality or illegality

of any practices; such positions are set forth in the Statement of

Policy itself.


 

I. Background


 

A. General Background


 

The Conference Report on the Departments of Veterans Affairs and

Housing and Urban Development, and Independent Agencies Appropriations

Act, 1999 (H.R. Conf. Rep. No. 105-769, 105th Cong., 2d Sess. 260

(1998)) (FY 1999 HUD Appropriations Act) directs HUD to clarify its

position on lender payments to mortgage brokers within 90 days after

the enactment of the FY 1999 HUD Appropriations Act on October 21,

1998. The Report states that ``Congress never intended payments by

lenders to mortgage brokers for goods or facilities actually furnished

or for services actually performed to be violations of [Sections 8](a)

or (b) of the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et

seq.) (RESPA)]'' (Id.). The Report also states that the Conferees ``are

concerned about the legal uncertainty that continues absent such a

policy statement'' and ``expect HUD to work with representatives of

industry, Federal agencies, consumer groups, and other interested

parties on this policy statement'' (Id.).

This issue of lender payments, or indirect fees, to mortgage

brokers has proven particularly troublesome for industry and consumers

alike. It has been the subject of litigation in more than 150 cases

nationwide (see additional discussion below). To understand the issue

and HUD's position regarding the legality of these payments requires

background information concerning the nature of the services provided

by mortgage brokers and their compensation, as well as the applicable

legal requirements under RESPA.

During the last seven years, HUD has conducted three rulemakings

respecting mortgage broker fees. These rulemakings first addressed

definitional issues and issues concerning disclosure of payments to

mortgage brokers in transactions covered under RESPA. (See 57 FR 49600

(November 2, 1992); 60 FR 47650 (September 13, 1995).) Most recently in

a regulatory negotiation (see 60 FR 54794 (October 25, 1995) and 60 FR

63008 (December 8, 1995)) and then a proposed rule (62 FR 53912

(October 16, 1997)), HUD addressed the issue of the legality of

payments to brokers under RESPA. In the latter, HUD proposed that

payments from lenders to mortgage brokers be presumed legal if the

mortgage broker met certain specified conditions, including disclosing

its role in the transaction and its total compensation through a

binding contract with the borrower. This rulemaking is pending.

In July 1998, HUD and the Board of Governors of the Federal Reserve

delivered to Congress a joint report containing legislative proposals

to reform RESPA and the Truth in Lending Act. If the proposals in this

reform package were to be adopted, the disclosure and legality issues

raised herein would be resolved for any mortgage broker following

certain of the proposed requirements, and consumers would be offered

significant new protections.


 

B. Mortgage Brokerage Industry


 

When RESPA was enacted in 1974, single family mortgages were

largely originated and held by savings and loans, commercial banks, and

mortgage bankers. During the 1980's and 1990's, the rise of secondary

mortgage market financing resulted in new wholesale and retail entities

to compete with the traditional funding entities to provide mortgage

financing. This made possible the origination of loans by retail

entities that worked with prospective borrowers, collected application

information, and otherwise processed the data required to complete the

mortgage transaction. These retail entities generally operated with the

intent of developing the origination package, and then immediately

transmitting it to a wholesale lender who funded the loan. The rise in

technology permitted much more effective and faster exchange of

information and funds between originators and lenders for the retail

transaction.

Entities that provide mortgage origination or retail services and

that bring a borrower and a lender together to obtain a loan (usually

without providing the funds for loans) are generally referred to as

``mortgage brokers.'' These entities serve as intermediaries between

the consumer and the entity funding the loan, and currently initiate an

estimated half of all home mortgages made each year in the United

States. Mortgage brokers generally fit into two broad categories: those

that hold themselves out as representing the borrower in shopping for a

loan, and those that simply offer loans as do other retailers of loans.

The first type may have an agency relationship with the borrower and,

in some states, may be found to owe a


 

[[Page 10081]]


 

responsibility to the borrower in connection with the agency

representation. The second type, while not representing the borrower,

may make loans available to consumers from any number of funding

sources with which the mortgage broker has a business relationship.

Mortgage brokers provide various services in processing mortgage

loans, such as filling out the application, ordering required reports

and documents, counseling the borrower and participating in the loan

closing. They may also offer goods and facilities, such as reports,

equipment, and office space to carry out their functions. The level of

services mortgage brokers provide in particular transactions depends on

the level of difficulty involved in qualifying applicants for

particular loan programs. For example, applicants have differences in

credit ratings, employment status, levels of debt, or experience that

will translate into various degrees of effort required for processing a

loan. Also, the mortgage broker may be required to perform various

levels of services under different servicing or processing arrangements

with wholesale lenders.

Mortgage brokers vary in their methods of collecting compensation

for their work in arranging, processing, and closing mortgage loans. In

a given transaction, a broker may receive compensation directly from

the borrower, indirectly in fees paid by the wholesaler or lender

providing the mortgage loan funds, or through a combination of both.

Where a broker receives direct compensation from a borrower, the

broker's fee is likely charged to the borrower at or before closing, as

a percentage of the loan amount (e.g., 1% of the loan amount) and

through direct fees (such as an application fee, document preparation

fee, processing fee, etc.).

Brokers also may receive indirect compensation from lenders or

wholesalers. Such indirect fees may be referred to as ``back funded

payments,'' ``servicing release premiums,'' or ``yield spread

premiums.'' These indirect fees paid to mortgage brokers may be based

upon the interest rate of each loan entered into by the broker with the

borrower. These fees have been the subject of much contention and

litigation. Another method of indirect compensation, also the subject

of significant controversy and uncertainty, is ``volume-based''

compensation. This generally involves compensation to a mortgage broker

by a lender based on the volume of loans that the mortgage broker

delivers to the lender in a fixed period of time. The compensation may

come in the form of: (1) a cash payment to the broker based on the

amount of loans the broker delivers to the lender in excess of a

``threshold'' or ``floor amount''; or (2) provision of a lower ``start

rate'' (often called a discount) for such loans; the compensation to

the broker results from the difference in yield between the ``start

rate'' and the loan rate. Volume based compensation may be received at

settlement or well after a particular loan has closed.

Payments to brokers by lenders, characterized as yield spread

premiums, are based on the interest rate and points of the loan entered

into as compared to the par rate offered by the lender to the mortgage

broker for that particular loan (e.g., a loan of 8% and no points where

the par rate is 7.50% will command a greater premium for the broker

than a loan with a par rate of 7.75% and no points).1 In

determining the price of a loan, mortgage brokers rely on rate quotes

issued by lenders, sometimes several times a day. When a lender agrees

to purchase a loan from a broker, the broker receives the then

applicable pricing for the loan based on the difference between the

rate reflected in the rate quote and the rate of the loan entered into

by the borrower. In some cases, the broker can increase its revenues by

arranging a loan with the consumer at a particular rate and then, based

on market changes or other factors which decrease the par rate,

increase his or her fees. Some consumers allege that the compensation

system for brokers results in higher loan rates for borrowers and/or

that this compensation system is illegal under RESPA.

---------------------------------------------------------------------------


 

\1\ The term ``par rate'' refers to the rate offered to the

broker (through the lender's price sheets) at which the lender will

fund 100% of the loan with no premiums or discounts to the broker.

---------------------------------------------------------------------------


 

Lender payments to mortgage brokers may reduce the up-front costs

to consumers. This allows consumers to obtain loans without paying

direct fees themselves.2 Where a broker is not compensated

by the consumer through a direct fee, or is partially compensated

through a direct fee, the interest rate of the loan is increased to

compensate the broker or the fee is added to principal. In any of the

compensation methods described, all costs are ultimately paid by the

consumer, whether through direct fees or through the interest rate.

---------------------------------------------------------------------------


 

\2\ In many instances, these loans are called ``no cost'' or

``no fee'' loans. This terminology, however, may prove confusing

because in such cases the costs are still paid by the borrower

through a higher interest rate on the loan or by adding fees to

principal. HUD's regulations implementing RESPA use the name ``no

cost'' or ``no point'' loans consistent with industry practice.

---------------------------------------------------------------------------


 

C. Coverage of This Policy Statement


 

HUD's RESPA rules, found at 24 CFR part 3500 (Regulation X), define

a mortgage broker to be ``a person (not an employee or exclusive agent

of a lender) who brings a borrower and lender together to obtain a

federally-related mortgage loan, and who renders * * * `settlement

services' '' (24 CFR 3500.2(b)). In table funding, mortgage brokers may

process and close loans in their own names. However, at or about the

time of settlement, they transfer these loans to the lender, and the

lender simultaneously advances the monies to fund the loan. In

transactions where mortgage brokers function as intermediaries, the

broker also provides loan origination services, but the loan funds are

provided by the lender and the loan is closed in the lender's name.

In other cases, mortgage brokers may originate and close loans in

their own name using their own funds or warehouse lines of credit, and

then sell the loans after settlement in the secondary market. In such

transactions, mortgage brokers effectively act as lenders under HUD's

RESPA rules. Accordingly, the transfer of the loan obligation by, and

payment to, these brokers after the initial funding is outside of

RESPA's coverage under the secondary market exemption, found at 24 CFR

3500.5(b)(7), which states that payments to and from other loan sources

following settlement are exempt from disclosure requirements and

Section 8 restrictions. HUD's rule provides that in determining what

constitutes a bona fide transfer in the secondary market, HUD considers

the real source of funding and the real interest of the funding lender.

(24 CFR 3500.5(b)(7).)

Because this Statement of Policy focuses on the legality of lender

payments to mortgage brokers in transactions subject to RESPA, the

coverage of this statement is restricted to payments to mortgage

brokers in table-funded and intermediary broker transactions. Lender

payments to mortgage brokers where mortgage brokers initially fund the

loan and then sell the loan after settlement are outside the coverage

of this statement as exempt from RESPA under the secondary market

exemption.


 

D. RESPA and Its Legislative History


 

In enacting RESPA, Congress sought to protect the American home-

buying public from unreasonably and unnecessarily inflated prices in

the home purchasing process (S. Rep. No. 93-866 (1974) reprinted in

1974


 

[[Page 10082]]


 

U.S.C.C.A.N. 6548). Section 2 of the Act provides:


 

``significant reforms in the real estate settlement process are

needed to insure that consumers throughout the Nation are provided

with greater and more timely information on the nature and costs of

the settlement process and are protected from unnecessarily high

settlement charges caused by certain abusive practices that have

developed in some areas of the country. * * * It is the purpose of

this act to effect certain changes in the settlement process for

residential real estate that will result--


 

in more effective advance disclosure to home buyers and sellers of

settlement costs; [and]

(2) In the elimination of kickbacks or referral fees that tend

to increase unnecessarily the costs of certain settlement services.

* * *'' 12 U.S.C. 2601.


 

Section 4(a) of RESPA requires the Secretary to create a uniform

settlement statement which ``shall conspicuously and clearly itemize

all charges imposed upon the borrower and all charges imposed upon the

seller in connection with the settlement'' (12 U.S.C. 2603(a)).

Section 5(c) of RESPA requires the provision of a ``good faith

estimate of the amount or range of charges for specific settlement

services the borrower is likely to incur in connection with the

settlement as prescribed by the Secretary'' (12 U.S.C. 2604(c)).

Section 8(a) of RESPA, prohibits any person from giving and any

person from accepting any fee, kickback, or other thing of value

pursuant to any agreement or understanding that business shall be

referred to any person. (See 12 U.S.C. 2607(a).) Section 8(b) also

prohibits anyone from giving or accepting any portion, split, or

percentage of any charge made or received for the rendering of a

settlement service other than for services actually performed. (12

U.S.C. 2607(b).) Section 8(c) of RESPA provides, however, that nothing

in Section 8 shall be construed as prohibiting the payment to any

person of a bona fide salary or compensation or other payment for goods

or facilities actually furnished or services actually performed. (12

U.S.C. 2607(c)(2).)

Under Section 19 of RESPA, HUD is authorized to issue rules,

establish exemptions, and make such interpretations as is necessary to

implement the law. (12 U.S.C. 2618(a).)

RESPA's legislative history refers to HUD-VA Reports and subsequent

hearings by the Housing Subcommittee as defining "major problem areas

that [had to] be dealt with if settlement costs are to be kept within

reasonable bounds." (S. Rep. No. 93-866, at 6547.) One "major problem

area'' identified was the "abusive and unreasonable practices within

the real estate settlement process that increase settlement costs to

home buyers without providing any real benefits to them." Another

major concern was "the lack of understanding on the part of most

home buyers about the settlement process and its costs, which lack of

understanding makes it difficult for a free market for settlement

services to function at maximum efficiency."

The legislative history reveals that Congress intended RESPA to

guard against these unreasonable and excessive settlement costs in two

ways. Under Section 4, Congress sought to "mak[e] information on the

settlement process available to home buyers in advance of settlement

and require advance disclosures of settlement charges." (S. Rep. 93-

866, at 6548.) The Senate Report explained that "home buyers who would

otherwise shop around for settlement services, and thereby reduce their

overall settlement costs, are prevented from doing so because

frequently they are not apprised of the costs of these services until

the settlement date or are not aware of the nature of the settlement

services that will be provided."

Under Section 8, Congress sought to eliminate what it termed

``abusive practices''--kickbacks, referral fees, and unearned fees. In

enacting these prohibitions, Congress intended that ``the costs to the

American home buying public will not be unreasonably or unnecessarily

inflated.'' (S. Rep. 93-866 at 6548.) In describing the Section 8

provisions, the Senate Report explained that RESPA ``is intended to

prohibit all * * * referral fee arrangements whereby any payment is

made or `thing of value' is provided for the referral of real estate

settlement business.'' (S. Rep. 93-866, at 6551.)

The legislative history adds that ``[t]o 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].'' (S. Rep. 93-866, at 6551.) The Senate

Report states that ``reasonable payments in return for services

actually performed or goods actually furnished'' were not intended to

be prohibited (Id).3 It also provided that ``[t]hose 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.'' (Id.)

---------------------------------------------------------------------------


 

\3\ One of the examples of abusive activities listed in the

legislative history that RESPA was intended to remedy is ``a title

insurance company [that] may give 10% or more of the title insurance

premium to an attorney who may perform no services for the title

insurance company other than placing a telephone call to the company

or filling out a simple application.'' (S. Rep. 93-866, at 6551.)

Accordingly, where insufficient services are provided, RESPA is

intended to prohibit payment.

---------------------------------------------------------------------------


 

The Department has consistently held that the prohibitions under

Section 8 of RESPA cover the activities of mortgage brokers, because

RESPA applies to the origination, processing, and funding of a

federally related mortgage loan. This became an issue when, in 1984,

the 6th Circuit Court of Appeals held that in applying Section 8 as a

criminal statute, the definition of settlement services did not clearly

extend to the making of a mortgage loan. (U.S. versus Graham Mortgage

Corp., 740 F.2d 414 (6th Cir. 1984).) In 1992, Congress responded by

amending RESPA to remove any doubt that, for purposes of RESPA, a

settlement service includes the origination and making of a mortgage

loan. (Section 908 of the Housing and Community Development Act of 1992

(Pub. L. 102-550, approved October 28, 1992; 104 Stat. 4413). At the

same time, Congress also specifically made RESPA applicable to second

mortgages and refinancings. (Id.)


 

E. HUD's RESPA Rules


 

On November 2, 1992 (57 FR 49600), the Department issued a major

revision of Regulation X, the rule interpreting RESPA. The rule defined

the term ``mortgage broker'' for the first time. Under the rule,

mortgage brokers are required to disclose direct and indirect payments

on the Good Faith Estimate (GFE) no later than 3 days after loan

application. (See 24 CFR 3500.7(a) and (c).) Such disclosure must also

be provided to consumers, as a final figure, at closing on the

settlement statement. (24 CFR 3500.8; 24 CFR part 3500, Appendix A

(Instructions for Filling Out the HUD-1 and HUD-1A).) On the GFE and

the settlement statement, lender-paid mortgage broker fees must be

shown as ``Paid Outside of Closing'' (P.O.C.), and not computed in

arriving at totals. (See 24 CFR 3500.7(a)(2) and 24 CFR part 3500,

Appendix A.) The 1992 rule treats mortgage brokers as settlement

service providers whose fees are disbursed at or before settlement,

akin to title agents, attorneys, appraisers, etc., whose fees are

subject to disclosure and otherwise subject to RESPA, including Section

8.

The 1992 rule did not explicitly take a position on whether yield

spread premiums or any other named class of back-funded or indirect

fees paid by lenders to brokers are per se legal or illegal. By

illustration, codified as Illustrations of Requirements of RESPA, Fact

Situations 5 and 12 in Appendix B


 

[[Page 10083]]


 

to 24 CFR part 3500, the 1992 rule specifically listed ``servicing

release premiums'' and ``yield spread premiums'' as fees required to be

itemized on the settlement statement. Although the 1992 rule

specifically acknowledged the existence of such fees and provided

illustrations of how they were to be denominated on HUD disclosure

forms, this requirement was intended to ensure their disclosure, but

not to create a presumption of per se legality or illegality.

The anti-kickback, anti-referral fee and unearned fee provisions of

RESPA are implemented by 24 CFR 3500.14. Regulation X repeats the

Section 8 prohibitions against compensation for the referral of

settlement service business and for the giving or accepting of any

portion, split or percentage of any charge other than for services

actually rendered. (24 CFR 3500.14(c).) Regulation X provides that a

charge by a person for which no or nominal services are performed or

for which duplicative fees are charged is an unearned fee and violates

the unearned fee prohibition. (See 24 CFR 3500.14(c).) Moreover, 24 CFR

3500.14(g)(1)(iv) clarifies that Section 8 of RESPA permits ``[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.''

The Department's regulations provide, under 24 CFR 3500.14(g)(2),

that:


 

The Department may investigate high prices to see if they are

the result of a referral fee or a split of a fee. If the payment of

a thing of value bears no reasonable relationship to the market

value of the goods or services provided, then the excess is not for

services or goods actually performed or provided. These facts may be

used as evidence of a violation of section 8 and may serve as a

basis for a RESPA investigation. High prices standing alone are not

proof of a RESPA violation. The value of a referral (i.e., the value

of any additional business obtained thereby) is not to be taken into

account in determining whether the payment exceeds the reasonable

value of such goods, facilities or services. * * * (emphasis

supplied).


 

In addition, Regulation X clarifies that ``[w]hen a person in a

position to refer settlement service business * * * receives a payment

for providing additional settlement services as part of a real estate

transaction, such payment must be for services that are actual,

necessary and distinct from the primary services provided by such

person.'' (24 CFR 3500.14(g)(3).)

Since 1992, HUD has provided various interpretations and other

issuances under these rules stating the Department's position that the

legality of a payment to a mortgage broker is not premised on the name

of the particular fee. Rather, HUD has consistently advised that the

issue under RESPA is whether the compensation to a mortgage broker in

covered transactions is reasonably related to the value of the goods or

facilities actually furnished or services actually performed. If the

compensation, or a portion thereof, is not reasonably related to the

goods or facilities actually furnished or the services actually

performed, there is a compensated referral or an unearned fee in

violation of Section 8(a) or 8(b) of RESPA, whether the compensation is

a direct or indirect payment or a combination thereof.


 

F. Recent HUD Rulemaking Efforts


 

The Department received comments on the 1992 rule's requirement

that mortgage brokers disclose indirect payments from lenders on the

GFE and the settlement statement. In response, the Department reviewed

whether the disclosure of indirect or back-funded fees is necessary or

in the borrower's interest and whether additional rulemaking was needed

to clarify the legality of fees to mortgage brokers. Brokers had

alleged that these disclosures were confusing to consumers and

disadvantaged brokers as compared to other originators who were within

the secondary market exemption and were not required to disclose their

compensation for the subsequent sale of the loan. Consumer

representatives said that consumers needed to understand the existence

of indirect fees and whether brokers represented consumers in shopping

for loans. On September 13, 1995, the Department issued a proposed rule

(60 FR 47650) and in December 1995 through May 1996, embarked on a

negotiated rulemaking on these subjects.

Although the negotiated rulemaking did not result in consensus, on

October 16, 1997, HUD published a proposed rule (62 FR 53912) that was

shaped by views from both industry and consumer representatives

provided during the negotiated rulemaking (as well as by comments

received from the September 13, 1995, proposed rule (60 FR 47650)). The

1997 proposed rule proposed a qualified ``safe harbor'' for payments to

mortgage brokers under Section 8. Under the proposal, if a broker

enters into a contract with consumers explaining the broker's functions

(whether or not it represented the consumer) and the total compensation

the broker would receive in the transaction, before the consumer

applied for a loan, HUD would presume the broker fees, both direct and

indirect, to be legal. The 1997 proposal also provided, however, that

this qualified safe harbor would only be available to those payments

that did not exceed a test, to be established in the rulemaking, to

preclude unreasonable fees. This proposal was intended, among other

things, to establish that yield spread premiums paid to brokers meeting

the rule's requirements were presumed legal when brokers provided

consumers with prescribed information concerning the functions and

compensation of mortgage brokers. The Department has received over

9,000 comments in response to this proposed rule.


 

G. Litigation


 

During the last several years, more than 150 lawsuits have been

brought seeking class action certification based in whole or in part on

the theory that the making of indirect payments from lenders to

mortgage brokers violates Section 8 of RESPA. In various cases,

plaintiffs have argued that yield spread premiums or other denominated

indirect payments to brokers, regardless of their amount, constitute

prohibited referral fees under Section 8(a). These plaintiffs generally

argue that yield spread premiums are payments based upon the broker's

ability to deliver a loan that is above the par rate. Some lawsuits

have alleged that such yield spread premiums or other indirect payments

are a split of fees between the lender and the broker, or are simply

unearned fees and, therefore, also violate Section 8(b) of RESPA. Other

challenges rely, in part, on the alleged unreasonableness of brokers'

fees. These complaints assert that under the RESPA regulations,

payments must bear a reasonable relationship to the market value of the

good or the service provided and that payments in excess of such

amounts must be regarded as forbidden referral fees.

Many of the lawsuits involve allegations that consumers were not

informed by mortgage brokers concerning the mortgage brokers' role and

compensation. A common element in many allegations is that borrowers

were not informed about the existence or the amount of the yield spread

premiums paid to the mortgage broker, and the relationship of the yield

spread premium to the direct fees that the borrower paid. The facts in

these cases suggest generally that even where there were proper

disclosures on the GFE and the settlement statement, borrowers allege

that they were unaware of, or did not understand, that a yield spread

premium was tied to the interest rate they agreed to pay, and that they

could have reduced this charge or their direct


 

[[Page 10084]]


 

payment to the broker either by further negotiation or by engaging in

additional shopping among mortgage loan providers.

Courts have been split in their decisions on these cases. Some of

the decisions have concluded that yield spread premiums may be

prohibited referral fees or duplicative fees in contravention of

Section 8 of RESPA under the specific facts of the case. Some have held

that the permissibility of yield spread premiums must be based on an

analysis of whether the premiums constitute a reasonable payment,

either alone or in combination with any direct fee paid by the

borrower, for either the goods, services or facilities actually

furnished. Because some courts have found that this necessitates an

individual analysis of the facts of each transaction, some courts have

denied plaintiffs' requests for class action certification. Some courts

have certified a class without reaching a conclusion on the RESPA

issues. Others have held that yield spread premiums constitute valid

consideration to the mortgage broker in exchange for the origination of

the loan and the sale of the loan to the lender. These courts have

found that the payment of yield spread premiums is one method among

many of compensating the broker for the origination services rendered.


 

H. Reform


 

In July 1998, the Department and the Federal Reserve Board

delivered a report to Congress recommending significant improvements to

streamline and simplify current RESPA and Truth In Lending Act

requirements. The Report proposed that along with a tighter and more

enforceable scheme for providing consumers with estimated costs for

settlements, an exemption from Section 8's prohibitions should be

established for those entities that offer a package of settlement

services and a mortgage loan at a guaranteed price, rate and points for

the package early in the consumer's process of shopping for a loan.

Such an approach, which also includes other additional consumer

protection recommendations, would largely resolve these issues for any

mortgage broker who chooses to abide by the requirements of this

exemption. The Report's consumer protection recommendations included,

among other items, that Congress consider establishment of an unfair

and deceptive acts and practices remedy.

Under the ``packaging'' proposal set forth in the Report,

settlement costs would be controlled more effectively by market forces.

Consumers would be better able to comparison-shop, thereby encouraging

creditors and others to operate efficiently and pass along discounts

and lower prices. In addition, the Report's recommendations would

greatly simplify compliance for the industry and clarify legal

uncertainties that create liability risks.


 

I. This Policy Statement


 

This policy statement provides HUD's views of the legality of fees

to mortgage brokers from lenders under existing law. In accordance with

the Conference Report, in developing this policy statement, HUD met

with representatives of government agencies, as well as a broad range

of consumer and industry groups, including the Office of Thrift

Supervision, the Comptroller of the Currency, the Federal Deposit

Insurance Corporation, the Federal Reserve Board, the National

Association of Mortgage Brokers, the Mortgage Bankers Association of

America, the American Bankers Association, the Consumer Mortgage

Coalition, America's Community Bankers, the Consumer Bankers

Association, the Independent Bankers Association of America, AARP, the

National Consumer Law Center, Consumers Union, and the National

Association of Consumer Advocates.


 

II. RESPA Policy Statement 1999-1


 

A. Introduction


 

The Department hereby states its position on the legality of

payments by lenders to mortgage brokers under the Real Estate

Settlement Procedures Act (12 U.S.C. 2601 et seq.) (RESPA) and its

implementing regulations at 24 CFR part 3500 (Regulation X). This

Statement of Policy is issued pursuant to Section 19(a) of RESPA (12

U.S.C. 2617(a)) and 24 CFR 3500.4(a)(1)(ii). HUD is cognizant of the

Conferees' statement in the Conference Report on the FY 1999 HUD

Appropriations Act that ``Congress never intended payments by lenders

to mortgage brokers for goods or facilities actually furnished or for

services actually performed to be violations of [Sections 8](a) or (b)

(12 U.S.C. Sec. 2607) in its enactment of RESPA.'' (H. Rep. 105-769, at

260.) The Department is also cognizant of the congressional intent in

enacting RESPA of protecting consumers from unnecessarily high

settlement charges caused by abusive practices. (12 U.S.C. 2601.)

In transactions where lenders make payments to mortgage brokers,

HUD does not consider such payments (i.e., yield spread premiums or any

other class of named payments), to be illegal per se. HUD does not view

the name of the payment as the appropriate issue under RESPA. HUD's

position that lender payments to mortgage brokers are not illegal per

se does not imply, however, that yield spread premiums are legal in

individual cases or classes of transactions. The fees in cases or

classes of transactions are illegal if they violate the prohibitions of

Section 8 of RESPA.

In determining whether a payment from a lender to a mortgage broker

is permissible under Section 8 of RESPA, the first question is whether

goods or facilities were actually furnished or services were actually

performed for the compensation paid. The fact that goods or facilities

have been actually furnished or that services have been actually

performed by the mortgage broker does not by itself make the payment

legal. The second question is whether the payments are reasonably

related to the value of the goods or facilities that were actually

furnished or services that were actually performed.

In applying this test, HUD believes that total compensation should

be scrutinized to assure that it is reasonably related to goods,

facilities, or services furnished or performed to determine whether it

is legal under RESPA. Total compensation to a broker includes direct

origination and other fees paid by the borrower, indirect fees,

including those that are derived from the interest rate paid by the

borrower, or a combination of some or all. The Department considers

that higher interest rates alone cannot justify higher total fees to

mortgage brokers. All fees will be scrutinized as part of total

compensation to determine that total compensation is reasonably related

to the goods or facilities actually furnished or services actually

performed. HUD believes that total compensation should be carefully

considered in relation to price structures and practices in similar

transactions and in similar markets.


 

B. Scope


 

In light of 24 CFR Sec. 3500.5(b)(7), which exempts from RESPA

coverage bona fide transfers of loan obligations in the secondary

market, this policy statement encompasses only transactions where

mortgage brokers are not the real source of funds (i.e., table-funded

transactions or transactions involving ``intermediary'' brokers). In

table-funded transactions, the mortgage broker originates, processes

and closes the loan in the broker's own name and, at or about the time

of settlement, there is a simultaneous advance of the loan funds by the

lender and an assignment of the loan to that lender. (See 24 CFR 3500.2

(Definition of ``table funding'').) Likewise, in transactions where


 

[[Page 10085]]


 

mortgage brokers are intermediaries, the broker provides loan

origination services and the loan funds are provided by the lender; the

loan, however, is closed in the lender's name.


 

C. Payments Must Be for Goods, Facilities or Services


 

In the determination of whether payments from lenders to mortgage

brokers are permissible under Section 8 of RESPA, the threshold

question is whether there were goods or facilities actually furnished

or services actually performed for the total compensation paid to the

mortgage broker. In making the determination of whether compensable

services are performed, HUD's letter to the Independent Bankers

Association of America, dated February 14, 1995 (IBAA letter) may be

useful. In that letter, HUD identified the following services normally

performed in the origination of a loan:

(a) Taking information from the borrower and filling out the

application; 4

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\4\ In a subsequent informal interpretation, dated June 20,

1995, HUD stated that the filling out of a mortgage loan application

could be substituted by a comparable activity, such as the filling

out of a borrower's worksheet.

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(b) Analyzing the prospective borrower's income and debt and pre-

qualifying the prospective borrower to determine the maximum mortgage

that the prospective borrower can afford;

(c) Educating the prospective borrower in the home buying and

financing process, advising the borrower about the different types of

loan products available, and demonstrating how closing costs and

monthly payments could vary under each product;

(d) Collecting financial information (tax returns, bank statements)

and other related documents that are part of the application process;

(e) Initiating/ordering VOEs (verifications of employment) and VODs

(verifications of deposit);

(f) Initiating/ordering requests for mortgage and other loan

verifications;

(g) Initiating/ordering appraisals;

(h) Initiating/ordering inspections or engineering reports;

(i) Providing disclosures (truth in lending, good faith estimate,

others) to the borrower;

(j) Assisting the borrower in understanding and clearing credit

problems;

(k) Maintaining regular contact with the borrower, realtors,

lender, between application and closing to appraise them of the status

of the application and gather any additional information as needed;

(l) Ordering legal documents;

(m) Determining whether the property was located in a flood zone or

ordering such service; and

(n) Participating in the loan closing.

While this list does not exhaust all possible settlement services,

and while the advent of computer technology has, in some cases, changed

how a broker's settlement services are performed, HUD believes that the

letter still represents a generally accurate description of the

mortgage origination process. For other services to be acknowledged as

compensable under RESPA, they should be identifiable and meaningful

services akin to those identified in the IBAA letter including, for

example, the operation of a computer loan origination system (CLO) or

an automated underwriting system (AUS).

The IBAA letter provided guidance on whether HUD would take an

enforcement action under RESPA. In the context of the letter's

particular facts and subject to the reasonableness test which is

discussed below, HUD articulated that it generally would be satisfied

that sufficient origination work was performed to justify compensation

if it found that:

The lender's agent or contractor took the application

information (under item (a)); and

The lender's agent or contractor performed at least five

additional items on the list above.

In the letter and in the context of its facts, HUD also pointed out

that it is concerned that a fee for steering a customer to a particular

lender could be disguised as compensation for ``counseling-type''

activities. Therefore, the letter states that if an agent or contractor

is relying on taking the application and performing only ``counseling

type'' services--(b), (c), (d), (j), and (k) on the list above--to

justify its fee, HUD would also look to see that meaningful

counseling--not steering--is provided. In analyzing transactions

addressed in the IBAA letter, HUD said it would be satisfied that no

steering occurred if it found that:

Counseling gave the borrower the opportunity to consider

products from at least three different lenders;

The entity performing the counseling would receive the

same compensation regardless of which lender's products were ultimately

selected; and

Any payment made for the ``counseling-type'' services is

reasonably related to the services performed and not based on the

amount of loan business referred to a particular lender.

In examining services provided by mortgage brokers and payments to

mortgage brokers, HUD will look at the types of origination services

listed in the IBAA letter to help determine whether compensable

services are performed.5 However, the IBAA letter responded

to a program where a relatively small fee was to be provided for

limited services by lenders that were brokering loans.6

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\5\ In the June 20, 1995 letter, the Department clarified that

the counseling test in the IBAA letter would not apply if an entity

performed only non-counseling services (a, e, f, g, h, i, l, m, n)

or a mix of counseling and non-counseling services (but did not rely

only on the five counseling services (b, c, d, j, and k)).

\6\ In the particular program reviewed by HUD in the IBAA

letter, the average total compensation for performing six of the

origination services listed above was below $200.

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Accordingly, the formulation in the IBAA letter of the number of

origination services which may be required to be performed for

compensation is not dispositive in analyzing more costly mortgage

broker transactions where more comprehensive services are provided. The

determinative test under RESPA is the relationship of the services,

goods or facilities furnished to the total compensation received by the

broker (discussed below). In addition to services, mortgage brokers may

furnish goods or facilities to the lender. For example, appraisals,

credit reports, and other documents required for a complete loan file

may be regarded as goods, and a reasonable portion of the broker's

retail or ``store-front'' operation may generally be regarded as a

facility for which a lender may compensate a broker. However, while a

broker may be compensated for goods or facilities actually furnished or

services actually performed, the loan itself, which is arranged by the

mortgage broker, cannot be regarded as a ``good'' that the broker may

sell to the lender and that the lender may pay for based upon the

loan's yield's relation to market value, reasonable or otherwise. In

other words, in the context of a non-secondary market mortgage broker

transaction, under HUD's rules, it is not proper to argue that a loan

is a ``good,'' in the sense of an instrument bearing a particular

yield, thus justifying any yield spread premium to the mortgage broker,

however great, on the grounds that such yield spread premium is the

``market value'' of the good.


 

D. Compensation Must Be Reasonably Related to Value of Goods,

Facilities or Services


 

The fact that goods or facilities have been actually furnished or

that services have been actually performed by the mortgage broker, as

described in the IBAA letter, does not by itself make a payment by a

lender to a mortgage


 

[[Page 10086]]


 

broker legal. The next inquiry is whether the payment is reasonably

related to the value of the goods or facilities that were actually

furnished or services that were actually performed. Although RESPA is

not a rate-making statute, HUD is authorized to ensure that payments

from lenders to mortgage brokers are reasonably related to the value of

the goods or facilities actually furnished or services actually

performed, and are not compensation for the referrals of business,

splits of fees or unearned fees.

In analyzing whether a particular payment or fee bears a reasonable

relationship to the value of the goods or facilities actually furnished

or services actually performed, HUD believes that payments must be

commensurate with that amount normally charged for similar services,

goods or facilities. This analysis requires careful consideration of

fees paid in relation to price structures and practices in similar

transactions and in similar markets.7 If the payment or a

portion thereof bears no reasonable relationship to the market value of

the goods, facilities or services provided, the excess over the market

rate may be used as evidence of a compensated referral or an unearned

fee in violation of Section 8(a) or (b) of RESPA. (See 24 CFR

3500.14(g)(2).) Moreover, HUD also believes that the market price used

to determine whether a particular payment meets the reasonableness test

may not include a referral fee or unearned fee, because such fees are

prohibited by RESPA. Congress was clear that for payments to be legal

under Section 8, they must bear a reasonable relationship to the value

received by the person or company making the payment. (S. Rep. 93-866,

at 6551.)

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\7\ HUD recognizes that settlement costs may vary in different

markets. The cost of a specific service in Omaha, Nebraska, for

example, may bear little resemblance to the cost of a similar

service in Los Angeles, California.

---------------------------------------------------------------------------


 

The Department recognizes that some of the goods or facilities

actually furnished or services actually performed by the broker in

originating a loan are ``for'' the lender and other goods or facilities

actually furnished or services actually performed are ``for'' the

borrower. HUD does not believe that it is necessary or even feasible to

identify or allocate which facilities, goods or services are performed

or provided for the lender, for the consumer, or as a function of State

or Federal law. All services, goods and facilities inure to the benefit

of both the borrower and the lender in the sense that they make the

loan transaction possible (e.g., an appraisal is necessary to assure

that the lender has adequate security, as well as to advise the

borrower of the value of the property and to complete the borrower's

loan).

The consumer is ultimately purchasing the total loan and is

ultimately paying for all the services needed to create the loan. All

compensation to the broker either is paid by the borrower in the form

of fees or points, directly or by addition to principal, or is derived

from the interest rate of the loan paid by the borrower. Accordingly,

in analyzing whether lender payments to mortgage brokers comport with

the requirements of Section 8 of RESPA, HUD believes that the totality

of the compensation to the mortgage broker for the loan must be

examined. For example, if the lender pays the mortgage broker $600 and

the borrower pays the mortgage broker $500, the total compensation of

$1,100 would be examined to determine whether it is reasonably related

to the goods or facilities actually furnished or services actually

performed by the broker.

Therefore, in applying this test, HUD believes that total

compensation should be scrutinized to assure that it is reasonably

related to goods, facilities, or services furnished or performed to

determine whether total compensation is legal under RESPA. Total

compensation to a broker includes direct origination and other fees

paid by the borrower, indirect fees, including those that are derived

from the interest rate paid by the borrower, or a combination of some

or all. All payments, including payments based upon a percentage of the

loan amount, are subject to the reasonableness test defined above. In

applying this test, the Department considers that higher interest rates

alone cannot justify higher total fees to mortgage brokers. All fees

will be scrutinized as part of total compensation to determine that

total compensation is reasonably related to the goods or facilities

actually furnished or services actually performed.

In so-called ``no-cost'' loans, borrowers accept a higher interest

rate in order to reduce direct fees, and the absence of direct payments

to the mortgage broker is made up by higher indirect fees (e.g., yield

spread premiums). Higher indirect fees in such arrangements are legal

if, and only if, the total compensation is reasonably related to the

goods or facilities actually furnished or services actually performed.

In determining whether the compensation paid to a mortgage broker

is reasonably related to the goods or facilities actually furnished or

services actually performed, HUD will consider all compensation,

including any volume based compensation. In this analysis, there may be

no payments merely for referrals of business under Section 8 of RESPA.

(See 24 CFR 3500.14.) 8

---------------------------------------------------------------------------


 

\8\ The Department generally has held that when the payment is

based on the volume or value of business transacted, it is evidence

of an agreement for the referral of business (unless, for example,

it is shown that payments are for legitimate business reasons

unrelated to the value of the referrals). (See 24 CFR 3500.14(e).)

---------------------------------------------------------------------------


 

Under HUD's rules, when a person in a position to refer settlement

service business receives a payment for providing additional settlement

services as part of the transaction, such payment must be for services

that are actual, necessary and distinct from the primary services

provided by the person. (24 CFR 3500.14(g)(3).) While mortgage brokers

may receive part of their compensation from a lender, where the lender

payment duplicates direct compensation paid by the borrower for goods

or facilities actually furnished or services actually performed,

Section 8 is violated. In light of the fact that the borrower and the

lender may both contribute to some items, HUD believes that it is best

to evaluate seemingly duplicative fees by analyzing total compensation

under the reasonableness test described above.


 

E. Information Provided to Borrower


 

Under current RESPA rules mortgage brokers are required to disclose

estimated direct and indirect fees on the Good Faith Estimate (GFE) no

later than 3 days after loan application. (See 24 CFR 3500.7(a) and

(b).) Such disclosure must also be provided to consumers, as a final

exact figure, at closing on the settlement statement. (24 CFR 3500.8;

24 CFR part 3500, Appendix A.) On the GFE and the settlement statement,

lender payments to mortgage brokers must be shown as ``Paid Outside of

Closing'' (P.O.C.), and are not computed in arriving at totals. (24 CFR

3500.7(a)(2).) The requirement that all fees be disclosed on the GFE is

intended to assure that consumers are shown the full amount of

compensation to brokers and others early in the transaction.

The Department has always indicated that any fees charged in

settlement transactions should be clearly disclosed so that the

consumer can understand the nature and recipient of the payment. Code-

like abbreviations like ``YSP to DBG, POC'', for instance, have been

noted.9 Also, the Department has seen


 

[[Page 10087]]


 

examples on the GFE and/or the settlement statement where the identity

and/or purpose of the fees are not clearly disclosed.

---------------------------------------------------------------------------


 

\9\ This is an example only. HUD recognizes that current

practices may leave borrowers confused. However, the use of any

particular terms, including abbreviations, may not, by itself,

violate RESPA. Nevertheless, going forward, HUD recommends that the

disclosures on the GFE and the settlement statement be as described

in the text. HUD recognizes that system changes may require time for

lenders and brokers to implement.

---------------------------------------------------------------------------


 

The Department considers unclear and confusing disclosures to be

contrary to the statute's and the regulation's purposes of making

RESPA-covered transactions understandable to the consumer. At a

minimum, all fees to the mortgage broker are to be clearly labeled and

properly estimated on the GFE. On the settlement statement, the name of

the recipient of the fee (in this case, the mortgage broker) is to be

clearly labeled and listed, and the fee received from a lender is to be

clearly labeled and listed in the interest of clarity. For example, a

fee would be appropriately disclosed as ``Mortgage broker fee from

lender to XYZ Corporation (P.O.C.).'' In the interest of clarity, other

fees or payments from the borrower to the mortgage broker should

identify that they are mortgage broker fees from the

borrower.10

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\10\ HUD recognizes that current software may not currently

accommodate these additional disclosures. Both industry and

consumers would be better served if these additional disclosures

were included in future forms.

---------------------------------------------------------------------------


 

There is no requirement under existing law that consumers be fully

informed of the broker's services and compensation prior to the GFE.

Nevertheless, HUD believes that the broker should provide the consumer

with information about the broker's services and compensation, and

agreement by the consumer to the arrangement should occur as early as

possible in the process. Mortgage brokers and lenders can improve their

ability to demonstrate the reasonableness of their fees if the broker

discloses the nature of the broker's services and the various methods

of compensation at the time the consumer first discusses the

possibility of a loan with the broker.

The legislative history makes clear that RESPA was not intended to

be a rate-setting statute and that Congress instead favored a market-

based approach. (S. Rep. No. 93-866 at 6546 (1974).) In making the

determination of whether a payment is bona fide compensation for goods

or facilities actually furnished or services actually performed, HUD

has, in the past, indicated that it would examine whether the price

paid for the goods, facilities or services is truly a market price;

that is, if in an arm's length transaction a purchaser would buy the

services at or near the amount charged. If the fee the consumer pays is

disclosed and agreed to, along with its relationship to the interest

rate and points for the loan and any lender-paid fees to the broker, a

market price for the services, goods or facilities could be attained.

HUD believes that for the market to work effectively, borrowers should

be afforded a meaningful opportunity to select the most appropriate

product and determine what price they are willing to pay for the loan

based on disclosures which provide clear and understandable

information.

The Department reiterates its long-standing view that disclosure

alone does not make illegal fees legal under RESPA. On the other hand,

while under current law, pre-application disclosure to the consumer is

not required, HUD believes that fuller information provided at the

earliest possible moment in the shopping process would increase

consumer satisfaction and reduce the possibility of misunderstanding.

HUD commends the National Association of Mortgage Brokers and the

Mortgage Bankers Association of America for strongly suggesting that

their members furnish consumers with a form describing the function of

mortgage brokers and stating that a mortgage broker may receive a fee

in the transaction from a lender.

Although this statement of policy does not mandate disclosures

beyond those currently required by RESPA and Regulation X, the most

effective approach to disclosure would allow a prospective borrower to

properly evaluate the nature of the services and all costs for a broker

transaction, and to agree to such services and costs before applying

for a loan. Under such an approach, the broker would make the borrower

aware of whether the broker is or is not serving as the consumer's

agent to shop for a loan, and the total compensation to be paid to the

mortgage broker, including the amounts of each of the fees making up

that compensation. If indirect fees are paid, the consumer would be

made aware of the amount of these fees and their relationship to direct

fees and an increased interest rate. If the consumer may reduce the

interest rate through increased fees or points, this option also would

be explained. HUD recognizes that in many cases, the industry has not

been using this approach because it has not been required. Moreover,

new methods may require time to implement. HUD encourages these efforts

going forward and believes that if these desirable disclosure practices

were adhered to by all industry participants, the need for more

prescriptive regulatory or legislative actions concerning this specific

problem could be tempered or even made unnecessary.

While the Department is issuing this statement of policy to comply

with a Congressional directive that HUD clarify its position on the

legality of lender payments to mortgage brokers, HUD agrees with

segments of the mortgage lending and settlement service industries and

consumer representatives that legislation to improve RESPA is needed.

HUD believes that broad legislative reform along the lines specified in

the HUD/Federal Reserve Board Report remains the most effective way to

resolve the difficulties and legal uncertainties under RESPA and TILA

for industry and consumers alike. Statutory changes like those

recommended in the Report would, if adopted, provide the most balanced

approach to resolving these contentious issues by providing consumers

with better and firmer information about the costs associated with

home-secured credit transactions and providing creditors and mortgage

brokers with clearer rules.


 

III. Executive Order 12866, Regulatory Planning and Review


 

The Office of Management and Budget (OMB) reviewed this Statement

of Policy under Executive Order 12866, Regulatory Planning and Review.

OMB determined that this Statement of Policy is a ``significant

regulatory action,'' as defined in section 3(f) of the Order (although

not economically significant, as provided in section 3(f)(1) of the

Order). Any changes made to the Statement of Policy subsequent to its

submission to OMB are identified in the docket file, which is available

for public inspection in the office of the Department's Rules Docket

Clerk, Room 10276, 451 Seventh Street, SW, Washington, DC 20410-0500.


 

Dated: February 22, 1999.

William C. Apgar,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 99-4921 Filed 2-26-99; 8:45 am]

BILLING CODE 4210-27-P