The opinion of the court was delivered by: James Robertson United States District Judge
The National Association of Mortgage Brokers, Inc. (NAMB) sues Shaun Donovan, the Secretary of the United States Department of Housing and Urban Development (HUD), asserting arbitrary and capricious action in his promulgation of a "Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Customer Settlement Costs," 73 Fed. Reg. 68,204 (Nov. 17, 2008) ("Final Rule"). The parties have cross-moved for summary judgment. The defendant's motion will be granted.
Among its many provisions, the Final Rule creates a new standardized form that originators of federally related mortgages*fn1 must provide to prospective borrowers. HUD asserts that the new form provides borrowers with a clearer picture of loan terms and conditions, allowing them to compare loan offers more easily, and promoting competition between loan providers. NAMB argues that the Final Rule is procedurally and substantively deficient: procedurally, because HUD developed the new form with the help of data that it did not disclose during the notice-and-comment period; and substantively, because HUD did not adequately explain why it imposed disclosure requirements on mortgage brokers different from those required of direct lenders.
A few words about terminology: Mortgage loan originators are either direct lenders or brokers -- direct lenders originate loans and provide funds, while brokers originate loans and arrange for third parties to fund them.*fn2 See 24 C.F.R. § 3500.2. The various tasks that go into processing an application and originating a loan -- title searches, title examinations, credit examinations, real estate appraisals, and so on -- are known as "settlement services," for which the loan originator charges and the borrower pays a settlement fee. See 12 U.S.C. § 2602(3). Under long-standing federal law, loan originators must inform prospective borrowers of loan terms and settlement fees on a "good-faith estimate" form, or "GFE." See 24 C.F.R. Pt. 3500 App. A & B. The Final Rule at issue in this case creates a new GFE.
Broadly speaking, NAMB opposes the new GFE because of the way it discloses "yield spread premiums" (YSPs). A YSP is a payment by a lender to a broker that compensates the broker for originating a loan with an "above-par" interest rate. The "par rate" is the interest rate at which the lender will fund 100% of the loan with no premiums or discounts. Administrative Record [hereinafter, "A.R."] 241, 1636. If the par rate for a certain $100,000 mortgage is, say, 5%, and the broker originates that mortgage at a 5.5% interest rate, then the lender might deliver $100,500 at closing -- $100,000 that will be disbursed to the borrower, plus a $500 YSP for the broker.
YSPs can benefit certain borrowers. Consider a borrower who wants a mortgage but is unable to pay the entire settlement fee at closing.*fn3 If she is working with a direct lender, she might agree to pay a higher rate of interest on her loan in order to reduce her settlement fee. In such a case, the lender trades off the smaller up front fee for larger monthly interest payments, or, as we have seen in recent years, for the ability to package and sell a more valuable loan on the secondary market. The broker, unlike the direct lender, gets no benefit from the higher-interest loan. It is the YSP that gives him the incentive to accept a lower settlement fee from the borrower.
Borrowers only benefit from YSPs, however, if they can understand and make intelligent choices about the tradeoffs between short-term settlement costs and long-term interest payments. That was the idea behind the Real Estate Settlement Procedures Act(RESPA), 12 U.S.C. §§ 2601-2617, which provides mortgage borrowers "with greater and more timely information on the nature and costs of the settlement process." Id. § 2601(a). Section 4 of RESPA requires the HUD Secretary to "develop and prescribe a standard form for the statement of settlement costs which shall be used . . . as the standard real estate settlement form in all transactions in the United States which involve federally related mortgage loans." Id. § 2603(a). "Such form shall conspicuously and clearly itemize all charges imposed upon the borrower and all charges imposed upon the seller in connection with the settlement." Id.
The Final Rule is the result of a very long administrative process motivated in part by HUD's dissatisfaction with the way the existing GFE disclosed the impact of YSPs on loan terms. In HUD's view, "YSP payments [were] not required to be included in the calculation of the broker's total charge for the transaction, nor [were] they clearly listed as an expense to the borrower, even though the borrower promise[d] to pay the YSP through interest payments." Dkt. 15, at 10.
Thus, in 1995, HUD began the process of designing a new GFE that, among other things, would more clearly demonstrate the inverse relationship between settlement fees and interest rates, and would allow borrowers to compare competing loan offers quickly and accurately. HUD issued a proposed rule and sought public comment on alternative approaches to disclosing various indirect fees, including YSPs. A.R. 1783-90. The HUD Secretary convened a negotiated rulemaking advisory committee consisting of industry groups (like NAMB), consumer groups, state organizations, and government-sponsored enterprises. Id. 1777. Though this initial process reached a dead end, it laid the foundation for a proposed rule issued in 2002. That rule would have revised the existing GFE, simplified and standardized the disclosure of settlement costs, and modified other disclosure requirements. Id. 91. After receiving over 40,000 comments --mostly supportive of HUD's goals -- HUD decided to withdraw the rule in 2004 and gather additional information about settlement costs and the options for improving disclosure. Id.
HUD's first step was to assess the strengths and weaknesses of the existing GFE. It hired the Urban Institute to conduct a study of 7,560 home loans. Id. 3119. The study found that borrowers could not describe the basic aspects of their mortgages, particularly in more complex transactions involving YSPs. Id. 223-24. Unwittingly, borrowers tended to accept small reductions in their settlement fee in exchange for larger increases in their interest payments, resulting in significantly higher costs over the life of the loan. Id. 275, 316. In HUD's view, the Urban Institute study, combined with much of the research in the field, demonstrated that the existing GFE was too opaque for most borrowers to understand. Id. 246-67.
HUD then tried to design a more effective GFE. Between 2002 and 2008, HUD had the Kleimann Communications Group (KCG) conduct seven rounds of consumer testing. In the first three rounds, KCG tested HUD's draft GFE by asking current and potential homeowners for their thoughts on the GFE's clarity.
Id. 360, 2092. HUD discovered that customers better understood the tradeoff between settlement costs and interest rates if YSPs were disclosed more prominently. Id. 23, 364.
But highlighting YSPs had the potential to give direct lenders a competitive advantage over brokers. HUD was concerned that borrowers might mistakenly believe that loans originated by brokers were more expensive than comparable loans originated by direct ...