Industry pushes for HUD to drop RESPA rule change
Lawmakers asked to sign letter to Housing Secretary
By Matt Carter, Friday, July 18, 2008.Bookmarking Sites
Editor's note: Participate in an Inman Community group discussion about proposed changes to the federal Real Estate Settlement Procedures Act (RESPA) at the Inman Community site. Read a related post to this article here.
Trade groups representing Realtors, lenders, title insurers and settlement services providers are asking lawmakers to sign a letter to Housing Secretary Steve Preston urging HUD to scrap proposed changes to the Real Estate Settlement Procedures Act and work with the Federal Reserve on simplified loan disclosure forms instead.
HUD's proposed changes to RESPA, unveiled in March, include a new "Good Faith Estimate" form that's intended to help consumers compare different loan offers, and incentives for packaging settlement services with loans. HUD estimates the rule change would save consumers about $8.35 billion a year, but industry opponents say regulators have overestimated the benefits and underestimated the costs of implementing the changes.
Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill., have taken up the industry's cause, asking their colleagues to sign a letter to Preston that claims HUD has not conducted enough consumer testing of the proposed changes, which promise "to be more confusing and costly to both small businesses and consumers."
The letter also asks HUD to "discard the hundreds of pages of HUD's current proposed RESPA rule that have not previously been the subject of public comment and cover a number of subjects beyond disclosures" -- language that appeared targeted at packaging incentives (see text of letter).
The American Land Title Association issued an alert to members Thursday asking them to write their congressional representative and urge them to sign the letter.
The alert warned ALTA members that the proposed rule changes would double the time they spend on closings, and "unfairly assist the biggest mortgage lenders in gaining more control over the real estate consumer. The largest lenders could negotiate volume discounts with their affiliated settlement service providers and push small providers out of the business."
ALTA said other groups supporting the letter include the National Association of Realtors, Mortgage Bankers Association, National Association of Home Builders and the Real Estate Services Providers Council Inc.
Four years ago, Hinojosa and Biggert played a pivotal role in forcing HUD to withdraw proposed changes to RESPA, which included more explicit provisions allowing the packaging of settlement services with loans. In 2004, they drafted a letter signed by 226 lawmakers asking the Office of Management and Budget to reject HUD's proposed RESPA rule changes. The letter argued that a final rule was issued without an opportunity for additional public comment.
This year, after HUD unveiled its latest proposal for overhauling RESPA, Hinojosa and Biggert persuaded 146 colleagues to sign a letter asking HUD to extend the comment period for 60 days, to June 12. HUD granted the request, raising speculation that in the wake of HUD Secretary Alphonso Jackson's resignation final implementation of a new RESPA rule would be left to the next administration.
HUD officials have said they remain committed to publishing a final rule this fall for implementation next year, and incoming Housing Secretary Steve Preston has said he thinks the industry's issues can be addressed.
The "dear colleague" letter now being circulated by Hinojosa and Biggert argues that HUD's RESPA disclosure forms haven't been extensively consumer tested, and should be compatible with disclosure forms provided to consumers under the Truth In Lending Act.
In releasing proposed changes to enforcement of the Truth In Lending Act this week, the Federal Reserve said that consumer testing showed borrowers were confused by the disclosure of yield spread premiums.
Although HUD's proposed Good Faith Estimate doesn't use the terminology "yield spread premium," it would require that rebates paid by lenders when borrowers take out loans with higher interest rates than they might otherwise qualify for be disclosed and credited to their closing costs rather than pocketed by brokers.
In a speech this week, Federal Reserve Board member Randall Kroszner said disclosing yield spread premiums to consumers left some with the mistaken belief that mortgage brokers would be obliged to find them the lowest interest rate and best terms available. Others were convinced that working through a broker would cost them more than working directly with a lender, "which is not necessarily true either," Kroszner said. No matter how the language was changed to address those issues, "the forms continued to confuse consumers more than inform them."
While yield spread premiums can help borrowers who are willing to pay a higher interest rate pay down their closing costs, critics say mortgage brokers may pocket the rebates without a borrower's knowledge, and provide an incentive to place them in higher-cost loans. Although the Fed will continue to study the issue, it has decided not to require the disclosure of yield spread premiums in TILA disclosures for now.
The National Association of Mortgage Brokers cited the Fed's action as ammunition in its fight against HUD's proposed handling of yield spread premiums in its proposed RESPA rule change.
In a press release, NAMB called for "the immediate suspension" of HUD's proposed RESPA rule changes, saying "multiple studies indicate that consumers are more likely to choose higher-cost loans because of the HUD requirement that brokers disclose YSP."
In rolling out its latest RESPA proposal, HUD officials said they had conducted extensive consumer testing that demonstrated that the new rules would help consumers pick the best loan offer and settlement services package. HUD conducted five rounds of consumer testing from 2002-05 on its previous RESPA rule changes, and an additional round of tests in 2007.
According to a HUD report on the consumer tests, a 2003 Federal Trade Commission study showed that while consumers did become confused when yield spread premiums were disclosed, the tests relied on only a portion of the Good Faith Estimate. Further tests, in which consumers were presented with an improved Good Faith Estimate in its entirety, demonstrated they were able to pick the best loan, regardless of whether it was offered by a mortgage broker or loan officer, HUD said.
What's your take on HUD's latest shot at RESPA reform? Participate in an Inman Community discussion.
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Submitted by Jillayne Schlicke on July 18, 2008 - 3:36pm.
It doesn't matter what form is used if the person filling out the form doesn't know how to properly complete the form per RESPA, or if the person filling out the form intends to use the "confusing" government forms to deceive.
Go ahead and leave RESPA alone.
The real fix is to simply mandate that all loan originators, no matter where they work, owe a higher duty of care to the consumer.
Make all LOs fiduciaries.
Submitted by Marie Motter on July 18, 2008 - 3:46pm.
Good comment Ms. Schlicke. I am so tired of all the rhetoric about changing the HUD, changing settlement procedures when all of the problem is with the greedy, greedy loan originators and brokers. They do not want the consumer to know they are paying a higher interest rate and that the loan broker is pocketing the money. My own experience is that these loan brokers want to hide the YSP in a corner between two tiny lines so that the borrower doesn't notice. Mortgage bankers you should fix this problem, yes, the problem of this housing crisis that your greed and your greed only has created. I have personally sat in the chair and seen all of the shenanigans that the mortgage brokers ask the settlement agent to do to avoid the consumers knowing how much money they are making on the backend of a loan. They originated all of the loans to unqualified and risky borrowers, made a lot of money off of them and now are crying about having to disclose these amounts. This country is never going to get this straigthened out until our elected officials stand up to the lending industry lobbyists and start protecting the consumers with truthful disclosures.
Submitted by Matt Carter on July 18, 2008 - 6:20pm.
Jillayne, if HUD puts these rule changes in place, aren't loan originators going to have an incentive to update their systems and train their people to make sure the GFE gets filled out properly so they are in compliance? The cost of compliance is one of the objections they have raised.
Jack Guttentag ("The Mortgage Professor") is one person who seems to think what HUD proposes to do with the GFE is worthwhile (see Pt. 1 of his three-piece series here and Pt. 2 here.
Without taking sides, I guess one difference between the disclosure approach and creating a fiduciary duty for loan originators is that with disclosures, you are trying to provide sunshine for consumers to make better decisions themselves (an approach that HUD's own studies suggest doesn't seem to work all the time). With the fiduciary duty approach, aren't you basically giving consumers the right to go back and sue somebody after they decide they've been screwed? Some lenders might just chalk that up as part of the cost of doing business.
But because there could be a great deal of leeway for a judge to interpret whether a loan originator has breached their fiduciary duty, I wonder if given a choice, lenders would take the beefed up RESPA disclosures over fiduciary duty as the lesser of two evils.
I also wonder if the incentives for packaging settlement services like title insurance with loans aren't the industry's bigger problem with HUD's proposed RESPA rules.
Jack doesn't seem to think that HUD's solved the problem of consumers being overcharged for settlement services by instituting tolerances on the cost estimates provided on the GFE. Here's what he has to say on the issue in part two of his series:
"The most disappointing part of the proposed good-faith estimate is that it leaves untouched the odious network of relationships between loan providers and third-party service providers, which raise the cost of these services to borrowers. Mandating that a title charge of $1,000 on the good-faith estimate can't be more than $1,100 on the HUD-1 closing document doesn't accomplish much if the charge ought to be $300.
"Although it is not possible to know what the charge would be in a properly functioning competitive market, we do know that the perversely competitive markets we have now encourage high prices. Competition is perverse when service providers market not to purchasers but to the entities that refer the purchasers to them. The loan providers who refer mortgage borrowers to third-party service providers share in the overcharges -- sometimes legally, sometimes not."
It's interesting that Guttentag's vision of how things ought to work is a twist on the solution HUD thinks it's come up with by offering incentives for (but not requiring) the packaging of settlement services. Guttentag:
"The remedy is well-known and well-tested. It is to require lenders to pay for all services that they require from borrowers. If lenders want title protection, they should buy it and pay for it, passing the cost to borrowers in the rate and points. The cost passed through would be a small fraction of what borrowers pay now, as lenders are large and knowledgeable purchasers that can buy in bulk."
That last idea -- that lenders can negotiate better deals for settlement services, and that they will pass those savings on to consumers in order to compete for their businesses -- is at the heart of RESPA reform proposals going back to 2002.
If you want to "go ahead and leave RESPA alone," does that also mean you don't see anything wrong with the way settlement services are marketed to consumers?
Submitted by Bruce Hahn on July 18, 2008 - 7:17pm.
American Homeowners Grassroots Alliance
After many years in development, it's time to implement the new RESPA regs. In our comments to HUD on the proposed rule, we urged the government to strengthen them. (See our complete comments at www.AmericanHomeowners.org).
While not perfect, the new regs are an improvement. Many regulations turn out to need additional tweaking after implementation. If necessary we can do so with the new RESPA regs.
If we delay until everyone is in agreement, many abuses addressed by these regs will never get addressed. It's time for segments of the mortgage lending/real estate services sectors to stop trying to hide their practices from sunshine and solve some of the problems that these regulations address.
Let's implement the new RESPA regs now!!
Submitted by Jillayne Schlicke on July 20, 2008 - 7:17pm.
Hi Matt,
We're never going to get a repeal of the Affiliated Business Arrangements. Every single person with money to be made from AfBAs (also known as Controlled Business Arrangements) will be lobbying to keep the AfBAs in place.
I'm not so sure the Mortgage Professor's idea of having the lender pay for settlement services would work.
If I own...a real estate company, a mortgage company, a title company, and an escrow company, what incentive do I have to keep settlement service costs LOW?
HUD has proven ineffective at regulating RESPA on a wide-scale. I do not wish to discount the fantastic cases that they've prosecuted.....it's just that there never will be enough money available to regulate every single deal.
Regulation has largely been left up to the states.
Fiduciary duties will mean that mortgage company owners will have to take the time to make sure their LOs are acting with their client's best interests at heart.
Doing so actually will REDUCE the liability of the company owner.
Submitted by Matt Carter on July 21, 2008 - 8:54am.
Jillayne, the theory is that if the new GFE gives consumers the ability to compare a complete loan package -- including settlement services -- they will shop around for the best deal. Unless they priced their services competitively, AfBAs would not be able to compete with the discounted packages offered by lenders.
That's the "sunshine" vs. regulation approach. Create an open marketplace where consumers can help themselves, instead of trying to police a system where settlement services are marketed to real estate professionals, rather than the consumer.
That's the theory, anyway. Some also argue that with incentives for packaging, a few big lenders could end up running the whole show and you would ultimately see less competition.
Submitted by M C on July 21, 2008 - 4:02pm.
HUD is too politically motivated to serve Bankers and Mortgage Bankers at the expense of the consumer. It was HUD that certified in the November 2, 1992 that the YSP disclosure "...would not have anti-competitive discriminatory aspects of the rule with regard to small entities nor are there any unusual procedures that would need to be complied with by small entities."
Since November 2, 1992 the requirement of only Mortgage Brokers having to put a number in a POC of GFE which is not a cost to the consumer (only interest rate, mortgage insurance and closing cost are) has created a firestorm of confusion in the courts and choices consumers make when shopping for a mortgage.
HUD has vastly proved they are too politically motivated (funds from Banks for political campaigns and jobs after leaving HUD) and all the corruption experienced by HUD officials to make such important rules for the consumers.
Is it not odd, HUD Secretary Preston headed up the Small Business Administration when it was exposing HUD’s poor rule making; now he has quickly been indoctrinated into HUD's defending bad rules recently exposed by both The Federal Reserve and The Federal Trade Commission?
Consumers do not care what a provider's revenue is; rather they care about the terms and cost they the consumers have for obtaining the product or service. The consumer can best investigate that when shopping for a mortgage when the GFE is the exact same for every originator without politically motivated with manipulated additions of a YSP. There is no value of YSP disclosure because it is not a cost to the consumer; only interest rate, mortgage insurance and closing cost are what the consumer shops.
Submitted by Jillayne Schlicke on July 21, 2008 - 10:24pm.
@ M C
"Consumers do not care what a provider's revenue is"
Maybe consumer should care about what a provider's revenue is.....especially if it meant they could have received a lower interest rate.
Submitted by Matt Carter on July 28, 2008 - 1:56pm.
Here is "The Mortgage Professor" Jack Guttentag's take on how HUD proposes handling YSPs in the GFE.