The Department of Housing and Urban Development (HUD) next week will transfer hundreds of pending investigations of alleged violations of the Real Estate Settlement Procedures Act (RESPA) to the newly created Consumer Financial Protection Bureau (CFPB), which is taking over responsibility for RESPA enforcement.
The RESPA complaint caseload has been "extremely heavy," with more than 1,500 cases opened in the last 18 months, said Teresa Payne, HUD’s associate deputy assistant secretary for regulatory affairs, in testimony this week at a congressional hearing.
The hearing, conducted by the Insurance, Housing and Community Opportunity subcommittee of the House Financial Services Committee, was focused on regulatory changes and their impact on mortgage loan originations.
Last year, after a lengthy battle with real estate industry groups, HUD began requiring lenders to start using new standardized disclosure forms, including a Good Faith Estimate (GFE) that imposes "tolerances" on some fees limiting how much they can differ from initial estimates.
If required settlement services such as title insurance are provided by a company selected by the lender, for example, those fees aren’t permitted to change by more than 10 percent.
Payne said HUD’s RESPA office has answered more than 15,000 emails and handled more than 4,700 phone inquiries since the new GFE was introduced, the "vast majority" of which came from industry stakeholders.
She said interviews with borrowers show they are receiving more accurate estimates, and costs at closing are being held within allowable tolerances.
The new GFE "is holding lenders accountable for lowballing and bait-and-switch, which have made estimates closer to the actual closing costs," Payne said. "In some cases where tolerances were exceeded, borrowers received refunds for the overage from loan originators."
HUD has assisted individual borrowers in saving "hundreds or thousands of dollars" through GFE tolerance violation cures and loan term corrections, she said.
Anne Anastasi, president of the American Land Title Association, disputed those claims in her testimony.
"While designed to provide more accurate disclosures, tolerances have had the opposite effect," Anastasi said.
To avoid a tolerance violation, she said, some providers overestimate fees that are under their control, ensuring that if some fees outside of their control increase, "there will be a sufficient buffer to prevent a tolerance violation," she said.
"Even if a tolerance violation occurs, many consumers express surprise at the prospect of the refund, and show no understanding of the tolerance concept."
HUD has continued to enforce RESPA’s anti-kickback provisions, announcing two legal settlements this week in which real estate brokerages allegedly received illegal payments for business referrals.
Most recently, California-based lender Prospect Mortgage LLC had agreed to pay $3.1 million to settle allegations that the company entered into sham affiliated business arrangements in order to pay kickbacks to real estate brokers, agents, banks, mortgage servicers and others who referred business to it.
In the other case, Fidelity National Financial Inc. agreed to pay $4.5 million to settle allegations that it paid illegal kickbacks to potentially hundreds of real estate brokerages for referring title insurance, home warranty and other business to the company through a Web-based transaction management platform, TransactionPoint.
HUD’s office of RESPA and Interstate Land Sales has 21 staff members, Payne said, all of whom are located in Washington, D.C.
The increased caseload has required greater coordination with state regulators, and HUD’s RESPA office has also been working more closely with the U.S. Department of Justice and HUD’s Office of Inspector General, Payne said.
Authority for enforcing RESPA will be formally transferred from HUD to the new Consumer Financial Protection Bureau on Thursday, July 21, with 37 HUD staff members scheduled to become CFPB employees by the end of the month.
CFPB has already begun work on new standardized loan disclosure forms that will replace the GFE developed by HUD and disclosures drafted by the Federal Reserve under its authority to enforce the Truth in Lending Act (TILA).
Congress has mandated that CFPB propose new model loan disclosure form within a year of asuming the authority to enforce RESPA and TILA, or July 21, 2012.
The Mortgage Bankers Association has complained that the presentation of closing costs on draft loan disclosures put forward by CFPB for public comment is inconsistent with the RESPA tolerance requirements currently in place.
Battle over home warranties
In the meantime, the real estate industry is backing legislation that would exempt home warranties from RESPA’s anti-kickback provisions.
Real estate industry groups like the National Association of Realtors have taken issue with an interpretive rule HUD published last year, which detailed when RESPA’s anti-kickback provisions apply to compensation paid by home warranty companies to real estate brokers and agents who sign clients up for their products.
HUD ruled that home warranty companies can compensate brokers or agents only for performing "actual and necessary services" unrelated to marketing their products, such as conducting inspections of items to be covered by a warranty and recording serial numbers of items to be covered.
Marketing performed by a real estate broker or agent on behalf of a home warranty company to sell a warranty to a particular homebuyer or seller constitutes a "referral" to a settlement service provider, HUD said.
NAR, in a letter to HUD after the interpretive rule was issued, maintained that home warranties are not required by lenders and should not qualify as "settlement services" governed by RESPA.
"HUD should clarify that the interpretive rule only applies to service arrangements between home warranty companies and real estate brokers or agents predicated on transactionally based compensation," NAR said. "Flat-fee marketing agreements, therefore, fall outside HUD’s interpretations."
But HUD stuck to its position, and on on July 7, Rep. Judy Biggert, R-Ill., introduced HR 2446, the "RESPA Home Warranty Clarification Act of 2011," which would exclude home warranties from RESPA, and require that home warranty companies paying real estate brokerages and agents to market their products to disclose that fact to consumers.
Payne told Biggert — a longtime NAR ally, and the chairwoman of the Insurance, Housing and Community Opportunity subcommittee — that the Obama administration has not yet taken a formal position on the bill.
But, she said, "HUD has concerns that the proposed legislation could limit consumer protection in the context of home warranties and lead to higher closing costs for consumers through referral fees." That, Payne said, "would be in contrast to the purpose of the statute and would erode the statute’s consumer protections."
HUD is recommending a study that investigates the quality of home warranties, business practices around their sale, and representations made to consumers when home warranties are marketed to them.
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