Let's play Bargain Hunt

Submitted by Fred Carver on March 14, 2008 - 4:28pm.

Good Day...The questions is who's next to be posted as Bad on HUD, Realtors Commissions? Building Inspectors, painters, Contractors? maybe the mortgage industrty was and is over charging, but isn't negotiable? It is in Canada.
Sounds like the thin edge of the stick, anyone in the service industry in the real estate world. Is it coming...maybe everyone's service rate will be posted on HUD.

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Submitted by Matt Carter on March 26, 2008 - 4:11pm.

Thanks for your comment Fred. Hey, where is everybody else? In the interest of jump-starting the discussion, I'm posting all of the comments the public has submitted to the Federal eRulemaking Portal (cited above) into our comments section. Why am I doing this? Well, the way the portal is set up, it's kind of a pain to read the comments -- you have to download each comment. There are some insightful comments here (some are merely interesting) and it's a shame to think that they might not otherwise see the light of day. So here they are, warts and all. Presented in the order submitted, with the exception of the last two posts, which I bumped to the end because they are so long (they are also probably the most thought out). ********************************** Comment Submitted by Steve Evans, Stewart Mortgage Services, Inc. I am all for transparency in our industry, rooting out unethical people and providing an easier way for borrowers to shop loans. But how can we do this if the banks aren't regulated in the exact same way? Bank originators don't need to, and do not, disclose YSP or other fees and this gives them a HUGE opportunity to hide compensation form the Borrower. If the mission is truley for transparency in the industry and protecting the borrower, then make the banks follow the same rules!! Anything short will not accomplish your goals. Thank you! ************************* Comment Submitted by Larry M., Major Mortgage Lender I'm a Loan Officer with a Major Lender and have been for the last 8yrs. I spent my first year in the "broker world" and I can attest to differences in both business segments. I agree that a uniformed GFE or Closing Cost Estimate should be used. I say this because there is a "vast" majority of the general public that won't take the time to read or perform any due dilegence prior to shopping for a mortgage loan. This has always been true and it will remain so. Therefore I do agree that "some" form of standardization is needed on this document. The overall disclosure process is an Attorney's dream. This will never be simplified. As long as attorneys review and have their say in this part of the process....it will "never" be streamlined. I was "trained" too personally go over these documents with clients. Some don't require this consultation but the greater majority of most applicant(s) do. When necessary, I take the time to go over each individual disclosure with my client and make sure they understand what each disclosure means before they sign. Again not all clients need this. I do this for my piece of mind and too provide a high level of customer service for my clients. It is also "sales 101" ... it helps builds rapport, this leads to better service which hopefully leads to future referral business from the client and/or the REALTORS involved. Which leads me to my point. WE ARE SELF EMPLOYED!!! There are a few loan officers paid a base salary though only a handful of Bank. This not common. I personally know many Loan officers in my city, it's a fairly small group overall in town, who work for other banks and Mortgage Brokers who I consider independant. The large "majority" of my fellow Mortgage Professionals are straight 100% Commission based employees. In other words we are self employed. If we're not getting and "closing" the business then we don't make any money to feed our families and pay our bills. WE ARE SELF EMPLOYED. However, since I'm with a Major Company and have a large name behind me, my employer "keeps" 40-50% of the revenue I generate (the house). ALSO, I'm capped on the amount of additional compensation I "could" generate through an origination point. When I compete with brokers, I seldom charge an origination point so that I have a chance of capturing that clients business. Brokers get paid off points and YSP. Brokers and the mortgage bankers working for that broker, can beat my rate and still make good YSP because of the Wholesale relationship with a lender......At one point in this business, I would get beat on a loan/rate by my own company....because a broker was using our Wholesale rates. Brokers should not be required to "give" back the YSP. They have overhead just like any small business. To regulate and institute "new" laws, requirements, training, etc., etc. is fine....something needs too be done....and I'm all for it.....BUT, to regulate my pay. To tell a self employed professional how much money they can make or cannot make, borders on Socialism. As a professional mortgage loan officer; it is my responsibility to the REALTORS, the HOME BUYERS, the SELLERS, (the SELLERS BECOME BUYERS on another transaction)...it is my responsibilty to make this process "successful." FREE of STRESS, FREE of PROBLEMS. I have many important people "counting" on me to get the transaction completed. I market to Real Estate professionals on my very "level of service and expertise." It's what makes me successful. On the other hand, if I don't do these things successfully with a high degree of service, knowledge, capacity to manage people and the loan process....then I don't get paid.... Anything can go wrong on a deal and it usually does...it's the mortgage professional with the right attitude, loan product knowledge and experience that keeps everyone happy and prevents or minimizes any pitfalls. If compensation regulations "stiffles" the very nature of commerce...then eventually every "person" and I use this word....not professional....WILL BE AN ORDER TAKER. If you think there's problems "now" with our industry....Just think what you'll get when your sitting in front of $12/hr bank employee. Yes, eventually this person could eventually gather enough experience and knowledge to be consider something of an asset to a REALTOR or Home Buyer. But I've left out one very important factor to all this. STRESS. .... it must be a number like 95% - 98% of all current mortgage professionals.... WE Live off the STRESS... WE Live with the STRESS... WE manage the STRESS....WE FEAST off the STRESS....>>>> HOW??? WHY??? >>> Because, Not on Every Deal but on some, if we do a great job and our Clients are willing to pay for our SERVICE, our KNOWLEDGE and our EXPERTISE....>>> Then we can make some money. Just like any self employed person/business sets out to do. Take that away and many will leave the industry and with it will go the SERVICE, the KNOWLEDGE and the EXPERTISE....that so many REALTORS and HOMEBUYERS have been counting on for years and years. I'm said my peace. Thank You. Larry M. ******************************** Comment Submitted by Natalie Kraft, Accurate Title Company (Attachment) One of the largest misconceptions in the closing process is the cost of recording. There are often accusations that Closing Agents intentionally overcharge for recording fees. This is not usually the case. It is nearly impossible to correctly ascertain the recording costs prior to closing. While the cost per page and per document is known, the exact number of pages and documents is rarely known in advance. Many times an additional document(s) are required which are unknown at the time of application.and preparation of the GFE. The following are examples of additional documents or pages that are not previously known: 1. A release of a prior mortgage or judgment that needs to be filed which has turned up on the title report. 2. The legal description is too long to fit on the face of the documents itself and an addendum must be included with the document for this legal description. 3 An additional document that must be recorded to ensure good title, such as a Death Certificate. Quit Claim Deed, Marital Waiver or Affidavit.. 4. There are multiple signers and an additional page is required for all the signatures. These are but a few of the instances where the actual recording costs can change and would not always be known prior to preparation of the HUD-1, let alone when the application is taken and a GFE is given to the consumer. When you say on the GFE that the Government Recording Fees cannot change, then you are misleading the consumer. It should either disclose the price per page and document or explain that while the cost per page/documents is fixed, the total amount is subject to change based on the numbers of pages and documents. Otherwise, you are going to really confuse the borrower or seller who will think they are being over-charged for recording fees when this is not true. If you are comparing the GFE with the HUD-1 the Recording Fees will rarely be exact and this will cause a lot of confusion. A better way to show this on the GFE would be to show "estimated" number of pages/documents and cost for each. Then the consumer could count them at closing to ascertain that they are not being over-charged. Many times the number and pages of the documents are not known by the Closing Agent until the documents arrive from the lender. However, the Lender requires the HUD-1 be prepared prior to release of these documents. This part of the Proposed Changes is not going to simplify and improve the process. Instead it is going to cause confusion to the consumer. Closing agents will see this as a yet another hidden liability, and stop the closing, to the detriment of the consumer, if additional required costs need to be incurred, and loan originations will be held responsible for items they could not possibly have known about at the time of preparation of the GFE. The Recording Fee section of the proposed GFE should be changed to stop confusion and benefit everyone, most especially the consumer. ************************************* Comment Submitted by Laurena Psenner, California Escrow Association I feel strongly that the Settlement Servicer/Escrow Practitioner should NOT be a part of the disclosure process as it relates to interest rates, yield spread premiums, and fees in connection with their financing option. We currently do not have financial input other than the fees for title and escrow services. Our role should continue to be limited to the preparation of the final RESPA related HUD-1 Settlement Statement and recordation of the documents. As a Title Insurer, our fees are posted with the California Department of Insurance, an Agency that keeps us accountable. We have always been a neutral third party, complying with the instructions of the principals. The Loan process, other than the recording of the Deed of Trust, final funding and disbursing of the loan proceeds, should not even be considered a part of an Escrow Officer's job. In California, an Escrow State, we only have loan documents signed in our office as an Accommodation service for the Lender, Bank or Mortgage Broker. I would encourage Escrow staff and Settlement Servicers to put the responsibility of signing the loan documents back in the hands of the Lenders. Oh, wait! Perhaps that's how all this came to be in the first place? Loan Officers that may only make loans based on their potential income, and not have the consumer's best interests in mind? Focus on legitimizing that part of the process, and leave the Escrow practitioner out of it. I oppose any mandatory "script" that would give the consumer the impression that the Escrow practitioner and/or Title Company has any input as to the Lender charges. *********************** Comment Submitted by Mary Jane Zeigler, Coryell County Land & Abstract Company I think the "script" needs to be completed by the lender and delivered to the borrower and executed BEFORE THE CLOSING and then the docs needs to match the script. One problem we confront on a daily basis is that the documents which typically arrive for closing at the very last minute, do not match what the borrower has contracted for or is expecting. It doesn't solve the waste of the closing agent's time when they have to revise closing docs while the borrower is sitting at the closing table, or when they have to return for another closing. Closing agents are not compensated for multiple downloads of documents or duplication of effort required for lender to redraw and send docs. Borrowers need to acknowledge that they know what they have contracted for and lenders need to disclose all details BEFORE the actual closing. Then the docs need to match the disclosure. Maybe what we really need is to encourage people to borrower less, rather than borrowing the maximum amount under credit conditions which might not last. If borrowers were required to have more equity in their collateral, there would not be as many foreclosures. ********************************* Comment Submitted by Tiffany Taylor-Rodriguez, Platinum Funding I'm honestly trying to understand the logic behind making it mandatory for Mortgage Broker's to disclose YSP, but allowing big banks and lenders to charge YSP and not have to disclose it to borrowers. Why is that? Just like licensing laws I think these disclosures should apply to all mortgage loan originators. Perhaps I'm missing some information, but after 17 years in the mortgage industry, I just can't find the logic in these laws... ******** Comment Submitted by Christy Brady Janssen, The Law Offices of Christy Brady Janssen As a solo practitioner, I rely heavily on my paralegal for closings. It is not the closing agent's responsibility to explain every single lender-imposed fee to the borrower. This should be handled by the lender at either the commitment letter stage or the good faith estimate stage. This proposed rule is 1) confusing and unclear (not to mention lengthy); 2) does not promote shopping by the consumer; 3) it is ill timed given the current conditions in the housing market; and 4) the requirement of a closing script required to be read by the closer to the customers at closing raises a host of problems, not the least of which is the unauthorized practice of law. In short, this bill is a disaster. ****************************** Comment Submitted by James Dewey I am an attorney-title agent in a small town. While I can appreciate a need to have a better disclosure of broker fees and some way to link the good faith estimate to the actual closing costs, most of the proposed changes will neither simplify nor improve the process of obtaining mortgages. I expect a major conflict between the proposed fee agreements with our Louisiana bar association rules. I also believe that the idea that recording fees are fixed is not realistic. I don't know what has to be recorded until I receive the loan documents and don't get that until after I have supplied my estimate of recording costs, which is normally done at the time I issue a commitment, long before I know what is going to be include in the mortgage documents. I actually try to compare the GFE with the closing costs, and normally find errors in the insurance estimate, the appraisal fee, and the per diem. I also sometimes find errors in lender fees, for which I can't see much of an excuse. Rather than change the HUD form, come up with a new form to compare the GFE with the numbers on the final HUD. Of course, most of my customers are hopelessly confused over costs, APR, good faith estimates, and related disclosures so whatever changes are made won't really help them a great deal. ******************************** Comment Submitted by Peter Cugno, Americas Moneycenter, Inc. I like the proposed GFE, clearer than before. I also very much like the closing script which compares GFE to HUD-1 line by line and any differences. THAT idea is a homerun for borrowers. No more signing under the ether! ********************* Comment Submitted by Dorothy Reik This does not address the increase in margin on Option Arms which results from "yield spread premiums" and also refusal by the borrower to agree to a pre-payment penalty if the broker is gettin a large "ysp." Option Arms, when handled appropriately, are useful debt instruments, but they have been abused. I personally have one and my interest rate went to 7% but now it will go down to 4% because I have a 2.05% margin. Abuse of these programs has resulted in very high margins and inflated interest rates due to 3 point "yield spread premiums" offered to brokers by lenders. I always advised my clients to buy the lower margin and they did. They are all fine. ************************** Comment Submitted by Anita Salem, Homeowner This new rule was just brought to my attention and, as a homeowner, I would like to express my appreciation for the steps you are taking in simplifying the mortgage process. I am a college educated professional and have owned four homes. With each purchase I have been frustrated and often confused by the amount and quality of the information provided to me by my lenders. It's no wonder that predatory lenders have had such success selling their loans to people who have not fully understood the impacts. This revised GFE is a great step forward in simplifying the loan process. The financial impacts are clearly stated and organized. The section on trade-offs and the shopping cart are also great tools to help borrowers better understand their options. Great job! ******************** Comment Submitted by Dan Kratochvil 1. The APR noted on the TIL always provided a good measure to compare different loan options---how does the proposed rule incorporate this form? It appears that the new propsed forms could show four equal loans with four differents APRs. 2. How will a federal or state bank show how much it is making on a loan; it earns more than what appears on its GFEs. 3. In a purchase, where the seller pays some closing costs, how will the seller paying closing costs affect the completion of the GFE? ******************************* Comment Submitted by Kelly Weseman, Calder Home Loans, Inc. To Whom It May Concern: My name is Kelly Weseman and I am a Mortgage Broker that works for Calder Home Loans, Inc. We do business in both Oregon & Washington. I have been in the business for about 5 years now and in late 2006 my wife started our own mortgage brokerage company called Calder Home Loans that we now run & operate. This new "Good Faith Estimate" proposal that RESPA is trying to pass, requires Mortgage Brokers to have 3 other competitors give quotes on their clients loan is absolutely discriminative to mortgage brokers and completely unjustified! In no way, shape, or form should we have to "by law" be quoted along side with other competitors on our services. One reason is that unless we are the 4th broker to make a quote on the deal we will not be chosen because it will all come down to who ever is the most desperate for getting the deal and under cutting the other competitors quotes. The person with the cheapest quote wins and all regards to quality, customer service and financial guidance for the clients & their future will suffer. Like most of the good mortgage brokers left out there, we rely heavily on happy & satisfied repeat clients that trust and appreciate our services. This is the way that we have weathered this market and stayed in business thus far. I can not believe the blame and restrictions that are being proposed and placed on mortgage brokers right now. It's as if all of the major banks in America have managed to avoid taking the blame in any way for the poor housing market we are in today. The banks are the ones that make all the loan programs and offer them to brokers to sell to the public. If they offered these poor loan programs that are getting both them and the clients into financial trouble, then the brokers should not be the ones taking all the blame and punishment for selling the loan programs that the banks are offering. If they didn't think the loan programs were a good and profitable idea, then they wouldn't have offered them to brokers to sell to the public. Like any honest business, brokers would not be intentionally selling a service to a client if we were not trying to help them achieve what they want and put them in a better financial situation for the future. Brokers want clients to refer them to more clients. Mortgage Brokers could not predict the poor housing market that we are sliding into any better than the big corporate banks could. The difference is the banks had and still have all the control and the brokers have none. If Mortgage Brokers have to do this, then why don't all parties involved have to do the same? The Lender, the Realtor, the Appraiser, the Credit Agency, the Title & Escrow company, the Homeowners Insurance Agency and so on should all have to be quoted along side their competitors as well. I don?t wish this upon any of these parties but if this new proposal goes through, then all parties should be subject to the same conditions because they are all involved and all getting paid for the services that they provide. Singling out Mortgage Brokers as the scapegoat is just plain discrimination. This will only hurt the housing industry more and put us all in an even worse market situation than we are in. Clients choose to pay for our services just like you would pay for a doctor or lawyer. You wouldn't want to pick a doctor to perform a major surgery that you needed in order to save your life based on how cheap the doctor will work for, nor should you with major financial decisions that could affect your long term future. I hope this proposal gets thrown out immediately! I feel I have made my point and think anyone that reads this could relate to what this would do to all the small business owners out there trying to make an honest living for providing much needed knowledge and services. This would eventually put all Mortgage Brokers out of business and give the big Corporate Banks that much more control over our society to do whatever they want and make the general public their puppets. I don't think that they did a very good job with the power and control they already had over our housing market and realized that they should try to put the blame on the smaller guys that can?t fight back while they scramble around to try and fix their mistakes. So for anyone that agrees with me in any way, please let the proper sources know! Your opinion counts and your voice should be heard! We work for the people! Sincerely, Kelly Weseman Calder Home Loans, Inc. ************************** Comment Submitted by James Biggs This is all good but it does NOT do any good if the lender does not give out this paperwork until the loan is submitted to underwriting! This PREVENTS buyers from shopping. This is the standard procedure of Countrywide. This issue was verified again on 3/19/2008 in Scottsdale, AZ at a Countrywide office. *************** Comment Submitted by James Caldwell, First Citizens State Bank Regarding: Department of Housing and Urban Development 24 CFR Parts 203 and 3500 (Docket # FR-5180-P-01) RIN 2502-A161 Real Estate Settlement Procedures Act (RESPA): Proposed rule to simplify and improve the process of obtaining mortgages and reduced consumer settlement costs. This correspondence is in response to the subject proposed RESPA Act changes appearing in the Federal Register dated 3/14/08, Volume 73, #51. I see a number of proposed changes that I think would negatively impact the consumer: 1. In the Good Faith Estimate shown on page 14097, clarity needs to be added that a customer does not have to lock in the rate at the time the Good Faith Estimate is given. It appears as though the rate is shown as an item that can not change. That could be very confusing and lead to only best efforts pricing which is higher than cash settlement. Many clients are not ready to lock in a rate at the time they submit their application. There needs to be greater flexibility within the form to allow clarification that pricing/rate can be set at a later date. 2. Items such as surveys and pest inspections can vary significantly between properties and need to have greater than a 10% flexibility for variance between the GFE and RESPA. 3. The proposed Good Faith Estimate is put into a narrative form which seems very busy and is less readable than the concise format of the existing Good Faith Estimate. This GFE needs to be cleaned up and reduced to a 1 page format. If not, the customer may not be inclined to read it and they will be less informed than under the current program. This voluminous attempt at simplicity and clarity is an oxymoron as well as a huge step backwards. Try it out on some consumers, I have, and you will find that it is less consumer friendly than the existing GFE. You need to roll this out into the real marketplace rather than mere desk top planning. This needs real market testing with an independent marketing firm to test its "simplicity and clarity" with the consumer. I think you will then understand my concern. The real issue is putting All Lenders under the same Regulation and disclosure and enforcement as the banking industry. If that was done none of this proposal would even be considered. If you have questions on this please give me a call. Sincerely, Jim Caldwell ******************8 Comment Submitted by Mark Vogel There are some good points in the RESPA reform area but I'm still unclear as to why we keep TARGETING Mortgage Brokers. I'm sick and tired of the continued attacks on the Broker community. We provice a service that cannot be obtained elsewhere. We provide a place to go where we can shop various lending sources and offer a wide variety of lending programs and interest rates. You keep targeting the yield spread premium. Do you not understand that if you go to buy a car, the car dealer also receives a yield spread premium for delivering that car loan to their list of lenders? What do banks and mortgage bankers not have to disclose their yield spread premium? Are you too stupid to realize that they are being compensated the same way? Why are you trying to close down the mortgage broker? Are you trying to create a monopoly for the banking industry? Do you realize that you will be forcing people to only have the opportunity to obtain a mortgage loan from a small list of banks - who can act like the oil companies and they can set the interest rate wiohout competition and pad thei pockets just like the oil companies. As a Mortgage Broker, since I have to disclose my total income on every loan to the borrower, then everyone should - including the oil companies, food industry, car dealers and banks. Put everyone on the same playing field and create FAIR COMPETITION. I want to know how much profit the car dealer gets when he sells me a car and what they get paid for delivering the car loan. Do you really think that is costs $25,000 for a car and that they are not making any money at all????? Your simplified Good Faith is not simplified and is more confusing. Make a standard Good Faith Estimate that looks just like the HUD 1 Settlement Statement. Do not create any additional forms as more paperwork is not helping, it just creates more confusion. Apply your brains to helping level out the fair business. Do not create a monopoly for the banking industry. You all need to get a grip on reality. You have no clue. ************* Comment Submitted by Elizabeth Jose I urge you to adopt these procedures to make the home purchase process more transparent. I am a 25 year old law student and in the next few years I hope to purchase a home. Even though I am familiar with contracts, I am still afraid that I will be taken advantage of when buying my first home because the process is so confusing. I have heard horror stories of lenders promising one rate and then changing to a higher rate after the down payment has already been paid, leaving buyers the choice of taking the more expensive mortgage or losing the down payment. I am especially excited about the provision of the rule that will force lenders to gaurantee that their estimates are accurate and will allow buyers to comparison shop using the good faith estimate. My fears about being taken advantage of or not understanding the process cause me to delay preparations for buying my first home. I believe if the mortgage process were more consumer friendly then people would feel less threatened when buying a house and this would lead to more houses being sold. Please adopt these new rules. ************ Comment Submitted by Johnny Walker, Century 21 Schutjer Realty Interesting proposals. As a Realtor and mobile notary public signing agent, I would welcome any additional efforts at more transparency. However, it was my experience over the last three years that not only did consumers not understand what they were signing, most weren't interested in the details. Many were merely interested in getting their purchases closed or their refinance transactions funded. These changes mean nothing if ALL lenders, including banks and credit unions, are not included. In my experience, all kinds of fees are hidden regardless of which institution is originating the loan. It would not be a fair business practice to punish third party mortgage originators, while financial institutions such as Countrywide and Wachovia (formerly the World Saings division) offer products that put the consumer at risk the day the sign the loan. Other suggestions I would make would include prohibiting negative amortization loans for anyone with a FICO score below 780, or altogether for primary residences. Stated income loans are often referred to as "liar's loans" and for good reason. I would eliminate stated income entirely. Had the industry practiced good underwriting principles all along, we wouldn't have the housing and liquidity crisis that we are currently enduring. Again, the bank loan officers are just as guilty of putting consumers in loans they couldn't afford the day the signed the documents as third party mortgage orignators, so I would hope that any future RESPA changes would be universally applied. ******************** Comment Submitted by Mark Vogel (2nd Comment) Everyone should be disclosing YSP, Servicing Premium including BANKS. Stop putting all the disclosures on the Mortgage Broker. Put everyone on the same playing field. Banks also know their profit on the loans just like we do and they should have to report the income on the HUD as well. ********** Comment Submitted by Steve Shepherd One of the goals listed in the proposal says that the new regulation would facilitate shopping. The proposed regulations claim that with the inclusion of six pieces of information you would have a GFE application. Those six items include: Name, SSN, property address, gross monthly income, borrowers estimate of the house price, and amount sought for the mortgage loan. Most mortgage companies provide prequalification information to prospective applicants upon request. This is very common for most prospective applicants. Thus, most shopping is done without a "property address". If regulators want mortgagers to complete GFEs within reasonable estimates to try to facilitate shopping, why would the "property address" be needed for the GFE application? Usually when a property is identified, the borrower needs a loan and is captive to the mortgager. The fundemental problem with the GFE is that the GFE is not filled out in good faith, and not in a way that allows for the shopping of settlement services. Thus, if a property address is needed, the new regulations have not increased the likelihood that a GFE will be provided to a prospective applicant. ************************* Comment Submitted by Cindy Meyer, All California Mortgage I am just a paper-pusher (work on the Administrative side of a mortgage broker's office), but I have been in this industry forever - well, it feels like that but it has really only been 15 yrs. Although I think it is great that everyone is trying to come up with new forms to make sure the borrower fully understands the loan, I really feel like the whole thing is being approached incorrectly. When I was a loan assistant and the borrower seemed to be confused, I would have them recite the details of their loan program to me. Borrowers have to sign and read so many forms that they become numb and now we are going to be giving them MORE to read, sign and listen to. Why not have a blank form that the borrower fills out explaining the loan program, payment, etc? This is really the only way to make sure that they know what they are getting into. If they fill out the form incorrectly, then the loan advisor will know what information they are not understanding. This, to me, seems better than having sign a ton of forms and hoping that it is all sinking in. ***************** Comment Submitted by Howard Lax (Attachment) Your Name Your Company Your Address Regulations Division Office of General Counsel Department of Housing and Urban Development 451 Seventh St., SW., Room 10276 Washington, D.C. 20410-0001 Re: Real Estate Settlement Procedures Act (RESPA): Proposed Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs, 08-01015 [FR-5180-P-01; RIN2502-AI61] Dear Secretary Jackson: We are most concerned that some features of this rule might not work on our side of the looking glass. We would like to present these concerns to you. Definitions HUD defines “origination service” very broadly. A PEO or a temporary help agency providing staff, an accountant providing annual audits for an FHA correspondent, a quality control audit service, the services repairing the copier and maintaining the computer system, and the attorney advising the lender, could all be providing “origination services” since these services are required for the lender to originate loans. We trust that HUD will restrict its definition so that none of these extraneous service providers are expected to provide a GFE and other disclosures to consumers. HUD includes other terms in its rule that are not defined. · HUD mentions an “application for a prequalification” in the definition of a “GFE Application.” but this term is not defined or used elsewhere in the regulation. · HUD mentions “intermediary transaction” in the definition of mortgage broker and in relation to table funded transactions, but this term is not used or defined further. We do not understand what HUD means by this term or how an “intermediary transaction” differs from a table funded transaction. We have no idea why these terms are in this rule, or what purpose HUD intended by placing these terms in the rule. Undefined terms imply that there is some duty owed to consumers that is not defined. We anticipate that these terms will foster litigation as an offensive tool by some attorneys, and force lenders and mortgage brokers to pay class settlements and significant legal fees to avoid paying greater litigation costs. Tolerances HUD is putting tolerances on settlement costs when comparing the GFE and the HUD-1. How can HUD do this, given that at least two Courts of Appeals rejected HUD’s assertion that HUD has the power to control settlement costs? See Santiago v. GMAC Mortgage Corp., 417 F .3d 384 (3d Cir. 2005) and Kruse v. Wells Fargo Home Mortgage, Inc., 383 F .3d 49 (2d Cir. 2004). Further, HUD is imposing tolerances on all fees, and not just mortgage broker and lender fees. How can HUD control increases in costs that are imposed by state and local government units (recording fees and transfer taxes)? Recent US Supreme Court decisions hold that the states retain sovereign immunity from enforcement of federal laws. See the US Supreme Court decisions in Kimel v. Florida Board of Regents, and Alden v. Maine. One of the earliest commentaries on the formation of our federal government stated, “The Framers explicitly chose a Constitution that confers upon Congress the power to regulate individuals, not States.” It is pretty obvious that HUD is “wishing and hoping and thinking and praying, planning and dreaming” (see the theme song of My Best Friend’s Wedding) to limit all consumer closing costs. However, caring about consumers is not going to win the heart of a federal judge. HUD’s objective is to keep mortgage brokers honest, so that disclosures mean something. When a mortgage broker provides an estimate of costs, it must be a good faith estimate. HUD wants mortgage brokers to be accountable for estimates by making mortgage brokers live up to their offers. That is not the way to skin this cat. HUD may achieve the same object by simply tweaking its 1999 and 2001 policy statements. Simply make the GFE a core mortgage broker service. If the GFE is not made in good faith, the mortgage broker is not entitled to receive lender paid mortgage broker fees. Mortgage brokers will get the message that they need to be accurate in their estimates or they will not be paid. Of course, no action is complete without a counteraction. HUD will need to protect mortgage brokers from lender bait and switch schemes if HUD makes the GFE disclosure a core origination service. Lenders cannot be allowed to change their commitments at closing in order to avoid paying the broker. If HUD decides to incorporate tolerances in its final proposal, questions still remain how these tolerances will be enforced. Does the closing agent have an obligation to check the tolerances and stop the closing if the tolerances are exceeded? What enforcement authority does the title agent have to stop a closing? The title agent is obligated to follow the instructions of the parties to the transaction, not the instructions of HUD. What authority does HUD have to stop a transaction where the transaction violates HUD tolerances, especially when Section 17 of RESPA states that RESPA does not affect the validity or enforceability of any sale or contract for the sale of real property or any loan, loan agreement, mortgage, or lien? The idea of tolerances as proposed by HUD is a terrible policy decision. First, HUD should only make a loan originator responsible for costs and fees under the loan originator’s control. Instead of imposing tolerances, the GFE should require a disclosure of which fees and loan terms are committed and which fees and loan terms may float. Loan originators should be given the option of disclosing caps or tolerances, and absorbing rate and fee risks as a marketing tool. Second, the consumer should not have to pay a horrible penalty for changes in market fees and rates. Purchase agreements typically have “drop dead” dates after which the seller of a home is free to cancel the transaction and keep the buyer’s earnest money deposit. If the final costs and fees are not within tolerances, the closing agent is not going to close, and the buyer of a home is going to lose his earnest money deposit. If this rule has any impact it is likely to influence closing agents to collect a closing fee up front, because they must be paid if the closing is cancelled. Any failure to charge the lender for a blown closing is likely to be interpreted as something of value for the referral of future settlement service business, and a violation of Section 8(a) of RESPA. Uniform GFE Format HUD will require a new format for the GFE, similar to the 2002 and 2005 GFE forms proposed by HUD. These forms were hooted down by Congress and by 40,000 comments in 2002, and abandoned by HUD in 2005. A four page GFE form is fundamentally inappropriate for consumer transactions. If anyone reads beyond page 2 it will be a miracle. This is especially true with all of the other HUD disclosures given to the borrower. I challenge Secretary Jackson to stand on the steps of the Capitol building on a nice sunny day, and find ten consumers who have read the Settlement Costs booklet. In addition, there are technical problems with the form, including the following: · Section 3 on page 2 is too small. You could have third parties underwriting the loan, preparing loan documents, providing a review of the appraisal, inspecting the property (there may be two or more inspections, such as well and septic, pests, and city certification of occupancy), etc. There is no room on the page for these additional services. · A mortgage broker or lender has no basis to estimate homeowner and condominium association fees. Association fees vary from project to project, and from unit to unit. There is no standard for any community. · There is no provision for cooperative housing share loans in the form (lease payments/carrying charges, underlying mortgage, association insurance, parking fee, etc.). HUD is also targeting its disclosures at the wrong audience. Instead of paying a consultant hundreds of thousands of dollars to conduct disclosure surveys around the country, HUD should simply ask homeowners who call the HOPE NOW line why HUD disclosures failed. HUD needs to improve disclosures to reach those who “do not get it,” instead of those who do. Our secondary concern is the time and cost of implementing the new form. In the past, HUD published its format as a scan of a poor copy of the actual form. That might be sufficient for the Government Printing Office, but it does not help lenders and mortgage brokers who need to reprogram their loan origination systems (LOS) to use the new GFE format. At the very least, HUD should publish the GFE form in Word (.doc), Open Office (.odt), rich text (.rtf), hypertext markup language (.html), portable document text (.pdf), and DOS text (.txt) formats so that loan originators can import the form as a custom document into whichever LOS program they use, without paying for a software update. Uniform Settlement Statement Format Borrowers, sellers, closing agents and lenders have struggled with a settlement statement that starts on page 2 for too long. The HUD-1 format will remain substantially the same. It was my impression that HUD wanted the GFE and the HUD Settlement Statement to mirror each other to permit easy comparison of estimated and actual costs. If the GFE is four letter size pages, and the HUD Settlement Statement is two legal size pages, with different placement for costs and fees, comparison of the estimated fees to actual fees will be very tedious. Input of GFE numbers into specialized software will be necessary to make sense of these forms and to compare estimates to actual costs. HUD is handicapping its own disclosure forms and shooting itself in the foot by bringing different forms to the marketplace. Any judge that reviews these forms will overturn the rule because the forms created by HUD do not satisfy the stated purpose of the rule. Ideally, there should be one form for both the GFE and the page of the Settlement Statement that details closing costs. It should be simple to compare closing costs to estimated costs if the same form is used for both the GFE and the closing, with one column for the estimated fees and a second column for the actual fees paid by the borrower. HUD elected instead to mandate a GFE, a HUD Settlement Statement, and a script that are all substantially different forms with the same information placed in three different formats. This is like giving the borrower a Torah scroll, the King James Version of the Old Testament, and a copy of the movie “The Ten Commandments.” All three contain the same information, but no borrower would believe it. Estimated Fees Under the current rule, the GFE may contain ranges of fees if the exact fee is not known. In this proposal, a range of fees is not mentioned. How can the broker estimate recording fees and other fees that depend on circumstances beyond the control of the broker or lender, and which are not know until closing? HUD should continue to allow mortgage brokers to provide estimates, but the basis of the estimates should be justified. HUD may find that adding a list of reasons for estimates to the end of the GFE provides more information that will help consumers than a high wild guess designed to protect the mortgage broker from liability for underestimating fees. Applications The new rule will define a “GFE application.” The GFE application will include limited information, and anyone who obtains any of this limited information must provide a GFE. Presumably, anyone who prequalifies a buyer will be required to provide a GFE. This will greatly expand the scope of persons subject to the rule. Does a real estate broker who asks a buyer for financial information before advising the client to accept a purchase agreement need to provide a GFE to the buyer? This possibility does not make sense. It is also not clear whether a mortgage broker can ask for less than complete information to prepare a GFE application. Second, a social security number is only needed to obtain a credit report, and a credit report should only be requested when the borrower initiates a credit transaction. The purpose of submitting a GFE application is to shop for credit, and not to apply for credit. The definition of a GFE application states, “Neither a GFE application nor an application for a prequalification is a mortgage application for a federally related mortgage under this part.” FTC staff opinion letters indicate that shopping for credit does not justify a loan originator to obtain a credit report. Mandating that a borrower must provide a social security number to a loan originator, and that the loan originator must obtain a credit report to prepare a GFE, conflicts with the consumer protections found in Section 604(a) of the Fair Credit Reporting Act. Furthermore, HUD anticipates that each mortgage broker the consumer visits will prepare a GFE application, obtain a credit report, and provide a GFE. Ordering multiple credit reports in this manner will lower the consumer’s credit score and potentially disqualify the consumer from receiving the very best credit terms available in the marketplace. If the rule as proposed forces the loan originator to provide the disclosed credit terms, and the consumer’s credit score drops below secondary market underwriting thresholds due to multiple pulls of credit reports, the loan originator will not be able to sell the loan into the secondary market. To avoid this issue, loan originators may require consumers to sign exclusive loan origination contracts that restrict the consumer’s right to shop for better loan terms. Any breach of the exclusive loan origination contract would be a default in the terms of the loan made to the borrower, and result in the lender refusing to fund the loan or permit foreclosure of the mortgage soon after closing. HUD should allow loan originators and non-brokers to collect only the financial information they deem necessary to (a) decide whether to do business with a consumer, and (b) advise a client whether to do business with a consumer, without providing disclosures. There is no need to create a GFE application, or to dictate what information can or cannot be collected by a loan originator prior to receiving a residential mortgage loan application. The rule should simply state that anyone who does not provide a GFE when (a) a consumer requests a residential mortgage loan and (b) the loan originator obtains a consumer credit report to consider the application, cannot receive a mortgage broker fee. The rule should also state the obverse – a GFE need not be provided by a person who will not be compensated for originating a mortgage loan. There are additional problems with the limits on information collected for a GFE application, and the new information disclosed in a GFE. First, HUD wants the consumer to have committed credit information in his or her hands when the borrower leaves a lender or mortgage broker office so that the consumer can realistically shop for better credit terms. Hence, HUD’s proposed GFE must contain specific committed loan terms. This sounds nice, but it is unrealistic. How can a mortgage broker or any loan originator commit to provide a loan without a license and a warehouse line of credit? Mortgage brokers do not offer loans (only lenders offer loans). TILA regulations prohibit a creditor from advertising loan terms that are not generally available from the creditor. Any mortgage broker that discloses specific loan terms to the borrower in a GFE commits a fraudulent act and violates TILA. A mortgage broker might be able to provide committed loan terms for a lender if the mortgage broker can tie into each lender’s origination system to download current rates. However, committing to loan terms early in the application process will increase credit costs. Each loan commitment is matched with a comparable hedge to protect the lender against credit risk. The longer the commitment period, the more the risk will exist, and the more the hedge will cost. Furthermore, someone has to pay for the hedge when the loan does not close. Borrowers will pay for all of the broken commitments through much higher interest rates. Second, the information permitted in the GFE application does not include borrower asset information. How can anyone commit to offer a loan to the applicant or even provide GFE information if they do not know whether the borrower has money for a downpayment, closing costs and a reserve? Without knowing whether the borrower has sufficient funds to make a downpayment of 20% of the purchase price, it is impossible to know whether and how much mortgage insurance will cost. It appears that HUD either does not believe that assets are important when financing a home, or HUD is providing a competitive advantage to the consumer’s depository institution (which knows what the consumer’s assets are). HUD must allow a mortgage broker or lender to take a full FNMA Form 1003 application as a GFE application. HUD could achieve its objective by requiring the mortgage broker or lender to include a copy of the lender underwriting transmittal form (showing approval of the credit and the terms of the loan) as an attachment to the GFE. If the approval form is not attached to the GFE, the mortgage broker or lender cannot process a full mortgage loan application from the borrower. Further, the mortgage broker or lender should wait three business days before soliciting the consumer for a mortgage loan application. This solution guarantees the consumer a three business day window to shop for credit without interference from the persons who provided a GFE to the borrower. If the consumer does not want to wait three days to apply for a loan, that is the consumer’s choice. HUD should also realize that a loan originator can lead a consumer to water, but cannot make him drink. If HUD wants consumers to ask for more information than “how much is my payment?” HUD needs to encourage financial education in public schools. The FDIC is pushing financial education through its Money Smart program. HUD is pushing housing counseling for post-foreclosure blues. The time to fix the barn door is before the horse runs off. GFE Fees HUD wants to limit fees for providing a GFE. RESPA states that settlement service providers cannot charge for preparing the HUD Settlement Statement or any TILA disclosures. There is no provision in RESPA allowing HUD to limit fees for preparing other disclosures. As a general rule of statutory construction, the mention of limited items or subjects in a law is interpreted as the exclusion of all other similar items. Hence, the mention of the HUD Settlement Statement and TILA disclosures in Section 12 of RESPA necessarily means that Congress did not intend to limit fees for other disclosures. HUD anticipates that lenders will not charge for a GFE under the new rule. Quite the opposite will occur. Unless HUD permits a loan originator to collect asset information, or HUD eliminates the requirement that the GFE terms must be binding, the only GFE that a consumer will receive will be from the consumer’s depository institution. Depository institutions traditionally charge higher interest rates for mortgage loans because the regulatory costs to do business are higher (due to CRA, BSA, etc.). Hence, consumers will go to their bank for a GFE, but get a loan from a mortgage company. Banks will start charging for the GFE due to the high level of runoff and the need to recover their costs. HUD intends to limit GFE fees to actual costs of preparing the form. Under TILA, mortgage lenders are permitted to exclude reasonable and necessary loan documentation fees from the finance charge disclosure. Various court decisions have cited documentation fees up to $600 as appropriate. The 2005 GFE form is about the same length and complexity as the average tax return. Tax return preparation fees for a simple itemized return (IRS Form 1040, and Schedules A and B) run $88 to $321 on average according to a study by the National Society of Accountants. We should expect nothing less for itemizing closing costs and loan terms on a four page GFE. The rule permitting a loan originator to collect a fee will generate significant litigation. HUD has not defined what costs may be included in the fee for preparing a GFE. Can a lender include the cost of keeping a branch open in the fee for preparing a GFE? If the lender could have prepared the disclosure at a lower cost, or a competitor is preparing the disclosure at a significantly lower cost, is the lender still justified in charging its fee for the disclosure? Can the lender include the cost of litigating these issues (or the cost of insurance to pay for such litigation) in its calculation of the maximum fee for preparing a GFE? Encroachment on TILA HUD includes payment, rate, prepayment, whether the interest rate and payment amount may rise, balloon payment, and other information on the GFE. This information must also be disclosed under Sections 17 to 19 of Regulation Z. TILA requires segregation of the information that must be disclosed under TILA. HUD can refer borrowers to the TILA disclosures, but HUD cannot make up its own disclosure containing information disclosed under TILA. Presentation of TILA information in a non-TILA format is deemed to risk confusion by consumers. HUD should stick to its own responsibilities, and quit trying to improve on TILA disclosures. The fact that the FRB is revamping its disclosures does not give HUD license to do this job for the FRB. The very disclosures that HUD proposes could subject lenders to TILA liability. YSP as a Consumer Fee HUD intends to include the YSP as a payment to and from the borrower in its new disclosure forms. Mortgage broker fees paid by the borrower are finance charges. There is no such thing as a negative finance charge (the FRB advises that lenders may credit certain amounts toward specific closing fees to avoid this issue, but there is little to support this in FRB regulations and commentary). Inclusion of the YSP as a fee paid by the borrower may throw off TILA disclosures and/or state law thresholds for high cost loans. Telling the consumer that he or she is receiving a credit from the lender that the consumer never sees is confusing. HUD should drop the concept and accept the fact that this is a fee paid by the lender to the mortgage broker. Consumers understand the concept of manufacturer payments to auto dealers for volume sales (how else could they sell a car at invoice?). HUD Statement of Policy 1999-1 stated that mortgage brokers cannot sell a loan because they do not have property rights in loan applications. HUD should explain how YSP’s work in a similar fashion to dealer incentive payments rather than make loan originators provide disclosures that mortgage brokers have property rights in mortgage loan applications. Packaging Repackaged Cost averaging is packaging dressed up in sheep’s clothing. Average cost pricing will allow some lenders to demand a certain number of free transactions from settlement service providers before the settlement service provider can charge for its services. The discount can be used to offset higher lender loan fees. Large loan originators who use this device effectively will get bigger at the expense of smaller loan originators. If HUD wants a level playing field, the rule needs to level the playing field. Including a device that only one class of settlement service provider may effectively exploit is going to destroy the playing field. Comparison of the GFE and HUD-1 If any group of settlement service providers will be up in arms about this proposal, it will be title agents. HUD plans to appoint the closing agent as the new RESPA police, responsible for checking the fees disclosed on the GFE against the fees disclosed on the HUD-1. Comparison of these forms will be near impossible. HUD also left us with an enigma. Why did HUD leave the HUD-1A form the same when HUD changed the HUD-1? If the additional information in the HUD-1 is important enough to put in the HUD-1, it should be important enough to put in the HUD-1A. Did HUD simply run out of room in the HUD-1A? By not changing the HUD-1A to match the HUD-1, HUD is in effect stating that it is not important that the borrower receive the added clauses in the HUD-1. If the HUD-1A will be changed, why must the official form include a notice that the form will be changed? Other technical problems with the HUD-1 form include: · State laws permit loan processing or origination fees. They do not permit a “service fee” as described on line 801. Mortgage brokers are not eligible for federal preemption of state usury laws, and no non-depository loan originator is exempt from state usury laws when originating a junior lien loan. As a result, mortgage loans may only be available from depository institutions in some states. · There is no room on line 902 and 903 for the name of the PMI company and hazard insurance agent, respectively. · It is not clear what line 904 is for. · Indicating on line 1110 that owner’s title insurance is optional will encourage buyers not to obtain title insurance. This disclosure also improperly implies that purchasing the owner’s title insurance costs more than purchasing just the lender’s title policy. In most states, buyers and sellers pay the same aggregate premium whether one or both policies are ordered. If both policies are ordered, the seller pays 60% of the basic premium for the owner’s policy and the buyer pays 40% of the basic premium for the lender’s policy. If no owner’s policy is purchased, the buyer pays the full basic premium for the lender’s policy. This is a dangerous disclosure · If the underwriter’s portion of the title insurance premium is beyond scrutiny under Section 8(c) of RESPA, why is HUD requiring this disclosure in lines 1113 and 1114? · It is pretty obvious that HUD is trying to justify its lawsuit claiming that the service of providing the amount of the conservation fee is a settlement service. HUD required the Conservation Fee on line 1205. The inclusion of this one fees while excluding other government fees raises the question of whether all of the other fees charged by governments (e.g. mortgage taxes and other local taxes, and city certification of occupancy) should be included in the HUD-1. · There is no room at the bottom of page 2 of the HUD-1 for an acknowledgement and certification by the parties that the information in the HUD-1 is accurate. The font size in this form must be reduced by at least 20% to fit the acknowledgement at the bottom of this page. How small does HUD want the text to be in this form? Core Title Services The definition of “primary title service” makes the closing of a loan a core title service. As a result, all title agencies must close loans in order to qualify for the exception in Section 8(c) of RESPA that exempts the split of the title premium from scrutiny. This overturns local customs that allow “title only” agencies (agencies that offer insurance but do not close loans). HUD recognized title only agencies in its 1996 Statement of Policy regarding Florida title insurance practices. The requirement that title agencies must close loans violates the McCarran-Ferguson Act that made the states solely responsible for regulating the sale of insurance. It also puts notary closing services out of business, and limits closings to urban areas where title agencies are located. Borrowers who live in rural locations will no longer be able to close at home, at their convenience. Closing Scripts HUD requires a face to face reading of a verbatim script. This is a well intentioned but useless idea. The buyer comes to the closing having paid a substantial earnest money deposit that is not refundable. Assume that the script makes the borrower realize that the loan product offered to the borrower is unaffordable or it will not meet the borrower’s financial needs. All of the options available to the borrower at the closing will lead to substantial financial hardship. The time to educate borrowers about loan products is before the borrower goes to a loan originator to obtain a loan. HUD should be promoting public financial education in grade schools and adult education similar to the Money Smart program offered by the FDIC. HUD is many years behind the curve in promoting early consumer education. Most of HUD’s efforts at home ownership counseling are targeted at reverse mortgage (HECM) loans and borrowers who default on their loan payments. Furthermore, little has been done by HUD to update HUD approved counseling for defaulting homeowners. The script itself and the concept of reading the script to borrowers at a closing raise more issues than the script solves: · There is no indication in the rule whether the lender is responsible for preparing the script, or the lender can force the mortgage broker or closing agent to bear this responsibility. · This will be a labor intensive job and the cost cannot be recovered from the borrower (HUD made the script part of the Settlement Statement, and RESPA prohibits charging for preparing the Settlement Statement). Who is going to pay for the preparation and reading of the script? · Can the reading of the script be waived since providing the HUD-1 at closing can be waived? · It will take more than a year to rewrite and implement changes to loan origination software systems and document preparation software systems to produce the script from the contents of the loan documents. We anticipate that problems will arise due to difficulties in transferring data from a loan origination system to a document preparation system. In all likelihood, the GFE data will be input by hand into the closing document preparation software, introducing the potential for mistakes and increasing costs. · The face to face reading requirement negates the potential for electronic transactions made possible when HUD recognized Esign and electronic disclosures. · It is not clear whether the rule will prevent an attorney in fact or other representative (such as a conservator) from closing a loan (since the borrower must be physically present for the closing). · Can the script be read over the phone? Is video conferencing (via Skype service) permitted? · It is very hard to find people qualified to read a script clearly. Closing agents may start recording closings at significant cost simply to prove that the script was read properly. Nobody wants to be fined or sued under state consumer protection laws for a misstatement in reading the script. · If HUD permits attorneys in fact to close loans, then a cottage industry will spring up to serve persons who do not want to take extra time off work to close the loan. · The script will slow down closings, and permit closing agents to complete fewer transactions per day. If the number of transactions per closer is cut in half, the closing fee will double to make up for the lost income. We anticipate that the closing fees will be a percentage of the loan amount, similar to origination fees, to reduce the closing cost for low income borrowers. · “Hybrid adjustable rate mortgage” as used in the script is not defined. HUD should not use terms that borrowers are not familiar with. · The proposed disclosure of the payment feature does not adequately describe the compounding of interest found in pay option ARM loans and reverse mortgages. · The old FHLBB balloon payment disclosure was much better than HUD’s version. The FHLBB disclosure used by many lenders today on a voluntary basis warns that the borrower may need to go to another bank to obtain a loan to pay off the balloon loan. · The negative “credit or charge” for the interest rate chosen by the borrower is confusing. Does a negative number mean it is a charge or a credit? The whole concept is confusing since the borrower never sees any of this money, and cannot get a check for this amount. · HUD has not explained the protocol for reading a chart. Do you also describe the layout of the page and state what is in a box and what is not, and where the box is in relation to other boxes? How should the chart be explained to visually impaired persons? Does reading of a tabular format script discriminate against the handicapped? · Does the reader have to start over if the reader stumbles over a sentence? Servicing Disclosure Statement The revision of the Servicing Disclosure Statement requirement does not say who is going to provide the Servicing Disclosure when the mortgage broker is not the table funding lender. HUD also did not provide a new sample disclosure to comply with the law. The disclosure required under the current rule, which HUD declined to eliminate from the rule, was judged by Congress to be unnecessary over a decade ago. Why does HUD continue to drag its feet on eliminating this disclosure? Do you believe? HUD included a savings clause in its regulation. If any provision of the regulation is held to be unenforceable, the remainder of the regulation shall not be affected. This clause is not unheard of. It appears in a host of Department of Agriculture rules, such as 7 CFR §905.89, one Energy Department rule, 10 CFR §1704.10, a few FTC rules, and other agency rules (search the Code of Federal Regulations for sections titled “Separability” to find most of these). However, HUD is charged with writing regulations that comply with the law. HUD should not be throwing everything against the wall to see what sticks. That is poor lawyering. We should expect more out of HUD than what we are getting for our money. If HUD was willing to spend hundreds of thousands of dollars to produce studies to justify its proposal, it could have spent a little more to hire a few expert RESPA attorneys to help write this proposed rule. HUD might also have approached the American Bar Association’s Business Law Section for assistance in this task. HUD has not done so, and now has a greater task at hand to fix what can only be described as a seriously flawed proposal. We wish HUD the best in this endeavor, and we look forward to reviewing the next draft of this proposal in a year, or two, or three…. Sincerely, ********************** Comment Submitted by James Pannabecker Re: Docket No. FR –5180-P-01 Real Estate Settlement Procedures Act (RESPA): Proposed Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs Dear HUD, I am an author of The RESPA Manual: A Complete Guide to the Real Estate Settlement Procedures Act and other books on topics related to banking and mortgage lending. First, let me commend HUD for joining the Federal Reserve Board in attempting to improve the mortgage lending process. Improvement is, of course, a worthy goal. So is simplification. Unfortunately, regulators are constrained by what exists. It is difficult to improve a process when one is not permitted to take the entire thing apart and begin anew. When I was employed within the industry, total quality management (TQM) was popular. We were tasked with critically examining each step in the loan origination process and finding different ways of attaining goals and objectives. We probably had more flexibility than regulators do. For example, in seeking its goal of improvement, HUD may feel it cannot toss out the good faith estimate (GFE) or uniform settlement statement requirement. On the other hand, HUD could recommend changes to Congress, which is exactly what Congress in 1996 invited HUD and the Federal Reserve to do when it asked them to create a single disclosure to satisfy RESPA and the Truth-in-Lending Act (Section 2101, Economic Growth and Regulatory Paperwork Reduction Act of 1996, Title II of the Omnibus Consolidated Appropriations Act, Pub. L. 104-208). It’s been twelve years. The result at the end of all this time is a proposal to at least double the length of the typical GFE, and far more than double the length of the Uniform Settlement Statement. This is not what the Congress asked for in 1996. I doubt it is what the Congress or the people want in 2008, even following another mortgage crisis. They want simplification, and that may require a return to the basics, following something like a regulatory TQM analysis of the mortgage lending process. If it has not done so already, HUD should gather complete sets of actual loan documentation from all jurisdictions, for the most common types of mortgage loans. True simplification would require creative thinking of ways to eliminate paperwork, to identify essential disclosure items, and to address the requirements of various statutes in combined documents – all toward the goal of producing simplified disclosures consumers actually will read and understand. To be a success, HUD and the Federal Reserve may find it necessary to rely on federal preemption, with Congressional imprimatur if necessary, and/or state cooperation similar to what has occurred with the fairly recent nontraditional mortgage lending guidance. No matter what HUD may come up with during the next several months regarding its current proposal, it is unrealistic to think most consumers, faced with the stack of documents currently presented to them during the mortgage lending process, will pay attention and understand the new pages HUD proposes to add. Assuming HUD chooses to ignore this sage advice, I offer specific comments on its proposal: 1. The proposal would create too long documents and require too much paper. Granted that American homebuyers are frustrated by the disclosures they have been receiving, especially while they are upset about today’s economic challenges, more paper is not the answer they seek. Remember, too, they have recently developed a consensus about global climate change. More paper certainly is not the answer to that crisis either. 2. Current regulations allow GFEs and Truth-in-Lending disclosures to be combined. Prohibiting this does not promote the goal of simplification. 3. The definition of “GFE application” is awkward. The current wording, which states “[t]he loan originator may require the GFE applicant to provide no more than….” appears to assume inquirers are going to be applying for a GFE rather than a mortgage loan. They are not. Many, if not most, will have no idea what a GFE is. They want a mortgage loan. The proposed language may represent an attempt to build in a shopping process. But some folks, so-called sophisticates for example, may be ready to go. Having already researched loan originators, they may show up with a completed FNMA/FHLMC loan application form, financial statement, and other documents, and want approval as soon as possible. If the wording is simply an attempt to specify when a GFE application has been received – that is, the amount of information that constitutes a GFE application – then the proposed wording is not suitable. Whatever is intended by its wording, HUD should not attempt to slow down the mortgage lending process. 4. Requiring disclosure of a different monthly payment amount (principal, interest and insurance) than for Truth-in-Lending disclosures (principal, interest, taxes and insurance), which makes an extra explanation necessary, unduly complicates the disclosures. The payment disclosures should be consistent. 5. Requiring disclosure of the interest rate and not the APR seems to suggest that HUD does not agree with the Truth-in-Lending Act’s decision that the APR is an effective tool for comparing loan rates. This is another example of an additional term that may contribute to confusion and does not seem to promote HUD’s stated goal of simplification. 6. The required disclosure: “Can your loan balance rise?” with two possible answers, “No” and “Yes, it can rise to a maximum of $ ___,” is confusing and misleading. Of course, the loan balance can rise, and it often does, for example, when a borrower misses a payment, fails to satisfy obligations stated in the security instrument (e.g, maintaining property insurance, paying assessments), or fails to escrow enough to cover disbursements from escrow. Someday a borrower will say, “but you told me back when I applied for my loan – here, see my GFE – that my loan balance cannot rise.” Perhaps the disclosure would be more appropriate if it said something like, “No, unless you don’t live up to all the terms of your loan agreement.” 7. HUD should be very clear on how to fill out the GFE form. The instructions appear to be quite complicated. It would be useful to do some testing to ensure they are straightforward, easy to understand, and not subject to varied interpretations. 8. The instructions for three different lines of the GFE form provide this or something similar: “Where a loan originator permits a borrower to shop for [third party] settlement services, the loan originator must provide the borrower with a written list of settlement services providers at the time of the GFE, on a separate sheet of paper.” This adds several more layers to the stack of paper the potential applicant receives. A prudent lender, concerned about lender liability for having “recommended” third-party service providers, would include an attempted disclaimer. A prudent lender also would be concerned about how long these lists need to be. The lists are likely to become a continuing burden, as excluded service providers seek to be included and listed service providers mess up and are deleted. Perhaps the best way to satisfy the requirement would be to hand the potential applicant a copy of the yellow pages of the telephone book for the local area, except the regulation says “a sheet of paper.” HUD should reconsider this requirement and, if it is retained, provide guidance on how the document should be prepared. 9. The inclusion of the phrase “and such other steps as are necessary to originate a mortgage loan for the prospective borrower” to the definition of “mortgage application” is curious and unnecessarily broad. For example, 3500.7(f)(1) states “[t]he loan originator must complete final underwriting within a reasonable time after a borrower’s mortgage application is complete.” But the definition of “mortgage application” indicates underwriting itself is a step that precedes the receipt of a “mortgage application.” I suppose a definition of the term “originate” could dispose of this inconsistency. 10. The proposed uniform settlement statements may not be consistent enough with the GFE to promote ease in comparison. I had expected to find similar listings on each form. Instead, the settlement statement seems to simply contain cross-references to the GFE on various lines. This may not be effective. 11. A closing script sounds like a good idea, but the proposed script is much too long and injects too much more paper into the closing stack. Also, requiring a separate acknowledgment does not simplify the process. 12. The proposal appears to use the terms “settlement” and “closing” interchangeably. The term “settlement” is defined (§ 3500.2(b)) in a definition that states “[t]his process may also be called ‘closing’ or ‘escrow’ in different jurisdictions.” It may not make a difference, but sticking with the defined term would promote clarity because the two terms sometimes have different meanings within the same jurisdiction. 13. I’m curious about the consumer testing mentioned in the preamble. First of all, it appears to assume existing disclosures are ineffective. (I understand existing disclosures differ because a prescribed form does not exist, but testing could be performed with several examples of disclosures lenders and mortgage brokers typically use.) Is the assumption substantiated by other studies? Was the understanding of consumers using the proposed forms compared to the understanding of consumers using the existing disclosures? Second, it seems rather myopic to exclude a testing of Truth-in-Lending disclosures. Consumers receive both TILA disclosures and a GFE, not just a GFE. They are used together, often presented at the same time, so is it really possible to determine one is effective without testing whether they are equally effective together? And does it matter which one the consumer views first? I think these questions point to the need for what I mentioned at the beginning of this comment letter, that is, a combined, coordinated effort to look at all the paperwork. Separately examining this disclosure or that disclosure may make sense from an agency ownership perspective, but it may not promote improvement or simplification. 14. The first sentence of the definition of “credit or charge for the specific interest rate chosen” seems a bit convoluted, especially the phrase “, for a mortgage broker,” which I suppose could be deleted altogether and mean the same thing. 15. The closing script requirement, in proposed § 3500.8(d)(2), says the person conducting the closing must “read the closing script aloud to the borrower and explain [three listed items].” § 3500.8(d)(3) requires disclosure and explanation of inconsistencies. It sounds as if there are three steps: (1) read; (2) explain the three items; and (3) then explain inconsistencies. Or are there only two: (1) read the closing script which must include various pieces of information and must also include a written explanation of the three items (as the model closing script appears to do); and (2) then explain inconsistencies? This needs to be clarified. 16. The Loan Description near the beginning of the closing script requires this disclosure: “The Loan Type must state the following: If the loan is Conventional, FHA, VA, or other government program. If the loan is a Fixed Rate, Adjustable Rate, Hybrid Adjustable, Payment Option Mortgage, or other such description that correctly identifies the loan product.” Or is this intended to be an instruction to the preparer? If it is a disclosure, the use of the word “if” is confusing. Perhaps “whether” would be more appropriate. 17. In light of the complexity of the HUD proposal, I am reluctant to support the proposed legislative changes to the RESPA statute, although for years I have thought it may be appropriate to allow private rights of action for violations of Sections 4 (settlement statements) and 5 (GFE and special information booklets). If HUD adopts the proposal, it might be better to wait a couple years to allow complexities to sift through and settle down before changing the statute. In the meantime, the Truth-in-Lending Act (TILA) seems to offer a private right of action in situations where the GFE is used to meet TILA’s itemization of amount financed requirement, and State mini-RESPA and unfair or deceptive trade practices statutes may offer private rights of action in some circumstances. We must take the time to follow a rational, comprehensive improvement process, coordinated among the agencies that regulate the mortgage lending process (federal and state), the industry, consumers, and other interested persons. Rushing to implement a more complicated and more paper-intensive proposal because something drastic has just happened will not solve our problems. We took more than 12 years to get to this point and I think we all know we still don’t have the simplification proposal Congress asked for. We owe it ourselves and to the people facing foreclosure to do it right this time.

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