Packaging is dead! Long live packaging!

Submitted by Matt Carter on March 26, 2008 - 5:37pm.

The debate then was all about packaging -- bundling loan origination fees and settlement services charges into a single, guaranteed offer, which was supposed make it easier for consumers to compare offers from different lenders.

Some big lenders (like banks) and consumer groups liked the idea, saying loan originators would be able to negotiate reduced settlement service fees from title insurers and other settlement service providers, which they would pass on to consumers in order to compete for their business.

Mortgage brokers, title insurers, builders, NAR -- basically everybody in real estate who wasn't a large lender -- disliked the idea, saying it would put big lenders in the driver's seat. Opponents claimed small businesses would lose and consumers would end up paying more if packaging forced more industry consolidation.

Now HUD is talking about giving settlement service providers, including lenders, some leeway to negotiate volume discounts for settlement services that they would be permitted to package with loans, and also do cost averaging (see the original Inman News story on the proposal).

The trade associations and upper management types I've been talking to are very interested in the potential implications of these packaging incentives (the special report will explore the issue in depth -- for now check out this astute legal analysis from RESPA experts at K&L Gates, Phillip Schulman and Holly Spencer), and this excerpt from public comments submitted to HUD by another heavy hitter in the field, attorney Howard Lax:

"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."

Others have similar concerns about volume discounts.

HUD doesn't deny that the incentives are an attempt to achieve some of the same goals they were hoping to accomplish in 2002, but they are no longer offering people who want to engage in packaging a "safe harbor" from RESPA's Section 8 anti-kickback provisions.

In their lengthy analysis of the proposed rule, HUD analysts say it "includes many of the cost-reducing features that would supposedly be offered by packaging," all "without having to offer a Section 8 exemption to the industry."

In other words, we're going to let you do some packaging type stuff, but we're not giving up our right to haul you in if we think you're doing it in a way that violates the law. If you read HUD's analysis, HUD thinks it can take this more limited, "no safe harbor" approach because so many companies are already using packaging strategies.

So far, packaging seems to have taken a side stage in the debate over HUD's latest attempt at RESPA reform. There's been more interest in the new, supposedly simplified, Good Faith Estimate and the way mortgage brokers' yield spread premiums are disclosed.

They're not actually called yield spread premiums on the GFE, but they are reported and, better yet (if you're the borrower), they must be credited against closing costs, not pocketed by the broker. Mortgage brokers say banks make similar fees when they sell loans in the secondary market, but when that does happen, it happens after the loan closes. So HUD proposes tacking a little "if your loan is sold in the future" disclaimer onto the last page of the GFE warning borrowers that can happen, but lenders wouldn't be required to tally the (hypothetical) amount with their other service charges.

The $8.35 billion in savings HUD estimates borrowers might realize (because they will make smarter decisions and because lenders and settlement service providers will compete harder for their business) would mostly come at the expense of loan originators, who stand to lose as much as $5.88 billion in revenue a year, according to HUD.

HUD is taking comments on the new proposal until May 13, and looking at the comments that have been submitted so far online, mortgage brokers are going to be the most vocal critics.

An excerpt from one such commenter:

"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."

But other commenters welcomed HUD's proposed RESPA changes:

"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!"

When HUD opened the comment period, I asked Inman Blog readers to CC us their thoughts on RESPA reform. Not much of a response so far, so to prime the pump -- and to make it easier for you to see what's been said so far -- I've taken the public comments submitted to HUD so far and copied them to the comments section of my original RESPA post. That post also provides links to the proposed rule change, HUD's lengthy analysis, and the Web site where you can submit your own comments to regulators.

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Submitted by Matt Carter on April 3, 2008 - 9:13am.

You are invited to join in an ongoing discussion of RESPA reform in the Inman.com Community section.

http://www.inman.com/community/groups/respa-reform

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