Packaging incentives: tolerances
Posted in RESPA reform By Matt Carter, Monday, March 31, 2008.HUD wants to introduce tolerance standards that would lock in some of the estimated charges presented to borrowers before they reach the closing table, such as loan origination fees. Increases of more than 10 percent would be prohibited on other charges, including settlement services like title insurance when borrowers use services that are selected or identified for them to use (see page 3 of the proposed Good Faith Estimate). The tolerances don't apply, however, when borrowers choose their own settlement services -- only when they are selected by the originator, or the borrower chooses from a list provided by the originator.
Tolerances “raise questions as to who will control a borrower’s selection of third party service providers,” say K&L Gates attorneys Phillip Schulman and Holly Spencer.
Some settlement services providers worry tolerances could promote packaging of settlement services or lender-owned affiliated business arrangements. Consumers, they fear, will always select lender-recommended providers to avoid the uncertainty of increased closing costs, which will discourage consumers from shopping for other providers, Schulman and Spencer have noted.
Attorney Howard Lax thinks tolerances as proposed by HUD are a "terrible policy decision" because loan originators shouldn't be responsible for costs they don't control, and consumers stand to lose their earnest money if changes in market fees and rates bust the tolerances and the closing is called off.
Lax wants to know if the closing agent will have an obligation to check the tolerances and stop the closing if the tolerances are exceeded, and what authority HUD has to stop a transaction. Schulman and Spencer share those concerns.
"Is a settlement agent really supposed to stop a $500,000 sale when the 10 percent tolerance is exceeded by a mere $15 overage?" Schulman and Spencer wonder. "Why is the settlement agent even saddled with the responsibility for a lender or broker’s charges?"
Lax thinks that if the 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."
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Submitted by Diane Cipa on April 4, 2008 - 2:35pm.
If the loan originator opts to NOT make a referral or give the consumer the name of third party providers, they put their estimate of costs in the second part of that section on page two of the GFE. Those estimates won't be subject to a tolerance assessment as the consumer will be directed to shop for themselves. Consumers will take responsibility for their own shopping choices.
The relief of this regulatory burden is a plus for loan originators who are not affiliated.
Loan originators involved in an affiliated relationship with a third party provider, motivated to make a referral to feed the system have a duty to know the pricing of their referral partner. Likewise, loan originators who simply have a business relationship but no affiliation, should know the pricing of their referral partner.
I don't see these tolerances as encouraging packaging. I think they'll either encourage consumers to shop for themselves or at the very least force loan originators to be familiar with the pricing of their referral partners.
Either way it will force some stability and reliability into price quotes.
I see opportunity for consumer oriented enterprises.