Howard A. Lax

• Manage |RSSRESPA reform

Read the policy statement and ignore the mention of real estate brokers and HWC. HUD is not interpreting the RESPA Section 8(c) exception for cooperative brokerage agreements. If this policy statement were limited to an interpretation of the cooperative brokerage agreement exception, then this policy statement would only apply to brokers. If HUD intended to limits its interpretation to interpreting the cooperative broker agreement exception, it would have said so. Instead, HUD invokes the 1999-1 policy statement for mortgage brokers by way of comparison, and then says that the same policy applies to other settlement service providers – you cannot split a fee (in this case the home warranty premium) unless you provide settlement services associated with the fee. Also, it does not matter what settlement service is being marketed. The same RESPA Section 8 rule applies to all settlement services – it is illegal to pay a referral fee. There is only one Section 8(a) and 8(b) of RESPA – there is no special provision applying to real estate brokers referring business to home warranty companies. Here is what the policy statement says: "D. Conclusion Accordingly, HUD interprets section 8 of RESPA and HUD's regulations as these authorities apply to the compensation provided by home warranty companies to real estate brokers and agents as follows: (1) A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under section 8; (2) Depending upon the facts of a particular case, an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge; and (3) The amount of compensation from the HWC that is permitted under section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business." Now I remove the references to HWC and real estate brokers, and make this policy statement generic (which is what the courts will do): "D. Conclusion Accordingly, HUD interprets section 8 of RESPA and HUD's regulations as these authorities apply to the compensation provided by settlement service providers to their referral sources as follows: (1) A payment by a settlement service provider for marketing services performed by other entities or persons on behalf of the settlement service provider that are directed to particular homebuyers or sellers is an illegal kickback for a referral under section 8; (2) Depending upon the facts of a particular case, a settlement service provider may compensate a person for services when those services are actual, necessary and distinct from the primary services provided by the person, and when those additional services are not nominal and are not services for which there is a duplicative charge; and (3) The amount of compensation from the settlement service provider that is permitted under section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business." Finally, notice that HUD published this policy statement WITHOUT OFFERING A COMMENT PERIOD. What HUD is saying is that the 2008 letter that preceded the policy statement is binding, and there is no need to offer public comment on whatever informal policy statements HUD makes. This is HUD’s new policy, overturning the provision in Section 4(b) of Regulation X stating: "(b) Unofficial interpretations; staff discretion. In response to requests for interpretation of matters not adequately covered by this part or by an official interpretation issued under paragraph (a)(1)(ii) of this section, unofficial staff interpretations may be provided at the discretion of HUD staff or counsel. Written requests for such interpretations should be directed to the address indicated in §3500.3. Such interpretations provide no protection under section 19(b) of RESPA (12 U.S.C. 2617(b)). Ordinarily, staff or counsel will not issue unofficial interpretations on matters adequately covered by this part or by official interpretations or commentaries issued under paragraph (a)(1)(ii) of this section." You cannot bootstrap an informal position into a rule without public comment and Congressional review. That is what HUD is doing here.

Just ask them how they addressed each of my comments on the proposal. See http://www.respanews.com/Media/PublicationsArticle/lax%20comment%20letter.doc . Then ask them if they fixed the rule as I suggested: 1. The consumer needs to be educated before shopping, not at the closing table. Move the script to the application phase as part of the GFE (which the lender or mortgage broker will prepare), make it an estimate, and provide a final script at the time of commitment (when the title agency and lender call the borrower to schedule the closing). That way the closing goes smoothly, the problems get ironed out before it is too late to do anything, and you can still have an electronic closing. By the way, reading a table to the consumer is extremely hard. Teach the consumer how to read a table or graph, and then give them a copy to study on their own. 2. Drop the tolerances until Congress gives HUD authority to impose tolerances. Allow brokers to estimate charges they have no control over (like recording fees) by providing a range. 3. I just saw a closing statement with a $165 mortgage recording fee that nobody noticed had an extra digit ($100). This stuff happens all the time. Most of the time, nobody catches these mistakes. Do title agents have quality control plans and do quality reviews of 10% of their closings like FHA mortgagees do? Why not? 4. HUD also needs to put its money where its mouth is. HUD should commit a hundred million dollars to public school education regarding buying and financing a home. The FDIC would probably match it to provide education on investments, saving, and banking. Stop worrying about those in foreclosure who are beyond help, and teach people what they need to know so they do not end up in foreclosure. An ounce of prevention is worth a pound of cure. Give a person a fish and he eats for a day. Give a person a fishing pole, and he might be able to make his mortgage payments. 5. A four page GFE in color is useless. Go get four of them, and see how easy it is to flip pages back and forth to compare costs and terms. What was wrong with the one page Pollock disclosure that everyone likes? 6. Revamp the HUD-1. Starting on page 2 is crazy. Borrowers should be able to compare GFE numbers and closing costs side by side on the same page (page 1). 7. Cost averaging should be limited to costs that are billed monthly and are not known at closing. HUD has no clue how to create a level playing field. HUD should also not shoot its mouth off about how much title agents are overcharging until HUD personnel have walked a mile in their shoes. Does any title agent think he or she is paid 40% more than they deserve? 8. HUD should stick to its mandate - closing costs. It has no business jumping into the FRB's domain of disclosing loan terms. Besides, the FRB has committed to revamping TILA disclosures for all types of loans. The FRB started with credit card disclosures last year. HELOCs are next, and then closed end loans. Why does HUD need to interfere with what the FRB has on its schedule? It took 12 years for HUD to dump the Servicing Disclosure Statement. All of a sudden it has to jump in and add loan disclosures? 9. The FRB may (some day) impose locks on loan originator compensation, if the consumer can understand them and the locks do not upset the secondary mortgage market. It should be HUD’s job to teach consumers what they need to know about loan origination fees well before time of application, so the FRB can do its job. If HUD wants to do something to make all brokers earn their keep, change the list of items that a broker needs to provide to earn a fee (Statement of Policy 1999-1). Add an accurate GFE as a mandatory service. Let the broker prepare an updated GFE seven days before the closing if the first one is not accurate. Brokers will comply with the law if they cannot get paid until they do comply. 10. HUD should not promulgate rules to stop abusive credit practices. The FRB has much broader authority (under HOEPA) than HUD has (under RESPA) to stop lending abuses. HUD looks like it is trying to one-up the FRB.

There is still a lot to say regarding the proposal, including a few suggestions on how to fix things without throwing out the good intentions that HUD brings to the table. We need to concentrate in the extended comment period on telling HUD how to get it right. 1. The consumer needs to be educated before shopping, not at the closing table. Move the script to the application phase as part of the GFE, make it an estimate, and provide a final script at the time of commitment (when the title agency and lender call the borrower to schedule the closing). That way the closing goes smoothly, the problems get ironed out before it is too late to do anything, and you can still have an electronic closing. 2. Drop the tolerances until Congress gives HUD authority to impose tolerances. Allow brokers to estimate charges they have no control over (like recording fees) by providing a range. 3. I just saw a closing statement with a $165 mortgage recording fee that nobody noticed had an extra digit ($100). This stuff happens all the time. Most of the time nobody catches it. Do title agents have qulaity control plans and do quality reviews of 10% of their closings like FHA mortgagees do? Why not? 4. HUD also needs to put its money where its mouth is. HUD should commit a hundred million dollars to public school education regarding borrowing, buying insurance, and buying a home. The FDIC would probably match it to provide education on investments, saving, and banking. Stop worrying about those in foreclosure who are beyond help, and teach people what they need to know so they do not end up in foreclosure. An ounce of prevention is worth a pound of cure. Give a person a fish and he eats for a day. Give a person a fishing pole... 5. A four page GFE in color is useless. Go get four of them, and see how easy it is to flip pages back and forth to compare costs and terms. What was wrong with the one page Pollock disclosure that everyone likes? See the article at http://www.aei.org/publications/filter.all,pubID.27144/pub_detail.asp and the form at http://www.aei.org/docLib/20070521_Pollock1.pdf. 6. Revamp the HUD-1. Starting on page 2 is crazy. Borrowers should be able to compare GFE numbers and closing costs side by side on the same page (page 1). 7. Cost averaging should be limited to costs that are billed monthly and are not known at closing. HUD has no clue how to create a level playing field. HUD should also not shoot its mouth off about how much title agents are overcharging until HUD personnel have walked a mile in their shoes. Does any title agent think he or she is paid 40% more than they deserve? 8. HUD should stick to its mandate - closing costs. It has no business jumping into the FRB's domain of disclosing loan terms. Besides, the FRB has committed to revamping TILA disclosures for all types of loans. The FRB started with credit card disclosures last year. HELOCs are next, and then closed end loans. Why does HUD need to interfere with what the FRB has on its schedule? It took 12 years for HUD to dump the Servicing Disclosure Statement. All of a sudden it has to jump in and add loan disclosures? 9. Let the FRB impose locks on loan originator compensation. The FRB has much broader authority than HUD to stop lending abuses. HUD looks like it is trying to one-up the FRB. If HUD wants to do something to make all brokers earn their keep, change the list of items that a broker needs to provide to earn a fee (Statement of Policy 1999-1). Add an accurate GFE as a mandatory service. Let the broker prepare an updated GFE seven days before the closing if the first one is not accurate. Brokers will comply with the law if they cannot get paid until they do comply.