Industry groups today voiced alarm over changes proposed by federal regulators to the Real Estate Settlement Procedures Act, or RESPA, saying they will prove costly to implement and won’t help consumers as claimed.
The Department of Housing and Urban Development says its proposed changes to RESPA — including simplified disclosures of loan terms and settlement costs, and incentives for packaging settlement services with loans — will save consumers about $8.35 billion a year, or more than $700 per loan.
In their first opportunity to make a case against the proposed changes in a public forum, industry groups representing Realtors and title insurers urged HUD to back away from packaging incentives and tolerances, calling them anti-competitive.
The Mortgage Bankers Association voiced support for packaging incentives but joined other industry groups in criticizing some aspects of HUD’s proposed standardized disclosure forms and a required reading of a lengthy closing-table script.
A consumer advocacy group, the Center for Responsible Lending, said it supported some of HUD’s goals in providing incentives for packaging, but said the department’s RESPA reform proposal needs fine tuning to make sure consumers benefit.
Testifying on behalf of the National Association of Realtors before members of the House Committee on Small Business, Adam Cockey said HUD should rework its RESPA reform proposal "to focus on common-sense disclosures" while eliminating packaging incentives such as volume discounts and tolerances limiting price changes after good faith estimates have been provided.
Cockey said providing incentives for lenders to package settlement services like title insurance, appraisals and inspections would favor large lenders and firms at the expense of local, small settlement service providers.
"Undoubtedly, the largest lenders will be able to apply the greatest market pressure on independent small settlement service providers to reduce their prices in order to be included in the lender’s package," Cockey said in his prepared testimony. "We believe that such a move would drive independent providers out of business and allow these larger in-house providers to then raise prices."
The American Land Title Association took a similar stance, arguing that with housing in a slump, HUD "should avoid causing any further disruption to the market and focus on incremental changes that can be achieved without adding to the economic downturn."
HUD estimates that the changes to RESPA would cost the industry about $570 million in up-front costs, including about $390 million in costs for small business. The recurring costs would be $1.23 billion a year, or nearly $100 per loan, HUD estimates.
But HUD expects a net benefit for consumers of $722 per loan the first year the changes are implemented, and $768 per loan after that. That assumes that consumers shop around for the best deal on a loan, and that loan originators pass on the savings and efficiencies they gain in packaging settlement services through incentives for cost averaging and volume discounts.
Gary Kermott, president of the American Land Title association, called volume discounts "anti-competitive" and claimed they will harm small independent title agencies that can’t discount their own prices to compete with large national title providers, or guarantee a stream of business to local title-related service providers.
"While such discounts may result in lower prices for the consumer in the short term, once the small businesses have been pushed out of the competitive marketplace, large providers are left to compete only among themselves," Kermott said in his prepared testimony.
ALTA warned of potential challenges to HUD’s statutory authority and "Congressional and industry opposition" to packaging incentives, urging regulators to instead concentrate on "meaningful changes that assist consumers in understanding loan and settlement terms and disclosures."
The Mortgage Bankers Association said cost averaging and volume discounts will benefit consumers, but that HUD needs to be more explicit in assuring lenders that they will not be subject to RESPA’s anti-kickback provisions. Unlike a previous proposal to allow packaging put forward by HUD in 2002, the proposed RESPA rule changes would not provide a "Section 8 safe harbor" from prosecution.
By mandating that consumers can only be charged the discounted price, lenders will have little incentive to enter into discount arrangements, the MBA said in prepared testimony.
The Mortgage Bankers Association also said it supported the disclosure of yield-spread premiums paid to mortgage brokers, a proposal that’s opposed by the National Association of Mortgage Brokers.
Julia Gordon, policy counsel at the nonprofit Center for Responsible Lending, said that although incentives for volume-based discounts may help home buyers save money, "this value is only realized if the cost savings are passed on to the consumer rather than retained by the lender." Gordon said additional safeguards are needed to ensure that happens.
Another incentive for packaging settlement services with loans — permitting average-cost pricing of services — could be useful, but the actual cost to the consumer should be disclosed in the HUD-1, CRL maintains. Gordon said average-cost pricing is not appropriate for costs that depend on loan amount, such as title insurance premiums, recording costs and transfer taxes because those buying or refinancing less expensive homes would be at a disadvantage.
The Center for Responsible Lending also said it’s important for HUD to wait for the Federal Reserve Board to complete its ongoing revision of separate disclosures required under the Truth In Lending Act, or TILA, so that the forms are compatible with each other, and that the annual percentage rate of a loan be disclosed on the good faith estimate.
To ensure adequate enforcement of RESPA, the Center for Responsible Lending said HUD should increase civil penalties for violations and add a "private cause of action" allowing borrowers to sue companies that violate its provisions.
NAR complained that when it comes to disclosures, HUD "has not found the right formula for determining what information to include and how to present it."
HUD’s proposed changes to the good faith estimate "do not simplify the disclosure process," or match up with the HUD-1 closing statement — "an obvious design change" that would make a long closing script HUD wants read to borrowers at the closing table unnecessary, NAR said.
The closing script, which would take about 45 minutes to read, would double the amount of time required to close a loan, Cockey said. Although HUD takes into account the extra cost for the settlement agent to provide such a service, "it makes no attempt to recognize the costs to the other participants at the closing table" — including the buyer, seller and their real estate agents, the group said. Those costs could multiply costs by a factor of four or more, he said.
The closing script would come "too late in the process to help consumers" and add "significant time and costs," NAR complained. Some closing companies think they will have to add another closing room and double their staff to maintain the current level of closings, the group said.
While HUD expects many lenders will provide the four-page good faith estimate free of charge in order to compete for business, if lenders decide to recoup the cost of putting the estimate together by charging a fee, that could decrease the amount of shopping, NAR maintains.
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