A proposal to relax federal regulations to encourage the packaging of settlement services like title insurance with mortgage loans is either anticompetitive or doesn’t go far enough — depending on who’s weighing in.
Today is the last day to submit comments on the Department of Housing and Urban Development’s proposed changes to the Real Estate Settlement Procedures Act, or RESPA, and critiques from industry and consumer groups are flooding in at the last moment.
HUD estimates its proposed changes to RESPA, which include a revised good faith estimate (GFE) form that shows loan terms and settlement services costs, will help consumers comparison shop and save more than $700 per loan. Industry groups say HUD has underestimated the cost of implementing the new rules.
Although only about 2,200 comments had been submitted as of Wednesday afternoon — a far cry from the more than 40,000 responses to a more aggressive 2002 proposal that was withdrawn by HUD — many groups waited until the deadline loomed to submit their comments.
See the RESPA reform group on the Inman Community section for a link to submit comments.
While groups representing real estate brokers and title insurers are strongly opposed to incentives for packaging, the Mortgage Bankers Association wants HUD to go even further in allowing average-cost pricing and volume discounts of settlement services.
Incentives for packaging are anticompetitive, the National Association of Realtors maintains, because only lenders issue the good faith estimate (GFE) loan disclosure that HUD expects consumers will use to comparison shop.
HUD would bar lenders from changing their own origination fees quoted in the GFE, and if they are offering to package settlement services with a loan, the cost estimates they provide could change by no more than 10 percent.
"The largest mortgage lenders will be able to apply the greatest pressure on settlement service providers to reduce prices in order to be included in the lender’s ‘guaranteed’ package," NAR said in comments to HUD on the proposed rule change. "This will effectively and unfairly reduce the opportunity of independent third-party service providers to get in front of consumers to sell their products and services."
Although the Mortgage Bankers Association has many issues with HUD’s proposed four-page GFE form — the group wants HUD to work with the Federal Reserve to make sure the form is compatible with Truth in Lending Act disclosures — the MBA wants HUD to go further in offering incentives for packaging.
"MBA has long sought explicit clarification of the legality of average-cost pricing, not to increase industry profits but to facilitate pricing arrangements to reduce operational and compliance costs, and streamline operations — all of which will result in lower costs to consumers," the group said.
"Average-cost pricing methodologies permit tiered pricing arrangements where the average prices for third-party services purchased in volume are lower than the prices for services purchased individually," the MBA said.
But HUD’s proposal could prove challenging for originators who don’t have past experience to base their average costs on, the MBA said. HUD could provide more flexibility by allowing originators to charge fees that exceed the average cost paid to service providers for any class of services by a small margin, such as 10 percent, the MBA said.
The MBA also argued that HUD’s proposed rules for volume discounts are too restrictive. If HUD insists that all of the discount must be passed along to the borrower, "there will be little incentive for lenders to enter into discount arrangements," the MBA maintains.
That’s because lenders will have to make sure "each and every dollar of discount is passed on to the consumer," or risk violating RESPA. The restriction is unnecessary, because "market competition will result in the consumer receiving the benefit of discounts," the group said.
Mortgage brokers, on the other hand, feel they are being unfairly singled out by HUD’s proposal to automatically credit borrowers for rebates lenders pay to loan originators on mortgages that carry higher interest rates — so-called "yield spread premiums."
In a set of "talking points" to members, the National Association of Mortgage Brokers complained that fees similar to yield spread premiums "are present in any mortgage origination distribution channel, regardless of whether a broker is involved."
NAMB urged members to make a case with HUD that the proposed GFE "misleads consumers by perpetuating the fallacy that through a lender a zero-point/zero-cost loan is free to the consumer. The GFE should treat all originator transactions the same."
Weighing in on behalf of consumers, the New York State Consumer Protection Board said that originators might be able to manipulate fees for settlement services, as long as they stayed within the 10 percent tolerances proposed by HUD.
The Consumer Protection Board — a member of the New York State Real Estate Board and the state’s "top consumer watchdog and think tank" — also recommended that HUD cap the amount originators are allowed to charge borrowers for each GFE.
Allowing loan originators to recoup costs such as credit reports "can and will likely be abused by some lenders or mortgage brokers, absent more stringent language," the group said.
CPB also took issue with HUD’s handling of rebates lenders pay mortgage brokers and other loan originators for high interest loans — so-called "yield spread premiums." While HUD would require loan originators to disclose such rebates and credit them toward borrower’s closing costs, they are not labeled yield spread premiums.
"CPB shares HUD’s concern that the meaning of yield spread premiums is not easily understood by consumers," the board said. "However, eliminating the term from the proposed GFE is an inadequate solution" and may conflict with the Federal Reserve Board’s proposed changes to Truth in Lending Act disclosures.
A better alternative would be to define yield spread premiums and list them as a component of service charges disclosed on the GFE, CPB said. CPB also said the GFE should disclose the annual percentage rate of the loan, or APR, which includes closing costs financed by the loan. Not disclosing the APR to borrowers "conceals the true cost of credit and hinders them from comparison shopping," CPB said. "This runs counter to HUD’s stated objective of facilitating shopping or competition for consumers so as to lower purchase transaction costs."
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