Editor’s note: Participate in an Inman Community group discussion about proposed changes to the federal Real Estate Settlement Procedures Act (RESPA) at the Inman Community site. Read a related post to this article here.
Trade groups representing Realtors, lenders, title insurers and settlement services providers are asking lawmakers to sign a letter to Housing Secretary Steve Preston urging HUD to scrap proposed changes to the Real Estate Settlement Procedures Act and work with the Federal Reserve on simplified loan disclosure forms instead.
HUD’s proposed changes to RESPA, unveiled in March, include a new "Good Faith Estimate" form that’s intended to help consumers compare different loan offers, and incentives for packaging settlement services with loans. HUD estimates the rule change would save consumers about $8.35 billion a year, but industry opponents say regulators have overestimated the benefits and underestimated the costs of implementing the changes.
Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill., have taken up the industry’s cause, asking their colleagues to sign a letter to Preston that claims HUD has not conducted enough consumer testing of the proposed changes, which promise "to be more confusing and costly to both small businesses and consumers."
The letter also asks HUD to "discard the hundreds of pages of HUD’s current proposed RESPA rule that have not previously been the subject of public comment and cover a number of subjects beyond disclosures" — language that appeared targeted at packaging incentives (see text of letter).
The American Land Title Association issued an alert to members Thursday asking them to write their congressional representative and urge them to sign the letter.
The alert warned ALTA members that the proposed rule changes would double the time they spend on closings, and "unfairly assist the biggest mortgage lenders in gaining more control over the real estate consumer. The largest lenders could negotiate volume discounts with their affiliated settlement service providers and push small providers out of the business."
ALTA said other groups supporting the letter include the National Association of Realtors, Mortgage Bankers Association, National Association of Home Builders and the Real Estate Services Providers Council Inc.
Four years ago, Hinojosa and Biggert played a pivotal role in forcing HUD to withdraw proposed changes to RESPA, which included more explicit provisions allowing the packaging of settlement services with loans. In 2004, they drafted a letter signed by 226 lawmakers asking the Office of Management and Budget to reject HUD’s proposed RESPA rule changes. The letter argued that a final rule was issued without an opportunity for additional public comment.
This year, after HUD unveiled its latest proposal for overhauling RESPA, Hinojosa and Biggert persuaded 146 colleagues to sign a letter asking HUD to extend the comment period for 60 days, to June 12. HUD granted the request, raising speculation that in the wake of HUD Secretary Alphonso Jackson’s resignation final implementation of a new RESPA rule would be left to the next administration.
HUD officials have said they remain committed to publishing a final rule this fall for implementation next year, and incoming Housing Secretary Steve Preston has said he thinks the industry’s issues can be addressed.
The "dear colleague" letter now being circulated by Hinojosa and Biggert argues that HUD’s RESPA disclosure forms haven’t been extensively consumer tested, and should be compatible with disclosure forms provided to consumers under the Truth In Lending Act.
In releasing proposed changes to enforcement of the Truth In Lending Act this week, the Federal Reserve said that consumer testing showed borrowers were confused by the disclosure of yield spread premiums.
Although HUD’s proposed Good Faith Estimate doesn’t use the terminology "yield spread premium," it would require that rebates paid by lenders when borrowers take out loans with higher interest rates than they might otherwise qualify for be disclosed and credited to their closing costs rather than pocketed by brokers.
In a speech this week, Federal Reserve Board member Randall Kroszner said disclosing yield spread premiums to consumers left some with the mistaken belief that mortgage brokers would be obliged to find them the lowest interest rate and best terms available. Others were convinced that working through a broker would cost them more than working directly with a lender, "which is not necessarily true either," Kroszner said. No matter how the language was changed to address those issues, "the forms continued to confuse consumers more than inform them."
While yield spread premiums can help borrowers who are willing to pay a higher interest rate pay down their closing costs, critics say mortgage brokers may pocket the rebates without a borrower’s knowledge, and provide an incentive to place them in higher-cost loans. Although the Fed will continue to study the issue, it has decided not to require the disclosure of yield spread premiums in TILA disclosures for now.
The National Association of Mortgage Brokers cited the Fed’s action as ammunition in its fight against HUD’s proposed handling of yield spread premiums in its proposed RESPA rule change.
In a press release, NAMB called for "the immediate suspension" of HUD’s proposed RESPA rule changes, saying "multiple studies indicate that consumers are more likely to choose higher-cost loans because of the HUD requirement that brokers disclose YSP."
In rolling out its latest RESPA proposal, HUD officials said they had conducted extensive consumer testing that demonstrated that the new rules would help consumers pick the best loan offer and settlement services package. HUD conducted five rounds of consumer testing from 2002-05 on its previous RESPA rule changes, and an additional round of tests in 2007.
According to a HUD report on the consumer tests, a 2003 Federal Trade Commission study showed that while consumers did become confused when yield spread premiums were disclosed, the tests relied on only a portion of the Good Faith Estimate. Further tests, in which consumers were presented with an improved Good Faith Estimate in its entirety, demonstrated they were able to pick the best loan, regardless of whether it was offered by a mortgage broker or loan officer, HUD said.
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