Offering a few concessions to the real estate industry, the Bush administration is moving forward with regulatory changes that it expects will dramatically alter the way mortgage loans and settlement services like title insurance are marketed and sold to consumers.
The new rules, which would not be enforced until 2010, would require loan originators to stick closely to cost estimates provided to borrowers on a new, standardized disclosure form. The rules would also provide incentives for lenders to package settlement services such as title insurance with loans.
Officials at the Department of Housing and Urban Development claim the new rules will help borrowers comparison-shop between competing loan offers or complete loan packages, saving them an average of nearly $700 at the closing table.
"Millions of families go to the settlement table … without clearly understanding what they are paying for," Housing Secretary Steve Preston said in announcing changes several years in the making. "In many respects, it’s clear that the current way people buy and refinance their homes isn’t serving us very well at all and has contributed to the current housing crisis."
The new rules are intended to help borrowers avoid paying excessive loan origination and closing costs, and understand potential issues like payment shock from adjustable-rate mortgage (ARM) loans, balloon payments, and prepayment penalties for refinancing.
Preston said HUD plans to publish the new regulations under the Real Estate Settlement Procedures Act, or RESPA, in Friday’s Federal Register. If Congress does not stand in the way, the RESPA rule changes would take effect within 60 days after publication.
HUD will allow a one-year transition period, during which companies that want to start doing businesses under the provisions of the new rule can do so. But lenders and mortgage brokers would not be required to use the new, standardized Good Faith Estimate and HUD-1 settlement statements until Jan. 1, 2010.
That day may never arrive, as industry opponents could still appeal to Congress to block implementation of the rule, or ask the incoming Obama administration to propose a new RESPA rule that would supersede it.
Industry opponents say HUD — which has been attempting to update the 34-year-old law since 2002 — has overestimated the benefits of RESPA rule changes to consumers, while underestimating the costs to loan originators, title insurers and settlement services providers.
Some industry groups, including the National Association of Realtors and the American Land Title Association, maintain HUD’s proposed incentives for packaging settlement services with loans could actually reduce competition by promoting further industry consolidation.
To encourage packaging, the proposed rule changes put forward by HUD in March would allow lenders leeway to pass on volume discounts to consumers and use average-cost pricing.
That could allow big lenders to pressure settlement services providers into reducing their prices in order to be included in the lenders’ preferred packages, Anthony Lindsey, CEO of GlobeCrossing LLC, testified on behalf of NAR at a congressional hearing in September.
HUD has said such pressure by lenders will save consumers money. But NAR thinks that in the long run, small settlement service providers will be driven out of business, leaving the companies that survive free to raise their rates, Lindsey said at the hearing (see story).
To prevent last-minute changes in fees charged for settlement services, HUD proposes placing "tolerances" limiting fee increases for services provided by a lender or a company recommended by the lender to 10 percent. No tolerances would be imposed on fees when consumers select their own settlement services.
"This is a consumer revolution that occurred today, and I don’t think people will fully appreciate it until it’s implemented in January 2010," said Jeff Lazerson, president of Mortgage Grader. "We were the only industry that I can think of that the written estimate wasn’t worth the paper it was written on."
Laguna Niguel, Calif.-based Mortgage Grader operates one of a growing number of Web sites that not only allow consumers to shop for mortgages online, but fully disclose the fees charged. Lazerson believes HUD’s RESPA rule changes will be a boon for Mortgage Grader and Fair Closing Costs, another site his company operates that helps consumers shop for settlement services (see story).
But ALTA maintains that HUD lacks the legal authority to impose tolerances, which effectively changes the good faith estimate into an offer. Although HUD officials say tolerances will remain a part of the final RESPA rule, they will allow 30 days to "cure" violations.
Mortgage brokers and mortgage bankers also have issues with HUD’s proposed disclosures, pointing out that the Federal Reserve will require a different set of disclosures to meet Truth in Lending Act (TILA) requirements.
In an Aug. 7 letter, 243 members of the House of Representatives asked HUD to withdraw its proposed RESPA rule changes and limit itself to working with the Federal Reserve to create simplified disclosure forms that also meet TILA requirements.
HUD, which received more than 12,000 public comments after announcing the proposed rule changes in March, said it would attempt to strike a balance between the needs of consumers and the real estate and lending industries in its final rule. But HUD refused to withdraw the rule.
In a speech this summer, Preston called it "absolutely reprehensible" that so many lawmakers were "fighting to stall progress, especially when they know so many families are in trouble because they didn’t understand the terms of their mortgage."
Today, Preston struck a more conciliatory note, saying that HUD hopes changes to the final rule "will convince our industry partners and those in Congress that we have approached this rule-making process in a thoughtful manner."
But HUD’s changes appeared to be mostly minor. HUD dropped a proposed requirement that settlement agents read a "closing script" that takes borrowers through their settlement statement to make sure it jibes with the good faith estimate, or GFE. Industry opponents said reading the script would be costly, time consuming and impractical.
Instead of a closing script, HUD has created a new page on the HUD-1 settlement statement that’s intended to help consumers compare their final loan terms and closing costs to the GFE themselves.
The GFE has been reduced from four pages to three, and each designated line on the final HUD-1 will now include a reference to the relevant line from the GFE.
HUD had not released the text of the final proposed rule when it announced its imminent publication, but promised that it would be posted later today. Having not seen the actual language of the rule, industry groups were guarded in their comments.
"I think those are good things, they represent movement in the right direction," said Ed Miller, ALTA’s chief counsel and vice president of public policy, of the changes HUD officials revealed at a press conference. "The script was not workable. It didn’t take into the effect of laws and regulations at the state level, and we are happy HUD was responsive to our complaints."
But while those changes address some industry concerns, it’s unclear if HUD has left in place some or all of the packaging incentives that could have a big impact on settlement services providers.
It’s believed that HUD has removed provisions allowing volume discounts from the final rule. If that’s the case, the change, taken in conjunction with a 30-day right to cure fees that exceed tolerances, "could mitigate a lot of the problems" with tolerances, Miller said.
If lenders lowball estimates of fees for settlement services simply to win business, settlement service providers shouldn’t be held responsible, Miller said.
"Most industry groups had concerns about tolerances and volume discounts put together," Miller said.
HUD and the Federal Reserve also remain on a path that will lead to the federal government requiring two sets of different — and in some ways incompatible — loan disclosure forms: one for RESPA, and one for TILA.
TILA disclosures will require lenders to disclose annual percentage rate, or APR, which incorporates some fees into calculating what it will cost borrowers to pay the loan back. HUD’s GFE provides the interest rate on the loan, not the APR — a practice some say could stump consumers.
"If you’re handed (HUD’s GFE) and the TILA (disclosure) form at the same time, and one shows APR and the other the interest rate, you create confusion right from the get-go," Miller said.
HUD says it’s trying to help consumers choose not just the best loan — the focus of TILA disclosures — but the best loan package, including settlement services. Because APR does not include all fees, it may not be a good indicator of who’s offering the best deal.
"HUD was completely right in that thinking," Mortgage Grader’s Lazerson said. "The APR stuff is just a smoke screen for lenders to make more profit at the consumer’s expense."
John Courson, chief operating officer of the Mortgage Bankers Association, said HUD could address the issue by using an "all in" APR that includes all fees.
"That number can be shopped apples to apples," Courson said. "The borrower can change the APR depending on what they do or don’t want to finance into the rate."
Courson said the MBA is disappointed in the "continued inability of the Fed and HUD to work together to harmonize disclosures."
Preston told reporters today that while HUD agrees there may be opportunities down the road to work with the Fed on more compatible disclosures, RESPA reform needs to be done quickly.
The Obama administration will reportedly be able to roll back any regulatory changes that have significant economic impacts if they are made after Nov. 20.
"Our initial reaction is we appreciate HUD’s effort — they’ve made a good start … but we think they could do more," Courson said.
While HUD appears to have adopted a number of the MBA’s suggestions in creating the final GFE and HUD-1 statements, Courson said, disclosures of yield-spread premiums sometimes paid to mortgage brokers should be more clear.
HUD’s standardized GFE does not identify yield-spread premiums by name, but it would require that the rebates be applied to a borrower’s closing costs. HUD says that would allow borrowers who choose to pay a higher interest rate in order to reduce their closing costs to do so, without mortgage brokers pocketing the rebates without their knowledge.
Mortgage brokers, however, complain that banks don’t disclose service-release premiums when they sell loans in the secondary market that they don’t have to report.
HUD officials said they were intent on creating disclosure forms that didn’t create consumer bias for or against mortgage brokers or bank loan officers.
In seven rounds of consumer testing, borrowers were able to select the lowest-cost loan 92 percent of the time, whether it was originated by a mortgage broker or lender, said HUD Assistant Secretary for Housing Brian Montgomery.
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