Consumers will be less likely to accept overpriced loans, title insurance and other services — including those offered by businesses affiliated with real estate brokerages and builders — once new loan disclosure forms and settlement procedures are fully in place at the end of next year.
That’s according to a lengthy review by the Department of Housing and Urban Development of its proposed rule changes governing enforcement of the Real Estate Settlement Procedures Act.
In publishing a final rule in Monday’s Federal Register, HUD detailed numerous "significant" changes to its proposed overhaul of RESPA in response to feedback from industry and consumer groups.
When they announced the new rule last week, HUD officials emphasized concessions they made to the real estate industry trade groups, who were highly critical of the rule changes as first proposed in March. Industry critics said HUD has overestimated the extent to which consumers will comparison shop, and underestimated the unintended consequences of the rule change, such as consolidation.
HUD’s response to the criticism included dropping a requirement that consumers be read a lengthy script at the closing table, and shortening the standardized good faith estimate (GFE) from four pages to three.
More crucially, perhaps, HUD toned down but did not abandon measures intended to encourage consumers to shop for the best deal and create more competition between lenders and settlement services providers. The measures still in place could have a dramatic impact on the way those products are marketed and sold to consumers.
The overall goal of the new, standardized GFE is helping consumers compare different loan packages, HUD said. The new disclosures and procedures will empower consumers to compare not only the rates and terms of different mortgage offers, but the price of services required by most lenders, such as title insurance.
Slack on tolerances
HUD said one way it is helping consumers comparison shop is by imposing tolerances on how much prices and fees quoted in the GFE can change before borrowers reach the closing table. Loan origination fees can’t change at all, and fees for required services won’t be permitted to change by more than 10 percent when they are provided by a company selected by the lender.
Trade groups representing lenders and settlement service providers were generally opposed to tolerances when they were proposed by HUD in March. In order to minimize the risk of violating the tolerances, some said, big lenders would have to contract with large settlement service providers, driving small companies out of business and reducing competition.
HUD said accurate estimates are crucial to empowering consumers to shop for the best deal, protecting them from "low-ball" offers that change at the last minute. But HUD said it did not intend to punish loan originators for unforeseen changes in a borrower’s circumstances or other factors beyond their control, such as government recording charges.
HUD says the final rule provides some additional leeway for fees to change due to unforeseen circumstances. If there are changes in the tax rate or the price of the property after the good faith estimate is provided, for example, originators can provide a revised estimate.
While transfer taxes will still subject to a "zero tolerance," HUD acknowledged that government recording charges may not be be known until closing, and will instead be categorized with other settlement services that can change by 10 percent overall.
HUD will cut lenders some additional slack by giving them up to a month after a closing to correct any failure to achieve the tolerances. The final rule would give loan originators 30 days to "cure" violations by reimbursing the borrower by the amount the tolerances were exceeded.
If that sounds like a slap on the wrist that won’t deter loan originators from engaging in bait-and-switch tactics, HUD says that until Congress grants it additional power to enforce RESPA, it can’t legally impose fines for such violations.
But lenders won’t be able to break the rules with impunity, HUD says, because federal and state banking regulators can punish the companies they license for RESPA violations. In addition, aggrieved borrowers can bring civil suits under RESPA seeking redress, and lenders who sell loans on the secondary market can also be held liable by the investors who buy them if they break rules governing mortgage originations.
In its handling of tolerances, HUD says the final RESPA rule "seeks to balance the borrower’s interest in receiving an accurate GFE early in the application process … with the lender’s interest in maintaining flexibility to address the many issues that can arise in a complex process such as loan origination."
Incentives for packaging
In addition to better equipping consumers to comparison shop, the RESPA rule changes HUD proposed in March included incentives for lenders to package settlement services such as title insurance with loans.
One incentive HUD suggested to encourage packaging was to allow lenders to negotiate volume discounts with settlement services providers. As long as those discounts were passed to consumers, HUD proposed, they would be explicitly permitted under RESPA.
HUD reasons that if consumers are able to shop for an entire loan package — including title insurance and other settlement services — lenders will negotiate for more affordable settlement services in order to win their business.
That would be a radical departure from the way the process often works now. Because many consumers don’t traditionally shop for title insurance and other settlement services, some companies market their services to the real estate brokers, mortgage lenders and builders who are in a position to refer business for them.
RESPA prohibits settlement services providers from paying for business referrals. But many have created affiliated businesses with real estate brokers and others that can refer clients to them, allowing them a legal avenue for splitting profits. Critics say affiliated businesses charge higher rates.
The Mortgage Bankers Association liked the idea of allowing lenders to negotiate with settlement services providers for volume discounts. But the MBA said HUD wouldn’t be giving lenders much incentive to negotiate if they were required to pass along all of the savings to consumers — an opinion shared by the Federal Trade Commission.
Many other industry groups had strong objections to negotiated volume discounts, saying the practice would put too much power in the hands of big lenders and reduce competition.
The American Bankers Association and the Community Bankers of America said smaller banks wouldn’t be in as strong a position to negotiate volume discounts as their larger rivals, putting them at a competitive disadvantage. The American Land Title Association, which represents title insurers, also said small businesses would be disproportionately harmed.
Rep. Donald A. Manzullo, R-Ill., complained to HUD that if small businesses were forced to reduce their prices, many would be driven out of businesses, resulting in an anti-competitive environment where large lenders would be able to raise prices for settlement services.
Manzullo was one of 243 House lawmakers who asked HUD in an Aug. 7 letter to withdraw its proposed RESPA rule changes and limit itself to working with the Federal Reserve on simplified disclosure forms instead. HUD, which had previously agreed to a request by lawmakers to extend the public comment period on the rule change, said it would push forward with a final rule that balanced the needs of the industry with those of consumers (see story).
In the end, HUD backed down from explicitly allowing negotiated discounts between loan originators and settlement service providers, saying in Monday’s Federal Register that it wanted to "provide adequate market flexibility … and due consideration to small business concerns."
But HUD said it still maintains that Congress did not intend for RESPA to prohibit such negotiated discounts, and will "consider other avenues for providing guidance on negotiated discounts, including … the issuance of statements of policy."
HUD also left largely intact another incentive for packaging settlement services with loans: average cost pricing. Average cost pricing will allow loan originators and third-party settlement services providers to charge an average of their actual cost of providing services like courier delivery of documents. Tracking the actual cost of such services when they are provided in volume creates an unnecessary expense, HUD reasons.
The National Association of Realtors wanted average cost pricing limited to small items such as courier fees and recording costs, saying consumers could end up paying more than an average on bigger ticket items like appraisals.
While HUD to avoid such potential inaccuracies, it would allow more flexibility in how average charges are calculate. But the final rule will allow the practice for any settlement service that’s obtained from a third party on behalf of the consumer.
HUD will leave the method of determining the average up to the settlement service provider, but the total amount received from consumers for the service cannot exceed the amount paid to the providers of the service.
‘Required use’ of AfBAs
At the same time HUD is attempting to create incentives for loan originators and settlement services providers to offer competitive loan packages, it’s trying to eliminate bogus incentives tied to the required use of affiliated businesses.
Critics say an egregious example are price incentives offered by some home builders when buyers agree to use the builder’s affiliated mortgage company. In practice, the "incentives" actually amount to a penalty for using another lender, critics say, and dissuade home buyers from shopping around for a loan. In the end, many who financed their home through an builder-affiliated lender during the housing boom ended up paying more, because they were steered into high-cost loans, critics say.
Builders and industry groups objected strongly when HUD announced that it intended to make clear that RESPA prohibits disincentives that consumers can only avoid by choosing a particular settlement service provider.
CTX Mortgage Company said the proposed change would ‘‘provide a significant road block" preventing home buyers from benefiting from streamlined mortgage and title services offered by parent company Centex.
The National Association of Home Builders said studies of builder-affiliated mortgage companies showed some have lower per-loan operating costs than outside lenders. Those savings and others associated with affiliated businesses are difficult to quantify, NAHB said, but they are significant and they are passed along to consumers, the group claimed.
NAR said real estate agents and brokers often offer inducements to clients, such as gift certificate to local businesses and free home inspections, that the "required use" rule change would prohibit.
HUD said its final rule will allow settlement services providers to continue to offer incentives when providing a combination of "bona fide" services at a total price lower than the sum of the market prices of the individual services, as long as the purchase of a combination of services is optional and not made up by higher costs elsewhere in the settlement process.
The new "final use" definition "makes it clear that economic disincentives that are used to improperly influence a consumer’s choices are as problematic under RESPA as are incentives that are not true discounts," HUD said.
In spite of all the changes to the RESPA rule changes put forward in March, HUD hasn’t revised its estimate of what the new playing field will mean for consumers: savings of $700 per loan, or about $8.35 billion a year.
Now that a final rule has been published, Congress has 60 days to decide whether to block its implementation. If Congress lets the changes stand, President-elect Barack Obama’s administration will not be able to rescind them, but would have the option of drafting new rules to supersede them.
Although HUD won’t require loan originators to start using the new standardized GFE and HUD-1 settlement statement until Jan. 1, 2010, companies would be permitted to abide by the existing rule or follow the new ones during a 12-month transition period.
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