The Obama administration today released details of plans to combat "the worst abuses in mortgage markets" by creating a new Consumer Financial Protection Agency to safeguard consumers from deceptive practices and provide them with concise information for comparing mortgages and other loans.
The agency would have the power to set standards protecting consumers and encouraging competition, and the authority to make sure consumer-protection regulations "are written fairly and enforced vigorously," the Treasury Department said in a press release.
The Consumer Financial Protection Agency might, for example, develop guidelines for simple "plain vanilla" mortgages with predictable payments, require a "duty of care" for mortgage brokers, and ban "yield spread premiums" — rebates paid by lenders when mortgage brokers place borrowers in high-interest-rate loans.
The new rules would serve as a floor, not a ceiling pre-empting states from passing their own laws, and states would be empowered to enforce the strengthened federal rules.
The Consumer Financial Protection Agency would also have the ability to gather information from anyone making loans and respond to changes and address bad practices as they develop.
During the housing boom, no single agency was charged with looking at mortgage lenders of all types across the market. Had the proposed agency existed, "its examiners could have gotten inside the operations of these unregulated mortgage companies and detected unfair, deceptive and abusive lending practices that so damaged the markets," the Treasury Department said.
A draft bill the administration delivered to Congress would require the new agency to develop a uniform mortgage disclosure form and put it forward for public comment within a year of the agency’s creation.
The uniform disclosure form would have to meet the requirements of both the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) — something the real estate industry has been demanding since the Department of Housing and Urban Development and the Federal Reserve drew up separate disclosure forms for consumers.
The standardized disclosure forms developed by HUD to meet RESPA requirements — the Good Faith Estimate and HUD-1 settlement statement — are currently scheduled to become mandatory on Jan. 1, over the objections of lenders and critics within the real estate industry.
Industry groups including the Mortgage Bankers Association, the American Escrow Association and the American Bankers Association have asked HUD to withdraw the form and other RESPA rule changes and work with the Federal Reserve on a uniform disclosure form.
The National Association of Home Builders and the National Association of Mortgage Brokers have also filed separate lawsuits aimed at blocking aspects of the rule changes (see story).
Many House lawmakers are sympathetic to the real estate industry’s concerns. Last year, more than 240 lawmakers signed a letter urging HUD to withdraw its proposed RESPA changes and work with the Fed on a simplified disclosure form (see story).
In a 300-114 vote May 7, the House approved HR 1728, a bill aimed at curbing predatory lending, which also included an amendment that would delay HUD’s RESPA rule changes for one year. It’s unclear whether Senate lawmakers will follow suit. …CONTINUED
Although the new GFE and proposed RESPA changes were drawn up during the Bush administration, Obama’s Secretary of Housing, Shaun Donovan, said last month that he remains committed to implementing the changes on Jan. 1 (see story).
In proposing the new disclosure forms and RESPA rule changes in March 2008, HUD said they would save consumers nearly $700 per loan, or $8.35 billion a year, by helping them shop for the best price on not only a mortgage, but settlement service like title insurance (see story). HUD has said the Fed’s TILA disclosure form emphasizes loan terms.
Asked if HUD still plans to implement the new disclosure forms and RESPA rule changes on New Year’s Day, a HUD spokesman today said Donovan "is already on record that the department is moving ahead with fully implementing the final RESPA rule come Jan. 1."
That means the Obama administration appears to be on a course in which it will require lenders to begin using HUD’s new RESPA disclosure forms on the first of the year, and then ask the new Consumer Financial Protection Agency to draw up new forms to replace them.
HUD estimates that more than 10,000 lenders would be affected by the proposed RESPA rule change, plus more than 4,000 credit unions that originate mortgages. Adopting the new disclosure forms and complying with the new RESPA rules will involve considerable time and expense.
In an impact analysis, HUD estimated that lenders and settlement services providers are facing $571 million in one-time costs to implement the changes, and will then face recurring compliance costs of $918 million a year, or $73.40 per loan.
The draft bill released by the Obama administration today would allow the Consumer Financial Protection Agency to hold off on drawing up a uniform mortgage disclosure form if it determines that "any proposal issued by (the Fed and HUD) carries out the same purpose."
Either way, lenders and settlement services providers like title insurers are faced with a dilemma because they must prepare to implement any changes well in advance. They could spend the money required to become compliant with HUD’s RESPA rule changes, only to see them suspended by Congress or superseded by the new disclosures to be drawn up by the Consumer Financial Protection Agency.
There are "lots of conflicting scenarios out there which create Excedrin-like headaches for lenders and other settlement service providers," said Philip Schulman, an attorney with K&L Gates who is an expert on RESPA issues.
It’s impossible to say whether or when a Consumer Financial Protection Agency will be created or if Congress will set aside implementation of HUD’s RESPA rule change, Schulman said.
"I think it is fair to say that neither (the protection agency nor congressional suspension of HUD’s RESPA rule) will be in effect on Jan. 1, 2010," Schulman said in an e-mail. "Therefore, all the industry can do at this point is gear up for the new GFE and HUD-1 scheduled to be in place on New Year’s Day."
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