HUD contemplates RESPA reform

NAR believes proposed changes to RESPA won’t benefit consumers.

The stated purpose of the Real Estate Settlement Procedures Act is to provide consumers with information about the real estate mortgage transaction and its costs, and to prohibit certain practices, such as referral fees between settlement-service providers, that result in higher costs and reduced quality to the consumer. To provide consumers with cost information about the mortgage process, RESPA created the Good Faith Estimate (GFE) and the HUD-1 closing document.

To combat higher costs in the transactions, RESPA’s Section 8 makes it a criminal act for settlement-service providers to pay fees to each other for the referral of business. Although Section 8 causes angst among settlement-service providers because
violations may result in criminal and civil penalties, it is also where the consumer receives the most protection from unnecessarily high costs in the transaction.

Current environment

The U.S. Department of Housing and Urban Development (HUD) believes the biggest problem with the current mortgage process is the lack of firm cost information to enable the borrower to truly shop for a loan among various lenders. The first disclosure a borrower receives is the GFE. Unfortunately, the problem with this disclosure is that it is only an estimate; there is no requirement that this disclosure accurately reflect the true costs to close the loan.

When the borrower is provided the HUD-1 at closing and the costs are higher than the estimate, there is very little the borrower can do other than pay the additional money to complete the transaction. It is estimated that this occurs far more often in the home-equity and refinance market than in the home-purchase market. NAR believes this is largely due to the presence of a real estate professional in the home-purchase transaction.

Other problems cited by HUD as reasons for reform include a lack of borrower understanding of mortgage-
broker functions and compensation, and the assertion by lenders that current rules impede the packaging of settlement services.

The proposed rules

In an effort to simplify the mortgage process and to provide certainty to borrowers about their costs, HUD has proposed rules that change the mortgage-disclosure process by requiring lenders to disclose mortgage loan costs (interest rate and settlement costs) in one of two ways:

1. Improved GFE: This new format for the GFE requires firm quotes for lender-origination charges, lender-required services, and government charges. Other lender-required but shoppable third-party services will be subject to an upper limit or 10% tolerance.
2. Guaranteed mortgage package (GMP): This change would require the lender to disclose the loan rate and a single, guaranteed price for a package of settlement services. For example, the lender would quote 7% interest and a $3,000 GMP. Lenders or packagers offering this option would be exempt from Section 8 (the prohibition against kickbacks). This exemption would apply only to the services within the package. The current prohibition against referral fees among lenders, real estate licensees, and other providers would be maintained. (Under this approach, borrowers will no longer have a choice in the selection of their providers. Instead, they will choose lump-sum packages.)

NAR position

NAR supports the preservation of the current RESPA rules and opposes any broad regulatory relief for lenders who will package services. There has been no evidence that such a regulatory structure will result in lower costs to the consumer, and the GMP provisions could give a competitive advantage to lenders.

NAR believes HUD should conduct additional economic analysis on the GMP to assess its impact on consumers and the industry. Until then, HUD should hold off on advancing the GMP and instead take an incremental approach to reform by improving the GFE to require firmer cost quotes and add enforcement provisions for noncompliance.

The lending industry feels these changes will improve the current system by bringing more certainty and simplification to the mortgage transaction, while providing relief to the lending industry from class-action lawsuits.

Outlook

The comment period on these reforms closed Oct. 28, 2002. HUD received more than 45,000 comments and is still reviewing them. Several hearings have been held in the U.S. House and Senate, focusing on the small-business and consumer impact of the proposal. Congressional leaders have recommended that HUD conduct additional analysis and publish a revised proposed rule for additional comment.

Reprinted from the National Association of REALTORS®

Photo © Corbis Images.

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