Groups Reject RESPA Reform

Several groups are asking that implementation of RESPA reforms be delayed by the U.S. Department of Housing and Urban Development at least until they can be implemented in conjunction with the recently proposed TILA revisions by the Federal Reserve Board. In addition, they are asking that once finalized, the transition period be lengthened to at least 24 months rather than the 12 months now called for because of necessary software revisions and other costly and time consuming systems changes.

Some, including the Mortgage Bankers Association and the Consumer Mortgage Coalition, even question whether consumers would benefit from the proposal as currently written because of implementation costs, a potential failure to obtain volume discounts and an information overload that will discourage consumers from reading all the material. The quality of services to consumers, warns the National Association of Realtors, could suffer because of the emphasis on cost reductions.

And the Real Estate Services Providers Council, whose members include home builders, title insurers, real estate broker-owners and other settlement service providers — and which also criticizes what they see as an emphasis on price over service — suggests the proposal would ban legitimate incentives offered by a company’s one-stop shopping services that benefit consumers.

Further, argue NAR, the Small Business Administration’s Office of Advocacy and others, the proposal would unfairly hurt small brokers, loan originators, settlement service providers and Realtors and help their large competitors by its treatment of volume discounts and its imposition of costly requirements.

“HUD’s proposal,” said the Independent Community Bankers of America, in a view most organizations seem to share, “is ill-timed, contains elements that will likely confuse borrowers and adds to the burdens of an already overcomplicated process.”

ICBA added, “They will cause significant additional disruptions to a mortgage industry already in turmoil.”

Although commentators point to a need for more detailed and transparent disclosures to borrowers, which HUD’s proposal seeks to address, they question many aspects of that proposal. HUD, they feel, is complicating disclosure and other rules rather than simplifying them, adding costs and time to the mortgage process.

And the American Financial Services Association, National Association of Mortgage Brokers and Consumer Bankers Association — among others — even say that HUD lacks the statutory authority to promulgate many provisions of the proposal, such as settlement and non-settlement costs and fees and also some of the loan term and broker compensation disclosures in the Good Faith Estimate. They also point to alleged conflicts and duplications with TILA, the Equal Credit Opportunity Act, HMDA, Regulation Z and other notice requirements.

The proposal, says NAMB, must explain how it relates to not only existing law but also to the Federal Reserve Board’s proposed amendments to Reg Z.

NAMB also maintains that the proposal “fails to comply with some of the most critical APA [Administrative Procedures Act] standards,” which proposed federal rule making must meet.

Most frequently criticized are disclosures and other requirements concerning GFEs, “closing scripts” and broker compensation, including yield-spread premiums.

RESPA’s explanation of the YSP is, maintains NAR, “incomplete” because it lacks “an accompanying explanation of lender compensation,” preventing a full understanding of the tradeoff of economic incentives between brokers and lenders.

And NAMB complains that the proposal focuses only on YSPs while ignoring other types of compensation, and thus “obfuscates and confuses” originator compensation.

GFEs, as newly defined by HUD, are “overly prescriptive” and “extremely costly to implement,” according to the American Bankers Association. Further, according to NAR, HUD underestimates the number of GFEs and their costs that would have to be made per loan and totally ignores or dismisses the operational, underwriting and hedging costs of those GFEs.

Because the new GFE application only provides the borrower’s name, social security number, gross monthly income, property address, borrower’s estimate of the property’s value and the mortgage loan amount being sought, the CMPS Institute, the Federal Trade Commission staff and several groups complain that lenders and brokers would be required to deliver GFEs before all the pertinent information was obtained. Thus, originators should be able to request more information.

Limiting the information originators obtain for the GFE, said the FTC staff, “may result in the loan terms disclosed on the GFE being dramatically different from the final terms offered after full underwriting.”

Limiting information, says AFSA, would jeopardize risk-based pricing, which has opened the mortgage market to individuals with less-than-perfect credit, because risk-based pricing requires lenders to fully underwrite an application before the lender can assign an appropriate price to the loan application.

And at four pages, up from a single page, MBA said the new GFE will defeat HUD’s and MBA’s goal, overload borrowers with material and be “largely ignored by consumers.” The trade group, along with others, is instead calling for HUD and the Federal Reserve to develop and implement a joint GFE-TILA disclosure.

MBA also charges that it is unclear which of the two definitions of “application” — the GFE application or mortgage application — is the “the officially recognized trigger for the various statutory requirements.”

While MBA commends the clarification of volume discounts and use of average cost pricing for settlement services, the group complains these are too restrictive as proposed. And CBA, which also basically supports these aspects of RESPA reform, notes that the Federal Reserve Board needs to clarify Reg. Z as it pertains to average cost pricing and that the volume discount should be more widely treated.

While one purpose of the GFE is to better enable consumers to shop for the best loan for them, NAMB maintains that as proposed it is “unworkable” and would create confusion.

The “closing script,” which is to be read by the settlement agent, is criticized for its length, its requirements and its complexity. NAR said that it’s not only flawed but “comes too late in the process to be of real value to the borrower. By the time the borrower reaches the closing table it is highly unlikely that he or she will walk away from the transaction unless serious misrepresentations or issues are uncovered.”

Further, notes ICBA, this “very long and complicated” script would be read when borrowers and settlement agents are usually pressed for time.

And MBA says implementation would “raise legal concerns, be too costly, provide little benefit to the consumer at closing and raise significant operational concerns.” If a closing script is to be implemented it should be done as part of RESPA-TILA reform, they say.

The Real Estate Services Providers Council even warns that actions related to the closing script “would violate unauthorized practice of law requirements.”

The comment letters also continue the dispute over the differences between mortgage bankers and mortgage brokers and how they are compensated.

MBA, CMC and American Bankers Association object to the lumping together of both mortgage bankers and mortgage brokers as “mortgage originators,” without taking into account the differences in services and compensation. And CMC also points to the performance differences between bankers and brokers in meeting rate locks and other loan promises.

However, NAMB objects to HUD’s definition of mortgage broker, charging that it “perpetuates distinctions among mortgage originators that no longer have meaning in the marketplace.” And it complains that the proposed broker compensation disclosures “make distinctions among mortgage originators with no basis for doing so and in disregard of market realities.”

The Certified Mortgage Planning Specialist Institute complains that only mortgage brokers are required to disclose the commissions they earn “while allowing bankers to slide by without disclosing their commissions.”

FTC staff similarly said the proposed broker compensation disclosures should be reevaluated “as they may adversely affect consumers and competition.”

The proposed compensation disclosures, notes FTC staff, “continue to create confusion that leads to an anti-broker bias among a significant proportion of consumers.”

Citing the costs of converting systems to accommodate any new RESPA changes, the MBA also says that any RESPA changes, especially to the GFE, should be delayed until they can be combined with planned changes in TILA disclosures. NAR, in addition to opposing finalization of the new RESPA rules until they are “harmonized” with TILA, also calls for “marrying” RESPA’s GFE requirements and the HUD-1 to “mirror one another.”

The Federal Reserve Board is currently in the process of establishing new rules under TILA.

And the Real Estate Services Providers Council suggests a joint HUD and Federal Reserve Board form with both RESPA and TILA disclosures.

Settlement cost definitions and restrictions also are criticized by MBA, ICBA, NAR and others. ICBA said those costs are locked too early in the transaction. And ICBA warns that HUD’s single-minded emphasis on cost reduction would be anti-competitive because it will produce large company winners and small company losers, and also would reduce the quality of settlement services because of the higher cost.

NAR warns that “quality and value may be affected by HUD’s cost reduction mechanisms.”

HUD’s role in the mortgage process, it added, should be limited to its “existing authority to eliminate kickbacks, enhanced enforcement efforts and permitting free-market forces to determine the right combination of price and value.”

Similarly, MBA also questions whether a “zero tolerance” for lender and broker fees is justifiable under RESPA or that a 10 percent tolerance on certain third party charges required by the lender or broker is the best approach. It also termed these limitations as “legally questionable under RESPA.”

And CBA said that tolerances are inconsistent with the notion of a good faith estimate mandated by RESPA. “By mandating tolerances, HUD has, in effect, replaced estimates with guaranteed fees,” it charged.

Many conclude their comments with strong negative pictures of the outcome if HUD’s RESPA form is implemented.

HUD’s RESPA proposal, NAR concludes, is cumbersome, confusing and “not likely to yield benefits in the real world.”

“The proposal,” warns AFSA, “would dramatically change the entire loan application, underwriting and origination process for every lender in the country. Unfortunately, the changes will increase risk for every participant in the origination process and will introduce substantial additional cost to each step of the process. Both effects will translate into higher mortgage costs for all consumers.”

“The rule is badly flawed, runs counter to a number of legal and regulatory requirements, and will harm, rather than help, consumers,” ABA concludes. “It should be withdrawn and re-proposed after further consideration.“

Jerry DeMuth is an award winning journalist who has been reporting for four decades.

e-mail Jerry at demuth933@earthlink.net