Realty Times November 4, 2002

HUD Gets 25,000-plus Comments On Its Mortgage Settlement Reform Proposals
by Kenneth R. Harney

The Bush administration's proposals for reform of the country's real estate settlement proceures have drawn a record 25,000-plus responses from lenders, mortgage brokers, Realtors and others---many of them critical.

The Department of Housing and Urban Development was hit with a paper blizzard of counter-proposals last week as it closed the official 90-day public comment period on its proposed changes to the Real Estate Settlement Procedures Act (RESPA) regulations. If adopted in final form in 2003, the rules will govern millions of home purchases and refinancings annually nationwide.

The proposals, originally issued by HUD Secretary Mel R. Martinez last July, would:

  • Force lenders and brokers to guarantee greater accuracy in their "Good Faith Estimates" of closing costs provided to loan applicants. Some settlement-sheet items under the lender's control would be subject to "zero tolerance" for increases, while other items that are "shoppable" by the applicant could not increase by more than 10 percent over initial estimates.

  • Require full disclosure of mortgage brokers' fees and identify commonplace "yield spread premiums" pocketed by brokers as a lender payment to the borrower that can be used to lower closing expenses.

  • Create a totally new optional format in the real estate finance marketplace--a "guaranteed mortgage package" in which the interest rate and all fees are bundled and locked from the date of application to the closing date. The packages would be designed to foster more effective shopping by consumers on all the cost items associated with a mortgage.

    Each of the proposals drew heavy fire from the industry groups most directly affected by them. Mortgage brokers, for instance, sent HUD the vast majority of the 25,000-plus comments, and were virtually unanimously in opposition to the tougher broker-fee disclosures. Brokers were especially incensed that their own heavier disclosures would not be matched by any additional fee disclosures by mortgage bankers or depository lenders. The latter are considered "secondary market" participants under RESPA, and are not subject to disclosure requirements for loan officer compensation, according to HUD.

    One broker, Julie Henderson of US Lending Co. in Redding, CA, complained that "by artificially identifying a yield-spread premium as a 'lender payment to the borrower'...you (HUD) expose just about every mortgage broker in America to class-action lawsuits." Henderson said that she "can just see a whole host of class-action plaintiffs asking (their brokers) 'where is my check from the lender?'"

    The 800,000-member National Association of Realtors applauded HUD's goal of toughening and tightening good-faith estimates, but came out swinging against HUD's guaranteed mortgage packaging concept.

    Calling it a "radical approach to reform," NAR said "there is not enough evidence of consumer and industry benefit to move forward" immediately with the packaging idea. NAR said its members are concerned that packaging closing costs will inevitably favor large banks and hurt smaller settlement service providers. By extending an exemption from RESPA's anti-kickback restrictions to packagers, said NAR, the guaranteed mortgage concept could both "reduce the quality of services provided (to consumers), and ultimately lead to higher closing costs."

    The Mortgage Bankers Association of America and banking trade groups generally favored the packaging plan, but asked for delay or changes on the toughened good faith estimates. Consumers groups such as AARP welcomed both the guaranteed package approach and more accurate good faith estimates, but offered HUD technical suggestions for improving them.

    HUD's time frame on the reforms? Officials at the agency say they would like to wrap up their reviews of the 25,000 comments late this year or early in 2003, and then issue a final rule sometime in the Spring. Between now and then, say groups opposed to the changes, look for Congress to weigh in on the issues--and possibly to block any HUD move to put the new rules into effect.


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