Realty Times - HUD Drafting New Closing-cost Disclosure Reform Proposals, Others Devising Their Own

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HUD Drafting New Closing-cost Disclosure Reform Proposals, Others Devising Their Own

by Kenneth R. Harney

Top federal housing officials are promising a “consumer-friendly” overhaul by this summer of the current rules on disclosures of mortgage-related fees and closing costs. In an interview, HUD Secretary Mel R. Martinez said the reforms will touch virtually every new loan transaction in the U.S., and will bring “far greater clarity and transparency than ever before” to home purchases and mortgage refinancings.

“I want people to be able to know early on just what costs to expect,” he said. “These (fees) shouldn’t be last-minute surprises on the day of settlement.” In advance of Martinez’s proposals, however, some innovative mortgage banking and brokerage firms are initiating new, voluntary consumer disclosures on their own. They are beginning to spell out in greater detail than ever before just what sorts of fees an applicant can expect to pay, and how much other settlement costs should total. A handful of firms are even promising applicants that if closing costs exceed initial “good faith” estimates by some threshold amount--say, 10 percent--the company will issue a revised disclosure well in advance of settlement.

Though the voluntary disclosures differ in some respects firm by firm, one that has attracted widespread attention was created by Fidelity Home Mortgage Corp., a mortgage banker based in Timonium, Md. The lender now requires all brokers to use the disclosure form with every applicant.

Key elements include:

Full disclosure of all fees to be paid by the lender to the broker, and the reasons for the payments. If, for example, the lender is going to pay a broker an extra $1,800 as a “yield spread premium” on the loan, the Fidelity disclosure form says so, and explains why. Is it because the borrower is paying a higher interest rate than Fidelity’s regular or “par” quote? Is the borrower paying an extra one-quarter of a percent because the broker is chipping in for some of the regular closing costs?

Full disclosure of all the services to be performed by the broker. These typically involve obtaining basic qualifying information from the applicant, checking credit, providing advice regarding the range of alternative loan products available, submission of the borrower’s application documents, and coordination of title and other settlement activities. For these services, a broker normally receives an “origination” fee. But to qualify for extra fees beyond that, the Fidelity disclosure requires brokers to spell out precisely what additional services they intend to perform. They must also document and retain details of these services in each customer’s loan file for possible later audit.

Full disclosure of the rate and fee alternatives available to each applicant. For instance, if a borrower requires a below-market interest rate, additional upfront payments will be necessary to “buy down” the rate. If the borrower wants a limited-cost or no-closing cost loan, the interest rate will have to be higher by some amount. If the customer simply wants a plain-vanilla, market-rate mortgage--ie., the standard rate and standard fees--that must also be spelled out.

Full disclosure of the contractual relationship that exists between the borrower and the broker, and between the broker and the lender. Fidelity’s model disclosure puts the relationship that exists between borrower and broker in most states in bold capital letters, so no one can miss it: “We (the broker) are acting as an independent service provider and not as your agent, with no duty or loyalty or fiduciary duty to you or any lender. We do not represent all lenders in the marketplace, and the lender with which your mortgage loan is placed may not offer the absolute lowest price, absolute best terms or the highest amount of loan dollars available.”

From a consumer perspective, that’s fair enough--as long as you know all this in advance.

Published: April 8, 2002

Use of this article without permission is a violation of federal copyright laws.

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation.

He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.

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