On Nov. 12, HUD issued its long anticipated final RESPA reform rule. However, the 341-page rule contains significant modifications from the version that was released for comment in March ”“ key among them being the removal of the closing script and the volume discount proposal. An amended definition of "required use" is still in the rule, however, as are some vestiges of the average-cost pricing proposal.
Curiously, HUD estimated that “improving upfront disclosures on the GFE and limiting the amount that estimated charges could change will save consumers nearly $700 in loan costs.” HUD said the savings come primarily from putting a 10 percent tolerance cap on settlement fees and providing a standardized form that will enable consumers to save money through shopping.
However, this latest estimate is even higher than the amount HUD said consumers would save from the proposed RESPA rule in March, when HUD estimated that with the closing script and other provisions, settlement costs would be lowered by $6.5 to $8.4 billion annually, with an average savings of $518 to $670 per transaction.
Thus, the loss of the closing script and other provisions does not appear to have detrimentally affected HUD's cost savings estimates, and indeed, seems to have improved them. It's worth noting that $700 was also the figure former HUD Secretary Mel Martinez estimated that consumers would save under the 2002 RESPA reform rule that included significant packaging provisions.
Making modifications
In describing the basics of the new rule, HUD Secretary Steve Preston stated that “for the first time ever, HUD will require that mortgage brokers and mortgage lenders provide consumers with a standardized Good Faith Estimate.” HUD believes that the standardized GFE will allow consumers to shop more effectively for the lowest cost loan. HUD has also released a modified version of the HUD-1 settlement statement that includes a “crosswalk” comparison to items on the GFE.
Preston noted that HUD “took the 12,000 comments we received very seriously. We have made some significant modifications from the proposed rule we issued last March. We very much hope these modifications will convince our industry partners and those in Congress that we have approached this rulemaking process in a thoughtful manner.”
In a similar vein, Brian Montgomery, HUD's Assistant Secretary of Housing, Federal Housing Commissioner, said, "We have carefully considered the concerns expressed from every corner of the mortgage market in developing this rule. I am convinced that we successfully balanced the needs of consumers with those in the business of homeownership. None of us can lose sight of the fact that millions of Americans simply don't understand all the fine print of their mortgages and this, in many respects, is at the heart of today's mortgage crisis."
Changes to the rule
Regarding changes to the rule, Montgomery cited HUD's original proposed requiring settlement agents to read a closing script at the closing table and provide a copy to borrowers.
“HUD ultimately discarded the script in favor of a new page on the HUD-1 Settlement Statement that allows consumers to easily compare their final loan terms and closing costs with those listed on their Good Faith Estimate,” Montgomery said.
Further, as most industry commenters said HUD's proposed four-page GFE was too long. HUD shortened the GFE form to three pages including an instructional page to help borrowers understand their loan offer.
In addition, the GFE will consolidate closing costs into major categories to prevent junk fees and display total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. HUD will specify the closing costs that can and cannot change at settlement. If a fee changes, HUD will limit the amount it can change.
HUD also said it agreed with the many commenters who suggested the new GFE allow consumers to compare their estimated closing costs with the actual costs included on their HUD-1 Settlement Statement.
“To facilitate comparison between the HUD-1 and the GFE, each designated line on the final HUD-1 will now include a reference to the relevant line from the GFE. Borrowers will now be able to easily compare their estimated and actual costs in very much the same manner as many of the commenters suggested,” HUD said.
In elaborating on these changes, Gary Cunningham, HUD's deputy secretary for regulatory affairs, noted that there is a new page 3 added to the HUD-1 which “specifically has a crosswalk in two parts.”
He explained, “The top portion traces the settlement costs that were on the GFE versus the final costs that were on the HUD-1, demonstrates a comparison between the two costs and shows which ones are limited by tolerances and whether the overall tolerance is violated. The bottom portion deals with loan terms, and basically picks up the loan term disclosures on first page of GFE and shows the borrower whether there have been any changes to those or what those final loan terms are. So with third page, a borrower fully understands what the final costs are on the HUD-1 and how they compare to the GFE.”
Originator provisions
Preston noted that “HUD will require that the compensation lenders pay to mortgage brokers be more fully disclosed. These so-called ”˜yield spread premiums' are rarely understood by, or fully disclosed to, borrowers. These premiums are directly tied to the higher interest rates that borrowers pay. Consumers deserve to understand this and they need to get credit for essentially paying these premiums.”
HUD added, “To ensure that HUD's new requirement will not create a consumer bias against brokers, the Department did rigorous consumer testing and found the new Good Faith Estimate helped consumers to select the lowest cost loan nine-out-of-10 times, regardless of whether the loan was originated by a lender or a broker.”
Loan originators will also be required to provide borrowers their Good Faith Estimate three days after the loan originator's receipt of all necessary information. To facilitate shopping, loan originators could require verification of GFE information (tax returns etc.) until after the applicant makes the decision to proceed.
HUD will also allow lenders and settlement service providers to correct potential violations of RESPA's new disclosure and tolerance requirements. Lenders and settlement service providers will now have 30 days from the date of closing to correct errors or violations and repay consumers any overcharges.
Reactions to the rule
The immediate response to the final rule appeared to be cautiously optimistic, with industry groups pleased that the closing script had been removed, the GFE shortened and the HUD-1 modified to compare fees from the GFE.
Kurt Pfotenhauer, CEO of the American Land Title Association, reflected on the amount of industry and Congressional comment that HUD received and said, "At initial glance, it appears that HUD has taken many of those concerns to heart. We appreciate that [Preston] undertook a new review of RESPA and recognized the need for greater transparency in the home buying process. There will be a one-year implementation period for this rule, and we look forward to learning more about what changes are included in this significant regulation."
David G. Kittle, chairman of the Mortgage Bankers Association, noted that HUD “clearly listened to many stakeholder concerns with the rule as previously proposed,” adding, "The rule's new estimate and settlement forms are an important step toward developing more consumer-friendly forms that will help borrowers better understand the loan they are getting and the fees they are paying while making it much easier for a borrower to shop and compare the different loans they are offered."
MBA Chief Operating Officer John A. Courson said they were “disappointed that HUD did not coordinate more closely with the Federal Reserve as the Fed implements its own improvements under TILA. As we have said many times, these two efforts ought to be undertaken together to ensure that the new guidelines and disclosures actually make the loan process simpler and more transparent for borrowers."
Courson added that "HUD should provide greater clarity concerning the new requirements on disclosure of broker fees tied to the interest rate selected by the borrower."
Although the National Association of Mortgage Brokers has not yet made a formal statement, NAMB said in an e-mail to members that they are also disappointed with the final rule and believe it “will hinder competition in the market and increase costs to consumers.” In addition, NAMB will be calling upon Congress to take immediate action to review the rule.
But Ken Trepeta, director of Real Estate Services for the National Association of Realtors, reserved judgment. “While we are waiting to see the rule itself and still have concerns, we are pleased with the effort Secretary Preston has made to find common ground and improve on the initial proposal,” he said.
Fed considerations
Regarding the suggestion that HUD drop the rule and engage in a joint rulemaking with the Federal Reserve Board, Preston noted that the Fed had seen the forms and that their comments had been incorporated into the final rule, but that time was of the essence in issuing a new regulation, and they couldn't afford to wait.
“We thought any delay in moving forward on this would be costly to consumer,” he said. “We're in a situation where we're seeing foreclosures vastly beyond what we've seen in recent history, and anyone looking at what's happening in the mortgage markets has got to say that the process needs to be reformed quickly.”
However, Preston added that “down the road, there may be a process to get TILA considerations brought into this more fully.”
Can rule be enforced?
Concerns were also voiced that the rule lacked appropriate penalty provisions to ensure that it is enforced.
Ivy Jackson, director of HUD's Office of RESPA noted that “currently, there are no penalty provisions under RESPA for not giving a GFE or for the estimate not being correct.” However, she said, “It is something we are interested in pursuing via legislative change.”
In terms of what enforcement remedies are currently available outside of HUD, Michael Flynn, HUD's acting general counsel, said, “Federal banking regulators certainly would use their enforcement authority over federal banks, state regulators have authority over state-chartered lending institutions and Many states allow plaintiff causes of action ””whether private or a class action ”” under state unfair and deceptive trade practices acts or violating state legal standards or federal legal standards.”
He added, “Many states have the authority and we would expect they would exercise it, and that the plaintiffs lawyers would assist consumers in such an effort by bringing actions.”
Congressional action needed
In terms of what legislative changes HUD will be seeking, Montgomery noted that HUD wants to formalize a requirement that loan documents be delivered 72 hours in advance of the closing, and that HUD be given the authority to issue civil money penalties against lenders who don't comply.
Preston also noted that the Housing and Economic Recovery Act (HERA) enacted earlier this year requires HUD to “recommend certain legislative changes to improve the RESPA process to Congress.”
“I think when you think about issues like providing documents ahead of time and the appropriate ability for enforcement actions, these issues will be the purview of congress and under consideration,” he said, adding that in order to provide uniformity in the application of this law, there is no doubt HUD will need congressional action.
HUD is currently “in the process of providing full recommendations on the path forward and [RESPA] is one of the things we'll be discussing with [Congress],” Preston said.
Overall however, Preston said, “I firmly believe this will be a big step forward for restoring trust and transparency between the industry and the homeowner. HUD's new Good Faith Estimate treats everyone fairly - real estate agents, brokers, lenders, title companies and other settlement service providers. But it also extends that fairness to the very people we must all focus on - the consumer.”
The final rule will be released in the Federal Register on Nov. 14 and will take effect 60 days after publication. The industry is being granted a one-year implementation period, meaning that the new standard GFE and revised HUD-1 will not be required until Jan. 1, 2010.