FTC Staff Files Comments with HUD on Proposed Amendments to RESPA Regulations
June 17, 2008
The Federal Trade Commission has authorized its staff to file comments with the U.S. Department of Housing and Urban Development (HUD) concerning proposed amendments to regulations implementing the Real Estate Settlement Procedures Act (RESPA).
RESPA and its implementing regulations govern settlement services for most residential purchase, refinance, and home equity mortgage transactions. RESPA requires that consumers receive certain disclosures during the mortgage process, including the Good Faith Estimate (GFE) within three days of the loan application and the HUD-1 Settlement Statement at closing.
On March 14, 2008, HUD issued a proposed rule to revise mortgage disclosures required under RESPA. In comments prepared by the Bureau of Consumer Protection, Bureau of Economics, and Office of Policy Planning, the FTC staff states that some of the proposed modifications could help consumers better understand and compare loan terms and closing costs. However, staff believes that some of them also may have the unintended consequence of further complicating the already complex mortgage process. The FTC staff believes consumers would benefit most if the federal government commenced a comprehensive effort to reform federal mortgage disclosures.
In addition to these general views on mortgage disclosure reform, the FTC staff comments focus on seven issues arising from HUD's proposed rule:
Revised GFE Form and Application Concept: Regarding HUD's proposal to improve and standardize the GFE form to help consumers shop among loan originators, the FTC staff suggests that HUD consider reevaluating the new "GFE application" concept. If the concept is retained, the staff suggests re-labeling it so that consumers do not confuse a GFE application with a mortgage application, and educating consumers about the differences between these two parts of the mortgage lending process. The staff also suggests that HUD consider allowing loan originators to ask for more information in accepting a GFE application than the proposed rule would permit, because limiting the information the originators obtain may result in the loan terms disclosed on the GFE being dramatically different from the final terms offered after full underwriting.
Revised HUD-1 Form and HUD-1 Closing Script Addendum: HUD's proposed rule intends to make it easier for consumers to compare the estimated settlement costs on the GFE form with the actual costs on the HUD-1 form and in the new Closing Script that settlement agents must read to consumers. The FTC staff recommends that HUD consider clarifying or modifying several aspects of the revised HUD-1 form, Closing Script, and Comparison Chart of GFE and HUD-1 terms, including the following:
- HUD should conduct further consumer testing of the Closing Script and Comparison Chart, including assessing whether settlement agents can adequately convey the information.
- HUD should consider assigning to lenders, rather than settlement agents, the responsibility of completing as much of the Closing Script as possible.
- HUD should evaluate whether to issue a guidance document explaining to settlement agents their responsibilities if there are inconsistencies between the relevant documents, and revising the Closing Script to inform consumers of their options if estimated settlement cost "tolerances" are exceeded.
- HUD should consider clarifying the "unforeseeable circumstances" that, among other things, allow costs to increase substantially between the time of the GFE and HUD-1.
Mortgage Broker Compensation Disclosures: HUD proposes revising the disclosure requirements for mortgage broker compensation received in the form of a yield spread premium from the lender. The FTC staff comments urge HUD to consider reevaluating its proposed broker compensation disclosures, which could adversely affect consumers and competition. The comments also recommend that HUD consider evaluating and testing alternative disclosures to determine what will most benefit consumers.
Average Cost Pricing, Negotiated Discounts, and Competition: HUD's proposed rule recognizes pricing mechanisms intended to promote greater competition and lower consumer settlement costs. The FTC staff comments support these goals and the amendments that would allow average cost pricing and remove restrictions against quantity discounts. However, the comments encourage HUD to consider whether pricing restrictions on the re-sale of settlement service components and prohibitions on referral fees may inadvertently decrease competition and efficiency in the settlement services market.
Definition of "Required Use" of Affiliated Business Services: HUD's proposed rule would expand the definition of "required use" of services that affiliated businesses provide. FTC staff recommends that HUD reconsider the proposed change. The expanded definition could deprive customers of the lower prices that can result from bundling related services. HUD also may wish to test the effectiveness of the affiliated business disclosure.
Consumer Research: The FTC staff commends HUD's use of consumer testing in developing its proposed revised GFE and closing disclosures. The staff also urges HUD to continue to carefully test and revise disclosures, particularly the Closing Script, to minimize consumer misunderstanding.
Comprehensive Reform of Federal Mortgage Disclosures: Although consumers would benefit from effective improvements in the GFE and HUD-1, the FTC staff's experience and research suggests that consumers would benefit most from a more comprehensive effort to reform federal mortgage disclosures. The staff expresses a willingness to work with HUD and the Federal Reserve Board on such an effort.