HUD Stays the Course on RESPA
September 18, 2008
Secretary of Housing Steve Preston lashed out Wednesday at "reprehensible" attempts by lawmakers to head off changes in the way mortgages and settlement services are marketed and sold to consumers, and said HUD remains intent on overhauling the Real Estate Settlement Procedures Act.
Preston's remarks to the Exchequer Club in Washington, D.C followed some of the fiercest criticism of the Department of Housing and Urban Development's proposed RESPA changes to date by industry opponents at a Congressional hearing Tuesday.
Industry groups including the National Association of Realtors, the American Land Title Association and the The Real Estate Services Providers Council dismissed HUD's claims that proposed changes RESPA could save consumers billions of dollars.
HUD -- which did not defend its proposal at the hearing -- maintains that revamping loan disclosures and providing incentives for settlement services like title insurance to be packaged with mortgage loans could save consumers $8.35 billion a year by better enabling them to shop around for the best deal.
"The unnecessary complexity of mortgages has significantly contributed to our housing crisis," Preston said in his speech Wednesday. "We must do something to make mortgages more understandable and the process more transparent."
Industry critics say that while HUD's proposed RESPA changes might initially help consumers save money, in the long run they would lead to more industry consolidation and higher prices. Some are questioning HUD's legal authority to implement its proposed rule changes, raising the prospect of legal action to block HUD from implementing them.
Two consumer groups testified Tuesday that while HUD's proposed RESPA rule changes are well intentioned, they need fine tuning in order to achieve the goal of helping consumers shop for the best deal on a mortgage loan and settlement services.
Preston said HUD remains "committed to striking a balance between the needs of consumers and those in business of home ownership" but had strong words for delaying tactics employed by Congress.
In an Aug. 7 letter signed by 243 members of the House, Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill., asked HUD to withdraw its proposed RESPA rule changes and instead limit itself to working with the Federal Reserve on simplified disclosure forms. Although HUD denied the request (see story), it extended the public comment period on the rule change from May 13 to June 12 at the request of Hinojosa, Biggert, and other lawmakers.
"I believe it is absolutely reprehensible that so many people in Congress today are fighting to stall progress, especially when they know so many families are in trouble because they didn't understand the terms of their mortgage," Preston said. "Our goal is to get RESPA completed by the end of this year and then provide the industry with a full year to implement that the rule."
Tuesday's hearing, convened by the House Subcommittee on Oversight and Investigations, was largely symbolic, as HUD submitted its final proposed rule to the Office of Management and Budget on Aug. 21 for review. Having considered more than 12,000 comments received after unveiling its proposed RESPA rule changes in March, HUD maintains it is now prohibited by executive order from commenting during OMB's 90-day review period.
"It is sad that the subcommittee waited until now to hold a hearing when they knew we wouldn’t be able to comment publicly on our efforts to protect home buyers," HUD spokesman Brian Sullivan said in a statement Tuesday. "HUD carefully considered all the public comments it received and its RESPA rule will provide vital consumer protections and make certain that home buyers better understand the mortgage documents they are signing at the closing table."
Sullivan said HUD has considered "each and every comment" and has made "significant modifications" to the proposed rule that it cannot discuss while they are under review by OMB.
Subcommittee Chairman Mel Watt, D-N.C., lamented HUD's absence at the hearing, saying he "thought it would be fun to see a bipartisan pummeling of a federal government agency and a spirited defense." In his opening statement, Watt said Federal Reserve officials also declined to testify, "citing a reluctance to be critical of another federal agency in public."
Work with the Fed
Industry groups have seized on comments Federal Reserve staff members submitted on June 13 in response to HUD's RESPA proposal. The Fed recommended that HUD coordinate with it on loan disclosures that meet the requirements of both RESPA and the Truth in Lending Act, or TILA.
The two sets of disclosures emanating from the Federal Reserve Board and HUD are confusing to consumers," said Anthony Lindsey, Chief Executive Officer of GlobeCrossing LLC, testifying on behalf of the National Association of Realtors.
Although Congress asked the Federal Reserve Board and HUD to "harmonize" the two sets of disclosures more than a decade ago, Lindsey said, "the two agencies have not undertaken this common-sense task despite repeated requests from Congress and with the knowledge that the existing set of separate disclosures is a primary cause of consumer confusion."
HUD has said that while it has coordinated with the Fed in its efforts to simplify RESPA disclosures, the agencies have different objectives and that the disclosure forms used to meet RESPA and TILA requirements can complement each other.
HUD, for instance, is focused on helping borrowers compare the cost of settlement services, and says including a loan's annual percentage rate (APR) on the good faith estimate (GFE) provided to consumers under RESPA might confuse them.
Consumer groups agree with the Fed that the APR is a valuable tool for comparing loans with different interest rate and point combinations. But HUD maintains that because APR is included on a separate TILA disclosure form, it's unnecessary to include it on the RESPA GFE. Consumer tests have demonstrated that the proposed GFE allows consumers to pick the best loan, HUD says.
But Margot Saunders, testifying for the National Consumer Law Center, said HUD's consumer tests focussed on comparisons of similar loans with different settlement costs. The proposed GFE is "standardized and legible" and "does a very good job" of helping consumers choose the cheaper loan if all that varies is settlement costs, Saunders said.
What HUD hasn't demonstrated is that its GFE would enable consumers to pick the best loan offer in cases where the fees paid by lenders to mortgage brokers vary, or when loans vary by interest rate, term, or other features.
"What HUD tested was consumer’s ability to choose the loan with the lower settlement costs when the two loans are otherwise comparable," Saunders said.
Saunders also questioned HUD's proposed handling of yield spread premiums, rebates paid by lenders when borrowers take out loans with higher interest rates than they might otherwise qualify for.
Although many borrowers may choose higher interest rate loans in order to apply yield spread premiums to their closing costs, critics say mortgage brokers sometimes pocket the rebates without the borrower's knowledge. HUD's proposed GFE would not identify yield spread premiums by name, but would require that they be listed and credited against a borrowers' closing costs.
Saunders said lender payments to mortgage brokers should not be characterized as a credit on the GFE, and that HUD should not presume that such payments reduce settlement costs.
"Merely having the lender payment shown as a borrower credit to reduce the settlement costs will not make it function that way -- brokers can still charge borrowers a separate or increased fees," she said.
But Saunders said it's the National Consumer Law Center's hope that HUD will improve its proposal to overhaul RESPA, not abandon it. The proposal "includes many positive features which we heartily endorse," she said, and which the group believes will "improve the transparency of the complex mortgage settlement process."
Industry groups, however, continue to voice their objections to incentives HUD proposes to encourage lenders and settlement services providers to package settlement services like title insurance, appraisals and inspections with loans. HUD's incentives for packaging include granting lenders leeway to pass on volume discounts to consumers and to use average cost pricing.
"The natural consequence of this proposal is that the largest lenders will best be able to apply considerable market pressure on settlement services providers to reduce their prices in order to be included in the lenders' preferred packages," Lindsey testified on behalf of NAR.
HUD has said that's one way it expects consumers will save money, but Lindsey said any benefits would be fleeting.
NAR believes that the long-term effect will be to drive small providers out of business, followed by an inevitable rise in closing costs once competitors are eliminated," Lindsey said.
Gary Kermott, president of the American Land Title Association (ALTA), said small independent title agencies "do not have the resources to guarantee a stream of business to local title-related service providers or discount their own prices to compete with large national title providers."
Once small businesses have driven out of business, Kermott said, "large providers are left to compete only among themselves."
HUD has said it envisions third-party providers would emerge to put together packages of settlement services for lenders, and that small companies could compete with larger firms by offering their services through such providers.
But HUD shouldn't assume that consumers will shop around for the best deal, Lindsey said. If lenders charge consumers for preparing a GFE, that could actually decrease the amount of comparison shopping they are willing to do, he said, citing a NAR-funded study by economist Anne Schnare. The study estimated that the cost of preparing the GFE will add up to $413 to the cost of obtaining a loan, compared with HUD's estimate of $181 (see story).
Another potential problem from the industry's perspective is that if cutting costs is the main focus of RESPA, the quality of services provided may suffer, Lindsey said.
"The housing market does not need more drive by appraisals where the appraiser, in order to save money, doesn't even get out of (the) car to inspect the home," NAR's spokesman at the hearing said. "It does not need loan officers who don't truly understand the differences among the array of mortgage products offered or cannot interpret a credit report so as to direct a consumer to the best mortgage for which they qualify. It does not need closing agents who don't know hte customs and rules of the area in which they work."
Industry groups also questioned HUD's legal authority to impose "tolerances" on cost estimates provided by lenders on the GFE, and a requirement closing agents to read a lengthy script to borrowers a the closing table.
HUD's rule changes would bar loan originators from changing the service fees provided on the GFE after interest rates are locked, and also prohibit changes to the lender charges or credits associated with the interest rate chosen. HUD also proposes limiting to 10 percent changes to estimated charges for title insurance and other required settlement services fees if the companies providing those services are selected by the loan originator rather than the borrower.
The imposition of tolerances changes the good faith estimate into an offer, ALTA maintains, which HUD does not have the authority to require.
"By characterizing the GFE and its contents (as an offer, which the consumer can use to compare with offers from other loan originators), it is ALTA's position that the settlement charges disclosed therein cease to become mere estimates, particularly when a lender could violate the regulations by exceeding the charges at closing," Kermott said in his prepared testimony.
Kermott used stronger language in expressing ALTA's objections to the closing script, which he said could turn an hour-long closing "into two or even three hours to answer the borrower's questions," forcing settlement agents to cut back on the number of closings they complete each day.
"We believe that HUD has absolutely no statutory authority to place on title companies and closing agents the obligations contained in its closing script regulations," Kermott said. While HUD maintains that it can require the scripts as an addendum to the HUD-1 settlement statement, Kermott said that argument "only demonstrates that HUD itself cannot find the statutory authority for such obligations."
Even if HUD had the legal authority to require title companies and closing agents to read the script, as a matter of sound policy it should be up to lenders to deliver the information HUD wants consumers to get in the script "well before closing," Kermott maintained.
It's not clear what the closing agent is supposed to do if discrepencies in loan terms are uncovered when the script is read at closing, Kermott said, and the "education" HUD proposes to provide consumers "comes too late in the process and from the wrong party to provide any benefit to consumers. It will only provide confusion."
The current timetable for implementing the new RESPA rules means it will likely be up to the next presidential administration whether to enforce a final rule.
HUD spokesman Brian Sullivan said the department has and has reviewed "each and every" comment received and made "significant modifications" it can't discuss while the final rule is under review by the Office of Management and Budget.
If OMB signs off on HUD's proposal, as a "major rule change" it would not take effect for 60 days -- and then only if Congress chose not to exercise its power to overrule HUD. If the final rule is adopted, HUD proposes a 12-month transition period where settlement services providers could either abide by the existing rule or follow the new one.