STEPHEN THOMASELLI
Bundling benefits consumers

In response to consumer complaints about the mortgage closing process being too confusing and unpredictable, more mortgage companies are beginning to bundle their services and offer a one-stop-shop price on their closing fees.

But if free-market forces are driving mortgage companies to adopt this approach without legislative or regulatory mandates, many members of the mortgage industry wonder why the U.S. Department of Housing and Urban Development is now proposing to reform the Real Estate Settlement Procedures Act to include fixed-fee prices, which they say ultimately may confuse the mortgage closing process rather than simplify it.

HUD’s proposal to reform RESPA suggests one lender-led, federally regulated fixed-fee package of interest rates and settlement charges for each homebuying transaction. HUD’s rationale for the reform is that such a change would streamline the homebuying finance system and benefit consumers.

But opponents of HUD’s proposed reform say bundling fees could create more confusion, more lawsuits and a more unpredictable closing processes – the exact thing HUD’s reforms are aiming to stamp out. Critics say bundling services and prices would make it difficult for consumers to understand exactly what they are paying for.

“As proposed, what HUD wants to do is allow lenders to have a single all-inclusive price for all services required to close a loan. As proposed, the borrower would not know what services the lender was contracting for,” said Ruth Dillingham, vice president and special counsel for the Lenders Division of First American Title Insurance Co. and chairwoman of the Massachusetts Mortgage Bankers Association. “The code word is ‘transparency.’ If HUD’s rule were to go into effect, we would lose the transparency currently in effect in closings. The customer wouldn’t be able to see the breakdown of the closing prices. A lot of concern has been raised about the fact that we are going to make the consumer unaware of what they are buying.”

The revamping of RESPA has been hotly debated. HUD’s initial one-package plan to combine loan origination and settlement service fees together has been criticized by real estate brokers, homebuilders and title companies, many of whom claim the plan would prevent them from offering packages that compete with packages offered by mortgage lenders. HUD reportedly also is considering a two-package plan that would separate loan-related fees from settlement fees, thereby allowing greater competition and transparency.

‘Fight’ Brewing

The HUD proposal would mandate “clear disclosure of mortgage broker fees” and would call for lenders to provide borrowers with a more clear and simple “good faith estimate” of costs free or for a nominal fee so that they can better understand the charges and use the information to shop for loans. The new proposed good faith estimate would limit lenders’ ability to raise their charges at the last minute.

“The fact of the matter is that HUD’s intention is to try and simplify the process and, in theory, I can see why a guaranteed mortgage package proposal would look like it would simplify the process. But in practicality, I don’t think it will simplify the process at all and I don’t think it will bring costs down for the consumer,” said Dean Caso, president of Homevest Mortgage in Needham.

Caso said the costs currently associated with a mortgage closing vary and it would be difficult to combine fees like flood insurance, legal fees, home inspections and interest rates into one package.

“These costs could vary. It would be great to have something that a consumer could have to compare apples to apples, but I don’t think HUD’s proposal does that,” said Caso. “It’s not only fees, though. The proposal also includes proposed interest rates. The interest rate needs to be guaranteed like the fees, prior to lock-in. It can only be changed by some observable or verifiable index. If we have a market shift where interest rates spike up tremendously, I’m in the position that I have to defend my increase in rate to the borrower Â… if that’s the case, this creates more confusion than it does help the consumer.”

While some mortgage companies have been offering bundled services for years, many lenders feel that HUD’s proposal to revamp RESPA by mandating mortgage bundling services would only complicate the process.

“We did bundling services a few years back, and rather than [show] a myriad of different fees, we went with one flat fee that encompasses everything except third-party services. It works well for us and serves to limit confusion for consumers,” said Stephen Thomaselli, president and founder of Loansnap.com, an online mortgage company serving New England. “While I believe that things need to be simplified for consumers, I don’t know that I’m a supporter of all things RESPA reform. I do think that having cost tolerances built into the [revised act] are a good idea Â… but most consumers don’t realize the fees associated with legal [services] from closings and registry fees have [been increasing] and are often the more expensive items on the list.”

ABN AMRO, a nationwide financial services institution that offers mortgage programs, recently initiated a “one-fee package,” which the company says has been extremely popular with its clients.

“Since the time the [RESPA] proposed rule was released, ABN has rolled out their own one-fee finance program and in their program they have found a way to tell their consumers what the prices are and what for, and still keep it at one lumped price,” said Dillingham. “So, why is HUD micromanaging a capitalistic society in which the capitalist has figured out how to gain the same end?”

However, some mortgage industry analysts disagree and say RESPA reform is necessary if the mortgage industry wants to maintain a consumer-friendly reputation.

Craig Focardi, senior analyst at Needham-based research company TowerGroup, said the proposed RESPA reform gives lenders more flexibility over the total cost of the financing, and that enables the consumer to compare and make educated decisions.

“The mortgage industry would be improved in its reputation if a customer knows what the price is going to be from the start. Ultimately, in the long term, anything that increases the transparency for the consumer is a good thing,” said Focardi.

And while some members of the mortgage industry argue that imposing a flat-fee mandate would eliminate the ability of the consumer to see what the closing costs entail, Focardi disagrees.

“The presence of all the details of origination costs has not eliminated the problem of consumers paying excessive fees, so by itself, detailed disclosure hasn’t helped at all. I think it’s time the industry tries something new and by having a bundled fee and [giving] a commitment that fees can’t go up. Consumers can do a more apples-to-apples comparison [of] lenders,” said Focardi.

However, Dillingham said HUD has been faced with a lot of opposition on the RESPA reform language, and the fight will continue if and when the reform ruling is released in the next few weeks.

“There is a lot of pressure on Congress to be vigilant on what happens when the actual rule is released, which is anticipated in the next couple of weeks,” said Dillingham. “Congress can step in by refusing to fund it, sending a message to HUD that Congress does not agree with the reform. Everybody has an ax in this particular fight.”