‘Gray areas’

The 90-day comment period on the proposed changes to the Real Estate Settlement Procedures Act, revised by the U.S. Department of Housing and Urban Development, ends today (Oct. 28), and mortgage industry professionals are concerned with the potential impact the impending revision would have on their businesses and customers.

Government regulators believe the current RESPA rules need changing in three major sections – mortgage broker compensation, improved disclosure and guaranteed packaging of settlement services – but mortgage brokers say the proposed language creates regulatory uncertainty and the potential for a huge negative impact on their industry.

HUD’s intent in reforming the current bill is to provide a more competitive environment and a more simplified process for the consumer, and while industry officials agree that HUD’s intentions are noble, they say the agency’s conclusions are slightly flawed.

“The mortgage industry agrees that any steps taken in the direction of preventing abuse are good steps,” said David Hadlock, principal of Hadlock Law Offices in Framingham. “But, I don’t believe that the industry feels that this proposed rule change will have a positive impact. To the contrary, it creates potential for further un-leveling the playing field.”

HUD’s reasons for amending the current language, as stated by agency Secretary Mel Martinez, are that it is “too complicated, too costly and too much of a mystery for many borrowers,” but Hadlock said the proposed disclosure changes do not resolve any problems that currently exist.

“The industry doesn’t disagree that we shouldn’t reduce confusion,” said Hadlock. “But the current proposal has numerable ambiguities and gray areas that could potentially increase [homebuyer] confusion.”

According to the Massachusetts Brokers Association, the current RESPA language needs reforming, and officials at MMA said they support improvements to the current plan and anything that will make the process clearer, while emphasizing that it is not the goal of RESPA that needs to be changed, but the mechanisms of RESPA.

John Brodrick, president of First Service Home Mortgage in Westwood and chairman of the MMA, said a main area of concern is the view consumers will have on the mortgage broker industry.

“The new proposal will end consumer ‘sticker shock’ because the numbers disclosed at the beginning of the [homebuying] process will match the numbers at the close of the process,” said Brodrick. “Most lenders do this now – it’s the few unethical lenders who are creating this issue.”

Hadlock, who also serves as regulatory and compliance counsel for MMA, said that a good portion of the industry is already planning implementation of the proposed rule and said there is presently planning under way on how business would change if the proposed bill went forward, but remains concerned with the overall impact on the industry.

“We want the consumer to be treated fairly, and good companies do that now,” said Brodrick.

Brodrick said the single “brightest spot in the economy” is housing and the greatest benefit to homeowners has been to refinance and lower their interest rates, but imposing new regulations would upset the system and would have significant economic impact.

“HUD has not yet digested whether the proposed rule will create the impact they are looking for,” said Hadlock. “A lot of the [mortgage] industry is completely unaware of the finer points of the proposal. We need to educate first so that the industry can make an informed decision on the bill.”

HUD has asked mortgage brokers and mortgage bankers to comment on 30 questions by today, and Hadlock said the most significant conflicts involve current state law, the addition of a package approach to consumers and improvements to the Good Faith Estimate.

The Good Faith Estimate is offered to homebuyers shortly after they apply for a home loan, and HUD wants to lenders to provide consumers a more “simple, clear and firm” Good Faith Estimate at nominal cost.

Currently, a list of fees associated with a mortgage closing – appraisal costs, attorney fees, recordings and title costs – is presented to the consumer on good faith and, according to Brodrick, most buyers do not know what each item means.

“The new Good Faith [Estimate rules] would allow the bundling of services; however, they would still be broken out on the HUD statement at closing,” said Brodrick. “In theory, those numbers should match. However, there is a zero tolerance associated with the good faith, which may drive the prices up.”

‘Illogical Decisions’

HUD is worried that under the present RESPA format, consumers are paying the yield spread premium that is not reducing rates, said Hadlock, and HUD’s proposal to end “sticker shock” to the consumer is leading the consumer to believe they will spend less.

According to HUD, by way of reformatting disclosure the public will save $8 billion a year in settlement costs.

“HUD is saying, by way of allowing packaging and requiring a new method of disclosing yield spread, they will make the consumers better shoppers,” said Hadlock. “If that is the case, you have to assume consumers are making illogical decisions and, in New England, that is simply not true. The consumer in New England is smart and HUD has historically sold the consumer short in terms of their confusion.”

Brodrick agreed that there are a number of state issues that need to be looked at and the “unintended consequences are really the major issue.”

Under current RESPA regulations, mortgage brokers or lenders do not have to necessarily be “packagers” but with the new reform, all brokers and lenders will have to get licensed in Massachusetts to be a packager.

“There is a significant cost involved because of the necessary automation and computer requirements that would be necessary if the proposed bill becomes effective. All origination systems will have to be overhauled,” said Brodrick. “The mortgage broker will be greatly effected … and the potential loss of market share due to the buying power of large national firms vs. small independent firms will hurt [the industry].”

Part of HUD’s proposed regulation is to offer consumers a “guaranteed mortgage package,” which includes a guaranteed mortgage interest rate and a guaranteed price for a complete package of settlement services.

According to Brodrick, the main advantage of an all-inclusive package is that it is simpler, but he says the disadvantage is that this package will create a situation where the smaller entities – attorney firms and appraisal companies – may not be able to compete with lenders that can do a high volume of business at a lower price.

“In real estate transactions, we all know that the lower price today is not the best price in the long run if there are complications in the transactions,” said Brodrick.

In theory, HUD can make the new RESPA language effective on Oct. 28, and mortgage brokers, bankers and analysts are hoping for some further discussion.

“This is an important discussion and it would be the wrong decision to immediately implement the rule. The current proposed rule has too many unknowns that could conflict with HUD’s goals,” said Haddock, who believes the best result would be more revisions and a further study on the current legislation.

“I think it’s important not to have this whole idea dropped [on Monday], but allow more opportunity to study the areas that haven’t been thoroughly thought through,” said Brodrick. “MMA supports RESPA reform, but we want to get it right.”

Results of RESPA Reform Worry Lenders

by Banker & Tradesman time to read: 5 min