RESPA / Reg X: What's in the Water at HUD?

Unless Congress stops it, HUD plans to make major changes to the Good Faith Estimate. These changes could dictate how loans are originated by creating mandatory procedures with regard to settlement services and related costs.

Before going any further, take note of the fact that the Real Estate Settlement Procedures Act does not contain any enforcement provisions for the GFE and HUD-1 disclosures. Also take note of the fact that the Truth in Lending Act is intended to disclose the costs of using credit in a transaction that (theoretically anyway) could also be conducted in cash. RESPA was passed to disclose the costs of real estate settlement - not the costs of financing the purchase of real estate.

HUD has concluded that RESPA's Regulation X must be improved. Certainly financial institutions agree. But HUD's ideas are the stuff of nightmares.

Ironically, the concepts that HUD is now proposing to resolve settlement cost problems are precisely the practice that was in place when RESPA was passed. Presumably, Congress thought it in the consumer's interest to put a stop to those practices.

Before RESPA
The problems consumers faced in the mid-1970s when RESPA was passed involved a variety of settlement service practices that made it difficult for the consumer to understand and anticipate the cost of settlement.

Two practices were identified as the biggest problems. One was required use of settlement service providers when there was an agreement or understanding about how the settlement service providers would benefit from the referral. This is addressed by RESPA's Section 8 and its related criminal sanctions.

The other practice was the non-disclosure of settlement costs by bulking or packaging them together so that the consumer was faced with a number (often quite large) but the consumer was not able to identify and evaluate the components.

Since enactment, HUD has pursued disclosures on an item-by-item basis. Each new interpretation or version of Regulation X has become more stringent in requiring the disclosure of specific components of settlement costs. HUD even requires that fees that cover multiple services, such as the fees charged by attorneys, be broken apart and specifically itemized.

The Future
HUD's proposal is not only a dramatic reversal of this trend; HUD's proposal actually re-institutes the practices in place before the law was enacted. In fact, HUD is proposing to legitimize the very practices that led to RESPA's enactment.

The new GFEs would consolidate reporting of all lender charges and broker compensation. They would include Truth-in-Lending information, duplicating or representing information on the companion early TIL disclosures.

Under the proposal, new information on the GFEs would include the APR as well as the interest rate and loan amount. If the loan terms change, or if the applicant does not qualify for the loan disclosed, new GFEs would be required before working to qualify the applicant for a new loan program.

Timing would be slightly different for the disclosure. GFEs would be required before the lender charges any significant fee. Present rules require that the GFE be provided once, within three days of the application. The proposal would limit GFEs to a period of 30 days. After that time, a new GFE would be necessary. Alternatively, the lender could ratify the existing GFE.

The proposal would create a tolerance of 10% for the accuracy of disclosures. Increases of more than 10% on certain charges would not be permitted. There would be no tolerance for charges imposed by the lender, or for services provided by providers that the lender requires. For example, if a lender disclosed $250 for an appraisal and selected the appraiser, the lender would take the risk that the appraisal could cost more. Increases could not be passed on to the customer.

Discounts would not only be allowed but encouraged. The proposal would allow volume discounts on the condition that the entire discount be passed on to the consumer. In short, the proposed regulation would encourage the very type of settlement service packaging that the law was originally passed to break apart or prevent.

HUD cited the ABN-Amro loan closing package as a model. In its announcement, HUD noted that the ABN-Amro package works effectively and has been well received by consumers. HUD did not address or show any analysis of how a market would function if all mortgage lenders followed the same approach. The results could, of course, take us back to pre-RESPA.

ACTION STEPS

This may be the most important proposal of the year. Prepare to comment.
Take a close look at your early and settlement disclosures. Think about the changes in process that would be involved in making the proposed GFE disclosures.
Meet with selected lending staff to discuss relationships with settlement service providers and how those relationships would be affected by this proposal.
Ask lenders to compile examples of changes in terms between application and closing that would be affected by this proposal. Changes requested by the customer or resulting from loan counseling would be particularly effective to use in your comments.