Real Estate Insight

HUD’s Proposal to Simplify RESPA

HUD has released a document, 24 CFR Parts 203 and 3500 Real Estate Settlement Procedures Act (RESPA): Proposed Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs; Proposed Rule.

HUD is looking for comments and/or suggestions before deciding to implement it.

The first thing one notices is that this proposal to simplify is 96 pages long. The current RESPA rules already cover what they are trying to “simplify”. Clear disclosure of costs and terms and disclosure of yield spread premiums are already required by the current regulations. HUD states “The mortgage industry has changed considerably since RESPA was enacted in 1974, and the regulations implementing RESPA’s original disclosure requirements are no longer adequate.”

Having been in the industry for over 20 years, I can tell you that the mortgage industry has not changed all that much. Loans still cost money, and it is either paid for by the borrower or by the lender in the form of a yield spread premium.

HUD thinks that their current RESPA rules do not facilitate shopping or competition to lower the costs of getting a loan. I say that, if properly prepared, the Good Faith Estimate (that is already required to be provided by the lender or mortgage broker within 3 days of taking the loan application) is an excellent tool to use in comparing loans. It is lenders and brokers that do not properly prepare this document that make it difficult to compare loan to loan. If the current regulations were enforced, a modification would not be necessary.

This proposal states:

HUD’s regulatory reform and enforcement efforts for RESPA remain guided by the following principles:

1. Borrowers should receive loan terms and settlement cost information early enough in the process to allow them to shop for the mortgage product and settlement services that best meet their needs;

2. Costs should be disclosed and should be as firm as possible to avoid surprise charges at settlement;

3. Many of the current problems arise from the complexity of the mortgage loan settlement process. The process can be improved with simplification of disclosures and better borrower information;

4. Increased shopping by borrowers will lead to greater pricing competition, so that market forces will lower prices and lessen the need for regulatory enforcement;

5. The key final terms of the loan a borrower receives should be disclosed to the borrower in an understandable way at closing; and

6. HUD will continue to vigorously enforce RESPA to protect borrowers and ensure that honest settlement service providers can compete for business on a level playing field.

Let me address these issues one by one:

1. Borrowers are already supposed to receive the loan terms and costs early in the process. As for shopping for settlement services, this is only allowed on a refinance. In a purchase transaction, it is always the seller’s choice of escrow and title service providers. In addition, most borrowers would not know where to start in seeking out alternate settlement services. Those that do are and should be allowed to specify their choice. Good brokers and lenders accommodate their customers’ desires.

2. Costs over which the lender/broker have control are generally quite firm, and should only change if there is a change in terms, i.e. buying down the rate by paying a discount fee that was not initially requested by the borrower.

3. The currently required disclosures are as user-friendly as they can be, given the admitted complexity of the process, with the exception of the Truth-In-Lending form. That is one document that confuses every borrower I have ever dealt with. A change to that would be welcome.

4. If this goes into effect, borrowers will have no greater ability to shop than they have right now. I have dealt with many serious “shoppers” in my career, and I have dealt with many people who are not interested into putting that much energy into the process. People will still be people and these changes will not improve that.

5. The key final terms of the loan a borrower receives at closing are clearly spelled out in the most basic document of the loan set, the Note. It spells out the amount borrowed, the interest rate, the payment amount, and when payments begin and end. If the loan is of an adjustable nature, the Note is called an Adjustable Rate Note. Those, too, clearly spell out the terms of the adjustments, when and how much. In addition, there is usually an Adjustable Rate disclosure that reiterates the terms.

6. HUD does not need any new regulations to be able to enforce the current regulations. If they simply enforce the rules that are already in place, that would serve to level the playing field. It is unscrupulous brokers that do not disclose their true fees until the closing table that take loans away from honest agents who do properly disclose. Unfortunately, but the time this is found out, most borrowers are so anxious to get the loan closed that they bite the bullet and sign anyway. If more borrowers walked away from the closing table and reported the offending brokers, HUD would have an easier time enforcing the existing rules. That is the key to leveling the playing field.