Mortgage Daily

Published On: March 14, 2008
RESPA Overhaul ProposedBrokers, mortgage bankers support proposal

March 14, 2008


The U.S. Department of Housing and Urban Development is proposing an overhaul of mortgage disclosures required under the Real Estate Settlement Procedures Act. Mortgage brokers, who have been on a campaign to eliminate disparity in disclosures between brokers, lenders and bankers, embraced the changes.

HUD announced today that proposed changes to RESPA disclosures, for which rules were established 30 years ago, will help borrowers more easily understand loan terms and loan costs. The agency said its own economic analysis determined that the average borrower is expected to save $700 if the changes are implemented.

The revisions would require lenders and brokers to provide a standard Good Faith Estimate that detail the interest rate and monthly payment — as well as any possible increases, and whether there is a prepayment penalty or balloon payment. In addition, closing costs would be consolidated into major categories to prevent junk fees, and total estimated settlement charges would be displayed prominently on the first page for easy comparison shopping.

HUD noted its proposal calls for settlement agents to read a closing script to borrowers at the closing table and provide a copy of the dialogue. In addition to comparing estimated and actual charges, the script would detail key loan terms. HUD said its tests confirmed borrowers appreciated having the scripts read out loud.

“A lot of the mortgage problems we see today are directly related to the fact that few people fully understand this process,” HUD Secretary Alphonso Jackson said in the press release. “Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that’s been one of the factors driving the current housing downturn.”

Federal Housing Commissioner Brian Montgomery echoed Jackson’s sentiment.

“It’s not right that millions of consumers go to the settlement table without fully understanding the mountain of paperwork they’re asked to sign and, on top of that, expected to pay thousands of dollars in closing costs for services they’ve never heard of,” he said.

HUD would specify charges that can and cannot change at settlement. The agency would also limit the amount fees can change.

One controversial aspect of the proposal is the disclosure of yield spread premiums paid by wholesalers to mortgage brokers because of the impact they have on interest rates.

“To ensure that HUD’s new proposal would not create a consumer bias against brokers, the department did rigorous consumer testing and found the proposed Good Faith Estimate helped consumers to select the lowest cost loan more 90 percent of the time, regardless of whether the loan was originated by a lender or a broker,” the statement said.

The National Association of Mortgage Brokers, which has previously indicated its opposition to the requirement that YSPs paid to brokers be disclosed without also requiring banks and mortgage bankers to disclose service released premiums, expressed support for HUD’s proposed changes.

“We are encouraged to see that HUD is broadening its definition of a mortgage broker to include all those who broker mortgage loans, whether they work at a federal or state bank, lender, credit union, or mortgage broker,” NAMB said in a statement today. “This seminal decision is an acknowledgement that the ‘originate-to-distribute’ business model practiced by many correspondent lenders, small- and mid-size banks, lenders, and other entities, amounts to mortgage brokering, and requires the same disclosure as mortgage brokers.”

HUD said it is also seeking legislation that would give it the authority to impose penalties for RESPA violations.

The Mortgage Bankers Association issued a statement indicating its support of the proposed changes which, it noted, would limit increases to fees disclosed in the GFE, modify the HUD-1 closing statement so that it better corresponds to the GFE, and permit disclosure of average cost pricing and negotiated discounts. MBA said the changes would also strengthen the prohibition against requiring the use of affiliates.

But MBA warned that HUD’s proposal, “in combination with Federal Reserve’s ongoing efforts to revise disclosures under the Truth in Lending Act, has the potential to add significant paperwork to the loan origination process.” The group called for coordination between HUD and the Fed.

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