HUD Proposes Changes to Home Mortgage Process

On March 14, 2008, the U.S. Department of Housing and Urban Development (HUD) published its 'Proposed Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs' (Docket No. FR-5180-P-01, 73 Fed. Reg. 14030). If this Rule takes effect, it would drastically change the way residential mortgage transactions are conducted. (The Rule also contains provision on other topics such as average cost pricing and volume discounts that are beyond the scope of this article.)

Good Faith Estimate

No longer would a lender furnish the borrower with a Good Faith Estimate (GFE) within three days after the borrower applies for a mortgage. Instead, under HUD's proposal, the borrower would apply for a GFE before applying for a mortgage. The lender would then issue a greatly expanded four-page “binding” good-faith estimate that would provide more information about the proposed transaction then the costs associated to the loan. After the GFE is issued, the lender would have to keep it open for 10 days. If the borrower finds the terms of the loan acceptable, the borrower would then apply for the mortgage.

The new expanded GFE would include a summary of the loan terms including the amount, length of the loan, initial interest rate, initial monthly payment and rate lock period. The GFE would also estimate the total settlement charges and property taxes, homeowner's insurance, flood insurance, mortgage insurance and any other required insurances.

Unlike the current GFE, fee estimates, once issued, could only change within very restricted limits. The lender's and mortgage broker's fees and charges, together with government recording and taxes, could not change. Services required by
the broker or lender, including title services required by the lender and owner's title insurance, would have a 10% change tolerance. Fees with no restriction would be services not required by the lender or broker, reserves for escrow, per-diem interest charges and insurance. The GFE must also state the date through which the quoted interest rate will be available.

The GFE would also contain a disclosure of the Yield Spread Premium (YSP), a payment made by a lender to a broker based on the interest rate. Currently, the YSP is shown on the HUD-1 settlement statement as a payment made “outside the closing”; and is not added into the cost of the loan. Under the proposed new system, the YSP would appear as a credit to the borrower with the charge made by the broker shown as a cost of the loan.

The Rule provides that the lender may not charge for the GFE except to recover the cost of generating it.

Closing Changes

The other change provided for by the Rule would take place at the closing. Under the proposal, the Settlement Agent would have to read to the borrower a closing script. In this script, the Settlement Agent would have to explain to the borrower the loan terms as stated in the note and other closing documents would have to make a comparison between the charges as shown on GFE and HUD-1 settlement statement and state whether the expense tolerance had been met.

HUD estimates that the changes to the closing process would add 45 minutes to a closing and increase the cost by at least $36.

Negative Responses

Reaction to the proposed Rule has been universally negative.

In a joint letter released June 12, the American Land Title Association, National Association of Realtors and the Center for Responsible Lending recommended “reforming the [proposed] GFE ' to provide clearer understanding” of loan terms and settlement costs. Each organization also issued individual letters criticizing the Rule from its own perspective. These letters are available on the organizations' individual Web sites.

While many agree that there are deficiencies in the current GFE, the majority of the comments to the proposed new Rule are that it goes well beyond what is necessary to correct the deficiencies.

In an undated comment letter, The Federal Deposit Insurance Corporation (FDIC) has stated its concern that HUD's proposed GFE is too long and provides too much information for it to be understood and appropriately used by consumers, basing this observation on its participation in an interagency project to develop model privacy notices for consumers. The inter-agency testing concluded that additional information often makes a form less useful because the basic concepts are overlooked.

The Federal Trade Commission has asked HUD to reconsider many aspects of its new proposed RESPA rule, at times agreeing with the theory behind the changes but not HUD's method of implementing them (www.ftc.gov/opa/2008/06/respafyi.shtm).

In its June 9 letter, Wells Fargo Home Mortgage stated: “The Proposal extends well beyond HUD's limited authority under RESPA to regulate the disclosure of settlement costs. Because the Proposal goes far beyond HUD's authority, it is unlikely to survive if challenged in the courts.”

In its June 11 letter to HUD, the Small Business Administration (SBA) also criticized the new Rule. This may be embarrassing for HUD Secretary Steve Preston, since this is the agency he headed before moving to HUD in April 2008.

Consumer Cost Questions

A principal concern is that the Rule would result in increased cost and not lower costs to the consumer. By HUD's own estimates, the one-time cost to switch to the new HUD-1 with the required closing script would be $169 million and the recurring cost to comply would be $676 million each year. Who, if not the consumer, is going to pay for this?

The closing script has been the target of many of the negative comments. Beside that fact that, as HUD admits, it will make closing longer, it will also put Settlement Agents in the unfamiliar role of having to explain the loan terms. In jurisdictions where settlements are not conducted by attorneys, would this put them in the position of engaging in the unauthorized practice of law? This is of particular concern to the National Notary Association. How do you read the closing script in areas where settlements are not conducted face to face? While the Rule requires the Settlement Agent to point out if the costs tolerances are not met, it is silent on what happens then. Does the closing continue? The Rule does not provide any guidance or create a new right for the borrower to adjourn the settlement.

Conclusion

The comment period for the proposed Rule had been scheduled to end May 13, 2008, but at the request of industry leaders and the 148 members of Congress who signed a letter to HUD, it was extended to June 12, 2008. HUD is now considering the comments. Will the Rule be adopted? We will have to see if HUD proceeds with the Rule as proposed or will resubmit it with changes. The last time HUD tried to make major revisions, in 2002, they went nowhere. President Bush has directed all agencies to promulgate final Rules by Nov. 1, 2008 (Memo by Chief of Staff Bolton May 9, 2008). To meet this goal, HUD would have to release the final Rule by the end of the summer to pass through the Office of Management and Budget review process in time.

On March 14, 2008, the U.S. Department of Housing and Urban Development (HUD) published its 'Proposed Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs' (Docket No. FR-5180-P-01, 73 Fed. Reg. 14030). If this Rule takes effect, it would drastically change the way residential mortgage transactions are conducted. (The Rule also contains provision on other topics such as average cost pricing and volume discounts that are beyond the scope of this article.)

Good Faith Estimate

No longer would a lender furnish the borrower with a Good Faith Estimate (GFE) within three days after the borrower applies for a mortgage. Instead, under HUD's proposal, the borrower would apply for a GFE before applying for a mortgage. The lender would then issue a greatly expanded four-page “binding” good-faith estimate that would provide more information about the proposed transaction then the costs associated to the loan. After the GFE is issued, the lender would have to keep it open for 10 days. If the borrower finds the terms of the loan acceptable, the borrower would then apply for the mortgage.

The new expanded GFE would include a summary of the loan terms including the amount, length of the loan, initial interest rate, initial monthly payment and rate lock period. The GFE would also estimate the total settlement charges and property taxes, homeowner's insurance, flood insurance, mortgage insurance and any other required insurances.

Unlike the current GFE, fee estimates, once issued, could only change within very restricted limits. The lender's and mortgage broker's fees and charges, together with government recording and taxes, could not change. Services required by
the broker or lender, including title services required by the lender and owner's title insurance, would have a 10% change tolerance. Fees with no restriction would be services not required by the lender or broker, reserves for escrow, per-diem interest charges and insurance. The GFE must also state the date through which the quoted interest rate will be available.

The GFE would also contain a disclosure of the Yield Spread Premium (YSP), a payment made by a lender to a broker based on the interest rate. Currently, the YSP is shown on the HUD-1 settlement statement as a payment made “outside the closing”; and is not added into the cost of the loan. Under the proposed new system, the YSP would appear as a credit to the borrower with the charge made by the broker shown as a cost of the loan.

The Rule provides that the lender may not charge for the GFE except to recover the cost of generating it.

Closing Changes

The other change provided for by the Rule would take place at the closing. Under the proposal, the Settlement Agent would have to read to the borrower a closing script. In this script, the Settlement Agent would have to explain to the borrower the loan terms as stated in the note and other closing documents would have to make a comparison between the charges as shown on GFE and HUD-1 settlement statement and state whether the expense tolerance had been met.

HUD estimates that the changes to the closing process would add 45 minutes to a closing and increase the cost by at least $36.

Negative Responses

Reaction to the proposed Rule has been universally negative.

In a joint letter released June 12, the American Land Title Association, National Association of Realtors and the Center for Responsible Lending recommended “reforming the [proposed] GFE ' to provide clearer understanding” of loan terms and settlement costs. Each organization also issued individual letters criticizing the Rule from its own perspective. These letters are available on the organizations' individual Web sites.

While many agree that there are deficiencies in the current GFE, the majority of the comments to the proposed new Rule are that it goes well beyond what is necessary to correct the deficiencies.

In an undated comment letter, The Federal Deposit Insurance Corporation (FDIC) has stated its concern that HUD's proposed GFE is too long and provides too much information for it to be understood and appropriately used by consumers, basing this observation on its participation in an interagency project to develop model privacy notices for consumers. The inter-agency testing concluded that additional information often makes a form less useful because the basic concepts are overlooked.

The Federal Trade Commission has asked HUD to reconsider many aspects of its new proposed RESPA rule, at times agreeing with the theory behind the changes but not HUD's method of implementing them (www.ftc.gov/opa/2008/06/respafyi.shtm).

In its June 9 letter, Wells Fargo Home Mortgage stated: “The Proposal extends well beyond HUD's limited authority under RESPA to regulate the disclosure of settlement costs. Because the Proposal goes far beyond HUD's authority, it is unlikely to survive if challenged in the courts.”

In its June 11 letter to HUD, the Small Business Administration (SBA) also criticized the new Rule. This may be embarrassing for HUD Secretary Steve Preston, since this is the agency he headed before moving to HUD in April 2008.

Consumer Cost Questions

A principal concern is that the Rule would result in increased cost and not lower costs to the consumer. By HUD's own estimates, the one-time cost to switch to the new HUD-1 with the required closing script would be $169 million and the recurring cost to comply would be $676 million each year. Who, if not the consumer, is going to pay for this?

The closing script has been the target of many of the negative comments. Beside that fact that, as HUD admits, it will make closing longer, it will also put Settlement Agents in the unfamiliar role of having to explain the loan terms. In jurisdictions where settlements are not conducted by attorneys, would this put them in the position of engaging in the unauthorized practice of law? This is of particular concern to the National Notary Association. How do you read the closing script in areas where settlements are not conducted face to face? While the Rule requires the Settlement Agent to point out if the costs tolerances are not met, it is silent on what happens then. Does the closing continue? The Rule does not provide any guidance or create a new right for the borrower to adjourn the settlement.

Conclusion

The comment period for the proposed Rule had been scheduled to end May 13, 2008, but at the request of industry leaders and the 148 members of Congress who signed a letter to HUD, it was extended to June 12, 2008. HUD is now considering the comments. Will the Rule be adopted? We will have to see if HUD proceeds with the Rule as proposed or will resubmit it with changes. The last time HUD tried to make major revisions, in 2002, they went nowhere. President Bush has directed all agencies to promulgate final Rules by Nov. 1, 2008 (Memo by Chief of Staff Bolton May 9, 2008). To meet this goal, HUD would have to release the final Rule by the end of the summer to pass through the Office of Management and Budget review process in time.