Putting RESPA to Rest, Once and for AllBrian L. PeartRESPA, HUD, Proposed Rule, GFE, NAMB, Guaranteed Mortgage Package,
Let me be the first to say that the U.S. Department of Housing
and Urban Developments Proposed Rule regarding the Real Estate
Settlement Procedures Act, which is is slated to arrive this
spring, will be a good thing for ethical Mortgage Brokers! No, I am
not crazy, and I am not on HUD's payrollI am a Mortgage Broker,
just like you. But I have read, analyzed and thought through the
report, and have concluded that we can actually beat the lenders
with this new law.
First, despite the National
Association of Mortgage Brokers efforts, this law is going to
pass. If you read the entire proposal, you will clearly see the
immense history that has gone into its drafting. In 1998, HUD and
the Federal Reserve co-sponsored a report seeking to reform RESPA.
In this report, they recommended that loan officers give firmer
quotes, earlier in the process and with low tolerances, encourage
some form of packaging with guaranteed costs, and provide a
safe-harbor from RESPAs Section 8 (regarding kickbacks). In other
words, HUD has been working on this thing since 1998, and its more
than four years in the making! There is no way that HUD is going to
let this thing pass without it ending up as law. On top of that,
since both large-scale lenders and the Mortgage Bankers Association
of America have endorsed it, HUD Secretary Mel Martinez has all the
support he needs. However, contrary to the doom and gloom, I
believe the Proposed Rule can provide huge opportunities for
Mortgage Brokers! Prudence dictates that we should have a strategy
in place, ready to roll when this thing becomes law. The two big
issues with brokers are the new Good Faith Estimate and the
Guaranteed Mortgage Package Agreement. Because they benefit the
consumer and HUD will not believe otherwise, both of these will end
up in the final law, albeit with some possible tweakingespecially
regarding FHA/VA loans. By implementing a sound game plan, not only
can you stay in business, but you can gain market share as
well.
Let's take the new GFE first. It is not true that brokers will
do no-point loans! In HUD's proposal, they categorize fees into two
main groups: Origination fees and miscellaneous fees. It looks
similar to this:
A. Origination Charges
Total: $_______
B. Interest-Rate Dependent Payment
(Until the interest rate is locked, these figures may
change)
+Borrowers Payment to Lender: $______
-Lenders Payment to Borrower (for higher rate): $______
Net Origination Charge Due from Borrower:
$_____
Heres how you would write a no-points loan:
Lets say you are writing a $100,000 loan and are looking to make
two points. First, you would quote $2,000 in Origination Charges on
line A. You would mirror that value in the Lenders Payment to
Borrower field as a minus (of course, you must lock the loan before
earning the two points back). The Net Origination Charge subtotal
would then be zero. Your customer only cares about the bottom
linewhat it will cost themwhich is designated at the bottom of the
form. They will see that you are making $2,000 as a company, but
they need not know how much of it is yours. If your rate quoted is
better than the lender, you will get the deal. All this does is let
the borrower know what your company makes on the deal.
Now, it is true that a lenders figures would both be zero under
this proposal, but in the end, the customers net is the same. You
and I both know that most of our customers are going with us
anyway, regardless of rate. Have you ever been asked, when dealing
with no-point loan borrowers, How do you make any money? Now can
you show them.
Now, if you overcharge your customers (which you obviously
shouldnt be doing), you will be clearly showing them the extent of
your gouging, by fully disclosing the yield spread premium. This
new GFE will really help us honest brokers, because it will rid the
industry of unscrupulous lenders and free us from our legal
concerns. The lenders won't gain market share because we can still
beat their rates any day, and the customers bottom line remains the
same. All the other features of the new GFEguaranteeing costs with
a 10-percent variance and securing rates tied to an indexwill be
the same for both lenders and brokers. As long as we have similar
rules and know them going in, we can beat the lenders and banks.
Why not? Weve been doing it for 15 years! Who knowsthis might even
help simmer the predatory lending uproar that continues with no end
in sight.
If youre still scared, HUD offers another solution in the form
of the GMPA, and it too will most likely pass into law. In fact, it
will probably become the preferred choice among consumers, because
it provides what every borrower wantsone figure to shop. The GMPA
proposes lumping all closing costs into one total package, and
guaranteeing the package price and interest rate for 30 days. In
exchange, HUD will carve out a safe harbor under RESPA, freeing you
from worries about kickbacks or steering business to "partners." I
have heard basically two distinct outcries about this proposal from
brokers, but as usual, the truth varies greatly from the fear.
The first concern is over the 30-day lock. However, the GMPA is
not presented the way that people think. This form is actually
well-thought out. Its simply mind-blowing to think that the
government came up with it in just two pages! At the top of the
proposed agreement, it states the basics of the formbelow you will
find the guaranteed rate and costs, upon your acceptance and
payment of [disclosed] fee. It even contains a clause in case they
do not qualify, which is necessary and similar to the one found on
the GFE. They will be signing this at time of application if the
final form is similar to the proposed. It is not a big deal.
It also states that the rate is guaranteed if they accept and
sign this agreement and lock the rate. If they opt not to lock, HUD
is proposing that the broker guarantees the rate will not go higher
than a certain percentage over an index for 30 days. I agree that
30 days is ridiculous. No one who is serious shops a loan for 30
days. I believe HUD will shorten this period, but as long as it is
tied to the 10-year, and adjusts if rates fluctuate, then I will
make the same amount of money. That's right, you can quote whatever
rate you want, as long as the customer accepts it and you guarantee
it. The GMPA does indeed level the playing field because it
prevents bait and switchers from using bogus GFEs. Guys ... we can
handle this!
The other large outcry I have heard is that packaging will give
the lenders an unfair advantage. If you are an aggressive broker, I
dont see how this is possible. This proposal actually provides the
greatest opportunity to dominate the lenders. Most of this outcry
centers on the second section of the GMPA, which basically
guarantees the price of all settlement costs. Now, the final HUD
will be itemized, but the amounts will be blank. The customer will
just pay this one price. Everything is included but the escrows,
which are broken out in a different section. I like this even
better than their proposed GFE. The price is the thing that the
customer will shop, and the bait and switchers will not be able to
hide costs in low-balled escrow quotes. Let's face itthe hazard
insurance they get will be the same, regardless of who the lender
is. If the argument is that the big lenders will be able to bundle
more services and provide lower quotes, the opposite, in fact, is
true! As you read this, lenders are acquiring companies and paying
lawyers to figure out ways to bundle services and skirt RESPA
anyway. They are making profits off of these bundled services
without passing any savings on to the customer. The Proposed Rules
safe harbor will prevent this, while opening the door for honest
Mortgage Brokers.
Lets face facts. You and I don't have that kind of money to
blow. But, we don't need fancy lawyers to compete, just an
agreement to team up. That is why I am starting to solidify my
relationships now. I can just visit my favorite title company and
form a partnership, and I never have to worry about illegal
kickbacks. Not only that, but I do not need to disclose points or
fees, or mess with YSP disclosure. The truth is, if I am
guaranteeing the final product, and the customer had time to shop,
then we should not have to worry. This is what we have been wanting
all along! Want to know what else? If the customer goes with us, we
control the deal. They must use our title company, et al.,
regardless of who the real estate agent or builder may be
pushing.
So, how do we beat the lenders? Think about it. They already
charge much higher costs than us. If I were to quote exactly what a
lender quotes, I would easily be making three points. (They need
those points in order to pay all of their vice presidents
salaries.) By teaming up and partnering with title companies and
appraisers, I can get them to save money, in return for steering
all of my business toward them. No RESPA to worry about. We cut the
costs $100 here or $50 there, and soon were lopping off nearly
$500! Thats less than one point! I now quote a GMPA of $2,500
instead of the original $3,000, and quote a rate where I will
receive one percent to 1.5 percent back from the lender. What
lender is going to touch that? Remember, they need to make at least
three points just to turn a profit. Even if they own the title
company and the appraiser, they cannot possibly quote as low as
Mortgage Brokers can and still make three points. We will become
the legitimate low-cost options in the marketplace. They can't
compete! Game over!
This law will only kill the fat-fee brokers, if that. If you are
smart and prepare, you can capitalize on this and gain market
share. There are several other strategies I have outlined in my new
book, The 2003 RESPA Survival Plan. Feel free to call (561)
684-3880 or e-mail
[email protected] to purchase a copy. Remember,
whenever there is major change, major opportunities are presented
to the early adopters. HUD will likely provide the industry with at
least three to six months to implement these changes, but if you
begin today, you will get a jump on the competition. Be ready, and
you will dominate!
The opinions in this article do not
necessarily reflect those of the National Association of Mortgage
Brokers, its state affiliates or The Mortgage Press Ltd.
Brian L. Peart is owner of Nexus Financial Group Inc. and the
author of The 2003 RESPA Survival Plan. He may be reached by
phone at (561) 684-3880 or e-mail
[email protected].
