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January 5, 2006

RESPA roundtables: Debate, rumble or real input? Joseph Falk RESPA, HUD, YSP, GFE
The U.S. Department of Housing and
Urban Development has held a series of roundtable discussions
on RESPA reform. As positions are stated, debating points made and
disagreements aired, will HUD implement the many and varied views
expressed in these sessions? Will the comments be considered by
HUD? Will there be meaningful reform? Or, are we discussing
alternatives that the industry does not want implemented?
It is hard to determine the effect of these roundtables on HUD's
thinking. However, no observer can miss the clear consensus forming
from these sessions:
1. The new Good Faith Estimate (GFE) is not simple, clear and
fair.
2. Few participants support any form of packaging.
What is HUD going to do? Will HUD listen to industry opposition
or will they proceed with a rule in the fall? The following review
highlights our recollection of some of the positions taken by a
wide variety of participants. It is hoped that by sharing the
comments of various participants, you can get a sense of the
discussion and the potential for reform.
The history of RESPA reform
On June 27, HUD Secretary Alphonso Jackson announced a roadmap to
RESPA reform. Six roundtables were announced, to encourage industry
and consumer input, include small business perspectives and to
jump-start the stalled RESPA reform effort. HUD originally proposed
a rule on July 29, 2002 titled, "RESPA: Simplifying and Improving
the Process of Obtaining Mortgages and Reduce Settlement Costs to
Consumers." In response to considerable public comment from
industry, federal agencies, members of Congress and consumers, the
secretary took a 'time out' from this rulemaking process. The rule
was withdrawn in early 2004. The roundtable process seeks to hear
input from all affected parties on this 2004 effort and RESPA
reform in general.
The current process
As of this writing, three of the six scheduled roundtables have
been held, and impressions and policy recommendations are beginning
to take shape. The first of the roundtables was held in Washington,
D.C. on July 14. Most of the attendees consisted of trade
associations, consumer groups and industry leaders. The second
roundtable was held in Los Angeles on July 21. Held in conjunction
with the Small Business
Administration, participants at this roundtable included small
business owners and industry participants. The third roundtable was
held back in Washington, D.C. on July 28 and participants once
again included trade groups, consumer advocates and large national
industry players. NAMB has been invited to send participants to all
six roundtables.
Each roundtable, so far, has followed the same pattern. After a
welcome, HUD officials presented an overview of the 2004 effort and
the 41-page document released by HUD on Aug. 14. Participants were
able to ask technical questions of HUD officials as to the effects
and intentions of the stalled 2004 effort. After a break, a
facilitator sought guidance from assembled representatives on:
1. What changes, if any, should be made to HUD's GFE form to
make it more helpful to consumers and industry?
2. How should loan originator compensation be disclosed on the
GFE?
3. What may be the impact on consumers of a mortgage package that
includes an interest rate guarantee and a fixed price for
settlement costs?
4. How can sub-packaging be designed to maximize competition
without creating undue complexity for consumers?
5. Should HOEPA loans be eligible for packaging?
6. Should there be an opportunity to cure and/or provide remedies
for errors or violations of mortgage packaging or GFE
requirements?
Roundtable number one July 14 in Washington,
D.C.
National Association of Mortgage
Brokers President Jim Nabors and I participated in the first
D.C. event. The Idaho
Association of Mortgage Brokers, Maryland Association of Mortgage
Brokers and Wisconsin
Association of Mortgage Brokers were also invited. Additional
invitees included the National
Association of Realtors, National
Association of Consumer Advocates, National Center on Poverty
Law, National Consumer Law
Center, Nebraska
Realtors Association, Mortgage
Bankers Association, American
Land Title Association, AARP, ACORN and ABN-AMRO. In all, 36 groups and
representatives were invited to attend. In addition to many HUD
officials, there were other government officials in attendance,
including representative from the Department of Justice,
congressional staffers, the Federal
Trade Commission and more.
HUD's Assistant Secretary of Housing Brian Montgomery provided
the welcome, followed by a "2004 RESPA Overview" by Deputy
Assistant Secretary of Regulatory Affairs Gary Cunningham.
Secretary Jackson then addressed the group. In prepared remarks, he
stressed that this process was meant to be an open, transparent
attempt at RESPA reform. He said that all of us were invested in
this process, but we should not misunderstand the purpose of the
roundtables. The roundtable process was not meant as negotiated
rule-making. He said that he could have issued a final rule in
2004, but decided not to do it, opting instead for stimulating
dialogue. He repeated his assertion that what happened in 2004 is
over, the table is set for new thinking, and that he is concerned
about doing it right (not necessarily fast). He refused to define
"consensus," rebutting the widely reported rumor that he wanted 80
percent consensus on positions before moving forward. He concluded
his remarks by saying that he intends to move forward on RESPA
reform.
Dr. Charles Field facilitated the rest of the roundtable effort.
A lively debate ensued. First up, the GFE. NAMB presented its
position on GFE reform. We believe that there should be a level
playing field; mortgage brokers should not be disadvantaged by
being the only distribution channel to disclose back-end income.
NAMB maintained that it was not fair that lenders did not disclose
their par-plus pricing, gain on sales, or securitization gains,
since mortgage brokers have to disclose yield spread premiums
(YSP). We continued to stress the fact that industry participants
act in many ways sometimes as a broker, sometimes as a lender,
sometimes acting in different capacities while a transaction is
being processed. We commented that grossing up the YSP disclosure
(and then netting the amount down to a net cost), as contemplated
by HUD, increased confusion, adding a burden to brokers only. We
continued that this scheme would foster competitive disinformation
by stressing the higher "disclosed gross-cost of a broker
transaction" versus a seemingly lower "net-cost lender transaction"
(of which the benefits to the company are not disclosed). President
Nabors jumped into the fray and added that all industry
participants are getting paid after closing and that consumers
should be aware of that fact. David Berenbaum of the National Community Reinvestment
Coalition added that he is worried about new products and the
lack of current disclosure guidelines. He is interested in
additional disclosure for interest-only loans, the four-pay
option-ARM plans and additional efforts to inform consumers about
their choices. Mike Calhoun from the Center for Responsible
Lending added that consumers have little understanding of how
YSPs are handled. Mr. Calhoun emphasized that mortgage brokers are
paid for a service, not a loan, and that many consumers feel that
brokers are supposed to shop for the best deal for the consumer.
Jim Nabors continued to push for a "level playing field for all."
Many in the group suggested going from a one-page GFE to a
four-page form, including a teeter-totter and a shopping chart,
would create confusion, not clarity. The suggestion was made that
the proposed GFE be eliminated and replaced by a form exactly
paralleling the current HUD-1 format.
The second half of the session emphasized packaging,
sub-packaging and Section 32 loans. In a passionate display, most
of the participants derided and opposed the packaging concept. Most
inferred that reducing transparency and allowing kickbacks was not
good public policy. NAMB added that, with packaging, there would be
increased incidents of fraud and illegal transactions.
Sub-packaging met with similar consensus views. While an
interesting concept, HUD was not providing clarity and simplicity
by allowing packaging, sub-packaging and a four-page GFE that would
allow sub-packaging. Additionally, by eliminating Section 8
kickback protections, there was no proof that the savings would be
passed along to consumers. There appeared to be consensus in the
room that packaging should not be allowed for transactions made
pursuant to Section 32 of the Truth in Lending Act (high-cost
loans). These consumers, it was said, were less likely to shop,
less likely to compare and more likely to be taken advantage of by
predatory lenders.
Roundtable number two July 21 in Los
Angeles
This second of six scheduled roundtables was held in conjunction
with the Small Business
Administration. Representatives from the California Association of Mortgage
Brokers and NAMB, along with real estate agents, escrow
companies, title companies and other settlement service providers,
packed the roundtable. NAMB members and leaders included Chris
George, Jonathan Barnato, Ginny Ferguson, Ted Grose and Ed Smith.
In what was reported as a "rumble," participants proceeded to
barrage HUD with complaints and accusations about the severe
negative impact the proposed RESPA reform would have on small
business.
Packaging discussion dominated the session. Near unanimous
negative comments were heard. Ginny Ferguson, a past NAMB board
member, reported that HUD officials seemed surprised at the level
of opposition to packaging. HUD repeated that "anyone could
package, including mortgage brokers," but that did little to
convince the opponents of the rule. HUD was accused of catering to
big business interests, which HUD flatly denied. Participants
stated that packaging, with Section 8 relief, would increase fraud
in the process and decrease clarity and transparency. Additionally,
participants complained about dramatically lower levels of
service.
"Brokers are not looking for any kind of special carve-out or
exemption from disclosure or Section 8 not offered to other loan
originating entities. We're looking for the rule to apply
consistently to all originators," stated Ted Grose, NAMB board
member.
A GFE discussion was then held. Representatives from CAMB spoke
out against the four-page GFE and the YSP as a credit to the
borrower. "I asked my processor, who has been in the business for
20 years, to review the proposed GFE. After reading through the
form three times, she asked, 'What exactly are they trying to tell
me here? This is the most confusing document I have seen in a long
time,'" reported Ginny Ferguson, NAMB representative. "Grossing up
the total compensation to then net it down by subtracting out the
YSP is not clear or simple, and it certainly is not going to
provide a greater certainty of costs to the consumer," she
continued. CAMB representatives also spoke out against a guaranteed
GFE upon first application with only a 10 percent tolerance in
third-party fees.
When questioned as to the motivation to reform the GFE, HUD
officials cited more than 2,000 complaints they receive annually, a
large portion from borrowers having GFEs that underestimate their
closing costs and force them to come with large amounts of money at
the last minute. Most participants stated that this was not a
problem with the GFE, but a problem in the industry with uneducated
or 'bad apple' lenders and brokers who underestimate their costs to
get business. Participants called on HUD to enforce RESPA as a
better answer to providing clarity and transparency in the process.
HUD also revealed that they have tested the new forms, but declined
to reveal the results.
Brian Sullivan of HUD's Office of Public Affairs closed the
roundtable discussion by reiterating that HUD viewed this process
with a clean slate; the comments from the roundtable participants
were what they were looking for, and they would factor our comments
into their future rule-change proposal.
Roundtable number three July 28 in Washington,
D.C.
Back in Washington, D.C. for the third of six scheduled sessions,
37 national players assembled to debate and discuss RESPA reform.
In addition to NAMB and the South
Carolina Mortgage Brokers Association, the Consumer Mortgage
Coalition or CMC (a large lender trade group), Countrywide, AARP, ACORN, the Real Estate Services Providers
Council, America's Community
Bankers, ATM
Corporation, Bank of
America, the National
Association of Hispanic Real Estate Professionals, NAR and the
Lending Tree participated
in the debate. The process mirrored the roundtables that were
previously held by HUD, with Secretary Jackson reiterating his
belief in an open process and the importance of RESPA reform.
While many of the comments mirrored those made in previous
sessions, a few new comments were made and responses noted.
Representing NAMB were President-Elect Harry Dinham and Legislative
Chair Joe Falk. Representing the South Carolina Mortgage Brokers
Association were Executive Director JoLee Gudmundson and Past
President David Krahn.
When asked about regulatory authority, HUD Deputy Assistant
Secretary of Regulatory Affairs Gary Cunningham said that HUD does
have authority to impose a packaging scheme. When asked about the
department's preemption authority, Mr. Cunningham stated that HUD
does have regulatory authority to preempt state statutes. Many in
the room seemed surprised by that comment and a consumer advocate
representative later commented that HUD should consider preemption
very cautiously, as Congress was watching.
NAMB began the debate by demanding that the entire YSP
disclosure be dropped from the GFE form. Quoting from the
previously issued FTC report from 2004, it was said that 75-90
percent of studied consumers believe that a direct lender loan
(that did not disclose the YSP) was less expensive than the broker
loan (that did disclosure the YSP). The study continued that when
tested, 90 percent of consumers picked the less expensive loan when
no broker compensation disclosure was made. NAMB reiterated its
belief that "grossing up the origination fee to then reduce it by
crediting a YSP" would only cause confusion. Members of the
consumer advocacy community disagreed with the premise that the YSP
disclosure should be eliminated. Three representatives of consumer
groups admitted that they used a mortgage broker for their own
loans! Even the CMC representative, Anne Canfield, said that she
got her personal loan from a broker! A spirited debate ensued, with
many comments opposing GFE reforms. Again, it was suggested that
HUD use the HUD-1 form model rather than a new GFE form.
This session saw the first vocal support of the packaging
option. Anne Canfield of the CMC stated that HUD should delay GFE
changes and move ahead with packaging options. As one of the few
vocal supporters of packaging, Ms. Canfield repeated her claims
that packaging should be implemented. Others, including Sandor
Samuels from Countrywide, suggested that while full Section 8
relief was problematic, he opted for limited Section 8 reform,
possibly under section B and C (discounts and averaging). As
expected, most of the settlement service provides, including the National Credit Reporting
Association, strenuously opposed packaging in any form. There
seemed to be consensus including from a representative of the
consumer advocacy community that savings under packaging would not
be passed along to consumers. There were several comments
suggesting that packaging should be implemented without Section 8
relief. Many commented that packaging is now being used in the
marketplace and that HUD should see what happens, rather than
imposing the new regulation.
Alys Cohen, staff attorney for the National Consumer Law Center,
reiterated her belief that enforcement was needed now and in a
packaging scenario, a consumer would not know if certain
protections under HOEPA were triggered. She urged that HELOCs be
included under RESPA (they are currently excluded). Countrywide
stated that they are opposed to the current packaging proposal, per
se, and that eliminating kick-backs was the whole reason RESPA was
passed by Congress in the first place. The ATM Corporation
suggested that any benefits from packaging should benefit the
consumer, not the lender/broker. Many agreed. NCRC, a consumer
group, passionately presented their position that packaging would
change the fundamental position of who purchases services (from the
consumer to the lender/broker). NAMB added that such a change would
increase the cases of all forms of fraud: loan, appraisal, credit,
title, etc.
A suggestion was made that HUD form an advisory committee of
industry and trade professionals to consult and advise HUD on
continuing industry developments and challenges, even after the
RESPA process had been concluded.
The next step
So, what's the next step a rule? State pre-emption? As of this
writing, there are three more roundtables to come. Is HUD
listening? Will the consensus against packaging be different with
the next sessions? Kim Kendrick, senior counsel at HUD, suggested
that the rule may be ready for release as early as September.
It is too soon to gauge the effects of these sessions or if HUD
will make changes to the 2004 effort. However, no one can deny that
input is being given and a wide variety of views are being
expressed. For now, NAMB continues to attend, participate and
monitor these important sessions.
Joseph Falk is legislative chair and past president of the
National Association of Mortgage
Brokers. He may be reached at (305) 858-9038 or e-mail joefalk@namb.org.

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