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Jan 05, 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 The rule was withdrawn in early 2004.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 [email protected].
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