HUD proposes mortgage reform to help consumers better understand their loan, shop for lower costsMortgagePress.comAlphonso Jackson, RESPA, mortgage reform, good faith estimate
In an effort to significantly improve the complicated, unclear
and costly homebuying process, U.S.
Department of Housing and Urban Development Secretary Alphonso
Jackson proposed mortgage reform designed to help consumers better
understand their loan terms so that they can shop more effectively
for the largest purchase of their lives.
HUD's proposal reforms the more than 30-year old rules of the
Real Estate Settlement and Procedures Act (RESPA), and improves
disclosure of the loan terms and closing costs consumers pay when
they buy or refinance their home. For the first time ever, HUD is
proposing that mortgage lenders and brokers provide consumers with
a standard good faith estimate (GFE). By more openly disclosing the
key elements of the loan and by controlling fee inflation, HUD
seeks to provide consumers with enough information to allow them to
shop more effectively for the lowest cost loan. HUD's economic
analysis finds that by offering consumers clearer, more certain
cost estimates, the average borrower will save nearly $700.
"A lot of the mortgage problems we see today are directly
related to the fact that few people fully understand this process,"
said Jackson. "Buying a home can be very intimidating. 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. Our proposal fixes that. We owe it to the
American homebuyer to give them the information they need to make
smart choices."
Brian Montgomery, HUD's Assistant Secretary for Housing, added,
"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. This
new good faith estimate will give families the tools they need to
understand what they're getting into before they sign on the dotted
line."
In light of recent increases in loan defaults and foreclosures,
the need for reform is imperative. When President Bush announced
his comprehensive plan to address rising foreclosures last August,
he pledged to offer new mortgage rules that would help families
avoid getting into trouble in the first place. This proposed RESPA
rule makes good on that pledge.
HUD is proposing to offer consumers a standard GFE that will
substantially enhance disclosure of all important aspects of the
loan, including:
•The interest rate and monthly payment;
•Whether the interest rate and principal balance can increase
and by how much; and
•Whether the loan has a prepayment penalty or balloon
payment.
The proposed GFE would consolidate closing costs into major
categories to prevent "junk fees" and display total estimated
settlement charges prominently on the first page so the consumer
can easily compare loan offers. In addition, HUD's new proposed
rule would specify the charges that can and cannot change at
settlement. If a fee changes, HUD proposes to limit the amount it
can change. HUD also proposes to modify the HUD-1 settlement
statement to help consumers compare the anticipated charges on the
GFE and their actual charges.
The GFE would also require that lender payments to Mortgage
Brokers (often called yield spread premiums) be disclosed. It is
HUD's belief that these payments are directly dependent on the
interest rates that consumers agree to, and therefore ought to be
disclosed. 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 GFE helped consumers to select the
lowest cost loan more than 90 percent of the time, regardless of
whether the loan was originated by a lender or a broker.
Finally, HUD is proposing that settlement agents read a "closing
script" to borrowers at the settlement table and that a copy be
provided to the borrower. This closing script would ensure that the
settlement agent not only compares the borrower's estimated and
actual charges, but would detail the key terms of the loan. HUD's
extensive consumer testing found borrowers appreciated the enhanced
disclosures, believed the loan details on the closing scripts were
clear and understandable, and reacted positively to having the
scripts read out loud.
Legislative changes to RESPA
To further bolster consumer protection and to ensure uniform and
consistent enforcement of RESPA, HUD intends to seek legislative
changes to the Act that will complement the regulatory improvements
made by the rule. Currently, RESPA does not provide HUD with
enforcement mechanisms for some of the most important consumer
disclosures and protections. A lack of enforcement authority and
clear remedies for violations of critical sections of RESPA
negatively impact consumers and diminish the effectiveness of the
statute.
HUD will seek the authority to impose penalties for violations
of specific sections of RESPA, including Section 4 (provision of
uniform settlement statement); Section 5 (GFE and settlement costs
booklet); Section 6 (loan servicing); Section 8 (prohibition
against kickbacks, referral fees and unearned fees); Section 9
(title insurance); and portions of Section 10 (regarding escrow
accounts). In addition, HUD proposes the authority for the
Secretary and State regulators to seek injunctive and equitable
relief for violations of RESPA, require delivery of the HUD-1 to
the borrower three days prior to closing, and establish a uniform
statute of limitations applicable to governmental and private
actions under RESPA.
To read the full text of HUD's proposed RESPA rule, visit www.hud.gov/respa.
