Webster’s New Universal Unabridged Dictionary, defines the word “simplify” as “to make less complex or complicated; make plainer or easier.” We as a society know that in today’s times, when government interjects itself in the affairs of the people in order to make things “simple,” that simplicity doesn’t always come to fruition, and in fact, often results in unintended negative consequences.
It’s no mystery that when on March 14, 2008, the U.S. Department of Housing & Urban Development (HUD) decided to simplify the homebuying process for the American consumer through revisions to the Real Estate Settlement Procedures Act (RESPA), that a virtual train wreck of confusion was on the horizon. One of the aims of HUD’s RESPA reform was to standardize the Good Faith Estimate (GFE) to improve disclosure of loan terms and settlement costs for the consumer. The end result of HUD’s vision of RESPA simplification is a more complicated and confusing process for the homebuyer, the lending industry and the government.
On Jan. 1, 2010, HUD will require that lenders and mortgage brokers provide consumers with a standard GFE that clearly discloses key loan terms and closing costs. Closing agents will also be required to provide borrowers a new HUD-1 Settlement Statement that clearly compares consumers’ final and estimated costs. The new RESPA rule initially became effective on Jan. 16, 2009, but HUD provided a one-year transition period for the mortgage industry to incorporate these changes.
The confusion on the government side is evident when you rewind a shade over a year ago. It was on Sept. 16, 2008, before the U.S. House of Representatives Subcommittee on Oversight and Investigations of the Committee on Financial Services, when David H. Stevens, then president of affiliated businesses for Long & Foster Companies and current Assistant Secretary for Housing/FHA Commissioner, testified on behalf of the Real Estate Services Providers Council Inc. (RESPRO) at a hearing on HUD’s proposed RESPA rule. RESPRO is a national non-profit trade association of residential real estate brokerage, mortgage, home building, title and other settlement service companies who work to promote an environment enabling providers to offer diversified services for home buyers through affiliations, joint ventures and other strategic alliances.
“RESPA reform has been a nightmare for the mortgage industry since it was proposed back in 2002,” said Marc Savitt, CRMS, president of Martinsburg, W. Va.-based The Mortgage Center. “If the industry cannot understand the revised GFE due to confusion, how is the consumer going to understand it?”
On behalf of RESPRO, Stevens weighed in on supporting HUD’s goal of providing simplified mortgage disclosures that make it easier for consumers to shop when they purchase or refinance a home. However, in the testimony, Stevens and RESPRO believed that the RESPA reform proposed by HUD in March of 2008 would have the opposite effect.
“HUD fully understands how bad this rule is, as evidenced by David Stevens’ September 2008 testimony before the House Subcommittee on Oversight and Investigations of the Committee on Financial Services,” said Savitt, then president of the National Association of Mortgage Brokers (NAMB) who sat beside Stevens on Sept. 16, 2008 and represented the mortgage broker trade association at the House Subcommittee on Oversight and Investigations of the Committee on Financial Services during the RESPA reform hearing. “I also testified at that same hearing and remember the passion in his voice, with respect to his concern of consumer confusion and damage to the overall housing market.”
Quoting the testimony of Stevens from the hearing:
“The proposed Good Faith Estimate (GFE) is lengthy, complex, and cannot be easily compared by a borrower with the HUD-1 Settlement Statement at closing to determine whether the actual costs exceed the estimate provided at the time of the loan application.”
“The proposed GFE contains terminology that conflicts with other disclosures consumers receive under the Truth-in-Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA), which will add to the borrower’s confusion during the loan application process.
“HUD’s proposed new GFE and mortgage application process would overlap and conflict with the broader federal mortgage regulatory framework under TILA and ECOA, which would further add to the borrower’s confusion.”
Lengthy and complex? Quite the polar opposite of Webster’s definition of “simplify,” the initial intent of the RESPA rule. Conflicting terminology in the GFE? Why burden the borrower with more troubles as they embark on what is likely the single largest purchase they will make in their life. Overlapping regulatory framework? Wasn’t this supposed to be made “simple?”
“In studies conducted by the Federal Trade Commission [FTC] in 2004 and 2007, it was determined that the new GFE was confusing to consumers,” said Savitt. “If HUD allows this rule to go in to effect on Jan. 1, the housing market will be seriously injured.”
Stevens as new FHA Commissioner is no stranger to the mortgage lending arena, as he has seen both sides of the fence. Before accepting the role of FHA Commissioner, he served as president and chief operating officer of The Long & Foster Companies. With Long & Foster, one of Stevens’ responsibilities was president of affiliated businesses, overseeing the individual business units for mortgage, title, insurance and settlement services for the company. Prior to that, Stevens had a brief stint of a little over a year as executive vice president, national wholesale manager for Wells Fargo from 2005-2006. Prior to his short tenure with Wells, he served as senior vice president for the single family division at Freddie Mac for approximately seven years. Stevens got his start in the financing world back in 1983, with World Savings for 15 years, working his way up to the role of group senior vice president. Doing the math, that’s a grand total of 26 years in the finance industry prior to his accepting President Obama’s nomination as FHA Commissioner back in March of 2009.
Less than half the way through Stevens’ prepared testimony, he makes the statement:
“These are just a few reasons why we believe HUD’s 2008 proposed RESPA reform rule—which was almost 100 printed Federal Register pages—was fundamentally flawed. Given the short timetable for public comments (March 14-June 13, 2008), the thousands of comments received, and the extremely short time after the deadline for comments that HUD took to analyze them, draft a final rule, and send it to OMB [Office of Management and Budget] (June 13-August 14, 2008), we think that it is extremely unlikely that HUD has modified the proposed rule in a manner that would resolve these and numerous other potential problems.”
“Fundamentally flawed” was the Stevens/RESPRO description of the rule. Now that may have been back in September of 2008, but with a rule set for enactment on Jan.1 and nothing having been done yet to rectify these “fundamental flaws,” it looks as though a “fundamentally flawed” rule will be governing the industry responsible for the single greatest investment in one’s life come Jan. 1. He concluded this section by stating, “we think that it is extremely unlikely that HUD has modified the proposed rule in a manner that would resolve these and numerous other potential problems.”
Now that he is in charge of enforcing this revised RESPA rule, Mr. David Stevens, in his position as FHA Commissioner, has the power to change things. As of this writing, there has been no movement on modifying any portion of this rule that would resolve any of its potential problems.
“As recently as last month, Vicki Bott, HUD Deputy Assistant Secretary of Single Family Housing, called the revised RESPA rule ‘confusing,’ while speaking on a Webinar,” said Savitt. “The last thing our economy needs right now is another housing crisis.”