Simplifying the disclosure forms provided to home buyers could save them an average of $668 at the closing table — an estimated $8.35 billion a year — by helping them find the best deal from mortgage lenders and settlement service providers such as title insurers.
That’s the claim officials with the Department of Housing and Urban Development (HUD) are making as they roll out their latest attempt at reforming the Real Estate Settlement Procedures Act (RESPA).
Proposed revisions to RESPA published in today’s Federal Register would require all loan originators to provide borrowers with a standardized Good Faith Estimate (GFE).
HUD says simplifying and standardizing the GFE would make it easier for home buyers to shop around by comparing the fees charged by loan originators, whether they are yield spread premiums paid to mortgage brokers or other fees charged by banks.
The proposed rule would also allow settlement service providers to seek volume-based discounts for settlement services, which HUD believes would lead to lower third-party settlement service prices. Settlement service providers would also be allowed to use "average cost pricing" for third-party services they purchase, simplifying the process.
"The higher reward for shopping, along with the increased ease with which borrowers can compare loans, should lead to more effective shopping, more competition, and lower prices for borrowers," HUD said in a lengthy impact analysis of the proposed rule change.
The $8.35 billion in savings HUD estimates borrowers might realize would mostly come at the expense of loan originators, who stand to lose as much as $5.88 billion in revenue a year, according to HUD’s 590-page analysis.
Those losses will be borne largely by loan originators who "have been overcharging uninformed consumers, through the combination of high origination fees and yield spread premiums," the analysis concluded.
HUD estimates third-party settlement service providers would see up to $2.47 billion in reduced revenue, or 30 percent of the savings consumers are expected to see. Title and settlement agents would take the largest hit — $1.79 billion — with other third-party service providers including appraisers, surveyors and pest inspectors losing the remaining $680 million.
Changes to GFE forms
The GFE forms currently in use are little more than a long list of charges, HUD argues, and don’t show consumers how to shop and compare loans. The current GFE, for example, does not make clear the relationship between closing costs, such as yield spread premiums, and the interest rate on a loan.
Mortgage brokers say yield spread premiums — rebates provided by lenders when borrowers agree to pay a higher interest rate on their loan — are a useful tool that allow home buyers to finance their closing costs into their loans.
But critics say that mortgage brokers often pocket all or part of yield spread premiums without the borrower’s knowledge, and that the practice can serve as an incentive for brokers to place borrowers in higher-cost loans.
Although the term "yield spread premium" is never used, the new GFE proposed by HUD would require brokers to disclose as their "service charge" the full amount received for originating a loan, and that borrowers receive credit for that portion of the amount paid by wholesale lenders for loans with higher interest rates (the yield spread premium) against their closing costs.
The proposed GFE form also specifies which charges can and cannot change at closing. Originators would be barred from changing their service fees — or charges or credits for the interest rate chosen — after interest rates are locked.
The GFE form would also cap increases on title insurance and other required settlement services at 10 percent when they are selected by or identified by loan originators (see proposed GSE form).
"The good faith estimate will finally mean what it says," said HUD Assistant Secretary Brian Montgomery, briefing reporters today. "What you see is what you get."
To make the good faith estimate a more useful tool for comparison shopping, HUD is also proposing to change the HUD-1 settlement statement to make the GFE and HUD-1 easier to compare (see proposed HUD-1 statement).
The rule change would also create, as an addendum to the revised HUD-1, prepared scripts to be read at closing comparing the GFE to the HUD-1. The scripts advise borrowers whether changes in promised closing costs have stayed within the allowed limits, and verifying that loan terms on the GFE match loan documents such as the mortgage note.
The closing scripts are intended to ensure that "a knowledgeable and experienced person, the closing agent, will walk the borrower through the transaction to ensure the borrower understands what the charges are and whether tolerances have been met or exceeded," HUD said in its impact analysis.
Industry reaction
HUD’s past attempts at RESPA reform — including a 2002 proposal to create a simplified three-page GFE — met with considerable resistance from the industry.
"There was opposition last time, and there will be opposition this time," Montgomery said. But with many borrowers having trouble keeping current on their loans, he said, "The timing is very good to push through what we think is a very bold rule" change.
The GFE form rolled out today "is a better product than the product we had a couple years ago," Montgomery said, and has been subjected to extensive consumer testing.
HUD said that when presented with different loan scenarios using the new form, consumers were able to correctly identify the best loan offer 92 percent of the time, regardless of whether it was offered by a mortgage broker or another originator.
The National Association of Mortgage Brokers today issued a statement saying that while the group is still analyzing the 96-page proposal, "we are encouraged to see that HUD is broadening its definition of a mortgage broker to include all those who broker mortgage loans, whether they work at a federal or state bank, lender, credit union, or mortgage broker."
In the statement, NAMB Executive Vice President Roy DeLoach said equal treatment of all mortgage originators is "a huge victory for consumers" requiring "everyone who brokers a loan to disclose their compensation in a uniform way" allowing consumers the ability to comparison shop.
In raw dollar terms, mortgage brokers are expected to take the majority of the $5.88 billion annual revenue hit HUD says loan originators could be facing under the new rules. Mortgage brokers stand to lose up to $3.53 billion in annual revenue, while lenders such as banks, thrifts and mortgage banks could see revenue fall by $2.35 billion, HUD estimates. But the 60-40 split in revenue losses between mortgage brokers and other lenders is in line with their share of mortgage originations, HUD said.
HUD estimates that more than 10,000 lenders would be affected by the proposed rule change, plus more than 4,000 credit unions that originate mortgages.
Loan originators and settlement service providers would also have to shell out up to $570 million to become compliant with the proposed rule changes, HUD estimates, and then face recurring compliance costs of $1.2 billion per year — or $98.48 per loan.
For loan originators, an estimated $401 million in initial compliance costs include $91 million for new software and training, $116 million for legal advice and training, and $193 million for additional training not related to new software and legal compliance.
Settlement services providers face up to $169 million in one-time costs for switching to the new HUD-1 form and the standardized closing script. Those costs would include $62 million for software and training, $37 million for legal advice and training, and $71 million in additional training.
HUD says it is also seeking authority to enforce consumer disclosures and protections, and impose penalties for specific sections of RESPA including those that prohibit kickbacks and referral fees.
Mortgage Bankers Association Chairman Kieran Quinn said in a statement that more clarity and transparency in the loan origination and closing process would "serve consumers well." But Quinn warned that the proposed rule changes — along with the Federal Reserve’s own plans to revise disclosures provided under the Truth in Lending Act — have the potential to add "significant paperwork to the loan origination process." HUD should coordinate with the Federal Reserve to "ensure that any new mortgage disclosures actually simplify the process for consumers," he said.
Another industry group, the American Land Title Association, issued a statement noting that HUD has been "wrestling" with simplified disclosures for years, and that the proposed changes "may fall short of achieving this goal." ALTA looks forward to "working with policymakers and other trade associations in the coming weeks to craft meaningful reforms that simplify the settlement process, make it more transparent, and promote greater consumer choice," said Chief Executive Officer Kurt Pfotenhauer.
Comments on the proposed rule changes will be accepted until May 13, and may be submitted electronically to the Federal eRulemaking Portal at www.regulations.gov.
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