Real Estate Services – New RESPA Rule Confusing and Overly Expansive

Brought to you by RISMedia and the National Association of Realtors®

By Ken Trepeta

RISMEDIA, July 2008-Recently the U.S. Department of Housing and Urban Development (HUD) issued a proposal to amend the rule for the Real Estate Settlement Procedures Act (RESPA). RESPA was enacted in 1974 to address problems in the real estate settlement process including curbing abusive practices that increased costs to home buyers and to reduce the lack of understanding about the settlement process and its costs among consumers.

While the proposed rule changes are intended to simplify and improve disclosure requirements for mortgage settlement costs and protect consumers from unnecessarily high settlement expenses, the proposal falls extremely short of this objective. Instead, it brings questionable and untested wholesale changes to the settlement process-changes that will directly impact the real estate industry.

Realtors® and RESPA

Realtors have a strong stake in the provision of simplified disclosures of mortgage settlement costs early in the loan transaction for several reasons. Realtors are typically the first contact in the home-buying process and stay with the consumer through settlement, developing close working relationships with clients.

As a result, consumers look to real estate professionals to help them understand the home-buying process from beginning to end. Abusive lending practices are most likely to occur when uninformed consumers are overwhelmed by a transaction laden with unfamiliar financial terms and a confusing array of compensation models and settlement services. Early disclosures, clearly presented, will help consumers and their agents identify the mortgage product that provides the optimal combination of cost and value for their particular circumstances.

Fails to Achieve Simplified Disclosures

One of the primary objectives of the RESPA statute is to provide disclosures so that home buyers will better understand mortgage and settlement costs. A key means to achieving this objective would be to have the Good Faith Estimate (GFE) track the HUD-1. By marrying the two forms so that they mirror the other would greatly assist consumers in understanding whether or not the terms and expenses that were disclosed to them at loan application are those that are the governing terms and costs at closing.

However, HUD did not follow the suggestions of the industry, including NAR, the Center for Responsible Lending, ALTA or its own consultants and instead expanded the GFE to four letter-sized pages. The newly expanded GFE contains too much fine print and instructions, which may prove difficult for consumers to comprehend, particularly the system proposed for the disclosure of discount points and yield spread premiums (YSP). It also does not give the consumer access to all relevant cost information resulting in consumers getting less than the full disclosure Congress intended in the original statute. All of this will result in consumers looking more heavily to real estate agents and other real estate professionals to solve problems and answer questions caused by the confusing, unmatched forms.

If HUD married the GFE and HUD-1, it would obviate the need for the cumbersome and expensive “closing script” that Realtors and agents must read at settlement, which reinforces final loan terms to the borrower. While the “closing script” may appear beneficial, it actually comes too late in the process to help consumers, as it is unlikely the borrower will walk away from the transaction unless serious misrepresentations are uncovered.

Similarly, there is little that can be done to make major changes at closing and in the event proposed “tolerances” are exceeded, Realtors and other settlement service providers at the closing are the ones who will be looked upon to fix the situation. It also does not account for the various closing models used across the country that cannot incorporate the “closing script” without making fundamental changes to how closings are conducted.

In addition, there are a number of practical concerns with requiring the settlement agent to prepare the closing script, including adding significant time and expense to an already complicated transaction, exposing the agent to charges of the unauthorized practice of law and providing little instruction on what alternatives should be used for non-English speaking or hearing-impaired customers.

Attempts to Lower Costs through Government-Directed Pricing Mechanisms

HUD’s proposed rule attempts to lower prices through government-directed pricing mechanisms. Its proposed GFE allows lenders to de facto “package” settlement services such as title, title insurance, appraisals and inspections. In addition, HUD has allowed large lenders to “guaranty” the cost of their packaged services within 10% of the quoted packaged price, while also allowing the large lenders to tell potential borrowers that their competition has no limits on what they can charge and the charges can change right up to closing.

These provisions ignore the plain intent of Congress that RESPA not be a rate-setting statute. Volume discounts, while appealing in theory, under the proposed rule put real estate firms at a disadvantage in favor of the largest lenders. The structure of the proposal gives the mortgage lender control over the transaction and price leverage over all other settlement service providers.

HUD’s proposed pricing mechanisms also ignore the role of value in the real estate transaction. The current mortgage market crisis provides the best evidence needed to demonstrate that quality does matter. A thorough and professional appraisal offers assurance of the value of a property. The quality of a loan officer’s review of a full credit report can mean a borrower gets a better interest rate and/or the most appropriate loan for their circumstances. Creating a system that promotes only the lowest price, national providers will squeeze quality and local experience out of the system to everyone’s detriment.

The real estate industry cannot afford to incorporate untested and controversial changes that will add unnecessary confusion and expense to the real estate settlement process especially in current market conditions. The proposed rule does just that. It will require the industry to modify existing software programs, assume additional risks, and provide additional services of dubious value to the consumer.

Moreover, it will require all settlement service providers to undergo extensive education and retraining to understand the new requirements resulting in lost time and additional expense. For these reasons, NAR is encouraging HUD to withdraw the proposal and reissue a new proposal that focuses on a clearer and more useful GFE that tracks the HUD-1.

Ken Trepeta is director of Real Estate Services at the National Association of Realtors®. For more information, please visit www.realtors.org.

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