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Oh, It Is Painful
by Robert Franco | 2008/03/19 |

I have been trying to get through HUD's Proposed Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs. At one point, I thought that I'd rather volunteer to test the latest CIA water boarding techniques. The summary of the proposed rule contains a rather long one-sentence paragraph that was particularly painful reading. (please put down any sharp objects you may be holding before you continue on)

HUD’s objective in proposing these revisions is to protect consumers from unnecessarily high settlement costs by taking steps to: Improve and standardize the Good Faith Estimate (GFE) form, to make it easier to use for shopping among settlement service providers; ensure that page one of the GFE provides a clear summary of the loan terms and total settlement charges so that borrowers will be able to use the GFE to comparison shop among loan originators for a mortgage loan; provide more accurate estimates of costs of settlement services shown on the GFE; improve disclosure of yield spread premiums to help borrowers understand how they can affect their settlement charges; facilitate comparison of the GFE and the HUD–1/HUD–1A Settlement Statements (HUD–1 settlement statement or HUD–1); ensure that at settlement borrowers are made aware of final loan terms and settlement costs, by reading and providing a copy of a ‘‘closing script’’ to borrowers; clarify HUD–1 instructions; clarify HUD’s current regulations concerning discounts; and expressly state when RESPA permits certain pricing mechanisms that benefit consumers, including average cost pricing and discounts, including volume based discounts.

So, you can understand why it is so painful to read. But, I must say that it isn't all bad. Some of HUD's work here is interesting and worthwhile. There are, however, a few concepts which I find questionable.

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HUD states that the mortgage industry has changed considerably since RESPA was enacted in 1974, and the regulations implementing RESPA's original disclosure requirements are no longer adequate. I don't think anyone could argue with that. It is nice to see the realization. However, it estimates that the proposed rules will reduce settlement costs by $6.5 billion to $8.4 billion annually - with an average savings of $518 to $670 per transaction. That seems like a very aggressive estimate to me. The contention is that effective advanced disclosure of settlement costs will allow people to shop around for a better deal and result in substantial savings.

HUD believes that the problem is that the disclosures are too complicated and by simplifying them, competition will force prices lower and lessen the need for regulatory enforcement. I do agree that the disclosures could be simplified, but that won't eliminate the problem. The disclosures still must adequately reflect the transaction, which is by nature very complicated. It will be quite a chore to explain all of the terms in a simple manner.

HUD also states that they will continue to vigorously enforce RESPA to protect borrowers and ensure that honest settlement service providers can compete for business on a level playing field. That part almost made me chuckle out loud. I would not really call their enforcement efforts "vigorous." Sure, they have gone after some of the biggest offenders, but RESPA violations occur on a smaller scale that have a much larger effect on the entire industry and they are all but ignored. Honestly, I do not believe that HUD is capable of vigorous enforcement simply due to the number of transactions and the limited resources it can devote to enforcement. It would take a huge bureaucracy that would resemble the IRS with numerous field auditors that actually review closing documents to ensure compliance. That just isn't going to happen. This industry has already proven that they cannot self-regulate, but HUD does not have the manpower to impose its regulation.

I also got a kick out of HUD's proposed rule for a "closing script." The rule would ensure that at settlement, borrowers are aware of final loan terms and settlement costs, by reading and providing a copy of a "closing script" to borrowers. I think HUD is giving borrower much more credit than is due. Most don't care about anything but the payment! I don't know how many times I have repeatedly pointed out insane interest rates, ridiculous prepayment penalties, multiple junk fees, and harsh default provisions to borrowers. I have done everything short of beat them with a mop handle and chase them out of my office before they sign! They don't care! When I'm done, they say "What's my payment?" And, they sign as fast as they can without reading any of it for themselves.

I haven't gotten through he entire 96 page document, but I think that the emphasis on "simplified disclosures" may be misplaced. While certainly a worthwhile and necessary element of RESPA reform, I don't think that disclosures are the answer to the problem our industry is facing. More needs to be done to prohibit certain settlement practices that drive up costs.

There does seem to be some substantive changes that will have an impact, such as the authority to impose civil money penalties for RESPA violations. As I get a little further into the proposed rule, I'll post my thoughts on other changes.

Robert A. Franco


Categories: Abstractors, RESPA

1243 words | 2199 views | 4 comments | log in or register to post a comment

HUD spent a lot 'fixing' the Good F...
HUD spent a lot 'fixing' the Good Faith Estimate. This document only confuses. I think the better solution is to drop the GFE and issue preliminary HUD-1s. That's the only way a borrower can compare fees directly. I don't mind the decision to sub-total each section.

The other issue for their 'Script' is that borrowers don't understand the terms of the loan. The solution is NOT to create an elaborate work-around, but to specify how tha note can be more user-friendly.
by Scott Cheffer | 2008/03/21 | log in or register to post a reply

I agree that the GFE needs both sim...
I agree that the GFE needs both simplification to get to the core info (including pre-payment penalties, adjustment dates, etc.) and TEETH. Right now a loan officer can say anything - the GFE does not need to even vaguely resemble the closing statement and there is no penalty.

HUD already has a REQUIREMENT that the closing statement be given to the buyers and sellers one day in advance of settlement. But of course no one pays attention to that, usually because theclosers don't have the figures together until day of closing. If the buyers or sellers complain they did not receive the HUD-1 in advance, the closer says, "well then, would you like to re-schedule buyers, sellers, real estate agents, attorneys and the builder for tommorrow (along with the moving company, etc.)?"

Look forward to your future comments on the proposed rule, Robert.
by Jeanne Johnson | 2008/03/24 | log in or register to post a reply

I believe that RESPA ...
I believe that RESPA requires one-day advance delivery of the HUD-1 only upon request of the borrower. How many borrowers know to ask? Probably not too many. Also, the settlement agent is only required to disclose those fees known to the settlement agent at the time of the request. These days, that information often consists of title fees on the day before closing. (sigh)
by Pat Scott | 2008/03/25 | log in or register to post a reply

I am very excited about this new GF...
I am very excited about this new GFE and the closing script.

The closing script is an addendeum to the HUD which the settlement agent will prepare with information provided by the lender.

Compliance officers at more lender operations are going to police the GFE very closely now which means no more last minute surprises in the lender or broker fees.

Everyone will be more careful and that's a good thing.
by Diane Cipa | 2008/03/30 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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