CUNA Comment Letter
Real Estate Settlement Procedures Act
May 14, 2008
Office of General Counsel
Department of Housing and Urban Development
451 Seventh Street, SW Room 10276
Washington, DC 20410-0001
RE: Docket No. FR-5180-P-01 Real Estate Settlement Procedures Act (RESPA)
Dear Sir or Madam:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Department of Housing and Urban Developments (HUDs) proposal to amend the Real Estate Settlement Procedures Act (RESPA) rules, designed to simplify and improve the process of obtaining mortgage, as well as to reduce settlement costs for consumers. CUNA represents approximately 90 percent of our nations 8,400 state and federal credit unions, representing approximately 90 million members.
Summary of CUNAs Position
- Although CUNA strongly supports improvements to the good faith estimate (GFE) form, we oppose increasing it from the current one-page form to the proposed four-page form. This will not benefit borrowers, who we feel will be confused, overwhelmed, and possibly intimidated by the additional information, rather than helped to understand their loan options.
- If HUD retains the current form or proceeds in finalizing the proposed GFE form, the form should include the annual percentage rate (APR), which may be helpful for borrowers if they want to compare loan terms among various lenders. CUNA also suggests other changes that will improve the proposed GFE form.
- CUNA does not believe it is necessary to require lenders to provide the GFE within three days after the consumer submits the GFE application. We also encourage HUD to change the wording of the GFE so it clearly indicates that the loan has not been approved and that the borrower must submit the subsequent mortgage application in order to receive a decision as to whether the loan will be approved.
- The proposal will require certain settlement costs on the GFE to be accurate within certain thresholds, unless there are unforeseeable circumstances. CUNA requests clarification that unforeseeable circumstances include circumstances that are unforeseeable by the lender, even if they are foreseeable by the borrower.
- The proposal to allow lenders to remedy violations by reimbursing borrowers for closing costs above the required the threshold has merit, although we believe lenders should have thirty days after closing to provide the reimbursement without being considered in violation of these threshold requirements, instead of the proposed fourteen-day period.
- CUNA opposes the requirement that lenders must ensure that borrowers receive notice of a loan rejection within one day after this decision is made. This time period is not sufficient, and lenders will not be able to verify that the borrower received the notice within this very short period of time.
- CUNA strongly opposes the requirement that an addendum to the HUD-1 or HUD-1A settlement statement be read aloud to the borrower at the time of settlement. Borrowers may prefer not to have this information read to them and they should already be aware of and understand much of this information well before the settlement date. As permitted under the Electronic Signatures in Global and National Commerce Act (E-Sign Act), the mortgage industry is evolving to the point in which closings may be conducted remotely by using electronic signatures and disclosures. Requiring the addendum to be read aloud will frustrate these efforts.
- The submission of both an application to receive the GFE and then a subsequent mortgage application will raise compliance issues as to whether the initial GFE application will trigger reporting requirements under the Home Mortgage Disclosure Act (HMDA), as well as adverse action notices under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA).
- CUNA recommends that HUD coordinate with the Federal Reserve Board (Board) to ensure that the required compliance date for new RESPA provisions be the same as the compliance date for the Boards upcoming changes to Regulation Z, both of which will substantially change the regulatory requirements for mortgage loans.
- HUD indicates it will seek legislative changes that would strengthen the penalties for RESPA violations and further change the disclosure requirements. We urge HUD to seek input from credit unions and other lenders as it pursues these objectives.
The proposed rule will make significant changes to the GFE form and will alter the process under which borrowers obtain GFEs. These changes will result in a new format for the GFE, which is intended to ensure that the estimates are more accurate. The changes are also intended to facilitate comparisons between lenders, as well as facilitate comparisons between the GFE and the HUD-1 or HUD-1A settlement statements. Lenders will be required to ensure that the estimates on the GFE are accurate by requiring certain costs to remain unchanged between the time the GFE is issued and the settlement date, while requiring the total of certain other costs not exceed the GFE estimate by more than ten percent.
The proposed rule is intended to ensure that borrowers are aware of the final loan terms and costs at settlement by providing additional information and requiring this information to be read aloud to the borrower. The proposal will also clarify when it is appropriate to provide borrowers with discounts and average price costing of settlement services.
Since the mid-1990s, HUD has been examining ways to improve the mortgage process for borrowers and to lower settlement costs. In 1998, HUD and the Board, in response to a Congressional directive, issued a joint report that addressed possible RESPA reforms. HUD then issued a significant proposal in 2002 to amend the RESPA rules, which was later withdrawn after concerns were raised by CUNA and others, specifically the change that would have permitted the packaging of mortgage services that would be offered for a guaranteed price. CUNA opposed these provisions as they would have disadvantaged smaller lenders and, therefore, would have reduced competition within the mortgage lending industry. In 2005, CUNA and others were invited by HUD to participate in a series of roundtable meetings to continue the discussion on possible RESPA changes.
CUNA wholeheartedly supports the general concept of simplifying and streamlining the RESPA rules to improve the home finance and settlement process and possibly reduce costs for consumers. The home purchase process is currently very confusing, inefficient, and overwhelming for most homebuyers. Although HUDs current efforts in reforming the RESPA rules are commendable, credit unions have a number of very significant concerns with regard to this proposal, as addressed below.
The Revised GFE Form
Under the proposal, the GFE will be a four-page standardized form. The form will describe the significant terms of the loans and will inform borrowers that they may use the GFE to compare the terms with offers from other lenders. The proposed GFE will also group and consolidate all the fees and charges into major cost categories, with a single total amount estimated for each category.
Although CUNA strongly supports improvements to the GFE form, increasing it from the current one-page form to the proposed four-page form will not benefit borrowers. Rather, borrowers will be confused, overwhelmed, and possibly intimidated by the additional information, which will undermine the stated goal of helping consumers understand their loan options. Although we understand the proposed GFE underwent significant consumer testing, and the results appeared to indicate that borrowers understand the information, we believe there are better alternatives for ensuring that the information is provided in a less confusing manner.
Much of the required additional information in the proposed GFE form is educational in nature. This includes information on how to shop for a mortgage loan, the trade-offs between different loan options, and the responsibilities of homeownership. Although we certainly support providing educational information, this type of information should be included in the booklet entitled, The Homebuyers Guide to Settlement Costs that HUD prepares and provides to borrowers to help them understand the nature and costs of real estate services. We believe it would be less confusing and intimidating for the borrower if only cost information is provided on the GFE and include the additional educational information in the HUD booklet. The result should be a shorter GFE, without sacrificing the information provided to borrowers. Since HUD envisions that the GFE will be used by consumers to shop various loan options, we believe a shorter GFE will be less cumbersome for those consumers who are using multiple GFEs from various lenders.
If HUD retains the current form or proceeds with the proposed GFE form, we believe the form should include the APR. Although the interest rate will be included, the APR will be more helpful to borrowers as they compare loans among various lenders. The APR incorporates certain fees and charges into the interest rate and including this on GFE should help facilitate comparisons of loans offered by various lenders.
If only the interest rate is disclosed on the GFE, we are concerned that this will encourage certain lenders to offer low-rate loans to entice borrowers, even though these loans will have very high fees, which may be less appealing than loans with a somewhat higher interest rate and much lower fees. Although these fees are disclosed on the GFE, consumers may not be able to compare this information as easily as they can compare the APRs. We believe legitimate lenders that may offer a somewhat higher interest rate with much lower fees will be disadvantaged if borrowers are only comparing the interest rates. Although we realize the APR is provided on the Truth in Lending Act disclosures, we believe it would be helpful to include it on the GFE form, especially if the interest rate is also disclosed.
Potential problems that result because the APR is not included may be compounded lenders will be able to choose the period of time in which the interest rate would be available. We certainly appreciate that lenders will be able to make this determination, since interest rates change constantly, and lenders may not be able to guarantee interest rates for any significant period of time without assessing additional costs on borrowers to hedge against the interest rate risk. However, certain lenders may take advantage of this flexibility by offering a low interest rate loan for a very short period of time, even though the borrower may not ultimately be able to lock-in the lower rate. This will disadvantage other lenders that may offer a slightly higher rate for a longer period of time.
We are also concerned with the process under which the applicant receives the GFE. Under the proposal, there will be a new GFE application and a separate mortgage application. On the GFE application, the borrower would provide the information necessary to provide a preliminary credit decision, which would include the borrowers name, Social Security number, property address, gross monthly income, the home price or an estimate, and the amount of the requested mortgage loan. If the information is acceptable, the lender or the broker will then provide the GFE. If the borrower chooses to proceed, he or she would then submit the mortgage application, which would request the additional information that would be required to underwrite the loan.
Our concern here is with the proposed requirement that the lenders decision to provide the GFE or reject the loan request must be made within three business days. Lenders may not be able to make a reasonable decision with regard to the loan request within this short period of time, especially since only limited information is provided to receive the GFE, which may or may not be entirely accurate or complete. In these situations, lenders will need to make assumptions, which may or may not be verified.
For this reason, we believe lenders should have the flexibility to decide when it is appropriate to issue the GFE. If GFEs are to be used by consumers for loan shopping, as HUD envisions, then we would anticipate that legitimate lenders will issue their GFEs as soon as it is reasonably possible, since further delay would only encourage consumers to go elsewhere for their mortgage loans. However, some lenders may need more than three days to provide the GFE, and the proposal should provide flexibility in these situations. Allowing lenders additional flexibility will also benefit consumers if the additional time results in GFEs that are more accurate.
Although we recognize that under this process the loan decision will not be made until the mortgage application is submitted and reviewed, we believe the receipt of a four-page GFE with significant, detailed information will give the borrower the impression that the loan request has been approved or will be approved after the mortgage application is submitted. Applicants will not appreciate that it is at best a tentative offer and subject to the receipt and review of substantially more information, with a reasonable possibility that the loan request will ultimately be denied. This is even more likely under the economic environment in which the underwriting standards for most lenders are much higher than they have been in recent years.
To help ensure borrowers do not unreasonably expect that the receipt of the GFE is equivalent to the loan being approved, we believe the GFE should further emphasize that the loan has not yet been approved. For example, although information at the top of the first page indicates the loan terms will apply if you are approved for this loan, we believe this should be emphasized further, either by providing this information in a larger print size, with a different font, or in bold print. An alternative could be a sentence at the beginning of the form that states:
Your loan has not been approved at this time. You will need to provide additional information on a separate mortgage application before the lender can make decision as to whether your loan is approved.
Again, this should be emphasized by disclosing this statement in a different print size, different font, or in bold print. Another alternative would be to add the phrase if your loan is approved after the headings Summary of Your Loan Terms and Summary of Your Settlement Charges that appear on the first page of the form.
On the first page of the GFE form, the lender must indicate whether the interest rate and payments may rise. We agree that this disclosure is important. However, we believe the disclosure would be more understandable if the terms adjustable rate loan and fixed rate loan were used. For example, under the heading Your Loan Details, there could be a statement that clearly indicates this is either an adjustable rate loan or a fixed rate loan by using these terms and then provides further explanation, depending on the type of loan. For a fixed rate loan, the statement would also indicate that the interest rate will not change for the life of the loan and for an adjustable rate loan, there would be comparable information, which is already included on the proposed GFE, with regard to the extent that the interest rate, payments, or loan balance may rise. We believe that since consumers are generally familiar with the terms fixed and adjustable, using these terms on the GFE will further highlight this information.
RESPA requires a disclosure as the whether the servicing of the loan may be transferred, and HUD has requested comment as to whether this disclosure should be on the GFE. We would have no objection to requiring a simple disclosure as to whether the servicing may be transferred, assuming this information would not need to be provided on other loan disclosures. HUD should, however, clarify that this is to be a simple disclosure as to the possibility that the servicing will be transferred. Otherwise, we would be concerned about the possibility that providing more information about the specific loan being applied for may require a new GFE if the specific information were to change during the loan process.
The proposed GFE will require disclosure of alternative loans with higher or lower interest rates that would have different settlements costs, and HUD has requested comment as to whether a no-cost loan should be one of these alternatives. We do not believe there should be a requirement to disclose a no-cost option, as there may be confusion as to which costs may or may not be paid for by the lender. For example, borrowers may not realize that for a no-cost loan they may still be required to provide funds for the initial deposit to the escrow account or that they may also be required to provide funds for the homeowners insurance for the first year.
Because of this likely confusion, there may not be a means in which to adequately disclose a no-cost option alternative within the GFE. The proposed disclosure of an option with a higher interest rate in return for lower settlement costs should be sufficient to inform the buyer that there are options with substantially reduced settlement costs in exchange for a higher interest rate for the loan.
In general, we believe the proposed disclosure of alternatives with higher or lower interest rates may be overly burdensome for lenders. We agree with the proposed written disclosure that clearly indicates the borrower may choose a lower rate loan with higher settlement costs or a higher rate loan with lower settlement costs. However, it would be overly burdensome to require also that the lender fill out a chart with specific interest rates and settlement costs to illustrate this disclosure, as well as calculate how much more or less the settlement costs will be with each of these alternatives. We believe it is unnecessary to require lenders to identify these specific alternatives and to make the required calculations, especially since the borrower may have no interest in choosing any of these alternatives. The general written disclosure as to how a lower or higher interest rate loan will affect settlement costs should be sufficient.
Most lenders would be more than willing to provide specific examples of these alternatives, based on current loan offerings, if the borrower requests this information. In these situations, we believe it is preferable that this information be provided during a discussion with the borrower as it will give the lender or the broker an opportunity to explain clearly the advantages and disadvantages of each alternative. For example, choosing a lower rate will yield smaller monthly payments but this requires a calculation as to how long the borrower needs to hold the loan in order for the monthly savings to exceed the additional settlement costs. This type of information cannot easily be provided in the proposed disclosure.
GFE Cost Thresholds
The proposal requires lenders to disclose certain costs on the GFE that cannot be changed, unless due to unforeseeable circumstances. The total of certain other lender required services cannot exceed ten percent, unless due to such circumstances, although specific costs may exceed the threshold, as long as the total does not exceed the estimate by more than ten percent.
The term unforeseeable circumstances provides a number of examples, such as acts of God, war, disaster, other emergencies, changes in the purchase price, boundary disputes, environmental problems, the need for an additional appraisal, and the need for flood insurance. We appreciate these examples, but believe this term should be clarified to include situations that are unforeseeable from the lender perspective, even if they are foreseeable from the borrowers perspective. This would include changes the borrower made that differ from the information provided in the GFE application and the mortgage application, such as requested changes in the term of the loan, changes from a fixed to a variable interest rate, the expiration of the interest rate lock-in that occurs through no fault of the lender, and when the borrower decides to pay additional discount points after receiving the initial GFE. This clarification would provide comfort for lenders and reduce future litigation over the meaning of this term, to the benefit of both lenders and borrowers.
Under the proposal, HUD is also considering allowing lenders to remedy violations if the closing costs exceed the tolerances by reimbursing the borrower for the excess costs within fourteen days of closing. We certainly support the concept of providing lenders with a period of time to cure violations as a means to protect themselves from litigation that may arise. However, we believe the time period should be extended to thirty days as fourteen days may not be enough time to identify and correct these types of mistakes. We believe borrowers will not be harmed if this time period is extended as borrowers would certainly prefer to recover these excess costs without the need to pursue litigation or other costly means, regardless of whether the time period is fourteen or thirty days.
The Mortgage Application and Modifications to the HUD-1 and HUD 1A Settlement Statement
Once the borrower receives the GFE and decides to apply for the loan, he or she must then submit a mortgage application that includes all the additional information that would be required to underwrite the loan. If the loan request is rejected, the borrower must receive notice within one business day of the decision, and the lender must then provide a new GFE if a new loan product is offered as an alternative.
We are very concerned with the proposed one-day notice requirement. It may be extremely difficult for lenders to provide notification within such a short period of time, especially during times of very high loan volume. Even if a notice can be sent within one day and the lender may try to call or email the borrower, there is no means to ensure the borrower will answer the telephone or read the email within the one-day period. Further, there is no means to prove that this notice was provided within the one-day period, other than the lender noting this in the loan file, which we hope will be recognized as sufficient proof for compliance purposes.
At a minimum, the rules should clarify that leaving a message on a telephone answering machine or sending an email will be sufficient and there should be no requirement to document that the lender reached the borrower by telephone or that the borrower read the email. We also request a three-day notification requirement, instead of one, to accommodate periods of high loan volume or other circumstances that would make it very difficult, if not impossible, for lenders to provide the notice within such a short period of time.
Under the proposal, an addendum would be added to the settlement statement that would detail the loan terms and settlement information and specifically compare the loan terms and settlement charges listed on the GFE with the final terms and charges on the settlement statement. The settlement agent would be required to read this addendum, also referred to as the closing script, aloud to the borrower at settlement, as well as provide a copy at that time.
We strongly oppose this requirement, which assumes that individuals prefer and are better able to understand the information if it is read to them. Although some may benefit if the information is read to them, others may be better able to understand the information if they read it themselves. Not only is it questionable to generalize how individuals prefer to receive this information, but also some may be insulted by a process in which information is read to them under the assumption that they are incapable of reading it for themselves.
We also believe that at the time settlement occurs, the borrower should already be familiar with and understand the information in the addendum. We acknowledge it is the lender and brokers responsibility to ensure this understanding, and if they carry out this responsibility correctly, then it should be unnecessary to require this information to be read to the borrower at the time of settlement. At this time, the borrower is anxious about completing the loan process and may also be focused on the myriad details associated with moving. It is simply too late and not effective to wait until this time to ensure the borrower understands the information by reading it to them and this will only result in a settlement process that will be longer than it needs to be. We are also concerned that the individual reading the addendum to the borrower at settlement will not be able to answer certain questions about the loan terms that the borrower may have since he or she will likely be an outside attorney or settlement agent who, unlike the lender or broker, may not be intimately familiar with the loan terms.
Although most loan closings are conducted in person, not all States require this, and we believe in-person loan closings may become less common in the future. Under the E-Sign Act, mortgage loan documents may be signed electronically and mortgage loan disclosures may also be provided in electronic form. Although not yet widely used, electronic signatures and electronic disclosures should eventually allow loan closings to be conducted remotely by borrowers at home or at another convenient location, without face-to-face contact with other parties. Although it has been a slow process since the E-Sign Act was enacted in 2000, the mortgage industry is working towards the goal of developing these types of electronic mortgage transactions. In light of this, the requirement of reading the closing script would be archaic and would be a significant obstacle in achieving this goal.
If HUD continues to believe the addendum is necessary, we suggest that it be provided to the borrower in advance of settlement, as contemplated under the proposal, and the borrower should have the option to decide whether it is read aloud at settlement. Under this approach, the acknowledgement page would need to be changed to indicate that the reading to the borrower was offered as an option, as opposed to being a requirement.
Compliance Issues and the Implementation Period
The requirement that a borrower submit a brief application for the GFE and then a more substantive mortgage application if he or she wants to apply for the loan raises issues under HMDA, FCRA, and ECOA. An application for a loan must be reported under HMDA, regardless of whether the credit is actually extended. The issue is whether the GFE application or the mortgage application triggers the HMDA reporting requirement.
As envisioned by HUD, a borrower would be encouraged to apply for multiple GFEs. In this situation, multiple applications from the same borrower would be reported under HMDA. Although borrowers may currently submit multiple applications, this proposal may likely facilitate these instances of multiple applications, which will substantially increase the number of applications reported under HMDA. This will increase the HMDA regulatory burden for lenders substantially, and we encourage HUD and the federal financial institution regulators to clarify that this is not the intent of the proposed GFE application process.
We have similar concerns with regard to the FCRA and ECOA requirements that require an adverse action notice to be provided when applications for credit are denied. The issue is whether the adverse action notice needs to be provided if the lender denies the loan request after the GFE application is submitted or if the notice is to be provided if the lender denies the loan request after the mortgage application is submitted. Although current regulatory requirements may indicate that the notice be submitted if the GFE application is denied, this may not be appropriate if the borrower is applying for the GFE for the purpose of comparing loan terms among lenders, as opposed to applying for the mortgage loan itself. Again, the proposal may very well lead to borrowers submitting multiple GFE applications, resulting in a possible proliferation of adverse action notices, and we encourage HUD and the federal financial institution regulators to clarify that this is not the intent of the proposed GFE application process.
HUD intends to impose a twelve-month implementation period in which the new requirements under this proposal would not be mandatory for twelve months after they are issued in final form. We suggest the implementation period be extended, due to the complexities of the proposal and the number of significant related proposals that have been and will be issued by the Board. For example, as a result of the current subprime mortgage crises, the Board has recently issued a proposal that establishes new protections from unfair and deceptive home mortgage lending and advertising practices. The Board is also in the midst of a multi-year process to amend all of the requirements under Regulation Z, the rules that implement the Truth in Lending Act. This process began last year when the Board proposed expansive changes to the Regulation Z open-end credit rules and in the near future, the Board will issue a similar extensive proposal to amend the closed-end credit rules, which will include mortgage loans.
Because HUDs current RESPA proposal and the Boards upcoming Regulation Z proposal for closed-end loans will both substantially change the requirements for mortgage loans, we believe the required compliance date for the final version of HUDs RESPA proposal should be the same as the compliance date for the Boards final version of the Regulation Z mortgage loan proposals. Credit unions and others will be required to invest resources in revising current disclosures, providing appropriate staff training, and implementing the necessary data processing changes. This burden will be significantly alleviated if all mortgage loan regulatory changes are effective at the same time.
If HUD decides not to coordinate with the Board, the agency should realize that most lenders rely on third-parties to provide the necessary forms and to implement the necessary software system changes that would be needed to comply with these new requirements. For this reason, HUD should confer with these third-parties to determine if twelve months is a sufficient period of time, if the agency has not already done this.
Finally, in the preamble to the proposal HUD has indicated it will seek legislative changes that would strengthen the penalties for RESPA violations and further change the disclosure requirements. As we have seen over the past several years, the process of implementing changes to the RESPA rule has been a very long process that has required close coordination between HUD and the lending community. This close coordination will also be necessary if HUD pursues these legislative objectives and, therefore, we urge HUD to seek input from credit unions and other lenders as part of this process.
Thank you for the opportunity to comment on these proposed RESPA rules. If you or other HUD staff have questions about our comments, please give Senior Vice President and Deputy General Counsel Mary Dunn or me a call at 1-800-356-9655.
Senior Assistant General Counsel