CUNA Comment Letter
Real Estate Settlement Procedures Act (RESPA)
September 1, 2005
Ms. Ivy Jackson
Director - Office of RESPA and Interstate Land Sales
Office of Housing
Department of Housing and Urban Development
451 Seventh Street, SW - Room 9158
Washington, DC 20410-8000
RE: Real Estate Settlement Procedures Act (RESPA)
Dear Ms. Jackson:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on recent efforts by the Department of Housing and Urban Development (HUD) to reform the Real Estate Settlement Procedures Act (RESPA). CUNA represents more than 90 percent of our nations nearly 9,100 state and federal credit unions.
HUD began these efforts with a proposal in 2002, which was later withdrawn, and has now resumed these efforts by sponsoring a series of meetings with representatives from the financial services industry and others that will be followed shortly by a revised proposed rule from HUD. At HUDs invitation, CUNA participated in the first meeting sponsored by HUD on July 14, 2005.
At that meeting, HUD invited the participants to submit written comments on a series of issues raised at this meeting, including comments on a revised Good Faith Estimate (GFE) form and a revised form for lenders to use when offering Guaranteed Mortgage Packages (GMPs). These packages would contain a guaranteed, lump sum price for all loan originator and government-required settlement costs associated with obtaining a mortgage, along with a guaranteed interest rate. In 2002, HUD had proposed allowing lenders to offer such packages and included an initial GMP form for lenders to use. CUNA appreciates the additional opportunity to participate in this process and to submit these written comments.
Summary of CUNAs Comments
- We do not support HUDs proposed four page GFE that was shared with us during our meeting on July 14, 2005. We would prefer the current one page form instead of the form proposed by HUD and without the disclosures that are otherwise required and provided under the Truth in Lending Act (TILA). We also oppose any requirement that lenders guarantee an interest rate and are concerned about any requirement that will impose caps on certain closing costs. A better approach may be amending RESPA to allow penalties to be imposed on lenders who willfully and consistently underestimate the costs provided on the GFE and who consistently fail to provide the GFE and TILA disclosures.
- We agree that disclosures regarding the yield spread premiums need to be changed to ensure that consumers clearly understand how brokers and lenders are compensated and how this affects the interest rate and closing costs that they pay. This may be accomplished by requiring a separate page to the GFE that provides clear and concise disclosures when there is yield spread premium associated with the loan. Lenders that charge a higher interest rate without lowering the settlement costs should clearly disclose this to the consumer.
- As indicated in our comment letter in response to the 2002 proposal, we are opposed to regulatory changes with regard to mortgage packaging that includes an interest rate guarantee with a fixed price for settlement costs. We believe that smaller lenders, such as credit unions, will be unable to compete with large lenders who can negotiate concessions from settlement service providers in exchange for significant business to those that agree to be included in the package. This will eventually reduce competition as smaller lenders are priced out of the market. Packaging will also make it harder for consumers to reconcile their package form with their HUD a HUD 1-A form that they receive at the time of settlement. Lenders are currently packaging costs without the need for regulatory changes, and this innovation should continue without additional changes from HUD.
- We do not see any benefits for consumers for any proposal that allows subpackaging in which anyone could package certain settlement costs. This will add an additional party to the process, and the additional costs of the services provided by these new parties will borne by the consumers.
- Home Ownership Equity Protection Act (HOEPA) loans should not be eligible for packaging. Overinflated costs and junk fees are of a particular concern with regard to predatory loans and packaging, with a fixed settlement price without itemization, may exacerbate these problems.
- We agree that lenders should have an opportunity to cure and provide remedies for violations of the GFE and any packaging requirements. The regulators should be involved in formulating the remedies.
At the meeting that CUNA attended and in the notice announcing these series of meetings that appeared in the Federal Register on June 29, 2005, HUD requested comments in response to six specific questions. Below are our responses to these questions and these responses also include specific comments on the revised proposed GFE and GMP forms that were discussed during the July 14, 2005 meeting.
In order to provide specific comments in this area, it would be helpful if HUD would share with us information as to the abuses it is trying to address. This would be statistics that HUD has compiled regarding these abuses, the frequency that they are occurring, and how these abuses will be addressed in HUDs proposal to reform RESPA. This information will help all of us to understand and focus on these problems and to discuss how they should be addressed, whether that is through amending the GFE or through other means.
Until we have the opportunity to receive and review this information, we believe the GFE should not be expanded beyond the current length of one page. We opposed the proposal in 2002 that would have expanded the GFE to three pages and we again oppose the four-page form that was shared with us during our meeting with HUD on July 14, 2005.
We agree the GFE should continue to provide information regarding the costs of the loan origination, but it need not include the annual percentage rate (APR), the note rate, and other proposed information because it is already disclosed separately, as required under Regulation Z, the rules implementing TILA. We also believe that both credit unions and their members benefit from the current form in which the information can be easily tracked from the GFE to the HUD 1 or HUD 1-A that the consumer receives shortly before or at settlement. Other information, or items on the GFE that cause confusion for borrowers, should be explained in a clear and thorough manner through other materials, such as the Homebuyers Guide to Settlement Costs.
The GFE that HUD shared with us also appears to require lenders to guarantee an interest rate for ten days without any commitment from the borrower. Credit unions will not be able to guarantee a rate for this period of time. Credit unions also do not have the ability to guarantee the rate beyond the rate lock period, such as when a closing is delayed based on circumstances beyond the control of the credit union.
When a rate is quoted to a borrower, that rate can only be honored for that day until there is a commitment from the borrower to accept the loan. It is only when there is this commitment that the credit union can then guarantee the rate for a short period of time, such as thirty days.
Credit unions need this commitment, for example, to lock in a rate with Freddie Mac or Fannie Mae. Otherwise, credit unions will incur significant costs if they lock in a rate and the borrower does not then follow through with the loan. Requiring credit unions to guarantee the rate will increase the costs of loans for all their borrowers because the potential costs for when certain borrowers do not follow through will have to be passed on to other members. Credit unions, as not-for-profit institutions, will not have the ability to readily absorb these significant costs.
If one of the goals of RESPA reform is to encourage the prompt delivery of the GFE and to ensure that the estimates on the GFE are reasonable, one approach may be to seek a statutory amendment to RESPA that will allow for penalties to be imposed on lenders who willfully and consistently fail to adhere to the requirement that the GFE and TILA disclosures be delivered within three days after the loan application. These penalties should also apply to lenders who willfully and consistently underestimate the costs on the GFE. Current law does not allow for penalties, which may explain why certain lenders consistently fail to adhere to these requirements. However, such penalties should not apply to lenders who fail to comply on occasion due to an inadvertent and unintentional mistake. This and the possibility of penalties should address the abuse that currently exists in which junk fees are added to the settlement costs at closing and other fees are overinflated, all without prior notice to the consumer.
We also believe that the GFE disclosures should clearly list the individual fees so that all of these costs are readily discernable. Allowing for the fees to be consolidated and disclosed as a lump sum will not improve the GFE and will facilitate the abuse of hiding and overinflating the settlement costs.
We also note that the GFE that was shared with us at our meeting with HUD requires that the sum of certain closing costs cannot increase by more than ten percent. This is somewhat different from the approach in the 2002 proposal in which certain specific costs could not increase by more than ten percent.
Even though the current approach in which the sum of the costs cannot increase by more than ten percent is somewhat more flexible than the 2002 proposal, we are still concerned about any proposal that includes these types of limits. Such limits can lead to problems in a number of situations. The following are some examples:
- A survey that may be disputed and leading to more surveys and disputes, which adds to costs and leads to additional appraisals. All of these would lead to unexpected costs above what the lender guaranteed.
- A credit report that may lead to information that needs to be verified, resulting in additional costs above what the lender guaranteed.
- When a lender has to change a service provider if the original provider cannot perform the service.
- Environmental problems discovered that leads to more unexpected costs. Water rights issues may also lead to more costs.
Under any approach, if costs have to be guaranteed, lenders may have to increase their costs to cover contingencies that will only happen a small number of times. Smaller institutions, such as credit unions, will otherwise not be able to absorb this risk.
We again request that HUD provide us with any information and statistics it has as to the types of complaints received and the type of originator involved, which may very well indicate that the vast majority of abuses to be addressed involve mortgage brokers, the selling of servicing, and yield spread premiums. Within the credit union industry, originator compensation is often straight salary, with occasional commission income, which is either a flat dollar amount per loan or a small percent of the origination fee. For others in the mortgage industry, compensation is typically straight commission, funded through origination fees, selling servicing rights, or yield spread premiums. This is an environment that lends itself to abuse of the borrower or, at best, is an environment that is poorly understood by consumers.
We agree that yield spread premiums are often not in the consumers best interest. The broker is being paid by the consumer to find them a lender at the best available rate. The broker should not be permitted to keep the yield spread that should be passed on to the consumer, which is often the case when the broker is working with an uninformed borrower. There must be clear and easy to understand disclosures informing consumers as to how yield spread premiums operate in order to better inform borrowers of these arrangements. This should help mitigate the abuses that are now taking place in the mortgage market.
One possible approach that may address these abuses is to provide consumers with specific GFE information when a broker is involved that explains in detail not only the cost of the loan origination, but also the anticipated income sources and amounts that will be received by the broker. This information could be provided as a separate page that would be an appendix to the current GFE.
We note that on the GFE that was shared with us during our recent meeting with HUD, a portion of this new form is devoted to providing information regarding loan origination charges and credits. This provides the consumer with information as to the credit or charge they may pay in order to receive the promised interest rate.
While this does provide some information regarding the yield spread premium or discount points that may be charged, we note that this information would not clearly disclose situations in which the broker is charging a higher interest rate without reducing the fees. An example would be when the interest rate is 5% and the broker charges 6% and retains the 1% difference. This is an area in which there is abuse that needs to be addressed and is not addressed in the proposed GFE. This is also an issue with the proposed form that was shared with us with regard to mortgage packaging.
We note that elsewhere on the form there are statements informing the borrower that loans with lower interest rates will have higher settlement costs and that loans with higher interest rates will have lower settlement costs. We agree there should be very clear and concise statements with this information that should be included in the current GFE or any amended GFE that HUD may ultimately require lenders to use.
As we indicated in our comment letter in response to the 2002 proposal, we believe that the long-term effects of mortgage packaging may not be favorable for consumers. Large lenders will be able to gain a significant advantage over small lenders as they negotiate price concessions with settlement service providers in return for their ability to ensure significant business to those providers that agree to be included in the package. Large lenders can effectively eliminate competition over time through such volume pricing, which may be favorable for consumers in the short run, but will not be in their best interests over the long term if small to medium size lenders are priced out of this market.
Since the fixed price for settlement services does not itemize the cost for each service, we are concerned that a mortgage package with such a fixed price will prevent consumers from shopping for individual settlement services in an effort to reduce their costs. We are also concerned that it may be hard for consumers to reconcile the mortgage packaging form with the HUD 1 or HUD 1-A form that the consumer receives at or shortly before settlement.
We have observed that much has changed since the 2002 RESPA proposal in that some lenders are packaging closing costs without the need for regulatory changes. We believe this innovation should continue without further involvement from HUD. This will avoid a situation in which HUD may inadvertently regulate a reduction in competition, which may ultimately force certain consumers to turn to predatory lenders if they cannot qualify for loans with these large lenders.
We also note that the packaging form that was shared with us during our recent meeting with HUD also envisions an interest rate guarantee. For similar reasons as explained above in response to Question #1, we do not believe it is possible for lenders to guarantee the rate in the manner envisioned by HUD.
Without further information or a proposal from HUD regarding subpackaging, it would be difficult for us to provide specific comments on this issue. However, our initial reaction is that subpackaging would not benefit consumers and would likely increase settlement costs.
Allowing outside parties to provide a fixed price package for certain settlement services would seem to increase the costs because these outside parties would likely charge of fee for this service that would be in addition to the costs of the underlying services. In essence, this would add another middleman to the process, which could only result in increased costs for consumers. We do not see how such an approach would benefit consumers.
Subpackaging could also lead to arrangements among service providers that would not benefit consumers. For example, real estate agents may decide to provide a subpackage for certain settlement services and then make an arrangement with a lender in which the agents would agree to refer loans to lenders in exchange for encouraging the borrower to purchase services contained in the subpackage. In addition to increasing costs, this would also discourage borrowers from shopping for these services.
We do not believe that HOEPA loans should be eligible for packaging. Packaging with respect to predatory loans covered under HOEPA may just exacerbate the abuses that are already occurring in the industry. These abuses include overinflated costs and significant junk fees, which are of a particular concern with regard to predatory loans. Allowing packaging, which includes one fixed price for settlement services, without an itemization of those services, would only exacerbate these abuses. Borrowers who do not qualify for prime loans are often very vulnerable to predatory practices and are, therefore, more in need of loan information that is clear and detailed.
We definitely believe that lenders should have an opportunity to cure and provide remedies for violations of these requirements. One approach could be to allow a 60-day cure period that would be available to the lender once the error or violation is uncovered or revealed, without penalties being assessed if the error is resolved within this time frame.
Another idea to consider would be for each lenders regulator to have the authority to study and evaluate remedies for fairness and then issue rules regarding the appropriate remedies that would be permitted. Not only would this provide remedies for lenders, but would provide the regulators with valuable information regarding the types and frequency of errors, which will help them in their supervisory capacity.
Thank you for the opportunity to comment on these issues regarding RESPA reform. If you or other HUD staff have questions about our comments, please give Senior Vice President and Associate General Counsel Mary Dunn or me a call at 1-800-356-9655.
Senior Assistant General Counsel
Credit Union National Association