CUNA Comment Letter -- Real Estate Settlement Procedures Act Strengthening the Required Use Prohibition
September 1, 2010
Office of General Counsel
Department of Housing and Urban Development
451 7th Street, SW Room 10276
Washington, DC 20410-0500
|RE:||Docket No. FR-5352-A-01 Real Estate Settlement Procedures Act Strengthening the Required Use Prohibition|
To Whom It May Concern:
The Credit Union National Association (CUNA) appreciates the opportunity to submit comments in response to the request from the Department of Housing and Urban Development (HUD) for input on how to amend the current prohibition against the required use of affiliated settlement service providers for residential mortgage transactions under the Real Estate Settlement Procedures Act (RESPA). These changes would be intended to address practices in which certain homebuyers commit to using a home builders affiliated mortgage lender in exchange for construction discounts or discounted upgrades without sufficient opportunity to review the transaction or comparison shop among other lenders. CUNA represents approximately 90 percent of our nations 7,700 state and federal credit unions, which serve approximately 93 million members.
Summary of CUNAs Comments
- CUNA supports HUDs efforts in closely reviewing these provisions, and we encourage HUD to issue a proposal to ensure that consumers are fully protected when they purchase a home and are then encouraged to use a specific lender or settlement service provider that is affiliated with the homebuilder.
- CUNA is concerned that the benefits provided to consumers in these situations may be illusory and that consumers are not provided with an adequate amount of time to shop for mortgage loans and settlement services, either from credit unions or other financial service providers, many of whom may be able to provide loans and services at a competitive rate and cost, even taking into account the benefits being provided by the homebuilder.
- CUNA also believes that the disclosures required in these situations can be improved. For example, we would support enhanced disclosures for first-time homebuyers who are referred to affiliated service providers since they may not be knowledgeable about the home purchase process and may, therefore, be more likely to rely on the homebuilder for objective advice.
Under RESPA, referrals to affiliated settlement service providers are generally prohibited on the basis that the referrers return on investment in the affiliate would be considered a kickback or otherwise a thing of value in exchange for the referral, which is prohibited under Section 8 of RESPA. However, a referral will be permitted if the following conditions are met:
- The referral is accompanied by a disclosure of the affiliation and estimated charges by the provider to which the consumer is referred;
- The consumer is not specifically required to use a particular settlement service provider; and
- The arrangement does not otherwise involve prohibited compensation.
Under current RESPA rules, the required to use condition is not violated if the consumer is offered discounts or rebates for the purchase of settlement services from the affiliate, as long as it is optional for the consumer to use the affiliate and the discount is truly a discount below the prices that are otherwise available. Also, the discounted prices cannot be made up by charging higher costs elsewhere in the settlement process.
In 2008, HUD issued a final rule that amended the Good Faith Estimate form, the HUD-1 and HUD-1A settlement statements, and made other changes to the RESPA rules. The final rule also clarified that the provisions regarding the required use of affiliated settlement service providers, specifically by indicating that these provisions cover incentives as well as disincentives when providers impose a penalty or other type of economic disincentive if the consumer uses a nonaffiliated provider.
HUD clarified these provisions out of concern that consumers have essentially been required to use these affiliated providers because the timing of the contract precluded the buyer from shopping for settlement service providers, the costs and interest rates offered were not competitive, and it has been difficult to quantify certain of the discounts offered. However, litigation arose that challenged these provisions of the final rule and, as a result, HUD withdrew these provisions. HUD has now issued an advance notice of proposed rulemaking as the first step in reviewing these provisions and possibly issuing a new proposal to address these concerns.
We support HUDs efforts in closely reviewing these provisions, and we encourage HUD to issue a proposal to ensure that consumers are fully protected when they purchase a home and are then encouraged to use a specific lender or settlement service provider that is affiliated with the homebuilder. We understand that the current rules are intended to ensure that the consumer is fully aware of the relationship between the homebuilder and the settlement service provider and that the use of the affiliated service provider is voluntary.
However, we are concerned that this goal has not been achieved and that the full amount of the benefits offered to the consumer may be illusory. We are also concerned that the consumer in these situations is not provided with an adequate amount of time to shop for mortgage loans and settlement services, either from credit unions or other financial service providers, many of which may be able to provide loans and services at a competitive rate and cost, even taking into account the benefits being provided by the homebuilder.
Although the current RESPA rules provide protections in these situations, we believe there will always be at least a perceived conflict of interest when a homebuilder refers a consumer to an affiliated service provider, regardless of the benefits and convenience being provided to the consumer. The homebuilder clearly benefits financially when the affiliated provider is used and, in these situations, there have been no indications that these financial benefits have not invariably taken precedence over the best interests of the consumer.
Although we are concerned about the interests of the consumer in these situations, we are not necessarily suggesting that these practices be banned. We support HUDs approach of closely studying these issues to determine if the consumers interests are being served and what changes can be made in the RESPA rules to ensure this result. For example, we believe the analysis of data that compares the performance and characteristics of loans procured from affiliated providers with loans obtained from arms-length lenders would help in these efforts.
We also believe that the disclosures required in these situations can be improved. For example, we are particularly concerned with first-time homebuyers who may not be familiar with the home purchase process and the wide variety of financing options that are available. These individuals may be more likely to rely on the homebuilder for objective advice and may not be as likely to explore other options. For this reason, we would support enhanced disclosures for first-time homebuyers who are referred to affiliated service providers.
Thank you for the opportunity to comment on how HUD may clarify the current prohibition against the required use of affiliated settlement service providers for residential mortgage transactions under the RESPA rules. If you have questions about our comments, please contact Senior Vice President and Deputy General Counsel Mary Dunn or me at (202) 638-5777.
Jeffrey P. Bloch
Senior Assistant General Counsel