CUNA Comment Letter
Real Estate Settlement Procedures Act (RESPA)
October 28, 2002
Rules Docket Clerk
Office of General Counsel Room 10276
Department of Housing and Urban Development
451 Seventh Street, SW
Washington, DC 20410-0500
RE: Docket No. FR-4727-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 more than 90 percent of our nations more than 10,000 state and federal credit unions. This letter reflects the views of our member credit unions and of CUNA's Consumer Protection Subcommittee, chaired by Mr. Kris Mecham, CEO of Deseret First Credit Union, Salt Lake City, Utah.
In a sincere effort to simplify the mortgage process, promote competition to lower costs, and to facilitate the ability of borrowers to shop for a loan, the proposed rules will permit lenders to offer borrowers Guaranteed Mortgage Packages (GMPs). These packages will 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.
The proposed rules will also make significant changes to the Good Faith Estimate (GFE) form. The changes will result in a new format for the GFE and are also intended to ensure that the estimates are more accurate and delivered in a more timely manner.
We realize that HUDs proposal is intended to address the concerns expressed by consumers with regard to the current complexity of the mortgage process. These concerns are not unfounded, and we also share HUDs desire to address this problem. However, we believe that this proposal will be unduly burdensome for lenders with very few corresponding benefits for consumers.
Summary of CUNAs Position
- HUDs proposal to allow lenders to offer GMPs will likely place small lenders, such as credit unions, at a distinct competitive disadvantage, as compared to large financial institutions. Credit unions have a mission to serve the underserved and those of modest means. Credit unions will have a difficult time achieving this mission with regard to mortgage lending if they are no longer able to compete effectively with larger institutions that offer GMPs.
- HUD has stated that one of the goals in permitting lenders to offer GMPs is to "simplify the mortgage process." In our view, GMPs will have the opposite result and will actually result in significant, additional confusion.
- Referring to GMPs as a "guarantee" is a misnomer and may mislead borrowers. Under certain circumstances, the interest rate and certain charges may change. To the extent that lenders will be able to offer GMPs, we suggest that these transactions and the underlying agreements be labeled as "Conditional" or "Partial" Guarantee Mortgage Packages.
- If HUD moves forward with the proposal to allow lenders to offer GMPs, we urge that they be permitted initially under some type of pilot program, in which lenders in certain select geographic regions will be able to offer GMPs for a limited period of time. HUD can then evaluate the results of the program to determine if the GMPs actually fulfill the goals that HUD envisions.
- The changes to the GFE will result in additional confusion, not less as HUD envisions, primarily because this form will increase from one to three pages and will include duplicative information that is already required under the Truth in Lending Act (TILA).
- Under the proposal, lenders will generally not be able to exceed the estimates on the GFE by more than ten percent for services that are not under the lenders control. Lenders should not be held to this threshold for these types of services.
- There needs to be clarification of the term "unforeseeable and extraordinary circumstances," which would permit lenders to exceed the charges listed in the GFE by more than what would otherwise be permitted. This term should include a number of circumstances, such as boundary disputes, environmental problems, and when the amount of the loan changes at the borrowers request or when the interest rate lock-in expires through no fault of the borrower.
- If acceptable to the borrower, lenders should be able to collect the fees for the credit report and appraisal upon application so as not to delay the mortgage underwriting process.
- The term "application," which triggers the requirement to issue the GFE, should not include situations such as telephone inquiries or website interactions, which are offered by lenders merely to help educate and provide information to consumers, unless this information includes the borrowers signature.
- To the extent that HUD proceeds further to implement changes to the GFE, we urge that any such changes be incorporated in the current form.
- We do not support a requirement that an amended GFE trigger a new 30-day period in which the new terms would be open for the borrowers acceptance during this time period. This would extend the loan process for an unacceptable period of time.
CUNA wholeheartedly supports the general concept of amending the RESPA rules in order to simplify and streamline the home purchase and settlement process in an effort to reduce costs for consumers. Financial institutions, regulators, and consumer groups all recognize that the home purchase process is currently very confusing, inefficient, and overwhelming for most homebuyers.
In the past, CUNA has been very active in efforts initiated by both Congress and the regulators to reform both RESPA and TILA to the benefit of consumers and financial institutions. CUNA intends to be very active in all future efforts to reform the RESPA and TILA rules. 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 that we want to bring to your attention.Proposal to allow lenders to offer GMPs
HUDs proposal to allow lenders to offer GMPs, as an alternative to providing borrowers with a GFE, will likely place small lenders, such as credit unions, at a distinct competitive disadvantage as compared to large financial institutions. Only the larger institutions will have the ability to negotiate discount pricing with settlement providers, which can then be passed on to the borrower.
Although we recognize that lower prices for borrowers is appealing and is the goal of this proposal, we believe the opposite result may actually occur. Since smaller lenders, such as credit unions, may not be able to compete effectively, the mortgage market may very well be even more dominated by larger institutions as the smaller lenders cut back or even leave the mortgage market entirely. This may actually result in a monopolistic situation, in which the mortgage market would be dominated by just a handful of lenders that have the wherewithal to create GMPs.
Although the home purchase process is very confusing to the average borrower, the mortgage market is actually the envy of the world as evidenced by the very high percentage of American families that own their home, which now approaches 70%. This remarkable record reflects the alternatives that consumers have with regard to the mortgage lending market. These consumers have a wide variety of choices when they shop for a mortgage loan, which include mortgage brokers, large banks and thrifts, and credit unions with which they have an established and personal relationship.
We are also concerned that the offering of GMPs may actually harm current efforts with regard to curbing predatory lending practices. We recognize that one of the goals of these proposed rules is to better educate borrowers in an effort to curb predatory lending, a goal that is shared by all financial institution regulators, Congress, and state governments, as well as credit unions.
However, the proposal to allow institutions to offer GMPs may actually thwart this goal. Credit unions are member-owned, not-for-profit cooperatives, with a mission to serve the underserved and those of modest means. If credit unions are no longer able to compete effectively with larger institutions that offer GMPs, then they will have a difficult time achieving this mission with regard to mortgage lending. The result may be that those that could be served by credit unions may actually fall prey to predatory lenders, especially since many of the larger financial institutions have not historically shown an interest in providing reasonably priced mortgage loans to the underserved and those of modest means.
If HUD moves forward with the proposal to allow lenders to offer GMPs, we urge that this be permitted initially under some type of pilot program, in which lenders in certain select geographic regions will be able to offer GMPs for a limited period of time. HUD can then evaluate the results of the program to determine if the GMPs actually fulfill the goals that HUD envisions.
HUD has stated that one of the goals in permitting lenders to offer GMPs is to "simplify the mortgage process." In our view, GMPs will have the opposite result and will actually result in significant, additional confusion. Currently, borrowers receive a one page GFE and a HUD-1 statement at settlement. The individual charges are cross- referenced between the GFE and the HUD-1 so that it is possible for the borrower to reconcile the charges that appear on both of these forms.
Although we recognize that these current forms can be rather confusing for the average borrower, the confusion that will result from the documentation that will be generated if a borrower selects a loan as part of GMP will be far worse. In these situations, the borrower will now receive a GMP agreement and HUD-1 statement that will be very difficult to reconcile, and in addition, the borrower will receive a separate listing of the finance charges that are included in the APR, as required under TILA.
Increased confusion will also prevent borrowers from shopping effectively for the mortgage loan that best meets their needs. Since the GMP agreement and GFE statements will be completely different, the borrower that explores the GMP option may be able to compare other GMP offers, but he or she will not be able to compare a GMP with loan offers that are provided under the GFE option. This will not only restrict the borrowers ability to shop for a loan, but would harm competition since the lenders that offer GMPs would only need to be competitive with other GMPs, instead of the entire mortgage market.
We also note that referring to GMPs as a "guarantee" is a misnomer and may mislead borrowers. Under the current proposal, the interest rate may change prior to the borrower locking in the rate, the mortgage insurance premiums may change based on the final appraisal of the property, and the escrowed reserves may change by up to ten percent and even more if there are "unforeseeable and extraordinary circumstances." Other costs are excluded entirely from the guarantee, which include those that are dependent on the borrowers choice of service provider. Lenders also have the option to exclude costs for pest inspections, appraisals, and the lenders title insurance.
Borrowers are likely to believe that the lump sum for settlement services that are quoted as part of the GMP is the final and total amount that the borrower will need to pay, but this would actually not be true, based on the exceptions noted above. Therefore, to the extent that lenders will be able to offer GMPs we suggest that these transactions and the underlying agreements be labeled as "Conditional" or "Partial" Guarantee Mortgage Packages.
We also note that there are twenty-one specific state laws that establish pricing for title insurance. These laws require that prices for title insurance be disclosed separately from the prices for other services, which would conflict with the GMP in that the pricing for title insurance would be combined with the pricing of other services without separate disclosure.Proposed Changes to the GFE Form
Again, we understand and applaud HUDs desire to simplify and improve the settlement process and understand that the proposed changes to the GFE form were designed to achieve that goal. However, we have many concerns with these proposed changes and believe that they will actually increase confusion, to the detriment of both the borrowers and the lenders.
First, the proposed GFE form will be three pages, instead of the current one page form. Although CUNA has been a strong supporter of improvements to the RESPA disclosure form, we cannot see how increasing the GFE form to this extent can possibly be considered simplification.
Any significant change to the GFE form will present a number of compliance hurdles, including system changes and staff retraining. These hurdles generally impact smaller lenders, such as credit unions, to a greater extent than the larger lenders that have the resources to address these compliance concerns. Also, because credit unions are not-for-profit financial institutions, the increased compliance costs cannot be absorbed by the credit union and will have to be passed on to the members.
This is not to imply that credit unions will always oppose changes to the GFE form because of compliance costs. We recognize that the GFE form should be improved and could support changes that accomplished that goal, notwithstanding the initial compliance costs. However, the proposed changes will not result in improvement, and we cannot support any changes such as these that will both create additional confusion for borrowers as well as increased compliance costs for credit unions.
Much of the confusion arises because the additional detail that will be required will include information on the interest rate and finance charges, which are already included in the TILA disclosures that borrowers receive. From the beginning, TILA was intended to address disclosures with regard to the interest rate and finance charges while RESPA was intended to address settlement charges. Although the interplay between TILA and RESPA has always been confusing for both borrowers and lenders, this confusion will be compounded further if the GFE were to include duplicative disclosures that are already required under TILA.
Also, information such as an explanation of the originators function and that the borrower is responsible for shopping for his or her best loan can be considered educational information. Such information should be included in the booklets, titled The Homebuyers Guide to Settlement Costs, that HUD prepares and is provided to borrowers to help them understand the nature and costs of real estate settlement services. In fact, all the changes in this proposal that would require including educational information on the GFE should instead be included in this booklet.
We are also concerned about the new requirements regarding tolerances, in which actual settlement costs may not exceed the costs listed on the GFE by certain thresholds, absent "unforeseeable and extraordinary circumstances." For certain changes, lenders will not be able to charge more than what is listed on the GFE. For other changes, lenders will not be able to exceed the estimate by more than 10%.
We do not believe that such tolerances should apply to costs that are not under the control of the lender. Examples of such costs include hazard insurance, homeowners insurance, and escrow payments. Lenders should not have to undertake the pricing risk for these charges. Such risks would, in particular, adversely affect smaller financial institutions, such as credit unions, because they are less able to undertake these risks, as opposed to the larger lenders that have the ability to absorb them. Also, as not-for-profit financial institutions, any costs associated with these risks would have to be passed on to the members.
For other charges, HUD needs to clarify the meaning of the term "unforeseeable and extraordinary circumstance" and there has to be flexibility to address a number of contingencies. For example, during the lending process the credit union may have to address a number of situations that were not accounted for, such as boundary disputes, environmental problems, or water rights issues. Lenders should be permitted to impose additional charges under these and similar circumstances.
The term "unforeseeable and extraordinary circumstances" should be clarified to apply to certain situations that are "unforeseeable" from the lenders perspective but may not be from the borrowers perspective. This includes situations in which the borrower decides to borrow more than originally requested, the borrower changes the term of the loan or changes from a fixed to a variable interest rate, the interest rate lock-in expires through no fault of the lender, and when the borrower decides to pay additional discount points after receiving the initial GFE. All of these and possibly more examples to clarify the term "unforeseeable and extraordinary circumstances" would provide comfort for lenders and reduce future litigation over the meaning of this term, to the benefit of both lenders and borrowers.
The requirement to provide any guarantee of any cost that is not within the credit unions control could pose a safety and soundness issue. This would result in a conflict between complying with these proposed rules and satisfying the concern of the regulator, which for most credit unions is the National Credit Union Administration (NCUA) as administrator of the National Credit Union Share Insurance Fund.
One particular concern for credit unions is with regard to the guarantee of the cost of the appraisal. Section 722.5 of NCUAs rules and regulations provides that an appraiser must exercise independent judgment. Such judgment may be compromised if the credit union was in a position to dictate the cost of the appraisal by claiming that it could not pay any additional amount that may be necessary to appraise the value of the property accurately. This could occur if the property included unique characteristics that were not known at the time the GFE was issued.
If the proposed changes are adopted in some form, we urge that HUD clarify that it would be permissible for lenders to collect the fee for the appraisal and credit report at the time that an application is submitted. We understand HUDs concern that significant funds not be collected prior to the borrower receiving the GFE. However, borrowers are used to and now expect a rapid underwriting process. This is made possible because under the current process, the appraisal and credit report, the first steps in the mortgage process, can be completed immediately upon application and after collection of the appropriate fees.
Under the proposal, it appears that these fees may not be collected until later in the process after the borrower receives the GFE and agrees to proceed with the transaction. Since the process cannot begin in earnest until the appraisal and credit reports are obtained, this will directly increase the amount of time between the date that the application is received and the settlement of the mortgage transaction.
Contrary to HUDs purpose in limiting fees before the borrower receives the GFE, allowing fees to be collected for the appraisal and credit report at the beginning of the process would not limit the borrowers options. In fact, the options would increase as borrowers would be able to decide either to pay these fees at the beginning in an effort to shorten the underwriting process or waiting until receiving the GFE before deciding whether to proceed further by paying these fees.
We also note that lenders will be permitted to collect a small fee for preparation of the GFE, which would be in addition to the fees for the appraisal and credit report. We suggest that this be clarified to permit lenders to collect such a fee upon application, prior to preparing the GFE. Credit unions need this protection in their efforts to serve the underserved market. Many members apply for loans that they are not qualified for, and the fee is needed in order to defray the loss that this imposes on the credit unions. Being able to defray such costs will help credit unions vigorously serve the underserved market to ensure that all qualified members in this market receive the loans that they deserve.
We also believe that the proposed definition of "application" will interfere with the ability of credit unions to educate their members about the mortgage application process. The proposal imposes a much lower threshold of what is considered a loan application and appears to include any inquiry, verbal or written, in which the borrower provides very basic information, such as the Social Security number, property address, basic income information, information or estimate of the property value, and the amount of the loan requested. Receipt of this information will require the lender to issue a GFE.
Credit unions currently provide significant information about mortgage loans, either over the telephone or on the credit unions website. As part of this exchange, the member will often be requested to provide the information that will require the issuance of the GFE under the proposal. Such information is needed before the credit union can provide information regarding the interest rate of the loan and the estimate of the closing costs.
Providing this information either verbally or through the credit unions website has always been considered an exchange of information and a routine member service, not an application. Providing this service and education will be severely hampered if such an exchange of information is considered an application, requiring that a GFE be mailed to the member and a copy retained in order to verify compliance. One option to address this concern regarding the "application" is to require lenders to provide the GFE if the information is provided by the borrower, along with a signature, which could include an electronic signature.
To the extent that HUD proceeds further to implement changes to the GFE, we urge that any such changes be incorporated in the current form. We understand HUDs concern that the current form, with its numerous list of possible charges, may encourage unscrupulous lenders to impose a number of "junk" or "garbage" fees that only serve to increase the lenders profits. However, we do not believe that the proposed GFE form accomplishes this purpose. The new form reflects broader categories with a lump sum estimate for each category. We believe that under this approach, it will be easier for lenders to hide these types of unwarranted charges because they will be able to "pad" these estimates without having to identify the increased charges directly.
Currently, these costs have to be identified under such headings as "processing" or "underwriting" fees. Significant public attention has been raised recently regarding the appropriateness of such fees and as a result, borrowers have been increasingly aware that these fees can often be eliminated or reduced upon request. However, converting to the proposed GFE will hinder this ability since these fees will not be specifically identified.
Credit unions are also concerned that borrowers will review the lump sums under these broad categories and then call the lender for a breakdown of these costs, similar to the breakdown that is listed on the current GFE. Requiring lenders to respond and provide this information on a case-by-case basis, as opposed to listing it on the GFE, will only serve to increase the burden on the lender and slow down the loan process for all parties involved.
Although we support providing an amended GFE if there are any subsequent changes to the loan terms, we believe that the lender should not be required to refund the fees that have already been collected if the borrower rejects the amended GFE. One exception could be that there be a refund of any fee that was paid to lower the interest rate than what appears on the amended GFE.
We also do not support a requirement that an amended GFE trigger a new 30-day period in which these new terms would be open for the borrowers acceptance during this time period. There may be situations in which multiple GFEs could be triggered for a particular loan application, which would generate multiple 30-day acceptance periods. This would extend the loan process for an unacceptable period of time. As with other lenders, many credit unions often have a commitment to deliver the loan to a secondary market investor. These credit unions could be at risk of delivery default if they do not have a loan to deliver within a certain period of time
In the proposed rule, HUD requested comment on how these rules can address the matter of loan rejection or threatened rejection as a means of allowing the lender to change the GFE or GMP agreement simply to earn a higher profit. Although we agree that this is an unacceptable practice that should not be tolerated, we believe that the current laws prohibiting lenders from engaging in unfair and deceptive practices are sufficient to address this practice and should be used to the fullest extent possible in order to stop such activities.
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 Associate General Counsel Mary Dunn or me a call at 1-800-356-9655.
Assistant General Counsel