Feds propose changes in mortgage rules

Feds propose changes in mortgage rules

Bankrate.com
Feds propose changes in mortgage rules
Monday July 18, 6:00 am ET
Holden Lewis


The federal housing department wants to simplify the process of getting a mortgage and, on Thursday, proposed changes in the paperwork that borrowers get from prospective lenders.

The Department of Housing and Urban Development recommended alterations Thursday in the good-faith estimate, or GFE. The housing agency revealed the proposal at a round-table, organized by HUD, in which bankers, title companies, consumer groups and others were invited to argue, discuss and occasionally agree.

HUD wants to amend the regulations enforcing the law that governs loan closings. The law, called the Real Estate Settlement Procedures Act, or RESPA, would remain the same. But HUD's secretary, Alphonso Jackson, wants to change the rules under RESPA for two reasons: to make closing a mortgage less confusing to borrowers, and to prevent lenders from lowballing the closing costs in the GFE, then jacking up the costs at the closing table.

Surprises at closings
The GFE is not binding, so a lender can underestimate the closing costs, mistakenly or not. As a result, borrowers sometimes discover at the last hour that the final closing costs are a lot higher than the original estimate. When that happens, they have three choices: knuckle under and pay the higher costs, delay the closing, or nix the deal and start all over again, preferably with another lender.

HUD proposed a revised GFE document that would force lenders to give accurate estimates of closing costs. The proposed new GFE would have fewer categories of closing costs. It would separate settlement charges into three broad categories: the lender's service charges, charges for services that the lender selects, and charges for services that the borrower selects. The latter two categories overlap; the borrower can choose a slew of providers or can leave that chore in the hands of the lender.

More certainty at closing?
The lender's service charges listed in the GFE can't be increased. As for charges for services in which the lender selects the provider, the total can't rise more than 10 percent over the total listed on the GFE. The sky's the limit on upward revisions for charges for services in which the borrower selects the providers.

The draft GFE includes a worksheet that would make it easier for consumers to compare mortgage offers.

HUD proposed another document that lenders could use, called a Mortgage Package Offer, or MPO. It's a tuned-up version of an idea that HUD proposed but which was withdrawn last year after the industry complained.

With a Mortgage Package Offer, the lender would guarantee the rate and all of the settlement costs. All the settlement service providers, such as the title insurance company and flood certifier, would be selected by the lender. The MPO would guarantee one flat fee for all of those services, and it would guarantee an interest rate (if locked) and any discount fees or yield spread premiums.

A few lenders, such as ABN AMRO, E-Trade Mortgage, E-Loan and ditech.com, already offer bundled services in which all or most of the settlement services are guaranteed in one flat fee. A few years ago lenders were reluctant to offer flat-fee, bundled services because HUD's rules made such business practices risky. That's because RESPA forbids kickbacks.

Winking at volume discounts
A strict interpretation of RESPA's anti-kickback provision would make volume discounts illegal. If a credit bureau were to charge $24 for a credit report, but would be willing to charge $20,000 for 1,000 credit reports, the lender could charge each customer $20 for a credit report. But RESPA, strictly interpreted, wouldn't allow such a discount. And it certainly wouldn't allow the lender to charge $22 and pocket the extra two bucks as profit. Nor does RESPA seem to countenance average-cost pricing, in which a lender would charge every borrower $100 for services that sometimes cost $50 and sometimes $150, but on average $100.

By not going after ABN AMRO and other lenders that bundle settlement services, HUD has given its tacit OK for volume pricing and average-cost pricing. But, says Ann vom Eigen, legislative and regulatory counsel for the American Land Title Association, that approval hasn't been made explicit. Her organization would like HUD to do so.

Packaging is already happening, vom Eigen says, "so certain parts of the rule, as it would have been released in 2004, are clearly unnecessary at this point in time."