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Real Estate Settlement Procedures Act (RESPA)




NAR Submits Comments on Proposed RESPA Changes
The Downside Risks of HUD's Guaranteed Mortgage Package
Key Points for RESPA Comment Letter (PDF)
HUD Proposed Rule (PDF)
NAR Issue Brief
NAR Full Summary of Proposed Rule
NAR Press Releases
HUD Economic Analysis (PDF)
HUD Letter Clarifying Policy Statement on Unearned Fees (PDF)
Q & A of HUD's Proposed Rule (PDF)


RESPA Reform

Background
In 1974 Congress enacted the Real Estate Settlement Procedures Act to address what was then considered problems in the real estate settlement process. Key among them was abusive practices that increased costs to homebuyers and a lack of understanding among homebuyers about the settlement process and its costs. RESPA's stated purpose was twofold: (1) to provide the consumer with information about the real estate mortgage transaction and the costs associated with it, and (2) to prohibit certain practices, such as referral fees between settlement service providers, that result in higher costs and reduced quality to the consumer. To provide consumers with cost information about the mortgage process, RESPA created the Good Faith Estimate (GFE) and the HUD-1 closing document. To combat higher costs in the transactions, RESPA's Section 8 makes it a criminal act for settlement service providers to pay fees to each other for the referral of business. Through the years RESPA was amended and clarified to address new business practices, i.e. Affiliated Business Arrangements (AfBA) and other innovations in the marketplace. However, most would agree, there still exists a great deal of uncertainty over what fees are permitted v. prohibited. This is an area that continues to cause a tremendous amount of angst among settlement service providers given that Section 8 violations may result in criminal penalties as well as substantial civil penalties. However, Section 8 is also where the consumer receives the most protection from unnecessarily high costs in the transaction.

Current Environment
HUD believes the biggest problem with the current mortgage process is the lack of firm cost information to enable the borrower to truly shop for a loan among various lenders. The first disclosure a borrower receives is the Good Faith Estimate (GFE). Unfortunately, the problem with this disclosure is that it is only that, an estimate. There is no requirement that this disclosure accurately reflect the true costs to close the loan. When the borrower is provided the HUD-1 at closing and the costs are higher than the estimate, there is very little the borrower can do other than pay the additional money to complete the transaction. It is estimated that this occurs far more often in the home equity and refinance market than in the home purchase market. We believe this is largely due to the presence of a real estate professional in the home purchase transaction. A real estate licensee assists the borrower through the transaction maze and corrects the problems before they happen or renegotiates at closing to minimize the impact on the borrower.

Other problems cited by HUD as reasons for reform include a lack of borrower understanding of mortgage broker functions and compensation and the assertion by lenders that current rules impede the packaging of settlement services. To address these issues, HUD's proposal sets out specific mortgage broker disclosures and creates a safe harbor for lenders who wish to package.

The Proposed Rule
In an effort to simplify the mortgage process and to provide certainty to borrowers about their costs, HUD's proposal would change the mortgage disclosure process by requiring lenders to disclose mortgage loan costs (interest rate and settlement costs) in one of two ways:

1. Improved Good Faith Estimate (GFE): Establishes a new format for GFE and requires firmer price quotes. Lender origination charges, lender required services, and government charges must be firm. Other lender required but shoppable third party services will be subject to an upper limit, or 10% "tolerance". Or

2. Guaranteed Mortgage Package (GMP). Lender discloses the loan rate and a single guaranteed price for a package of settlement services. For example, 7% int. and $3000 GMP. Lenders, or packagers offering this option will be exempt from Section 8* (the prohibition against kickbacks). This exemption would only apply to the services within the package. The current prohibition against referral fees between lenders, real estate licensees and other providers will be maintained.
(Under this approach, borrowers will no longer have a choice in the selection of their providers. Instead they will choose lump sum packages)

*Under today's rules, a lender is prohibited from charging a borrower more for a third party settlement service than it cost the lender. The proposed rule would eliminate this prohibition and permit the lender to make a profit on the service as long as the service is part of a GMP.

Status/Outlook:
HUD's proposed rule was issued on July 29, 2002. There is a 90-day comment period, which closes on October 28, 2002. Industry is currently analyzing this very complex proposal to ascertain its impact.

The House Financial Services Committee held a hearing on Thursday, October 3, 2002. Secretary Martinez testified and responded to several questions regarding the competitive landscape that might result from such changes. The Small Business Administration will be hosting an Industry Roundtable on October 9, 2002, to discuss the small business implications of the proposed changes. There is also interest in Congress to hold hearings early next year. NAR is supportive of a delay to permit enough time to more fully analyze the economic impact of this proposal.

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