What else is there to say (that can't be said in 60 days)?
Posted in RESPA reform By Matt Carter, Monday, April 28, 2008.It was probably no surprise to most members of this group that trade associations representing realtors, lenders, title insurers and builders would want to push the timeline for RESPA reform back by 60 days -- or perhaps into oblivion (see previous discussion).
After publishing its proposed RESPA rule changes in the March 14 Federal Register , HUD opened up a comment period that's scheduled to end May 13. It's true that the proposed changes and their implications for the industry are complex, and that HUD's analysis is a lengthy one. But it's hard to argue -- as Representatives Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill. claim in a letter to HUD they're asking colleagues to sign, that it covers subjects "that are beyond disclosures and have not previously been the subject of public comment."
Beyond disclosures, yes. Not previously the subject of public comment? Not only has HUD been inundated with public comments at roundtable meetings on the big RESPA reform issue that goes beyond disclosures -- the packaging of settlement services with mortgages -- but it's met on a number of occasions with industry lobbyists behind closed doors.
This list from the Office of Management and Budget shows HUD officials have held more than two dozen meetings with industry groups to discuss RESPA reform in the last six years, including four meetings in the last five months.
Want to see the Mortgage Bankers Association's dream RESPA rule? Check out the materials they brought to their Jan. 31 meeting with HUD, including an outline of proposed legislation, the "Mortgage Origination Clarity Act of 2007" (starts on page 7 of the document).
Much of the MBA's concerns center around the reporting of yield spread premiums, but on Jan. 16, HUD heard from the Consumer Mortgage Coalition, Washington Mutual, HSBC, Wells Fargo Home Mortgage, and United Guaranty. In their meeting materials, CMC said HUD could avoid the controversy surrounding packaging and a "total elimination" of Section 8 prohibitions by offering "a more narrowly tailored exemption" for some packaging incentives, such as average cost pricing and volume discounts.
"The CMC has consistently recommended a broad packaging approach to RESPA reform, one that will allow market competition to reduce settlement services charges. That approach involved guaranteeing the price of settlement costs early in the transaction in exchange for an exemption from RESPA's Section 8 prohibitions on referral fees and fee-splits. The exemption would allow, for example, wide use of volume-based discounts, average cost pricing, and other common business pricing structures between and among the users of settlement services and the providers of those servicers. Because Section 8s broad prohibitions may call these arrangements into question, it acts as a regulatory barrier to the effect(ive) use of leverage and competition that keeps settlement costs artificially high. As was demonstrated by the diverse view of industry and consumer groups at the roundtables held by HUD in the summer of 2005, reform of RESPA's Section 8 requirements, particularly a broad-based packaging approach with a total elimination of Section 8's prohibitions, is highly controversial. Lesser steps that would bring some measure of competition, but are short of full packaging, may include clarity on the permissibility of average cost pricing, or a more narrowly tailored exemption for volume discounts, which could include a more narrowly drawn definition of what a 'discount' means under RESPA."
Sounds sort of like what HUD ended up proposing (although without the explicit Section 8 "safe harbor" CMC had advocated).
On Dec. 14, NAR officials met with HUD staff. Meeting materials included a June 1, 2006 letter from NAR to Housing Secretary Alphonso Jackson that is startling for how closely it anticipates the proposal HUD would roll out nearly two years later:
NAR asked HUD to:
"1. Revise the Good Faith Estimate (GFE) to Ensure Certainty and Simplicity: HUD should provide for an early, firm and clear GFE, synchronized with the HUD-1, to provide certainty and simplicity for borrowers early in the process. This single step, which can be accomplished fairly quickly, will do more to achieve the aims of RESPA reform than any other, without introducing unpredictable effects into the real estate finance marketplace, or picking industry winners and losers through regulation.
2. Encourage Packaging without a Section 8 Exemption: HUD should discard the proposal for a Section 8 exemption to facilitate packaging. The marketplace has already begun to respond vigorously under current law to offer bundled services. Current law permits packaging but requires that 100 percent of any discounts created by bundling services be passed on to the consumer. The Section 8 exemption would remove the requirement that savings accrue to the borrower and would be a step backwards for the goals of RESPA reform. NAR specifically opposes a Section 8 exemption for so called "volume based" discounts. A Section 8 exemption for volume based discounts would allow the provider of services, rather than the consumer, to pocket the savings. Instead of permitting Section 8 exemptions, HUD can encourage packaging by studying and publicizing different market-based approaches to bundled services."
The letter concludes with a call for HUD to step up enforcement and education efforts.
Given that HUD essentially gave NAR everything it was looking for back in 2006, it will be interesting to see why the group is now among those calling for a 60-day extension of the comment period that would put a decision on RESPA reform in the hands of the next administration.
Of course, that's not to say that folks aren't going to have legitimate issues with the proposed rule change. I just wonder whether there's anything to say that hasn't been said before (or that can't be said in 60 days)?
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Submitted by Diane Cipa on April 28, 2008 - 10:23pm.
Matt: There IS nothing else to say. Anyone who was interested in RESPA, read it and has or is prepared to comment by the original date in May.
ALTA, RESPRO, NAR, all the trade groups and their media lap dogs weren't prepared for the blogosphere. Frankly, I think they assumed they would control the message like they always have. I don't need them to tell me how to think and you don't either and neither do your readers.
Freedom of speech is pretty damn powerful and these guys were blindsided - totally.
Here's what they need time for. The big members and the big advertisers are against reform of any kind which will upset the automation plans and referral networks they have so carefully crafted over these last couple of decades.
They need time to figure out an angle to stop or delay change.
They can't argue their case in any kind of open forum because they can't argue against the truth. The truth is that the RESPA proposal is fair and a good solution to a very tough problem.
I can only hope that HUD can withstand the pressure coming from so many who pretend that they care but just couldn't care enough to do what we did and that's read the freaking proposal.
It's about spin. It's tactics to stop reform. It ain't in any way shape or form meant to help the consumer. The ONLY friend consumers have is HUD and let's hope HUD is a tough enough friend to make this work.
Submitted by Diane Cipa on April 28, 2008 - 10:36pm.
Weaseling out...they're giving it their best shot.
Submitted by Dave Wirsching on April 29, 2008 - 3:37am.
Diane - you've missed the bigger picture. These rules are the most anti-competitive and anti-small business program to come out of HUD since the last RESPA.
The trade groups are only quibbling over the added expense of the closing script. It cuts into their margins. The rest of the changes suit them just fine.
The big providers really want the "reform" of negotiated/volume discounts. They are counting on HUD's track record of sponsoring vague and unenforceable rules that appear to foster competition, but are so poorly thought out that they eventually open up entire segments of the market to anti-competitive practices (pick anything to do with ABAs for a current example).
The large providers will partner with the large lenders to concoct a smoke and mirrors "discount plan" that small to mid-size lenders and service providers, like title insurance agents and appraisers, won't be able to match. The advertising power and the lure of the discount will crush any smaller providers.
HUD won't figure out what happened until we've all disappeared from the scene. Instead of the utopian competitive marketplace you envision, there will be an extremely small number of lenders offering "bundles" that must be used in order to obtain a "discount." There will be no consumer shopping for services, no real choice and no real savings to the consumer. Do you think these big providers will use a monopoly position to discount?
Don't believe in the power of the blogsphere, if this rule moves forward as-is, we'll be road kill on the information super highway.
Submitted by Diane Cipa on April 29, 2008 - 6:19am.
Well, we're diametrically opposed on the consequences of this proposal.
I strongly believe an empowered consumer is one who will choose me. I give great service and I charge a competitive price. I can effectively separate myself from the automatons and the ignorant idiots who hold a title license and so I expect to survive as a boutique provider.
Whether or not the RESPA proposal goes through, that's the future I see for myself in the title business because the industry has embraced automation and ignorant licensees with referral sources. So I see the same path either way and guess what? RESPA reform helps me because it gets the consumer looking more closely at what they are buying. That gives me a chance to tell them they are buying CRAP when they buy from commodity dealers of title.
Volume discounts with REAL RESPA enforcement in place is a much more friendly environment for the good guys.
Transparent disclosure is a much more friendly environment for the consumer.
It's all win.
Submitted by Diane Cipa on April 29, 2008 - 6:23am.
PS Why not just make comments to that end? HUD is listening. If you feel strongly about the impact on small business, say it!
Why delay the entire project? You already know what you think. Will time make any difference to you or change your opinion?
Submitted by Dave Wirsching on April 29, 2008 - 6:31am.
There won't be any REAL enforcement - no one has the $$$ to do it right. We'll get the pretend enforcement we've had for the last dozen years. "...full of sound and fury, signifying nothing"
You will never have a chance to compete as a boutique. Do you think that your service is really going to be worth several hundreds of dollars in phantom "discounts?" The consumer won't shop - the lender or real estate agent will block potential shoppers by telling them the discount is off the table if they pick and choose vendors.
You'll never get a chance to compete, and if you do, you won't be able to match the artificial "discount" that the lender or RE agent will provide.
New construction business today is a great example - you can't even get a chance to compete - the buyer looses their "free upgrade" if they dare to use an outside vendor. Do you think that this will play out any differntly?
Submitted by Dave Wirsching on April 29, 2008 - 6:31am.
I want it delayed so it will die. Otherwise we independent agents will do the dying.
Submitted by Diane Cipa on April 29, 2008 - 7:11am.
Well, two things. The new definition of "required use" helps in the builder abuse and ABAs. Also, HUD has clearly indicated in their proposal the intent to seek legislative relief for enforcement with teeth. I have no doubt that they will get the ability to police their rules and I expect the added threat to curb abuse.
I know it's off subject but you can't ignore the commitment of the states to find and shut down sham ABAs. The landscape of our market is likely to look very different in another year or so.
Lastly, we are lucky in PA to have regulated rates which place a floor on title premiums so we can't be negotiated out of competition on the down side.
Volume discounts are not packaging. Discounts flow to the consumer and for the benefit of the consumer and so long as we have free speech and thank heavens for the blogosphere, we can reach consumers.
Big players and big advertisers don't control the message any longer.
Submitted by Howard A. Lax on May 7, 2008 - 9:17pm.
There is still a lot to say regarding the proposal, including a few suggestions on how to fix things without throwing out the good intentions that HUD brings to the table. We need to concentrate in the extended comment period on telling HUD how to get it right.
1. The consumer needs to be educated before shopping, not at the closing table. Move the script to the application phase as part of the GFE, make it an estimate, and provide a final script at the time of commitment (when the title agency and lender call the borrower to schedule the closing). That way the closing goes smoothly, the problems get ironed out before it is too late to do anything, and you can still have an electronic closing.
2. Drop the tolerances until Congress gives HUD authority to impose tolerances. Allow brokers to estimate charges they have no control over (like recording fees) by providing a range.
3. I just saw a closing statement with a $165 mortgage recording fee that nobody noticed had an extra digit ($100). This stuff happens all the time. Most of the time nobody catches it. Do title agents have qulaity control plans and do quality reviews of 10% of their closings like FHA mortgagees do? Why not?
4. HUD also needs to put its money where its mouth is. HUD should commit a hundred million dollars to public school education regarding borrowing, buying insurance, and buying a home. The FDIC would probably match it to provide education on investments, saving, and banking. Stop worrying about those in foreclosure who are beyond help, and teach people what they need to know so they do not end up in foreclosure. An ounce of prevention is worth a pound of cure. Give a person a fish and he eats for a day. Give a person a fishing pole...
5. A four page GFE in color is useless. Go get four of them, and see how easy it is to flip pages back and forth to compare costs and terms. What was wrong with the one page Pollock disclosure that everyone likes? See the article at http://www.aei.org/publications/filter.all,pubID.27144/pub_detail.asp and the form at http://www.aei.org/docLib/20070521_Pollock1.pdf.
6. Revamp the HUD-1. Starting on page 2 is crazy. Borrowers should be able to compare GFE numbers and closing costs side by side on the same page (page 1).
7. Cost averaging should be limited to costs that are billed monthly and are not known at closing. HUD has no clue how to create a level playing field. HUD should also not shoot its mouth off about how much title agents are overcharging until HUD personnel have walked a mile in their shoes. Does any title agent think he or she is paid 40% more than they deserve?
8. HUD should stick to its mandate - closing costs. It has no business jumping into the FRB's domain of disclosing loan terms. Besides, the FRB has committed to revamping TILA disclosures for all types of loans. The FRB started with credit card disclosures last year. HELOCs are next, and then closed end loans. Why does HUD need to interfere with what the FRB has on its schedule? It took 12 years for HUD to dump the Servicing Disclosure Statement. All of a sudden it has to jump in and add loan disclosures?
9. Let the FRB impose locks on loan originator compensation. The FRB has much broader authority than HUD to stop lending abuses. HUD looks like it is trying to one-up the FRB. If HUD wants to do something to make all brokers earn their keep, change the list of items that a broker needs to provide to earn a fee (Statement of Policy 1999-1). Add an accurate GFE as a mandatory service. Let the broker prepare an updated GFE seven days before the closing if the first one is not accurate. Brokers will comply with the law if they cannot get paid until they do comply.
Submitted by Jillayne Schlicke on May 7, 2008 - 9:47pm.
All this can be fixed by making all loan originators, no matter where they work, (bank, broker, consumer loan lender, credit union, correspondent lender, savings and loan, pawn shop, payday lender) a fiduciary for the consumer.
The industry has fought this....but it's coming. Why not embrace it now and leave RESPA alone?
The reason why is that lenders are afraid of lawsuits from private attorneys more than they're afraid of HUD.
Submitted by Diane Cipa on May 8, 2008 - 1:39pm.
Jillayne: How would you make that happen and how would YOU define the duties?
Submitted by Jillayne Schlicke on May 8, 2008 - 2:16pm.
Hi Diane,
Making it happen at the federal level is a good idea because it would be a more uniform playing field for all LOs, no matter where they work and no matter what state they're in.
Having a patchwork of state laws is a huge burden on a national company trying to operate in all 50 states.
As to how I would make it happen, well we would need industry support to work with the senate and congress. Right now NAMB ferociously opposes fiduciary duties. I don't I'm going to personally change their mind anytime soon.
Some will have to be dragged kicking and screaming.
However, the industry is WAY better off working WITH legislators instead of having the bills created without the industry's guidance.
General Fiduciary duties are to act in the highest good faith and loyalty for one's client.
Putting your client's interests above your own interests.
An LO would not have to guarantee the "best rate" or the "lowest fees."
Instead, F-duties are more of a process and not another disclosure form to be signed.
Here's an example:
1) email the consumer a good faith estimate.
2) review each line of the GFE with the consumer, taking care to make sure fees are fully explained. Next, make sure that your client understands your explanation.
Another fine example is how there are many deceptive ways of explaining a yield spread premium, almost all of which are not entirely clear and direct and honest.
Instead of improving forms, we need to improve the people who complete the forms, deliver the forms to consumers, explain the forms, and answer questions about those forms.
Submitted by Diane Cipa on May 8, 2008 - 2:28pm.
Hi, Howard: I see your concerns and as you are an advocate for title professionals I can understand some of your positions.
Let's take #1 for example. I don't disagree that pre-shopping education is preferred but it's likely beyond the control of the industry or government unless they wish to require counseling before consumers are permitted to shop for a mortgage loan.
The form of the GFE - being in color and in separate pages and categories - is one that semi-literate consumers might find easier to use. HUD has made an effort through testing to find the form which consumers find the most friendly.
Without mandatory counseling, the GFE, with its structure and boilerplate being uniform, can be used by consumers with various levels of education and reading ability.
I understand the desire to subject the mortgage lender to the task of reading the script, however, I think this misses a key end goal of the script.
The script is meant to be a safety net, a final check to make certain that the consumer is getting what they bargained for in the shopping and mortgage approval process.
The script is a part of the HUD-1. Remember that the mortgage lender has already provided ALL of this information in the GFE. So, as part of the closing, the closer reviews the HUD-1 and reads the script.
The knowledge that the script WILL be read at closing should serve to motivate mortgage lenders to fix problems before sending the transaction to the table.
You cannot believe how much time is wasted in HUD preparation and closing table time because the lender and the borrower is not on the same page.
Forcing lenders, through the burden of compliance, to do a better job of quoting pricing and following through with interoffice communications through the lending process to the closing table will help those of us who are at the end of the line.
The reading of the script is easy. The explanations included in the script simply replace other words already being spoken at the table.
It requires some discipline not to ad lib, but that's a surmountable hurdle.
Preparation of the script will be darn easy once software has been upgraded to include it. Until that time, we'll all do stuff manually just as we did the initial escrow accounts statements and aggregate adjustments and prorations, etc.
As to whether the closing is electronic or not, I don't see how having the script impacts the methodology. There are two types of electronic closings. If you have a human notary sitting with the consumers using an electronic seal, they read the script. If you have a remote closer using a video feed and a POA, the remote closer reads the script via the live feed to the consumer. It works either way.
Submitted by Diane Cipa on May 8, 2008 - 2:31pm.
Jillayne: I'm on board with any effort to move in that direction.
Submitted by Diane Cipa on May 8, 2008 - 3:31pm.
"7. Cost averaging should be limited to costs that are billed monthly and are not known at closing. HUD has no clue how to create a level playing field. HUD should also not shoot its mouth off about how much title agents are overcharging until HUD personnel have walked a mile in their shoes. Does any title agent think he or she is paid 40% more than they deserve?"
Average cost pricing is OPTIONAL in the proposed reform.
I do not believe it's HUD's goal, nor should it be HUD's goal to create a level playing field. I believe their goal is the protection of the consumer.
I don't see this carefully thought out reform proposal and "shooting off its mouth", but proposal for a method of disclosure that will make the terms of mortgage financing more easily understood by consumers. I expect that with full information and less obscure disclosures, a free and competitive market will allow players to find their real value.
I have reason to believe that HUD does have on staff folks who have walked the walk.
Who says whom is paid 40% more than they deserve?
Submitted by Dave Wirsching on May 8, 2008 - 4:55pm.
Diane -
There won't be a free and competitive market, and that's the point everyone is making.
Submitted by Diane Cipa on May 9, 2008 - 6:57am.
Well, "everyone" may be right or "everyone" may be wrong. Time will tell.
Forecasts of likely outcomes, I think, rest upon who you believe has more power, the consumer or the referral network.
"Everyone" seems to think the RESPA proposal will promote referral networks and give them a greater power to lock down competition and therefore consumers will lose.
I believe the RESPA proposals empower consumers with more information and transparency in pricing.
I find it interesting that the "everyone" who have created and currently enjoys referral networks are the "everyone" fighting the RESPA proposal.
What gives?
Submitted by Dave Wirsching on May 9, 2008 - 7:19am.
Diane - your support of these changes is based upon the assumption that the vast majority of consumers will exercise their right to shop. If they shop, they will create a competitive marketplace, and therefore the rules changes will work. Your fundamental assumption is flawed and therefore your analysis of the rules is flawed also.
This isn't about power of referral or the consumer, it’s about motivation. Your faith in consumer's motivation to shop is misplaced.
Take autos, for example. High value, important purchase. There is a vast amount of credible and useful information available to consumers that they could use to make an informed decision. Yet, as any auto dealer will tell you, the vast majority fail to use the information and walk right into the dealer to make a purchase.
Do you think that real estate services, with less credible shopping information and a lower frequency of use, are somehow going to radically different? If you think so, why?
There will always be a segment of consumers who shop, but I can't see them being the majority. Without the majority of consumers shopping there won’t be a significant enough marketplace for competition. Without competition the RESPA reforms become toxic to everyone but the large lenders and affiliates.
Submitted by Diane Cipa on May 9, 2008 - 7:48am.
Hi, Dave: That's an interesting analogy. Consumers who wish to shop when purchasing a vehicle are able to find information and comprehend it, if they choose. I know when I walk into a dealership how much the dealer is making and I decide - or rather my husband does because he does this research - how much I want to pay. We make our offer based upon the dealer making $500. We pay cash. We walk and find another dealer if these folks don't go for the offer.
The mortgage marketplace is not so transparent. It's really hard for even sophisticated consumers to find data and comprehend data when shopping.
Yes, some people buy based upon emotion and some are careful shoppers.
That can't be legislated or regulated.
Creating a market in which data is available in a useful form for those who choose to pay attention is what this is all about.
I'd rather have the label on the medicine bottle than not. It's my business if I choose to read it.
I would hope that given all the terrible harm experienced by so many consumers that there is a hunger out there for a better way and that creates new opportunities for new business models.
The old obscure and selfish methods have got to go.
Submitted by Diane Cipa on May 10, 2008 - 9:26am.
"Do you think that real estate services, with less credible shopping information and a lower frequency of use, are somehow going to radically different? If you think so, why?
There will always be a segment of consumers who shop, but I can't see them being the majority. Without the majority of consumers shopping there won’t be a significant enough marketplace for competition. Without competition the RESPA reforms become toxic to everyone but the large lenders and affiliates."
Dave: I've been giving this more thought.
Here's why I think consumers in a real estate transaction will be more likely to shop.
We've had extensive media coverage and publicity concerning the competence and integrity of all players in real estate. Add to that the explosion of real estate blogs.
Real estate bloggers tend to be independent pundits who want to express their expertise and inside information. Through Google Alerts I read snippets of real estate agent blog posts all day that include advice on how to buy title insurance and why the consumer should buy it.
This type of information coming from real estate sales agents is a new dynamic in the marketplace.
I continue to believe the blog medium is extraordinarily powerful and the impact on the marketplace of hundred and thousands of real estate bloggers is yet to be demonstrated.
It's my opinion - I may be wrong - that the net result will be a far more open and competitive marketplace with the point of sale moving to an earlier stage in the transaction, meaning that providers will need to be out there speaking to consumers and seeking the order early rather than waiting around for a referral from the real estate agent or lender.
Regarding your concern that the RESPA proposal will be toxic if there is no open marketplace, is there a specific part of the reform that is concerning you?
I confess I'd prefer to not have the volume discounts and average cost pricing in the final rule and I will comment that I believe those options are not well defined and likely to create problems later, but I can live with them if we have to.
I really love the GFE, HUD-1 and script - with tweaks to fix a few spots.