Should a real estate agent making a referral to a third party provider have an obligation to give an accurate fee quote?
Posted in RESPA reform By Diane Cipa, Sunday, April 6, 2008.Under the proposed GFE rule, a loan originator may relieve themselves of the burden of third party fee quote accuracy by NOT giving the consumer the name of providers. The loan originator can suggest that the consumer shop for those services themselves. In this case, the loan originator must still provide a quote for these third party services, however, there is no tolerance burden for accuracy.
In these cases the consumer may still be referred to third party providers by the real estate agent and I wonder if HUD should extend some duty for accuracy to the real estate agent. Real estate agents do not provide GFEs but in the case of affiliated businesses, they are required to provide a written quote of fees charged by the affiliated business. Should HUD adjust the RESPA affiliated business disclosure rules so that the fee quote has a tolerance burden similar to that of the proposed GFE?
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Submitted by Matt Carter on April 8, 2008 - 1:39pm.
So Diane, it sounds like you are saying that in trying to provide an out for loan originators who don't want to package, HUD may be inadvertently creating a loophole for AfBAs?
Most of the group probably doesn't need it, but here is some background on what I think Diane is getting at here.
In order to protect consumers from unexpected changes on the fees they are promised on the Good Faith Estimate (GFE), and what they are actually charged at closing (the numbers on the HUD-1), HUD would impose tolerances on those fees.
Loan origination fees -- which originators can presumably control -- would not be permitted to change at all. Other charges, including settlement services like title insurance, could not change by more than 10 percent IF borrowers use services that are selected or identified for them by loan originators (see page 3 of proposed GFE).
Some people think tolerances might encourage borrowers to choose settlement services that are packaged with mortgages by loan originators. That might be good from a borrower's perspective if they end up getting a better price, but bad if it leads to less competition down the road (because not everybody will be in a position to package, and borrowers may not be that eager to go shop on their own).
For loan originators who may not be in a position to offer packaging, or who may have worries about staying within the tolerances, HUD proposes an out: If the loan originator doesn't select or identify the settlement services provider -- in other words, if the borrower picks them on their own -- the 10 percent tolerances don't apply. The settlement services fees charged on the HUD-1 don't have to match the estimate on provided on the GFE.
Diane seems to be worried that if the borrower goes out shopping for title insurance or other settlement services on their own, their realtor might direct them to an affiliated business which could quote them one price and charge them another at closing. Could this be a problem for non-affiliated businesses too? Or is this only a potential problem when the real estate agent is providing the quote?
Submitted by Diane Cipa on April 8, 2008 - 2:11pm.
Hi, Matt: Well two things. I would hesitate to use the word PACKAGING when discussing the RESPA reform proposal because the proposed rule has NO packaging option.
Any loan originator that makes a referral for third party services, whether affiliated or not, must quote accurate fees. The accuracy will be judged okay if the actual cost on the HUD-1 doesn't exceed the GFE quote by more than the 10% tolerance. So, even giving the borrower a list of names of providers creates the compliance burden for quote accuracy on the GFE.
The loan originator may choose to never give a referral or name and instead simply instruct the borrower to shop for the services on their own. In this case, the compliance burden for quote accuracy has been eliminated.
My concern is that HUD is attempting to create a reliable shopping experience for the consumer and under the existing rule and proposed rule there is no requirement that the real estate agent provide an accurate quote when they make a referral for third party services.
It seems reasonable that within affiliated companies, the real estate agent should know the fees being charged by affiliated third party service providers. Perhaps, then HUD should tighten the affiliated business disclosure so that the real estate agent or any affiliated business for that matter has to make a more concerted effort to be accurate. If that is the case, a 10% tolerance would seem doable.
You mention non-affiliated real estate agents and I agree, it would really be an issue for both affiliated and non-affiliated. If the consumer is referred or steered to a third party provider, does the person doing the steering, whether affiliated or not have a duty to give an accurate quote? I think yes and I think a 10% tolerance is reasonable.
Steering, however, isn't dealt with in this proposal but we can always make suggestions in comments.
Submitted by Matt Carter on April 8, 2008 - 2:35pm.
OK, thanks for elaborating on that point Diane. I guess it's not so much that they would be creating a loophole for AfBA's, but leaving in place an existing situation where real estate agents don't have to provide accurate quotes when providing referrals for third party services.
As far as using the word "packaging," I guess I'm OK with it because HUD says in its analysis "this proposed rule will encourage the packaging and bundling of originator and third-party services without a broad safe harbor."
The entire passage from p. 319 of HUD's analysis:
"First, HUD included tolerances in the new GFE, which will encourage lenders to negotiate with third-party providers in order to reduce their costs. Second, this proposed rule encourages volume discount arrangements, which will also lead to more competitive third-party prices. Third, the proposed rule also allows lenders and other service providers to average cost price. Fourth, the new GFE itself is a much improved shopping document over the existing GFE requirements; for example, individual fees are consolidated into broad categories and a summary, first page provides the shopper with key information to select the least expensive loan package. Thus, the proposed new GFE already includes many of the shopping benefits and cost-reducing features that would have been offered by packaging. Finally, this is all accomplished without having to offer a Section 8 exemption to the industry. It is also anticipated that this proposed rule will encourage the packaging and bundling of originator and third-party services without a broad safe harbor."
Submitted by Diane Cipa on April 8, 2008 - 4:14pm.
Exactly, Matt. HUD, whether intentionally or not, leaves this quote loophole in place.
HUD can't fix everything and I can live with the loophole but I plan to mention it in my comments just in case it was an unintentional oversight by HUD.
On the packaging issue, what I guess I'm trying to say is that this new rule doesn't create a packaging option like we saw in the previous proposals. There is no safe harbor and packaging does not, in my opinion, create any benefits for the consumer that a free and competitive market won't achieve on its own.
So, you can package or not, the disclosures remain the same and the loophole we were discussing remains the same. Packaging doesn't create any dynamic which affects either issue.