Origination News Feature Story

Focus on GFE in RESPA

By Brian Collins

WASHINGTON-If the Department of Housing and Urban Development really wants to finalize a Real Estate Settlement Procedures Act rule by year-end, it should pare down the proposal and focus solely on improving the good-faith estimate, according to industry groups.

HUD has received over 2,500 comment letters on its RESPA proposal that would require lenders to provide mortgage applicants with a standardized four-page GFE that discloses key terms of the mortgage and settlement costs.

However, the RESPA proposal issued in March allows lenders and other settlement services providers to use volume discounts and average cost pricing, which scares owners of small companies who are afraid volume discounts will give big companies a license to drive down prices.

The RESPA rule also requires closing agents to read a "closing script" to the homebuyer that compares the loan terms and settlement charges estimated on the GFE with those on the HUD-1 settlement sheet. No one expected HUD to introduce this new element into the closing process and trade groups like the American Land Title Association and the Mortgage Bankers Association are concerned it will cause problems and confusion at the closing table. In addition, the four-page GFE has come under criticism for conveying too much information to the consumer and its attempt to disclose fees received by mortgage brokers is misleading and hard to understand. The National Association of Realtors wants the GFE simplified and reduced to one page. The NAR also has asked HUD to withdraw the RESPA rule and start again. The RESPA rule "tips the balance in favor of the largest financial industry players, opens the door to legal challenges, and does little if anything to benefit consumers," said Adam Cockey, who chairs NAR's Real Estate Services Forum.

"Every trade group has a different reason why they don't like it," according to RESPA attorney Phillip Schulman. "Hopefully HUD will seriously consider the comments and focus on GFE and make it simpler and clearer," he said. Mr. Schulman is a partner at K&L Gates in Washington.

Time is running out on the Bush administration and HUD officials know they only have seven months to finalize the RESPA rule. They also know the trade groups are trying to delay the process and run out the clock. "We are committed to finalizing this rule before the end of the administration. I believe further delays help nobody," HUD assistant secretary Brian Montgomery said last month. He stressed during a speech at the National Press Club that the RESPA proposal will help to make the mortgage more understandable to borrowers and require all mortgage lenders and brokers to clearly display an estimate of all settlement services, fees and charges. "The industry should embrace this rule as a best practice that strengthens their business and better serves their customers," Mr. Montgomery said. Fueling more opposition to the rule, a study by the Realtors shows HUD underestimated the compliance costs of implementing the RESPA rule.

HUD estimates the costs associated with the revised GFE would be about $45 per loan.

The NAR study found the costs would be $300 after applying more realistic assumptions and accounting for additional hedging and underwriting costs. HUD estimated the closing script would cost about $54 and take 15 minutes to read to the borrower and answer questions. The Realtors study estimates it would take longer and the costs would be about $108 or double HUD's estimate.

"The National Association of Realtors' study confirms our concerns that HUD's attempt to make the settlement process easier and more affordable could very well end up making the process more confusing and more costly," said ALTA chief executive Kurt Pfotenhauer.

Meanwhile, Steve Preston has been sworn in as the new HUD secretary and he seems to be committed to RESPA reform and providing better disclosures of loan terms and costs to homebuyers. "I think it is important for individuals to understand what they are getting into. I am hopeful that can be done in a way that is not overly burdensome to the industry," Mr. Preston said during his confirmation hearing.