Origination Views

Eyeing Proposed RESPA Rule Changes

By David Kittle

Mr. Kittle, chairman-elect of the Mortgage Bankers Association, testified on "The Real Estate Settlement Procedures Act (RESPA) and Its Impact on Small Business" before the House Committee on Small Business on May 22. Following is an excerpt from his prepared testimony.

HUD's proposed GFE and HUD-1 ... would revise the requirement for disclosure of yield-spread premiums from lenders to mortgage brokers as "a charge or credit for the interest rate chosen." This amount would be subtracted from the lender's and broker's "service charge" to arrive at the "adjusted origination charge."

While MBA appreciates HUD's efforts to clarify the function of a YSP in relation to the interest rate, HUD's approach to mortgage broker disclosure, in MBA's view, would be unclear to borrowers. In fact, it further obfuscates the issue by disclosing discount points as charges in the same block as YSPs.

MBA believes that by adopting a new terminology for mortgage broker fees, the costs occasioned by this change for lenders, brokers, and other ancillary businesses large and small will be enormous. If allowed to occur, the costs that would be occasioned by consumer confusion would also be enormous for the industry.

In this vein, MBA opposes the use of the term "originator" and also opposes changes to the definition of "mortgage broker" in the rule, which confuse the respective functions of mortgage bankers and mortgage brokers.

From the preamble to the proposed rule and the economic analysis, MBA understands that HUD's approach was shaped by concerns from mortgage brokerage industry advocates and the Federal Trade Commission (FTC) that the form should provide a "level playing field" between brokers and lenders. But MBA believes that both of these assertions are incorrectly premised and typify confusion about brokers' and bankers' respective functions.

Lenders and brokers perform distinct functions in the marketplace and are perceived differently by consumers. They are not the same players; they do not play the same game, and applying the same rules to them is ill-advised. Mortgage brokers act as middlemen to arrange mortgages; mortgage bankers lend money. Consumers regard brokers as shopping for them and they tend to stop shopping when they use brokers. On the other hand, consumers regard bankers as sources of their own loan products whose prices they shop and compare. Brokers and bankers have different incentives and regulations, and brokers present greater risks of consumer steering.

Specifically, considering that consumers regard brokers as middlemen shopping for them, it is wholly appropriate for the consumer to know if the broker is also receiving a fee from the lender based on the consumer's choice of a higher rate. Armed with compensation information, and other information on the relationship between the interest rate and settlement costs, the consumer can make informed choices and avoid steering and abuse.

In order to make clear the differences between mortgage bankers and mortgage brokers and policy recommendations, as indicated, MBA has just published a policy paper on this subject to assist policy makers, which it is presenting to this committee as an appendix. It comprises a careful analysis of the differences between these two businesses, why they warrant different regulatory treatment, and MBA's recommendations on appropriate policies.

While MBA appreciates HUD's efforts to establish a GFE application to facilitate shopping, this aspect of the rule should not be finalized until it is made clear how this change will interface with other laws.

A significant complication that lenders will face in light of these proposed amendments stems from the proposed revisions to the definition of "mortgage application." The proposal would replace this definition now found in RESPA's implementing regulation, and would establish two new definitions that, in effect, would bifurcate the mortgage application process into two distinct phases -- the "GFE application" phase and the "mortgage application" phase. The proposal is much more than a mere change of language, however. The impact of this redefinition has repercussions that extend well beyond RESPA, and may significantly alter legal and regulatory responsibilities under other laws and/or engender great confusion if not clarified.

Specifically, changes in the definition of "application" impact TILA and "Regulation Z," the Equal Credit Opportunity Act and "Regulation B," Home Mortgage Disclosure Act and "Regulation C," Fair Credit Reporting Act rules, and Section 311 of the Fair and Accurate Credit Transactions Act of 2003 concerning the risk-based pricing notice.