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October 28, 2002
Rules Docket Clerk
Office of General Counsel
Room 10276
Department of Housing and Urban Development
451 Seventh Street, SW
Washington, DC 20410-0500
RE: Docket No. FR-4727-P-01 -- Real Estate Settlement
Procedures Act (RESPA); Simplifying and Improving the Process of
Obtaining Mortgages to Reduce Settlement Costs to Consumers
Dear Sir or Madam:
The Conference of State Bank Supervisors (CSBS) is pleased to have
the opportunity to comment on the Department of Housing and Urban
Development?s (HUD?s) proposed amendments (Proposal) to the rules
that implement RESPA. The Proposal presents significant changes
that will affect consumers, state bank regulators and state
regulated entities. CSBS is the national organization of state
officials responsible for chartering, regulating and supervising
the nation?s 6,500 state chartered commercial and savings banks
and over 400 state-licensed branches and agencies of foreign
banks. Many perspectives in CSBS? comments are derived from the
experience state bank regulators have in supervising mortgage
brokers, mortgage bankers, and other non-depository institutions.
Background
HUD issued its proposed rule under RESPA to simplify and improve
the process of obtaining home mortgages and reduce settlement
costs for consumers. RESPA governs settlement costs, settlement
fees and the disclosure of such fees to consumers. The Proposal
was published in the Federal Register on July 29, 2002 and
requested comments from affected parties by October 28, 2002.
The Proposal follows a joint study completed and published in 1998
by HUD and the Board of Governors of the Federal Reserve System
that identified certain weaknesses in the manner in which
consumers obtain mortgage credit. The 1998 study found that the
process of refinancing a home remains too complicated, too costly,
and too opaque for many borrowers. In addition, under current
rules, many borrowers are provided estimated settlement cost
information on a Good Faith Estimate (GFE) only after paying a
significant fee required by loan originators.[1]
This prevents consumers from shopping for mortgage products based
on the amount of fees and the final Annual Percentage Rate (APR)
involved in the transaction. The preliminary GFE information,
although expected to be close to the final costs involved in
closing a loan, is often unreliable and understated. The Proposal
indicated that such concerns regarding the mortgage process remain
largely unaddressed.
Generally, the Proposal seeks to target these concerns by: (i)
better equipping consumers to effectively shop for the most
suitable mortgage products through more streamlined and condensed
disclosures; (ii) reducing regulatory red tape and fostering
innovation; and (iii) reducing consumer costs associated with
closing on mortgage transactions.
Proposed Approach
HUD?s Proposal offers a dual approach to the settlement market.
The first approach includes a revised GFE that includes specific
tolerances limiting the amount that final settlement charges can
exceed initial estimated figures. This approach also presents a
new method of reporting wholesale lender payments in brokered
transactions. The second approach features guaranteed costs based
on a package of settlement services. Under the Proposal, consumers
and originators can use either approach, which HUD suggests will
allow the market to determine the best alternative given a
specific set of circumstances. Both approaches require that the
costs be made available to the borrower for a minimum of 30 days.
HUD?s Modified Good Faith Estimate
The revised GFE approach simplifies the process of originating
mortgages by consolidating costs into a few major categories. This
new approach should improve the level of clarity that is available
through the current GFE because the existing GFE contains an
extensive list of [?junk?] fees that can overwhelm and confuse
consumers. The new GFE also makes estimates more certain by
requiring loan originators to adhere to amounts reported on the
GFE for major cost categories and by allowing loan originators to
exceed estimates by a tolerance of no more than ten percent. The
new approach should reduce instances in which consumers pay
amounts at settlement that are significantly higher than figures
that they received on their GFE. This revised approach should also
make the process more easily understood by more borrowers and
allow consumers to effectively shop for lower fees involved in
residential loan transactions.
Section one of the new GFE would require that loan originators
describe their services. The new GFE also ensures that, in
brokered transactions, borrowers receive the full benefit of a
higher price paid by wholesale lenders for a loan with an above
average interest rate. The Proposal indicates that the goal of
this change is to make sure that yield-spread premiums are
properly credited to borrowers. Brokers must also clearly report
the total origination fees they receive on the GFE and the HUD-1,
instead of the current practice of reporting their origination
fees net of any yield-spread premium. The Proposal also clarifies
that loan originators can make arrangements with third party
settlement service providers (such as bulk discounts) to lower
prices for borrowers, provided these prices are passed on to the
consumer and that the arrangements don?t include kickbacks or
payments for referred services.
Guaranteed Packages of Settlement Services
The new Guaranteed Cost or Packaging Approach would replace the
GFE by offering a lump-sum price for settlement costs that would
provide a specific, guaranteed settlement cost to consumers. The
?Guaranteed Mortgage Package Agreement? (GMPA), which in essence
becomes a contract between the originator and the borrower and
replaces the GFE, includes all origination and settlement services
needed to close a mortgage. The GMPA would also include a
guaranteed interest rate, subject to change if the borrower does
not lock-in a rate. Essentially, the GMPA would reduce a loan
offer to the settlement package price, an interest rate, an APR,
and a PMI premium rate. HUD hopes this will allow borrowers to be
better informed, shop more easily, and obtain mortgage credit that
best suits their needs at the lowest possible cost. However, the
Proposal makes clear that the GMPA cannot be offered on loans
defined as high cost by the Home Ownership and Equity Protection
Act (HOEPA).
Those entities using the GMPA approach would receive a safe harbor
from current prohibitions found in Section 8, which would provide
protection from charges of illegal referral fees, kickbacks, and
unearned fees. HUD provided the safe harbor to enable ?packagers?
to pursue lower prices with third parties that offer settlement
services and products notwithstanding existing language in Section
8 of RESPA that prohibits such arrangements. Through this
approach, HUD assumes market competition and innovation would be
an appropriate substitute for regulation.
CSBS Position
CSBS commends HUD for its efforts to simplify the process that all
consumers confront when they seek to obtain mortgage credit. CSBS
also strongly supports efforts to expand the suite of regulatory
tools that can be used to combat confusing and deceptive lending
practices. The Proposal seeks to broaden such tools through a
revised GFE, by specific reforms regarding how fees and other
forms of compensation charged by mortgage brokers are reported,
and by allowing guaranteed packages of settlement services, an
approach that is currently restricted under existing RESPA rules.
Our analysis and perspective on the core elements of the Proposal
follows.
Revised Good Faith Estimate
CSBS commends HUD on its attempt to simplify and streamline RESPA
forms, making them more easily understood and better tools to
facilitate comparison shopping of mortgage products. Grouping
certain fees together and condensing costs on the GFE will help
consumers to better understand what specific costs they can expect
to pay at closing and will allow consumers to more easily shop for
lower fees. CSBS also supports the proposed requirement that the
GFE be provided to consumers before loan originators accept
initial loan fees.
Providing clear definitions about which fees are to be included in
the condensed fees will also benefit consumers by providing
improved consistency between lenders and brokers. This proposed
change should provide significant value.
CSBS also supports the inclusion of tolerance levels in the
Proposal. Currently, although originators are required to provide
a good faith estimate of costs, they are not required to observe
the estimated/listed fees in the GFE. Accordingly, disreputable
originators can misrepresent their prices, seemingly undercutting
their competitors, without being held accountable when actual
settlement costs are much higher.
The combined proposed changes should significantly help consumers
shop for the best mortgage products for their individual needs.
CSBS is therefore supportive of these elements of the Proposal.
Guaranteed Mortgage Packages
While CSBS sees considerable benefits in the proposed changes to
the GFE, state banking regulators are more skeptical of the value
that the GMPA approach would provide to consumers. One reason for
this concern is that several states have laws that prohibit
kickbacks and limit referral arrangements. This approach would
violate those laws that are designed to protect consumers from
collusion and unfair treatment without providing clear evidence
that the market driven, guaranteed mortgage package approach would
provide greater relative benefits to consumers.
In that regard, CSBS questions HUD?s basis for assuming that the
Proposal will reduce fees based on market competition. The
Proposal included no empirical evidence that suggests that
settlement fees will be reduced, especially for less financially
literate consumers. Because the GMPA approach consists of a
general package price without many details, it would be easier for
a disreputable loan originator to hide unjustified fees. This
approach could be most detrimental to those borrowers that are
more vulnerable to predatory lending practices. Furthermore, by
using this approach, lenders will be given a safe harbor from
Section 8 and will be beyond enforcement from regulators. How will
HUD monitor for abuses associated with this approach? How will HUD
address abuses?
Additionally, the GMPA approach suggests a relatively high level
of financial literacy, an awareness that one should shop for the
best mortgage package, and an awareness that a mortgage broker or
other intermediary may not be shopping for the best overall
package for the consumer/client. There may be a segment of
consumers who are left more, not less, vulnerable from the GMPA
approach.
Additionally, the GMPA approach may collide with various
provisions of many state laws, including the definition of what
constitutes an ?application? and the number of days that state
licensed and regulated lenders are required to act upon an
application. CSBS encourages HUD to address this proposal in
greater detail, including an analysis of monitoring and
enforcement strategies designed to protect consumers.
Preemption of State Laws
HUD?s Proposal specifically asks about preemption of state laws
and whether the Proposal conflicts with state laws. It has long
been the CSBS view that federal preemption should only take place
under a clearly articulated standard and in consultation with
affected states.
Although CSBS understands that preemption allows interstate
financial institutions to more easily operate in a uniform manner,
CSBS believes it is very important to provide state and local
communities with the opportunity to address specific consumer
protection issues. CSBS asks that if preemption takes place, and
state consumer protection statutes are displaced by the Proposal,
HUD should clearly articulate states? authority to enforce the
consumer protection measures embodied in HUD?s final rule. In that
regard, concerning enforcement, HUD indicates that it plans to
strongly enforce the new RESPA rule. CSBS would also ask, absent
the above mentioned grant of authority, how HUD plans to supervise
mortgage brokers and other non-banking lenders. Much of the
compliance oversight for such entities currently and appropriately
takes place at the state level.
Lastly concerning federal preemption, CSBS encourages HUD to refer
to section 3500.13(a) of the current regulation that states,
?State laws that are inconsistent with RESPA or this part are
preempted to the extent of the inconsistency. However, RESPA and
these regulations do not annul, alter, affect, or exempt any
person subject to their provisions from complying with the laws of
any State with respect to settlement practices, except to the
extent of the inconsistency.? Section 3500.13(b)(1) describes
what may be considered inconsistent as, ?The Secretary may not
determine that a State law or regulation is inconsistent with any
provision of RESPA or this part, if the Secretary determines that
such law or regulation gives greater protection to the consumer.?
Furthermore, according to Section 3500.19(a) of the regulation,
which governs enforcement authority, ?It is the policy of the
Secretary regarding RESPA enforcement matters to cooperate with
Federal, State or local agencies having supervisory powers over
lenders or other persons with responsibilities under RESPA..."
CSBS will therefore look to HUD for RESPA-related changes that
enhance the environment for consumers seeking mortgage credit,
without preempting state laws that currently provide a higher
standard of protection against disreputable lenders, mortgage
brokers or related mortgage originators.
State Enforcement of Consumer Protection Laws
Abusive lending practices have long been an issue and challenge
that state banking departments have invested significant resources
to address. States across the country have pursued a variety of
approaches including extensive financial literacy programs,
rigorous examinations, and robust enforcement actions including
unprecedented fines. A recent example of the commitment that state
bank supervisors have demonstrated to the fight against abusive
lending practices is found in the nationwide agreement reached
between state banks supervisors, state attorneys general and
Household Financial.
The agreement in principle with Household was announced on October
11, 2002 and represents the largest direct consumer restitution
settlement in the nation?s history. All of the expected proceeds
(approximately $484 million) will benefit consumers. A coalition
of state bank supervisors played a critical role in developing the
agreement by conducting exhaustive examinations that uncovered
unfair and deceptive lending practices. As part of this historic
agreement Household has agreed to, among other things: (i) limit
lender fees, (ii) provide written disclosure of interest rates
available to borrowers (including discount points that can
decrease the interest rate charged); (iii) provide borrowers with
a GFE that has a reasonable relationship (within a ten percent
tolerance level) to the charges the borrower actually pays at
settlement, (iv) limit the duration of prepayment penalties; and
(v) clearly disclose whether the loan package includes a
prepayment penalty.
HUD?s Proposal seeks to address many of the issues and problems
discovered during the course of the examinations that culminated
in this agreement. Sustained attention and coordinated efforts at
the state and federal levels will result in a dramatically
improved environment for consumers that seek mortgage credit.
Conclusion
CSBS wishes to applaud HUD?s efforts to make the disclosures
required by RESPA more streamlined and consumer friendly. In
addition, the fee tolerances proposed by HUD will reverse a trend
of the GFE becoming a less meaningful tool to assist consumers.
Notwithstanding some of the concerns raised regarding the GMPA
approach and preemption of state laws, CSBS fully commends and
supports HUD?s efforts to assist consumers that are navigating the
mortgage lending process.
CSBS believes that cooperative efforts between federal and state
authorities to deter confusing, and possibly abusive lending
practices will have a greater impact than individual efforts at
either the state or federal level. We would welcome opportunities
to work with the Department of Housing and Urban Development and
other relevant federal regulatory agencies to develop joint
initiatives in this area. Thank you for your consideration and we
invite you to call on us if we can provide additional information.
Best Personal Regards,
Neil Milner
President and CEO
_____________________________________
[1] As in HUD?s Proposal, CSBS uses the term
?loan originator? throughout this document to refer to lenders and
mortgage brokers. |
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