Alphonso Jackson, Secretary of Housing and Urban Development (HUD), Friday released a proposed mortgage reform package designed to help consumers better understand the terms of the loans they are considering and offering guidelines for shopping for different products.
The changes, if enacted after a mandatory period of public comment, will reform
the 30-year old Real Estate Settlement Procedures Act (RESPA).
Chief among the reforms; for the first time HUD is proposing that mortgage brokers
and lenders provide consumers with a standard Good Faith Estimate. Jackson said
that by offering consumers clearer, more certain cost estimates the average
borrower will save nearly $700.
"A lot of the mortgage problems we see today are directly related to the fact that few people fully understand this (the home buying) process," the Secretary said. "Buying a home can be very intimidating. Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that's been one of the factors driving the current housing downturn. Our proposal fixes that. We owe it to the American homebuyer to give them the information they need to make smart choices."
HUD said that the proposed Good Faith Estimate (GFE) will substantially enhance disclosure of all important aspects of the loan, including:
- The interest rate and monthly payment;
- Whether the interest rate and principal balance can increase and by how much;
- Whether the loan has a prepayment penalty or balloon payment.
HUD released a draft both of the proposed GFE and of a revised HUD-1, the settlement statement given to all borrowers at the closing on the loan. The GFE is remarkable clear for a government document. It consolidates closing costs into major categories to prevent "junk fees" and displays total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. In addition, HUD's new proposed rule would specify the charges that can and cannot change at settlement. If a fee changes, HUD proposes to limit the amount it can change. Modifications to modify the HUD-1 settlement statement are mainly to assist consumers to compare actual charges on the HUD-1 with prior estimates on the GFE.
One feature of The Good Faith Estimate is not going to make lenders happy. It would require that lender payments to mortgage brokers (often called Yield Spread Premiums) be disclosed. Lenders have already come out strongly against such a change since it was first proposed by consumer activist groups. HUD said it is its belief that these payments are directly dependent on the interest rates that consumers agree to and therefore ought to be disclosed. However, to ensure that HUD's new proposal would not create a consumer bias against brokers, the Department said it did rigorous consumer testing and found the proposed Good Faith Estimate helped consumers to select the lowest cost loan more 90 percent of the time, regardless of whether the loan was originated by a lender or a broker.
Finally, HUD is proposing that settlement agents read a "closing script" to borrowers at the settlement table and that a copy be provided to the borrower. Each proposed script - there is a different one for each loan type - restates in a clear and specific manner every loan term and also provides a graphic showing borrowers which numbers can change from that provided in the GFE and by how much. This script will provide a ready post-closing reference to the loan.
The proposed reforms go beyond the cosmetics of new forms. HUD is also proposing legislative changes to RESPA. HUD currently does not have an enforcement mechanism for some of the most important consumer disclosures and protections and so intends to seek the authority to impose penalties for violations of specific sections of RESPA.
Among the sections for which authority will be sought are those dealing with the provision of a uniform settlement statement, Good Faith Estimate, and settlement costs booklet; loan servicing; prohibition against kickbacks, referral and unearned fees; title insurance; and portions of the section regarding escrow accounts.
HUD will also ask that the Secretaries of and State and other regulators be allowed to seek injunctive and equitable relief for violations of RESPA; require delivery of the HUD-1 to the borrower three days prior to closing; and establish a uniform statute of limitations applicable to governmental and private actions under RESPA.
The proposed GFE, modifications to the HUD-1, and proposed settlement scripts can be reviewed in their entirety at www.hud.gov.