Proposed RESPA Reform

When I read the news on HUD’s proposed reform of the Real Estate Settlement and Procedures Act (RESPA) I was skeptical. Cathy from Sequim challenged me to read the 96-page federal register document so we could all figure out what’s going on. I am here to tell you that there is one very good change coming out of this proposal. In fact, it’s so good that I am borderline hopeful that this change might do what legislation is suppose to do and what HUD forgot to do when they signed the original version of RESPA in 1974. But first, the changes that will have many, but not all mortgage brokers screaming bloody murder:

HUD wants to make the Good Faith Estimate (GFE) look the same, no matter where homebuyers apply. Right now there are many off-the-shelf (OTS) software systems that make the GFE look different from company to company. Also, some OTS software can be modified. Some fees, for example, the Yield Spread Premium (YSP), are shown down at the bottom of the form, below the “total costs

258 thoughts on “Proposed RESPA Reform

  1. Absolutely amazing Jillayne. Thank you for the short course because I could never have gotten past the first page without my eyes blurring. Plenty to keep up on as ususal. Thanks for the post. BTW, don’t the kids ever miss their mom???

  2. Jillayne, thanks for all of your hard, hard work on this — it was very informative. Regarding the lack of enforcement, there certainly seems to be no political will, either on the state level or federally, to pay for increased governmental enforcement. I wonder what will happen to that aspect in the coming months/years?

  3. Jillayne:

    I knew I could come here and get a level headed reading of the subject.

    Don’t know if I like the association of loan originators w/sociopaths. I guess you know some folks that I don’t, or it was one bad Friday:)

    My first concern on reading the new form on Friday was about the similar proposed form required by WA State. I’m 110% for disclosure, but duplicative (if not duplicitous) disclosures can harm borrowers, because it bombards them with paperwork, and they give up trying to understand the important features.

    It reminds of the scene in Amadeus, when Emperor Joseph II is trying to explain his critisism of Mozart’s masterpiece and finally can only offer “There’s simply too many notes”.

    Re YSP, I can already hear the crowing about how it’s going to better/easier for the LO at the banks or doing correspondent instead of brokered loans, since they don’t have to disclose the YSP.

    ComPLETEly agree about the enforcement of FHA originations.

    I’ll dig into the 96 pages later.

    Meanwhile, my head is still spinning from the tsunami of changes arriving daily in the past week.

  4. Hi Jim Dub,

    Actually, I’ve raised my children to become sociopaths so that they wouldn’t have to bother with pesky emotional problems such as “missing me.” Parenting is much more efficient this way.

    /sarcasm off.

    This may be a sign that I’ve been spending too much time over at The Onion.

    Life is a work of art or perhaps a song. Working parents find their own patterns and rythm and somehow most everything gets done.

    Thanks for the compliment; glad to be of help.

    Your boys must be as big as my girls by now!

  5. Hi sfvre,

    You’re welcome. In the coming months/years, it is my opinion that the money needed to enforce the onslaught of new federal and state laws will come from increased fees levied on the practitioners.

    Banks, lenders, and brokers will all have to pay more in fees to their government regulators, will pay higher costs for internal compliance control measures, and will pay higher legal fees. All this will be passed on to the consumer in the form of higher consumer fees.

    This is ironic in that RESPA was created to help LOWER settlement costs to homebuyers and refinancing homeowners.

    We will all hold out hope that the invisible hand of the free market will guide competitors to compete on price.

    I have been saying for years now that if the industry wants government off their back, they must self-regulate: In the long run, it will save companies money.

  6. Hi Roger,

    I’m not so sure Correspondent lenders are going to be able to be treated like a bank this time around in regards to not disclosing their YSP to the consumer. From the way I’m reading the register, a correspondent lender is considered as a mortgage broker for the purposes of the proposed new rules.

    Click on the link for the federal register and do an acrobat keyword search on the term “correspondent” to read what I’m reading.

  7. J:

    Dang, you gave ME a homework assignment before I could give you one!

    Your kids growing up to be sociopathic LO’s give me the widdershins!

    I think the new GFE is an improvement (with exposure of neg am, prepay dollar amount and terms), but they may have gone overboard. Did you see the section where you can compare quotes from other lenders?

    It’s kind of like Microsoft Vista, they may have packed too many features in, and sucked up all the available RAM in the borrowers’ brains.

    I WAS pleased to see that borrowers that used the new GFE’s saw the benefit of lower low loan costs over lower rates, at least that’s how I read the report.

    I’ve been preaching that sermon for years!

    I’m going to work on the YSP thing, coming back soon!

  8. Thank you Jillayne for your insightful comments… I was only kidding about the homework assignment but the summary reviews might make good vacation reading…. no really you did a great job summarizing what is an initimidating document.
    Anyway, I don’t think I am a sociopath but one way around having to refund a YSP to the borrower at closing would be to overestimate the YSP on the initial Good Faith Estimate. I actually like it that everyone must use the same form and I believe we can all adapt to this even though the new GFE seems a bit wordy… reminds me of filling out tax returns.

  9. Jillayne:

    Did as you suggested. It certainly seems they intend to treat correspondent lenders the same, but it’s not as clear as to exactly how.

    Worthy of future studies. Meet me at the library for “homework club” ? 🙁

    You know, one could call you a policy wonk, and not insult you….:)

  10. I went through the script and can honestly say that I have always done closings hitting all these points.

    It will be very helpful to have the GFE when there are differences to explain. Escrow Officers are usualy at a loss without knowing what the Borrower has been told.

  11. How can you disclose YSP when you don’t know what it’s going to be until it’s locked?

    These changes will only result in higher fees to the borrower. Every broker that I’ve spoken too all say that they will increase fees because of the extra work having to be done by the LO and processors.

    This will make even less sense to the borrowers.

  12. Hi Jeff,

    You’re right. This has also been a problem for consumers as well. Inside the federal register are research findings that go on for pages and pages of consumer groups who have submitted research to HUD showing that time and time again, the YSP did not decrease the cost to the consumer but instead, YSP was used to increase the fees to the broker. Many of these groups were trying to get YSP re-defined as an “unearned fee” which would mean it YSP would have been classified as an illegal kickback under RESPA Sections 8 and/or Section 9. I believe brokers/LOs are lucky to still be earning ANY YSP at all.

    In terms of raising costs, that’s the NAMB party line.

    Competition translates into lower fees in a capitalist economy.

    Competition also means that often, (not always) the best and brightest have the opportunity to charge and earn higher fees.

    So getting back you your original example, a broker/LO could quote a higher YSP, and then when the loan is locked, if it’s lower, the difference goes back to the consumer.

    Yet the problem for that broker/LO is that the consumer can shop for a better deal and find another broker who is willing to quote LESS YSP and give the borrower the better rate.

    HUD’s new rules are allowing consumers to see exactly how much the broker/LO is making.

    Many brokers/LOs that I meet don’t have any problems at all with justifying their fees to their clients.

  13. Jillayne,

    I’ve read some of the research findings. I stopped after I started thinking and realized that the subjects were asked to take part in research. Although it was random, it isn’t like they didn’t know they were taking part in research. Things people say are sometimes different than what they will actually do.

    If YSP is defined as an “unearned fee” the investors will find another way to pay the brokers. Is as simple as that. If anything should be done it should be to limit the amount of the YSP.

    Competition does result in lower fees in a perfect world. But as you know this isn’t a perfect world. As costs of everything seem to be going up so will our fees. The only way to offset those fees is the current system of YSP. Yes it gets abused, but the answer is not eliminating it. Just limit it.

    However, it won’t matter in the long run if we cannot earn YSP’s. We’ll be in the same boat as every other broker. It will raise the costs to the consumer even though there is competition, because most borrowers don’t/won’t shop and after sitting in someone’s office for an hour and coming out more confused, they don’t want to do it again.

    Justifying fees isn’t the problem. The borrower having enough money to pay those fees is.

    The bottom line is that the only way the consumers will be helped is if they shop. You can educate them all you want but that will not make the majority smarter borrowers. “You can lead a horse to water but you can’t make him drink.” I don’t believe that the majority of the borrowers shop and I don’t believe they will just because they’re told to.

    Unless you live in an upper class, highly educated market, many borrowers don’t have the understanding and don’t or won’t take the time to be educated and don’t have the money to pay higher fees.

    I could go on but I just realized how much I wrote….I think I’ll just go into development and let you guys worry about this.