In a remarkable admission, two federal agencies have told Congress that key portions of the principal national consumer protection law for home buyers and mortgage refinancers cannot be enforced.
The Federal Reserve Board and the Department of Housing and Urban Development acknowledge in a new report that the Real Estate Settlement Procedures Act promises consumers an impressive list of protections against costly misrepresentations and fraud by real estate agents, lenders, loan brokers, title and escrow companies.
But, the agencies admit, there are no teeth to back up some of those promises.
“Some of the most important consumer provisions included in [the settlement statute] are unenforceable,” say the Fed and HUD in a joint study conducted for the House and Senate. The report seeks to help Congress revamp the 25-year-old settlement procedures law and the 30-year-old Truth-in-Lending Act.
For example, the agencies say, “quality information [about transaction costs] early in the home-buying process is a primary concern” for any intelligent consumer. Yet as currently drafted, the Real Estate Settlement Procedures Act does not provide HUD with enforcement authority in the event of violations connected with the provision of mandatory “good faith estimates” by lenders on settlement and financing costs.
Ditto for the real estate settlement costs sheet--the “HUD-1" form that all purchasers and refinancers are supposed to receive at the end of the transaction.
Say you apply for a home mortgage. The next week you’re mailed a “good faith estimate” disclosure outlining the settlement charges you can expect to pay.
The estimates are extremely important in evaluating whether you can afford the loan you’re signing up for and whether your lender’s charges compare favorably with those of competitors. All lenders are required to send out these estimates within three business days of your application.
But what if they send them out two weeks late? Or never? Whom do you call?
Apparently not HUD. It has “regulatory” authority over the disclosure statute. That is, it writes the rules lenders are supposed to follow. But it can’t enforce its own rules on good-faith estimates.
That lack of teeth gets even more serious when lenders or loan brokers play games with the estimates--especially low-balling upfront to get you in the door.
In one case in California, a mortgage broker sent out “good faith estimates” that turned out to be nearly $2,100 below what the home buyer received and was asked to pay at closing.
Could that home buyer turn to the federal regulatory agency overseeing the statute for enforcement muscle?
Not to HUD, which has no legal authority to compel lenders to stand behind their good-faith estimates. In the case of the California borrower, by the way, the large reputable wholesale lender on whose behalf the broker was originating mortgages ultimately made up the difference for the irate consumer--and stopped doing business with the broker.
Here are other areas of the federal real estate settlement statute that leave consumers high and dry if they seek federal enforcement help:
* Escrow account cash in refinancings.
Some mortgage lenders require borrowers to establish an escrow account for taxes and insurance at closing and pay into it for the duration of the loan.
Yet there are no federal requirements--or enforcement authority--covering lenders’ timely return of escrow balances when homeowners refinance with a new lender, and some servicers hold on to these funds for months.
“This often creates a financial hardship for borrowers who are refinancing their loans and must place escrow funds in the new [mortgage] account while the old servicer retains the existing escrow account balance,” says the new report to Congress.
* Loan servicer failure to pay homeowner property taxes.
The federal consumer protection law “requires servicers to pay escrow items such as taxes and insurance in a timely manner,” the Fed and HUD say. But when the servicer forgets to do so, or pays late and incurs penalties that get passed along to borrowers without their knowledge, whom does the homeowner turn to for help? Not to federal regulators. You have to file suit yourself. You’re on your own.
* “Force placing” of higher-cost hazard insurance by lenders when policies lapse because of untimely payment by the servicer.
Same problem: HUD and the Fed say that this abuse goes on and “result[s] in greater premiums” being paid by innocent homeowners. But neither agency has legal authority to stop the practice under current law.
Both agencies are asking Congress to close these enforcement loopholes.
In the meantime, if you get low-balled on your “good faith estimates” or if your servicer hangs on to your escrow balance way too long, contact your state banking and real estate regulators, or your state attorney general’s office. There may be a state remedy to your federal consumer protection problem.
Distributed by the Washington Post Writers Group.