HUD Proposal Would Guarantee Cost of Loan Closing
The U.S. Department of Housing and Urban Development filed its proposed rule changes governing the mortgage lending process in the Federal Register last week, sending the topic to a public debate.
The changes proposed by HUD to the Real Estate Settlement Procedures Act, or RESPA, would guarantee closing costs and make it harder for lenders to increase rates and fees after a home buyer applies for a mortgage.
HUD also wants to ease rules preventing lenders and brokers from packaging appraisals, title searches and other services for one fee.
Companies such as Cendant Corp., a mortgage lender and owner of the Coldwell Banker, Century 21 and ERA residential brokerages have argued that RESPA, which was enacted in 1974, needs to be reformed to streamline the lending process and give consumers more information about fees they would pay.
“We are very encouraged by the changes,” said Rod Alba, director of government affairs at the Mortgage Bankers Assn. of America. “Much of this is what industry groups have been pushing for.”
The public will have a 90-day period in which to comment on the changes after which the rules will take effect or additional changes will be made.
By making fees more transparent, large companies that can offer widespread discounts over their smaller competitors would probably benefit the most from the reforms being proposed by HUD Secretary Mel Martinez, analysts said.
“For the industry as a whole, the reform will empower companies that already have an integrated, bundled approach toward real estate offerings,” said Jeffrey Kessler, an analyst at Lehman Brothers. “It could hurt some small mortgage and title brokers who offer individual services.”
A controversial aspect of HUD’s proposals is the guarantee of mortgage rates, said Joe Kolar, a real estate attorney at Boston-based law firm Goodwin Procter. Rates are determined, in part, by the prices of mortgage-backed securities bought and sold by investors, and are out of the control of lenders, he said.
If mortgage rates were to suddenly rise, industry groups are worried that under the new rules a lender may still be forced to offer the lower rate they guaranteed.
HUD’s recommendations include a change in the way mortgage broker compensation is presented to consumers by requiring fees to the brokers be included as part of the loan interest rate. These payments are easy to miss on the list of fees, said Brian Sullivan, a HUD spokesman.
As a result, home buyers suffer from “sticker shock,” Sullivan said. Not only do they not know how much they are paying for the different services needed to complete the purchase of a home, they are not being given the opportunity to shop around, he said.
The reform “is going to make the entire industry sharpen their pencils,” said John Kennedy, associate general counsel for HUD.
