RESPA and other changes that face our industry
Monday, 23 November 2009 09:42
The new RESPA rules are likely to come. Though the MBA and other similar organizations have requested a delay in the introduction of the rules, so far all such requests have been rejected.
We should assume that next year we will operate under the new regulations.
While everyone still struggles to understand the new RESPA rules, system developers have already been working for months to adapt their systems to the new RESPA rules. HUD addresses uncertainties by updating RESPA’s FAQs on a regular basis; it gives clarifications, but the constant changes also make RESPA a moving target. So far, HUD has been careful in addressing reverse mortgages in RESPA’s FAQs. Since reverse mortgages are not addressed in the final rules of RESPA, there is no legal basis to address some reverse-mortgage-specific issues. The first set of answers to reverse mortgage specific questions showed some good understanding by the RESPA team; however, there were some clear mistakes such as confusing set-asides with escrows. The new rules are complicated and there is some ambiguity. This article reflects my current understanding of the new RESPA rules.
Purpose of RESPA
The Real Estate Settlement Procedures Act (RESPA) is a “Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Cost”. The purpose of thisarticle is not to address the question of whether RESPA willachieve these objectives or not. Instead, this article focuses onhighlighting some aspects of the new rules and analyzes howthe new RESPA rules and other regulations, still in the pipeline,will change the industry.
The final RESPA rule and the 571 pages long “RegulatoryImpact Analysis” as published by HUD can be found here at http://www.hud.gov/offices/hsg/ramh/res/respa_hm.cfm.Neither of these documents mentions reverse mortgages evenonce. However, by not explicitly excluding reverse mortgages,reverse mortgages are subject to RESPA - which do not fitreverse mortgages very well.
The new GFE (Good Faith Estimate) is at the core of RESPA. The changes in the GFE go beyond cosmetic modifications to the layout of the document; its objective is to strengthen the prospective borrower’s position:
“The final RESPA rule includes a new, simplified Good Faith
Estimate (GFE) that includes tolerances on final settlement
costs and a new method for reporting wholesale lender
payments in broker transactions...The new GFE will produce
substantial shopping and price-reduction benefits for both
origination and third-party settlement services.”
The New GFE - Now 3 Pages
The GFE has been “simplified” from 1 to 3 pages. Additionally, RESPA expressly prohibits making changes to the GFE. Due to these restrictions, the new GFE cannot be adapted to reverse mortgages.
Page 1 of the GFE gives a general overview of the loan terms. NRMLA and HUD are currently trying to figure out how some of the forward-specific fields should be adapted to the reverse mortgage.
Page 2 is the closest to the “old and familiar GFE”. The main difference is rather than listing the fees line by line they are now grouped together. Most significantly, the “origination fee” will no longer be disclosed on the GFE, but will be combined with other fees into the “origination charge”.
RESPA has learned something from the reverse mortgage industry and added a page 3: What our industry has offered its customers for years - a comparison document - will now be integrated in a simplified form into the new GFE - modified to fit the forward world.
$8,350,000,000 in savings - 167,000 in lost jobs.
$8.35 billion or $668 per loan: this is the amount that HUD\ estimates borrowers will save thanks to the new RESPA rules. In other words, this is how much less HUD estimates the mortgage industry will earn in revenues. Assuming an average annual income of $50,000 per employee in the mortgage industry, this will result in a job cut of 167,000 jobs from the industry (including related services). Assuming that reverse mortgages make about 1% of the industry’s total, RESPA may take away about 1,670 reverse mortgage jobs. RESPA’s objective is not the creation or preservation of jobs. RESPA is not here to benefit the mortgage industry nor the US economy as a whole. RESPA’s intention is to cut costs to the borrower, which cuts jobs in the mortgage industry.
How does RESPA try to accomplish this?
While RESPA does not go into any specifics, RESPA’s aims are the following:
1. Bait and Switch
Imagine buying a car, agreeing on the price, and when you sign the final contract you find out that the price is actually a few thousand dollars higher than originally agreed upon. Bait and switch is misleading, immoral, legally questionable and plainly wrong. It harms borrowers as well as honest loan originators. As discussed below, RESPA addresses bait and switch by holding originators accountable for their offer.
2. Direct Charges
The final invoice for the car bought in the example above is composed of a long list of charges like the base price of the car, special features, destination charge, taxes, etc. RESPA’s new guidelines mandate how to disclose charges. The objective is to make it easier to compare different offers.
3. Indirect Charges
The friendly car salesman convinced you that a sun roof will give you a better tan, that leather seats will last longer, and an extended guarantee will make you sleep better. For these options the salesman gets commission from the manufacturer. Such commissions are common practice in any trade. In the end it is the customer who pays for them, either by direct charges or consequential ones as discussed below. There are indirect remunerations in the mortgage industry, one being the Yield Spread Premium (YSP). RESPA does not expressly prohibit the
YSP, but it aims to,
“improve disclosure of yield spread premiums
(YSPs) to help borrowers understand how YSPs can affect
borrowers’ settlement charges...”
In other words, the YSP to brokers gets under pressure. RESPA puts the pressure on the YSP by requiring a new way of disclosing it. It is fair to assume that the balance between brokers and lenders will swing towards lenders.
4. Consequential Charges
The purchase price for a car is just the beginning. The real cost begins once you start driving the vehicle: Interest, insurance, gasoline, tires, etc. Page 1 of the new GFE attempts to reveal the real cost of a mortgage; unfortunately, it is not a good fit for the reverse mortgage.
Accountability
As indicated above, one of the biggest achievements of RESPA is that it addresses the unfair practice of charging higher fees at closing than originally disclosed. RESPA sets very strict guidelines on how much fees are allowed to increase. RESPA creates three categories for charges:
1. Charges that cannot increase The origination charge is in this category.
2. Charges that cannot increase by more than 10% in their aggregate amount
Most of the charges (appraisal, MIP, title insurance...) fall into this category.
3. Charges that can change
Charges for services where the borrower selects the service provider such as homeowner’s insurance may (but will not always) fall in this category.
Lenders and brokers will be required to provide highly accurate forecasts of the fees charged to the borrower at closing. Any mistake when providing the initial disclosures may be costly to the originator.
Application
RESPA also defines when a GFE has to be issued. The new guidelines state that it is no later than 3 business days after an application. To avoid any misunderstandings, RESPA also provides a new definition of an application.
The originator has received an application if the customer provides:
• name
• monthly income
• SSN
• property address
• estimate of the property’s value
• the mortgage loan amount sought
• and possibly additional information required by the originator
Changed Circumstances
Every new regulation needs to have enough ambiguity to create new business opportunities for lawyers. “Changed circumstances” is the term that accomplishes this for RESPA. Assume the prospective borrower told the loan officer that he owns a property fee simple, free and clear. However, the property is actually a leasehold, there is a spouse on the title, and the property needs significant repairs. When learning of changed circumstances, the lender may re-issue a new GFE that takes account of the changed circumstances. While there is some guidance on what constitutes a changed circumstance, there is a lot of uncertainty – particularly when it comes to reverse mortgages. Without changed circumstances a lender cannot issue a new GFE.
HUD 1
The HUD 1 remains the document that describes the final financial transaction. Like the GFE, the HUD 1 now has 3 pages. The changes from the current HUD 1 are:
In Column - Out of Column
Regulators were in a dilemma that could best be shown in the following example:
• In the new GFE the MERS registration fee became part of the Origination Charge (not separately shown).
• However it is paid to a third party and must be disclosed as such in the HUD 1.
• RESPA also wants to make it easy to compare the HUD 1 to the GFE.
This is accomplished by showing charges outside of the column the same way POC charges are shown.
Compare Table to the GFE
The third page of the HUD 1 will compare the final HUD 1 to the GFE that was originally disclosed, allowing the change of costs to be validated.
Responsibility
The lender will be responsible for loans. If a broker originates a loan with an inaccurate GFE, the lender will assume responsibility as soon as the lender accepts the GFE. As lenders assume more responsibilities from brokers we can expect that they will also exercise more control, and possibly they may also want to keep more of the revenues.
Licensing
Lenders will not only assume the responsibility for the loans originated by brokers, but also for the brokers themselves. The FHA will no longer license brokers and will shift the responsibility to the lender. Lenders are currently establishing guidelines and requirements for licensing brokers.
While this opens the path for new brokers not approved by FHA to enter the space, it also increases the risk for the lender. Presently, it is difficult to say whether lenders will bring on more brokers or if they will shift their focus on working with fewer brokers.
Conclusion for the Reverse Rortgage
It is difficult to estimate how the new RESPA rules will affect the reverse mortgage industry.
There are concerns that the new RESPA rules might not bring much benefit to the reverse mortgage borrower but hurt the industry. Bait and switch has never been a serious problem in reverse mortgages and costs are well regulated. Tracking fees and re-disclosures will probably not bring much benefit to the borrowers, but will increase the cost of operation and delay the closing of loans.
The YSP does not pose any cost to the borrower as long as it does not increase the rate. In a reverse mortgage, a higher interest rate provides less money to the borrower (at current interest rates), making the offer less attractive.
RESPA will increase the cost of originating reverse mortgages by adding operational overhead. The new GFE may confuse borrowers rather than enlightening them because it just doesn’t fit a reverse mortgage.
It would be ironic if all that RESPA achieved for the reverse mortgage industry was to push reverse mortgage originators out of their jobs and decrease competition.
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