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June 12, 2008
Regulations Division
Office of General Counsel
Department of Housing and Urban Development
451 Seventh Street, SW
Room 10276
Washington DC 20410-0001
RE: Docket No. FR-5180-P-01, Proposed Changes to RESPA Regulation
By mail and email: HSG-RESPA@HUD.gov
Gentlemen:
We submit these comments of the American Homeowners Grassroots Alliance (AHGA),
a national nonpartisan consumer advocacy organization serving nation’s
homeowners. The fact that between five and six million American homeowners
are currently at risk of foreclosure makes it clear that a large share of
homeowners lacked full awareness of the types of risks of certain types of
mortgages before agreeing to their terms. The heartbreaking stories that
AHGA has heard from many members and nonmembers revealed that many of them
didn’t fully understand the potential of many mortgage terms to cause
problems in the future, and many claim to have been unaware of those
provisions at all. Better consumer education is a significant part of the
solution to the recurrence of the current housing crisis, and changes to
current RESPA regulations are a critical component to that solution.
The Department of Housing and Urban Development’s proposed changes to RESPA
regulations are constructive, and AHGA encourages HUD to strengthen the
proposal. Timely, consistent, and clearer disclosures of all important
factors that affect mortgage financing decisions are needed. The magnitude
of the current housing crisis and its tragic impact on the personal lives of
millions of American homeowners, and the entire economy, argues for rules
that place far more weight on assuring full consumer understanding of
mortgage terms. This is more important than preventing minor additional
paperwork and inconvenience for companies that play various roles in the
mortgage financing process.
AHGA urges HUD to require disclosure of the Annual Percentage Rate (APR) on
the Good Faith Estimate (GFE), prohibit charges for the provision of the GFE,
and make a number of other changes to protect American homeowners and the
American economy in the future. Timely, consistent and clearer disclosures
will reduce the frequency of poor financial decisions by consumers, many of
whom lack the sophistication to “read between the lines”. Consumers will
benefit from clarity and reinforcement regarding elements of mortgage
obligations that could create future risks. Disclosures will reduce
deception by making it harder for lenders or brokers to skip over or
minimize the significance of important terms and conditions, and may lower
mortgage costs by fostering more competition.
AHGA recommends that borrowers be required to provide the GFE form within 2
days of a loan application and prohibit charging a fee for providing the GFE.
Both of these changes would facilitate consumer comparison shopping between
lenders and mortgage brokers. If HUD decides to allow a GSE application fee,
a specific modest GSE application fee cap of $20 or less should be imposed.
Because it is so critical to sound decisions the Annual Percentage Rate
(APR) should be disclosed in the GFE. The APR enables borrowers to compare
interest rates and fees, and is therefore essential to comparing lending
alternatives. Although the Truth in Lending Act (TILA) requires APR
disclosures, reinforcing that information is important. In addition, APR
disclosure is presently required only for new home purchases, not for
refinancing and other loans.
Requiring GFE disclosure of loan prepayment penalties, balloon payment
requirements, monthly escrows, and the terms determining whether the
interest rate and monthly payments can rise (and if, so, by how much) is
very important and should be highlighted in bold type. The estimate for
charges for settlement services should be made effective for 30 business
days from the delivery of the GFE, to allow consumers more time for
comparison for shopping. In some cases ten days (as proposed) is not enough
time to cover the period from application to loan origination.
The current requirement that lenders provide names and contact information
for any service provider that the lender requires borrowers to use should be
maintained. This enables diligent borrowers to research those service
providers and base their decisions in part on the record and reputation of
those companies. HUD should retain the proposed restriction against allowing
a lender to increase the service charges, and government recording and
transfer charges, between application and settlement. These increases are
typically known by lenders well in advance and can be included in GFEs.
Similarly, the proposed10% cap on increases in estimated total charges of
services required by lenders, title services of companies identified by the
lender, and optional owner’s title insurance of companies identified by the
lender, should be maintained to prevent fee gouging. In addition, all
anticipated referral fees and/or gifts to lenders or mortgage brokers
greater than $25 in value can affect the objectivity of a lender or broker.
They should be broken out and shown as a separate line item called
“additional compensation to lender/mortgage broker” on all appropriate
federal forms.
The current “unforeseeable circumstances” language should be tightened to
reduce the potential for abuse. In cases where there is a legitimate
unforeseen circumstance, lenders should be required to inform a borrower
within three days and provide a new GFE if the circumstance is believed to
be curable. If the lender rejects the borrower’s loan application as a
result, the lender should be required to inform the borrower of that
decision within one business day.
Yield Spread Premiums (YSPs) have a legitimate place in the marketplace for
sophisticated borrowers who can use them to eliminate up-front loan costs
when they expect rates to drop and hope to refinance in the future.
Unfortunately, YSPs have also served extensively as a vehicle for extracting
excessive and unjustified charges in the high-cost, subprime, and/or
non-traditional mortgage markets. YSPs should be prohibited for those types
of loans unless the mortgage broker receives no other compensation, the loan
includes no discount points or origination points, does not have a
prepayment penalty, and there are no other settlement costs other than
government fees and escrows. It should also be made clear to all borrowers
that while a YSP will lower settlement costs, it will also raise interest
rates, and the relationship between the two and total payments over the life
of the loan should be disclosed to the borrower in the application process
and included in HUD’s required closing script.
Many borrowers are unaware of tax, hazard, and/or private mortgage insurance
obligations prior to applying for a mortgage. These should be identified in
the first meeting with lenders or mortgage brokers and in all relevant
documents, disclosures and scripts. Many borrowers also incorrectly assume
that mortgage lenders or brokers owe them a fiduciary duty, as real estate
agents/real estate brokers do in most states. To prevent such
misunderstandings in the future, language should be inserted in GFEs and all
other relevant documents to the effect that “Mortgage lenders or brokers
have no legal obligation to provide borrowers the lowest interest rates
and/or best terms, and borrowers should always seek proposals from more than
one source to increase the likelihood of getting the lowest interest rates
and best terms.”
The use of Average Cost Pricing and Negotiated Discounts should be monitored
carefully by HUD to assure that they, like YSPs, are not abused to the
disadvantage of high-cost, subprime, and/or non-traditional mortgage
borrowers. If any differentials are found that cannot be accounted for by
demonstrated cost factors, those rules will have to be tightened further.
We also recommend that HUD pursue additional regulatory initiatives in
addition to the reform of RESPA procedures. As you may know, federal
competition agencies have pursued a number of antitrust actions aimed at
violations by real estate service organization institutions, including the
National Association of Realtors, state real estate trade associations, and
Multiple Listing Services (MLSs). The Justice Department’s Antitrust
Division and the Federal Trade Commission have sought to stop the efforts of
those institutions to implement practices such as prohibiting American
homeowners from receiving real estate commission rebates and preventing
their real estate listings from appearing on MLS websites and/or the public
websites of MLS members.
Other trends in real estate service practices, industry regulations, and/or
state laws that have proven injurious to American homeowners include the
practice of dual agency and the erosion of the fiduciary responsibilities of
real estate agents and brokers. Dual agency inherently creates conflicts
with fiduciary obligations and both are among the most frequent issues in
lawsuits against real estate brokers and agents by homeowners. Affiliated
Business Arrangements in the real estate services sector have created
conflicts of interest that are against the best interests of American
homeowners. At minimum disclosure requirements in that area must be
strengthened.
We urge HUD to study these serious problems in the real estate services
arena. By drawing attention to these problems HUD would help educate
American homeowners regarding practices that are against their best
interests. Such studies would prepare HUD to propose regulations that would
eliminate or restrict their practice.
Sincerely,
Bruce N. Hahn
President
CC: Steve Preston, Secretary, U.S. Department of Housing and Urban
Development
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