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HUD PROTECTS HOMEBUYERS FROM MORTGAGE INTEREST AND FEE OVERCHARGES IN MOVE TO SAVE AMERICANS MILLIONS EACH YEARWASHINGTON -- Housing Secretary Andrew Cuomo today announced landmark action to save homebuyers millions of dollars a year by protecting them from being charged excessively high interest rates and fees on mortgages obtained by mortgage brokers.
"We want to help American families avoid being overcharged for their home mortgages," Cuomo said. "The Department of Housing and Urban Development is acting to protect consumers and fundamentally change the way many Americans borrow to buy homes."
Cuomo said the HUD action will benefit many of the approximately 3 million families who get home mortgages -- for purchases, refinancing and home equity loans -- handled by mortgage brokers each year. Mortgage brokers handled about $333 billion in mortgage transactions last year -- accounting for about half of all mortgage transactions in the nation.
The Secretary said HUD launched its consumer protection action today by proposing a new regulation to prompt mortgage brokers to sign binding contracts disclosing their fees upfront and revealing who they represent.
"We expect the new honest lending contracts created by our regulation will save consumers millions of dollars each year," Cuomo said. "We want to replace confusion with clarity in the complicated process of getting a mortgage, taking the mystery out of homebuying."
"The message we want to give consumers, loud and clear, is: comparison shop," Cuomo said. "People need to comparison shop for the lowest interest rate on a mortgage, in the same way they comparison shop for the best price on a car."
"By giving consumers more information earlier in the mortgage process, our honest lending contracts will enable them to shop around and find the best deal," Cuomo said.
By lowering the cost of homeownership, Cuomo said the new contracts will help achieve President Clinton's goal of increasing America's homeownership rate to an all-time high of 67.5 percent by 2000. The rate was 65.7 percent in the second quarter of this year -- the highest quarterly rate since 1980.
Cuomo said consumers who want information explaining the mortgage process can call a toll-free telephone line at HUD: 1-800-217-6970, and also receive information at one of HUD's web sites at http://www.hud.gov/fha/res/respa_hm.html.
Consumer groups supporting HUD's approach include the American Association of Retired Persons and Consumers Union.
"HUD's proposal will help end the bait and switch tactics that can cost consumers dearly when they try to finance their home through an unscrupulous mortgage broker," said Michelle Meier, Counsel for Government Affairs with Consumers Union, the publisher of Consumer Reports Magazine.
"AARP's goal will be to ensure during the comment period that the proposed rule and binding contract provide the consumer with the maximum information and flexibility to control the structure and costs of his or her own mortgage transaction," said Eugene I. Lehrmann, a member of the AARP Executive Committee and the group's immediate past President.
Because mortgages involve such large amounts of money and many have repayment terms of 30 years, even a small difference in the interest rate can have a dramatic effect.
For example, if Mr. and Mrs. Smith get a mortgage at an interest rate of 8 percent instead of 7.5 percent, the half-point increase in the rate would cost them an extra $1,244 over 30 years for each $10,000 they borrowed. So if Mr. and Mrs. Smith get a $150,000 mortgage, the extra half-point in their interest rate will cost them an extra $18,660 over 30 years.
Many consumers don't understand the role of mortgage brokers, assuming the brokers shop on the consumers' behalf to find the best loan available. In fact, mortgage brokers can sell consumers loans on which the brokers make the largest fees. As a result, consumers can be steered to higher priced or lower quality loans by mortgage brokers, without realizing they need to comparison shop to get the loan at the lowest interest rate.
By creating more informed consumers, HUD's proposed disclosure regulation is expected to increase competition, enable consumers to find loans at lower interest rates, and drive down fees charged to consumers by mortgage brokers -- resulting in millions of dollars in consumer savings each year.
The regulation, which can take effect after a 15-day review by Congress and an opportunity for public comment, sets a new standard for mortgage broker services.
The standard would, for the first time disclose to the homebuyer upfront: 1) all the fees the mortgage broker would receive for getting a mortgage for the homebuyer; and 2) whether the mortgage broker commits to getting the borrower the best loan available from the lenders doing business with the broker.
Consumers who claim they were illegally steered to mortgages by mortgage brokers have filed class action lawsuits around the country against the brokers and lenders, accusing both of violating the Real Estate Settlement Procedures Act (RESPA) of 1974. Mortgage brokers argue their lender-paid fees are legal fees for services performed.
RESPA prohibits settlement service providers -- including mortgage brokers -- from receiving kickbacks and fees for the referral of settlement services business as well as unearned fees, and requires disclosure of all fees imposed on borrowers. However, current regulations allow mortgage brokers to disclose fee information in technical language that many consumers do not understand. In addition, the disclosure comes too late to enable consumers to comparison shop.
HUD's new regulation would eliminate this problem by creating a simple one-page disclosure form -- the honest lending contract -- written in plain English to be signed by a mortgage broker before a borrower applies for the loan. The contract will also inform consumers of their rights in the mortgage process.
Brokers would check one of three boxes on the disclosure form describing their representation: 1) "I Represent You;" 2) "I Represent You, But I May Receive a Fee From a Lender;" or 3) "I Do Not Represent You." Additional details of the representation are listed under each alternative. Another entry on the form requires listing of the compensation that the mortgage broker collects from both borrower and lender.
Content Archived: January 20, 2009