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HUD Archives: News Releases

HUD No. 98-298
Further Information:For Release
In the Washington, DC area: 202/708-0685Friday
Or contact your local HUD officeJuly 17, 1998


WASHINGTON - Housing Secretary Andrew Cuomo today proposed consumer protection legislation designed to save American borrowers at least several hundred million dollars a year by reducing mortgage settlement costs, eliminating predatory lending abuses, and setting fines of up to $1 million a year for loan originators that fail to comply with tough new requirements.

"Our legislation will protect consumers from being deceived or confused during the complicated process of getting a mortgage," Cuomo said. "We want to make the process of getting a mortgage simpler, cheaper, more efficient and less confusing for homebuyers. We want to help more American families turn their dreams of homeownership into reality."

The proposed legislation would, for the first time, enable consumers to get guaranteed settlement costs from loan originators, protecting consumers from being deceived by "bait and switch" schemes and other abuses that deceive them about settlement costs that are sometimes $1,000 or more higher than originally estimated. The legislation would also protect consumers against other predatory lending abuses that can deceive low-income elderly and others and lure them into high-interest loans they cannot afford to repay.

In addition, the new legislation would bar loan originators from collecting significant fees for information on settlement costs until the consumer agrees to get a mortgage from the loan originator. In some cases, consumers now pay fees ranging as high as $500 to get information needed to allow them to comparison shop for mortgages. Substantial fees discourage homebuyers from applying to several loan originators in search of the best loan.

The Department of Housing and Urban Development's legislation would allow lenders and others to bundle settlement services as "package deals" to offer homebuyers "one-stop shopping" for their mortgage and all other settlement services at a guaranteed price.

Under current law, loan originators don't have to provide a homebuyer with an estimate of settlement costs until after the homebuyer applies for a loan. Even if the estimate turns out to be far lower than the homebuyer's final settlement costs, there is no federal penalty against the lender. Some homebuyers have complained that they never received an estimate of settlement costs, and others have said estimates they received understated settlement costs by several hundred dollars or more.

Under HUD's proposed legislation, loan originators could still choose to offer consumers "good faith estimates" of settlement costs (also known as closing costs), as they do today. However, estimates could not exceed final costs by more than specified limits, to be developed later.

Loan originators who raised the price of guaranteed settlement services - or exceeded estimated charges by more than the limits - would be subject to maximum fines of $1,000 per incident and up to $1 million per year.

HUD's legislative proposals would amend the Real Estate Settlement Procedures Act, known as RESPA, which is under HUD's jurisdiction.

The proposals were contained in a joint report that HUD and the Federal Reserve Board submitted today to the Senate Committee on Banking, Housing and Urban Affairs. The report also contained recommended reforms in the Truth in Lending Act, which comes under the Federal Reserve's jurisdiction.

HUD General Counsel Gail Laster represented the Department in testimony before the Senate committee today on the reform package.

American families are expected to close on $1.1 trillion to $1.2 trillion in home mortgage loans (including refinancings) this year, with closing costs amounting to several thousand dollars per loan and billions of dollars in total.

"Consumers benefit whenever businesses compete to offer them the best products and services at the lowest prices," Cuomo said. "Our legislation will encourage the conservative principle of free-market competition."

Current law makes it difficult for loan originators to offer a range of settlement services provided by others - such as a title search, a property survey, a termite inspection and a flood certification - as a package to consumers without violating RESPA restrictions on fee sharing. As a result, lenders have no incentive to try to hold down such costs and simply pass them on to consumers.

HUD's proposed changes to RESPA would encourage loan originators to hold down prices of all settlement services in a package, to make the package more attractive to consumers shopping for the best deal.

HUD's proposed legislation to change RESPA would also:

  • Provide consumers with information about their mortgage interest rate, points and other settlement costs earlier in the home financing transaction process, before it is to late to back out of a loan.

  • Give homeowners who are behind on their mortgage payments earlier notice of impending mortgage foreclosures, so steps can be taken in an effort to avoid foreclosure.

  • Outlaw the predatory lending practice of adding the price of a lump-sum life insurance payment to the amount of money borrowed in a high-cost mortgage. Under this practice - which provides insurance to pay off a home mortgage if the insured person dies - a homeowner pays for as much as 30 years worth of life insurance in one payment. Consumer groups have found that this is much more costly to consumers than simply taking out a standard life insurance policy and making payments once a year or several times a year.

  • Place new restrictions on balloon mortgages for high-cost loans. Balloons require that a mortgage be paid off in a lump sum after a short time.

  • Increase counseling and education for certain high-cost loans before consumers can enter into high-cost mortgages.

  • Require greater overall consumer education, including additional disclosure to consumers about the way the mortgage process works - with specific information on mortgage brokers, escrow accounts, private mortgage insurance and other topics.

Content Archived: January 20, 2009

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