March 11, 2003
HUD NEARS FINAL RESPA RULE TO SAVE CONSUMERS BILLIONS OF DOLLARS
WASHINGTON - Consumers have a right to a mortgage settlement process that is more
transparent and less costly. That was the message Housing and Urban Development
Secretary Mel Martinez delivered to the House Small Business Committee today as
he described his effort to reform the regulatory requirements of the Real Estate
Settlement Procedures Act (RESPA).
Martinez Outlines Benefits Of Reforming Mortgage Settlement Process That
Will Increase Competition And Opportunities For Small Business
HUD is currently in the final phase of the most sweeping reform of RESPA since the law was enacted in 1974. Martinez told committee members that millions of Americans complain they simply don't understand the process of buying and refinancing their homes. In explaining his plan to update existing regulations, Martinez sought to reassure the committee that HUD's RESPA reform would actually stimulate greater competition and business opportunities for small service providers.
"The process of buying or refinancing a home in 2003 should not be the mystery it is today," said Martinez. "I believe we can help create a clearer and cheaper settlement process for millions of consumers, while encouraging greater opportunity for small businesses in the mortgage industry."
Reforming RESPA is an important part of the Bush Administration's goal of expanding homeownership, particularly among minorities who continue to significantly lag behind national homeownership rates. First-time homebuyers who are less educated in the complexities of the mortgage settlement process will particularly benefit by HUD's reform.
Martinez also pointed to an economic analysis that demonstrates HUD's RESPA reform would increase competition in settlement services and would ultimately save consumers an estimated $8 billion a year or approximately $700 per loan transaction. HUD's final RESPA rule is expected to be completed this spring following a review by the Office of Management and Budget.
Last July, Martinez proposed three principle regulatory changes to RESPA:
Requiring Greater Disclosure of Mortgage Broker Fees. When a borrower qualifies for a home loan with a mortgage broker, but lacks the cash to pay for the upfront loan origination and other settlement costs, the borrower may choose to pay a slightly higher interest rate in exchange for the lender's payment of some or all of these costs. The difference between the interest rate borrowers qualify for and what they end up agreeing to results in a lender payment to a broker that is often called a 'Yield Spread Premium.' Under current rules, these payments are not clearly disclosed to borrowers. Sometimes these payments simply serve to increase broker compensation. HUD is proposing that in brokered loans, these Yield Spread Premiums be clearly disclosed and credited toward the borrower's settlement costs.
Improving the Good Faith Estimate. Shortly after a person applies for a home loan, they receive something called the Good Faith Estimate from their lender that details their estimated settlement expenses. Today, this estimate is more like a Good Faith GUESSTIMATE. HUD wants lenders to provide consumers a more simple, clear and firm Good Faith Estimate, at no or nominal cost, so that they can better understand the charges and use it to shop for a home loan and service providers BEFORE they become so invested in the process that they can't back out. The new Good Faith Estimate would sharply limit lenders' ability to raise their charges at the last minute.
Removing Regulatory Barriers to Lower Costs. Current regulations inhibit the practice of offering consumers a single guaranteed package including the price for total settlement costs and a mortgage interest rate. Under Martinez's proposed reform, any entity would now be able to assemble and offer consumers "guaranteed mortgage packages" - a guaranteed mortgage interest rate and a guaranteed price for a complete package of settlement services. Consumers would know their ultimate costs in time to shop for the best mortgage product BEFORE incurring any out-of-pocket expenses and avoiding last-minute "junk fees" and other unexpected increases in settlement costs.
HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities, creating affordable housing opportunities for low-income Americans, supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development as well as enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet.