Testimony before the FINANCIAL SERVICES COMMITTEE Subcommittee
on Housing and Community Opportunity regarding
Simplifying the Home Buying Process: HUD’s Proposal to Reform RESPA
Mr. Chairman and Members of the Committee, the National Consumer Law
Center1 thanks you for inviting us to testify today
regarding the HUD’s proposal to rewrite the RESPA. We offer our testimony
here today on behalf of our low income clients, as well as the Consumer
Federation of America, Consumers Union, and the U.S.
Public Interest Research Group.2
We wish to commend Secretary Martinez for the dramatic approach to RESPA3
reform advocated in these Proposed rules. Clearly, the Department has recognized
that the current state of RESPA’s consumer protection is a murky mess.
For example, to the extent that RESPA’s current regulations provide rules
that protect consumers, these rules are generally unenforced or are unenforceable
by the courts. Some changes must be made, and it is HUD’s responsibility
to articulate the means by which this important statute will effectuate its
purpose of protecting consumers in the mortgage settlement process.
The stated goals and orientation of the Proposed Rule are wonderful –
to protect consumers. We credit the hard work and creativity of HUD staff in
the conception of this Rule. We applaud the many positive features of these
proposals, and hope that HUD has accepted the comprehensive comments4
we submitted in the spirit in which they were offered – as constructive
so as to assist HUD in achieving its goals of creating a regulatory regime under
RESPA that is truly protective of consumers – which is the purpose of
RESPA.
There are several overarching concerns and a myriad of important details which
must be worked through to ensure that the Rule does in fact protect consumers,
instead of simply providing a shield behind which mortgage originators can hide
inappropriate, unfair, and illegal activities. While the overall concepts are
good, there are significant changes in the details of the rules which must be
made to prevent substantial harm to consumers. However, we want to be absolutely
clear that our most important concern has to do with the Rule’s potential
to facilitate predatory lending.
The single most critical point for the representatives of low and
middle income consumers providing these comments is that HUD limit the Guaranteed
Mortgage Package Agreement (“GMPA”) to prime loans. If subprime
loans are permitted to be made through the GMPA structure, predatory lending
will be facilitated and protected by the GMPA exemption. This means
that HUD must go beyond its current proposal to exclude only HOEPA loans from
the GMPA exemption, and exclude all loans with subprime characteristics.
Major Concerns
I. To avoid facilitating predatory lending, the GMPA should be limited to
prime loans.
The idea behind the Guaranteed Mortgage Package Agreement (“GMPA”)
is to simplify the mortgage shopping process by both bundling the loan closing
costs with the loan points, and providing an interest rate guarantee based on
the borrower’s credit qualifications. This would accomplish two important
goals: 1) It would allow borrowers to shop for loans based simply on the interest
rate and the money required to obtain the loan; and 2) It would permit borrowers
to apply to numerous lenders and receive guarantees of the loans for which they
actually qualify, subject only to verification of the information the consumer
has provided about the value of the home, the borrower’s income, and other
assets. The most important aspect of the GMPA is that it allows borrowers to
obtain loan guarantees based on their actual credit rating very early in the
process. This will prevent tremendous misunderstanding and allow borrowers with
less than perfect credit to participate fully in the shopping process.
The GMPA is a creative and novel proposal which, if implemented properly,
will enable mortgage shoppers in certain markets to shop more effectively.
However, HUD must keep in mind that this shopping does not occur among all consumers
– those who are today already the victims of predatory mortgages and those
who will be targeted in the future. This submarket thrives in an atmosphere
in which lenders and brokers target homeowners and experience little pressure
to provide the best products. Indeed, the incentives run in the other direction
– borrowers are steered to the worst products. The GMPA must not provide
a new means for lenders in the subprime market to avoid liability for non-compliance
with consumer protection law in that segment of the marketplace which most needs
more substantive consumer protection.5
As the GMPA streamlines disclosure of specific charges and services it will
allow mortgage originators to hide illegal fees and insulate lenders from legal
challenges under both RESPA and the Truth in Lending Act (“TILA”).6
It was HUD’s intent to trade compliance with the specific requirements
of RESPA’s Section 8.7 However, an inadvertent result
of the GMPA will be to conceal information needed to determine the accuracy
of TILA disclosures as well, providing legal insulation from both federal laws.
One of the effects of the bundling of loan fees under the Guaranteed Mortgage
Package (“GMPA”) will be that TILA compliance will no longer be
discernable by a comparison of the TILA disclosure and the HUD-1.8
High cost loans may be successfully camouflaged from challenge under TILA regulations,
or even HOEPA compliance, as a result. Neither bank regulators nor others reviewing
mortgage loans will be able to perform accurate compliance reviews.
As the purpose of the GMPA is to encourage shopping in the open marketplace
of competitive mortgage lending, the GMPA should only be provided to that section
of the market which is most capable of using competitive pressures in the open
marketplace to protect themselves – to the prime market. This is essential.
To ensure that HUD’s new GMPA does not facilitate and
protect predatory loans from legal scrutiny, any loan that meets any one of
the following triggers should not be permitted to be made as a GMPA
–
Any HOEPA loan
Any loan with a prepayment penalty.
Any loan with a guaranteed mortgage package price (the single fee) –
which equals or exceeds 5% of the principal of the loan.
A. HOEPA loans can be mischaracterized, yet protected from challenge in a
GMPA
The Home Ownership and Equity Protection Act, passed in 1994,9
does not cure the problem of abusive home equity lending. The law continues
to allow high rate home equity loans to be made and does not regulate excessive
interest rates or fees per se. Its coverage is limited, excluding loans with
high rates and fees just under the trigger amounts, open-end home equity credit,
and reverse mortgages.10 Extraordinarily abusive loans can
continue to be made without triggering HOEPA protections because lenders can
easily circumvent HOEPA by charging rates and fees just under the HOEPA trigger
amounts.
As a result, in many high cost loans, there is litigation regarding whether
the fees charged by the lender have been properly allocated to the HOEPA points
and fees trigger. Many loans are treated by lenders as non-HOEPA loans, only
to be determined later by regulators or attorneys for consumers to have been
wrongly excluded from HOEPA. Once it is shown that a loan should have been covered
by HOEPA, but was not, considerable consumer protections then apply.11
A lender who violates the requirements of HOEPA faces enhanced statutory penalties
as well as rescission of the loan.12 The protections of HOEPA
are thus most often helpful to consumers when they have been breached –
because they provide substantial assistance in avoiding foreclosure on loans
which included abusive terms.
The HUD-1 required by RESPA satisfies the requirement under TILA that an itemization
of the amount financed be made available to the borrower. This itemization is
critical for determining not just TIL compliance but also whether the loan is
covered by HOEPA. The GMPA would make it impossible for consumers - or regulators
- to determine whether a loan presented as a non-HOEPA loan was actually a HOEPA
loan.
This is why the GMPA cannot be permitted to mask the fees of loans which are
anywhere in the neighborhood of HOEPA loans – else substantially abusive
loans will be made under the rubric of the GMPA, thus denying to consumers the
ability to test these loans for compliance with the Truth in Lending Act and
appropriate exclusion from HOEPA.
B. All subprime loans should be excluded from the GMPA.
We know the characteristics of predatory loans. HOEPA only covers
a small percentage of subprime loans.13 The HOEPA triggers
suggested by HUD in the Proposed Rule do not provide nearly enough protection.
Currently advocates estimate the bulk of predatory loans finance between 5 to
8% of the principal of the loan as points, fees and closing costs.14
HUD has already stated that financing more than 3% of points and fees is a sign
of a predatory loan.15 Further, in its regulations of the
GSEs HUD has prohibited the provision of housing credits for loans in which
more than 5% of the principal has been charged.16 It is also
important to note that many of the new anti-predatory lending laws passed by
the states have used 5% points and fees as a trigger for coverage.17
Thus, to ensure that HUD’s new GMPA does not facilitate and protect
predatory loans from legal scrutiny, any loan that meets any one of the following
triggers should not be permitted to be made as a GMPA: any HOEPA loan. any loan
with a prepayment penalty, and any loan with a guaranteed mortgage package price
(the single fee) – which equals or exceeds 5% of the principal of the
loan.
In other words – in addition to HOEPA loans, any loan which has either
a prepayment penalty, or the price for the GMPA is equal to or more than the
5% of the loan principal – must not be eligible for the exemption outlined
in the Proposed Rule. Any lender making a loan with either of these criteria
would still be required to itemize the fees paid to settlement service providers
pursuant to the rules for the Good Faith Estimate.
1. GMPA should not be permitted for loans with high points and fees
As predatory loans generally charge high points and fees it is essential that
the GMPA not be permitted to be provided for these loans. The most meaningful
mark of a predatory loan is in the high amount of points and fees18
financed by the borrower. The more the borrower is charged up-front, the more
the immediate financial gain achieved by the lender. This is why many of these
loans are not affordable to the homeowner – the lender has an incentive
to make them non-performing loans. If that loan does not perform such that the
homeowner is forced to refinance, it just means more profit for the lender at
each refinancing. For the homeowner, it means more equity is stripped from the
home each time.
Using 5% of the principal as the trigger for exclusion from GMPA eligibility
will still allow loans with very high up-front cost to be made with a GMPA.
According to various studies, closing costs on conventional mortgages rarely
exceed 2% of the loan amount.19 Using 5% as the trigger allows
ample – perhaps too much? – room to ensure that all prime loans
for which a GMPA might be appropriate would be eligible for the competitive
benefits of the GMPA. However, this figure also ensures that loans which are
not truly competitive are excluded from the exemption.20
2. GMPA should not be permitted for loans with prepayment penalties
Prepayment penalties also are the mark of a predatory loan, and lenders providing
GMPAs should not be permitted to include prepayment penalties.
When a lender extends considerable expenses in the making of a loan, the lender
does risk loss if the loan is prepaid before the regular payments on the loan
allow the recoupment of these expenses. In the prime mortgage market, the effect
of competition protects lenders: the low interest rate the borrower currently
has discourages the borrower from prepaying the loan. Typical prime mortgage
loans stay on the books for an average of five years. Thus only 2% of prime
loans have a prepayment penalty.21
However, fully 70% of subprime loans have prepayment penalties because of
lack of perceived options on the part of the borrowers.22
In the subprime mortgage market, the brokers are generally the gatekeepers for
the loans, and they operate on the reverse competition method of yield spread
premiums. The higher the premium paid to a broker, the more likely the broker
will match a lender up with an unwitting borrower. The hefty price paid to the
broker in the yield spread premium is an expense that the lender must recoup
in order to avoid a loss, especially considering that the same broker has an
incentive to market aggressively another loan to the same borrower. Thus, the
lender must charge prepayment penalties to protect itself from the costs incurred
by yield spread premiums.
If prepayment penalties were disallowed, unreasonable yield spread premiums
would not be paid by lenders, because they could not afford the risk. This would
not mean that loans would not be made – they are made every day in the
prime market without hefty premiums and prepayment penalties. As yield spread
premiums are completely masked in the GMPA – unreasonable yield spread
premiums should not be encouraged by allowing loans with prepayment penalties
to be included in the exemptions offered by the GMPA.23
It is clear to many that prepayment penalties on subprime loans have virtually
nothing to do with lowered interest rates.24 It therefore
cannot be argued that precluding loans with prepayment penalties will deprive
most borrowers of a viable way to decrease interest rates.
II. The GMPA should not be implemented without resolving its effect on TILA
compliance
To ensure that the GMPA does not create havoc with compliance and enforcement
of TILA, HUD should move forward on the GMPA portion of the Proposed Rule only
after coordinating with the Federal Reserve Board to ensure that compliance
with TILA maintains the current degree of transparency in home mortgage loans.
TILA and RESPA are connected in several ways. Overhauling RESPA as suggested
will create havoc to the balance currently struck between RESPA and TILA.25
In transactions to which RESPA applies, TILA rules say that the lender need
not give an itemization of the amount financed if it provides the both the GFE
and HUD-1.26 Mortgage lenders have consistently used the GFE
and HUD-1 as a replacement for the itemization of the amount financed.27
The importance of the consumer receiving an itemization of the closing costs
for TILA compliance purposes cannot be overstated. This is the only way both
regulators and consumers can determine if the APR, finance charge, and amount
financed disclosures are accurate. The effect of the Proposed GMPA disclosure
is to eliminate the itemization of the closing charges, at least on any form
provided under RESPA. Since the HUD-1 substitutes for the TILA itemization,
the effect of using the proposed truncated HUD-1 will be that neither consumers
nor regulators will be able to review the TILA cost of credit disclosures for
accuracy.28
Given the interplay between TILA and RESPA, it is imperative that
HUD not move forward on implementation of the GMPA unless TILA and HOEPA compliance
can be enforced.
III. The GMPA rules must be tightened.
If designed properly, with all of the issues relating to compliance with TILA
resolved, and limited to the prime market, the Guaranteed Mortgage Package could
prove helpful for consumers who shop in a competitive marketplace for their
mortgages. In such a market, the GMPA would facilitate the ability of consumers
to compare mortgage products that are actually available to them. With automated
underwriting, mortgage lenders can (and already do in some instances) easily
provide consumers guaranteed information about closing costs, interest rate
and points early enough so that they can shop and make informed choices in a
quick and timely manner. Only this type of inclusive disclosure would clearly
meet the purposes of RESPA and offer American homeowners a real opportunity
to choose the best loan available for their individual needs.
Under the current scheme of mortgage financing, very few consumers know with
certainty the interest rate or the total points and closing costs they will
be charged for a mortgage loan before they have to pay the fees for application,
credit report, appraisal, etc. Instead, consumers must generally pay a fairly
sizeable sum to apply for a mortgage loan, the full cost of which they will
not know until some later time. The effect of the current industry practice
is that even sophisticated consumers find it next to impossible to ensure that
they are receiving the best loan that fits their needs. Moreover, unscrupulous
brokers and lenders have a virtually free hand to increase the junk fees, points
and/or interest rates on the loans.29 Essentially, mortgage
borrowing today is like what some folks call "buying a pig in a poke."
You pay before you know what you're getting.
The better system is one in which the consumer can apply, at no charge, to
the several lenders receiving the credit report, answer any additional questions
the lenders request, and then receive from the lenders a guarantee of a loan
at a specific rate, with a fixed amount of points charged, and a guarantee of
the full amount of closing costs to be charged.30 This guarantee
should be subject only to two contingencies: 1) that the information supplied
by the consumer regarding income and assets could be verified; and 2) that the
value of the collateral – the consumers’ residence – was sufficient
to secure the loan. Under this method, consumers would actually know the full
price for a mortgage loan before they paid for it.
Assuming that HUD clarifies that “final underwriting” only means
verification of information provided by the consumer – and requires that
all of the credit qualifications of the consumer be approved prior to the offer
of the GMPA, the GMPA should indicate the minimum requirements the consumer
must meet.31
A. Section 8 Exemption Is Not Justified without a Clear Guarantee
Unfortunately, the Guaranteed Mortgage Package outlined by HUD in these Proposed
Rules only seems to be describing a program like this, but the crucial elements
of exactly what is promised, and what is left open to later decision –
“final underwriting” – are not addressed.
We have long recommended to HUD that it design a form for consumers to use
when applying to lenders. Consumers could fill out this form once, and send
it along with any other information a particular lender requires to a number
of lenders. Each lender would then conduct a credit underwriting of the consumer’s
application, based on the consumer’s actual credit, and the information
provided by the consumer about income, value of the home, other assets, etc.
The GMPA must then be offered to the consumer contingent only upon the lender’s
verification of the information provided by the consumer. Unless HUD clarifies
the meaning of “final underwriting” to mean just this, the entire
GMPA has minimal value for consumers – only offering lenders a way of
avoiding compliance with Section 8 of RESPA, and virtually all of the important
provisions of TILA.
The bottom line is that may be completely unnecessary for HUD to provide an
exemption from section 8 liability to create the incentive in the marketplace
to offer the guaranteed interest rate and guaranteed closing costs. There is
little in current law that would stop a lender from providing these guarantees
now. We do agree with HUD’s principle that removing the barrier of Section
8's prohibition of volume based discounts would allow lenders to shop for settlement
services and thus reduce costs. However, HUD can remove the barrier this places
on the marketplace without creating the problems that will result from the exemptions
from RESPA and TILA. All HUD need do is remove the current regulatory barrier
for volume based discounts by requiring that the value of volume based discounts
be passed along to consumers. This seems a far simpler solution than the current
construct for the GMPA.32
B. Lender’s breach of the GMPA promise must create a presumption that
Section 8 has been violated
HUD must effectively hold lenders to the promises made in the GMPA. It is
completely ineffective to provide that a lender’s failure to keep the
undertakings made in the GMPA simply causes the lender to lose the exemption
from Section 8. If the GMPA is not abided by, the consumer has no way of determining
whether a Section 8 violation has occurred, and no way of alleging one in a
legal complaint. HUD must provide that a lender’s failure to keep the
promises made in the GMPA to the consumer results in a presumption of a violation
of Section 8.
IV. Requirements for yield spread premiums must be tighter.
HUD has made good recommendations on how to deal with the cantankerous issue
of lender payments to mortgage brokers. The Proposed Rule would amend 24 C.F.R.
§ 3500.7, to add a new subsection (d)(5) requiring that all yield spread
premiums paid by the lender must be disclosed in the GFE as a payment to the
borrower. This is very helpful to consumers – as far as it goes. However,
this proposed rule change is a significant benefit to the borrower which must
be included, not only in that section of the rules relating to disclosures,
but also in the substantive protections of the regulations interpreting RESPA’s
section 8,33 that is, in 24 C.F.R. § 3500.14.
HUD’s Proposed Rule on the treatment of yield spread premiums would
really be helpful if it were not couched entirely in the context of a disclosure.
There is no private right of action under RESPA for violating its disclosure
provisions.
Consumers who do business with mortgage brokers generally have the understanding
that the brokers will provide them the loan at the lowest rate that the broker
finds for them. Consumers have generally understood and agreed to a specific
broker's fee to be paid directly by them – either in cash or by borrowing
more – to the mortgage broker to compensate the broker for obtaining the
loan. What consumers do not understand, and have not agreed to, is the mortgage
broker receiving an additional fee from the lender. Extensive academic analysis
has proven this observation to be true.34
As the Secretary has indicated, the goal is to change the current practices
of allowing yield spread premiums to operate simply to increase the profit of
mortgage brokers and lenders while providing little or no benefit to consumers.
Given the statements of the Secretary, and the extensive testimony at the 2002
Senate Hearings,35 the lack of correlation between the fees
paid to a mortgage broker on a given loan and the amount of work performed by
the mortgage brokers on that loan should be an accepted fact at this point.
However, for HUD to make the Secretary’s promise36 a
reality, several more decisive steps must be taken.
HUD must substantively change the regulations regarding payments of the
yield spread premium, not just the sections relating to disclosures.
Before any payment is made to the broker, the borrower and the mortgage
broker must enter into a binding fee agreement regarding the total compensation,
however denominated, to be paid to the broker.
The borrower must be offered a choice of how to pay the broker fee, whether
in cash, by borrowing more, or by increasing the interest rate and having
the lender pay the broker fee.
This choice should be offered after loan approval but before the settlement.
The amount the broker is paid must be the same whether paid by the borrower
or the lender. The amount paid the broker by the lender reduces, by the exact
amount, the amount owed by the borrower to the mortgage broker.
The total amount paid by borrower and lender must be reasonable compensation
for goods, services and facilities actually provided.
These principles accomplish several things. First, the consumer knows upfront
how much the mortgage broker will charge. Second, the consumer is given the
opportunity to choose how this payment will be paid. Third, and most importantly,
the broker compensation remains the same regardless of method of payment. This
point is crucial, because it eliminates any anti-competitive incentive the broker
has to place the borrower in a loan with an interest rate greater than that
for which the borrower would otherwise qualify. In other words, whether the
borrower chooses a below par loan, a par loan, or an above par loan with a yield
spread premium, the broker compensation will remain the same. This is not how
the system works today and it must be changed.
HUD’s current proposal on how to treat yield spread premiums is a variation
of these principles. However, as currently configured, they are neither clear
enough to offer real protections to consumers, nor are they enforceable by consumers.
For example, under the new proposal it is not at all clear how and when the
consumer actually exercises the choice of whether to use the yield spread premium.
The proposed information to be included in the GFE does not necessarily include
loan terms which are actually available to the consumer. It is not clear how
the consumer should indicate the choice actually made.
We strongly recommend that HUD make good on the Secretary’s promises
and make the yield spread premium a useable – and enforceable –
credit for the consumer. This can best be done by requiring two separate agreements
to be executed between the consumer and the broker, one at the beginning of
the relationship in which the broker states the total amount of compensation
to be received for the loan, and another when the loan has been approved in
which the consumer is informed of the various options by which he/she can pay
the broker’s fee and other closing costs, and the consumer exercises that
option.
To date, yield spread premiums are generally paid by the lender to the broker
solely in compensation for the higher rate loan. In other words, because the
broker brings to the lender a loan at a higher rate than the consumer would
otherwise qualify the broker is paid a fee, or kickback. These fees are an extra
fee that the broker is able to extract from the deal. In most cases, the borrower
is not only paying an upfront broker fee, but is also paying a higher interest
rate as a result of this kickback. As this practice clearly provides an incentive
for brokers to obtain above par loans for consumers, the dynamics of the marketplace
closely resemble the marketplace that Congress attempted to control with its
passage of RESPA. This is what is going on in the marketplace today, and this
is why the rule proposed by HUD is so sorely needed.
Because of extensive litigation flowing from the industry’s continued
refusal to comply with the mandate of RESPA, in 1998, Congress issued a directive
to HUD to write a Statement of Policy.37 Despite the issuance
of the 1999 Policy Statement, the industry continued as before – lenders
continued to pay broker fees without evaluating either the services provided
by the broker or whether the payment of the lender fee reduced the fees otherwise
owed by the borrower. Because the benefit to the brokers and lenders was so
great (higher fees for brokers, higher interest rates for lenders), the mortgage
industry’s strategy was to continue its illegal practice, pay off the
few individual actions brought against it and mount a massive effort to fight
class action cases challenging the payment of these fees, which might actually
cost the industry real money and cause the industry to change its behavior.
Despite industry’s behavior, the Eleventh Circuit ultimately held that
consumers could join together in class actions and challenge this activity.38
The industry reacted strongly to this case (Culpepper II) and pushed HUD to
step in to clarify its policy statement. HUD accepted the invitation and issued
its second policy statement on the subject on October 18, 2001. The crux of
HUD's "clarification" comes on page 11, with the statement:
HUD’s position is that in order to discern whether a yield spread
premium was for goods, facilities or services under the first part of the
HUD test, it is necessary to look at each transaction individually. . .[21]
In addition, HUD explicitly repudiated the decision in Culpepper II and stated
its standard to be: the total compensation paid to the broker from any source
(not just the lender-paid fee) must be for goods, services, or facilities. Unfortunately,
the effect of HUD’s 2001 Policy Statement had the intended impact on the
payment of lender paid broker fees. Providing the "clarification"
of the 1999 Statement as sought by the mortgage industry has had the effect
of completely eliminating class actions as a form of redress for illegal lender
paid broker fees.39 Now, without class actions as a means to litigate the legality
of these fees, the industry has no incentive to change its practices or even
to comply with a new regulation – because there are insufficient legal
resources in this nation to represent consumers in individual actions involving
claims of only a few thousand dollars.
V. The new rules for the GFE, while basically good, must be tweaked to be
fully protective of consumers.
We applaud the bright line rules proposed by HUD to severely limit the gaming
currently rampant in the marketplace on closing costs. The GFE should be a true
reflection of actually anticipated costs, not an opportunity for lenders to
mislead consumers – as it is currently. Lenders who make numerous loans
do have the capacity to determine their own charges and those of settlement
service providers that they choose and require.
There are a number of significant changes, however, which must be made to
the construct of the proposed GFE, for example –
The language regarding the broker’s relationship to the consumer
is incorrect in many states and must be deleted.
The comparison chart on the GFE form should be uniform and reflect actual
terms available to the consumer.
There is no longer any justification to exclude home equity lines from
RESPA coverage, so the rules should require they be covered.
The disclosures in section II of the GFE should include critical loan terms
such as prepayment penalties and balloon terms.
The credit from the lender must not appear simply as a credit against closing
costs, rather it should appear as a cash credit in the 200 series of the HUD-1.
We have provided more detailed information about our recommendations in the
comments submitted to HUD.
VI. There must be effective enforcement mechanisms for an originator’s
failure to comply with all aspects of these new rules.
Even perfect consumer protection rules will only work in the marketplace if
they are enforced in a meaningful way. Lenders must have incentives to comply
with the rules, because lack of compliance is too costly. The Proposed Rule
does not currently include any mechanisms to punish transgressors. The proposal
only provides that once the transgression is caught, the remedy is for the lender
to provide what was promised all along. This rewards lack of compliance because
the cost of being caught breaking the rules is the same as compliance. This
is frankly absurd. HUD must provide a means to make it cost originators if they
violate these rules – or else the rules are virtually meaningless. We
propose several specific measures to make the new RESPA rules meaningful:
Civil enforcement of each element under the rule is essential. This includes
the requirements for treatment and disclosure of the yield spread premium,
the new rules for the Good Faith Estimate, as well as for a lender’s
failure to keep the promises in the GMPA.
HUD must remove its stated prohibition against enforcing violations of
section 8 through class actions. The 2001 Statement of Policy explicitly requires
a court’s individual review of each transaction, eliminating the efficient
enforcement mechanism of class actions. Once HUD’s Proposed Rules provide
the new rules of the road, there is no reason a court cannot evaluate and
enforce the yield spread requirements in class reviews – as the only
issue will be whether the mortgage broker actually gave the consumer the full
benefit of the payment from the lender.
A lender’s failure to follow the rules for the new Good Faith Estimate
must be actionable in some manner, other than merely regulatory enforcement
– as regulatory enforcement has shown that it is not sufficient to encourage
the industry to comply with the law. Although the RESPA statute does not provide
a private right of action in this regard, HUD can and should articulate that
it believes the failure to comply with these rules is unfair and deceptive.
This should enable some private enforcement under state and federal prohibitions
against unfair and deceptive acts and practices.
A lender’s failure to follow the rules when offering a GMPA or to
close on a loan thereafter that does not conform to the GMPA must presumptively
violate RESPA’s Section 8. The current proposal results in the lender
losing its exemption from Section 8 coverage and only allows the consumer
a potential contract action against the lender for not keeping the promises
in the GMPA. This is completely ineffective. As attorney’s fees are
generally not available for breach of contract, few consumers will have the
means to bring a case to court for the few thousand dollars which would be
obtained in a contract action on most failed GMPAs. Further, consumers will
not have the means to allege a prima facie case of a violation of Section
8 as the GMPA scenario dictates that neither the initial estimate, nor the
HUD-1 will provide details on the payments of fees for services provided by
third parties. Therefore, HUD must state that if a lender fails to comply
with the promises made in the GMPA, there is a presumption that the lender
has violated Section 8.
Conclusion
Given the complexities of the mortgage closing process, the potential effect
of the changes in RESPA’s rules on predatory lending we have extensive
and detailed concerns on every aspect of the HUD’s proposed rules on RESPA.
For a full explanation of all these concerns we respectfully refer you to our
comprehensive comments filed with HUD.40
We have met several times with officials from HUD and we appreciate their
willingness to hear our concerns and proposals. We remain seriously concerned,
however, about the effect of the final changes in the RESPA rules on the low
and moderate income homeowners who are already facing massive problems in the
mortgage marketplace. We are hopeful, however, that HUD will attend to these
issues and not exacerbate the crisis situation facing this nation’s communities.
Thank you for the opportunity to testify today.
February 25, 2003
Testimony written and presented by:
Margot Saunders
Managing Attorney
National Consumer Law Center
1629 K Street, NW
Washington, D.C. 20006
(202) 986-6060
margot@nclcdc.org
also on behalf of:
Consumer Federation of America
Consumers Union
U.S. Public Interest Research Group
______________________________________
1The National Consumer Law Center is a nonprofit
organization specializing in consumer issues on behalf of low-income people.
We work with thousands of legal services, government and private attorneys,
as well as community groups and organizations, from all states who represent
low-income and elderly individuals on consumer issues. As a result of our daily
contact with these advocates, we have seen examples of predatory practices against
low-income people in almost every state in the union. It is from this vantage
point – many years of dealing with the abusive transactions thrust upon
the less sophisticated and less powerful in our communities – that we
supply these comments. We have led the effort to ensure that electronic transactions
subject to both federal and state laws provide an appropriate level of consumer
protections. We publish and annually supplement twelve practice treatises which
describe the law currently applicable to all types of consumer transactions.
2The Consumer Federation of America is a
nonprofit association of over 280 pro-consumer groups, with a combined membership
of 50 million people. CFA was founded in 1968 to advance consumers' interests
through advocacy and education. Consumers Union is the nonprofit publisher of Consumer Reports
magazine, is an organization created to provide consumers with information,
education and counsel about goods, services, health, and personal finance; and
to initiate and cooperate with individual and group efforts to maintain and
enhance the quality of life for consumers. Consumers Union's income is solely
derived from the sale of Consumer Reports, its other publications and from noncommercial
contributions, grants and fees. Consumers Union's publications carry no advertising
and receive no commercial support. The U.S. Public Interest Research Group is the national lobbying
office for state PIRGs, which are non-profit, non-partisan consumer advocacy
groups with half a million citizen members around the country.
3 The Real Estate Settlement and Procedures Act (“RESPA”),
12 U.S.C. § 2601, et seq.
4 As this testimony can only provide a summary of the many
issues which must be addressed in the proposed rules, we point you to the comprehensive
comments that we filed with HUD, available on our website at www.consumerlaw.org.
Our comments to HUD were provided on behalf of our low income clients, five
national consumer advocacy groups, as well as the clients of 17 legal services
programs in urban and rural areas throughout the nation. See, Appendix 1. Portions
of these comments are reiterated in this written testimony.
5 We have supported the concept of the GMPA in the past in
the context of statutory change in the law. Amending the RESPA and TILA statutes
would allow all the overlapping issues of disclosures under both statutes, enforcement,
and protections against predatory lending, to be addressed together. Attempting
to address the disclosure problems of RESPA only through regulation unfortunately
creates serious implications for enforcing TILA requirements and removes existing
protections against predatory lending. See Margot Saunders, Testimony
Regarding the Rewrite of Truth in Lending Act and Real Estate Settlement
Procedures Act (Sept. 16, 1998), available on-line at http://www.consumerlaw.org/initiatives/predatory_mortgage/sen_mortg.shtml.
6 15 U.S.C. § 1601 et seq. Currently, compliance with
TILA’s required allocation of fees between amount financed and finance
charge can be tested only by comparing the disclosure of specific fees provided
on the RESPA HUD 1 with the statements of the disclosures provided on the TILA
form. Though TILA generally requires the lender to provide the borrower with
an itemization of the amount financed unless the consumer opts out, lenders
need not give this itemization if they provide both the GFE and the HUD-1. Official
Staff Commentary § 226.18(c)-4.
7 12 U.S.C. § 2607.
8 This situation may change if the Federal Reserve Board issues
new regulations or new comments under TILA requiring otherwise. These comments
evaluate the effect of the Proposed RESPA Rule on existing interpretations of
TILA rules.
9 Codified at Section 129 (15 U.S.C. § 1639) and in Sections
31 and 32 of Regulation Z (12 C.F.R. § 226.31 and 226.32).
10 15 U.S.C. §1602(aa)(1).
11 For example, only HOEPA loans require the extra disclosure
required three days before closing, as well as limitations of the circumstances
in which prepayment penalties can be charged (15 U.S.C. § 1639(c)), special
requirements for payments made to home improvement contractors ((15 U.S.C. §
1639(i)), and prohibitions on extending credit without regard to the consumer’s
payment ability (15 U.S.C. § 1639(h)).
12 15 U.S.C. § 1640(a) and 15 U.S.C. § 1635.
13 Federal Reserve Board, Final Rule, Statement of Basis and
Purpose, 66 Fed. Reg. 65604, 65607 (Dec. 20, 2001).
14 This information is gleaned from the hundreds of loan documents
reviewed each year by the attorneys providing these comments. See also Washington
Department of Financial Institutions, Expanded Report of Examination for Household
Financial Corporation III as of April 30, 2002, at 48 (finding that Household
charged 7.4% in upfront costs on most loans), available from the National Center
on Poverty Law as Clearinghouse No. 54,580.
15See, Joint HUD-TREASURY Report on Recommendations
to Curb Predatory Home Mortgage Lending, June 20, 2000, at page 11. http://www.hud.gov/library/bookshelf18/pressrel/pr00-142.html.
The agencies noted the dangers to homeowners of financing high fees:
Financing points and fees may disguise the true cost of credit to the borrower,
especially for high interest rate loans. Restricting the financing of points
and fees for HOEPA loans would cause these costs to be reflected in the interest
rate, enabling borrowers to better understand the cost of the loan, and to
shop for better terms.
16See 24 CFR 81.16(b)(12) and 24 CFR 81.2. These
regulations do allow third party fees paid for closing costs to be excluded
from the 5% calculation. However, as these fees would not be itemized on the
GMPA, excluding some fees would not be possible. It is also far better, at this
point of the development of this new product to exclude too many loans, rather
than to include too many, and limit enforcement of existing law on predatory
mortgages as a result.
17See, e.g. N.C.G.S. S.L. 1999-332; Ga. Code Section
7-6A-1 et seq.; 2001 N.Y. A.B. 11856 (SN) (Oct. 3, 2002).
18 We include in our definition of fees the high costs of
single premium credit insurance.
19 According to the Federal Housing Finance Board’s
"Monthly Interest Rate Survey,” Table 1: Terms on Conventional Single-Family
Mortgages, Annual National Averages, All Homes, available at www.fhfb.gov/MIRS/mirs_t1.xls,
initial fees and charges average less than one point from 1995 through 2000
on conventional residential mortgages.
20 For example, a loan of $150,000 would be permitted to
have a GMPA package cost of $7,499. A $200,000 loan could have a GMPA price
of $9,999. These up-front costs are actually much higher than most competitive,
prime loans would ever charge for up-front closing costs. To the extent that
the figure of 5% may represent too small a sum to compensate lenders for their
up-front costs when making small loans (for example loans of less than $75,000),
the 5% trigger could be adjusted upwards. However, just as this figure is adjusted
upwards for smaller loans, the 5% trigger should also be adjusted lower for
loans of larger amounts.
22See Gail McDermott, Leslie Albergo, Natalie Abrams,
Esq., NIMS Analysis: Valuing Prepayment Penalty Fee Income Standard & Poor's,
News Release, Jan. 4, 2001. Also see, North Carolina Coalition for
Responsible Lending, Prevalence of Prepayment Penalties, available at http://www.responsiblelending.org/PL%20-%20Coalition%20Studies.htm citing data obtained in an interview with the Mortgage Information Corporation
and the industry newsletter, Inside Mortgage Finance, and the following articles
on conforming mortgages: "Freddie offers a new A-, prepay-penalty program," Mortgage Marketplace, May 24, 1999; Joshua Brockman, "Fannie revamps
prepayment-penalty bonds," American Banker, July 20, 1999.
23 Subprime lenders claim that borrowers voluntarily choose
prepayment penalties to reduce their interest rates. Borrower choice cannot
explain, however, why some 70% of subprime loans currently charge prepayment
penalties and only 2% of conventional loans do (almost all in California). The
real reason is that conventional mortgage markets are competitive and sophisticated
borrowers have the bargaining power to avoid these fees; borrowers in subprime
markets often lack sophistication or are desperate for funds and simply accept
the penalty that lenders insist that they take. In addition, predatory lenders
favor prepayment penalties as a way of preventing borrowers from seeking more
competitive rates and terms once they realize what has happened.
24 See e.g. Amy Crew Cutts, On the Economics of Subprime
Lending, FTC Roundtable: Economic Perspectives on the Home Mortgage Market,
Washington, D.C. October 16, 2002, Slide 2.
25 Of relevance to this discussion, TILA requires the lender
to give the consumer an itemization of the amount financed, including the sum
of the prepaid finance charges. However, the lender need not give the itemization
if the consumer opts out of receiving it. 15 U.S.C. § 1638(a)(2)(B); Reg.
Z § 226.18(c).
26 Official Staff Commentary on Regulation Z, § 226.18(c)-4.
27 TILA and RESPA also intersect when the mortgage transaction
involves the purchase, acquisition, or construction of the home securing the
mortgage. In the purchase-money context where the mortgage loan is subject to
RESPA, TILA requires that a good faith estimate of the TILA disclosures be given
within 3 days of application (in effect, concurrently with the GFE). 15 U.S.C. § 1638(b)(2); Reg. Z § 226.19(a)(2).
28 HUD proposes that the HUD-1 contain a list of the finance
charges that the lender used to calculate the APR. This suggestion does not
cure the problems just described. Whether a particular lender violates the finance
charge disclosure rules requires an independent review of all of the closing
costs, not just those that the lender treated as finance charges. Under the
proposal, regulators and consumers would be unable to make that independent
review.
29 The numerous class action lawsuits challenging the payment
of yield spread premiums to mortgage brokers is a primary example of consumers
who have found they received mortgage loans which were more expensive than they
should have.
30 All closing costs charged by the lender to close the loan
would be included in this guarantee. Some expenses would be excluded from the
guaranteed closing costs package, such as certain truly optional expenses like
owner’s title insurance, as well as expenses unrelated to the loan itself
like hazard insurance and property taxes.
31 The GMPA will be based on information provided by the consumer
on income, value of home, other assets, and similar information. The preliminary
underwriting performed by the lender is based on the consumer’s information
and the consumer’s actual credit status (as determined from credit reports).
However, the GMPA will be offered contingent on the consumer fitting certain
preconditions, rather than needing every detail provided by the consumer to
be exactly correct. For example, if the consumer provides information indicating
annual income of $70,000 a year, and the terms of the loan offered in the GMPA
require annual income of $60,000, the GMPA should state this. So if this consumer
actually had annual income of $69,000, the GMPA should still be valid. If the
consumer’s information turns out to be incorrect in a de minimus amount,
that should not alleviate the lender’s obligations under the GMPA.
32 Indeed, it seems quite likely that HUD need do nothing
to facilitate this type of guarantee and fixed price for closing costs. At least
one large lender – ABN AMRO – has been providing this product quite
successfully for some time. This lender is providing the product, with all the
guarantees that we advocate (guarantee of the interest rate as well as points
and closing costs) and is doing it without the exemption from section 8 liability,
and with full compliance with the Truth in Lending Act. See www.mortgage.com.
Indeed, according to one commentator, several other large lenders are now providing
the same type of guaranteed packages, also without requiring a change in the
law. See, Ken Harney, Bundled' Settlement Fees Attracting Rate
Shoppers, Washington Post, Real Estate Section, February 10, 2003. www.washingtonpost.com/wp-dyn/articles/A8995-2003Feb14.html.
34See, e.g. Statement of Prof. Howell E. Jackson,
Harvard Law School, before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, Jan. 8, 2002, available at http://banking.senate.gov/02_01hrg/010802/jackson.htm.
36 Regarding this new rule, the Secretary said: “The
new policy will make clear that it is illegal for a settlement service provider
to mark-up fees when it is making a payment to another settlement service provider,
unless it provides additional value to the homebuyer in the process, or when
a provider does no work for the fee and charges an unreasonable amount.”
See HUD No. 01-105, October 15, 2002, “Martinez Moves to Protect Homebuyers;
Calls for Simplified Mortgage Process.”
37 "The conferees expect HUD to work with representatives
of industry, Federal agencies, consumer groups, and other interested parties
on this policy statement." See the Conference Report on the Departments
of Veterans Affairs and Housing an Urban Development, and Independent Agencies
Appropriations Act, 1999, H.R. Conf. Rep. No. 1050769 at 260 (1998).
39 This has been the exact decision of several courts, including
Glover v. Standard Fed. Bank, 283 F. 3d 953 (8th Cir. 2002); Shuetz
v. Banc One Mortgage Corp., 292 F.3d 1004 (9th Cir. 2002); Heimmermann
v. First Union Mortgage Corp., ___ F.3d ___, 2002 WL 31067330 (11th Cir.
Sept. 18, 2002).
and NCLC