HUD proposes mortgage reform to help consumers better understand their loan, shop for lower costs

March 14, 2008

Jackson: Need for reform is now; proposal to save consumers almost $700

WASHINGTON – In an effort to significantly improve the complicated, unclear and costly homebuying process, U.S. Housing and Urban Development Secretary Alphonso Jackson today proposed mortgage reform designed to help consumers better understand their loan terms so that they can shop more effectively for the largest purchase of their lives.

HUD’s proposal reforms the more than 30-year old rules of the Real Estate Settlement Procedures Act (RESPA), and improves disclosure of the loan terms and closing costs consumers pay when they buy or refinance their home. For the first time ever, HUD is proposing that mortgage lenders and brokers provide consumers with a standard Good Faith Estimate. By more openly disclosing the key elements of the loan and by controlling fee inflation, the Department seeks to provide consumers with enough information to allow them to shop more effectively for the lowest cost loan. HUD’s economic analysis finds that by offering consumers clearer, more certain cost estimates, the average borrower will save nearly $700.

“A lot of the mortgage problems we see today are directly related to the fact that few people fully understand this process,” said Jackson. “Buying a home can be very intimidating. Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that’s been one of the factors driving the current housing downturn. Our proposal fixes that. We owe it to the American homebuyer to give them the information they need to make smart choices.”

Brian Montgomery, HUD’s Assistant Secretary for Housing, added, “It’s not right that millions of consumers go to the settlement table without fully understanding the mountain of paperwork they’re asked to sign and, on top of that, expected to pay thousands of dollars in closing costs for services they’ve never heard of. This new Good Faith Estimate will give families the tools they need to understand what they’re getting into before they sign on the dotted line.”

In light of recent increases in loan defaults and foreclosures, the need for reform is imperative. When President Bush announced his comprehensive plan to address rising foreclosures last August, he pledged to offer new mortgage rules that would help families to avoid getting into trouble in the first place. This proposed RESPA rule makes good on that pledge.

HUD is proposing to offer consumers a standard Good Faith Estimate (GFE) that will substantially enhance disclosure of all important aspects of the loan, including:

The interest rate and monthly payment;
Whether the interest rate and principal balance can increase and by how much; and
Whether the loan has a prepayment penalty or balloon payment.

The proposed Good Faith Estimate would consolidate closing costs into major categories to prevent “junk fees” and display total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. In addition, HUD’s new proposed rule would specify the charges that can and cannot change at settlement. If a fee changes, HUD proposes to limit the amount it can change. HUD also proposes to modify the HUD-1 settlement statement to help consumers compare the anticipated charges on the Good Faith Estimate and their actual charges.

The Good Faith Estimate would also require that lender payments to mortgage brokers (often called Yield Spread Premiums) be disclosed. It is HUD’s belief that these payments are directly dependent on the interest rates that consumers agree to and therefore ought to be disclosed. To ensure that HUD’s new proposal would not create a consumer bias against brokers, the Department did rigorous consumer testing and found the proposed Good Faith Estimate helped consumers to select the lowest cost loan more 90 percent of the time, regardless of whether the loan was originated by a lender or a broker.

Finally, HUD is proposing that settlement agents read a “closing script” to borrowers at the settlement table and that a copy be provided to the borrower. This closing script would ensure that the settlement agent not only compares the borrower’s estimated and actual charges, but would detail the key terms of the loan. HUD’s extensive consumer testing found borrowers appreciated the enhanced disclosures, believed the loan details on the closing scripts were clear and understandable, and reacted positively to having the scripts read out loud.

Legislative Changes to RESPA

To further bolster consumer protection and to ensure uniform and consistent enforcement of RESPA, HUD intends to seek legislative changes to the Act that will complement the regulatory improvements made by the rule. Currently, RESPA does not provide HUD with enforcement mechanisms for some of the most important consumer disclosures and protections. A lack of enforcement authority and clear remedies for violations of critical sections of RESPA negatively impact consumers and diminish the effectiveness of the statute.

HUD will seek the authority to impose penalties for violations of specific sections of RESPA, including Section 4 (provision of uniform settlement statement); Section 5 (GFE and settlement costs booklet); Section 6 (loan servicing); Section 8 (prohibition against kickbacks, referral fees, and unearned fees); Section 9 (title insurance); and portions of Section 10 (regarding escrow accounts). In addition, HUD proposes the authority for the Secretary and State regulators to seek injunctive and equitable relief for violations of RESPA; require delivery of the HUD-1 to the borrower three days prior to closing; and establish a uniform statute of limitations applicable to governmental and private actions under RESPA.