RESPA Reform Lite

HUD takes a pragmatic approach to its final changes.

February 1, 2009

The federal government has finalized sweeping reforms to settlement rules for residential transactions, but it will be nearly a year before you'll see any big changes at the closing table.

As one of its parting actions, the Bush administration in November revised the Good Faith Estimate and HUD-1 forms, ostensibly to make it easier for consumers to compare costs between the two documents, improve the disclosure of yield-spread premiums that are paid to mortgage brokers, and make it less likely consumers will face big cost discrepancies between the preliminary GFE and the HUD-1 settlement statement presented at closing.

The National Association of REALTORS® has long supported making closing costs more reasonable and transparent for consumers, so, although it has concerns with some aspects of the new rules, the changes could lead to some improved practices, NAR says. Notably, the rules are a major improvement over the U.S. Department of Housing and Urban Development's proposed reforms in March 2008.

"What HUD came out with is much better than we were expecting," says Adam Cockey of Chase Fitzgerald & Co., in Baltimore. "But we'll be carefully monitoring how these changes play out." Cockey chairs NAR's Real Estate Services Committee and sat on the association's Real Estate Settlement Procedures Act presidential advisory group.

Some minor changes included in the reforms took effect on Jan. 16, 2009. However, the date that's most important for real estate practitioners to remember is Jan. 1, 2010. That's when lenders will be required to use a new three-page GFE (up from the current two pages) and a revised HUD-1 closing statement.

The new forms increase transparency by requiring lenders to calculate yield-spread premiums as part of their origination fee. Some critics say the premiums — which compensate mortgage brokers based on the interest-rate spread for which borrowers qualify and what they ultimately lock into — give mortgage brokers an incentive to place borrowers into higher interest loans than they otherwise could get. The National Association of Mortgage Brokers has said it will challenge HUD's treatment of yield-spread premiums in court because small brokers will be disproportionately hurt.

In another significant change, the new forms will no longer allow lenders to change certain costs that are stated on the GFE form. Costs that cannot be altered include the origination fee and transfer taxes. Some third-party costs, such as title searches and inspections, can change, but they're limited to a maximum change of 10 percent.

If the transaction gets to the closing table and the HUD-1 form shows that costs have changed more than the limit, the deal can still close, but the cost discrepancies will have to be worked out within 30 days. "That 30-day cure period is one of the changes from HUD's original proposal we support. There was concern a deal could collapse at the last minute because of a minor cost discrepancy if the settlement officer and the lender couldn't work out the discrepancy after closing," says Cockey.

Although they're not required to start using the new forms until next year, lenders have the option of adopting the forms now. If they do, the new rules on cost discrepancies and calculating the yield-spread premium kick in immediately.

The changes that took effect earlier this year are mostly technical, having to do with escrow disclosures and electronic signatures, among others.

But a few changes are substantive. One allows lenders to use an average when filling out third-party costs on the GFE. Another mostly affects home builders: It's an "antitying" provision prohibiting builders from using an incentive to channel consumers into one of their affiliated services such as a mortgage lender. Some home builders have indicated they might challenge this provision.

In a victory for REALTORS®, HUD eliminated a proposed provision that would have permitted lenders and other settlement service providers to negotiate discounted charges as part of a one-stop shopping package. NAR was concerned that such negotiated discounts would skew the playing field in favor of large providers and promote discounted pricing over higher quality service. HUD says it wants to revisit the issue later, so it's something NAR has to continue to watch, says Cockey.

Another big victory, particularly for title companies, is the elimination of a proposed mandatory closing "script," which settlement officers would have been required to read. The script raised a number of concerns, not the least of which was the amount of time it would consume during each transaction.

"Anything that helps consumers is good, and some of these changes might help them," says Cockey. "But we will be watching carefully to see how some of these reforms translate into real-life situations."

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.