More thoughts on RESPA reform

In my conversation with Mr. White from VA about how to disclose unallowable fees under the new RESPA, he mentioned to me that they were struggling just like we were to figure it out. He also asked me my thoughts on the new regulations, and I thought I would share my reply:

You asked about my thoughts on the new RESPA, and my main criticism is that it was written by people who clearly have never worked in the industry, at least not at the ground level where borrowers and loan officers actually do the work. In fact, much of our RESPA training was spent listening to the attorneys venting about how RESPA conflicts with other federal regulation like the Truth-In-Lending act. It was their position that in some circumstances a lender couldn't help but violate one or the other because what one requires the other prohibits.

The fact that they never considered how RESPA would interact with VA loans is further evidence that these rules were written in a vaccuum. Regulators need to understand the complex interactions of the differenct federal regulations that come into play so they don't create compliance conflicts. Many of these issues are so obvious that it's clear there was nobody at the table who had ever actually originated a loan.

The other big issue is the way the new RESPA favors the banks over brokers. For background, brokers have always had to disclose any SRP (which when abused results in a higher rate, but is nearly always present to some extent even when locking the best available rate) while banks have not. The logic is that banks release the servicing a day or two after closing so the SRP is not part of that transaction - even though it is part of their rate lock just like for brokers. Anyway, the new RESPA transfers that money to the borrower instead of the broker. Banks and brokers typically make 1.25% to 1.5% on each loan with 1% being paid by the borrower and the rest in SRP. We never know exactly what we'll make until we lock the rate, but the borrower does know what they'll pay. Now if a broker wants to make 1.5% on a loan they must charge that amount on the GFE and then hope to get the 0.5% back for the borrower in SRP. Banks do not have to change anything, so in a scenario where both loans close with the exact same costs, the broker's initial Good Faith Estimate will look worse by 0.5% of the loan amount, which is a significant amount for anyone shopping around.

This provision also fundamentally shifts the risk from the broker to the borrower. We used to charge a 1% fee and hope to make more when we lock. Now we have to charge more and hope to get it back for the borrower when we lock. So now we know exactly what we'll make up front, but the borrower doesn't know exactly what they'll pay until the loan is locked. Brokers are used to taking that risk, but borrowers are not going to be comfortable with such fuzzy numbers, especially when it comes to closing costs.

The one good thing about the new RESPA is that it does away with bait-and-switch tactics. Once you issue a GFE you can't change your fees. Lenders who engaged in those tactics were certainly a problem and should be removed from the industry. Of course, HUD could have accomplished this goal by simply sticking with the old forms and regulations but adding the provision that once you disclose your fees you can't change them, but that would have been too easy.

The old GFE would, in fact, work better for this purpose because the borrower actually signed it. There is no signature line on the new 3 page GFE and, in fact, HUD has specifically prohibited us from having the borrower sign it. What good is a disclosure that you "can't change after issuing" if the borrower doesn't sign it? How will auditors be able to tell how many times that form was changed as long as they remember to get the old ones out of the file? I know that dishonest people will always find a way around any regulations, but in this case HUD seems to have given it to them on a silver platter. This part is so unbelievable it seems to go beyond simple incompetence. What were they thinking?

Anyway, I apologize for the long-winded rant, but you did ask...

More on VA under the new RESPA

VA issued a circular on January 7th giving some guidance as to how to handle VA's unallowable borrower fees under the new RESPA. You can read it here: http://www.homeloans.va.gov/circulars/26_10_1.pdf

It seemed somewhat encouraging but not completely clear, so I e-mailed William White for clarification. From our discussion, it seems that it is VA's position that on a refi we would itemize the fees from "our origination charge" on a separate sheet and also itemize which of those fees are being paid by SRP on a separate page of the HUD and, by doing that, be able to pay the unallowable fees using SRP like we always have. This is great news because if you read my earlier posts you'll see that we would all be out of the VA refinance business without some provision like this.

Of course, now the challenge is to get the wholesale lenders to see it that way. One I spoke with thought that VA was wrong about this and would change their mind shortly, and of course they don't want to be stuck with a pipeline full of loans that can't be closed. His argument was that since SRP is now credited to the borrower it's the borrower's funds, and those fees can't be paid by the borrower's funds. I ran that argument by Mr. White from the VA and he said that they were OK with doing it that way. He also stated that they were struggling to figure out how to deal with the new RESPA just like the lenders are. The difference is that at least VA seems to be trying to make it work.