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.

HUD's response to my question

Well, I got a response from HUD, but it wasn't the most helpful thing in the world. It looks like they haven't thought about, and don't intend to think about, the way their new rules interact with the existing rules of other federal agencies like the VA. This is unfortunate since these interactions are critical to the way things actually work in the real wold. Of course, the problem may be that the people making the rules don't actually work in the "real world" of mortgage finance.

Here is the exact quote in answer to my questions from my last post:

"It is recommended that you discuss the VA guidelines with their office, HUD cannot interpret regulations promulgated by another federal agency."

It's very frustrating when you have two federal agencies making rules that are in direct conflict with one another and that somehow both have to be applied in the same transaction. I wonder if I should take this question to VA... or will they just respond that they don't interpret HUD's regulations?

VA Loans under the New RESPA

If you've heard anything about the new RESPA rules going into effect in January 1, 2010, you've undoubtedly heard that there are issues. One issue that jumps out at me is the handling of the VA non-allowable closing costs. I was all over HUD's RESPA site and VA's website and could find no answers, so I wrote an e-mail to HUD's RESPA questions address. Since I know I'm not the only one with this question I'll be sure to post any reply I get as well. Here's what I wrote to HUD:

I'm wondering how to handle "non-allowable" borrower fees like the ones in a VA loan. Certain fees, such as underwriting, processing, and the buyers part of the escrow fee for example, are "non-allowable" borrower fees in a VA loan. Traditionally these are paid by the seller in a purchase and paid with rebate pricing by the lender in a refinance.

First, on a purchase do we still disclose those fees even though the borrower cannot by law pay them? The FAQs say we should include the owners title policy in the GFE even though the seller traditionally pays that, so is it the same with the non-allowable fees? Is there a way to show seller paid closing costs on the new GFE at all?

Second, on a refinance those non-allowable fees are typically paid by the broker/lender using SRP or rebate pricing because there is no seller to pay them and the borrower is not allowed to pay them. Since any rebate must now go directly to the borrower that option is no longer available. Consider the fact that VA limits the origination fee to 1% of the loan amount and the fact that VA non-allowable fees are usually between $1,000 and $1,300. If the loan amount is anywhere near $130,000 the originator would be doing the loan for nothing, which is obviously not going to happen. If I'm reading the new rules correctly, VA refinances will be a thing of the past as of January 1st.

Since I'm sure your intent was not to deprive veterans of the opportunity to refinance or purchase a home, I'm assuming there is some exception or workaround that I'm not aware of. For VA loans the new GFE is unclear and leaves the originator in a position where they may end up covering those non-allowable fees, which is not a risk I think any of us are willing to take.

Thank you in advance for your response.

RESPA Reform effective January 1, 2010

Here are highlights of the new RESPA rules:

Standardized Good Faith Estimate form that all lenders must use. You can view the new three page GFE at http://www.hud.gov/content/releases/goodfaithestimate.pdf. It will be worthwhile for you to familiarize yourself with this form since it is what all everyone will be using.

This new form groups fees into subtotals rather than itemizing each one. The idea is that buyers can compare the total of the fees rather than adding up the various individual fees and trying to determine which ones vary from lender to lender.

New HUD-1 Settlement Statement corresponds to the GFE allowing buyers to easily compare the quoted fees to the actual fees at closing.

Certain fees, including all lender fees, can not change (0% tolerance) once they are quoted unless there is a change in circumstances (loan amount, down payment, etc.) or a change requested by the borrower (loan term, etc.). Even in these cases, only the charges directly affected by the new circumstance can change.

Even third party fees that are required by the lender, like title and escrow, must be accurately disclosed to within a 10% tolerance. Ideally these tolerances will finally put an end to the “bait and switch” tactics employed by some lenders.

The new GFE also makes the loan terms very clear right on the first page. It includes “yes or no” checkboxes for things like variable rates or payments, negative amortization, balloon payments, and prepayment penalties.

We've been creating regulations like this for almost as long as lending has been around, and so far they still haven't come up with a way to keep dishonest lenders from cheating unsuspecting borrowers. I don't have much confidence that they've finally figured it out now either. These new rules certainly aren't perfect and certainly won't prevent all predatory and dishonest lending practices, but they are the reality we have to deal with for now.

For more information you can go to the 51 page FAQ section of HUD’s website at http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf

A Vast Anit-Consumer Conspiracy

Today another new disclosure law goes into effect. This one is called the Mortgage Disclosure Improvement Act, or MDIA, and it really doesn't add much except additional time to the process. You must wait so many days after each set of disclosures to move on to the next step such as ordering the appraisal, signing loan docs, and so on. The MDIA doesn't actually improve the disclosures as the name would suggest, it just adds some waiting periods to the disclosures we already have.

This new regulation got me thinking about the sheer number of disclosures that are required in any loan package. I won't go into all the details, but I can assure you that anything that anyone thinks is important will show up on multiple forms and that every minute detail is covered ad-nauseum on densly packed legal size forms. The stack of papers that a borrower must sign at escrow typically exceeds one inch in thickness.

I'm sure that each form, taken by itself, has some value. I can see how the rulemakers, who are perhaps too isolated from the real world, might think that each one is vitally important. However, the actual effect of all these required disclosures is that borrowers aren't reading any of them. They are simply overwhelmed by the sheer volume of paper and most just sign and hope.

With a good loan officer that's fine. However, if anyone wanted to slip something in or change loan terms without anyone noticing, what better opportunity than to bury it under mounds of meaningless paperwork? I begin to wonder if it could all be part of a vast anti-consumer conspiracy. Are all these forms part of an industry effort to make sure borrowers don't really know what they're getting and what they're paying? Could they be intentionally overwhelming and confusing borrowers while making it look like consumer protection?

When you think about the money some of the largest banks in the country made by selling loans to borrowers who didn't understand them, you can see where my suspicions come from. I can't count the number of homeowners, especially older folks, I've talked to who are just now realizing what the "Payment Option Arm" they were sold really is. They were the wrong borrwer for that loan, they never understood it, and now they're upside-down in their homes with payments about to skyrocket. These loans were sold over the phone by big banks like Countrywide, and the scary details were hidden in the reams of paper the borrowers were asked to sign.

The greatest service we could do for consumers is to junk all the forms and start over. With just a note, a trust deed, and a few choice disclosures to sign, borrowers would actually have a chance to understand what they're getting. If the documents were easy to understand, most of the exotic loans with negative amortization, balloon payments, etc. would never have been done. Of course, our legislators and the big banks who own them probably realized this long ago. . .

It's HVCC Day

Today is the day that the Home Valuation Code of Conduct goes into effect. This is the set of rules designed to keep fraudulent lenders and appraisers from conspiring to inflate appraisals. The actual effect is more likely going to be to harm the real estate market and consumers.

The main change is that loan officers can no longer order appraisals or communicate with appraisers. For mortgage brokers this means that the wholesale lender will order the appraisals through an Appraisal Management Company, or AMC. These AMCs have been around for some time and can be useful for lenders who do business out of their local area. You can simply contact one of these AMCs and let them find the appraiser.

Unfortunately, the result is often an inferior appraisal with an inflated fee. The reason is that these AMCs are taking a cut out of the appraisal fee, so it costs the consumer more than it would if ordered directly and the appraiser is paid less than they otherwise would. Up until now appraisers would only accept AMC work if they weren't busy with local lenders. Why do the same work for less money? So basically if the lenders who know you don't want to hire you, you take work for less money from people who don't know you. Not exactly a recipe for selecting the best appraisers.

Even now with the HVCC in place, a small bank exception will still allow good appraisers to do work for local lenders for higher fees than the AMCs pay. So who's left doing these appraisals ordered anonymously through AMCs? Are they any good? Will they be done on time? In my experience, the answer is too often "no."

Another problem is that these appraisals will be ordered by the lenders, not the brokers. This is fine if everything goes smoothly, but sometimes for one reason or another a loan needs to be moved. There is a procedure for this, but it remains to be seen how cooperative lenders will be and how much extra this will cost the borrower.

By far the biggest issue with the HVCC is that it simply won't work. Large lenders like Countrywide and Wells Fargo are simply using AMCs that they own and control. These AMCs in turn have increased influence over appraisers because of the market share they control. The HVCC was clearly written by people too far removed from the real world of real estate to understand what they were doing.

People determined to commit fraud will always find a way no matter how many new rules pop up. Things like the HVCC only make it more difficult for the honest people. The only way to fix the problems that exist in the real estate/mortgage market is to aggressively pursue and weed out the bad actors one at a time.