Consumer Law

A Comment on HUD's New RESPA Regulations

By Jeff Sovern

Last month, when HUD came out with its new RESPA regs, we blogged about it here.  I've been going through the regs more carefully in connection with an update to our casebook that my co-authors and I are preparing (we're hoping to get something out in time for the spring semester), and I am struck once again by what an improvement the new Good Faith Estimate appears to be over the former form, in most respects.  HUD did extensive consumer testing of the new form and alternatives, and it shows.  The form comes in somewhat long at four pages, but I guess HUD thought that struck the right balance between information overload and leaving out important information.  I suspect the new form will do as good a job as can be done in acquainting consumers with the terms of their loans--at least, those consumers who learn from reading such forms .  The one uncertainty I have about the form is the disclosure of yield-spread-premiums.  YSPs are the fees mortgage brokers charge their borrowers that are then added to the principal of the loan.  YSPs don't seem objectionable in principle, but in practice they have been subject to abuse.  Brokers have sometimes charged huge fees--ostenstibly for securing a lower interest rate--and studies have shown that people of color often get charged higher YSPs than whites.  It appears that YSPs have enabled brokers to obtain much larger compensation than other forms of compensation, and under the former form, it's easy to see why.  The old HUD-1, provided at settlement, disclosed the yield-spread premium under the heading ?POC,? or ?payment outside closing.?  Few consumers knew what this meant.  The new form discloses, on the second page, the orginator?s origination charge, and describes it as the ?charge for getting this loan for you.?  So far, so good.  Presumably consumers who see a high number in that line will negotiate for a lower fee or else switch brokers.  A second block then states the credit the consumer receives for the interest rate, which is described as reducing the settlement charges; and the charge the consumer pays for the interest rate, which is described as increasing the settlement charges.  I find that confusing.  I think, though I'm not sure, that the credit will reflect the YSP, since the YSP is added to the principal, and so is not included in the settlement charges.  I wonder if consumers will read a high total, and then see the YSP styled as a credit, and think it's OK then because it's a credit.  But again I'm not sure.  Let's hope HUD's consumer testing reflects what consumers understand in the real world, and that I'm wrong.

Full post as published by CL&P Blog on December 28, 2008 (boomark / email).