Consumer Law

Different Take on New RESPA Reg

By Jon Sheldon

This is NCLC?s take on HUD?s new RESPA Regulation changes.  [Although under my name, this was written by Diane Thompson with input from other NCLC staffers.] The new Good Faith Estimate Statement (GFE) does seem much more user-friendly?with a couple of serious caveats.

First, the form doesn?t tell borrowers what their APR is and consistently overemphasizes settlement costs over interest rate costs. The problem, of course, is that how expensive a loan is depends mostly on interest costs, and then on how you make your payments?how long do you hold the loan, how much of the loan do you actually get the use of and how much is fees, etc.

Second, the YSP disclosure is confusing and untested.  HUD did several rounds of testing.  But it never tested its disclosures to see if borrowers could choose the cheaper loan when the interest rate varied!  Its tests all assumed that the payment of a YSP only changed the settlement costs, not the amount of the loan, or the interest rate, or the monthly payment.  This is simply not how YSPs work in the real world. (A final test did assume a difference in interest rate and YSP?but borrowers were not asked to choose the cheapest loan in this example?only compare the GFEs to the final settlement statement for discrepancies).  Worse, HUD chose to assume that YSPs always operate as a credit against settlement costs, when virtually all available research suggests that in most cases the presence of a YSP increases the total settlement costs beyond any offset created by the YSP.

There are other problems with the final rule, including the difficulties it introduces in evaluating loans for Truth-in-Lending compliance, particularly with respect to the disclosure of origination and title fees, the removal of caps on origination fees for FHA loans, its blessing of average charge pricing, and its failure to make the GFE binding (only some fees are fixed, no interest dependent fees are fixed, other fees can vary within a 10% tolerance; originators can cure most underdisclosures up to 30 days after closing; and brokers can withdraw any guarantee as to settlement costs whenever they convince the borrower to apply for a slightly different loan product).

NCLC's more detailed, but still short, summary analysis of the final rule can be found here.

NCLC?s detailed comments on the proposed rule can be found here. 

Full post as published by CL&P Blog on January 05, 2009 (boomark / email).