On Friday, March 14, 2008, the Department of Housing and Urban Development released its proposed rule additions and amendments to the Real Estate Settlement Procedure Act (RESPA). The proposed rules, if adopted, would alter RESPA in several material respects. Most notably, the proposed new rules would require for a uniform Good Faith Estimate (GFE) to be distributed to all borrowers, which uniform GFE is intended to clearly detail the borrower’s loan terms and the loan originator’s fees.

A copy of the proposed uniform GFE can be viewed by going to http://www.hud.gov/offices/hsg/sfh/res/200803/5180GFE.pdf .

Under the current RESPA statutes, a GFE is required to contain certain information, but there has not yet been any specific required form that the GFE must take. Therefore, the information provided in GFE’s currently can be placed almost anywhere on the page and in almost any form desired by the loan originator. According to HUD, the goal of the proposed rules which would require loan originators to complete and deliver the new uniform GFE to borrowers is to establish a uniform disclosure method that borrowers can use to: (1) become better informed about their potential loan and (2) readily comparison shop against other loans available through other loan originators. The proposed new GFE form would even include a section for the borrower to use to write down the pertinent loan terms from each of the loans that they shop, theoretically allowing the borrower to more easily compare the loans.

Some believe that these proposed rule amendments, if enacted, will establish much needed and long overdue regulatory change in the industry. Even the National Association of Mortgage Brokers stated in its release last month that “RESPA provides structure to a complex web of transactions, and this proposed rule represents a major step forward in terms of consumer protections.”

However, many others remain skeptical about the effectiveness of the proposed new rules. The American Land Title Association stated that HUD has been “wrestling” with simplified disclosures for years, and that the proposed changes “may fall short of achieving this goal.” Further, Mortgage Bankers Association Chairman Kieran Quinn warned that the proposed rule changes — along with the Federal Reserve’s own plans to revise disclosures provided under the Truth in Lending Act — have the potential to add “significant paperwork to the loan origination process.” Quinn went on to say that HUD should coordinate with the Federal Reserve to “ensure that any new mortgage disclosures actually simplify the process for consumers.”

But the greatest deficiency in the proposed rule has not yet been mentioned by any of the national associations. The greatest deficiency in the proposed new rules is that they still place all of the responsibility and faith for accurately and clearly guiding the borrower to the best loan in the hands of the loan originators (most often a mortgage broker).

The primary and inherent goal of the mortgage broker is to sell a loan to the borrower. This goal often flies in the face of HUD’s goal of protecting borrowers through disclosure efforts. Because these goals are perpetually competing, there will never be a disclosure system that will sufficiently protect borrowers from mal-disclosures, bait and switch, or pure fraud, as long as HUD relies solely on loan originators for the disclosure. In fact, the proposed uniform GFE form could do more harm than good by giving borrowers a false sense of security in believing that, so long as their mortgage broker fills out a uniform GFE, the borrower will know exactly what terms are in the loan he or she actually signs.

Unless and until HUD requires or incentivizes borrowers to have an objective qualified third party review their loan on their behalf, the loan origination and settlement process will continue to remain subject to abuse. As long as the disclosing party (traditionally the mortgage broker) has motive, there will be abuse.

By way of example, no buyer in his right mind would think of asking his real estate broker to perform the appraisal or physical inspection on the home he is preparing to purchase. The broker wants the sale to go through and therefore any inspection or appraisal would be subject to the broker’s bias. The same defect remains in the loan origination process when HUD encourages borrowers to rely solely on their mortgage brokers for guidance and disclosure regarding their loan.

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Attorney Tyler F. Belong is a partner at the San Diego law firm of Hogue & Belong. Mr. Belong is also a founder of the Mortgage Accountability Association.

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