Mortgage Industry Lines UP Against Consumer Protections

by Peter G. Miller
October 21st, 2009

The mortgage industry has come out against changes in the RESPA rules which are due to start January 1st.

“The RESPA rule,” says a coalition of industry associations, “is scheduled to take full effect on January 1, 2010 – less than three months from now. Despite the best motivations of HUD, and the sincerest efforts of the industry, there are simply too many unresolved issues to allow the industry to be fully RESPA-compliant by the first of the year. HUD’s guidance has come far too late in the process and has been inadequate and often contradictory. Due to unresolved issues and critical unanswered questions, many lenders and settlement service providers are unprepared to comply. This, in turn, will cause very inconsistent implementation and confusion for consumers seeking to purchase a home.”

But there is nothing sudden about these proposals. HUD has been trying to make changes in the way that loan terms are disclosed since 1995. There have been seven different versions of the new Good Faith Estimate, none of which meet the lofty standards of the lending community.

So what’s the big deal?

First, under the new rules mortgage brokers would have to plainly disclose the yield spread premiums that they earn from each loan they originate.

Second, no lender would be allowed to steer “consumers to transactions that are not in their interest in order to increase the mortgage broker’s or loan officer’s compensation.”

Third, the new forms would make it easier for borrowers to compare loans in several ways:

___Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs paid by consumers;

___Require lenders to show how the consumer’s APR compares to the average rate offered to borrowers with excellent credit;

___ Require lenders to provide final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing; and

___ Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.

The lending industry is not against confusion in general , it’s only against “confusion” when it means borrowers will better understand the costs and consequences of individual loans.

The good news is that we already have loans which offer clear terms. FHA mortgage financing is plainly understandable, does not allow pre-payment penalties, requires real appraisals and bans “gotcha” clauses.

Claims that the lending industry cannot adopt the new rules by January 1st are absurd. They certainly had no trouble making instant credit card adjustments before new rules went into effect — rules which raised consumers costs. You can bet that if changes scheduled for January 1st resulted in larger industry fees that there would be no trouble at all making the deadline and that all claims of “confusion” would magically disappear.

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