HUD Chief announces proposed real estate closing reform

Source : http://www.hud.gov/news/
For Release
Thursday, October 3, 2002

MARTINEZ PROMISES CONSUMERS AN END TO 'SETTLEMENT STICKER SHOCK'

Unprecedented RESPA Reform Could Save Americans $8 Billion a Year

WASHINGTON - Consumers have the right to receive upfront and firm cost information that will prevent sticker shock when they buy or refinance their homes, Housing and Urban Development Secretary Mel Martinez said today in testimony before the House Financial Services Committee. Martinez outlined his proposal to overhaul the nation's mortgage settlement process as part of the Bush Administration's efforts to expand homeownership, particularly among minority families.

Martinez told committee members that current regulations are outdated and don't adequately protect consumers from a process that is "too complicated, too costly and too much of a mystery for many borrowers."

"It is time to take the uncertainty out of mortgage financing," said Martinez. "It isn't right that far too many Americans sit down at the settlement table only to discover unexpected fees that can add hundreds, if not thousands, of dollars to the cost of their loan."

In June, Martinez announced a plan to reform the regulatory requirements under the Real Estate Settlement Procedures Act (RESPA). Based on HUD's Homebuyer Bill of Rights, the proposal would greatly simplify and clarify the homebuying and refinance process. Americans currently spend $50 billion a year on settlement costs associated with buying or refinancing a home without fully understanding what it is they're paying for.

An economic analysis of HUD's proposed rule finds the comprehensive proposal could potentially save consumers $8 billion a year.

Martinez told the Committee, "This Administration is committed to streamlining the process, so consumers can shop for a mortgage and better understand what will happen at the closing table. Reforming the process and avoiding 'settlement sticker shock' is simply the right thing to do."

HUD's proposed reform would:

Clearly Disclose Mortgage Broker Fees. When a borrower qualifies for a home loan with a mortgage broker, but lacks the cash to pay for the upfront loan origination and other settlement costs, the borrower may choose to pay a slightly higher interest rate in exchange for the lender's payment of some or all of these costs. The difference between the interest rate borrowers qualify for and what they end up agreeing to results in a lender payment to a broker that is often called a 'Yield Spread Premium.' Under current rules, these payments are not clearly disclosed to borrowers. Sometimes these payments simply serve to increase broker compensation. HUD is proposing that in brokered loans, these Yield Spread Premiums be clearly disclosed and credited toward the borrower's settlement costs.

Improve the Good Faith Estimate. Shortly after a person applies for a home loan, they receive something called the Good Faith Estimate from their lender that details their estimated settlement expenses. Today, this estimate is more like a Good Faith GUESSTIMATE. HUD wants lenders to provide consumers a more simple, clear and firm Good Faith Estimate, at no or nominal cost, so that they can better understand the charges and use it to shop for a home loan and service providers BEFORE they become so invested in the process that they can't back out. The new Good Faith Estimate would sharply limit lenders' ability to raise their charges at the last minute.

Remove Regulatory Barriers to Lower Costs. Current regulations inhibit the practice of offering consumers a single guaranteed package including the price for total settlement costs and a mortgage interest rate. Under Martinez's proposed reform, any entity would now be able to assemble and offer consumers "guaranteed mortgage packages" - a guaranteed mortgage interest rate and a guaranteed price for a complete package of settlement services. Consumers would know their ultimate costs in time to shop for the best mortgage product BEFORE incurring any out-of-pocket expenses and avoiding last-minute "junk fees" and other unexpected increases in settlement costs.

The proposal is currently in a public comment period that expires October 28, 2002. For those interested in commenting on the new rule, visit RESPA and write:

U.S. Department of Housing and Urban Development
451 Seventh Street, SW
Room 10276
Washington, DC 20410

HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities, creating affordable housing opportunities for low-income Americans, supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development as well as enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov .

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