WASHINGTON — The Department of Housing and Urban Development is close to completing a new proposal to overhaul enforcement of the Real Estate Settlement Procedures Act, according to sources.
Though the plan is likely to reignite the fight between various players in the mortgage market — which helped doom the agency's last attempt at reform — observers said they expect the latest effort to succeed, in part because of the housing market's continuing problems.
"This is what I'd call a golden opportunity for Respa reform if there ever was one," said Robert Davis, the managing director of government relations at America's Community Bankers. "There's a more unique focus on the importance of Respa reform and other forms of mortgage market reform now. I think the last year has revealed what problems can occur if consumers are not adequately financially literate and don't have the information to make the best decisions."
Details of the latest reform proposal are not public, but industry observers said they expect HUD to significantly scale back from its previous plan in 2002. The agency said this month that the new plan will focus on revising how companies disclose a good faith estimate on mortgages. It also said it had dropped efforts to encourage companies to package or bundle settlement services, the most controversial part of the earlier proposal.
HUD officials have pledged to release their proposal by early 2008. Several sources said HUD is already largely finished drafting it and expects to send it within a month to the Office of Management and Budget, which has at least 90 days to comment. HUD officials declined to comment on their timing but said they are moving forward with reform.
"While it is too early to discuss the substance of a new Respa rule, our driving force will be to provide consumers with the tools they need to shop for the best loan for them," wrote Brian Montgomery, HUD's federal housing commissioner, in an e-mail to American Banker. "These changes will be based on extensive consumer testing and our prior discussions with both industry organizations and consumer advocacy groups."
The effort has even received a boost from President Bush, who said in a radio address Sept. 1 that reforming the mortgage disclosure process was crucial to resolving the housing crisis. "My administration is working on new rules to help our consumers compare and shop for loans that meet their budgets and needs," he said.
Many said the high-profile attention helps to improve prospects for reform of the law. But they also said its ultimate chances will depend on how broad it is.
"Now that it's on [the] presidential agenda, it increases the odds that there not only will be a proposed Respa rule but that it will become final," said Sue Johnson, the president and executive director of the Real Estate Services Providers Council. "If it is a rule that is limited to truly improving disclosures, its chances would be greatly enhanced. If it's more far-reaching, then its odds go down proportionally."
Howard Glaser, a Washington lobbyist and former HUD official, said completing the proposal will be easier with bundling off the table. He said he expects a final plan to include a revised good faith estimate that correlates with the HUD 1 form, a statement of actual charges and adjustments. HUD would probably try to require lenders to make the form available early to the borrower and include additional disclosures on broker compensation, including yield-spread premiums.
HUD "got a little gun-shy because they had such a critical reaction from Congress on what they proposed before," he said. "But the time is right now. It's been percolating, but it hasn't been [on] the front burner. The president now has reprioritized that."
Even a scaled-down plan, and support from the president, is unlikely to spare the proposal controversy. Industry observers said they expect a fight over how exactly HUD plans to update the good faith estimate. Divisions still exist among real estate agents, lenders, brokers, and title insurers on how the good faith estimate should look, including whether yield-spread premiums should be disclosed, and the threshold at which a settlement cost estimate could permissibly differ from a closing cost estimate.
"Partially, it will depend on what the [good faith estimate] proposal is," said Charlotte Bahin, a partner in Lord Bissell & Brook LLP. "Almost everything in Respa is so fraught with controversy I don't know if there are any areas people feel safe with."
HUD's last attempt to reform the law, which included bundling, a revision of the good faith estimate disclosure, and other changes, collapsed in 2004 amid overwhelming opposition. The proposal stimulated 40,000 comment letters, the most for any HUD plan.
The agency also drew fire for how it handled the proposal. Industry groups complained they were never consulted during its development. HUD Secretary Alphonso Jackson has said he would move more slowly to reboot the process and build support for changes. The agency held roundtable discussions nationwide two years ago to seek input from industry representatives and consumer groups.
Ken Trepeta, a regulatory policy representative for the National Association of Realtors, said hurdles remain but that he expects HUD to be more cautious this time.
"I'm just expecting HUD will not come out with anything too drastic because it will be dead on arrival, especially with a more consumer-oriented Congress," he said.
However, brokers continue to oppose any change they say would single them out, such as disclosure of yield-spread premiums. Roy DeLoach, the vice president of government affairs at the National Association of Mortgage Brokers, said it was lenders' underwriting that caused the current housing problems and that lenders — not brokers — should have to enhance their disclosures.
"It was the lenders' underwriter that failed," he said. "We are the only channel that actually discloses everything, so why wouldn't you have the lender disclose their margin?"
But lenders and others argue that the housing problems have put increased scrutiny on brokers, making it more difficult for them to escape added disclosures this time. Brian Chappelle, a partner at Potomac Partners, said he expects yield-spread premiums to be a part of any final rule.
"I would suspect they would take a strong stance on requiring [disclosure of] yield-spread premium and other compensation to mortgage broker[s]," he said. "I don't think the arguments in the past will hold up because of the turmoil in markets today."
Despite the current problems, some said they remain pessimistic about reform's chances.
"While lenders may want simplicity, there are other parties to this debate that want just the opposite," said Ann Grochala, the director of lending and accounting policy at the Independent Community Bankers Association. "It's still too hard."
But others said reform is probably inevitable. "There's a greater understanding [of] the need for it, and there is a lot of support for a reform of Respa," said Erick Gustafson, a lobbyist at the Mortgage Bankers Association. "On average, that's an improvement in the environment, and it would be hard to argue that there isn't a strong need for Respa modernization."
