Last week was a watershed for borrowers, lenders, mortgage brokers and others covered by the Real Estate Settlement Procedures Act. Not only did the Department of Housing and Urban Development give final approval to regulations that took nearly six years to write, but President Bush on Oct. 28 signed into law the Housing and Community Development Act (H.R. 5334), which places refinancings under Respa.
Both the law and the regulation specify that a "settlement service" under Respa includes a federally related (insured) mortgage loan. A 1984 case (U.S. vs. Graham Mortgage Corp.). the U.S. Court of Appeals for the 6th Circuit in Cincinnati ruled that it was unclear whether a mortgage loan was a settlement service under Respa. Nonetheless, HUD has continued to treat mortgage loans as a settlement service.
In one of the most controversial portions of the regulation, HUD, in an appendix listing transactions covered by Respa, makes it clear that mortgage broker fees must be separately disclosed. The week before, the National Association of Mortgage Brokers had filed suit to challenge the HUD position as laid out earlier in an opinion letter.
The regulation moots the NAMB case, which contended that HUD did not follow proper procedures, including soliciting public comment, before issuing the opinion letter. HUD followed those procedures with the regulation. (See The Mortgage Marketplace, Oct. 26, page 1.)
While pleased with the broker disclosure rules, the Mortgage Bankers Association was outraged when HUD did not place a cap on fees paid real estate brokers by borrowers who use computerized loan origination systems. The MBA had claimed the payments were referral fees, banned under Respa. but was willing to accept the fees with a cap. (See The Mortgage Marketplace, Jan. 27, page 2.)
Herbert B. Tasker, president of the MBA. charged that the computerized loan origination systems decision was "a last-ditch effort to gamer election support," an assertion described as "lunacy" by Alfred A. DelliBovi, deputy secretary of HUD. "HUD clearly bought our argument that the fees should be set by the market," said John A. Tucillo, chief economist for the National Association of Realtors.
The NAR also was pleased that the regulation permits real estate brokers to refer customers to services, such as title insurance, offered by affiliates of the brokerage as long as the affiliation is disclosed and the customer is not required to use the affiliated services.
The inclusion of refinancings undere Respa, directed by the housing bill, "may increase the cost of compliance," according to an analysis by McKenna & Fitting, a Los Angeles law firm.
But "one possible benefit of the expanded coverage ... is that the itemization of the amount financed that is required under the Truth-in-Lending Act may no longer be required," the analysis said.
The inclusion of refinancing "may have a very material effect on wholesale lending operations," the analysis noted.
"Many lenders and brokers have relied on the principle that refinance transactions and junior lien transactions are not subject to the limitations on referral fees and kickbacks cointained in Section 8 of Respa to pay large amounts of monies for referrals in connection with these transactions. Those loans are now covered and those transactions will now be subject to Section 8."