Housing Department's Rules Need Touching Up
The Department of Housing and Urban Development recently established its long-awaited position on interpretation and enforcement of the Real Estate Settlement Procedures Act, known as RESPA.
The final rule was bottled up for more than two years by the lobbying of Realtors, mortgage bankers, and even members of Congress. These debating interest groups issued ominous-sounding press releases along with other pronouncements.
Each opponent warned the housing department of the dire consequences of adopting any other faction's position.
Virtually all parties to this conflict are now claiming victory. To sort out these claims, a close examination of the housing department's new position is in order.
The housing department focused primarily on the treatment of computerized loan-origination systems. In recent years, much of the controversy over settlements revolved around this issue.
Essentially, a computerized loan system is a mortgage-lender directory. Through a computer terminal in the broker's office, the system provides access to a list of loan products offered by one or more mortgage lenders.
Listings of this type could include certain underwriting requirements, minimum loan amounts, interest rates, application fees and points, and other information concerning the various mortgage products available at any given time.
With some types of system, the realty brokers may be required to pay a fee to the owner of the computerized network. Individual consumers may pay the brokers for their services in accessing the system. And individual brokers may receive compensation directly from the network or the individual mortgage company that ultimately issues a loan, or from both.
Some loan-origination systems offer loan products at rates and terms unavailable from that same lender "off-system." The best-known system, Citicorp's Mortgage Power, has been at the center of much recent debate.
Future Treatment Guidelines
Several housing department proposals concern the future treatment of computerized loan-origination systems. First, the housing department will require all systems to be "competing," meaning that more than one lender must be accessible. For systems that offer only one lender's catalogue of products, the housing department would permit continuation for two years.
After this "grandfather" period, the system would be required to offer competing lender products. The housing department envisions future programs to be akin to the international airline reservation systems now available to travel agents.
The housing department will need to resolve the issues triggered by this position.
For example, how many competing lenders must appear on a system? Will the number of competing lenders vary depending on region? A major metropolitan areas might contain a large number of competing mortgage lenders, while a more remote area might have only two or three.
Guidelines for Competitors
There is also a qualitative issue: Will a system comply with the housing department's criteria for competing lenders? One listing on the system might be for a major national lender offering myriad products (Citicorp, for example), while the competing lenders are small, rural banking institutions that may offer only one or two types.
The use of computerized international reservations systems as a model poses other competition issues.
Suppose, for example, that Citicorp sponsors a computerized loan-origination system in which a number of other lenders participate.
Could Citicorp arrange its products to appear first, or more prominently, on the computer terminal screens accessing the Citicorp system? Or would the housing department require equal prominence in display?
This has been an issue in the airline reservations business: May American Airlines flights to Chicago appear prior to any other competing airline's flights to Chicago -- on a system sponsored by American Airlines?
Timing for Disclosures
The housing department also requires any realty agent utilizing a computerized loan-origination system to tell the consumer of any fee the broker will receive for providing consumer access to a list of mortgage products. This disclosure will be required on both the good-faith estimate of settlement costs and the housing department's settlement sheet used at closings.
The realty agent must also inform consumers that more favorable loans may be available from lenders who do not participate in the system. As with any disclosure issue, the housing department will need to address the timing of disclosures.
Since the good-faith estimate need not be issued for a few days following a consumer's loan application, these realty agent disclosures might be meaningless if not given earlier. Such disclosures might best be given before a broker gains permission from an individual borrower to access his or her information in a computerized system.
Early disclosure would be of even greater significance if the borrower pays application or other fees prior to receipt of a good-faith estimate.
If a consumer is required to pay a realty agent for access to the computerized system, the housing department will not permit this fee to be a condition of a loan or any other settlement service. This fact should also be included in any early disclosures.
Uncertainty About Fees
The housing department contemplates a cap on the fee a realty agent receives for accessing a computerized loan system. While the department cited no specific dollar amounts, realty agents prefer a higher cap while mortgage bankers prefer a lower cap.
The housing department refers to Pennsylvania's recently enacted Act 90, covering the licensing of first-lien mortgage bankers and brokers. Under this statute, the Pennsylvania Real Estate Commission has set a maximum borrower's fee of $100 to realty agents for mortgage-loan assistance.
In any event, the Real Estate Settle Procedures Act requires -- and the housing department acknowledges -- that the fee established by the department must reflect actual services provided by the realty agent. It may not be compensation for a mere referral by the broker.
Conflicts of Interest
In its concluding comments on the issue of computerized origination systems, the housing department recognizes that realty agents have fiduciary duties to their clients, the home sellers. The housing department does not believe that these duties will be in conflict with real estate brokers who offer computerized loan services to consumers.
Despite this primary obligation to their seller clients, the housing department notes that real estate brokers are obligated to deal fairly and honestly with home buyers. Real estate brokers are no more and no less human than any other professionals.
Possible conflicts of interest can arise. For example, two prospective buyers are interested in bidding on a home, but only one of them is interested in utilizing the real estate broker's loan system if the bid is accepted.
The other perspective buyer would prefer to shop for a mortgage independent of the broker. If both perspective buyers intend to offer identical bids, the realty agent might encourage the seller to accept the bid linked to use of the computerized system.
Other theoretical conflicts of interest might arise. For this reason, the housing department may wish to reconsider its assumption that there is no inherent conflict of interest in such computerized loan arrangements with real estate brokers.
The housing department also intends to address the controlled-business-arrangement provisions of the act. In the absence of a provision concerning certain disclosures, the act now prohibits any mortgage lender from requiring a borrower to use the services of an affiliated company.
Provided that appropriate disclosures are made to consumers and no referral fees are paid, the settlement law permits the referral of such business to affiliated entities. The housing department has now indicated that it favors multiservice companies or company groups.
Before translating this philosophy into a regulation, the housing department should examine the Truth-in-Lending Act and Regulation Z, as well as various state laws that may impose limitations on the consolidation of these services into one "interest rate" and which may raise other issues concerning pricing disclosure.
It is not at all clear that companies will incorporate the pricing of such services, assuming that such incorporation is permissible under federal and state law. Affiliated companies may prefer to continue the existing practice of referring consumers to various affiliated entities.
|Graham Mortgage' Questions
The housing department will conduct a survey of escrow agents across the country to determine whether violations of the settlement law's prohibitions on excess escrows are occurring or are commonplace. The housing department will also make clear in its revised regulations that the provision of computerized loan-origination services will be considered a settlement service.
The housing department deserves much credit for coming forward with a plan to resolve the controversial issues surrounding its enforcement of the settlement procedures act.
But the department will need to consider the additional issues raised by its new position on the settlement procedures act so that final enforcement guidelines will not be subject to yet more years of stalemate and controversy.
Mr. Paul H. Schieber is a member of the consumer financial-services group of Blank, Rome, Comisky & McCauley, a Philadelphia-based law firm.