Controversial regulations under the Real Estate Settlement Procedures Act are scheduled to go into effect Dec. 2. Stephen B. Ashley, president-elect of the Mortgage Bankers Association, in an interview with The Mortgage Marketplace, critiques the regulations. Ashley is chairman and chief executive officer of the Sibley Mortgage Corp., Rochester, N.Y. He also has been chairman of the MBA's legislative committee. MMP: What are the principal concerns mortgage bankers have about the Respa regulations? Ashley: There are two fundamental issues. First, should a real estate sales person have a financial interest in any way, shape or form in deciding where the borrower/home buyer obtains financing?
That is fundamental because the minute a real estate sales person has a financial interest in the source of funding that individual's ability to fairly present choices of mortgage financing to a borrower is compromised.
This will add to the cost of financing. Lenders will become bidders for business, albeit under the guise of services performed. MMP: What in the regulation produces this conflict of interest? Ashley: It permits a sales person to be compensated by his or her employer for referring borrowers to affiliates that offer related services, such as lending. title insurance and appraisals. It has introduced the element of a financial reward for a sales person to steer the borrower to the affiliates. The regulation also doesn't go far enough in defining what constitutes a service for which a fee can be paid. Otherwise payment is an illegal referral fee. MMP: What's the other fundamental issue?
Ashley: The marketplace for mortgage products is the real estate agent's office. Access to that market is crucial if we are to have as free a market as possible. The regulation doesn't require the user of a computerized loan origination system to carry more than one lender. If the real estate agent uses only one lender. the borrower is denied knowledge of other possible sources of financing. I'm not suggesting that a sales office should have every source represented. but there should be four or five active lenders to give buyers good exposure to the market.
MMP: The regulation appears to require a fair amount of disclosure about these relationships. Won't that be sufficient to protect borrowers? Ashley: We're always better off with disclosure. But we now have so many papers in the mortgage process that. as a practical matter. they are seldom read carefully or understood. They are usually signed quickly to get through the ordeal and get on with the emotionally satisfying part of the process. buying a home. I think it is simplistic to suggest that disclosure wfil completely cure the potential for abuse. MMP:- HUD says it won't extend the effective date. Will the MBA challenge the regulations in court. Ashley: I'm a businessman. not a lawyer. There are a number of issues that MBA is examining in consultation with counsel. and it is entirely possible that we will want to challenge the regulations Judicially. MMP. How about Congress and the executive branch? Ashley: We certainly will try to educate the new members of Congress and the new administration about the issues. 1 think it will take them a while to settle in before they take a careful look at this.
We expect that about half the members of the House Banking Committee will be new members. Many will be minorities because their agendas include housing and other matters that are in that committee's Jurisdiction. We expect consumer issues to have a very receptive audience. To the extent that the Respa regulations are viewed as making housing credit more expensive. we think the committee will take a serious interest in this subject. particularly as they impact lending in urban areas and affordable housing.
MMP: What if the regulations are not changed by any method and you have to live with them?
Ashley: There are several strategies the industry could follow. Obviously. we'd be looking at implementing our own CLO systems. It needn't be anything more complicated than a single modern and a personal computer.You will see pricing schemes that involve payment for services in some form or other. These could be in the context of closing costs or they could involve controlled business arrangements or formal and informal affiliations.
MMP: Who will be affected? Ashley: The real challenge will be to that part of the industry that is generating 30% of the originations--the mortgage brokers. The smaller firms that really are mortgage brokers or mortgage bankers that operate in a brokerage fashion will be put between a rock and a hard place. On the one hand. the regulations give an incentive to real estate brokerages to operate as mortgage brokers and. on the other hand. they require the disclosure of service release premiums.The bottom line is that home buyers will ultimately lose. We'll survive this but it won't be right; it won't be the right thing to do.