WASHINGTON — Despite opposition from the mortgage industry and several members of Congress, the Department of Housing and Urban Development finalized a rule Wednesday to revamp the mortgage settlement process.
The final rule will require lenders to give borrowers a three-page good-faith estimate of loan costs, including details on whether the interest rate can change, the existence of prepayment penalties, and total closing costs.
In response to intense criticism of its March proposal, HUD made some changes, including shortening the estimate from an initially required four pages and dropping a requirement that lenders read from a script at closing.
But industry representatives and consumer groups remained skeptical of HUD's claims that the rule will simplify the mortgage process. They also said the final rule remained in conflict with separate mortgage disclosure requirements from the Federal Reserve Board.
"We don't think this is a consumer-friendly change," said Robert Davis, the vice president for governmental affairs at the American Bankers Association. "It doesn't help the consumer understand the transaction and make the best decisions."
The rules have been so long in coming that many thought a final set might never arrive. HUD first began trying to rework rules implementing the Real Estate and Settlement Procedures Act a decade ago. A 2004 attempt sparked massive opposition and was eventually withdrawn.
The latest version, proposed in March, did not draw the same degree of opposition, but many said it was overly broad, confusing, restrictive, and a stretch of HUD's legal authority. Critics primarily focused on the proposed four-page good-faith estimate, which they said was too complicated.
In response, HUD sought to simplify the estimate in its final rule. It cut the number of pages to three and said the estimate must disclose loan costs, prepayment penalties, interest rate resets, and balloon payments.
That did not satisfy many observers, who said three pages was still too long and missed the most critical point.
"The most important question that the information form should help the borrower to answer is, 'Can I afford this loan?' " said Alex Pollock, a fellow at the American Enterprise Institute. "You could be getting the lowest-cost loan and still not be able to afford it."
Observers were also dismayed that the rules were released without coordination between HUD and the Fed, whose own regulations implementing the Truth in Lending Act overlap with the Respa rule. "There's the potential for conflicts in consistency that I'm sure many are worried about," said Sue Johnson, the president of Real Estate Services Providers Council Inc.
During a conference call with reporters, HUD Secretary Steven Preston acknowledged the concern but said the agency did not have time to coordinate with the central bank. "We thought any delay on moving forward with this would be at a cost to the consumer," he said. "Anyone looking at what's happened in our mortgage markets and understanding that this came from mistakes made at the closing table realizes we need to get these rules out there."
The lack of coordination could cause lenders a big headache, some said.
"We are going to have to change all of our systems, which is tens of millions of dollars at a time when the industry is extremely stressed," said Anne Canfield, the executive director of the Consumer Mortgage Coalition. "Once they figure out everything is confused, we expect they will make us change all over again."
HUD officials also said the new good-faith estimate tackles yield-spread premiums, though it does not mention them by name. Under the rules, a broker must display to a borrower the interest rate of the loan as well as the percentage that is being charged or credited for closing costs.
The ABA and some consumer advocates said that did not go far enough. "It fails to stop the perverse incentives — such as abuse of yield-spread premiums — that continue to exist in today's mortgage market to reward risky and inappropriate behavior," said California State Assemblyman Ted Lieu, D-El Segundo.
The new rules take effect Jan. 1, 2010.
