Mr. Horn, president of Denver-based origination technology provider Mortgage Spirit, has written an opinion piece about how he believes market participants will need to operate under pending Real Estate Settlement Procedures Act requirements and why, while others believe the development has negative implications, he believes the regulatory change will have positive results for the industry.
As of Jan. 1, 2010, the mortgage industry will change as originators prepare to define their revenue on the HUD reformed good-faith estimate. The new GFE demands 100% transparency on the part of the originator, a challenging requirement that frightens many conditioned to do business as usual. The significant shift that the regulations impose perpetuates unwarranted panic. With the lack of facts and direction, certain myths about operating under RESPA's new requirements have developed. In order to keep costs associated with such an industrywide transition down and position your organization for success, it is imperative to correct the false perceptions and embrace change.
Myth No. 1: The new good-faith estimate will annihilate brokers. Many brokers argue that the revised regulatory requirements discriminate against brokers specifically with the required broker-only disclosure of yield-spread premium.
Brokers and mortgage bankers operate under different structures. YSP is only a function of mortgage brokers, and that premium is absolutely identified at the time of closing because the broker never takes the risk of the file. Mortgage banking operates using a service release premium, an amount not always identified at the time of closing due to the option of selling the servicing rights of a loan to another lender. Mortgage bankers are lifted from the full disclosure requirement because of this distinction.
Although this appears to be a competitive disadvantage for brokers, if positioned the correct way, they will be able to use this to their advantage. By honestly disclosing earnings, the borrower becomes more comfortable working with the broker, and the likelihood greatly increases that the broker will retain the lead and keep the file in-house. The broker that has the ability to clearly communicate revenue and the difference between mortgage brokers and bankers will have a competitive edge.
The broker is the only entity required to disclose with full transparency (YSP vs. SRP). The broker requirement of fully disclosing revenue including YSP, although uncomfortable for some brokers, will help his or her business. Stripped of any secrets, trust will be re-built between the broker and the borrower.
Myth No. 2: The new GFE will be unhealthy for the mortgage industry. Due to the varying tolerances involved in the new standard three-page GFE, certain information requires 0% tolerance, requiring accuracy between revenue, closing costs (10% tolerance) and transfer tax figures listed on the GFE to match identically to those listed on the HUD-1 at closing. If the information does not match exactly, the originator will have to cure or return the difference. The originator or lending institution will hold the risk of any tolerance loss. However, this added pressure on the originator produces a healthier scenario for the borrower, which can lead to a healthy domino effect for the industry. With such increased transparency and oversight, HUD is taking positive steps to streamline the disclosure system to ensure the borrower is shopping for the most appropriate loan. There is a direct correlation between a healthy borrower and a healthy mortgage industry.
Myth No. 3: The regulatory transition is too difficult to implement into one's business. There is much effort and discomfort involved in changing one's organization's language and mindset to be centered on revenue discussions that shifts from "percentage point" terminology to "dollar amounts" terminology. Such a radical change presents a great opportunity for software vendors to restructure and retool their technology according to the new GFE. The technology providers that are currently focusing their systems to produce the GFE format efficiently are the vendors that originators should turn to. Certain automated systems are designed to protect the loan officer against tolerance loss.
In actuality, the "threats" associated with HUD's pending requirements are healthy for the industry overall. If done properly, the broker channel will thrive, the mortgage industry will once again prosper and the adoption curve will be easy for originators seeking to align with partners who take the requirements seriously.