RESPA
2/7/03
In 1974 Congress enacted the Real Estate Settlement Procedures Act to address
what was then considered problems in the real estate settlement process. Key
among them was abusive practices that increased costs to homebuyers and a lack
of understanding among homebuyers about the settlement process and its
costs.
RESPAÆs stated purpose was twofold:
(1) to provide the consumer with information about the real estate mortgage
transaction and the costs associated with it.
(2) to prohibit certain practices, such as referral fees between settlement
service providers, that result in higher costs and reduced quality to the
consumer.
To provide consumers with cost information about the mortgage process, RESPA
created the Good Faith Estimate (GFE) and the HUD-1 closing document. To combat
highercosts in the transactions, RESPAÆs Section 8 makes it a criminal act for
settlement service providers to pay fees to each other for the referral of
business.
Through the years RESPA was amended and clarified to address new business
practices, i.e. Affiliated Business Arrangements (AfBA) and other innovations
in the marketplace. However, most would agree, there still exists a great deal
of uncertainty over what fees are permitted v. prohibited.
This is an area that continues to causea tremendous amount of angst among
settlement service providers given that Section 8 violations may result in
criminal penalties as well as substantial civil penalties. However, Section 8
is also where the consumer receives the most protection from unnecessarily high
costs in the transaction.
In an effort to simplify the mortgage process
and to provide certainty to borrowers about their costs, HUDÆs proposal
would change the mortgage disclosure process by requiring lenders to
disclose mortgage loan costs (interest rate and settlement costs) in one of
two ways:
1. Improved Good Faith Estimate (GFE): Establishes a new format for GFE and
requires firmer price quotes. Lender origination charges, lender required
services, and government charges must be firm. Other lender required but
shoppable third party services will be subject to an upper limit, or 10%
"tolerance". Or
2. Guaranteed Mortgage Package (GMP). Lender discloses the loan rate and a
single guaranteed price for a package of settlement services. For example,
7% int. and $3000 GMP. Lenders, or packagers offering this option will be
exempt from Section 8* (the prohibition against kickbacks). This exemption
would only apply to the services within the package. The current
prohibition against referral fees between lenders, real estate licensees
and other providers will be maintained.
(Under this approach, borrowers will no longer have a choice in the
selection of their providers. Instead they will choose lump sum
packages)
*Under todayÆs rules, a lender is prohibited from charging a borrower more
for a third party settlement service than it cost the lender. The proposed
rule would eliminate this prohibition and permit the lender to make a
profit on the service as long as the service is part of a GMP.
HUDÆs proposedrule was issued on July 29,
2002. The comment period ended on October 28, 2002. HUD received over
40,000 comments letters, including C.A.RÆs comment letter (see link
below).á Currently, HUD plans to issue a
final rule by summer 2003.á NAR and CAR continue to oppose
the GMP and work towards finding a better solution.
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