February 10, 2004

RESPA reform looked easy on paper. But it's proving a difficult sell to mortgage bankers, community bankers, mortgage brokers and realtors, not to mention distinguished members of the Small Business Committee of the U.S. House of Representatives

At a January 6 hearing, numerous objections were brought to bear against reforms to the Real Estate Settlement Procedures Act (RESPA) proposed by the Department of Housing and Urban Development (HUD). The HUD proposals are now under review by the Office of Management and Budget (OMB).

However, the industry's biggest objections might have to wait until HUD comes forth with more detail about what it's proposing in its latest version, which sources say includes the concept of a "two-package proposal."

Under RESPA reform, mortgage originators would be able to choose between two options: a Guaranteed Mortgage Package (GMP), which would have lenders quote consumers a single price for everything involved in closing a mortgage; or a Good Faith Estimate (GFE), in which only certain line items would be subject to a percentage variance. Other line items would have to be fulfilled as first quoted.

The original concept of a GMP ran into lobbying pressure from realtors and other constituents. Now, HUD is said to be considering a "two-package proposal," by which some fees would be guaranteed by the lender and others by a settlement services provider.

But this would raise "serious statutory questions," according to Regina Lowrie, president and CEO of Gateway Funding Diversified Mortgage Corp. (Ft. Washington, Pa.), speaking on behalf of the Mortgage Bankers Association. "The novelty of this proposal, and the fact that HUD's thinking has evolved beyond the original proposed rule, mandates that HUD re-issue another proposed rule, and that it prepare another economic analysis, that fully explain how it seeks to structure this new option."

Furthermore, she adds, the modified HUD proposal implies that settlement service providers would be responsible for making disclosures to consumers, which is not something they currently do today, and thus beyond the scope of the regulation.

Since the details of the revised proposal have not yet been made public, detailed objects to the "two-package" system were not as forthcoming as the criticisms against other aspects of RESPA reform. Witnesses charged RESPA with having performed an incomplete economic analysis that fails to comply with the Regulatory Flexibility Act, which requires federal agencies to analyze the impact of new regulations before issuance.

From the community bank perspective, RESPA reform "will create an environment where the largest originators and settlement service providers will drive out the smallest," according to R. Michael Menzies, Sr., President and CEO, Easton Bancorp (Easton, Md., $99 million in assets), in a statement on behalf of the Independent Community Bankers of America. "Larger market participants have a greater ability to negotiate volume discounts for services within the package than do smaller participants because of their size," he says.

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