Dear Secretary Preston: Please chuck RESPA reform

Reps. Ruben Hinojosa Judy Biggert are teaming up again and asking colleagues to sign a letter to HUD Secretary Steve Preston insisting that HUD basically throw out its entire proposed RESPA rule change and start over, working with the Federal Reserve, on new disclosure forms (and, implicitly, drop packaging incentives altogether).

You will recall that it was Hinojosa, D-Texas, and Biggert, R-Ill., who got HUD to extend public comment on the proposed rule change by 30 days. The dynamic bipartisan duo were also instrumental in galvanizing Congressional opposition in 2004 to scuttle HUD's last attempt at RESPA reform (see story).

The (proposed) letter to Preston (see below) basically makes two arguments about disclosures: they should be consumer tested, and be compatible with or the same as the Fed's Truth in Lending Act (TILA) disclosures. The letter completely glosses over the issue of packaging, saying merely that in order to expedite the process of coming up with better disclosures, that HUD should "discard the hundreds of pages of (the) current proposed RESPA rule that have not previously been the subject of public comment and cover a number of subjects beyond disclosures."

Interestingsly enough, in announcing its overhaul of TILA enforcement Monday, the Fed ended up backing down on a plan to require that mortgage brokers enter into written agreements with borrowers in order to collect yield spread premiums (see story).

In a speech today, Fed board member Randall Kroszner had some interesting things to say about the consumer testing that led to the decision to abandon the Fed's proposal for handling yield spread premiums via TILA, which he said revealed two problems:

"The first problem is that many participants believed, after reading the disclosure, that the broker would be obliged to find them the lowest interest rate and best terms available, which is not true.  The second problem was that many participants came to believe that working through a broker would cost them more than working directly with a lender, which is not necessarily true either.  The firm tried to correct these misunderstandings, but no matter what it did to change the language, the forms continued to confuse consumers more than inform them."

The National Association of Mortgage Brokers seized on the Fed's action as ammunition against the provisions of HUD's proposed RESPA rule that deal with YSPs. While the proposed GFE doesn't use the terminology "yield spread premium," it would require that the rebates lenders pay when borrowers take out loans with higher interest rates than they might otherwise qualify for be disclosed and credited to their closing costs rather than pocketed by brokers.

In a press release, NAMB called for "the immediate suspension of the Department of Housing and Urban Development’s (HUD) Real Estate Settlement and Procedures Act (RESPA) reform proposal based on the findings of FRB tests and FTC consumer tests. These multiple studies indicate that consumers are more likely to choose higher cost loans because of the HUD requirement that brokers disclose YSP. This requirement has cost consumers hundreds of millions of dollars since 1992. It is time to put an end to this misguided approach.

Krozner says the Fed's not done with yield spread premiums, but industry opponents seem to have convinced Hinojosa and Biggert to adopt the same approach employed by NAMB -- insist that proposed changes to RESPA disclosures be consumer tested and coordinated with TILA.

It's hard to argue that consumers shouldn't be bombarded with different or perhaps even conflicting disclosure forms, but hasn't HUD done consumer testing? The Hinojosa/Biggert letter claims that, to their knowledge, HUD's proposal has "not undergone extensive consumer testing (and) promises to be more confusing and costly to both small businesses and consumers."

For his part, Preston has said he thinks RESPA reform is workable (see story).

Hinojosa/Biggert proposed letter to Preston:

"Dear Secretary Preston,

We appreciate your efforts to simplify and improve disclosures under the Real Estate Settlement Procedures Act (RESPA) and the Department of Housing and Urban Development's (HUD) recent decision to extend by an additional 30 days the public comment period for its proposed RESPA rule. However, this extension was not sufficient to address the concerns that we and the public have regarding the proposed rule's complexity, contentious provisions, incongruity with related federal agency efforts, and potential costs to consumers.

"In light of these concerns, we request that HUD withdraw its proposed RESPA rule and immediately commence a joint rulemaking process with the Federal Reserve Board to produce more simplified mortgage and real estate settlement cost disclosure forms. To expedite this process, we also ask that you discard the hundreds of pages of HUD's current proposed RESPA rule that have not previously been the subject of public comment and cover a number of subjects beyond disclosures.

"The concept of a joint HUD-Board rulemaking is not new. In 1996, Congress requested that HUD and the Board collaborate on a joint RESPA-Truth in Lending Act (TILA) rule. In 1998, HUD and the Board issued a report to Congress confirming that the agencies should jointly produce mortgage disclosure forms. On June 13th, 2008, the Board sent a letter to HUD encouraging such a coordinated effort that includes adequate consumer testing and specifically requested that the two federal regulatory bodies avoid conflicts as they work to modernize disclosures required by RESPA and TILA. In the July 1, 2008 issue of American Banker, Sandra Braunstein, the Board's Director of the Division of Consumer and Community Affairs, said:

   'Any effort to hasten the adoption of new mortgage loan disclosures without adequate testing and development ould, in the long run, hurt consumers more than help them, especially if consumers receive inconsistent disclosures under different legal regimes ... A single, integrated form, which creditors may use to satisfy the requirements of both laws, would mitigate the problem of "information overload." '

"As HUD proceeds with RESPA reform in concert with the Board, we also encourage you to ensure that any final proposal focuses on disclosures and enjoys the consensus of industry and consumer groups. Following HUD's withdrawal of the last RESPA regulation in 2004, then-secretary Jackson told the National Association of Realtors Midyear Legislative Meeting & Trade Expo:

    'If you want a bill [regulation] you have to have consensus ... Therefore, next time we will sit at a table, as we did at negotiated rulemaking. We will talk with the groups. If we have 75 percent or 80 percent agreement we will have a bill [regulation].'

"Unfortunately, HUD's current RESPA proposal does not reflect this consensus. And, again, RESPA stakeholders have not previously vetted -- nor reached any agreement on -- numerous provisions within HUD's proposed RESPA rule. We encourage you to honor HUD's commitment and work with stakeholders to promulgate a new rule that receives broad support.

"Finally, we ask that you work to produce a RESPA rule that takes into consideration its impact on small businesses and especially consumers. The current proposal, which to our knowledge has not undergone extensive consumer testing, promises to be more confusing and costly to both small businesses and consumers. On June 11, 2008, Small Business Administration (SBA) Chief Counsel for Advocacy Thomas Sullivan and Assistant Chief Counsel for Economic Regulation and Banking Jennifer Smith sent a letter to HUD Assistant Secretary for Housing-Federal Housing Commissioner Brian Montgomery expressing 'concerns with the potential economic impact of the proposal' on small businesses.

"Given these concerns and the thousands of other raised by our constituents and industry stakeholders, we are profoundly concerned that HUD's proposed RESPA rule will hinder rather than help the recovery of the housing market. It is critically important for consumers that any revision to RESPA achieve the following goals: simplify, clarify and reduce the cost of the mortgage and real estate settlement process.

"For these reasons, it is vital that HUD take a new and important step toward positive reform by immediately withdrawing its current proposal and, working with the Board, embark on a joint rulemaking process to improve RESPA and TILA disclosures."