Responding to pressure from consumer groups, the U.S. Department of Housing and Urban Development has proposed a regulation requiring mortgage brokers to sign binding contracts early in the process that disclose fees consumers pay.
The proposed regulation, which is undergoing congressional review and public comment, also would require brokers to identify the lenders with whom they are doing business.
The proposal would clarify existing rules by requiring that disclosures be put into plain English.
While applauding HUD’s decision to clear up ambiguities, Mortgage Bankers Association president Ron J. McCord said HUD’s language complicates the regulatory environment “by attempting to overcontrol the relationship between brokers and home buyers.”
“In proposing cumbersome rules for brokers, HUD is working against the movement toward a more simplified, streamlined and comprehensible mortgage process that encourages home buyers to shop around,” McCord said.
Eugene I. Lehrmann, of the American Association of Retired Persons, said his group pushed for the new rule.
“AARP’s goal will be to ensure during the comment period that the proposed rule and binding contract provide the consumer with the maximum information and flexibility to control the structure and costs of his or her own mortgage transaction,” Lehrmann said.
Mortgage brokers handled $333 billion in mortgages last year–about half of all mortgage transactions in the United States.
While many consumers assume that brokers shop for consumers to find the lowest rates–and many of them do–mortgage brokers can sell these loans to the bidder who will pay them the largest commissions.
Fred Glick, of American Financial Mortgage in King of Prussia, Pa., doesn’t understand what the fuss is about.
“The bottom line is most people are shopping hard these days for the lowest rates,” Glick said. “What the broker does with the mortgage afterward doesn’t affect them.”
HUD Secretary Andrew D. Cuomo said the proposed disclosure regulation is expected to increase competition, enable consumers to find loans at lower interest rates, and drive down fees charged to consumers by mortgage brokers.
“By giving consumers more information earlier in the mortgage process, our honest lending contracts will enable them to shop around and find the best deal,” Cuomo said.
McCord took another view, asking “why a complicated set of rules has been proposed for a whole industry.”
“HUD should instead be working toward rules that are simple and meaningful, and make it easier for home buyers to understand the home buying process,” McCord said.
The proposed regulation would create a disclosure form called “the honest lending contract.” The form would be written in plain English to be signed by the broker before the borrower applies for the loan. The contract also would inform consumers of their rights.
The Real Estate Settlement Procedures Act (RESPA) of 1974 prohibits real estate agents and mortgage brokers from receiving kickbacks and fees for referrals, and requires disclosure of fees to all borrowers. But the rules allow brokers to disclose this information in technical language.
However, the HUD proposal is not the answer, McCord said.
“The fact that the single issue of broker disclosure has taken five years of discussion at HUD is evidence that RESPA has become too complicated to understand or implement,” McCord said.
The proposed rule would carry the same penalties required for violations under the 1974 act: $10,000 fine, a year in prison, and civil liabilities including triple damages.
