Proposal to Revamp RESPA Rules Continues to Face Opposition

The Bush administration is signaling that it plans to issue a final rule to simplify the mortgage application and settlement process soon.

President George Bush is talking about Department of Housing and Urban Development's efforts to simplify the mortgage process when he discusses his administrations efforts to increase homeownership and stimulate economic growth.

The settlement sheets and disclosures make "you nervous. We're simplifying it," he said during a campaign stop in Merrimac, N.H. The President also told the U.S. Conference of Mayors "HUD is working to simplify the contracts and to make easier and less expensive for people to enter the process of buying a home."

HUD's proposal to revamp its Real Estate Settlement Procedures Act regulations is also highlighted in the annual budget proposal the President sent to Congress on Feb. 2.

The budget documents indicate the RESPA rule will provide "consumers with upfront disclosures of all costs associated with obtaining a federally related mortgage loan in understandable terms prior to the payment of non-refundable fees."

The budget documents also indicates the rule will strengthen RESPA so that lenders will be penalized if they fail to accurately disclose mortgage broker fees, interest rates, balloon payments and prepayment penalties.

"The Department issued a proposed rule covering RESPA reform in fiscal year 2002 and anticipates a final rule in FY 2004," HUD says in a summary of its budget. FY 2004 ends Sept. 30, but some sources are expecting the final rule could be issued in the next 60 days.

HUD shipped the RESPA rule to the White House budget office for final clearance in Dec. 16. It usually takes Office of Management and Budget three months to review a major rule. Once the review is complete, the rule can be published in the Federal Register.

The sudden submission to OMB stunned industry groups like the Mortgage Bankers Association and National Association of Realtors. They wanted to HUD to re-propose the RESPA rule so that they could review and comment on it one more time.

The Mortgage Bankers Association, the National Association of Realtors and American Land Title Association were urging HUD to re-propose the RESPA rule so that they could review and comment on it one more time.

While a re-proposal is unlikely, there is still hope OMB may recommend that HUD issue an interim final rule. This means the RESPA rule - which would change mortgage brokers disclosures and allow packaging of settlement services - would go into effect in 60 days. However, HUD would also solicit comments that would allow the agency to make further changes in the rule.

Such an approach may be able fend off expected legal challenges to the RESPA rule, at least temporarily, and it may neutralize attempts by Congress to block implementation of the rule.

Besides the housing trade groups, the chairmen of the House and Senate banking committees wanted HUD to re-propose the rule, as well as House Small Business Committee chairman Don Manzullo, R-Ill.

"The continued existence of tens of thousands of American small businesses is at stake on HUD's revisions to its initial proposal. Unfortunately, HUD will not put forward its final proposal for public review until after it is approved by OMB and ready for implementation. That is too late," Rep. Manzullo said.

To vent his frustration, the chairman held a special committee hearing (even though Congress was in recess) to get acting HUD secretary Alphonso Jackson to testify and explain his decision to submit the "secret" RESPA rule to OMB.

Mr. Jackson declined to testify at the Jan. 6 hearing. Rep. Manzullo countered by refusing to allow HUD assistant secretary John Weicher to testify in Jackson's place. HUD's testimony was placed in the record, while Mr. Weicher exited the hearing room.

"Everybody in America wants a new proposed rule except HUD," chairman Manzullo said.

Chairman Manzullo told reporters after the hearing that he decides who testifies, not HUD.

But the House Small Business Committee chairman was very pleased to have OMB administrator John Graham testify. Mr. Graham's staff is reviewing the RESPA rule.

Mr. Graham made it very plain that he could not discuss the contents of the final RESPA rule, which is one of the best-kept secrets in Washington.

He noted that OMB has three months to review the rule to ensure it meets regulatory standards. And it is an "open" process that allows interested parties to meet with OMB staff to present their views.

"Once it is published, if it is published, it can be reviewed by Congress," Mr. Graham said.

The Mortgage Bankers Association supports HUD's intent to simplify the mortgage process, MBA vice chairwoman Regina Lowrie testified. But MBA is concerned that the final rule would strip away important RESPA protections that prohibit kickbacks and referral fees among lenders, real estate agents and settlement service providers.

"We understand that the rule submitted by HUD to OMB may contain exemptions from Section 8 that are so broad that they create massive loopholes, which in effect legalize referral fees and kickbacks," Ms. Lowrie said.

MBA supports a Section 8 exemption for lenders who bundle mortgage and settlement services and offer consumers a guaranteed mortgage package. HUD's original proposal provided this Section 8 exemption.

However, the trade group is concerned HUD's final rule might allow real estate agents and others to use "shell packages" as a way to refer homebuyers to lenders for a fee.

Stanley Friedlander, immediate past president of the American Land Title Association, warned that his trade group will sue HUD if the final rule gives lenders a Section 8 exemption to package settlement services.

"If the rule is substantially similar to the proposed rule, ALTA has been directed by its board to institute litigation challenging the regulation," Mr. Friedlander testified.

National Association of Realtors president Walt McDonald told the committee that NAR opposes HUD's single-package approach, which would allow big lenders to control the packaging of settlement services.

NAR has endorsed a two-package approach that would allow lenders and non-lenders to package settlement services.

"We remain convinced that the changes contemplated by HUD to the real estate disclosure process require further study. Even the alternative two-package RESPA proposal submitted by NAR requires additional scrutiny and debate," Mr. McDonald testified. ALTA and the Real Estate Services Providers Council also support a two-package approach.

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