Robert M. Jaworski on HUD'S 2008 Proposal to Reform the Real Estate Settlement Process: Will It Work?
HUD's 2008 Proposal offers a "new and improved" version of Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), including a dramatic change to the form of Good Faith Estimate (GFE), modifications to HUD-1/1A Uniform Settlement Statement forms, new "closing script," and revision to the definition of a prohibited "required use" in connection with a referral to an affiliated business arrangement (AfBA). Robert M. Jaworski, Esq. analyzes the Proposal’s merits and explains why he believes HUD's declared intention to take final action by October 2008 is an extremely tight timetable for a rule of this significance. He writes:
HUD wants to throw out its old form of GFE in favor of a new one. The old form (which was a suggested format rather than a mandatory one) is a fairly straightforward, one-page form, with numbered lines for various fees that correspond to the numbered lines on the HUD-1. The proposed new one would be four (4) pages long, cannot be held side-by-side to the HUD-1 to compare fees (although the modified HUD-1 will include line number pointers to the new GFE to facilitate comparisons) and uses some new terms that seem likely not to be well-understood by consumers, such as “our service charge,” the “credit or charge for the specific interest rate chosen,” and “your adjusted origination charges.” This raises a concern at the outset that the new form may not represent an improvement over the old one.
. . . .
HUD's 2008 Proposal requires that a “Closing Script,” which HUD envisions will be prepared by the lender, be read aloud at the closing by the closing agent. Its purpose is to explain to the borrowers the loan terms that they are actually receiving, whether the fees they are paying are consistent (i.e. within the allowable tolerances) with the fees disclosed on the GFE, and whether the terms of the loan they are receiving are consistent with the terms promised on the GFE.
This requirement raises numerous issues. For example, how will it be effectuated in escrow states where there are no in-person “closings”? How will it impact title agent profitability? Will title agents who comply with it be at risk of being accused of engaging in the unauthorized practice of law? And will it serve to place title agents in the awkward (and thankless) position of referee between borrowers and lenders?
. . . .
The 2008 Proposal would also amend HUD’s existing definition of “required use” to specifically include a situation where the borrower becomes eligible to receive a discount, rebate or other economic incentive only if he/she uses a particular settlement service provider. This amendment would appear to outlaw the current practice of some new home builders to offer upgrades or discounts on the sales price or to pay all or some of the buyer’s closing costs if the buyer/borrower agrees to use the home builders’ affiliates for needed settlement services. While some of these offers may not provide consumers with the savings they think they are getting (because those savings may be made up by higher costs elsewhere in the transaction), many are no doubt legitimate. But the 2008 Proposal outlaws both good and bad offers, without attempting to differentiate between them. This can only hurt consumers.