HUD Has Gone Too Far
HUD's latest rulemaking on RESPA is beginning to send shock waves through the banking industry as they design compliance procedures for the new rules. The requirements for providing a controlled business notice before making a referral to a bank's affiliate mortgage company and the restrictions on incentive compensation are producing some absurd results.
HUD has good reasons to be concerned about referral practices in certain parts of the mortgage industry The world is full of people busily designing ways to earn money for doing nothing more than putting a customer and a lender together. Under of RESPA that amounts to nothing.
Unfortunately, the impact of HUD's new rules fall most heavily on banks. First, many banks are structured in ways that have now become suspect under RESPA. Many have moved mortgage lending into mortgage banking affiliates or subsidiaries. Bank holding companies use these organizational structures to make their businesses more efficient and to therefore provide better, less costly service to customers.
When customers are deluged with disclosures about costs, fees, terms, and conditions, it is difficult to figure out how a bank could hide excessive costs based on referrals. Even if the customer doesn't read the disclosures, it will all get closely scrutinized in the bank's next compliance examination.
Second, banks are regularly examined. There is nothing like a periodic visit from your friendly compliance examiner to inspire concern about compliance. The industry members that most concern HUD are virtually invisible to their regulatory agency, HUD. In terms of reaching the industry they "regulate", the enforcement efforts of HUD don't even cover the tip of the iceberg. For non-bank settlement service providers, choosing not to comply is a fairly low-risk bet.
Look at how this rule is going to work. Anyone in the bank must provide the consumer with a notice, ask the customer to read and sign it, and then (not before) tell the customer the name of the affiliate mortgage company In this notice are the costs of any settlement services that the affiliate may charge. Since the origination of the loan is a settlement service, arguably the cost of the loan should be included in this disclosure. HUD expects banks to prepare this notice without knowing what kind of loan the customer wants. As a practical matter, the referral form will take on the attributes of a good faith estimate or an early Truth in Lending disclosure.
Another aspect of the rule is the compensation that may or may not be paid to employees for referrals. Staff most qualified to make referrals, and most likely to be approached, may not be compensated or incented in any way. Tellers may be compensated because they have no connection with lending and would therefore not be likely to influence the consumer's choice.
This non-lending rule has another twist. A branch manager may be compensated for referrals as long as the branch manager doesn't make federally related mortgage loans. For some reason, HUD thinks that a customer would not place faith in the recommendation of a branch manager in the way that they would respond to the recommendation of a loan officer.
This all becomes particularly absurd when the referral in question is: "Thank you for coming to our bank to ask about a mortgage loan. All our mortgage lending is done through our mortgage bank, located next door..."
HUD would better use its resources by spending more time investigating and prosecuting the actual bad actors in the industry and less time designing rules, that HUD itself does little to enforce, that inappropriately and unnecessarily restrict the way banks can do business.
It is time to give active support to the legislation that would remove RESPA from HUD and transfer responsibility to the FRB. All of RESPA, not just the disclosure portion of the act, should be in the hands of an agency that has a better understanding of how the business and structure of banking actually works.
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 14, 9/96
First published on 09/01/1996