RESPA SAMPLE COMMENT LETTER
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SAMPLE COMMENT LETTER ON RESPA PROPOSAL
by Lucy Griffin, BOL Guru
The sample comment letter below provides an example of the format and >
Attn: Rules Docket Clerk
Office of General Counsel
Department of Housing and Urban Development
451 Seventh Street SW
Washington, DC 20410-0500
Re: Docket No. FR-4727-P-01
Thank you for providing the opportunity to comment on HUD's proposal to revise the Good Faith Estimate. Our institution is [describe institution (size) (# employees) (market features) (amount or type of mortgage lending business.)]
We have carefully reviewed the proposal to require a 3-page Good Faith Estimate ("GFE") and request that you consider the following concerns. We also recommend that HUD not make changes to the current GFE disclosure requirements. Our customers are satisfied with the disclosures we currently produce. We do not believe that the proposal would produce an improvement for customers. On the contrary, it would have a chilling effect on our willingness to make mortgage loans.
We find that our customers make the best use of disclosures that are clear and concise. The proposed GFE is three pages long, long enough to discourage customers from carefully reading it. Moreover, much of the information in the proposed GFE could be and is provided in other vehicles. For example, most of the proposed new disclosures could be in the booklet. In fact, placing information about the role of lenders and mortgage brokers in the booklet would be more helpful to consumers because it could be provided earlier in the process.
Booklets could be made available in lender lobbies, real estate broker offices, and on the Internet. In fact, HUD could provide a significant consumer benefit by providing the booklets in a prominent location on its Internet site rather than making consumers wait until they have applied for a loan to be given a copy. Then consumers could learn about the roles and general costs of all settlement service providers before having made some decisions, such as whether to use a loan broker.
In addition to explaining the roles of various service providers, the booklet could give consumers valuable information on how to shop for mortgages. In shopping, the most important thing a consumer should know is what questions to ask. These questions belong in the booklet to most effectively empower the consumer.
Using the GFE to duplicate information that is provided elsewhere is only going to confuse consumers. When the same information is presented in different formats, the result is confusing. To the extent that the proposed GFE duplicates required Truth in Lending disclosures, the result is confusion rather than enlightenment. Congress mandated the format of Truth in Lending disclosures and did not mandate any format for providing good faith estimates of settlement costs.
To the extent that HUD notes a problem with improperly disclosed and unexpected settlement costs, the problem is not the format of the disclosure but the failure of certain lenders to comply with HUD's existing rules. Federal and state bank examiners ensure that chartered financial institutions maintain a high level of compliance with HUD's rules. The efforts of HUD would be better spend on the mortgage lenders and brokers that are not subject to the rigors of a bank examination.
The proposal confuses the cost of credit v. cost of settlement. RESPA was enacted to require disclosures of the costs of settlement. Truth in Lending is the vehicle designed by Congress to disclose the cost of credit. The proposal mixes these two concepts. The result can only be confusing to borrowers. To achieve real clarification, the GFE should be looked at in the context of all required mortgage disclosures, the most significant of which is the Truth in Lending disclosure.
Placing settlement and credit cost disclosures together in a functional way can be an improvement over the current disclosures, but merging them haphazardly and using terminology in the GFE that differs from the use of terminology in the TIL creates more confusion.
The proposal ignores the important and established role of Truth in Lending disclosures. The content, format, and timing of Truth in Lending disclosures are dictated by Congress in the Truth in Lending Act. Congresss made significant changes to the Truth in Lending ("TIL") disclosure scheme in 1980. This should make it clear that Congress intended Truth in Lending, and not RESPA, to be the vehicle for disclosing and explaining the costs and terms of the credit contract.
TIL reduces the costs of a mortgage to several key pieces of information. The TIL disclosures revolve around the "material disclosures" which are the APR, finance charge, amount financed, total of payments, and payment schedule. These disclosures effectively condense the key credit price comparison to five pieces of information that consumers can use to easily compare the costs of various loans.
HUD expressed concern about the proliferation of "junk fees." These so-called junk fees are revealed in the material disclosures of TIL. Junk fees become finance charges and must be included in the total finance charge and taken into account in the APR. I short, a loan with junk fees will have a higher APR than a similarly priced loan that does not have junk fees.
Other third party fees, such as required settlement services and mortgage broker fees, are included in TIL's finance charge and APR, clearly showing the added cost. The APR calculated and disclosed under Truth in Lending is the vehicle Congress designed for identifying the true cost of credit.
The proposal adopts parts of Truth in Lending but uses them in ways that conflict with the TIL disclosures. The proposed GFE would use TIL's APR. It would also use TIL's descriptions of variable rate features and adjustable rate mortgages. This would result is unnecessary duplication of disclosures.
The proposal uses and presents credit pricing and product information that conflicts with the statutorily required disclosures of TIL. This duplicate and different presentation of information will confuse customers rather than help them. For example, the GFE would introduce the term "par value"without a clear definition or understanding of that term. It conflicts with - and will usually be a different number than - the amount financed that Truth in Lending requires.
Another confusing difference between the proposed GFE and the TIL disclosures is the presentation of a payment amount or payment schedule. TIL requires disclosure of a payment schedule that shows amounts and timing of all payments, including balloon payments. The proposed GFE would only disclose some of this information and uses a different format to do so. The result is confusing without providing any new information to the consumer.
Confusion of terms with Truth in Lending and typical contract language will only create additional customer confusion. The Federal Reserve has placed careful emphasis on consistent use of terms to avoid consumer confusion. Regulation Z preempts state laws that require inconsistent disclosures and terminology. The Federal Reserve Board has administered its preemption authority with great care to minimize federal interference with state concerns but to ensure consistent use of credit cost terminology. HUD's proposed GFE would re-introduce confusion that the Federal Reserve Board has worked carefully to minimize.
The proposal would make complex disclosures to reveal the cost of points and fees related to the credit transaction. This is already accomplished by Truth in Lending. RESPA directs disclosures on the cost of settlement services but does not require disclosures on the cost of credit. That is entirely within the scope of Truth in Lending. Terms such as the APR and the payment schedule belong on the TIL (which is given at the same time as the GFE) and do not belong on the estimate of settlement costs. Adding them to the GFE would not provide consumers with additional or useful information but it would produce confusing duplication.
In its Federal Register document, HUD stated its concern that mortgage brokers should appear competitive with mortgage lenders. We disagree and believe HUD's concerns are misplaced. Mortgage brokers are not lenders. They bring the borrower and the lender together. As such, they are professional shoppers, not lenders. As shoppers, the cost of their services should be made clear to the customer. Fees going to the broker should be clearly disclosed as broker fees and their services should be clearly described. It would be deceptive to present disclosures that make a mortgage broker appear to be a lender. We note, however, that descriptions of mortgage broker services could and should be contained in the homebuyer's booklet rather than on the GFE.
We believe that HUD has overstepped its authority by using RESPA's Good Faith Estimate process to regulate loan pricing. The proposal would actually regulate pricing by locking in the lender to disclosed rates. The procedure that would be established by the proposal would further eliminate any price negotiation with consumers and thus limit their choices. This could have fair lending implications. The proposal would limit the borrowing options that lenders could discuss without issuing multiple GFEs.
The GFE disclosure process should focus on who actually has control of what services and what costs. Placing responsibility for all costs on the lender is neither realistic nor appropriate. A GFE developed and provided by a broker should not be binding on lenders. This only encourages brokers to over-charge so that the number of willing lenders is maximized.
Making lenders responsible for all settlement costs as disclosed forces lenders to take a risk that may not be justified. Lenders do not have control over the pricing of third parties. Lenders do know the typical pricing for services in their market. They can and do provide GFEs using those costs. However, the proposal would place the risk for pricing changes on the lender. Smaller lenders, such as community banks, cannot take on thi
pricing risk. They are likely to withdraw from mortgage lending rather than take this risk. This result would be unfortunate for consumers because it is usually the community banks that make loans designed to accommodate specific customer needs or interests.
We believe that the proposed GFE form will not enhance consumer understanding nor make the settlement process easier to understand. This is based on numerous conversations with our customers and the questions they ask. Customers usually want to know only a few basic pieces of information. For purposes of the cost of credit, or Truth in Lending, the material disclosures provide the information. For purposes of settlement, we find that the current method of providing the GFE satisfies consumer's questions. Together, these disclosures provide the information they seek.
We believe that the proposed GFE form will not be well received by consumers. Unlike the current clear lists of costs, the proposed form obscures specific services and provides only total numbers in primary categories. This will not improve consumer understanding. It will not facilitate shopping. Simplification is as important for the consumer as for settlement service providers who comply. Simple and short are easiest to understand and to prepare. The proposal would create three pages instead of one, and present unnecessary duplication of information by using information from the TIL. In short, it makes a relatively simple process complex and confusing.
Truth in Lending provides an effective method for disclosing and controlling tolerances and variations before settlement. In contrast, HUD's proposal places restrictions that could have a negative impact on important parts of the mortgage market. In particular, locking in the costs of lender-required services could
For example, construction lending has delayed delivery where lock-ins on all costs, fees, and rates is impracticable. Some costs, for construction loans as well as for more traditional mortgages, are not known with precision until after settlement. Credit report fees vary depending on report content and the nature of report needed. The qualifications or credit weaknesses of the applicant trigger the type of credit report needed. The price is not always known when the application is taken.
Providing clear information about mortgage settlement services is more important than imposing a tolerance. The key to disclosures and to educated borrowers is ensuring that consumers know what questions to ask. When consumers know what to ask, they can shop more effectively.
The proposal would create a 30-day period for consumer shopping, during which the lender would have to agree to honor the prices disclosed. Those prices would then be locked in from acceptance of the lender's offer until closing -- an undefined period of time. HUD has not produced any hard or soft evidence that this time period and process would actually promote shopping. In fact, most consumers, with the exception of consumers seeking a prequalification, ask for rapid approvals. Customers seeking to refinance their mortgages usually want to go to settlement in a time frame measured by days rather than weeks or months.
HUD would allow lenders and other settlement service providers to package settlement costs without disclosing the specific services. While the GMPA has clear efficiencies, consumers would be unable to compare services offered by a lender using the GMPA to the services offered or required by a lender using a GFE. The GMPA, by not itemizing the specific service elements included in the package, eliminates the ability to compare. Borrowers could only compare a GMPA with other GMPAs but not to GFEs. Moreover, they would run the risk that the least expensive GMPA did not include all the services included in other packages.
Because of the packaging of prices, borrowers would be unable to determine whether prices in a GMPA are fair. In addition, examiners would have difficulty evaluating whether prices are fair, discounted, or marked up. We believe that encouraging packaging would gradually conceal the specific services and costs of settlement.
Government lending programs should not be exempted from any TIL or RESPA requirements. Generally, borrowers that most need the protections of this information are also the most likely to consider or be considered for government-sponsored lending programs. If this information is in fact useful to customers, these customers in particular should not be excluded from the protections. Borrowers considering government and conventional loans should be able to compare the costs and advantages of conventional and government programs. Providing an exemption of any significant mortgage program, such as FHA, undermines consumer shopping. Consumers should be able to compare the costs of a conventional loan with the costs of FHA loans.
HUD's proposed GFE would require lenders to disclose the cost of mortgage insurance when the GFE is provided. The need for mortgage insurance may not be known at that time. For example, an appraisal that establishes a value below what the borrower anticipated may mean that the loan to value ratio exceeds 80%, triggering a PMI requirement. The proposal would dictate that the application be denied or that the lender issue new disclosures (if counteroffer procedures are permitted by HUD.) Mortgage insurance costs cannot be anticipated and accurately disclosed before underwriting is complete. Lenders should not be held to the cost disclosed within three days of taking an application.
Instead, we recommend that information about when, how, and why costs such as PMI are added to a loan be explained in the booklet. This would both inform consumers and assist in credit shopping.
The proposal creates several problems with lending procedures and with other regulations. Perhaps the most significant of these is the fact that the GFE would severely restrict the presentation of credit choices to customers. By locking a lender into the GFE, the lender is not able to provide information about the variety of loan programs offered. The proposed GFE process would discourage loan officers from suggesting alternative products to the customer.
Closely related to this concern is the chilling effect the proposal would have on credit counseling. By requiring an unrealistic level of detail and accuracy in the Good Faith Estimate, HUD would discourage lenders from offering credit counseling and advice about credit products. As a practical matter, the proposal motivates lenders to offer only one loan product to the consumer. The consumer would therefore have less opportunity to learn about mortgage product options and, without information, could choose a product that is not the best available product for their needs.
Pre-qualifications would not be covered by the proposal, however customers need information about settlement costs when they seek pre-qualification. For that reason, we routinely provide a GFE for applicants who seek to be pre-qualified. We would have to stop this practice if the proposal were adopted. The limiting features of the proposal would create customer expectations that a voluntary disclosures carried the same level of commitment as the GFE covered by the rule. There are too many undecided issues in a pre-qualification, inlcuding the jurisdiction in which property will be located, to provide a disclosure as specific as HUD would require for the GFE.
The proposal would cause problems with counteroffers by creating a cumbersome process. Currently, Regulation B (Equal Credit Opportunity) provides a clear procedure for making a counteroffer to an applicant. HUD's proposal does not appear to anticipate counteroffers but would treat each loan product offer separately. It appears that a lender's counteroffer would be subject to the new GFE disclosure requirements. The result is likely to be that lenders issue a denial rather than making a counteroffer for which the applicant does qualify.
The GFE as proposed would cause serious complications in the monitoring data collection and reporting system of the Home Mortgage Disclosure Act. Each loan the consumer is interested in would trigger a GFE which is effectively an offer of credit. Alternatively, lenders could offer only one loan at a time, forcing the customer to reapply if the customer does not qualify for the loan. Under either method, the lender would be reporting multiple applications for HMDA when in fact there is only one.
Many construction loans and loans on new construction are made over longer periods of time than the proposal contemplates. A loan to be secured by a dwelling to be constructed may take 6 months or more before closing. Some take much longer. Delays in delivery and settlement that result from construction issues would cause cost changes. If HUD insists that the lender must be locked in to the settlement costs disclosed on the GFE, many lenders will stop offering construction loans.
The entire 2-hr On-Demand presentation, "What's a Good Faith Estimate to Do?" from BOL Learning Connect presented by Lucy Griffin on this proposal may be purchased in the Banker Store for immediate viewing.
This Comment Letter was first published on BOL Learning Connect as a part of the materials for the What's a Good Faith Estimate to Do?
First published on BankersOnline.com 10/17/02
First published on 10/17/2002