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The GFE: HUD Starts Over

It's official. HUD has withdrawn the "final" rule on GFEs that it sent to OMB for review. Instead of issuing a final regulation, HUD is going back to work.

Several significant developments led to this action. First, and most significant, was the bipartisan opposition in Congress. In his letter withdrawing the draft rule, Acting HUD Secretary Alphonso Jackson explained that "Congress, on a bipartisan basis," had voiced concerns about the rule. Specifically, members of Congress were concerned that they had not received a full briefing of the RESPA rule before it was sent to OMB.

This is putting a very tactful spin on HUD's attempt to bypass Congressional review before submitting the rule to OMB. Ordinarily, Congressional review would have been mandatory, however, HUD chose a time when Congress was in recess to skip a step and go directly to OMB. Congress was not pleased.

Not only did Congress resent the procedural step that HUD took to elude Congressional review, but many members of Congress from both parties had serious concerns with HUD's approach to the Guaranteed Mortgage Package Agreement ("GMPA").

There is general agreement in the settlement services industries that the GMPA would be a significant benefit for large, regional or nationwide lenders but that it could do serious harm to the ability of smaller and independent settlement service providers to compete. First, the mega-lenders would be able to negotiate deals that would effectively dominate the market. Second, they could offer a settlement service package without having to explain the contents, item by item, leaving applicants unable to compare a GMPA to a non- GMPA GFE.

The temporary demise of HUD's rulemaking attempt illustrates the divide between the Bush Administration's support of large businesses and the sensitivity of members of Congress to all businesses in their districts - both large and small. It was the bipartisan nature of the opposition to the rule that probably underlies the real reason for the withdrawal. Pursuing an issue that is so divisive within the Republican party is not a good strategy for an election year.

Acting Secretary Jackson stated his intent to reexamine the rule, revise it if necessary, and re-propose the rule.

Clues from OMB
OMB's response to Acting Secretary Jackson's letter is actually the most interesting part of this process. The letter contains some interesting clues to what this administration actually wants to do.

First, OMB's letter states that the rule submitted to OMB "would increase competition and inform consumer choice by making changes to the settlement procedures covered by RESPA." This amounts to a reiteration of the HUD position that the rule change is designed to promote competition and choice. The statement is made in the face of all the opposition to the rule which is based on the fact that the rule would actually limit competition, harm small businesses by limiting their ability to compete, and reduce the information given to consumers. There is no backing down from HUD's original explanation of its purpose in developing the rule.

The OMB letter discussed several specific aspects of the rule. First, with respect to forms, OMB stated that HUD "has improved" the GFE forms. However, OMB noted the recent study by the FTC which found that when consumers were asked to choose the least costly loan using HUD's proposed GFE and some alternatives drafted by FTC, consumers often chose the more expensive loan.

OMB noted that HUD has done additional consumer testing to follow up on the FTC test and encouraged HUD to develop a final form that enhances consumer comprehension "without creating biases in consumer reaction to the disclosure of the yield spread premium." In short, the single significant issue here is the disclosure of the yield spread premium; not the disclosure of other information. Arguably, the yield spread premium is as much as cost of credit as a settlement cost. HUD has not looked at the impact of this fee on TIL disclosures such as the finance charge and APR. Neither has OMB.

The OMB letter also referred to HUD's Regulatory Flexibility Analysis and Regulatory Impact Analysis. These are studies mandated by several federal laws. They require the issuing agency to analyze and consider the cost of the proposed rule and its impact on small businesses. The negative impact on small businesses is one of the major issues raised by those opposed to the rule.

The signal sent by OMB in its letter does not leave room for optimism here. Instead, OMB noted that HUD had submitted a "significantly improved" discussion of the effect the rule would have on small businesses and accepted HUD's conclusion that the rule would lead to significant consumer savings.

Instead of questioning HUD's conclusions - which would be a reasonable thing to do in light of all the concerns raised by small businesses - OMB suggests that HUD carry its position farther and find ways that the rule would "stimulate new businesses and jobs." In fact, OMB opens the door to working with HUD on ways to further refine the analysis of the rule's impact on "specific origination and settlement service industries." This sounds more like a plan to lobby than to re-think the structure and design of the rule.

Closely related to this recommendation is OMB's statement that HUD should expand its analysis of how various packaging alternatives would facilitate consumer shopping and savings. In short, there is no sign that anyone is backing down from the concept of the GMPA. Quite the contrary - the message is that HUD should work harder to develop its arguments.

As a final issue, OMB directs HUD to look at preempting state laws that could require inconsistent disclosures and consumer protections. The reasoning that HUD offers is that federal preemption may be needed "to ensure that consumers receive the full benefits intended by this rule."

Most state laws are more protective but in ways that make inter-state business difficult. This recommendation from OMB is the clearest message that HUD is taking these steps in the interest of the largest mortgage bankers, not banks. National banks, after all, are not subject to the state laws that could restrict their ability to offer products that national banking law authorizes. No such preemption is available to mortgage banks, such as Countrywide.

The issue is far from dead. The goal of HUD and this administration is clear. Thanks to Congress and the efforts of settlement industries, we have another chance. Don't sit back. Study this issue thoughtfully and get ready to comment.

In your comments, give thought and attention to several issues. First, provide information about what your customers want to know and the format in which they want the information. Second, draw distinctions between the costs of settlement and the costs of credit. Settlement costs belong on the GFE and the HUD-1. Costs of credit are best disclosed by Truth in Lending. Since the largest dollar amount on HUD's regulatory review table is brokers fees, illustrate how those are best shown in the APR. Don't sit back. This may be your last chance.


  • Take a long and careful look at loan disclosures, including the GFE, TIL and HUD-1. Consider how each presents information and how easy or difficult they are to understand.
  • Talk with loan closers about the questions customers ask. Consider what you can learn from this about what customers really want.
  • Think about ways that the settlement disclosures could be redesigned to best provide this information.
  • Compare numbers and information in the GFE, HUD-1 and TIL. Look especially at the best way to disclose payments to third parties that are based on the cost of credit, such as yield spread premiums.
  • Look for distinctions between costs of settlement (RESPA) and costs of credit (TIL).
  • Get ready to comment when HUD does something new with the GFE.

Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 3, 4/04

First published on 04/01/2004

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