What Is HUD Thinking?

HUD's proposal to revise the Good Faith Estimate is a significant turning in the regulatory process. HUD has taken a statutory provision which HUD has no authority to enforce and turned it into a series of requirements so detailed and complex that most smaller mortgage lenders will decide to leave the business of mortgage lending to others.

HUD is proposing these changes in response to the information and stories about consumer harm that are being circulated, particularly those that relate to predatory lending. Unfortunately for HUD and for those HUD means to help, this proposal will not stop predatory lending or unfair settlement practices. It may do just the opposite, by forcing most of the responsible lenders out of the business. This will, in turn, drive borrowers straight into the hands of the predators. At that point, the predators will be in control.

Predatory lenders are predators because they can get away with it. Generally, the lenders that indulge in predatory practices are not those regularly visited by examiners. They are businesses chartered by states and "regulated" by HUD or the Federal Trade Commission. The compliance game these lenders play is like that of the Gingerbread Man: catch me if you can.

These lenders do business knowing that the cost of compliance for them is much greater than the chance of getting caught at violating the consumer protection laws. In fact the cost of compliance is calculated to be greater than the penalty they would pay if caught. So some of these lenders make almost no attempt to comply. They simply have a contingency plan for getting caught.This formula is bad enough. But now add in the fact that neither HUD nor the FTC has authority under RESPA to take enforcement action under the settlement cost disclosure provisions of the act. If HUD finds a mortgage banker violating the Good Faith Estimate requirements, there is nothing that HUD can do about it. Now there is absolutely no cost - and therefore no risk - related to getting caught. In fact, this proposal produces no new consumer protection at all.

So what is HUD up to? How can a responsible regulator justify even taking the time to draft this proposal? The people behind this proposal may have good intentions for consumer protection. But this proposal fails to account for something essential. No regulation should be written without knowing enough about the business being regulated to write a rule that works. No regulation should be written without thinking through how the industry will comply. And no regulation should ever be written without considering the consequences of the rule - all of them.

This proposal is clearly drafted without understanding the mortgage lending and settlement service industries. It fails to understand and take into account who sets costs, how the costs are set, and when.

It also fails to account for practices that would be in the consumer's interest, such as reviewing a series of loan programs to find the one or more for which the consumer is qualified or which best suits the consumer's needs. In fact, it is likely to put a stop to this practice.

The real problem that needs solving is the fact that a large number of consumers don't know enough about finances. Many consumers have no idea what an APR or a finance charge is. They don't know how to consider the APR or the payment schedule. Lots of consumers don't have any idea what is involved in purchasing a home.

No amount of regulation can help an uneducated consumer make a smart decision. Our education system and our society fail to provide any sort of financial education for our youth - or our adults. With the Money Smart program, the FDIC is trying to change this problem. Everyone would benefit if lenders put their time into consumer education instead of preparing longer and longer disclosures when consumers don't know how to use the information.

Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 11, 8/02