May 22, 2008
Regulations Division
Office of General Counsel
Department of Housing and Urban Development
451 7th Street SW, Room 10276
Washington, D.C. 20410-0001
Re: Docket No. FR-5180-P-01
Proposed Rule to Simplify Real Estate Settlement Procedures Act Disclosures
Dear Sirs:
The following comments are offered on behalf of the Independent Bankers Association of Texas (“IBAT”), a trade association representing approximately 600 independent community banks domiciled in Texas. All of IBAT’s members make residential mortgage loans that are subject to this rule and will be strongly adversely affected by the proposed changes. Significant additional costs relating to reprogramming of software, obtaining new forms, and retraining staff will adversely affect a significant number of small businesses represented by the small community banks that are members of IBAT. Perhaps more significantly, the proposed changes are likely to create increased confusion for consumers rather than greater clarity. Specific observations follow.
New Good Faith Estimate (“GFE”) form. This proposal creates a very different GFE. The current form is one page with the enumerated items clearly tying back to the ultimate Settlement Statement. The proposed GFE is four pages long and summarizes fees in a manner that does not relate to the Settlement Statement. More significantly, it includes a proposed new “summary of your loan terms.” This section is similar to the Truth-in-Lending disclosure but significantly different and therefore has the potential to confuse rather than aid customers. For example, it includes an “initial interest rate” which is not expressed as an “annual percentage rate” (APR). Thus, when the applicant receives the early Truth-in-Lending Act disclosure required in certain residential mortgage transactions, there will be an immediate disparity between the two documents. Not only is this confusing but it also destroys the purpose of the Truth-in-Lending APR disclosure which allows the applicant to compare apples to apples.
Perhaps the Truth-in-Lending Act disclosure should be changed by the Federal Reserve. However, this proposed disclosure through the GFE is not authorized by federal law and creates an inappropriate, inconsistent overlap with the Truth-in-Lending Act and Regulation Z.
Tolerances. The GFE and the regulation have three different categories of settlement charges: ones that cannot increase at settlement, ones that can increase up to 10% at settlement, and those that can change at settlement. These categories ignore the effect of local law and the variety of real estate transactions covered by RESPA. In Texas, these categories actually will mislead customers rather than help them. Here are our concerns.
First, the category of charges that can increase up to 10% and those that can change include title services and lender’s title insurance. In actual fact, title insurance rates are fixed by the Texas Department of Insurance. These fees do not change. Listing them as items that could increase up to 10% is factually and legally incorrect in Texas.
The category of charges that absolutely cannot change include government recording and transfer charges. Texas does not have transfer charges. However, there is a per page fee for government recording. This amount is absolutely not known at application for real estate transactions in which the legal description is a metes and bounds one rather than a simple urban lot and block. Thus, if the applicant is purchasing a home in a rural area, the lender may not know at application time how many pages of description will be necessary for the deed of trust (security instrument). The difference will only be a few dollars. However, there will be an immediate violation of RESPA for these transactions.
Finally, the amount that can change includes the owner’s title policy. As noted above, that amount is fixed by the Texas Department of Insurance and is not negotiable in Texas. Perhaps more significantly, the typical Texas real estate purchase contract makes that a seller’s expense. Thus, the buyer/borrower has no cost. This GFE implies that the borrower could save fees by eliminating the owner’s policy. That is contrary to the applicant’s best interest.
Shopping for Credit. The GFE also makes some assumptions about how applicants can or should shop for credit. It basically has places for the initial interest rate (not APR), questions as to whether the rate can rise or the loan balance can rise (variable rate questions), whether there is a prepayment penalty and whether there is a balloon payment.
This does not include information that is more likely to be requested and used by applicants. Based on the experience of Texas lenders, it appears that applicants are more interested in the monthly payment. Thus, the relevant information relates to the impact of the amount of the down payment (and possible mortgage insurance if low down payment is offered) as well as the impact on the monthly payment of the term of the note. The same lender may be able to offer a variety of products with different payment amounts depending on fixed rate versus adjustable rate, amount of down payment, whether or not there is mortgage insurance, and other factors.
In addition, lenders need absolute clarity from the Federal Reserve as to whether or not this GFE application will constitute an “application” for purposes of Home Mortgage Disclosure Act loan application register and for purposes of the Equal Credit Opportunity Act adverse action notices. This new GFE application is not only more costly for lenders but also we believe unnecessary. While it was fairly common in the past for lenders to charge an application fee in order to apply for a residential mortgage loan, it is IBAT’s understanding that this practice has significantly decreased. Therefore, a person could submit applications to more than one lender to obtain multiple quotes without having the cost of an application fee. The complete application as opposed to the GFE application will allow the lender to do a better job of analyzing the credit that will be offered to that applicant. The standard application form is used by virtually all lenders, making it simple for the applicant to copy and use the same application several times.
The section relating to GFE applications also indicates that the GFE application can be in writing, computer generated form, or oral. This particular section needs to be made consistent with Regulation B which requires written applications for certain type of residential mortgage loans. Again, it needs to be clear as to whether these also trigger the adverse action notices required by the Equal Credit Opportunity Act and Regulation B. There are significant other provisions in this section that have implications for Equal Credit Opportunity Act. For example, there are rules relating to rejection and retention of records for three years (not 25 months as required by Regulation B).
Loan Script. The proposal adds an extremely lengthy, extremely complicated loan script that must be used by the closer. In Texas, it is extremely common for residential mortgage loans to be closed at a title insurance company. Thus, the loan script will need to be given by a non-lender. If there are questions from the borrower and the closer responds it is possible that this will violate the Texas Unauthorized Practice of Law act.
Broker Fee Disclosures. Texas law and regulations already have an explicit disclosure for broker fees. That form includes an explanation of how the broker will be compensated, whether by interest rate, total points or fees. There is the potential for inconsistency between this and the RESPA rule. Although the broker disclosure does not apply to banks but rather to brokers that are licensed by the Texas Savings & Mortgage Loan Department, banks do acquire loans from licensed mortgage brokers and will be affected by this aspect of the regulation.
Alternatives. One of the major problems that has been identified in this proposal and by the media in general is the lack of awareness by the public of the implications of an adjustable rate mortgage. Currently, consumers are required to be given an adjustable rate mortgage booklet and disclosures that include historical examples relating to the impact of an ARM. We would suggest that borrowers be required to sign an affidavit attesting that they have read the disclosure. Adding more disclosures to the current requirements simply adds to the stack of unread documents.
Another area that should be evaluated is the confusion created by disclosure of settlement costs that are not paid by the borrower at all but rather are paid by the lender outside of closing. Under the current rules and FAQs, the lender must include these settlement costs with the notation that they are “POC”. We would suggest that these be omitted or that the settlement statement be modified to clarify that these are not paid by the lender. The current processes are confusing.
Thank you for this opportunity to comment. As noted above, this proposal constitutes a significant increase in costs to community banks and has the unfortunate potential of discouraging them from offering residential mortgage credit. In turn, this reduction in competition has an adverse impact on consumers who will find a reducing number of choices in the marketplace.
