New Year Brings New Regulations for Mortgage Industry

Mortgage lenders and brokers are under increased pressure to provide consumers with clear and accurate information about the true cost of loans. And if they fail to do so, the federal government is now holding them accountable. On Jan. 1, new Real Estate Settlement Procedures Act (RESPA) regulations took full effect. For the first time the U.S. Department of Housing and Urban Development (HUD) is requiring lenders and brokers to use a standard “good faith estimate” form. “The new form reveals in plain and obvious ways what a consumer’s loan is,” said Brian Sullivan, spokesman for HUD. “These are facts that used to be buried in the fine print. All of the origination and third party settlement costs are clearly spelled out.” The point is to provide transparency about mortgage costs such as pre-payment penalties, fixed versus adjustable rate loans, balloon payments, and closing costs. The regulations are also designed to encourage borrowers to shop their loans. Local mortgage brokers, lenders and consumer advocates welcome the new regulations. But some are concerned there may be confusion over the next few months. And one Valley company has already designed a “RESPA compliant” calculator. “I think it has been a long time coming and is certainly a step forward,” said Paul Leonard, director of the California office of the Center for Responsible Lending. “The new forms are not the ideal, but they will provide greater clarity for borrowers.” Under the new system, some loan and closing costs cannot increase, including: origination charges; points for the specific interest rate chosen; adjusted origination charges; and transfer taxes. Others can only increase up to 10 percent if the borrower uses companies recommended by brokers and lenders who provided the good faith estimate. These costs include: required services; title services and lender’s title insurance; owner’s title insurance; required services that borrowers can shop for; and government recording charges. Costs that don’t have a cap on the amount they can change at settlement include: all of the above if borrowers do not use companies recommended by lenders and brokers who provided a good faith estimate; initial deposit for the escrow account; daily interest charges; and homeowner’s insurance. “Buying a home is not like buying a loaf of bread,” said Sullivan. “But it also shouldn’t require the borrower to have a doctorate degree.” Once consumers get a good faith estimate, they can shop to find the best price, he added. The new forms also include a section for comparing different estimates. HUD is also holding brokers and lenders accountable. If costs change over and above the new guidelines, they will be required to make amends at the time of closing, said Sullivan. “Accountability has never happened before,” he added. The new RESPA requirements are going to have an impact on a few different fronts, said Victor Benoun, president of The Mortgage Source, Inc. in Studio City. “The most obvious is that the whole intention is to provide consumers with transparency, which is a good thing,” said Benoun. “In the past, consumers were often not receiving the right information. And in many respects there is now no tolerance for mistakes.” On a practical level, the new standards will require lenders and brokers to spend a lot more time crafting good faith estimates. And when it comes to pre-approvals for home mortgages, they cannot provide an estimate without a specific property address tied to the mortgage. “The bottom line is that it will take more time and also cost lenders and brokers more money if they fail to disclose something, because they’ll be making up the difference,” said Benoun. “I think it’s going to be confusing at first to brokers and borrowers, but like anything else, it will smooth out over time.” Westlake Village-based Timios, Inc., a national title insurance and settlement services company, developed what it claims is the first 100 percent RESPA compliant online good faith estimate. The company’s in-house technology group developed a free, online, real-time rate calculator that meets the new disclosure and tolerance levels. Timios guarantees the escrow and other fees it quotes. “We’re interested in taking advantage of the shift of consumers making more educated decisions,” said Trevor Stoffer, president and CEO of Timios. “The objective is to drive business back to the title company.” Timios is currently licensed to operate in 38 states. Stoffer anticipates the company will obtain its California license by the end of January. “What the calculator aims to do is simplify the process,” he said.