Timeline of revisions, amendments
In 1974, the Real Estate Settlement Procedures Act (RESPA) was passed into law to keep settlement costs down by targeting illegal unearned fees, splits of fees, referral fees and kickbacks.
Minor revisions were made in 1976. The amendment to extend coverage to controlled business arrangements was passed in 1983 and implemented in 1992. In 1990, Section 6 mortgage servicing requirements were added.
Other changes made in 1992 included an amendment to extend RESPA to all residential mortgage loans with a lien, as it had previously only applied to purchase money loans under the 1974 rule. The rule was also revised to permit realty companies to affiliate with allied services, such as a mortgage lender and a title insurance company, and give discounts to consumers who use the package of services. Such business affiliations had to be fully disclosed in writing to buyers before they're referred from one company to another affiliated company. The 1992 RESPA rule also sanctioned the use of computer loan originations by real estate brokers to help buyers select and apply for a mortgage.
In June 1996, HUD issued a final RESPA rule that reversed a 1992 HUD regulation permitting compensation of employees by employers for marketing settlement services of an affiliated company.
In addition, the revised RESPA rule:
- Introduced more narrow exemptions for an employer's payments to its managerial employees and to employees who don't perform settlement services in any transaction;
- Added exemption language clarifying that an employer's payments to "bona fide" employees for generating business for the employer were permissible;
- Revised certain controlled business disclosure requirements;
- Withdrew exemptions for payments by borrowers for computer loan origination services;
- Issued three HUD policy statements dealing with computer loan originations, sham controlled business arrangements, and office space, lockouts, and retaliation.
In October 2001, HUD Secretary Mel Martinez issued a RESPA Statement of Policy 2001-1, which clarified HUD’s position on lender payments to mortgage brokers, and guidance concerning unearned fees under Section 8(b).
According to Martinez, the Statement of Policy was issued to eliminate any ambiguity concerning the department’s position with respect to those lender payments to mortgage brokers characterized as YSPs and to overcharges by settlement service providers as a result of questions raised by two pivotal court decisions, Culpepper v. Irwin Mortgage Corp. and Echevarria v. Chicago Title and Trust Co.
RESPA Reform: Round One
On June 26, 2002, Martinez announced a proposal to reform the regulatory requirements under RESPA to simplify the home buying process by requiring greater disclosure, allow consumers more choices, limit excessive settlement fees and encourage innovation and competition in the marketplace. The proposed RESPA rule was founded on a set of consumer-driven principles mandating that homebuyers have the right:
- To receive settlement cost information early in the process, allowing them to shop for the mortgage product and settlement services that best meet their needs;
- To have the disclosed costs be as firm as possible, thereby avoiding surprises at settlement;
- To benefit from new products, competition and technological innovations that could lower settlement costs;
- To have access to better borrower education and simplified disclosure; and,
- To know they are protected through vigorous RESPA enforcement and a level playing field for all industry providers.
To meet these principles, HUD planned to reform the home buying process by:
- Changing the way lender payments to brokers are recorded and reported to consumers;
- Significantly improving HUD's good faith estimate settlement cost disclosure; and,
- Removing regulatory barriers to allow market forces and increased competition to promote greater choice for consumers by allowing guaranteed packages or "bundling" of settlement services and mortgage loans.
In addition, Martinez vowed to put more emphasis on enforcement measures regarding RESPA violations.
The proposal went through a 90-day comment period in which HUD received more than 80,000 comments from various sectors of the real estate industry.
Mortgage Broker and Lender Fees
HUD’s proposal aimed to create a more “transparent” settlement process to facilitate consumers’ understanding of the true costs of their mortgage. The rule changed the way lender payments to mortgage brokers - yield spread premiums - were recorded and reported to consumers. Martinez wanted brokers to inform consumers about what they charge and how lender payments can help lower settlement costs. The RESPA reform rule mandated these payments be clearly disclosed so consumers could make the best financing choice.
More Choice Through Enhanced Disclosure
The proposal promoted greater choice for the homebuyer in shopping for lower-cost mortgages and settlement services. It aimed to improve HUD’s good faith estimate (GFE) settlement cost disclosure to make it firmer so consumers could use it to shop for the best deals.
Removing Regulatory Barriers
RESPA was passed into law to keep settlement costs down by targeting illegal unearned fees, splits of fees, referral fees and kickbacks. Over the years, however, RESPA rules have impeded the offering of guaranteed packages of settlement services and mortgages that could lower costs and enable consumers to more easily shop for mortgages. The proposal would have removed regulatory barriers to allow guaranteed mortgage loan packages for consumers to shop for their mortgages.
Withdrawal of the rule
In March 2004, the new HUD Secretary, Alphonso Jackson, announced that the Department was withdrawing the reform rule due to the number of concerns from real estate industry and consumer groups. “There are many groups concerned that they have not had a chance to see the changes that have been made to the rule since it was proposed two years ago. They deserve to see those changes,” he said.
Although no specific timetable was given, Jackson said the Department planned to review the comments and confer with Congress as well as various industry and consumer groups before then refining and reproposing another rule for comment.
RESPA Reform: Round Two
In the summer of 2005, HUD held a series of seven roundtables with industry members, consumer groups and small businesses to talk about RESPA reform. At that time, they unveiled the proposals that had been under consideration for the 2004 final rule, including a revised GFE form and a new Mortgage Package Offer (MPO) form. They also introduced a Settlement Services Package (SSP) concept which would allow for the bundling of settlement services separate from the package. The SSP was HUD’s answer to the industry’s previous request for a two-package proposal, as opposed to HUD’s original single-package proposal.
After digesting the feedback from the roundtables and conducting additional testing on various new proposed drafts of the GFE, HUD finally released a new proposed rule to reform the more than 30-year-old rules of RESPA on March 14, 2008. The proposed rule was accompanied by a report detailing the results of its consumer testing of the new disclosures and a nearly 600-page Regulatory Impact Analysis, among other things.
The new rule was opened for comment and the industry once again provided plenty of feedback to HUD on the various components of the proposal.
The new proposal included comprehensive changes to the GFE, including consolidating closing costs into major categories to prevent “junk fees” and displaying total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. In addition, the proposed rule specified the charges that can and cannot change at settlement. HUD also proposed to modify the HUD-1 settlement statement to help consumers compare the anticipated charges on the GFE and their actual charges.
The proposed GFE also required that lender payments to mortgage brokers (yield spread premiums) be disclosed, and proposed that settlement agents read a "closing script" to borrowers at the settlement table and that a copy be provided to the borrower.
The HUD proposal for the first time opened the door to average cost pricing and certain discounts, including volume-based discounts, which it felt would serve to lower settlement costs to consumers without violating the statutory requirements of RESPA. And finally, the proposal included a change to the definition of “required use,” which addressed concerns HUD had over economic disincentives that a consumer can avoid only by purchasing a settlement service from particular providers or businesses to which the consumer has been referred.
Initially the comment period for the new rule was scheduled to close on May 14, but was later extended to June 14 after the industry demanded more time to review the proposal. After the comment period closed industry groups as well as members of Congress requested that HUD scrap the rule entirely and work more closely with the Federal Reserve in crafting disclosures more in line with TILA.
RESPA Reform: The Final Rule
Despite the entreaties, HUD published a final RESPA rule in the Federal Register on Nov. 17, 2008.
The main focus of the new rule is the requirement of a new standardized good faith estimate and a modified version of the HUD-1 settlement statement that includes a crosswalk comparison to items on the GFE.
HUD discarded the proposed closing script in favor of a new page on the HUD-1 Settlement Statement that allows consumers to compare their final loan terms and closing costs with those listed on their good faith estimate.
The new GFE consolidates closing costs into major categories and displays total estimated settlement charges prominently on the first page so the consumer can compare loan offers. HUD also now specifies the closing costs that can and cannot change at settlement.
In deference to requests from the industry during the comment period, HUD also will allow lenders and settlement service providers to correct potential violations of RESPA's new disclosure and tolerance requirements. Lenders and settlement service providers will now have 30 days from the date of closing to correct errors or violations and repay consumers any overcharges.
Yield spread premium
The new rule requires that the compensation lenders pay to mortgage brokers, the yield spread premium, be more fully disclosed. Loan originators will also be required to provide borrowers their good faith estimate three days after the loan originator's receipt of all necessary information.
Average cost pricing
The final rule provides that an average charge may be used for any settlement service, provided that the total loan amounts received from borrowers for that service for a particular class of transactions do not exceed the total amounts paid to the providers of that service for that class of transactions. This approach leaves the method of determining the average charge to the discretion of the settlement service provider.
HUD also issued a new definition for required use, but scrapped that portion of the rule in May 2009 after yet another comment period on the subject. The agency has promised to re-propose new rules regarding required use after further study.
Although average cost pricing went into effect in January 2009, implementation of the new GFE and HUD-1 is slated for January 2010.
The Dodd-Frank Act
In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Title X of the act created the Consumer Financial Protection Bureau (CFPB). The act transferred the RESPA regulatory responsibilities from HUD to the new CFPB.
The Dodd-Frank Act mandated other changes to RESPA as well. It shortened time limits, increased penalties, and provided numerous amendments.
The Consumer Financial Protection Bureau
In July 2011, the CFPB took over RESPA regulatory duties. It did not, however, gain its full power until January 2012, when President Barack Obama named Richard Cordray as the bureau’s director.
New mortgage disclosure forms
The Dodd-Frank Act required the CFPB to draft new mortgage disclosure forms. The bureau was task with merging the initial Truth in Lending Act (TILA) and RESPA disclosures into one simplified form. In addition, the bureau was also required to merge the TILA and RESPA final disclosures.
The CFPB released its first round of prototypes in May 2011. It is required under the Dodd-Frank Act, to have a proposed forms finalized by July 2012.