FTC Staff Comments on Proposed Amendments to Regulations Implementing the Real Estate Settlement Procedures Act

In response to a request for public comment by the Department of Housing and Urban Development (HUD), on October 28 the FTC's Bureau of Consumer Protection, Bureau of Economics, and Office of Policy Planning filed a comment supporting HUD's goal of simplifying the mortgage process and enhancing competition but also "urg[ing] HUD, when evaluating these proposed changes, to conduct consumer research to determine whether they will enhance consumer comprehension of the mortgage process."

HUD had requested comments on proposed amendments to the regulations implementing the Real Estate Settlement Procedures Act (RESPA), which governs settlement fees paid by home buyers. "We very much support HUD's proposal to improve RESPA disclosures. Consumers benefit from clear, understandable disclosures, and careful consumer research is the best way to ensure that those disclosures get the job done," said J. Howard Beales, III, Director of the FTC's Bureau of Consumer Protection.

"We believe that allowing more flexibility in the packaging of settlement services will enhance competition and ultimately lower costs for consumers," added Ted Cruz, Director of the FTC's Office of Policy Planning.

The FTC staff's comment stresses the need to conduct consumer research to determine whether the proposals will enhance consumer comprehension of the mortgage process in connection with three other HUD proposals: 1) the disclosure of the mortgage broker compensation, including yield spread premiums; 2) the revision of settlement forms; and 3) enhancing the reliability of settlement costs.

According to the FTC staff comment, which is available on the Commission's Web site linked to this release, HUD's general approach in the proposed RESPA changes is to require brokers and lenders to provide consumers with more information about the mortgage process, and to provide some information in a revised format. The goal of these changes, according to HUD, is to make mortgage shopping more effective and to decrease search costs, thereby eventually leading to increased competition.

The FTC staff "believes this will generally benefit consumers, but also urges HUD to consider carefully whether the information disclosed will be useful to consumers and whether it is disclosed in an easily understood way." If the additional information or revised format confuses consumers, the comment states, "the proposed changes may not increase consumer welfare as much as HUD intends, and, in the worst case, may actually result in consumer harm."

The FTC staff accordingly urges HUD, when evaluating the proposed changes, to conduct consumer research to determine whether they will enhance consumers' understanding of the mortgage process. The changes also should "be augmented with comprehensive consumer education aimed at borrowers of all income and education levels, as well as business education for the mortgage industry." Specific FTC staff comments on the proposed amendments are provided below.

Settlement Service Packaging. The proposed regulations would remove regulatory barriers to allow lenders and others to offer packages of settlement services under certain circumstances. The FTC staff supports HUD's initiative to encourage packaging of the settlement services by providing packagers with safe harbor from certain RESPA liability if they abide by the regulations. The FTC staff further believes that this approach may enhance competition and ultimately lower the costs of settlement services to consumers.

Disclosure of the Mortgage Broker Compensation. HUD proposes addressing the issue of mortgage broker compensation and changing the way in which lender payments to mortgage brokers, including those called "yield spread premiums" (YSPs), are recorded and reported to consumers. The FTC staff notes, however, that the approach to the disclosure of broker compensation contained in the proposal could "confuse consumers and lead them to misinterpret the overall cost of a transaction." The new disclosure also applies to only one sector of the mortgage market - mortgage brokers - and not to other loan originators. The FTC staff is concerned that prominent emphasis of the YSP and the asymmetric disclosure of compensation for mortgage brokers might inadvertently burden consumers and competition. The FTC staff therefore urges HUD to engage in consumer research to assess whether the disclosure provides consumers useful information in an easily understandable format.

Revision of Settlement Forms. HUD aims to improve the Good Faith Estimate (GFE) settlement cost disclosure to make it easier to use. While the proposed new GFE groups charges by category and eliminates duplicative fee categories, the FTC staff believes that the form could be improved even further and supports HUD's plan to revise the form and test it with consumers.

Enhancing the Reliability of Settlement Costs. Finally, HUD's proposed regulations aim to increase the certainty of cost estimates provided to consumers on the GFE and the alternate form provided with settlement packages. The FTC staff believes that the cost estimates provided on these disclosures could be firmer if HUD clarifies which criteria can be used in final underwriting and specifies which types of "unforeseeable and extraordinary circumstances" would allow the lender to change the terms of the loan.

The Commission vote authorizing the staff to file the comment with HUD was 5-0.

NOTE: The views expressed in the comments are those of the staff of the FTC's Bureaus of Consumer Protection and Economics and the Office of Policy Planning, and do not necessarily represent those of the Commission or any individual commissioner.

Copies of the staff comments are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No. V030001)