Progress made in the lengthy effort to reform laws governing mortgage origination can be measured in inches. Class-action suits have galvanized the industry to seek relief, but working groups and regulatory proposals, while raising hopes, have often proved false starts. None, as yet, has produced global and genuine RESPA and Truth-in-Lending Act reform.
The effort to reform the key federal regulations surrounding the Real Estate Settlement Procedures Act (RESPA) and the Truth-in-Lending Act (TILA) (the main mortgage banking laws) was born in 1995 - more than three years ago. Its genesis was the negotiated rulemaking by the Department of Housing and Urban Development (HUD). While the negotiated rulemaking ultimately failed in that consensus was never reached among the key parties to the discussion, that was only the first in a series of events that chronicle the reform effort.
This article discusses the reform effort in three parts. First, it provides a snapshot of the reform of TILA and RESPA and discusses the history of the reform effort and its status today. Second, it analyzes the various concurrent efforts undertaken by the various groups, including the industry groups, consumer advocates, settlement-service providers, federal regulators and Congress. Last, it evaluates how the judicial, legislative and regulatory events at the heart of the reform effort interrelate.
History of the reform effort
To understand where the mortgage reform effort is today, it's essential to have a sense of its history [ILLUSTRATION FOR FIGURE 1 OMITTED]. By reviewing the chronology of the reform effort, one can grasp how these events have shaped the effort itself (see Figure 2). The following is an outline of the recent events that have affected the reform effort.
On October 25, 1995, HUD issued a notice stating its intent to establish a Negotiated Rulemaking Advisory Committee under the Federal Advisory Committee Act. HUD felt that the essence of a negotiated rulemaking is "that, in appropriate circumstances, it is possible and preferable to bring together agency representatives and all parties substantially affected by the subject matter of the regulation in order to negotiate the terms of the proposed rule."
This committee was to address whether the amount and nature of indirect payments to mortgage brokers should be disclosed to consumers. Further, "the Committee will seek to resolve whether RESPA permits volume-based compensation from wholesale lenders, entities that purchase mortgage loans, to mortgage brokers and, if such compensation is found permissible, whether and how the compensation should be disclosed."
While the negotiated rulemaking addressed only narrow issues, such as indirect compensation (i.e., premium pricing), and the legality of volume discounts, it spawned a much greater concern about reform of RESPA and TILA. Approximately 20 industry and consumer groups attempted to reach consensus in connection with the negotiated rulemaking. However, these groups did not reach consensus on these narrow issues.
Consensus, at that time, was defined as 100 percent agreement. Thus, the negotiated rulemaking effort failed. However, failure notwithstanding, the negotiated rulemaking process provided all participants, including HUD, with information about industry practices and the concerns of consumers.
Figure 2 Chronology: Three Years in the Making October 1995 Negotiated Rulemaking September 1996 Economic Recovery and Paperwork Reduction Act April 1997 HUD/Fed response that legislative reform needed, NOT regulatory revision Spring 1997 Statement of Policy 1997-I quashed June 1997 Mortgage Reform Working Group created October 1997 Proposed HUD Mortgage Broker Rule January 1998 Culpepper vs. Inland Mortgage June 1998 Culpepper clarification July 1998 HUD/Fed Joint Report July 1998 Faircloth and Lazio hearings August- Class certifications September 1998 - Mulligan vs. Choice Mortgage - Brancheau vs. Residential Mortgage September 1998 Roukema/Lazio hearing SOURCE: BUCKMAN & LOTSTEIN, P.C. Congressional mandate for simplification
After the negotiated rulemaking process failed, Congress enacted the Economic Growth and Regulatory Paperwork Reduction Act on September 30, 1996. This law mandated that HUD and the Board of Governors of the Federal Reserve System (Federal Reserve Board) streamline the home lending process by providing industry and consumers with streamlined and uniform disclosures.
Section 2101 specifically mandates that HUD and the Federal Reserve "simplify and improve the disclosures" required by RESPA and TILA, as well as simplify "the timing requirements" of those disclosures. Furthermore, Congress ordered HUD and the Federal Reserve Board to "provide a single format for such disclosures which will satisfy the requirements of each . . . Act."
The 1996 law addressed only narrow issues, specifically the simplification and the creation of uniformity of the disclosures in connection with RESPA and TILA. However, this mandate is generally referred to by many more broadly; that is, that the mandate sought reform of these laws. In the act, Congress allowed that if HUD and the Federal Reserve Board determined legislative action was necessary to simplify and unify the disclosure requirements under RESPA and TILA, HUD and the Federal Reserve Board should provide Congress with recommendations for change.
Approximately six months later, on April 2, 1997, the Federal Reserve Board published a notice stating that HUD and the Federal Reserve Board did not intend to publish a proposed joint rule containing regulations simplifying and unifying RESPA and TILA disclosure requirements. The Federal Reserve Board determined "that harmonizing TILA and RESPA to any significant degree requires changes that can only come about through legislative action." The Federal Reserve Board agreed to continue working with HUD to "develop legislative recommendations that would ease compliance for creditors and provide consumers useful information in a more timely manner."
It was evident to the regulators that legislative reform, and not regulatory revision, was necessary. HUD and the Federal Reserve Board agreed that a new framework was necessary; most of the industry groups, settlement-service providers and consumer advocates were pleased that the regulators joined them in calling for reform. Many felt that the statutes needed to be overhauled and that RESPA was "broken." TILA appeared to have its share of problems as well.
This event continued setting the stage for comprehensive reform of the mortgage lending laws. The Federal Reserve Board commissioned a survey regarding consumers' understanding of TILA.
Statement of Policy 1997-1
During this time, questions arose concerning the legality of premium pricing (i.e., yield spread premiums), and the industry requested that HUD either issue a rule or a statement of policy addressing this issue. HUD was also under pressure from Capitol Hill to provide the industry with clarity in regard to yield spread premiums.
HUD was in a difficult position. HUD had instructed originators how to disclose yield spread premiums in Section 13 of Appendix B to Regulation X of RESPA. In instructing originators on the proper disclosure of yield spread premiums, HUD implied that indirect compensation may be a legal form of compensation. On the other hand, consumer groups had concerns and requested HUD to place limitations and restrictions on this type of compensation.
In the spring of 1997, a statement of policy drafted by HUD was leaked. Statement of...