Curt Doman, International Document Services, Discusses the New RESPA Era

Curt Doman has been president of International Document Services for 16 years. He joined the document preparation services provider in 1993 as a data-entry person. A self-taught programmer since age 10 and software entrepreneur at age 13, Curt quickly learned that he had the skills to write a program for document creation, and developed the application that became the firm’s core offering, idsDoc. The RESPA “leniency” period is up in April, but Curt says banks should be ready now and for good. RESPA won’t go away anytime soon. The leniency on RESPA compliance ends in April. What are the consequences for lenders still trying to catch up after that? First, how does “leniency” matter if to-date no regulator has formally responded saying they will be lenient? Does “leniency” matter if the secondary market will not purchase the loan unless it’s fully compliant with the new RESPA changes? Leniency is more relevant if you are doing all your loans in house and keeping them in portfolio. The so-called leniency period is like a teacher saying no talking in class, but we’ll give you the first four months of class to get used to the rule. And, in the meantime, other teachers can come in and give you detention for talking, but I won’t. As for what happens with RESPA non-compliance after April? Big Trouble. The problem will not be government sanctions. It will be litigation brought forth by attorneys representing borrowers. Is there even such a thing as a “soft release” of rules? There may be such a thing as a “soft release” as far as the government policing and enforcing RESPA goes, but not for investors that are focused on eliminating risk or for individual regulators with an axe to grind. I’ve said before that regulators need to understand that there is no such thing as a “soft release” of rules. Once a law or regulated practice is in place, it instantly structures the framework for the trade market. No one is going to say, “We’ll let this loan slide because it is at the early stages of the new regulation.” No one wants a fly in their soup on the secondary market. Lenders, vendors and especially loan software developers, are in for a make-shift transition on RESPA. What about RESPA is unnecessarily complex? One thing I have run into while making this transition is Owners Title. There is a lack of clarity on what to do on the GFE or HUD-1. Owner’s Title policies must show on the GFE, but in many places it is customary that it is paid by the seller. Also, not getting together with the Federal Reserve Board to sort out prepaid finance charges before the release of RESPA. Most fees are now shown as paid by borrower on the HUD-1 and GFE with a rare exception, but the official commentary to Reg Z specifically states:

“Other seller-paid amounts. Mortgage insurance premiums and other finance charges are sometimes paid at or before consummation or settlement on the borrower’s behalf by a non-creditor seller. The creditor should treat the payment made by the seller as seller’s points and exclude it from the finance charge if, based on the seller’s payment, the consumer is not legally bound to the creditor for the charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available.”

So with RESPA showing items paid by seller on behalf of borrower on the HUD-1 and GFE as paid by borrower, is the borrower still no longer “legally bound to the creditor for the charge?” In general, they made too long and drastic of a change. There were easier ways to do this. Some accompanying instructions could have helped if the Federal Reserve Board released something official on how to handle the APR with the new RESPA changes.  Perhaps things may have gone smoother if an official HUD-created “Settlement Service Provider List” was actually part of the GFE maybe as page 4. On a larger scale, it’s a natural response for a high volume of government regulations following a market collapse like housing’s. But are these new rules like TILA and RESPA thwarting the recovery effort, or are they necessary changes for the long term? It has always been my opinion that the greater the bailout the more far-reaching the regulation. The public will want guarantees that this type of bailout will never happen again or legislators will not get re-elected. The legislators will not let this bailout slide. We had a very big bailout of the financial markets. This means we will have very big regulation of the financial markets. Does the extra red tape cause problems? Of course it does. Unfortunately, it will happen and there is very little we will be able to do about it. Legislators will do what it takes to get re-elected. Will these regulations fix the problem? Only time will tell. Is there any amount of consumer confidence improvement that would shed the need for these regulations? I feel it’s too late: the damage has been done. If these regulations ever go away it will be after most of us have retired. Further, lawmakers think they get paid for the lines of law they write not the ones they take away. We might see some common sense adjustments, but the essence of these changes is here to stay.