The U.S. Department of Housing and Urban Development has granted some home builders, lenders, and the National Association of Home Builders (NAHB) an extension of 90 days before the new "required use" definition becomes final, according to Brian Sullivan, public affairs supervisor for HUD.
HUD's Final Rule deals with how home builders work incentives and/or upgrades with affiliated mortgage companies in regards to the Real Estate Settlement Procedures Act (RESPA), preventing home builders from requiring that buyers use an affiliated mortgage company in order to receive discounts. HUD's intent is to "require more timely and effective disclosures related to mortgage settlement costs for federally related mortgage loans to consumers. The changes made by this final rule are designed to protect consumers from unnecessarily high settlement costs," according to the department.
On Dec. 22, more than 30 builders and lenders, as well as the NAHB, filed suit against HUD in the U.S. District Court's eastern district of Virginia, claiming that the change in definition is "illegal" and "arbitrary and capricious."
But many home building professionals see this change to a rule that has been in place for more than 16 years as a direct hit to the industry and in direct violation of RESPA.
The new definition is now set to take effect on April 16. NAHB could not be reached to confirm that it has accepted the extension, yet Sullivan said HUD extended the effective term based on the plaintiffs' request.
"This allows time for us to produce the required record on the merits of this case," Sullivan explained, adding that HUD will "vigorously defend itself on the merits of the case."
"HUD's new regulation, intended to implement the Real Estate Settlement and Procedures Act (RESPA), could not have come at a worse time for the nation's economy," said NAHB president and CEO Jerry Howard in a statement. "The HUD rule prevents home builders from offering consumers the best possible deal on the purchase of a new home, and limits the options available to new-home buyers as they seek out the services necessary at closing."
Howard added: "For the first time ever, HUD has disallowed home builders from offering bona fide discounts and packaging of real estate settlement services, which have saved home buyers thousands of dollars over the years in closing costs, title searches, and other fees. This rule is bad for consumers, bad for the housing industry, and bad for the economy."
HUD's public affairs director Brian Sullivan countered Howard's statements by saying: "The time has never been more right. Nothing in this final rule prevents a builder from offering incentives or discounts to encourage sales. Nothing in this rule prevents a builder from suggesting a consumer consider using an affiliated or preferred lender."
Sullivan pointed to a HUD statement that read: "This rule is reasonable regulation, and it helps consumers avoid getting into trouble in the first place. It's mystifying why anyone would stand in the way of the kind of transparency and consumer protections this rule brings to the marketplace."
Sullivan also referenced the rule's preamble, which was initially drafted six years ago and has gone through significant public comment, with HUD reporting it received more than 12,000 comment letters regarding the proposed change.
According to the preamble, consumers complained that the builder costs of incentives and discounts were actually built into the sales price of homes and are not true incentives or discounts. Statements by consumers also point to higher rates and fee charges by builders' affiliated settlement service providers.
To address these consumer complaints, HUD moved forward with the Final Rule because it saw a potential that consumers, unaware of the true value of the deal, "may forego shopping for lower rates and fees offered by unaffiliated settlement service providers."
Still, plaintiffs in the suit claim that HUD completely reversed its position from statements made in 1992, which recognized that home builder incentives such as the payment of closing costs and/or complimentary upgrades did not classify as illegal practices under RESPA--as home builders established their affiliated mortgage companies in accordance with RESPA's affiliated business arrangement exemption.
Plaintiffs also stated that the Final Rule is "not supported by empirical evidence" either through record or legal analysis. They further asserted that HUD did not address their concerns over the rule.
Calls to some plaintiffs were not immediately returned, but NAHB's Howard said he is optimistic that the matter will be resolved swiftly.
HUD's Final Rule also includes requirements for lenders and mortgage brokers to provide consumers with a standard good faith estimate (GFE), clearly disclosing key loan terms and closing costs. The Rule also includes 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 GFE. These requirements do not go into effect until Jan. 1, 2010.