On October 25, ASHI officially presented its views regarding the U.S. Department of Housing and Urban Development’s proposed rule to revise rules to implement the Real Estate Settlement Procedures Act. Although a quick turnaround from HUD is not expected, it is important that ASHI represent the profession and provide input.
In addition to expressing concern about the applications of the term “inspection” of property throughout the proposed regulation, and how they may appear ambiguous, at times overly broad or remaining silent on key types of inspections, the Society made two specific recommendations.
1) Placing “Home Inspection” fees on the New GFE Form
ASHI recommended that the revised form reflect the fees on the Good Faith Estimate (GFE); that a major cost category for optional third-party services be added, and that the cost category include an entry blank for an optional third-party service labeled “Home Inspection.”
2) Modifications to Section 8 prohibitions on referrals and fees
The Society also expressed concern that the regulation proposes to revise and relax prohibitions regarding referral fees and other “anti-kickback” provisions involving originators and third-party service providers. In relaxing the referral prohibitions and establishing a new Guaranteed Mortgage Package (GMP) approach, the proposed regulation could open a series of possibilities that could create conflicts, interfere with the independent, unbiased judgments of home inspectors, and be detrimental to homebuyers. ASHI recommended the relaxation should be explicitly limited.
For more about the recommendations and the supporting basis, see the full text of the comments below.
Real Estate Settlement Procedures Act: Simplifying and Improving the Process of Obtaining Mortgages To Reduce Settlement Costs to Consumers
October 25, 2002
The American Society of Home Inspectors, Inc. (ASHI)
ASHI is a national membership organization comprised of 6200 home inspection professionals throughout the country. ASHI is the oldest and leading non-profit professional association for independent home inspectors. The organization cooperates with its 83 Chapters in furthering the home inspection profession. Since its formation, ASHI’s Standards of Practice have served as the home inspector’s performance guideline, and are widely recognized and accepted by professional and government authorities.
The ASHI membership subscribes to a professional Code of Ethics that prohibits them from engaging in activities that might create a conflict of interest and thereby compromise their objectivity. Under the Code of Ethics, home inspectors have no personal or financial interest in the outcome of their inspections.
ASHI full Member home inspectors must conform to a rigorous, highly-specialized set of performance criteria unparalleled by other parties in real estate transfer. All ASHI Members must have demonstrated their proficiency by performing at least 250 fee-paid inspections in accordance with the ASHI Standards of Practice. They must pass the prestigious National Home Inspector Examination, administered by the Examination Board of Professional Home Inspectors, which tests their knowledge of residential construction, inspection techniques, and report writing.
They must also pass the ASHI Standards and Ethics Examination, demonstrating their knowledge and understanding of the Standards of Practice and the Code of Ethics.
In keeping with its charge to provide ongoing professional education and development, ASHI and its chapters sponsor frequent technical seminars and workshops for members. ASHI also serves the public interest by providing accurate and helpful consumer information to homebuyers on select home purchasing issues and home maintenance, and by offering comment on public policy affecting home transfers and consumer interests.
Placing “Home Inspection” fees on the New GFE Form
The proposed regulation should be amended to specifically include on the new GFE form a major cost category for optional third-party services, and that that cost category include an entry blank for an optional third-party service labeled “Home Inspection”.
In the proposed new GFE format, reference is made to listing “inspections” without specifying document or home or other type of inspection. Pest inspection is specifically included. ASHI is concerned about the applications of the term “inspection” of property throughout the proposed regulation, and how they may appear ambiguous, at times overly broad or remaining silent on key types of inspections.
The proposed regulation is silent with respect to “home inspection” per se. It is already the case, and has been so for decades, that home inspection is a for-fee service often sought by homebuyers, the fees for which are a significant portion of a homebuyer’s up-front costs to purchase a home. The cost of professional home inspections will often be greater than several of the constituent fees HUD presently proposes to be included on the GFE form. Home inspections, and their fees, should be and often are, at the least, topics for consideration for nearly every prospective homebuyer.
The existing widespread voluntary use of home inspections is sufficient on its own terms to justify including home inspection on the revised GFE form. But this argument is bolstered by indications that housing policy may trend toward greater encouragement of, and greater reliance on, home inspections as a means to protect consumers, reduce default exposure to federal mortgage financing programs, detect property flipping and reduce instances of fraud and mistake.
An ancillary benefit to homebuyers is that, with HUD’s clear intent to get GFEs to prospective homebuyers sooner in the process to facilitate shopping, the early consideration of home inspection would serve as a reminder to homebuyers that a home inspection is an important matter to consider early. HUD encourages homebuyers to obtain home inspections.
Thus, ASHI recommends that the revised GFE form reflect the fees on the GFE. ASHI recommends the addition of a major cost category for optional third-party services, and that the cost category include an entry blank for an optional third-party service labeled “Home Inspection”.
ASHI anticipates that, as an optional item, any home inspection fee estimate would be listed in the discretion of the originator. Any amount listed would be subject to the tolerances proposed for other originator-recommended optional services as set forth in the proposed regulation. The tolerances would not apply to a home inspection obtained by the borrower independent of the originator’s recommendation, as the proposed regulation would provide.
Modifications to Section 8 prohibitions on referrals and fees
The following discussion applies to both the revised GFEs and the proposed GMPs.
In both cases, the regulation proposes to revise and relax prohibitions regarding referral fees and other “anti-kickback” provisions involving originators and third-party service providers. HUD deems this necessary so that originators can follow market prices more closely to establish market rates, and thereby facilitate more accurate good faith estimates or, alternatively, offer GMPs. HUD’s stated belief is that larger originators will be able to negotiate volume discounts with third-party providers and then pass on the lower cost benefits to homebuyers, reducing their closing costs.
However, this could cause conflict of interest issues for some third-party providers, and there may be instances where it could be especially troublesome for home inspectors.
The independent home inspector is a unique participant in the typical home sale in that the home inspector may be the only professional whose duty of loyalty flows solely to the homebuyer. The home inspector is hired and paid by the homebuyer, and reports the condition of the property in question to the homebuyer and no other. ASHI home inspectors commit to avoid any financial interest in the outcome of a real estate transaction. This financial independence and loyalty solely to the homebuyer is central to the unbiased property assessment that a home inspector provides. Further, ASHI home inspections expend considerable resources educating consumers on this important characteristic. Most homebuyers who value home inspections reasonably expect that home inspectors are independent, unbiased and work in the sole interests of the homebuyer with no interest in the outcome of a specific transaction.
The delineation of loyalty to the homebuyer is important because, occasionally, the unbiased findings of an independent home inspector may run counter to the interests of an originator.
In relaxing the referral prohibitions and establishing a new “GMP/packaging” approach, the proposed regulation could open a series of possibilities that could create conflicts, interfere with the independent, unbiased judgments of home inspectors, and be detrimental to homebuyers. Presumably, originators might be encouraged to offer “in-house” home inspections, in which the homebuyers’ expectations for independence and objectivity would be unfounded. Or home inspectors might feel their independence compromised by the competitive business dynamic to establish and maintain referral relationships with originators.
In either case, the consumer benefits intended by the proposed regulation would be blurred at best.
While some relaxation of Section 8 would allow some originators to package and negotiate lower third-party fees, the relaxation should be explicitly limited to not diminish existing pro-consumer benefits for homebuyers – specifically, the unbiased nature of home inspections conducted by truly independent professional home inspectors. This may require strict prohibitions preventing originators from offering ersatz “in-house” home inspections in their mortgage packages. Strong restrictions on referral fees, their administration and transparency to homebuyers, or their outright prohibition, are advisable as well.
ASHI representatives would be pleased to work with HUD to further define solutions so that homebuyers may receive the benefits of the new GFE/GMP structures without compromising the objectivity of the home inspectors on whom they rely.