In coming weeks, the Department of Housing and Urban Development (HUD) plans to lift the 1% cap on origination fees for Federal Housing Administration (FHA) mortgages, sources close to the agency said.

HUD argues that competition will prevent fees from rising too much once a regulation overhauling up-front disclosures takes effect Jan 1.

If borrowers think they are being overcharged, the thinking goes, they can shop around for a better price and potentially take their business elsewhere.

"HUD feels the marketplace will drive origination fees down once the 1% cap is removed," said Phillip Schulman, a partner in the K&L Gates law firm.

The department had indicated last year that it might remove the cap when it completed a new Real Estate Settlement Procedures Act rule. But the agency also said then that it would reserve the right to reinstate or add limits on fees charged to the borrower.

At the time, the National Community Reinvestment Coalition was one of the few consumer groups to voice opposition to removing the cap.

It argued that government-guaranteed loan products should shield borrowers from excessive charges by establishing reasonable limits on fees.

The new RESPA rule will standardize the good-faith estimate of mortgage terms and closing costs that consumers get when they apply for a mortgage, making it possible to compare the fees charged by different lenders.

Closing agents also will be required to give borrowers a new HUD-1 settlement form that clearly compares the borrowers' final charges with the good-faith estimates.

Schulman said he is taking a "wait-and-see" approach before determining whether the market actually works, since borrowers have never been able to compare fees before.

"If origination fees go through the roof, then HUD may well step back in, and reverse the trend," he said.

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