After months of consideration, the U.S. Department of Housing and Urban Development (“HUD”) published its final Real Estate Settlement Procedures Act (“RESPA”) rule on November 17, 2008. The purpose of the reform, according to HUD, is to improve the disclosure of the key loan terms and closing costs consumers pay when they buy or refinance their home. Such reforms will help consumers to shop for the lowest cost mortgage and avoid costly and potentially harmful loan offers. Every settlement service provider will be affected by the reform, including the mortgage industry, the title insurance industry, real estate brokers and agents, and homebuilders. Below is a summary of the most significant provisions of HUD’s new RESPA rule.
I. Good Faith Estimate
A. Standardized GFE Form
Under the final rule, HUD has adopted a new standardized three page Good Faith Estimate (“GFE”). The GFE has been redesigned so that it can easily be cross-referenced with the new HUD-1 Settlement Statement (“HUD-1”) allowing consumers to easily compare the GFE charges against the final charges. The new form includes an estimate of the settlement charges as well as a summary of the key loan terms, including the initial loan amount; the loan term; the initial interest rate; the initial monthly mortgage amount; whether there is a prepayment penalty or if there is a balloon payment. The mortgage lender or broker (the “loan originator”) will also have the option of including additional loan options in chart form – one with a higher interest rate and one with a lower interest rate allowing the borrower to compare how a higher interest rate might lower up front settlement costs and a lower interest rate could increase the charges a borrower would pay at closing.
Effective January 1, 2010, HUD will require that mortgage lenders and mortgage brokers provide consumers with the new standardized GFE form within three business days of receiving an application. Loan Originators will be required, under the new rule, to keep the GFE’s stated settlement costs available for ten business days to allow consumers to comparison shop. Loan originators will be allowed to charge a fee for providing the GFE, but the charge must be limited to the cost of the credit report. Loan originators are prohibited from charging, as a condition for providing the GFE, any fee for an appraisal, inspection, or similar settlement service. It is important to note that if a loan originator uses the new form prior to January 1, 2010, the lender will be subject to all of the new requirements under the final rule (i.e., tolerance restrictions and fees).
B. Revised Definition of Application
Under the final rule, HUD has also adopted a single application process. An application, in order to trigger the GFE requirement, must have at least the following six pieces of information: 1) the borrower’s name; 2) the borrower’s Social Security Number (for obtaining a credit report); 3) the borrower’s gross monthly income; 4) the property address; 5) an estimate of the value of the property; and 6) the amount of the mortgage loan sought. Under this single application process, the loan originator is prohibited from requiring supplemental documentation to verify the information provided by the borrower as a condition for providing a GFE. The loan originator can, however, require the borrower to provide such verification information after the GFE has been provided in order to complete final underwriting. The information collected by the loan originator as part of the application cannot later become the basis for a “changed circumstance” under which a loan originator may issue a new GFE unless the loan originator can demonstrate that there was a change in the particular information or that it was inaccurate, or that the loan originator did not rely on that particular information in issuing the GFE. A “changed circumstance” can include Acts of God, war, disaster, information provided particular to the borrower or transaction that is inaccurate (including amount of the loan or estimated value of the property). According to HUD, this approach provides the flexibility that loan originators need to properly underwrite loans while limiting the “bait-and-switch” methods sometimes used by loan originators. Loan originators will no longer be able to draw in borrowers with a GFE and then after significant application fees have been paid, or burdensome documentation demands have been made, claim that a material change has resulted in a more expensive loan offering.
C. Tolerances
Under the final rule, there are now three categories under which various settlement charges fall, and absent unforeseen circumstances, the fees on the HUD-1 cannot vary from the GFE more than allowed under the category. Through the use of these tolerance limitations, HUD was seeking to balance the borrower’s interest in receiving an accurate GFE early in the application process to enable the borrower to shop effectively with the loan originator’s interest in maintaining flexibility to address the many issues that can arise in a complex process like loan origination.
The first category is the “Fixed Fees” category under which the fees estimated on the GFE may not be exceeded at closing. This category of fees is subject to a zero tolerance standard, meaning that the fees estimated on the GFE may not be exceeded at closing. This category includes lender or broker origination fees, discount points, yield spread premiums and transfer taxes. These are fees that generally should be known at the time the GFE is provided and should not change before closing. If there are changes in the tax rates or in the price of the property after a GFE is provided, those changes would either constitute changed circumstances or new information that would be the basis for providing a revised GFE.
The second category is the “10% Tolerance” category under which the sum of the fees may not increase more than 10% at closing. The individual fees in this category may increase or decrease so long as the sum of the total does not increase more than 10%. This category includes government recording fees and settlement service fees where the lender recommended the settlement service provider, including lender’s and owner’s title insurance if the lender’s recommended provider is used. This category also includes required services that the borrower can shop for if the borrower uses the provider recommended by the lender.
The third category is the “No Restrictions” category under which there is no limit to the amount of any increase in the fees that may appear on the HUD-1. This category includes the cost of settlement services where the borrower shops for his own provider and does not use the lender recommended provider, including lender’s and owner’s title insurance. This category also includes daily interest charges, initial escrow deposits and homeowners insurance.
If a lender exceeds these tolerance limitations, the final rule allows a 30-day cure period to cure any violation of the tolerance by reimbursing the borrower any amount by which the tolerances were exceeded. Any loan originator that violates the GFE requirements, which includes the tolerance requirements, shall be deemed to have violated section 5 of RESPA.
D. Disclosure of Yield Spread Premiums and Backend Fees
The final rule requires clear disclosure of broker fees as a credit or charge for the specific rate chosen. A yield spread premium will be denoted on the GFE and HUD-1 as a credit while discount points will be denoted as a charge.
II. HUD-1 Settlement Statement
Under the final rule, there will be an additional page added to the standardized HUD-1. The revised HUD-1 uses the same language to describe categories of charges as the GFE, and orders the categories of charges in the same way. This makes it much simpler to compare the two documents and confirm whether the tolerances required in the new GFE have been met or exceeded. HUD had originally proposed to have a closing script read by the settlement agent at closing to explain the key terms of the loan. Under the final rule, most of the information is contained in the new third page eliminating the need for the closing script.
Like use of the GFE, use of the new HUD-1 becomes mandatory as of January 1, 2010. If settlement service providers begin using the new form prior to January 1, 2010, the settlement service provider is subject to all of the new requirements under the new rule.
III. Average Charges and Negotiated Discounts
Although the revised GFE and HUD-1 are the primary components of the final rule, there have also been some changes concerning the use of “average charges” that go into effect January 16, 2009. The final rule clarifies that an average charge may be used by any settlement service provider that obtains a service from a third party on behalf of a borrower or seller; not just loan originators. Any provider that is able to calculate an average charge for a service in accordance with the provision and that is able to meet the provision’s recordkeeping requirements is permitted to use an average charge for that service. The final rule does, however, prohibit the use of average charges for settlement services where the charge is based on the loan amount or the value of the property.
HUD had proposed to amend the definition of “thing of value” in RESPA’s regulation to exclude negotiated discounts by settlement service providers in the amount of a third party settlement service. However, in response to negative comments regarding this proposal, HUD did not include the proposed amended definition in the final rule. HUD has made clear, however, its belief that discounts negotiated by a settlement service provider are not in violation of RESPA if the discount is passed on to the borrower.
IV. Required Use
Under the final rule as originally published, the definition of “required use” included economic incentives and disincentives that were contingent upon a borrower’s use or failure to use a particular settlement service provider. Settlement service providers (i.e., mortgage companies, real estate brokers, and title providers) could qualify for the affiliated business exemption if the combination of the bona fide settlement services was offered at a lower rate than the sum of the market prices of the individual settlement services and as long as: 1) the use of such services is optional to the purchaser and 2) the lower price for the combination was not made up by higher costs elsewhere in the settlement process. Under the final definition, buyers and sellers were both eligible to receive discounts for using particular settlement service providers. Owners of affiliated companies were also able to offer incentives to consumers and to tie those discounts to the consumers’ use of affiliate companies.
However, on Monday, May 11, 2009, HUD announced its intent to withdraw the new definition of "required use" after receiving more than 1,200 public comments about the definition. The final rule prohibited home builders, who were not considered as settlement service providers, from offering incentives to buyers to use their affiliated companies. In December of 2008, the National Association of Homebuillders and several other organizations filed suit to prevent the implementation of the new definition of "required use." Originally to take effect January 16, 2009, HUD extended the effective date of the “required use” provision until July 16, 2009 and solicited public comments. Based on the comments about the new "required use" definition, HUD withdrew the new definition from the final rule.
Although HUD has withdrawn the "required use" definition from the final rule, "required use" is still a part of the RESPA regulations. The definition of "required use" that was in place prior to the November 17, 2008 final rule will continue to apply. Although the issues on "required use" seem to be resolved for now, HUD intends to initiate a new rulemaking process on. According to HUD, they remain committed to the RESPA reform goals of the November 17, 2008, final rule and are concerned about some of the practices reported in the public comments.
V. Misc.
Under the terms of the final rule, HUD has also finalized its proposals to update mortgage servicing disclosures; to remove expired provisions of escrow regulations and to recognize the applicability of ESIGN.