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If you’re a home mortgage loan originator, mortgage broker, realtor, title agent or other provider of services related to the processing or closing of a residential mortgage loan, you know that January 1, 2010 is D-Day for the use of the new Good Faith Estimate (GFE) of settlement charges (www.hud.gov/respa) and HUD-1 Settlement Statement (www.hud.gov/respa) prescribed by the RESPA reform final rule published January 16, 2009. Hopefully, you and your firm are well on you way to being ready to implement the rule.
RESPA reform has had a long and tortuous history spanning several administrations. A final rule developed in 2004 was withdrawn by HUD in response to strong objections largely directed at provisions of the rule which would have permitted the “packaging” and sale of settlement services free of concerns that packaging would violate the anti-kickback provisions of RESPA, and be particularly damaging to smaller businesses and a wide range of settlement service providers.
HUD held extensive roundtables to solicit comment from industry, consumer groups and federal and state government agencies. The final rule did away with packaging in favor of the approach summarized below.
HUD was particularly concerned that an important part of the current mortgage crisis was a result of families going to the closing table without understanding their loans and without the meaningful ability to shop for the best loan for them. But HUD was also intent on accomplishing reform in a balanced way that considered those in the business of homeownership.
Points to Keep in Mind. Here are some key points to keep in mind as you work through the details that will provide perspective concerning the purposes and approach of the rule, and a framework for addressing issues not otherwise specifically addressed in the rule. See also HUD’s “New RESPA Rule Frequently Asked Questions” at the above link.
The Need for the Rule. A May 2008 study for HUD by the Urban Institute found:
- Settlement charges vary widely for similar loans with similar interest made to similar borrowers.
- Most borrowers see virtually no benefit in reduced settlement charges when they pay higher interest rates.
- Borrowers who pay “points” at settlement do not, on average, benefit from lower interest rates.
Purpose of the Rule and the New Standardized Forms. To help borrowers understand and shop for mortgages, which will result in better mortgage products, lower interest rates, and lower settlement charges for borrowers.
The Key Building Blocks and Concepts of the Rule.
- The GFE
- Tolerances
- The HUD-1 Settlement Statement
The GFE. Page 1 of the GFE substantially enhances the disclosure of loan terms, including the initial interest rate and monthly payment, whether the interest rate and principal balance can rise and the maximum to which they can rise, and whether the loan has a prepayment penalty and/or a balloon payment.
Lender payments to mortgage brokers tied to the interest rate of the loan (yield spread premiums or YSPs) are disclosed as part of Loan Origination Charges in Block A at the top of page 2 because of the borrower’s need to understand the trade off between upfront settlement charges and the interest rate.
The GFE consolidates settlement charges into major categories in Block B on page 2 to simplify the disclosure of charges and avoid fee proliferation.
Total Estimated Settlement Charges (the total of Blocks A and B) from the bottom of page 2 are carried forward to the bottom of page 1. This total becomes the borrower’s bottom-line settlement cost shopping number for a particular loan that can be compared to those on other GFEs the borrower obtains.
Tolerances. Settlement charges on the GFE are grouped into three categories: 1) those that cannot change between the time the GFE is given and the closing; 2) those whose total can increase up to 10% at settlement; and those charges that can change at settlement.
The tolerances are generally described at the top of page 3 of the GFE, and a detailed explanation of the tolerances and exceptions will be discussed in a later blog. However, in general, the items in 1) are or should be within the knowledge or control of the loan originator; those in 2) are for loan originator-required services which the originator selects or the borrower may select from a list of providers required to be provided by the loan originator; and the items in 3) are those over which the loan originator has no control or the borrower selects on his or her own.
The HUD- 1 Settlement Statement.
Two important conceptual changes have been made to the HUD-1:
- Where applicable, the itemized final settlement charges listed on page 2 reference the GFE line numbers where the charges were either itemized as a charge on the GFE or were part of a consolidated grouping of charges on the GFE, to enable the borrower to track settlement charges from the GFE to the HUD-1.
- A new page 3 has been added to the HUD-1. The top portion compares the items in each of the “cannot change,” “total cannot increase more than 10%,” and “can change” categories of the GFE to the final charges on the HUD-1 to clearly indicate to the borrower whether or not the tolerances have been violated.
- The bottom portion of page 3 summarizes the final loan terms and monthly escrow account payments, if any, in much the same format as on the GFE.
- The loan originator is required by the rule to provide the information necessary to complete page 3 of the HUD-1 to the settlement agent.
In future blogs we will explore in greater detail the requirements of the rule as they pertain to completion of the GFE and HUD-1 and other important provisions of the rule. Look also for our upcoming webinar on the new rule.