CUNA Regulatory Comment Call
March 21, 2008
Proposed RESPA Rule
- The Department of Housing and Urban Development (HUD) has issued a proposed rule to amend the requirements under the Real Estate Settlement Procedures Act (RESPA) in order to improve the mortgage process and to lower settlement costs for borrowers.
- The proposed rule will make significant changes to the Good Faith Estimate (GFE) form. The changes will result in a new format for the GFE that is intended to ensure that the estimates are more accurate and to facilitate comparisons between lenders. These changes will also facilitate comparisons between the GFE and the HUD-1 or HUD-1A settlement statements.
- The proposed changes are also intended to ensure that borrowers are aware of the final loan terms and costs at settlement by reading to them a copy of a closing script.
- The proposal will clarify when it is appropriate to provide borrowers with discounts and average price costing of settlement services. An earlier proposal in 2002 would have permitted lenders to provide a package of settlement services that would have guaranteed a lump sum price for all loan originator and government-required settlement costs associated with obtaining a mortgage, along with a guaranteed interest rate. CUNA and others strongly opposed this as it would have disadvantaged smaller lenders, and it is not included in this latest proposal.
- The proposed rule also includes changes to the disclosures in connection with the lender payments to brokers that are commonly referred to as yield spread premiums.
- Comments are due by June 12, 2008.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org and to Senior Assistant General Counsel Jeffrey Bloch at email@example.com; or mail them to Mary and Jeff in c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6032, if you would like a copy of the rule, or you may access them here.
Congress enacted RESPA in 1974 to ensure that borrowers are provided with sufficient and timely information on the nature and costs of the settlement process and are protected from unreasonably high settlement charges. HUDs Regulation X implements these RESPA requirements.
RESPA and Regulation X requires that a standard form be used that itemizes all charges paid by the borrower and the charges paid by the seller in connection with mortgage loans. The HUD-1 form is the standard form now used for most mortgage loans in which there is a seller, and the HUD-1A form is used for refinancing and subordinate loan transactions in which there is no seller.
RESPA further requires that a GFE be provided to the borrower no more than three days of the loan application. HUD has developed the standard form for the GFE, which requires lenders to state the amount or range of charges for specific settlement services that the borrower is likely to incur. RESPA also requires that borrowers receive the Special Information Booklet when they apply for a mortgage loan, which has also been developed by HUD.
Here are some additional, significant provisions that are included in RESPA and Regulation X:
- Borrowers must be notified whenever the servicing of the loan has been sold or transferred.
- Borrowers may not be required to purchase title insurance on property from any particular title company.
- Limitations on the amounts that lenders or servicers may require borrowers to deposit in escrow accounts and a requirement that borrowers receive an initial and annual escrow statement.
Since the mid-1990s, HUD has been examining ways to improve the mortgage process for borrowers and to lower settlement costs. In 1998, HUD and the Federal Reserve Board, in response to a Congressional directive, issued a joint report that addressed possible RESPA reforms. HUD then issued a significant proposal in 2002 to amend the RESPA rules, which was later withdrawn after concerns were raised by CUNA and others, specifically the change that would have permitted the packaging of mortgage services. In 2005, CUNA and others were invited by HUD to participate in a series of roundtable meetings to continue the discussion on possible RESPA changes.
DESCRIPTION OF THE PROPOSED RULE
Good Faith Estimate Revisions
Under the proposal, there will be a new GFE application and a separate mortgage application. The borrower would submit a GFE application in writing or electronically in order to receive a GFE, which will be revised under this proposal. On this application, the borrower would provide the information necessary to provide a preliminary credit decision, and would include the borrowers name, Social Security number, property address, gross monthly income, the home price or an estimate, and the amount of the requested mortgage loan. The lender may not charge fees with the application, except for the cost of preparing the GFE and the cost of obtaining a credit report.
If the information is acceptable, the lender will then provide the GFE. The lenders decision to provide the GFE or reject the loan request must be made within three business days. This new process is intended to encourage borrowers to obtain multiple GFEs in order to compare various loan offers. The estimate of the charges for the settlement services would be available until ten business days after the GFE is provided, unless extended by the lender.
If the borrower chooses to proceed, the lender may require the borrower to submit the mortgage application, which would include the additional information that would be required to underwrite the loan. If the loan request is rejected, the borrower must receive notice within one business day of that decision. The lender must then provide a new GFE if it offers the borrower a different loan product
Under the proposal, the GFE will be a four-page standardized form. The form will describe the significant terms of the loans and will inform borrowers that they may use the GFE to compare the terms with offers from other lenders. Although the interest rate will be included on the form, the annual percentage rate will not be included. The interest rate will reflect the current offer and would be available for a specific time period, as determined by the lender, and would be subject to change until it is locked in by the borrower.
The proposed GFE will also group and consolidate all the fees and charges into major cost categories, with a single total amount estimated for each category. If the lender permits a borrower to shop for a required settlement service, the lender must provide a written list of providers at the time the GFE is given to the borrower.
The proposed GFE also changes the disclosure of the yield spread premium. It will disclose the payments from the mortgage broker to the lender and will also advise the borrower how the interest rate of the loan affects the borrowers settlement costs, with a higher rate resulting in lower settlement costs and a lower rate resulting in higher costs. The lenders service or origination charge, along with the charge or credit that is provided for the rate that is chosen and locked in cannot be increased, unless due to unforeseeable circumstances. This also applies to government recording and transfer charges.
The total of the other lender required services cannot exceed ten percent, unless due to unforeseeable circumstances. This applies to service providers selected by the lender or providers that are on a list that is given to the borrower. An individual service may increase by more than ten percent, as long as the total of these services does not exceed the ten percent tolerance. Examples of the services subject to the tolerance include the appraisal, credit report, tax service, flood certification, mortgage insurance premiums, title services and lenders title insurance, optional owners title insurance, and pest inspection. Other costs, such as homeowners insurance, would not be subject to the overall threshold, and costs charged by service providers chosen solely by the borrower that are not on the lender-provided list would also not be subject to the tolerance requirements.
- Unforeseeable circumstances would include the following:
- Acts of God, war, disaster, or other emergency in which it would be impractical for the lender to be bound by the original GFE.
- Other circumstances that could not be reasonably foreseen that are specific to the transaction. Examples include change in purchase price, boundary disputes, environmental problems that were not previously disclosed, the need for an additional appraisal, and the need for flood insurance.
The borrower should be notified within three business days if there is an unforeseeable circumstance and the lender must then provide a new GFE. The borrower has the right at that time to not continue with the loan application. Otherwise, the lender can only increase the cost by the amount caused by the unforeseeable circumstance. If the borrower is no longer eligible for the specific loan terms described in the GFE, the lender must notify the borrower within one business day of the decision to reject the loan and provide a new GFE if another loan is made available. Lenders must retain the documentation explaining the unforeseeable circumstances for no less than three years after settlement.
The lender will not be bound by the original GFE if the borrower requests a change in the loan terms or other aspects of the mortgage transaction. The lender would instead need to provide a new GFE if the lender still chooses to provide the loan. Changes in settlement costs for a newly constructed home would be considered an unforeseeable circumstance with regard to the ten percent tolerance, although for these transactions the lender would have to state in the original GFE that a revised GFE may be issued up to 60 days prior to loan closing in order to not be bound by the original GFE.
HUD is considering allowing lenders a period of time, such as fourteen business days after closing, to remedy violations with regard to the charges that are subject to the ten percent tolerance. Under these provisions, a lender would not be in violation of these provisions if the tolerance is exceeded and the lender reimburses the borrower the excess amount within this time period.
The GFE also includes the following information:
- How to apply for the loan.
- That the borrower may consult government publications for more information.
- The financial responsibilities of homeownership. This includes the additional costs, such as property taxes and insurance, although this would not need to include homeowners association dues or condominium fees. The borrower would also be informed that there may be other costs and that they would need to obtain estimates from other sources.
- That the lender may receive additional fees by selling the loan after settlement, although the terms of the loan will not change if the loan is later sold.
- A mortgage shopping chart that allows borrowers to compare multiple GFEs.
To review the proposed GFE form, click here and refer to pages 14095-8.
Modifications to the HUD-1 and HUD-1A Settlement Statement
The HUD-1 and HUD-1A settlement statements that are received by the borrower at closing will be revised with the goal of allowing the borrower to more easily compare specific charges at closing with the estimated charges that were listed on the GFE and to help ensure that there are no additional or increased charges. To facilitate such comparisons, the relevant lines on the settlement statement would reference the corresponding part of the GFE in which this information is located, and these lines on the statement would stand out by using a different font. In general, the settlement statement must itemize each service provided by a third party to show the amount and the name of the party receiving the payment, although services in connection with the origination would not be itemized, such as document handling and processing fees.
In addition, an addendum would be added to the settlement statement that would detail the loan terms and settlement information and specifically compare the loan terms and settlement charges listed on the GFE with the final terms and charges on the settlement statement. The settlement agent would be required to read this addendum, also referred to as the closing script, aloud to the borrower at settlement, as well as provide a copy at that time. The proposed rule includes the format for the addendum and the instructions for completing both the addendum and the revised settlement statement. Upon request of the borrower, the settlement statement and the addendum would have to be made available for review by the borrower at least 24 hours prior to settlement.
To review the revised HUD-1 and HUD-1A settlement statement, click here and refer to pages 14062-5.
To review the new proposed addendum, which includes instructions and examples, click the link above and refer to pages 14066-92.
Permissibility of Average Cost Pricing and Negotiated Discounts and Additional Prohibitions on Requiring the Use of Affiliates
The proposed rule will recognize pricing mechanisms that may lead to lower costs for consumers by allowing prices for third-party services to be calculated using average cost pricing mechanisms established by HUD. By using average pricing, settlement service providers may negotiate pricing for third-party services on behalf of the borrower and can avoid the need to track individual prices on a transaction-by-transaction basis, which should lower administrative costs that can be passed on to the consumer. The average cost, instead of the specific cost, would be charged to the borrower. However, borrowers may not be charged more than the average price actually received by third parties during the period in which the average price is calculated, which would generally be a recent six-month period.
The proposal will also allow settlement service providers to negotiate volume-based or other types of discounts, as long as the borrower is not charged more than the discounted price. Lenders have been reluctant to obtain these discounts due to the current prohibition of obtaining discounts in exchange for the referral of business, as outlined under the anti-kickback provisions in Section 8 of RESPA.
RESPA currently allows businesses to make referrals to their affiliates that provide loan services, as long as the consumer is not required to use the service. The proposal will clarify that this will include incentives, as well as disincentives. An example of an incentive would be providing a discount to the borrower if an affiliate is used for a certain service, which may not be beneficial if the affiliate charges more than other competitors or if the discount is offset by higher costs elsewhere. However, providing a package of services in which the total price is less than the sum of the prices of the individual services will be permitted.
Servicing, Federal Housing Administration (FHA) Loans, and Transition Period
The proposal will implement a 1996 law that eliminated the requirement that loan applicants be provided a disclosure describing the lenders historical practice regarding the sale or transfer of servicing rights and eliminated the requirement that applicants sign a statement that they have read and understood this information. The proposal will also remove the current specific limitations on the amounts borrowers may be charged for the originating and closing of FHA loans.
HUD intends to include a 12-month transition period when it issues the final rule on these RESPA changes. During this transition period, there will be an option to comply either with the current RESPA requirements or the revised requirements outlined in the final rule.
QUESTIONS TO CONSIDER REGARDING
THE PROPOSED RESPA RULE
(HUD HAS REQUESTED RESPONSES TO THESE SPECIFIC QUESTIONS)
- HUD proposes a twelve-month implementation period in which these new requirements would not be
mandatory for twelve months after they are issued in final form. Is this time period sufficient?
- Do the proposed GFE and HUD-1/1-A settlement statements accomplish the goals of facilitating the
borrowers ability to shop for a loan and to compare the costs on the GFE with those on the HUD-1/1A
settlement statements? Do you believe the regulatory burdens outweigh the benefits for consumers? Do
you believe that the GFE costs on the new form will be consistent among loan originators within a
- Can the proposed changes be improved further to help consumers understand adjustable rate mortgages?
- Is the new addendum to the HUD-1/1A settlement statement, which is also read aloud to the borrower, the
best way for assuring that the borrower understands the loan terms and can compare those costs with the costs
on the GFE?
- Do you agree with the proposal in which certain costs cannot be changed, except for unforeseeable circumstances,
while others may change by up to 10%? Will you be able to provide costs information or estimates that conform to
these thresholds? HUD is also considering allowing lenders to remedy violations if the closing costs exceed the
tolerances by reimbursing the borrower for the excess costs within fourteen days of closing. Do you agree with
this approach? Is there a better approach or a different timeframe that should be used? Could these provisions
- The proposal will allow for average price costing for settlement services, which must be based on a
recent six-month average that will then be used for every transaction within the same class of transactions.
The proposal will also allow for the negotiation of discounts, as long as all of the savings are passed on to
the borrower. Are there alternative or other methods that should be used? How should class of transactions
be defined? Should it be defined by loan type, loan-to-value ratio, or by some other means? How should the
average price be calculated?
- RESPA currently allows businesses to make referrals to their affiliates that provide loan services, as
long as the consumer is not required to use the service. The proposal will clarify that this will include
incentives, as well as disincentives. Do you agree with this approach?
- RESPA requires a disclosure as to whether the servicing of the loan may be transferred. Should this
be on the GFE? The proposed GFE will require disclosure of alternative loans with higher and lower rates
that have different settlement costs. Should a no-cost loan be one of these alternatives?
- When providing a GFE, the borrower may only be charged for the cost of providing the GFE, along
with the credit report fee. Do you agree with this approach?
- Other comments?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Lilly Thomas Assistant General Counsel (202) 508-6733 email@example.com
Luke Martone Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org