CUNA Regulatory Comment Call


August 8, 2002

Proposed RESPA Rules

(MAJOR RULE)

EXECUTIVE SUMMARY

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com and to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary and Jeff in c/o CUNA’s 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 rules, or you may access them on the Internet at the following address:
http://hudclips.org/sub_nonhud/cgi/pdf/18960.pdf

BACKGROUND

Congress enacted RESPA in 1974 to ensure that borrowers throughout the country are provided with sufficient and timely information on the nature and costs of the settlement process and are protected from unreasonably high settlement charges. HUD’s 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 transaction 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 and 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 a 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:

Since the mid-1990’s, HUD has been examining ways to improve the mortgage process for borrowers and to lower settlement costs. The most significant effort occurred in 1998 when HUD and the Federal Reserve Board, in response to a Congressional directive, issued a joint report that addressed possible RESPA reforms. Many of the changes in the current proposed rules are derived from recommendations in this report.

DESCRIPTION OF THE PROPOSED RULES

Good Faith Estimate Revisions

The proposed rules are intended to address criticisms with regard to the GFE statement. These criticisms include the following:

As part of the proposed rules, HUD has developed a new format for the GFE statement and is seeking public comment on this format. The new GFE form and instructions are in Appendix C of the proposed rules, which can be accessed through the link below:
http://hudclips.org/sub_nonhud/cgi/pdf/18960.pdf

Here are the significant features of the new format:

The new form will also include a final total for all charges, which borrowers may use to properly compare with other lenders. This new format is also intended to help borrowers shop for settlement services by requiring lenders to separately identify those third party services that the lender has selected and required and those that the borrower may shop for independently. For those services that are required, the lender need only state the service, the name of the provider, and the cost estimate.

The proposed rules will require that the borrower receive the GFE after the borrower has provided basic credit information and the address of the property securing the loan, either in verbal or written form, but before the payment of any significant fee. This basic information will typically include the social security number, a property address, employment information, the property value (or estimate), and the amount of the loan needed.

This timing requirement is intended to ensure that borrowers receive the information in the GFE earlier in the loan process than they currently do so that they can shop around for the lowest mortgage rate and settlement services that meet their needs. The proposed rules will require that the fees charged to borrowers to prepare the GFE will be limited to the amount necessary to provide the GFE itself and will also require that the GFE estimates be valid for at least thirty days.

The new GFE form will include an Attachment A-1 that will include a breakdown of the origination charges into lender and broker charges so that borrowers can understand these respective charges and possibly negotiate these costs. Attachment A-1 also separates title agent services and title insurance into separate subtotals to reflect both the actual insurance and the title agent’s compensation, which often include both direct payments from borrowers and commissions from the insurance premium. Again, this is designed to provide information so that borrowers may compare title agent compensation that are used by various lenders and possibly negotiate these charges.

The proposed rules will also include provisions to ensure that the estimates listed in the GFE form are more accurate. This is intended to address concerns that some lenders have been using estimates significantly lower than the actual cost.

Here are the provisions in the proposed rules that are intended to address this concern:

If the cost at settlement exceeds the amount reported on the GFE form, absent unforeseeable and extraordinary circumstances, the borrower may withdraw the application and receive a refund of all loan-related fees. These circumstances must be documented, and the documentation must be retained by the loan originator.

RESPA contains provisions prohibiting referral fees. The proposed rules will clarify that these provisions will not be interpreted to prohibit a settlement service provider from using its market power to negotiate discounted prices, as long as the discounted price is charged to the borrower and is reported on the GFE.

Only minor changes to the HUD 1 or HUD 1A form are being made at this time to assist borrowers in comparing the new GFE with these forms. The new GFE will identify, next to each GFE category, where on the HUD 1 or HUD 1A form the corresponding cost information can be found. The proposed rules will require that all lender payments to borrowers be reflected in the borrower’s column on the HUD 1 or HUD 1A, under the applicable series.

Guaranteed Packaging of Mortgages and Settlement Services

In an effort to simplify the mortgage process, promote competition to lower costs, and to facilitate the ability of borrowers to shop for a loan, the proposed rules will permit lenders to offer borrowers Guaranteed Mortgage Packages (GMPs). These GMPs will contain a guaranteed, lump sum price for all loan originator and government-required settlement costs associated with obtaining a mortgage, along with a guaranteed interest rate. This approach is intended to allow borrowers to rely on the quoted price and rate and will facilitate shopping because borrowers will have fewer figures to compare among lenders. The GMP will not be permitted for high cost loans, as defined under the Home Ownership Equity Protection Act.

In order to provide GMPs, lenders will have to provide the following, without an up-front fee, within three days of a borrower’s application:

The GMP offer would remain open for thirty days from when it is delivered or mailed to the borrower. The offer is binding upon acceptance by the borrower and payment of a minimal fee, subject only to underwriting and property appraisal.

The GMP will also include the maximum up-front mortgage insurance costs, based on the estimate of the property value and the amount of the loan. The GMP agreement will inform the borrower that this premium may decrease depending on the final appraisal of the property. Escrowed reserves will also be disclosed and can change by up to 10% without violating the GMP agreement. The 10% limit can be exceeded if there are “unforeseeable and extraordinary circumstances.”

The only costs that can be excluded from the guarantee and not subject to the 10% limit are those that fluctuate depending on the borrower’s choice. This includes items such as hazard insurance, per diem interest, and optional owner’s title insurance.

Some borrowers may elect not to pay for settlement costs up-front and to pay for them in the form of a slightly higher rate. Other borrowers may pay additional amounts to lower the interest rate, in the form of discount points. These situations must be disclosed on the GMP agreement if they are applicable to the particular borrower.

The GMP agreement may be provided to the borrower in lieu of the GFE form. If the borrower and lender elect to use the GMP, the HUD-1 or HUD 1A statement will itemize the settlement services, but not the specific charge for each service. An exception would be for finance charges needed to calculate the annual percentage rate under the Truth in Lending Act, which will need to be itemized.

The proposed rules include a model GMP form, along with instructions. Borrowers will also receive the Special Information Booklet, which will include information on how borrowers can use the guaranteed prices and rates when they shop for mortgage products.

Mortgage Broker Compensation and Lender Payments to Brokers (Yield Spread Premiums)

Under the proposed rules, the GFE will require that mortgage brokers and loan originators describe their services and to advise borrowers that they should shop for the loan products and services that best meet their needs. This advice will be supplemented with additional education through the Settlement Cost Booklet and other means.

The GFE form will also show borrowers the effect of alternative interest rates and their effect on monthly payments and cash needed for settlement. The form will also outline the following options that borrowers have with regard to settlement costs:

Mortgage brokers can receive compensation for their services from other parties besides the borrower. Under these circumstances, the compensation often comes from the lender, which is then recovered from the borrower by charging a higher interest rate on the loan. This indirect form of compensation is often referred to as a “yield spread premium (YSP).”

There has been significant litigation in recent years regarding the legality of the YSP. The issue is whether the YSP is a fee for the referral of business, which is prohibited under RESPA. The issue has not been resolved by the courts, but HUD has taken the position that YSPs are acceptable, as long as they are reasonable and that proper disclosure has been provided to the borrower.

Under current RESPA rules, indirect compensation, such as the YSP, is disclosed separately from direct charges on the GFE form. The proposed rules will require disclosure on the GFE form in one location of the total origination fees, both direct and indirect, that are paid by both the mortgage broker and the lender. This will also include a breakdown of the origination fees to show separately the fees charged by the lender and the fees charged by the broker.

The GFE form will show the total origination fee, the amount of this fee that is paid by the lender, and the net amount that is due from the borrower.

The proposed rules outlined above regarding mortgage broker compensation and lender payments, such as the YSP, are not intended to eliminate borrower choices. Borrowers will still have the option to select loans at a slightly higher interest rate in return for not having to pay certain settlement costs at closing by means of the YSP or to lower the interest rate by paying additional discount points. The proposed rules are intended to improve disclosures for borrowers who may choose one of these options and to prevent certain abuses, such as borrowers who select loans with higher rates and still pay significant settlement costs.

QUESTIONS TO CONSIDER REGARDING THE PROPOSED RESPA RULES

(HUD HAS REQUESTED RESPONSES TO THESE SPECIFIC QUESTIONS)

The New Good Faith Estimate (GFE) Requirements

Guaranteed Mortgage Package Agreements

Other Questions

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com