Summary of New RESPA Regulations
January 23, 2009
The Department of Housing and Urban Development (HUD) finalized amendments to its regulation implementing the Real Estate Settlement Procedures Act. The final rule increases the length of both the Good Faith Estimate (GFE) and HUD 1/1A forms to three pages each. The new GFE requires more detailed disclosure of settlement services, including the way yield spread premiums (paid to mortgage brokers by lenders, hereafter “YSPs”) are disclosed. A separate section concerning escrow accounts is included. Amounts for settlement services are cross-referenced between the GFE and HUD 1/1A settlement statements to facilitate comparison. The final rule also strengthens the restrictions on using affiliated businesses. However, due to intense opposition after issuance of the final rule, including from homebuilders, HUD announced a delay of this provision.
GFE and HUD 1/1A. A GFE must be furnished within three business days after the originator’s receipt of an application . An application is defined with reference to the collection of at least six items of information: the applicant’s name, social security number, gross monthly income, the property address, an estimate of the value of the property, and the amount of the mortgage loan sought . Once the applicant submits all the mortgage application information deemed necessary by the loan originator (which may be more than the six items), the originator is required to deliver or mail (or, if the applicant agrees, provide by fax, e-mail, or other electronic means) a GFE to the applicant within three business days. If the mortgage broker provided the GFE, the lender is not required to provide an additional GFE, but is required to “ascertain” that the GFE has been provided .
The originator is limited to charging, as a condition for providing a GFE, only the cost of a credit report. Additional fees may be charged after the applicant has received the GFE, which is considered received three calendar days after it is mailed, not including Sundays and holidays. The originator also may not require, as a condition for providing a GFE, that an applicant submit supplemental documentation to verify application information .
The estimate of the charges and terms for all settlement services must be available for at least 10 business days from when the GFE is provided, except for the interest rate, charges and terms dependent upon the interest rate, the adjusted origination charges, and per diem interest .
The enhanced GSE now includes a loan summary chart on the first page. Set out separately is a section informing whether the loan requires an escrow account. The GFE retains the proposed tradeoff table, but leaves completion of the table optional. As proposed, the loan originator would have been required to complete the table to allow the applicant to choose the loan presented in the GFE, an otherwise identical loan with a lower interest rate and payments but higher settlement costs, or a loan with a higher interest rate and payments but lower settlement costs.
Under the final rule, completing the table is optional even if the loan originator has another loan for which the borrower may be eligible. However, in the preamble to the rule, HUD states that it “encourages” originators to complete the table because it would be helpful to consumers.
As proposed, YSPs must be disclosed as a credit to the borrower’s origination costs, even though HUD received many comments that this would be confusing to the borrower. HUD determined that disclosing YSPs as “paid outside of closing” or “POC” was not useful to the consumer.
To facilitate comparison between the HUD–1 and the GFE, each designated line in Section L (Settlement Charges) on the final HUD–1 includes a reference to the relevant line from the GFE. Also, terms used on the HUD–1 have been revised to conform to those used in the GFE. You may review the new forms and instructions from the link below and going to page 68243 (HUD 1/1A) or 68253 (GFE): http://www.hud.gov/offices/hsg/sfh/res/finalrule.pdf
Changed circumstances.  If a loan originator provides a revised GFE, it must document the reason and retain documentation of the reasons for at least three years after settlement. A revised GSE is permissible if changed circumstances result in increased costs for any settlement services beyond the relevant tolerances, if changed circumstances result in a change in the applicant’s eligibility, or if the borrower requests changes to the loan. The revised GFE must be furnished within three business days of receiving information substantiating changed circumstances, and charges may be increased only to the extent resulting from the changed circumstances. HUD will issue additional guidance on what constitutes changed circumstances.
Tolerances.  Origination and lender costs disclosed on the GFE may not increase. Settlement services recommended by the lender are subjected to a 10% tolerance between the GFE and closing. Title charges are subject to this tolerance if the lender recommended title company is chosen by the borrower. If the interest rate has not been locked or if a locked interest rate has expired, the charge or credit for the rate and the adjusted origination charges, per diem interest, and loan terms related to the interest rate may change. If the borrower later locks the interest rate, a new GFE must be provided showing the revised interest rate-dependent charges and terms.
The tolerance applies to the sum of all the included settlement services. Individual services may exceed the tolerance as long as the total does not exceed 10%. Recording fees, because they may not be precisely known, are subject to the 10% category while transfer taxes are subject to zero tolerance. Amounts charged for all other settlement services included in the GFE may change at settlement, such as services selected by the applicant (e.g., homeowner’s insurance).
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. A loan originator may cure a violation of a tolerance by reimbursing excessive amounts to the borrower at settlement or within 30 calendar days after settlement .
Average charges.  Settlement service providers are permitted to use an average charge for a settlement service, which is the average amount paid by one settlement service provider to another on behalf of borrowers and sellers for a particular class of transactions. The settlement service provider must define the class of transactions for purposes of calculating the average charge, consisting of RESPA-covered transactions: (i) made during a period of time not less than 30 calendar days and no more than six months; (ii) made within a specified geographic area (as determined by the settlement service provider); and (iii) involving a type of loan, also as determined by the settlement service provider. The same average charge must be used in every transaction. An average charge is not permitted if the charge varies based on the loan amount or property value. Here again, the settlement service provider is required to retain documentation supporting use of an average charge for at least three years after settlement.
Negotiated discounts. HUD did not adopt a proposal specifically to allow negotiated discounts, but will give it further consideration. HUD also noted that “discounts negotiated between loan originators and other settlement service providers, or by an individual settlement service provider on behalf of a borrower, where the discount is ultimately passed on to the borrower in full, is not, depending upon the specific circumstances of a particular transaction, a violation of Section 8 of RESPA.”
FHA fee limit. As proposed, the final rule removes the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan. HUD notes that the FHA Commissioner retains authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan.
Oral script. HUD had proposed to require the settlement agent to read an addendum to the HUD 1 aloud to the borrower at settlement. The addendum compares the loan terms and settlement charges estimated on the GFE to the final charges on the HUD–1 and describes the loan terms and related settlement information. This proposal elicited intense opposition and the requirement was dropped. However, as discussed above, HUD is requiring an additional page on the HUD–1/1A that sets forth a comparison between the charges listed on the GFE and the same charges listed on the HUD–1/1A, and summarizes the final loan terms.
Affiliated business. The term “required use” is defined to include a situation where the availability of an economic incentive or the ability to avoid an economic disincentive is contingent upon the person using or failing to use a referred service provider. As applied to the affiliated business exemption, a settlement service provider may offer a combination of services at a lower total price than if charged separately if such use is optional and the lower price for combined services is not made up by higher costs elsewhere in the settlement process .
This provision has been challenged by the National Association of Home Builders, which filed a petition for preliminary injunction against HUD. HUD has suspended the required use provision for a reported 90 days.
Compliance with the new requirements pertaining to the GFE and settlement statements is required as of January 1, 2010. Otherwise, the final rule is effective on January 16, 2009.
- 24 CFR 3500.7(a). The GFE is not required if, before the expiration of the 3-day period the application is denied or the applicant withdraws the application. 24 CFR 3500.7 (a)(3) and (b)(3).
- “Application” is defined in 24 CFR 3500.2(b).
- 24 CFR 3500.7(b).
- 24 CFR 3500.7(a)(4) and (5).
- 24 CFR 3500.7(c).
- See 24 CFR 3500.7(f)1).
- 24 CFR 3500.7(e).
- 24 CFR 3500.7(i).
- 24 CFR 3500.8(b)(2).
- 24 CFR 3500.2.
The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.
© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.