By Brian Chappelle
RISMEDIA, January, 2009-In November 2008, the United States Department of Housing and Urban Development (HUD) formally published its final Real Estate Settlement Procedures Act (RESPA) rule which overhauls the Good Faith Estimate (GFE) and HUD-1/HUD-1A settlement forms. The changes made by this new rule are designed to facilitate borrower shopping for a loan and to “synch up” the GFE and HUD-1 for comparison purposes, with the cornerstone of the rule being the aggregation of settlement fees into fewer categories (i.e. aggregation instead of itemization).
Several of the changes in the new RESPA rule (e.g. revised definition of required use and average cost pricing) will be effective January 16, 2009, while other changes will not need to be implemented until January 2010. Since several portions of the rule will be implemented this month, it is important that Realtors® understand what is contained in the new RESPA rule and how it will affect their business.
Highlights of the New RESPA Rule
Changes in the Disclosure of Origination Charges
The new origination disclosure attempts to separate origination charges from interest rate movements. All loan originators (mortgage lenders or brokers) must enter all fees associated with originating the loan including the yield spread premium (YSP) in its origination charges in Block 1 of Section A on the new GFE. This “block” is subject to zero tolerance meaning these fees cannot change even if the interest rate floats. However, brokers are able to treat the YSP as credit thereby “netting out” the YSP in Block 2 of Section A total (“Your Adjusted Origination Charges”) resulting in comparable “origination charges” for the mortgage lender and the broker. The Section A total above is the only amount of the section carried forward to the front page of the GFE.
With these changes, the rule appears to decouple origination charges from interest rate movements for all originators. For example, if interest rates decline after the GFE is provided, the originator cannot change its origination charges in Block 1. For the wholesale transaction, there could be less “fall out” since the mortgage broker will not have any personal incentive to transfer a loan if rates decline. Additionally, origination fees as part of the GFE must remain available for 10 days. Timing of the interest rate offer is at the discretion of the originator and can change as frequently as the originator determines. These changes need to be implemented by January 2010.
Revised Definition of “Required Use” for Affiliated Business Relationships
The new “required use” definition and the supporting language in the preamble raise questions as to whether affiliated businesses can offer preferred pricing tied to the use of an affiliated settlement service provider. Affiliated settlement service providers may qualify for affiliated business exemption as long as they offer “legitimate consumer discounts”. The preamble to the rule states: “RESPA and this final rule limit tying such a discount to the use of an affiliated settlement service provider.” The above language in the preamble suggests HUD is committed to ensuring that discounts are beneficial to the consumer and are not merely rearranging fees from other affiliated providers. This portion of the rule will be effective beginning January 16, 2009.
While dropped from the rule, HUD confirmed its view that volume discounts are permissible and not Section 8 violations. The preamble states: “It remains HUD’s position, however, that discounts negotiated between the loan originator and other settlement providers…,where the discount is ultimately passed on to the borrower in full, is not … a violation of Section 8 of RESPA.” This position is effective immediately since it is a reiteration of current policy.
Eligibility of “Average Charge” (i.e. Average Cost Pricing)
This allows settlement service providers to use prices based on average charges for the third-party services they purchase. Any settlement service provider may define a class of transactions based on a period of time, type of loan and geographic area. The regulation states: “The total amounts paid by borrowers and sellers for a settlement service based on the use of an average charge may not exceed the total amounts paid to the providers of that service for a particular class of transactions.” However, “the provider must ensure that the average charge used does not result in borrowers, in the aggregate, paying more for a particular settlement service than the aggregate paid for obtaining that service from third parties.” This regulation will be effective beginning January 16, 2009
GFE and HUD-1 Disclosure Forms
The final rule overhauls the GFE and HUD-1 disclosure forms and other changes to the GFE. First, the rule merges the two step GFE process (GFE and mortgage application) into one three page GFE disclosure as follows: Page 1- Summary of loan terms and settlement fees; Page 2 – Detailed estimate of settlement services including origination charges; and Page 3 – Consumer educational information including a trade off table that compares the subject loan with interest rates generating higher and lower settlement costs. While HUD encourages lenders to provide the alternative pricing in the trade off table, the originator is not required to provide the alternative transactions.
Other changes to the GFE the rule implements include:
• Originators, at their discretion, must provide a period of time for availability of the interest rate, while all other charges must be good for at least 10 business days.
• Mandatory delivery of the GFE within three days.
• Originators can only charge for credit reports. No fees for appraisal, inspection or other settlement service can be mandated with the GFE.
• Establish tolerances for GFE items
o Lender origination fees (including processing and underwriting) and transfer taxes have zero tolerance meaning that there can be no variation from the GFE to the HUD-1.
o Tolerance is 10% for third-party settlement costs.
o Flexibility in revising GFE when circumstances (“Act of God”, borrower error, etc.) necessitate change.
With respect to the HUD-1 disclosure form, the rule states it must correspond settlement charges on the HUD-1 with the applicable section of the GFE including eliminating the requirement for the closing script to be completed and read by the closing agent. HUD is also requiring a new third page of the HUD-1 to compare with GFE and an opportunity to “cure” inadvertent or technical errors within 30 calendar days of closing. While the GFE and the HUD-1 changes will not be effective until January 2010, a lender can implement the changes sooner if they like.
Other Changes in the New RESPA rule
Some of the other changes the new RESPA rule implements beginning January 16, 2009 include permitting electronic disclosures pursuant to the Electronic Signatures in Global and National Commerce Act (ESIGN) for all RESPA requirements. Additionally, it allows lenders to make technical amendments to transfer of servicing disclosure and aggregate accounting for escrow accounts (correcting outdated provisions). The new RESPA rule also includes deregulating the FHA origination fee to where lenders are no longer limited to one percent origination fee (subject to any administrative caps). However, this portion of the rule will not be effective until January 2010.
Since the proposed RESPA rule was first introduced in March 2008 to the final rule published on November 13, 2008, HUD received nearly 12,000 comment letters, with 6,000 coming from members of the National Association of Realtors®. The final RESPA rule shows that HUD listened fairly carefully to the comments and responses the industry and consumer groups made over that time period and made significant changes to the rule to address their concerns. To learn more about the new RESPA rule and what it means for Realtors®, please visit www.realtor.org/respa or www.hud.gov.
Brian Chappelle is a Partner with Potomac Partners, LLC and Senior Consultant for the National Association of Realtors® Real Estate Services program. For more information on NAR’s Real Estate Services program, please visit www.realtor.org/res.