HUD acts to provide real estate borrowers better information on loan/ closing costs to facilitate “loan shopping” and reduce loan/closing costs.
Under authority granted by the Real Estate Settlement Procedures Act (RESPA), the U.S. Department of Housing and Urban Development (HUD) has issued new rules effective January 1, 2010 designed to facilitate “shopping” for mortgage loans and reduce loan/closing costs for borrowers. These goals are to be met primarily through the use of a new mandatory Good Faith Estimate “GFE” form that lenders must provide to potential borrowers and a revised HUD-1 Settlement Statement form that settlement agents (closing attorneys in North Carolina) must use at closing.
By eliminating certain abusive practices and providing better information to borrowers, HUD expects its reforms will save borrowers nationally between $6.48 and $8.38 billion annually in loan and settlement costs, or about $518 – $670 per loan.
RESPA’s Purpose and Scope
RESPA was enacted by Congress in 1974 to help protect consumers when borrowing funds and utilizing services to close most residential real estate transactions. The law and HUD’s implementing regulations (“Regulation X”) have for many years
• Required lenders to give loan applicants a HUD-prescribed settlement costs information booklet and a “good faith estimate” (GFE) of closing costs within three business days following loan application.
• Required settlement agents to use a standardized HUD-1 Settlement Statement form.
• Required the GFE and HUD-1 statement to disclose any fees paid by a lender to a mortgage broker in connection with a loan.
• Required servicers of mortgage loans to disclose to loan applicants whether the servicing of their loan may be sold or assigned to another entity during the term of the loan.
• Established limits on the amounts that mortgage lenders (or servicers) may require a borrower to deposit into an escrow account for real estate taxes and insurance.
• Prohibited lenders, appraisers, attorneys, inspectors, real estate agents and others from paying or receiving any fee, kickback or other “thing of value” to or from any person for referring business incidental to a real estate settlement service.
Problems with Mortgage Lending Practices and Good Faith Estimates
Comprehensive studies by HUD over several years found numerous problems with the mortgage lending practices of some lenders and the good faith estimates they provided to borrowers. For example, some lenders would
• Charge non-competitive fees to borrowers who often faced wide variations in closing costs for both loan origination and third-party settlement services.
• Issue GFEs in a variety of formats that typically contained a long list of confusing individual charges and made it more difficult for consumers to shop for loans and control settlement charges.
• Include estimated closing costs on GFEs that were frequently unreliable or incomplete, with consumers often surprised to find at closing that actual charges were significantly higher than those shown on the GFE.
• Require potential borrowers to pay a substantial loan application fee before they would issue them a GFE, a practice that discouraged borrowers from shopping around for the best loan rates and fees.
• In order to increase profits for themselves and subsequent investors, pay fees (called “yield spread premiums”) to mortgage brokers for making loans at an interest rate higher than what borrowers were qualified for, and then pass the fee on to borrowers who were unaware they were being charged an above-market interest rate and excessive loan origination charges.
As a result of its findings, HUD determined that reforms were needed to provide prospective borrowers better information about loan costs to help them shop for the best loan, and to reduce their loan origination and closing costs. These reforms have been undertaken by changing RESPA regulations rather than amending the law. Real estate agents will encounter the most significant reforms in the new mandatory, standardized GFE form and the substantially revised HUD-1 form that lenders and settlement agents have been required to use since January 1.
New Standardized GFE Form and Procedures
Now, prior to issuing the GFE, lenders can charge potential borrowers no more than the cost of a credit report in connection with the loan application. This is intended to reduce the amount borrowers must pay to receive a GFE and thereby encourage them to shop for the best loan.
Also, for the first time, HUD has mandated the use of a standard three-page GFE form that will hopefully be easier for borrowers to understand, promote lower loan origination and closing costs, and facilitate loan shopping. The new form includes a summary of all key loan terms, a comprehensive loan origination charge that includes all direct costs for obtaining the loan, and a presentation of other settlement charges in a clear standardized format. It also contains a “shopping chart” showing the terms of the proposed loan and providing spaces for borrowers to enter similar terms and costs of other loans if they use it to loan shop, as well as a “tradeoff table” (which lenders may choose not to complete) showing two additional options for a loan in the same amount – one with lower settlement costs and a higher interest rate and monthly payment, and one with a lower interest rate and a lower monthly payment but higher settlement costs.
Following are some new reforms in GFE procedures:
• If a lender pays a “yield spread premium” to a mortgage broker for an above-market interest rate loan, the full amount of this fee must be credited on the GFE toward the borrower’s loan origination charge.
• Between the time they issue a GFE and closing, lenders can only change certain charges within strict limits, and these restrictions are clearly explained on the GFE. For example, quoted loan origination charges cannot increase at closing and quoted charges for services by providers selected by the lender (or by the borrower from the lender’s approved list of providers) cannot increase by more than 10% at closing, but quoted charges for services by borrower-selected providers not on the lenders’s approved list can change by any amount at closing.
• To increase competition among lenders and service providers and lower third-party fees, lenders may now use average charges for many third-party settlement services and quote these charges on the GFE form.
Revised HUD-1 Form
The HUD-1 settlement statement form is now a three-page form organized to correlate closely to the GFE form. The first two pages are essentially the same as the old form in format and content but there are differences in how some entries are handled, such as fees for “title services” (closing attorney, title insurance, courier fees) and buyer closing costs being paid by the seller. To clarify how the HUD-1 line items correlate to GFE line items, many of the line items for settlement charges on page 2 of the HUD-1 form reference the corresponding line item on the GFE. [Note: As of this writing, some uncertainties remain as to how some charges will be recorded on the HUD-1 form in North Carolina closings, but it is expected that these questions will soon be resolved.]
The new third page of the HUD-1 form shows the loan terms stated in the GFE, and it compares the loan costs and settlement charges shown on the GFE with those on the HUD-1. The charges that are not permitted to increase (such as the loan origination charge) cannot, of course, be higher on the HUD-1 than on the GFE (but may be lower). Likewise, the total of the charges that can increase a maximum 10% cannot exceed that limit when compared to the total of such charges on the GFE; however, charges for a particular service may increase by more than 10%. Other charges permitted to change by any amount are also shown so that the borrower can readily identify the changes. An unpermitted increase in a charge (a “tolerance violation”) must be corrected or “cured” by the lender within thirty days. If not corrected prior to closing, the closing attorney must issue a corrected HUD-1 form after the lender cures the tolerance violation by reimbursing the buyer for the overcharge(s). However, it is expected that lenders and closing attorneys will attempt to resolve any tolerance violations prior to the actual closing and issuance of the HUD-1 form.
Forms and Information
HUD has issued an updated settlement costs booklet titled Shopping for Your Home Loan that provides a comprehensive explanation of the GFE and HUD-1 forms and encourages borrowers to use GFEs from various lenders to shop for the best loan. The GFE form, HUD-1 form and settlement costs booklet, as well as the RESPA rules, form completion guidelines and questions relating to the forms, may be found on the “RESPA-Real Estate Settlement Procedures Act homepage”(www.hud.gov/respa) on the HUD website. You should also be able to acquire the new forms from local lenders and real estate attorneys.
This article came from the January 2010-Vol40-3 edition of the bulletin.