Public Hearing Set for Proposed Rule Changes

A public hearing for comments on proposed rule changes will be held at 9:00 a.m., February 10, 2010 in the Conference Room of the Commission’s office.

Following is a summary of proposed Commission rule changes which, if approved, would become effective July 1, 2010:

•  Require retention of trust account and transaction records for a period of five years instead of three as the current rules require.

• Add questions to the Residential Property Disclosure Form for home sellers to disclose whether their properties are located within one mile of the boundary of certain military facilities and to disclose noise, air traffic, vibrations, lights and other impacts from nearby military facilities.

• Allow postponement and completion of continuing education, Broker-in-Charge, and postlicensing courses, and the payment of license renewal fees for brokers and approved instructors who are members of the United States armed forces serving in combat or in presidentially-declared disaster areas.

•  Clarify when and under what circumstances students in the Broker-in-Charge Course and in all continuing education courses may be absent during the scheduled classroom hours and still receive continuing education credit for attending the course.

This article came from the January 2010-Vol40-3 edition of the bulletin.

Executive Director Position

The North Carolina Real Estate Commission has employed Young and Associates to assist the Commission in the search for a new Executive Director. All interested persons should send a resume to leigh@youngandassociates.com. Any questions should be directed to David Young at 828.691.6555.

HUD Revises HUD-1 Settlement Statement, Introduces New “Good Faith Estimate” Form

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.

Federal Agencies Gain Assistance From Commission in Fraud Cases

The Real Estate Commission has worked with various federal agencies to assist in the investigation of several mortgage fraud cases recently resolved in the federal criminal system.

On December 14, 2009, William Roosevelt Cloud was sentenced in a Charlotte federal court to 27 years of imprisonment. After a two-week trial, Cloud was convicted of conspiracy to commit mortgage fraud, three counts of mail fraud, 13 counts of bank fraud, one count of money laundering conspiracy, and six counts of money laundering, all related to his role in a large mortgage fraud scheme. Prior to his trial, 19 other participants in the scheme had already pled guilty, including Cloud’s wife.

Federal prosecutors in the Western District showed that Cloud and others purchased and immediately flipped homes in the Charlotte area after artificially inflating the values of the homes. They recruited buyers by promising them they could buy an investment home with no money down, offering to place tenants in the homes, and assuring the buyers that the homes would be resold within a short period for a profit, at which time the buyers would be repaid for participating. Instead, the houses did not sell and went into foreclosure, leaving the buyers with their credit ruined and the lenders with homes for which they had loaned more than the true value of the properties.

In another case, Mary Rose Wright was charged in November, 2009, in federal court in the Eastern District of North Carolina with conspiracy and wire fraud related to a separate mortgage fraud scheme.

Wright submitted an offer to purchase a Raleigh, North Carolina property for $1,650,000.00. She obtained a power of attorney giving her the authority to execute the purchase documents for the property on behalf of the buyer, who was also involved in the scheme.

Wright prepared a false verification of employment, false tax returns, and a false bank statement to assist the buyer in obtaining a loan in the transaction. She also submitted a loan application to the lender that contained false information. The lender made the loan and after closing Wright moved into the property. No mortgage payments were ever made, and the property went into foreclosure.

This article came from the January 2010-Vol40-3 edition of the bulletin.

Executive Director Phillip T. Fisher To Retire After 34 Years of Service

Phillip T. Fisher, Executive Director of the Real Estate Commission, will retire April 1 after 34 years of service, it was announced by Commission Chairman Marsha H. Jordan.

Fisher is the longest-serving administrator of the Commission since its creation as the North Carolina Real Estate Licensing Board in 1957.  Joining the Board in 1975 as Administrative Assistant to Secretary-Treasurer Blanton Little, he then succeeded Little upon his retirement in 1981.

In 1983, the Licensing Board was renamed the Real Estate “Commission” and his title changed to Executive Director. He prides himself on never having missed a Commission meeting in his nearly 29-year career as Secretary-Treasurer and Executive Director.

A Kannapolis native, Fisher graduated from the University of North Carolina at Chapel Hill in 1970.  While serving as a Sergeant in the US Army Reserves, he entered the real estate business as a broker and then vice-president of Fisher Real Estate of Kannapolis, also becoming one of the state’s first real estate instructors.

In his more than three decades with the Commission, he witnessed the expansion of the Commission from five to nine members and a four-fold growth in the number of real estate licensees from approximately 25,000 to nearly 100,000. The Commission also expanded from less than a dozen primarily clerical positions to fifty-four including professionals in law, education, financial auditing, and investigations.

Fisher led the Commission through a period of substantial change in the licensing and regulation of the real estate profession in North Carolina as the marketplace became increasingly more sophisticated and complicated.

To assist licensees in navigating the growing complexity of the business and to protect the interest of consumers, he developed the largest publications program of any real estate licensing regulatory organization in the United States and abroad.

To assist the Commission in shaping policy, he also planned, facilitated the discussions and prepared the reports for numerous advisory committees addressing such issues as agency disclosure, broker-in-charge responsibilities, community association management, incentive disclosure, interstate brokerage cooperation, specialty licensing and vacation rental management.

He was also instrumental in the formulation of the residential square footage guidelines and the formation of what is now The Appraisal Board.

Currently the senior member of the Association of Real Estate License Law Officials (ARELLO), he served as its President in 1991 when he was named by Governor Martin to The Order of the Long Leaf Pine. He is now considered the foremost authority on this awards program and composed in its honor a song, “The Long Leaf Pine”, which has been performed by the North Carolina Symphony.

The Commission congratulates Mr. Fisher on the completion of his long and distinguished service to real estate consumers, practitioners and the citizens of North Carolina and wishes him and his wife, Sandy, much happiness in his well-deserved retirement.

This article came from the January 2010-Vol40-3 edition of the bulletin.

Don’t Delay Your Postlicensing Education

Provisional brokers need to be more prompt than ever in taking their required postlicensing education. With the sharp decline in license applicants over the past two years, there are substantially fewer provisional brokers needing these courses than in the past. This means that the demand for the courses is much lower and sponsors are not only scheduling fewer course offerings but also are frequently having to cancel scheduled courses due to a lack of sufficient enrollment. Consequently, provisional brokers who wait to take a needed course until 90 days or less prior to their deadline are either having difficulty finding a course or having to travel farther to get a course. If you are a provisional broker, you should arrange to take the course you need at least six months ahead of your deadline. Remember that if you fail to take a required course by the end of the first or second year after licensure, your license will be made inactive, and if you don’t take all required courses by the end of the third year, your license will be canceled.

This article came from the January 2010-Vol40-3 edition of the bulletin.

Dates to Remember

Commissionaires Turn 21

In 1989, Executive Director Fisher asked for volunteers among Real Estate Commission staff members to form a choral group to be named the “Commissionaires” to perform primarily during the holiday season at nursing homes and senior centers around Raleigh.

Fisher, who will retire April 1, recalls that in the beginning, when Commission staff was half its present size, choristers totaled hardly more than half a dozen. Today,  the number totals more than 20.

The group’s first director was Education/Examination Officer Anita R. Burt, who taught and directed choral music at Meredith College prior to joining the Commission. These duties are now under the baton of Miriam J. Baer, Legal Services Assistant Director and Legal Counsel.

The Commissionaires have brightened the holiday season for audiences in the past two years at the Veteran’s Administration Hospital in Durham, the historic State Capitol building, and the Mayview Convalescent Center in Raleigh. In 2007, they helped commemorate the Commission’s 50th Anniversary observance and in 2005 the dedication of the Commission office building.

This article came from the January 2010-Vol40-3 edition of the bulletin.

Commission Creates Financial Fraud Unit

With the number of mortgage fraud investigations rapidly escalating, the Commission created a new Financial Fraud Unit to investigate these cases and to work with state and federal law enforcement agencies to bring appropriate cases for criminal prosecution.

Janet B. Thoren, the Commission’s Chief Deputy Legal Counsel and a Special Assistant United States Attorney, will supervise the unit. Michael Gray, the Commission’s former Chief Auditor/Investigator, has been designated as the Chief Financial Fraud Investigator.  As an investigator with the Commission for the past 14 years, Mr. Gray focused almost exclusively on mortgage fraud cases since 2000. In addition, the Commission has employed D. Scott Schiller in the position of Financial Fraud Investigator. Mr. Schiller, a former Special Agent with the Internal Revenue Service Criminal Investigation Division, has an extensive background in criminal investigation and mortgage fraud.

The Financial Fraud Unit is responsible for investigating mortgage fraud cases involving real estate licensees and working with federal and state agencies to promote the criminal prosecution of those involved in mortgage fraud.

This article came from the January 2010-Vol40-3 edition of the bulletin.

Borrower Beware

Many borrowers fudge a little when applying for a loan. The truth is, any lying on a real estate loan application is mortgage fraud.

Speaking about mortgage fraud, U.S. Attorney General Eric Holder said “these crimes have devastated and driven away many who were once willing to invest in our economy. They’ve robbed people of their homes and their economic security. They’ve depleted bank accounts and pension funds. In some places, they’ve dried up philanthropic giving and shuttered charities. They’ve placed unfair challenges before cash-strapped governments, local police departments, small businesses, and American workers and consumers.”

Given the steep rise in foreclosures and bank failures from bad loans, and the resulting economic decline, licensees should know now that even “little white lies” constitute mortgage fraud.

This article came from the January 2010-Vol40-3 edition of the bulletin.