The Department of Housing and Urban Development issued further clarification to the new Real Estate Settlement Procedures Act rule. Among issues addressed are how to handle third-party costs that come in below estimates, disclosing payments on hybrid adjustable-rate mortgages and other disclosure requirements.
Last week, after a nearly one-month hiatus, HUD issued two new versions of the frequently asked questions to provide further guidance on the RESPA rule scheduled for implementation on Jan. 1, 2010. The new versions are dated Nov. 17 and Nov. 19.
Under the new RESPA rule, when a loan originator permits a borrower to shop for the provider of a required settlement service, the loan originator must give the borrower a list identifying one or more available providers for each applicable service.
With regard to title services and lender’s title insurance, HUD advises that this is a category that comprises services within the defined term “title service” and includes all of the services within that definition, including conducting the settlement. Thus, when a loan originator permits a borrower to shop for title services and lender’s title insurance, the list of providers must identify title services and lender’s title insurance as a single service, and the various included services, such as conducting the settlement, may not be listed separately.
The new RESPA rule permits a loan originator, which is a mortgage broker and a lender, to issue a revised good faith estimate without regard to the tolerances on fee increases if there is a changed circumstance or borrower-requested change (although only the fees affected by the changed circumstance or borrower-requested change may be revised). The rule provides that documentation supporting the increases in the applicable fees must be retained for three years after settlement.
HUD advises that if there is a changed circumstance resulting in a revised GFE, then both a mortgage broker and lender must retain documentation of the reasons for the revised GFE. Presumably, HUD takes the same position if a revised GFE is issued based on a borrower-requested change. This is an interesting position, as it is stated without qualification, even though in many cases the broker may have no knowledge of a changed circumstance or borrower-requested change that led to the lender issuing a revised GFE.
As noted above, if there is a changed circumstance — then a loan originator may issue a revised GFE that increases the applicable fee(s) without regard to the tolerances. HUD advises that if a borrower selects a service provider that was not selected or identified by the loan originator, this is not a changed circumstance. This position should not present an issue for loan originators. Under the new RESPA rule, if the borrower uses a provider for a particular service that was not selected or identified by the loan originator, no tolerance applies to the fee for the service — the fee can increase by any amount.
HUD also advises that if a borrower initially selects a provider not identified by the loan originator for a particular service and then changes to a provider identified by the loan originator, this is not a changed circumstance. Thus, in such a situation the fee for the service would be included in the services that are subject to the 10 percent tolerance.
As noted above, under the new RESPA rule when a loan originator permits a borrower to shop for the provider of a required settlement service, the loan originator must give the borrower a list identifying one or more available providers for each applicable service. HUD advises that an affiliate of a loan originator may be included on such a list; however, an affiliated business arrangement disclosure “must be provided at the time the GFE is provided to the borrower or at the time of referral, whichever is earlier.” This statement by HUD appears to conflict with RESPA and Regulation X, under which a lender may provide an affiliated business arrangement disclosure at the time it provides a GFE.
HUD advises that if a government loan program chooses a settlement service provider, such as the appraiser on a VA loan, the settlement service should be disclosed in Block 3 on the GFE. Block 3 includes the charges for each service required by the loan originator when the originator selects the provider of the service.
If a lender will provide a credit that will cover third-party costs, HUD advises that, if at closing the third-party costs end up being less than anticipated, the loan originator may not reduce the amount of the credit. The loan originator may choose to (1) apply the remaining credit to additional costs, (2) apply the remaining credit to reduce the principal balance of the loan, (3) reduce the interest rate and the credit accordingly or (4) provide cash from the remaining credit to the borrower.
HUD advises that a loan-level price adjustment is included in the determination of whether there is a credit or charge for the specific interest rate chosen.
HUD provides further advice regarding the calculation of the credit or charge for the rate chosen in a transaction involving a mortgage broker:
- For transactions involving a mortgage broker, the credit for Block 2 of the GFE is calculated as the net payment from the lender above the principal amount of the loan. The net payment from the lender includes any payments made from the lender to the broker. The resulting computation is stated as a dollar amount. The calculation of Block 2 is the same, whether or not the transaction is table funded.
HUD provides the following response regarding whether a tolerance cure may be listed on the first page of the HUD-1:
- The cure for a potential tolerance violation may be listed as a credit to the borrower on page 1 of the HUD-1 with a description of the service(s) the credit is applied to. If the tolerance cure is applied to the overall tolerance category “Charges That in Total Cannot Increase More Than 10%”, the tolerance cure credit may be listed as a “lump sum” amount on a blank line in Lines 204 thru 209 with a description of the tolerance category cure. The comparison chart on page 3 of the HUD-1 should reflect the credit given for that service to cure the potential tolerance violation in the appropriate tolerance category.
HUD also provides an example of a $180 tolerance cure for the items included within the 10 percent tolerance category. In the example, “Cure for ‘10% Tolerance Category'” is set forth on Line 204 of the HUD-1, with $180 in the borrower’s column. HUD does not provide an example of how in this situation the comparison chart on page 3 of the HUD-1 would be completed to reflect the tolerance cure, and guidance on this point would be helpful.
HUD also advises that when a settlement agent issues a revised HUD-1 to reflect a tolerance cure or cure a technical error, the agent may label the HUD-1 as “Amended” to distinguish it from the original HUD-1.
The loan summary portion of the HUD-1 provides for the disclosure of a single periodic interest rate adjustment cap. Some ARMs have more than one periodic rate cap, such as one cap for the initial adjustment and another cap for subsequent adjustments. HUD advises that when different limits apply at different times in the life of the loan, either the maximum interest rate or the range of the change limits, such as 2 percent to 5 percent, can be inserted. It is not clear why inserting the maximum interest rate would be an appropriate option.
The GFE form does not contain signature lines, and HUD advises that signature lines may not be added to the GFE. HUD also advises that, while a loan originator may seek a borrower’s acknowledgment of receipt of a GFE, an originator may not refuse to provide a GFE based on a refusal of a borrower to acknowledge receipt. Additionally, if a borrower provides an acknowledgment of receipt of a GFE, the acknowledgment by itself does not constitute an expression of an intention to proceed with the loan covered by the GFE.
While additional pages may be added to the HUD-1 or HUD-1A, HUD confirms prior informal advice that additional pages may not be added to the GFE. HUD will permit the addition of lines to Block 3 (required services for which the loan originator selects the provider), Block 6 (required services for which the borrower may shop) and Block 11 (homeowner’s insurance) of the GFE. HUD provides examples of how additional lines may be added either vertically or horizontally to the blocks.
HUD confirms that under the RESPA rule no minimum font size applies to the GFE, HUD-1 or HUD-1A.
HOA Transfer Fee. HUD confirms that a fee such as a Homeowners Association transfer fee, unless it is service required by the loan originator, is not disclosed in the GFE and would be shown on a blank line in the 1300 Series of the HUD-1.
