The
New RESPA Rule - The EssentialsBy
Gary Cunningham Mortgage News Daily 10.06.09
If
you’re a home mortgage loan originator, mortgage broker,
realtor, title agent or other provider of services related to
the processing or closing of a residential mortgage loan, you
know that January 1, 2010 is D-Day for the use of the new Good
Faith Estimate (GFE) of settlement charges (www.hud.gov/respa) and
HUD-1 Settlement Statement (www.hud.gov/respa)
prescribed by the RESPA reform final rule published January
16, 2009. Hopefully, you and your firm are well on you
way to being ready to implement the rule.
RESPA
reform has had a long and tortuous history spanning several
administrations. A final rule developed in 2004 was
withdrawn by HUD in response to strong objections largely
directed at provisions of the rule which would have permitted
the “packaging” and sale of settlement services free of
concerns that packaging would violate the anti-kickback
provisions of RESPA, and be particularly damaging to smaller
businesses and a wide range of settlement service providers.
HUD held extensive roundtables to solicit comment from
industry, consumer groups and federal and state government
agencies. The final rule did away with packaging in
favor of the approach summarized below.
HUD was particularly concerned that an important part of the
current mortgage crisis was a result of families going to the
closing table without understanding their loans and without
the meaningful ability to shop for the best loan for them.
But HUD was also intent on accomplishing reform in a balanced
way that considered those in the business of homeownership.
Points to Keep in Mind. Here are some key points
to keep in mind as you work through the details that will
provide perspective concerning the purposes and approach of
the rule, and a framework for addressing issues not otherwise
specifically addressed in the rule. See also HUD’s
“New RESPA Rule Frequently Asked Questions” at the above
link.
The Need for the Rule. A May 2008 study for HUD
by the Urban Institute found:
Settlement
charges vary widely for similar loans with similar
interest made to similar borrowers.
Most
borrowers see virtually no benefit in reduced settlement
charges when they pay higher interest rates.
Borrowers
who pay “points” at settlement do not, on average,
benefit from lower interest rates.
Purpose
of the Rule and the New Standardized Forms. To help
borrowers understand and shop for mortgages, which will result
in better mortgage products, lower interest rates, and lower
settlement charges for borrowers.
The Key Building Blocks and Concepts of the Rule.
The
GFE
Tolerances
The
HUD-1 Settlement Statement
The
GFE. Page 1 of the GFE substantially enhances the
disclosure of loan terms, including the initial interest rate
and monthly payment, whether the interest rate and principal
balance can rise and the maximum to which they can rise, and
whether the loan has a prepayment penalty and/or a balloon
payment.
Lender
payments to mortgage brokers tied to the interest rate of the
loan (yield spread premiums or YSPs) are disclosed as part of
Loan Origination Charges in Block A at the top of page 2
because of the borrower’s need to understand the trade off
between upfront settlement charges and the interest rate.
The
GFE consolidates settlement charges into major categories in
Block B on page 2 to simplify the disclosure of charges and
avoid fee proliferation.
Total
Estimated Settlement Charges (the total of Blocks A and B)
from the bottom of page 2 are carried forward to the bottom of
page 1. This total becomes the borrower’s bottom-line
settlement cost shopping number for a particular loan that can
be compared to those on other GFEs the borrower obtains.
Tolerances. Settlement charges on the GFE are
grouped into three categories: 1) those that cannot
change between the time the GFE is given and the closing;
2) those whose total can increase up to 10% at settlement; and
those charges that can change at settlement.
The tolerances are generally described at
the top of page 3 of the GFE, and a detailed explanation of
the tolerances and exceptions will be discussed in a later
blog. However, in general, the items in 1) are or should
be within the knowledge or control of the loan originator;
those in 2) are for loan originator-required services which
the originator selects or the borrower may select from a list
of providers required to be provided by the loan originator;
and the items in 3) are those over which the loan originator
has no control or the borrower selects on his or her own.
The HUD- 1 Settlement Statement.
Two important conceptual changes have been made to the HUD-1:
Where
applicable, the itemized final settlement charges listed
on page 2 reference the GFE line numbers where the charges
were either itemized as a charge on the GFE or were part
of a consolidated grouping of charges on the GFE, to
enable the borrower to track settlement charges from the
GFE to the HUD-1.
A
new page 3 has been added to the HUD-1. The top
portion compares the items in each of the “cannot
change,” “total cannot increase more than
10%,” and “can change” categories of the GFE to the
final charges on the HUD-1 to clearly indicate to the
borrower whether or not the tolerances have been violated.
The
bottom portion of page 3 summarizes the final loan terms
and monthly escrow account payments, if any, in much the
same format as on the GFE.
The
loan originator is required by the rule to provide the
information necessary to complete page 3 of the HUD-1 to
the settlement agent.
In
future blogs we will explore in greater detail the
requirements of the rule as they pertain to completion of the
GFE and HUD-1 and other important provisions of the rule.
Look also for our upcoming webinar on the new rule.
For more
information about Lillian Wong & Associates and our services, please visit
my website at LillianWong.net or email me at
Lillian@LillianWong.com.
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