HUD finalizes significant reforms to the Real Estate Settlement Procedures Act
by Stites & Harbison, PLLC
On November 12, 2008, HUD released the final rule amending RESPA in hopes of improving the mortgage process and reducing consumer credit costs. The final rule revises RESPA in numerous ways including standardizing the Good Faith Estimate (GFE), revising the HUD-1 Statement, permitting average charges for settlement services, and removing limits on FHA origination charges. The rule, and the new GFE and HUD-1 forms, will take effect on January 1, 2010. The specific revisions to RESPA are discussed below.
- GFE. The rule standardizes the GFE to provide a clear and accurate summary of the loan terms and facilitate loan shopping. The revised three-page GFE requires loan originators to identify the loan's initial term, initial interest rate, rate lock period, total closing costs, and potential prepayment penalty or balloon payment. The GFE also provides instructions on how to compare the initial and final settlement charges and compare the GFEs received from different loan originators. Once a consumer submits the GFE information, the loan originator must mail or deliver the GFE to the consumer within three business days. Here is the revised version of the GFE.
- Tolerances. At settlement, the origination charge, credit or charge for the interest rate, and the transfer taxes may not exceed the amounts included on the GFE. Additionally, the sum of all charges for lender required settlement and title services and government recording charges may not exceed 10% of the amount reported on the GFE. If changed circumstances cause these settlement charges to vary from the GFE, the loan originator can avoid a violation of RESPA by providing the consumer with a new GFE. Otherwise, a violation of RESPA can be cured if the loan originator reimburses the borrower for the overcharge within thirty days.
- Disclosure of Origination Charges. The standardized GFE also requires loan originators to identify all charges paid by the consumer as a result of the mortgage loan origination, including any yield spread premiums.
- HUD-1 Statement. The HUD-1 statement is revised to allow consumers to easily compare charges on the GFE and the HUD-1 statement. Specifically, a chart on page three of the HUD-1 statement compares these charges. The HUD-1 statement's entries also provide consumers with specific references to similar information on the GFE statement. The HUD-1 terminology is also revised to coincide with the GFE terminology. Here is the new version of the HUD-1 statement.
- Average Charge. Settlement service providers who procure third party settlement services for consumers may charge consumers the average charge of the settlement service, provided that consumers, in the aggregate, do not pay more than the provider paid for the service.
- "Required Use" Definition. The definition of "required use" is revised to include economic disincentives along with incentives in instances of affiliated business referrals.
- FHA Charges. The specific limits on origination charges for Federal Housing Administration loans have been removed, instead permitting the FHA Commissioner to limit these charges.
- No Closing Script. The final rule omits the proposed closing script, which would have required the closing agent to read to consumers an addendum comparing the GFE and HUD-1 statement. Instead, a chart in the HUD-1 statement provides this comparison.
- No Clarification of Negotiated Discounts. The rule also omits the proposed clarification of negotiated discounts; however, HUD reiterated that negotiated discounts between loan originators and settlement service providers do not violate RESPA as long as borrowers benefit from the discount.
The Mortgage Bankers Association (MBA) has reacted positively to the revisions, noting the rule is a "step toward developing more consumer-friendly forms that will help borrowers better understand the loan that they are getting and the fees they are paying while making it much easier for a borrower to shop and compare the different loans they are offered." The MBA, however, had hoped that HUD would coordinate the RESPA revisions with the Federal Reserve's revisions of the Truth in Lending Act. Feel free to contact our firm with questions or for additional information.