RESPA Reform Top 10 Things to Know

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1 RESPA Reform Top 10 Things to Know Texas Land Title Institute December 2 3, 2010 Mr. Paul McNutt, Jr. Title Resources Guaranty Company 8111 LBJ Fwy Ste 1200 Dallas, TX Direct Fax paul.mcnutt@trgc.com

2 INSTRUCTOR PROFILE PAUL MCNUTT Company: Title Industry Background: Executive Vice President and General Counsel Title Resources Guaranty Company Dallas, Texas Current position 20 years. Prior experience as commercial escrow officer in Houston, Texas with several companies and as underwriting counsel. Educational Background: B.B.A., University of Texas L.L.B., University of Texas Dale Carnegie, Effective Speaking and Human Relations, 1989 Previous Teaching Experience: Industry Associations: Speaker, TLTA Regional Seminar 2007 Marital Rights 2007 Foreclosures 2008 Surveys Decedents in Title Testate and Intestate Successions Speaker, Texas Land Title Institute 2000 Optimizing Policy Coverages 2002 Illegal Subdivisions: Not Just a Platting Issue 2003 Powers of Attorney: How and When to Use 2004 Closing the Construction Project 2005 Maximizing Your Premium Dollar 2006 Commitments and Binders 2007 Access: Physical vs. Legal 2008 Frequently Asked Questions Resulting from Rule Changes 2009 The Title Objection Letter a Panel Discussion Speaker, State Bar of Texas Advanced Real Estate Course 2005 Premium Saving Tricks-Strategies Speaker for numerous training classes on commitments, rates and rules, ethics, current issues of the title industry, and for real estate agents Recipient: Peggy Hayes Teaching Excellence Award, 2000 from the Texas Land Title Association State Bar of Texas Dallas Bar Association Texas Land Title Association - Director 2000/2001 Texas Real Estate Commission Certified Instructor Legal Update MCE and Ethics MCE

3 RESPA Reform: Top 10 Things to Know Presented by: Paul McNutt, Jr. Title Resources Guaranty Company Top 10 Things to Know 1. HUD enacted a new required 3 page Good Faith Estimate effective 1/1/10. It must be issued for at least 10 days. Our new 3 page HUD-1 is used to compare the GFE at closing. 2. The principal purpose of the change is to allow borrowers to shop for the best loan. 3. A new feature is Roll up of each category of estimated costs into numbers to facilitate comparison among lenders. 1

4 Top 10 Things to Know 4. Lenders must meet exactly their estimated Origination charges (Line ) when we close, so that the HUD-1 reflects the same origination fees and loan discounts. If excess, a refund is required. 5. If interest or credit of borrower changes before closing a new GFE is issued by the lender because of the changed circumstance. Only charges related to the change can be altered by the lender. Top 10 Things to Know 6. If the lender names you as the title provider they give to the borrower, then the Title costs and some other lender outside fees must not be over 10% in excess of the GFE or a refund will be due the borrower. 7. HUD-1 Line Title Services and Lender s Title Insurance Title services and Lender s title insurance is a rolled up number of all title costs except the OTP. 2

5 Top 10 Things to Know 8. HUD-1 Line 1103 Owner s Title Policy OTP must be shown as a buyer s cost in all states & Washington D.C. If seller contracts to pay OTP, the credit is shown on page 1 Lines This is the biggest change on the HUD-1 in Texas, as sellers normally pay for the OTP. Top 10 Things to Know 9. The Texas Department of Insurance issued a letter requiring a work sheet in each GF file so auditors can see which part of the line 1101 total was title policy and which part was other fees. 10. The Texas Department of Insurance requires the escrow fee, if any, be shown on the HUD-1 line 1102 in the column for the Seller and outside the column for the Buyer (Also in the line 1101 rolled up buyer title policy cost.) 3

6 Pursuant to regulations adopted by the United States Department of Housing and Urban Development, loans that are regulated under federal Real Estate Settlement Procedures Act require a new form of: - Good Faith Estimate - Settlement Statement (HUD-1) Effective Date These new requirements officially went into effect on January 1, However, the Department of Housing and Urban Development has said that it will exercise restraint in enforcing the requirements during the first four months of

7 A principal purpose of the changes is to make it easier for borrowers to shop for loan and settlement services. A secondary purpose of the changes is to make the loan and settlement costs easier to understand. Good Faith Estimate 5

8 Good Faith Estimate Good Faith Estimate The lender must give every borrower a GFE if the loan is federally related, and thus subject to RESPA. If the lender either selects the title company, or has the title company on an approved list (which will usually be the case), then... 6

9 Good Faith Estimate Certain of the costs stated in the GFE must be exactly the same as on the final HUD. Other costs may increase by 10% in the aggregate. Some costs may vary an unlimited amount. Good Faith Estimate The lender must offer any borrower, whose actual costs in the group that must be no more than 10% over the GFE, a reduction of the costs by the amount necessary to have those costs not over 10% higher than the GFE. A similar refund for any costs in excess of the zero tolerance also must be made. 7

10 Good Faith Estimate This adjustment of costs to the consumer must be done by the lender within 30 days after closing. It will be a lender requirement by HUD. It is not a title requirement for the loan to be insured. Details about changes to the HUD-1 Form for 1/1/2010 8

11 Page One The first page of the HUD-1 form is almost unchanged. The only addition is that a telephone number for the settlement closing agent is now required. 9

12 Page Two The second page of the HUD-1 changes to make it more closely align with the revised GFE form of the lender. This is needed to make the comparisons that will be required on the new Page 3 of the HUD-1. 10

13 1100. Title Charges New Line 1101: Title Services and Lender s Title Insurance Total of all charges formerly itemized in the 1100 series: Lender s Title premium Document Preparation Escrow fees Disbursements to any third parties for title or attorneys regarding closing (Also, will be itemized outside the column later). The total will be compared with a total from the lender on the GFE on Page 3 of the HUD-1. This will be in the Section for 10% tolerance. 11

14 1100. Title Charges Line 1102: Settlement or closing fee Anyone paid fees will be detailed here with text of name and amount, outside the column. Generally in Texas this will be the place for the Seller s escrow fee to be shown according to the Texas Department of Insurance (TDI) answers to questions asked them when the new rules were effective. As to the Seller s part of the escrow fee this will be in the Seller s column on the HUD-1. As to the borrower s portion of an escrow fee it will be shown out of column here and be included in the 1101 rolled up number for the buyer fees Title Charges Line 1102: Settlement or closing fee (cont.) The justification for this placement by TDI was: TDI Auditors must be provided with information about exactly how much was charged for the title policy and how much was charged for the escrow fee so they can verify the rate rules were applied correctly. 12

15 1100. Title Charges Line 1103: Owner s Title Policy NEW! This is shown as a borrower cost in column, even if the contract provides that the cost is to be paid by the Seller. The credit to buyer from seller is shown as a page 1 credit to borrower for this cost. This will be compared with a total from the lender on the GFE on Page 3 of the HUD-1. This will be in the Section for 10% tolerance Title Charges Line 1103: Owner s Title Policy (cont.) This will be in the Section for 10% tolerance, along with line 1101, unless the lender instructs you to place it in the unlimited tolerance group, because they did not give the borrower your agency as a provider of services when they issued the GFE, and did not require the closing be held by your agency. 13

16 1100. Title Charges Line 1103: Owner s Title Policy (cont.) In the webinar HUD held recently, it was pointed out that it is HUD s belief that: The HUD-1 will not match your checkbook. It is no longer the equivalent of a disbursement worksheet. Therefore the fact that such items as this adjustment must be made for the seller paying for an Owner s title policy, per the contract, which makes the second page of the HUD-1 different from the costs actually incurred by the borrower, is immaterial to HUD Title Charges Line 1104: Lender s Title insurance The number is shown here, outside the column. This just reflects the actual cost, including the endorsements, of the policy. Note that the $5 Guaranty Fee is not listed here, but is on a separate line, but is rolled up into the 1101 in column amount. 14

17 1100. Title Charges Line 1105: Lender s title policy limit $ This is the liability amount of the policy. The presumption is there is only one Lender s title policy. A second HUD-1 would be required for a split loan Title Charges Line 1109: Attorneys Fees LENDER S: Probably in the 800 section, treated as a third party vendor. In 804 or higher by some lenders TITLE COMPANY S: Probably in the 1100 section, included in the total title charges. Under 1101 but detailed to whom paid outside column in 1109 or higher. SELLER S: In the 1100 section, in the seller s column. 15

18 1100. Title Charges Line 1110: Other Title Company Not shown, but used in Texas, as to any split of title premium to show the part paid to another title company or agent, and is out of Column as part of line

19 Comparison of Good Faith Estimate (GFE) and HUD-1 Charges First Section: Charges That Cannot Increase Mostly series lender fees, and the Line 1203 Transfer Taxes (That are not charged in Texas). The HUD-1 totals from page 2 are in the far column, and the amount given by the lender from its GFE is in the near column. 17

20 Comparison of Good Faith Estimate (GFE) and HUD-1 Charges Second Section: Charges That in Total Cannot Increase More Than 10%. Items the lender paid to outside vendors from the 800 section, beginning with line 804 and all lines thereafter in that section. Here are all Title Charges from the 1100 series, and line 1201 Government recording charges of the borrower. The HUD-1 totals of these from page 2 are in the far column; the GFE totals from the lender are in the near column. 18

21 Comparison of Good Faith Estimate (GFE) and HUD-1 Charges Second Section: Charges That in Total Cannot Increase More Than 10%. (cont.) The final step is to show on the next line the increase (if any) between the GFE and the HUD-1 charges in this section, or the % increase. If the % is over 10% the lender is under a duty to refund this difference to the borrower within 30 days of funding the loan. 19

22 Comparison of Good Faith Estimate (GFE) and HUD-1 Charges Third Section: Charges That Can Change These include items the borrower controls, such as line 903 homeowner s Insurance, and that depend on the date of the month you close, such as line 90l, the Daily interest charges. They also include the Initial Deposit for your escrow account from line

23 Loan Terms The terms of the loan required to be disclosed on this section are obtained from the lender. The official statement from HUD is: the loan originator shall transmit sufficient information to the closing agent to allow the closing agent to prepare the HUD-1/A, including the new last page. Loan Terms HUD insisted on the title agent presenting these loan terms as part of the closing, on their own form, not a lender form. It was stated as a compromise for having the title agent read a script that was originally proposed by HUD to be read to the borrowers at each closing. That script was 40 pages long. Therefore we should be grateful it is only a short compilation of loan terms instead of the script. 21

24 At a recent HUD webinar presentation HUD Deputy Assistant Secretary Vicki Bott indicated that it is not the title insurance industry s responsibility to make sure lenders are in compliance. The key thing to know is that the settlement agent does not need to validate the lender s compliance to the GFE and to the HUD tolerance chart, Bott said. It s the lender s responsibility to accurately give the information to the settlement agent. The settlement agent is not required to validate that the lender did it accurately. Texas Department of Insurance (TDI) Guidelines for the New RESPA Rule 22

25 The Texas Department of Insurance has issued guidelines for the Texas requirements to follow the new RESPA Rules, effective 1/1/2010, and to comply with Texas Insurance Code Section Content of Closing and Settlement Statements. (a) Each closing settlement statement provided to a party must state the name of any person receiving any amount from that party. (d) The closing and settlement statement must conspicuously and clearly itemize the charges imposed on the party in connection with the closing and settlement. Five areas are addressed in the guidelines: escrow fees, attorney fees, pass through fees, guaranty fees, and premium splits. Escrow Fees The new RESPA regulations appear to require the title agent to show all fees related to handling the escrow fees and issuing the loan policy in one lump sum on line If the escrow fee charged to the borrower is retained by the title agent the amount of the fee is not required to be disclosed on the HUD-1. TDI Auditors must be provided with information about exactly how much was charged for the title policy and how much was charged for the escrow fee so they can verify that the rate rules were applied correctly. (Therefore, an additional worksheet must be in the file for the review by the TDI auditors.) 23

26 Escrow Fees If an escrow fee is charged to the seller, the fee should be shown in the Seller s column on line If an escrow fee is charged to the borrower, the fee should be shown outside the column on line 1102 (and also shown inside the column as part of the lump sum on line Attorney Fees When a consumer is billed for attorney fees that charge needs to be identified, so that TDI auditors can compare the charged amount with the amount shown on the supporting invoice to check for overcharges. The borrower fees are outside the column on line 1109 or higher, as well as being included in line 1101, and the seller charges are on line 1109 or higher in the column on the seller side TDI is presuming they should be in the 1100 series. This may not be the case. 24

27 Attorney Fees If the lender has their attorney prepare loan documents this would be in line 801, Lender Origination Fees. If a buyer asked their attorney to attend to represent them, or to prepare a power of attorney or trust certification documentation, it would then be a section 1300 fee, a required item the borrower may shop. Pass Through Fees Since overcharging is not allowed on pass through expenses, all fees charged for pass through items must be clearly identified. But borrower fees are rolled up in line 1101, and then itemized with the payee name, the service rendered and the amount paid, outside the column in 1109 or higher. 25

28 Pass Through Fees Insurance Code Section , effective 1/1/2010, allows collecting e-filing fees and tax report charges. It states that actual costs or reasonable estimate of costs incurred were allowed. This definition may be a point of contention by the TDI, as they were opposed to this legislation. Care in justifying the charges, as being according to invoices in the agent files, should be taken by the title agent. Guaranty Fees The policy guaranty fee for the loan policy will also have to be included in the lump sum on line The policy guaranty fee on a loan policy should also be shown outside the column on a blank line in the 1100 series (1109 or higher). The policy guaranty fee for the owner s policy is shown as part of the cost of the policy on line A separate disclosure, outside the column, must be made on line 1109 or higher (as required by Administrative Rule G-1), so auditors can verify proper fee collection. 26

29 Premium Splits If a title agent is sharing a portion of the title insurance premium with an attorney or another title agency to pay for title services rendered, only the portion of the premium retained by the agent is shown outside the column on line The portion paid to the attorney or other title agent should be shown outside the column on a blank line in the 1100 series (1109 or higher). HUD s Top 10 Questions & Answers on RESPA 2010 Changes 27

30 Seller-paid items 1. Q: What if at closing the seller is paying for a settlement service that was listed on the GFE, such as the Owner s title insurance policy? How is that shown on the HUD-1? A: If the seller is paying for a service that was on the GFE, such as Owner s title insurance, the charge remains in the borrower s column on the HUD-1. A credit from the seller to the borrower to offset the charge should be listed on the first page of the HUD-1 in Lines and Lines respectively. HUD Series 2. Q: When the borrower is using a second loan to help finance the purchase of a home, may both loans go on one HUD-1? A: No, each loan must have a separate GFE and a separate HUD-1. The principal amount of the second loan must be listed outside the borrower s column with a brief explanation on Line of the HUD-1 for the primary loan. If the net proceeds of the second loan are less than the principal amount, the net proceeds may be listed on the same line in the borrower s column Second Loan (principal balance 30,000)$29,

31 HUD Series 3. Q: If an attorney prepares loan documents for a lender, where does that charge go on the HUD-1? A: Loan document preparation done on behalf of the loan originator is a processing and administrative service in the origination of a loan and is included in the charge on Line 801 of the HUD-1, and may not be separately itemized. See 24 CFR (b)(1) HUD Series 4. Q: What are title services? A: The term title services includes: 1. Any service involved in the provision of title insurance, including but not limited to: Title examination and evaluation Preparation and issuance of commitment Clearance of underwriting objections Preparation and issuance of policies All processing and administrative services required to perform these functions (e.g. document delivery, preparation and copying, wiring, endorsements, and notary); and 2. The service of conducting a settlement. 29

32 HUD Series 5. Q: Where should the settlement agent list the commitment fee, wire fee and other miscellaneous title fees on the HUD-1? A: The commitment fee, wire fee, and other miscellaneous fees are included as processing and administrative fees that are part of the definition of title services. All of these types of fees must be included in the charges shown on Line 1101 of the HUD-1, and are not to be itemized separately. HUD Series 6. Q: Are document preparation fees included in title services or would they appear as separate line item charges in the borrower s column? A: Document preparation fees are part of administrative or processing fees which are included in the charge in Line 1101 of the HUD-1 and may not be separately itemized. 30

33 HUD Series 7. Q: What charges are shown on Line 1301 of the HUD-1? A: Line 1301 is the total of all charges for third party settlement services that the loan originator required but for which the borrower was permitted to select the service provider. The charge on Line 1301 is shown in the borrower s column. All charges included in the total amount on Line 1301 must be separately itemized outside of the columns in Lines 1302 and subsequent lines, identifying the type of service, the name of the provider, and the amount of the charge. HUD Series 8. Q: Where should the charge for the Homeowners Association (HOA) transfer fee be disclosed on the GFE and HUD-1? A: The charge for the HOA transfer fee, unless it is a service required by the loan originator, need not be disclosed on the GFE. The charge for the HOA transfer fee may be shown on a blank line in the 1300 series on the HUD-1. 31

34 9. Q: If a settlement agent revises a HUD-1 to cure a technical error or to reflect a tolerance cure, may the settlement agent mark the HUD-1 as Amended to distinguish from the original HUD-1? A: Yes. If a settlement agent revises a HUD-1 to cure a technical error or to reflect a tolerance cure, the settlement agent may mark the HUD-1 as Amended to distinguish it from the original HUD Q: May a credit for a tolerance cure be listed on page 1 of the HUD-1? A: 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 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. 32

35 This example illustrates a $180 tolerance cure for the 10% tolerance category: 33