HUD s New RESPA Rule

Transcription

1 1300 Nineteenth Street, NW Fifth Floor Washington, DC HUD s New RESPA Rule November 24, 2008 On November 17, 2008 the United States Department of Housing and Urban Development (HUD) published in the Federal Register a new rule under the Real Estate Settlement Procedures Act (RESPA), capping a reform effort that HUD began in July of The last major revision to the RESPA rule, known as Regulation X, occurred in November of The new rule will be effective on January 16, Except for the new form of Good Faith Estimate (GFE), revised form of HUD-1 and the related requirements, compliance with the rule will be required upon the effective date. The new form of GFE and revised form of HUD-1 may be used upon the effective date of the new rule, but use of the modified forms and compliance with the related requirements is not required until January 1, HUD advises in the preamble to the new rule that it will issue guidance on compliance with the rule s requirements during the implementation period. Based on federal law applicable to major rules such as the new RESPA rule, there is a Congressional review period. Because the new RESPA rule was issued near the end of the existing session of Congress, the review period will last for the remainder of the existing Congress, and there will be an additional period for the next Congress to review the rule. Either the existing Congress or the next Congress can pass a joint resolution that prevents the rule from becoming effective or continuing in effect, as applicable. Although certain significant elements of the proposed rule were eliminated, such as the closing script and the concept of a Good Faith Estimate (GFE) application, the new rule is similar in many respects to the proposed rule. In particular, the new rule retains the concept of 0% and 10% tolerances in the amount by which certain charges disclosed in the GFE may vary. The new rule adds a severability provision to Regulation X under which a determination that any particular provision of the Regulation is held invalid, the remainder of the Regulation shall not be affected. This raises the question of whether HUD simply is engaging in housekeeping by adding a standard regulatory provision, or may be anticipating legal challenges to the new rule.

2 A significant non-respa change is that, as proposed, HUD eliminated the one percent cap on origination fees that may be charged in connection with an FHA loan. FHA retains authority to establish limits on the amount of such charge. There appears to be an issue regarding the effective date of the change. The portion of the RESPA rule that delays the applicability of certain listed changes until January 1, 2010 includes the revised FHA origination fee provision. The effect of addressing the applicability of FHA origination fee provision in the RESPA rule is not clear. I. Good Faith Estimate (GFE) A. GFE Application Eliminated. 1. HUD did not adopt the proposed concept of a GFE application that is separate from, and precedes, a mortgage application. 2. As proposed, a loan originator (defined as a lender or a mortgage broker) would have been required to issue a GFE within three business days of receipt of a GFE Application, and a GFE Application would exist if a specific property were identified and the following information were provided by a consumer: a. Name. b. Social Security Number. c. Property address. d. Monthly income. e. Applicant s best estimate of value of property. f. Loan amount sought. B. Application Triggers GFE. 1. Under the new rule, a lender or mortgage broker must provide a GFE not later than three business days after receipt of an application for a federally related mortgage loan, or information sufficient to complete such an application. This is consistent with the existing requirements under RESPA. However, as addressed below, the new rule revises the definition of application. 2. When a mortgage broker receives an application, the lender is responsible for ascertaining whether a GFE was provided. If the mortgage broker provided a GFE, the lender is not required to provide an additional GFE. 2

3 C. Revised Definition of Application 1. The definition of application is revised to read as follows: Application means the submission of a borrower s financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the borrower s name, the borrower s monthly income, the borrower s social security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator. An application may either be in writing or electronically submitted, including a written record of an oral application. a. Thus, the six items of information that, under the proposed rule, would have triggered the need to provide a GFE are now the minimum items of information that are needed to have an application. Additionally, HUD clarifies that the Social Security Number must be provided to allow for a credit report, and makes clear that the loan originator may deem that additional information is necessary to have an application. b. HUD states in the preamble to the rule that it strongly urges loan originators to develop consistent policies or procedures concerning what information it will require to minimize delays in issuing GFEs. 2. The new rule expressly provides that a lender or broker may not require, as a condition for issuing a GFE, that an applicant submit supplemental documentation to verify the information provided on the application. D. Fee Limitation. 1. The new rule prohibits the imposition of a charge, other than a fee limited to the cost of a credit report, to issue a GFE. No other fees may be charged, including without limitation an appraisal fee, inspection fee or fee for any other settlement service, until after the applicant receives the GFE. When a GFE is mailed to an applicant, the applicant is deemed to receive the GFE three calendar days after mailing, exclusive of Sundays and legal public holidays specified in 5 USC Section 6103(a). a. Pursuant to revisions to Regulation Z under the Truth in Lending Act that were adopted by the Federal Reserve Board in July 2008, and are effective October 1, 2009, other than a fee (that is bona fide and reasonable in amount) to obtain a credit report, no fee can be imposed on an applicant before the applicant receives the initial Truth in Lending disclosures. 2. The information that an applicant provides before the issuance of a GFE may not later be used to establish a changed circumstance that is an exception to the tolerance limits on fee changes, unless the loan originator can demonstrate that 3

4 E. GFE Contents. the information changed, the information was inaccurate, or the loan originator did not rely on the information. 1. The new rule shortens the GFE from the proposed four page version to three pages, and retains many of main elements from the proposal. In particular, the new GFE reflects the same basic format of the proposed form of GFE. 2. The main sections of the new GFE are as follows: a. The proposed Instructions section at the beginning of the GFE is replaced with a Purpose section that explains the purpose of the GFE and directs the consumer to sources of additional information. b. A Shopping for your loan section was moved to a more prominent location, as it now follows the Purpose section. The section contains loan shopping advisories for the consumer. c. An Important Dates section follows, with revisions from the proposed version of the section. The section provides for the disclosure of the time period that the interest rate and rate-related charges (if the rate is locked) are available, and the time period that the other settlement charges are available. i. As revised from the proposed version, the section provides for specifying a date and time (and not just a date) as the deadline for availability of these items. d. A Summary of your loan section follows the Important Dates section, and is similar to the proposed Summary of your loan terms section. The section provides for the disclosure of: i. The initial loan amount. ii. iii. iv. The loan term. The initial interest rate. The initial monthly amount owed for principal, interest and any mortgage insurance. v. Whether the interest rate can rise and, if so, the maximum possible rate during the loan term and period until the first rate change. 4

5 vi. vii. viii. ix. Whether the loan balance can rise even if payments are made on time and, if so, the maximum possible loan balance. Whether the monthly amount owed for principal, interest and any mortgage insurance can rise even if payments are made on time and, if so, when the first increase can occur, the maximum monthly payment after the first increase, and the maximum possible monthly payment during the loan term. Whether there is a prepayment penalty and, if so, the maximum penalty. Whether there is a balloon payment and, if so, the amount of the payment and the number of years until the payment is due. e. An Escrow account information section follows the Summary of your loan section, and provides for the disclosure of whether or not an escrow account is required. The proposed GFE included escrow account information in the Summary of your loan terms section. f. Consistent with the proposal, the second page of the new GFE provides for the disclosure of estimated charges in two main sections. The first section, Your Adjusted Origination Charges, addresses the compensation of the lender and mortgage broker, and the second section, Your Charges for All Other Settlement Services, addresses third party charges. i. HUD retained the proposed concept of disclosing lender-paid mortgage broker compensation as the charge or credit for the interest rate in the Your Adjusted Origination Charges section. This section, and the corresponding section of the HUD-1, are addressed in greater detail below. g. The Your Charges for All Other Settlement Services section provides for the disclosure of all other settlement service charges in nine main categories. i. Required services selected by the loan originator. A. The disclosure of each service, the estimated charge for each service identified, and the total amount of the estimated charges is required. ii. Title services and lender s title insurance. 5

6 A. The disclosure of each title service, premium and endorsement, the estimated charge for each service, premium and endorsement identified, and the total amount of the estimated charges is required. iii. Owner s title insurance. A. For purchase transactions, the disclosure of each premium and endorsement, the estimated charge for each premium and endorsement, and the total amount of the estimated charges is required. B. For non-purchase transactions, NA or Not applicable may be entered. iv. Required services that you can shop for. A. If the loan originator permits the borrower to shop for required services, the disclosure of each service, the estimated charge for each service identified, and the total amount of the estimated charges is required. Additionally, the loan originator must provide with the GFE, but on a separate sheet of paper, a list of settlement service providers. v. Government recording charges. A. The disclosure of the total of the estimated recording charges is required. B. The proposed form of GFE provided for a single disclosure of the combined government recording charges and transfer taxes. vi. Transfer taxes. A. The disclosure of the total of the estimated transfer fees on mortgages and homes sales is required. vii. Initial deposit for your escrow account. A. The disclosure of the total of the estimated deposit into the escrow or impound account is required. 6

7 B. By way of check boxes, whether all property taxes, all insurance and other specified items are included must be disclosed. C. If some, but not all, property taxes or insurance will be escrowed, the applicable taxes and insurance must be identified in the other blank. viii. Daily interest charges. A. The disclosure of the total of the estimated amount of daily or per diem interest is required. B. The per day amount of interest, the number of estimated days, and the anticipated settlement date must be shown. ix. Homeowner s insurance. A. The disclosure of any required hazard and similar insurance (such as flood insurance), the estimated premium for each required insurance, and the total of the estimated premiums for the required insurance is required. x. The total of the estimated charges for all of settlement services from the nine categories must be disclosed at bottom of page two. Additionally, the net amount of this total and the adjusted origination charges also must be disclosed. h. The third page of the new GFE begins with an Understanding which charges can change at settlement section, which is substantially similar to the proposed version of the section. The section explains charges subject to the 0% tolerance and the 10% overall tolerance, and charges that have no limit on changes. i. A Using the tradeoff table section follows, and is similar to the proposed Looking at trade-offs section. The section provides for a comparison of the disclosed loan with loans with a higher interest rate/lower settlement charges and with a lower interest rate/higher settlement charges. i. While the loan terms for the loan that is the subject of the GFE must be entered in the table, unlike the proposal, the completion of the remainder of the table is optional. The following language now appears with the table: Please ask for additional information if the table is not completed. 7

8 j. A Using the shopping chart section follows, and is substantially similar to the proposed version. The section is for completion by the consumer as a loan comparison tool. The loan originator is not required to enter information in this section. k. The GFE concludes with an If your loan is sold in the future section that is similar to the proposed section. The section notes that some lenders may sell the loan after settlement, and that any fees received by the lender in the future cannot change the consumer s loan or the charges paid at settlement. 3. The following sections from the proposed version of the GFE were not adopted: a. The proposed Getting more information section, although language that is similar to the proposed version of this section now appears in the Purpose section at the beginning of the new GFE. b. The Your financial responsibilities as a homeowner section that provided for disclosures regarding annual property taxes, homeowner s insurance and other items. c. The Applying for this loan section that provided for disclosure of how the consumer should contact the issuer of the GFE to apply for a loan, and the applicable charge to apply for a loan. The Purpose section of the new GFE contains a simple statement to contact the originator if the consumer decides to proceed with the loan. F. GFE Terms Availability. 1. General a. The new rule reflects the basic approach of the proposed rule regarding the initial availability of the terms in a GFE. b. The estimate of all settlement service charges must be available for at least 10 business days, except for: i. The interest rate. ii. The interest rate-dependent charges, which consist of: A. The credit or charge for the interest rate chosen. B. The adjusted origination charges. 8

9 C. The per diem interest. c. Section of the new rule refers to the 10 business day period as running from when the GFE is provided. The GFE Instructions in the new rule require that the GFE be dated, and that the GFE state the date until which the settlement service charges (other than the excepted charges) are available, which date must be at least 10 business days from the date of the GFE. Thus, it appears the intent is that the minimum 10 business day period is measured from the date the GFE is issued and not the date the GFE is actually received by the applicant. d. If the consumer does not express an intent to continue with an application within 10 business days after the GFE is provided, or such longer time as may be specified by the loan originator, the loan originator is no longer bound by the GFE. e. It appears from the new rule that as long as the consumer expresses an intent within the 10 business day-period to continue with an application for the loan reflected in the GFE, the charges set forth in the GFE may not increase, subject to tolerances and exceptions. The new rule does not address whether the loan originator can require that the intent be expressed in a certain manner, such as a written statement, within that time period for the originator to remain bound by the GFE. f. The interest rate and interest rate-dependent charges are available for the period specified by the loan originator i. If the interest rate is locked, then the rate and the rate-dependent charges may not change during the period that the lock is effective, subject to changed circumstances and other exceptions. ii. HUD advises in the preamble to the new rule that if a GFE is issued before the rate is locked, a revised GFE would be issued once the rate is locked to show the revised information. 2. Changed Circumstances and Other Exceptions. Subject to the tolerances and, for interest rate-dependent charges, the rate lock, a loan originator is bound by the GFE unless, based on changed circumstances or other exceptions, the loan originator provides a revised GFE within three business days of the applicable event, or the originator rejects the loan. If the loan originator elects to issue a revised GFE, the reason that a new GFE was provided must be documented, and the documentation must be retained for three years after settlement. a. Changed Circumstances. HUD revised the concept of unforeseeable circumstances in the proposed rule to changed circumstances. HUD 9

10 explains in the preamble to the new rule that many of the changes described in the proposed definition of unforeseeable circumstances happen frequently enough that they could be reasonably foreseen. HUD also modified the definition. i. Changed circumstances is defined as: A. Acts of God, war, disaster or other emergency. B. Information particular to the borrower or transaction that was relied on in providing the GFE and that changes or is found to be inaccurate after the GFE has been provided. This may include information about the credit quality of the borrower, the amount of the loan, the estimated value of the property, or any other information that was used in providing the GFE. C. New information particular to the borrower or transaction that was not relied on in providing the GFE. D. Other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems. ii. The following do not constitute changed circumstances : A. The borrower s name, the borrower s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in a credit report obtained by the loan originator prior to providing the GFE, unless the information changes or is found to be inaccurate after the GFE has been provided. i. HUD advises in the preamble to the new rule that because these specific information items are the minimum items that must be received by loan originators to provide a GFE, loan originators are presumed to have relied on such information when issuing a GFE and, therefore, the items may not form the basis for a changed circumstance unless the information changes or is found to be inaccurate. B. Market price fluctuations by themselves. 10

11 i. HUD provides in the preamble to the new rule as an example of a market price fluctuation a situation in which the appraiser that the loan originator intends to use for a loan raises its prices by $50 after the loan originator issued the GFE for the loan. iii. iv. If changed circumstances result in increased costs for any settlement services that would exceed the applicable tolerances, to avoid being bound by the GFE the loan originator must provide a revised GFE to the borrower within three business days of receiving information sufficient to establish changed circumstances. Charges may increase only to the extent the changed circumstances resulted in higher charges. If changed circumstances result in a change in the borrower s eligibility for the specific loan terms identified in the GFE, to avoid being bound by the GFE the loan originator must provide a revised GFE to the borrower within three business days of receiving information sufficient to establish changed circumstances. b. Borrower-Requested Changes. If a borrower requests changes to the loan identified in the GFE that change the settlement charges or the terms of the loan, to avoid being bound by the GFE the loan originator must provide a revised GFE to the borrower within three business days of the borrower s request. i. HUD states in the preamble to the new rule that this exception applies whether the change is first suggested by the loan originator or any other party. c. New Home Purchases. When the settlement on a newly constructed home is anticipated to occur more than 60 days from the time that a GFE is provided, the loan originator may provide the GFE to the borrower with a clear and conspicuous disclosure stating that at any time up until 60 days prior to closing the loan originator may issue a revised GFE. Failure to provide such separate disclosure precludes the loan originator from issuing a new GFE under the new home exception. 3. GFE Is Not a Loan Commitment. a. The new rule provides that nothing in the section that sets forth the GFE requirements shall be interpreted to require a loan originator to make a loan to a particular borrower. 11

12 G. GFE Tolerances. b. The new rule also provides that a loan originator is not required to provide a GFE if the loan originator does not have available a loan for which the borrower is eligible. c. These provisions were not contained in the proposed rule. In fact, HUD stated in the preamble to the proposed rule that once a GFE is issued a borrower may not be rejected unless the loan originator determines that there is a change in the borrower s eligibility based on final underwriting, as compared to information provided in the GFE application and credit information developed for such application prior to the time that the borrower chose the originator. 1. 0% Tolerance. Absent changed circumstances or an exception, no change is permitted in the following charges: a. The loan originator s origination charge. b. While the interest rate is locked, the credit or charge for the interest rate chosen. c. While the interest rate is locked, the adjusted origination charge. d. Government transfer taxes % Tolerance. Absent changed circumstances or an exception, no more than a 10% increase is permitted for the sum of the following charges (the tolerance is applied to the sum of all the charges, not to each individual charge): a. Lender-required settlement services, when the lender selects the third party settlement service provider. b. Lender-required services, title services and required title insurance, and owner s title insurance, when the borrower uses a settlement service provider identified by the loan originator. i. Although the language of the new rule refers to lender-required services, apparently the intent is to refer to lender-required settlement services. c. Government recording charges. 12

13 3. No Limit. Any remaining settlement service charges may change without limitation. H. Multiple Loans. 1. A separate GFE must be provided for each loan when a transaction with involve more than one mortgage loan. I. Required Provider Disclosure. 1. Under the current rule, if the lender will require the use of particular provider to perform a settlement service, certain information regarding the provider must be disclosed. a. There is an alternate disclosure method for cases in which the lender may choose from at least five providers to perform a specific settlement service. 2. The new RESPA rule eliminates the required provider disclosure requirement. J. Violation and Cure. 1. A violation of the GFE requirements is considered a violation of RESPA Section 5. Although there currently is no express statutory damages or penalties available for a violation of Section 5, HUD plans to request that Congress revise RESPA to add damage and/or penalty provisions to various requirements. 2. If any charges at settlement exceed the applicable tolerances, a loan originator could cure the tolerance violation by reimbursing to the borrower the excess at or within 30 calendar days after settlement. Placing a payment in the mail within the 30-day period would be deemed timely reimbursement. II. HUD-1/HUD-1A and Closing Script A. Closing Script Replaced With Charge Comparison and Loan Summary. 1. The proposed closing script to the HUD-1/HUD-1A is eliminated. In its place, the modified settlement statements now include: a. A comparison of changes between the charges in the GFE and charges in the HUD-1/HUD-1A broken down into three categories: i. Charges that cannot increase (i.e., charges subject to the 0% tolerance). 13

14 ii. iii. Charges that cannot increase in total by more than 10% (i.e., charges subject to the overall 10% tolerance). Charges that can change without any limitation. B. Seller-Paid Fees. b. A brief summary of loan terms that is similar to the summary in the GFE (which is discussed above). 1. The general rule is that charges that are paid for by the seller must be shown in the seller s column on page 2 of the HUD-1 (unless paid outside of closing). 2. There is an exception to promote comparability between the GFE and HUD-1. If a seller pays for a charge that was included on the GFE: C. P.O.C. Items. a. The charge must be listed in the borrower s column on page 2 of the HUD-1; b. The charge must then be offset by listing a credit to the borrower in the amount of charge on one of the blank lines in lines 204 to 209 of the HUD-1; and c. The charge must be included as a seller charge on one of the blank lines in lines 506 to 509 of the HUD The new rules expressly provides that for items paid out of closing (P.O.C.), the settlement agent must show the party making the payment, such as P.O.C. (borrower). D. HUD-1/HUD-1A Violation and Cure. 1. A violation of the HUD-1/HUD-1A requirements, including the average charge requirements that are discussed below, is considered a violation of RESPA Section 4. Although there currently are no express statutory damages or penalties available for a violation of Section 4, HUD plans to request that Congress revise RESPA to add damage and/or penalty provisions to various requirements. 2. An inadvertent or technical error in completing the HUD-1/HUD-1A could be cured if a revised HUD-1/HUD-1A is provided in accordance with the requirements of the new rule within 30 calendar days after settlement. 14

15 III. Mortgage Broker and Lender Compensation A. Mortgage Broker Definition. 1. The new rule revises the definition of mortgage broker to read: a person (not an employee of a lender) or entity that renders origination services and serves as an intermediary between a borrower and a lender in a transaction involving a federally related mortgage loan, including such a person or entity that closes the loan in its own name in a table funded transaction. A loan correspondent approved under 24 CFR for Federal Housing Administration programs is a mortgage broker for purposes of this part. 2. Under the existing definition of mortgage broker an employee and an exclusive agent of a lender are expressly excluded from the definition. Thus, the new rule removes the exclusion for an exclusive agent of a lender. 3. The inclusion in the revised definition of a person or entity that closes a loan in its own name in a table funded transaction appears to reflect the existing treatment of such a party in a table funded transaction. 4. The new rule also defines the term origination service that is used in the revised mortgage broker definition. Origination service means any service involved in the creation of a mortgage loan, including but not limited to the taking of the loan application, loan processing, and the underwriting and funding of the loan, and the processing and administrative services required to perform these functions. B. Mortgage Broker Compensation/Lender Fees. 1. Approach. Both the GFE and HUD-1 would contain three related disclosures designed to provide for the disclosure of the compensation of the lender and mortgage broker, including any lender-paid compensation to the broker: a. Our origination charge. b. Your credit or charge (points) for the specific interest rate chosen. c. Your adjusted origination charges. 2. Our Origination Charge. This includes all charges that loan originators involved in the transaction will receive, except for any charge (points) for the rate chosen (although in a transaction without a mortgage broker, the lender may include the points in this disclosure). a. A loan originator may not separately charge any additional fees for getting the loan, including for application, processing or underwriting. 15

16 b. The 0% tolerance applies to this charge. c. In the GFE, the charge is disclosed in Block 1 of the Your Adjusted Origination Charges section. d. In the HUD-1/HUD-1A, the charge is disclosed in Line 801, but not in either the borrower s or seller s columns. 3. Your Credit or Charge (Points) for the Specific Interest Rate Chosen a. Disclosure of the Credit or Charge. i. In the GFE, the credit or charge is disclosed in Block 2 of the Your Adjusted Origination Charges section. Block 2 contains three check boxes: A. The first check box would be used to indicate when the credit or charge for the specified interest rate is included in the amount disclosed for Our origination charge. B. The second check box would be used to indicate that the borrower will receive a credit of a specified dollar amount for the specified interest rate, and that the credit reduces the settlement charges. 1. If this box is checked, then the third box cannot be checked because there cannot be a credit and charge in the same transaction. C. The third check box would be used to indicate that the borrower must pay a specified dollar charge for the specified interest rate, and that the charge will increase the settlement charges. 1. If this box is checked, then the second box cannot be checked because there cannot be a credit and charge in the same transaction. ii. When no mortgage broker is involved, the lender may choose not to separately disclose any credit or charge for the rate chosen. If the lender so chooses, it must check the first box that reflects the credit or charge for the specified interest rate is included in the amount disclosed for Our origination charge. 16

17 iii. iv. In the HUD-1/HUD-1A, the credit or charge would simply be entered in Line 802, but not in either the borrower s or seller s columns. When the interest rate is locked, the credit or charge is subject to the 0% tolerance. A. This means that the credit cannot decrease in absolute value terms and any charge for the interest rate chosen cannot increase. b. Computation of the Credit or Charge (Points). i. Instructions for the GFE. A. When a mortgage broker is involved, the credit or charge for the specific interest rate chosen is the net payment to the mortgage broker from the lender. 1. The net payment to the mortgage broker is the sum of all payments to the mortgage broker from the lender, including payments based on the loan amount, a flat rate, or any other computation. 2. In a table funded transaction, the net payment is the loan amount less the price paid for the loan by the lender. B. There is a charge to the borrower when the net payment to the mortgage broker from the lender is negative, and the charge is entered as a positive amount in the GFE. C. There is a credit to the borrower when the net payment to the mortgage broker from the lender is positive, and the credit is entered as a negative amount in the GFE. D. If there is no net payment to the mortgage broker, the broker may check either the credit or charge box and enter 0. ii. Instructions for HUD-1. A. The credit or charge for the specific interest rate chosen is entered on Line 802, but not in either the borrower s or seller s columns. 17

18 B. When a mortgage broker will originate a loan in its own name (i.e., a table funded transaction), the amount shown on Line 802 will be the difference between the initial loan amount and the total payment to the mortgage broker from the lender. C. When a mortgage broker will originate a loan in another entity s name (i.e., a non-table funded transaction), the amount shown on Line 802 will be the sum of all payments to the mortgage broker from the lender, including any payments based on the loan amount or loan terms, and any flat rate payment. D. With both table funded transactions and non-table funded transactions, when: 1. the amount paid to the mortgage broker exceeds the initial loan amount, there is a credit to the borrower and it is entered as a negative amount ; and 2. the initial loan amount exceeds the amount paid to the mortgage broker, there is a charge to the borrower and it is entered as a positive amount. E. The instructions to the GFE expressly provide that if no mortgage broker is involved, the lender may elect to include the credit or charge for the specific interest rate in the origination charge disclosure. The HUD-1/HUD-1A instructions do not include the same express instruction, although the instructions provide that for a lender, the amount shown on Line 802 may include any credit or charge to the borrower. iii. Further guidance from HUD on the calculation of the credit or charge would be helpful. 4. Your Adjusted Origination Charges a. Your adjusted origination charges is the sum of Our origination charge and Your credit or charge (points) for the specific interest rate chosen, and will be a positive or negative number entered in the GFE and HUD- 1/HUD-1A. 18

19 b. In the GFE,, the charge is disclosed in Block 3 of the Your Adjusted Origination Charges section. i. In the HUD-1/HUD-1A, the number would be entered in Line 803, but not in the borrower s or seller s columns. b. When the interest rate is locked, the amount is subject to the 0% tolerance. IV. Required Use A. As proposed, HUD narrowed the current definition of required use, although the new definition differs in some respects from the proposed definition: 1. The current definition of required use is as follows: Required use means a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process. 2. HUD proposed to revise the definition to read as follows: Required use means a situation in which a borrower s access to some distinct service, property, discount, rebate or other economic incentive, or the borrower s ability to avoid an economic disincentive or penalty, is contingent upon the borrower using or failing to use a referred provider of settlement services. However, the offering by a settlement service provider of an optional combination of bona fide settlement services to a borrower at a total price lower than the sum of the prices of the individual settlement services does not constitute a required use. 3. The new version of the definition adopted by HUD is as follows: Required use means a situation in which a person s access to some distinct service, property, discount, rebate or other economic incentive, or the person s ability to avoid an economic disincentive or penalty, is contingent upon the person using or failing to use a referred provider of settlement services. In order to qualify for the affiliated business arrangement exemption under , a 19

20 settlement service provider may offer a combination of bona fide settlement services at a total price (net of the value of the associated discount, rebate, or other economic incentive) lower than the sum of the market prices of the individual settlement services and will not be found to have required the use of the settlement service providers as long as: (1) the use of any such combination is optional to the purchaser; and (2) the lower price for the combination is not made up by higher costs elsewhere in the settlement process. B. HUD explains its position on required use in the preamble to the new rule: The change to the definition of required use will not eliminate the ability of anyone to offer legitimate consumer discounts. HUD does not interpret RESPA as preventing a settlement service provider or anyone else from offering a discount or other thing of value directly to the consumer. However, RESPA and this final rule limit tying such a discount to the use of an affiliated settlement service provider. HUD believes that consumers will utilize affiliated and preferred businesses if the costs of using those businesses are lower than the costs associated with similar services from other providers. 1. HUD appears to be applying antitrust concepts of tying to RESPA and the affiliated business arrangement exemption. 2. The introductory language to the second sentence is confusing. Likely HUD did not intend to in fact require that incentives be offered in order to qualify for the affiliated business arrangement exemption. Presumably, the intent is that if an incentive is offered by a party in an affiliated business arrangement, the incentive must satisfy the conditions in the definition. 3. HUD modified the reference to borrower in the proposed definition to person. Parties commenting on the proposal noted that the proposed language appeared to restrict incentives to borrowers, which would exclude sellers of homes from being able to receive incentives. 4. The new rule appears to retain the concept of the proposal that only settlement service providers may offer incentives, and that incentives are limited to a reduction in settlement costs. V. Average Charge Pricing A. HUD adopted the proposed concept of average cost pricing, which is now named average charge pricing, with revisions regarding the application and administration of the concept. Parties can use the new average charge pricing authority effective January 16, 2009 without using the new forms of HUD-1 or HUD-1A (although use of the new forms is required by January 1, 2010). Among revisions made to the proposal are: 20

21 1. The expansion of the ability to use average charge pricing from only loan originators to any settlement service providers. 2. The expansion of the ability use average charge pricing from only amounts charged to borrowers to amounts charged to borrowers and sellers. 3. The concept now focuses more on the amount charged to the borrower rather than the underlying costs of providing a settlement service. 4. Charges that vary based on the loan amount or property value are expressly excluded from average charge pricing. 5. The amount stated in the HUD-1 for any itemized service cannot exceed the amount actually received by the settlement service provider for that service, unless the charge is an average charge calculated in accordance with the new rule. a. Note that this provision effectively adds to Regulation X HUD s position that RESPA Section 8(b) prohibits a settlement service provider from simply marking-up the fee of another settlement service provider. B. If an average charge for a service is disclosed in the HUD-1: 1. The average charge may not exceed the average amount paid by for the service by one settlement service provider to another settlement service provider on behalf of borrowers and sellers for a particular class of transactions involving federally related mortgage loans; and 2. The total amounts paid by borrowers and sellers for a settlement service based on the use of an average charge may not exceed the total amounts paid to the providers of that service for the particular class of transactions. C. A particular class of transactions must be defined for purposes of calculating the average charge as all transactions involving federally related mortgage loans for: 1. A period of time as determined by the settlement service provider, but not less than 30 calendar days and not more than six months; 2. A geographic area as determined by the settlement service provider; and 3. A type of loan as determined by the settlement service provider. D. If an average charge is used for transactions in a particular class, the same average charge must be used for every transaction within the class for which a GFE is provided. 21

22 E. When a settlement service provider uses average charge pricing, the provider must retain all documentation used to calculate the average charge for a particular class of transactions for at least three years after any settlement for which the average charge was used. VI. Volume Discounts A. HUD did not adopt the proposed concept of excluding negotiated discounts, which could include volume discounts, from the definition of thing of value. B. HUD advises in the preamble to the new rule that, based on comments submitted on the proposal, it has decided to give further consideration beyond this rulemaking to a regulatory change that explicitly allows negotiated discounts, including volume discounts.... HUD wants to ensure that any change will adequately protect consumers, while at the same time provide adequate market flexibility, and due consideration to small business concerns. C. Significantly, HUD also states in the preamble that: It remains HUD s position... that discounts negotiated between loan originators and other settlement service providers, or by an individual settlement service provider on behalf of a borrower, where the discount is ultimately passed on to the borrower in full, is not, depending upon the specific circumstances of a particular transaction, a violation of Section 8 of RESPA. If the borrower fully benefits from the discount, these types of mechanisms that lower consumer costs are within RESPA s principal purposes. VII. Title Service A. The new rule adds a definition of title service. The term is defined as: any service involved in the provision of title insurance (lender s or owner s policy), including but not limited to: title examination and evaluation; preparation and issuance of title commitment; clearance of underwriting objections; preparation and issuance of a title insurance policy or policies; and the processing and administrative services required to perform these functions. The term also includes the service of conducting a settlement. B. It is not clear if the statement that the term title service also includes the service of conducting a settlement is intended to modify the concept of core title services set forth in Statement of Policy In the Statement of Policy, HUD advises that in order to qualify for the title agent compensation exemption to RESPA Section 8, a title agent must perform core title services. The Statement of Policy provides that conducting the settlement is part of core title services when it is customary in the area for title agents to perform settlements and the agent s compensation for performing settlements is customarily part of the payment or retention from the title insurer. 22

23 C. As proposed, the HUD-1 now requires that the agent s portion and underwriter s portion of the title insurance premium be disclosed on separate lines. VIII. Mortgage Servicing Disclosure A. In 1996 RESPA Section 6 was amended to remove the detailed disclosure requirements for the up front Servicing Disclosure Statement and to require simply a statement as to whether the servicing of the loan may be assigned, sold or transferred to any other person at any time while the loan is outstanding. In May of 1997 HUD proposed to amend Regulation X to reflect the statutory change. B. The new rule amends Regulation X to reflect the statutory change. 1. A lender, mortgage broker who anticipates using table funding, or a dealer who anticipates a first lien dealer loan, must provide the up front Servicing Disclosure Statement. 2. A revised form of a Servicing Disclosure Statement is included in the new rule. The use of the specific language in the Statement is not required. Additionally, the model format may be annotated with additional information that clarifies or enhances the model language. 3. The revised Servicing Disclosure Statement does not provide for disclosure of the detailed information required by the existing Servicing Disclosure Statement. Rather, the revised Servicing Disclosure Statement contains the following model provisions for different situations: a. We may assign, sell, or transfer the servicing of your loan while the loan is outstanding. b. We do not service mortgage loans of the type for which you applied. We intend to assign, sell, or transfer the servicing of your mortgage loan before the first payment is due. c. The loan for which you have applied will be serviced at this financial institution and we do not intend to sell, transfer, or assign the servicing of the loan. C. Additionally, the new rule modifies the existing requirements for the Servicing Disclosure Statement by: 1. Eliminating the need to deliver the Statement at the time of application in the case of a face-to-face application. 23

24 2. Eliminating the requirement that each applicant sign an acknowledgment of receipt of the Statement. 3. Expressly providing that the Statement does not have to be issued if the application is denied within three business days of receipt HRJA7354OTH 24