How the New RESPA Rule Impacts Wholesale Lending By Richard Andreano, Jr. 1
Overview of Presentation Focus on certain aspects of revised RESPA regulation, Regulation X, that are scheduled to become effective on January 1, 2010. Still in statutory Congressional review period. Obama administration is reviewing all regulatory efforts near end of Bush administration. Two lawsuits filed so far. Change in definition of mortgage broker. Review of new GFE and related rules. Examine impact on wholesale lending. Brief summary of HUD-1 changes. 2
Mortgage Broker Definition The definition of mortgage broker was revised: 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 202.8 for Federal Housing Administration programs is a mortgage broker for purposes of this part. Exclusion for exclusive agent of a lender was removed. Now includes an express statement regarding table funding, but clarification needed. Use of undefined term intermediary. Use of new defined term origination service. Origination service: 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. 3 Scheduled effective date of new definitions is January 1, 2010.
New GFE Overview Significant change in format. Three page form with thirteen main sections. To be provided by the loan originator, which is defined as a lender or mortgage broker. If the mortgage broker provides a GFE, the lender is not required to provide another GFE. The lender is responsible for ascertaining that a GFE was provided. The scheduled compliance date for the new GFE and related rules is January 1, 2010. If you use the new GFE before that date, you still must comply with all the related rules. If you use the new GFE before that date, the revised HUD-1 or HUD-1A must be used. 4
New GFE Application Trigger A loan originator must provide a GFE not later than 3 business days after it receives an application or information sufficient to complete an application. An application: The submission of a borrower s financial information in anticipation of a credit decision, which shall include: Borrower s name. Borrower s monthly income. Borrower s social security number to obtain a credit report. Property address. Estimate of the property s value. Mortgage loan amount sought. Any other information deemed necessary by the loan originator. No fee may be charged as a condition for providing a GFE, except a fee limited to the cost of a credit report. 5
New GFE Page One 1. Transaction Identification Section: Originator name and contact Information. Borrower name and subject property. GFE date, which will be key in defining the period that the GFE terms are available. 2. Purpose Section: Explains the purpose of the GFE, identifies sources of additional information and advises how to proceed. 3. Shopping for Your Loan Section: Advises that only the consumer can shop for the best loan for him or her. 6
New GFE Page One 4. Important Dates Section: Specify the date and, at your option, the time through which the interest rate and certain rate-dependent charges are available. Interest rate-dependent charges: The credit or charge for the interest rate chosen. The adjusted originated charges. The per diem interest. The loan originator is free to specify the rate availability period before the rate lock. The rate lock governs once the rate is locked. Specify the date through which all other charges are available. Minimum 10 business day period. Specify rate lock timeframes. Provide the rate lock period that will apply once the rate is locked. If applicable, note the minimum time to lock before settlement. 7
New GFE Page One 5. Summary of Your Loan Terms Section: Addresses nine elements of the loan. For the interest rate, you enter the note rate and not the APR. 6. Escrow Account Information Section: Addresses whether the loan includes a monthly escrow or impound account for payment of taxes and insurance. 7. Summary of Your Settlement Charges Section: Block A: The adjusted origination charges from Block A on page 2 Block B: The total of all other settlement charges from Block B on page 2. 8 Block A+B: The sum of the two amounts.
New GFE Page Two 8. Your Adjusted Origination Charges Section: HUD s intent is to reflect the relationship between the interest rate and the settlements costs, including a yield spread premium paid to a mortgage broker, and to combine all of the various loan origination charges into a single charge. Block 1: Subject to an exception, this block must include all origination charges of the lender and, if applicable, the mortgage broker (e.g., application fee, processing fee, origination fee, underwriting fee, etc.). When there is no mortgage broker, the lender can elect to (a) include in the Block 1 amount any credit for the interest rate chosen, or (b) disclose any such credit in Block 2. When there is a mortgage broker, any credit (such as a yield spread premium) must be disclosed in Block 2. Block 2: To reflect that there is a credit for the rate chosen, check the second box and insert the dollar amount of the credit and the interest rate in the applicable blanks. In Block 2, enter the credit as a negative dollar amount. To reflect that there is a charge (or points) for the rate chosen, check the third box and insert the dollar amount of the points and the interest rate in the applicable blanks. In Block 2, enter the charge as a positive dollar amount. The second and third boxes are like radio buttons. You can check one or the other, not both. Block A: The total of Block 1 and Block 2. 9
New GFE Page Two 8. Your Adjusted Origination Charges Section Examples: Example 1: $100,000 loan with no points, total lender fees of 1.5% and the only broker compensation is a yield spread premium of 2%. Block 1, Our origination charge: Enter $3,500 ($1,500 in lender fees plus the $2,000 yield spread premium). Block 2, Your credit or charge (points) for the specific interest rate chosen: Complete the second check box, and enter a credit of $2,000 and the note rate in the blanks. In Block 2 enter a negative $2,000 (the $2,000 yield spread premium). Block A, Your Adjusted Origination Charges: Enter $1,500 ($3,500 from Block 1, less $2,000 from Block 2). Example 2: $100,000 loan with 2 points to buy down the rate, total lender fees of 1.5% and a broker fee of 1.0% Block 1, Our origination charge: Enter $2,500 ($1,500 in lender fees plus the $1,000 broker fee). Block 2, Your credit or charge (points) for the specific interest rate chosen: Complete the third check box, and enter a charge of $2,000 and the note rate in the blanks. In Block 2 enter $2,000 (the $2,000 in points). Block A, Your Adjusted Origination Charges: Enter $4,500 ($2,500 from Block 1, plus $2,000 from Block 2). For the loan originator compensation, the revised HUD-1 follows the format of the new GFE and provides for disclosure of: Our origination charge, Your credit or charge (points) for the specific interest rate chosen, and Your adjusted origination charges. As we will address, tolerances (i.e., limits on changes) apply to these charges and other GFE charges. 10
New GFE Page Two 9. Your Charges for All Other Settlement Services Section: Block 3. Required services that we select: For the services required by the loan originator for which the originator will select the provider, list each applicable service and the estimated charge for each service and enter the total amount in Block 3. Block 4. Title services and lender s title insurance: Enter the total estimated charge for all title services, premiums and endorsements in Block 4. Block 5. Owner s title insurance: For purchase transactions, enter the total estimated charge for all title premiums and endorsements in Block 5. For non-purchase transactions, you may enter NA or Not Applicable. 11
New GFE Page Two 9. Your Charges for All Other Settlement Services Section: Block 6. Required services that you can shop for: For the services required by the loan originator for which the borrower can select the provider, list each applicable service and the estimated charge for each service, and enter the total amount in Block 6. The loan originator must provide the borrower with a separate list of the applicable providers. Block 7. Government recording charges: Enter the total estimated recording charges in Block 7. Do not enter transfer taxes. Block 8. Transfer taxes: Enter the total estimated transfer taxes in Block 8. Block 9. Initial deposit for your escrow account: Enter the total required escrow or impound deposit at closing in Block 9. Indicate if the required escrow or impound deposits are for all property taxes, all insurance and any other specified items. If deposits are required for some, but not all, property taxes or insurance, do not use the all box. Check the other box and identify the applicable taxes or insurance. 12
New GFE Page Two 9. Your Charges for All Other Settlement Services Section: Block 10. Daily interest charges: Enter the total daily or per diem interest in Block 10. In the blanks enter the amount of interest for each day, the number of estimated days and the anticipated settlement date. Block 11. Homeowner s insurance: List each required hazard or similar insurance, such as flood insurance, and the estimated premium for each required insurance. Enter the total of the estimated premiums in Block 11. Block B. Your Charges for All Other Settlement Services: Enter the total estimated charges from Block 3 through Block 11. Block A + B, Total Estimated Settlement Charges: Enter the sum of Block A (Your Adjusted Origination Charges) and Block B. 13
New GFE Page Three 10. Understanding Which Charges Can Change at Settlement Section: This section explains the applicable limits, or tolerances, on changes in estimated fees. There is no need to enter information in this section. 14
New GFE Page Three 11. Using the Tradeoff Table Section: The intent of this section is to demonstrate the relationship between the interest rate and the settlement costs. The loan originator must enter basic information about the loan covered by the GFE in the left column. The completion of the remainder of the table is optional. The center column is for an alternate loan with lower settlement charges and a higher interest rate. The right column is for an alternate loan with higher settlement charges and a lower interest rate. If you elect to add information on alternate loans: The information must be for loans that you actually would offer. The alternate loans must be identical to the loan covered by the GFE, except for the interest rate and settlement costs. 15
New GFE Page Three 12. Using the Shopping Chart Section: This section is for completion by the consumer as a loan comparison tool. There is no need for you to enter information in this section. 13. If Your Loan is Sold in the Future Section: This section notes that a future loan sale will not change the loan or the charges paid at settlement. 16
New GFE Acceptance/Tolerances If the borrower expresses an intent to continue with the application within the 10 business day period after the GFE is issued (or longer period, if applicable), then the loan originator is bound by the GFE, subject to tolerances and exceptions. The new GFE rules divide charges into three categories: Charges that may not change unless an exception applies. Charges that, as a group, may not increase more than 10%, unless an exception applies. Charges that may change without limitation. 0% Tolerance: Unless an exception applies, the following charges may not increase: Government transfer taxes. The origination charge. When the interest rate is locked: The charge for the rate chosen (if there is a credit for the rate chosen, it may not decrease). The adjusted origination charge. 17
New GFE Tolerances 10% Tolerance: Unless an exception applies, the following charges may not, as a whole, increase by more than 10%: Charges for loan originator-required settlement services, when the loan originator selects the settlement service provider. Charges for loan originator-required settlement services, title services, required title insurance and owner s title insurance, when the borrower uses a settlement service provider identified by the loan originator. Government recording charges. No Limitation: Any remaining settlement service charges may change without limitation. Statutory requirement to provide a good faith estimate still will apply. 18
New GFE Tolerances, Exceptions If an exception applies, then charges affected by the exception may change without regard to the tolerances. The exceptions: Changed circumstances. Borrower-requested changes. New home purchases. Changed circumstances definition: Acts of God, war, disaster, or other emergency. 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.) New information particular to the borrower or transaction that was not relied on in providing the GFE. Other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems. 19
New GFE Tolerances, Exceptions Changed circumstances do not include: The minimum elements that trigger the need to provide a GFE the borrower s name, the borrower s monthly income, the property address, an estimate of the property s value, the mortgage loan amount sought, any information contained in any credit report obtained prior to providing the GFE, unless the information changes or is found to be inaccurate after the GFE is provided. Basically, you are deemed to have relied on this information. What if you received other information before providing a GFE and relied on the information? What if you received other information before providing a GFE, but did not rely on the information? Market price fluctuations by themselves. Example, the appraisal firm that the loan originator intends to use raises its prices by $50 after the GFE is issued. 20
New GFE Tolerances, Exceptions Changed circumstances affecting settlement costs: If changed circumstances would increase settlement charges beyond the applicable tolerance(s), a revised GFE may be provided. If a revised GFE is provided, it must be provided within 3 business days of receiving information sufficient to establish changed circumstances. The revised GFE may increase charges only to the extent the changed circumstances actually result in higher charges. Changed circumstances affecting loan: If changed circumstances result in a change in the borrower s eligibility for the specific loan terms identified in the GFE, a revised GFE may be provided. If a revised GFE is provided, it must be provided within 3 business days of receiving information sufficient to establish changed circumstances. When there are changed circumstances, an originator can deny the loan issuing a revised GFE is not required. To issue a revised GFE based on changed circumstances, you must document the reasons for the revision and retain the documentation for 3 years. 21
New GFE Tolerances, Exceptions Borrower-requested changes: If the borrower requests changes to the mortgage loan identified in the GFE that change the settlement charges or terms of the loan, a revised GFE may be provided. When the borrower requests a change, an originator can deny the loan issuing a revised GFE is not required. If a revised GFE is provided, it must be provided within 3 business days of the borrower s request. New home purchase: 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 separate, clear and conspicuous disclosure stating that at anytime up until 60 days prior to closing the loan originator may issue a revised GFE. If such a separate disclosure is not provided, a revised GFE may not be issued pursuant to this exception. To issue a revised GFE based on the borrower-requested change or new home exceptions, you must document the reasons for the revision and retain the documentation for 3 years. 22
New GFE Violation and Cure A violation of the GFE requirements will be considered a violation of RESPA Section 5. Currently there are no express statutory damages or penalties applicable to a Section 5 violation. HUD plans to request that Congress revise RESPA to add damages and/or penalties for violations. The Housing and Economic Recovery Act of 2008 requires HUD to submit to Congress by January 30, 2009 recommendations on reforms to RESPA to promote more transparent disclosures that would allow consumers to better shop and compare mortgage terms and settlement costs. The new rule includes a cure provision: If the charges at settlement exceed the GFE charges by more than the permitted tolerances, the loan originator may cure the tolerance violation by reimbursing the borrower the amount by which the tolerance was exceeded. The reimbursement must be made at or within 30 calendar days after settlement. A borrower is deemed to have received timely reimbursement if the loan originator delivers or places the payment in the mail within 30 calendar days after settlement. 23
New GFE Why is the NAMB Suing This is why: Your Adjusted Origination Charges Section of the new GFE, and corresponding provisions of the revised HUD-1. As noted above, HUD s intent is to reflect the relationship between the interest rate and the settlements costs, including a yield spread premium paid to a mortgage broker, and to combine all of the various loan origination charges into a single charge. When there is a mortgage broker, there must be separate disclosures of the origination charge and the charge or credit for the interest rate chosen. When there is only a lender, there is the option to disclose the charge or credit for the interest rate chosen as part of the origination charge, or to disclose the charge or credit separately. The NAMB is challenging the more detailed disclosure requirement for mortgage brokers. The NAMB believes that the required disclosures will confuse consumers and detract from their ability to comprehend mortgage loans and comparison shop. 24
New GFE Lenders and Brokers As noted above, the new rule provides that if the mortgage broker provides a GFE, the lender is not required to provide another GFE. The lender is responsible for ascertaining whether a GFE was provided. The new rule does not detail the interaction between a broker and lender regarding the issuance of a GFE by a broker and the acceptance of a GFE by a lender. It appears that if a lender accepts the GFE issued by a broker, the lender is bound by the GFE as if the lender had issued the GFE. A lender likely would not accept a broker-issued GFE unless the GFE accurately reflects the lender s loan products and charges. The new rule does not expressly address what happens if no lender will accept the GFE issued by a broker. The new rule also does not expressly address whether a lender can accept a broker-issued GFE subject to revisions. HUD has advised informally that lenders and brokers need to coordinate the issuance of GFEs. 25
New GFE Lenders and Brokers Coordination certainly will be key. Need to determine what information will be required to constitute an application upon which a GFE is issued. The information a broker must collect to estimate fees and provide loan details likely will differ depending on the potential lender(s). Limits on fee changes and the need for loan details requires greater broker knowledge of lender fees, loan products and related policies. Trade off table inclusion of alternate loans. Lenders may impose restrictions regarding settlement service providers selected or identified to the borrower by the broker, because the fees of such providers are subject to the 10% tolerance. If the new GFE is used the new HUD-1 also must be used, so brokers, lenders and settlement agents need to coordinate implementation of the new forms. 26
New GFE Lenders and Brokers The new GFE requirements likely will change many lenderbroker relationships. It is likely that many wholesale lenders will: Evaluate the number of broker relationships that they maintain. Evaluate broker qualification requirements. Evaluate broker agreements and broker obligations. Because of this, brokers need to be proactive rather than reactive. 27
Revised HUD-1/HUD-1A Overview While the HUD-1 and HUD-1A were revised, the basic format of the forms remains intact. The forms still provide for the itemization of fees. The changes include: A cross reference on various lines to the appropriate GFE Block in which the corresponding estimated fee was disclosed. A different approach to itemizing certain charges. The addition of a new page that compares the GFE and HUD-1/HUD-1A charges and summarizes the loan. The scheduled compliance date for the revised HUD- 1/HUD-1A and related rules is January 1, 2010. If you use the revised HUD-1/HUD-1A before that date, you still must comply with all the related rules. You cannot use the revised HUD-1/HUD-1A before that date unless the new GFE is used as well. 28
Thank you. Richard Andreano, Jr. Weiner Brodsky Sidman Kider PC Washington, DC andreano@wbsk.com 29