New RESPA Regulations for Mortgage Finance: Are You Ready? Complying With the Sweeping Changes in Real Estate Settlement Procedures

presents New RESPA Regulations for Mortgage Finance: Are You Ready? Complying With the Sweeping Changes in Real Estate Settlement Procedures A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Richard J. Andreano, Partner, Patton & Boggs, Washington, D.C. Donald E. Partington, Executive Vice President, Legal and Strategic Affairs, Fidelity National Title Group, Santa Ana, Calif. Tuesday, February 23, 2010 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations. CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. If no column is present: click Bookmarks or Pages on the left side of the window. If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages. If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10

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The New RESPA Regulations for Mortgage Finance Are You Ready? An Introduction to the New RESPA Rule Donald E. Partington

Stated Principles of RESPA Reform 1 Help consumers shop for the best loan 2 Shopping leads to competition and lower prices 3 Loan terms fully disclosed at closing

Key Features of the New RESPA Rule 3-page Good Faith Estimate (GFE) Disclosure of YSP s as a credit to consumer Tolerance limitations on settlement charges 3-page HUD-1 Settlement Statement Average Charge Agent and Underwriter split disclosed on HUD-1 Lender is responsible for transmitting GFE data and Lender is responsible for transmitting GFE data and all information necessary for completing the HUD-1 to the settlement agent

Final RESPA Rule When Is the Rule Effective? Most of the new rule s requirements became effective January 16, 2009 The new Good Faith Estimate (GFE) and HUD-1 must be used on transactions originated on or after January 1, 2010 Transactions originated prior to January 1, 2010 using the old GFE form will close using the old HUD-1 form 4

New RESPA Regulations for Mortgage Finance: Are You Ready? The New Good Faith Estimate Richard Andreano

GFE Trigger The receipt of an application triggers the need for a loan originator to provide a Good Faith Estimate (GFE). A loan originator is a mortgage broker or a lender. 6 An application is the submission of a borrower s financial information in anticipation of a credit decision that includes the following six minimum items of information: Borrower s name. Borrower s Social Security Number to obtain a credit report. Borrower s income. Property address. Estimate of the property s value. Loan amount sought. Plus, any other information the loan originator deems necessary.

GFE Trigger Although additional information can be required to have an application, this can have adverse consequences. The originator is presumed to have relied on the six minimum items of information, and any additional required items of information, that constitute an application when a GFE is issued. Can a GFE be issued without all six minimum items of information? Yes, but the originator is deemed to have received and relied on the six minimum items of information. 7

GFE Trigger A consumer cannot be required to provide verification documentation as a condition of issuing a GFE. A loan originator may not require the borrower to sign consents to verify employment, income or deposits as a condition of issuing a GFE. A borrower may voluntarily sign consents prior to the issuance of the GFE to facilitate the loan process. A consumer cannot be required to acknowledge receipt of a GFE as a condition to issuing a GFE. 8

Timeframe to Issue GFE A loan originator must provide a GFE within three business days of the receipt of an application. A business day for this purpose remains any day on which the offices of the loan originator are open for conducting substantially all of its business operations. The period to issue a GFE once an application is received is not revised. But there is a significant change when both a mortgage broker and a lender are involved. 9 If a lender accepts an application from a broker that t issued a GFE, the lender is bound by the GFE.

Timeframe to Issue GFE A GFE is not required when the application is denied or withdrawn in the three business day period. Previously a GFE was not required only if the loan was denied within the three business day period. A Settlement Cost Booklet also must be provided along with a GFE for purchase money transactions. The RESPA rule still provides that the Booklet is not required when a loan application is denied within the three business day period. No conforming change was made to the RESPA rule regarding withdrawn applications. 10 HUD advises in the FAQs that a Settlement Cost Booklet is not required in cases in which a loan is withdrawn within the period.

GFE-Related Fee Restriction ti The rule provides that other than a credit report fee, a loan originator may not impose a fee on a consumer before the consumer receives a GFE. If the GFE is mailed, the consumer is deemed to receive the GFE three calendar days after mailing, exclusive of Sundays and Federal holidays in 5 USC 6103(a). HUD advises in the FAQs that a fee beyond a credit report fee may be imposed after a loan applicant both receives a GFE and indicates an intention to proceed with the loan covered by the GFE. Don t forget the MDIA rule fee restriction. A fee beyond a credit history fee may not be imposed before the consumer receives the creditor s initial Truth in 11 Lending Disclosure Statement.

GFE Initial Availability When a GFE is issued, the GFE terms must be available for at least 10 business days, except for the interest rate and the interest rate-dependent charges, and the related loan terms. The general business day definition applies a day on which the offices of the loan originator are open for conducting substantially all of its business operations. The interest rate-dependent charges are: The credit or charge (points) for the rate chosen. The adjusted origination charges. Per diem (or daily) interest. 12 There is no minimum period of availability for the interest rate or the interest t rate-dependent d t charges.

GFE Tolerances If within the 10 business day-period, or such longer period that the loan originator may specify, the consumer expresses an intent to proceed with the loan covered by the GFE, the GFE is binding subject to both tolerances on charge increases and exceptions. The rule does not indicate how a consumer must express an intent to proceed. It is advisable to specify a reasonable method that the consumer must use to express an intent to proceed. 13

GFE Tolerances There are three tolerance categories: 0% tolerance no charge increase permitted. 10% bucket tolerance charges charges in total may not increase by more than 10%. There is no limit on the amount a specific charge may increase, except for the overall 10% cap. No tolerance no limit on increases in charges. 14

0% tolerance: GFE Tolerances Government transfer taxes. Our origination charge. Credit or charge (points) for the interest rate chosen, when the rate is locked. Adjusted origination charges, when the rate is locked. 15 10% bucket tolerance: Government recording charges. Charges for loan originator-required services when the originator i selects the specific provider. Charges for loan originator-required settlement services, title services, required title insurance and owner s title insurance, when the consumer uses a provider identified d by the originator.

GFE Revision There are three exceptions that permit a loan originator to revise a GFE. Changed circumstances. Borrower-requested changes. Newly constructed homes. 16 With a changed circumstance or borrower-requested change, only the charges affected by the changed circumstance or borrower-requested change may be increased. Revisions of the applicable charges may be made without regard dto the tolerances.

GFE Revision i Changed circumstances include: Acts of God, war, disaster or other emergency. Information regarding the borrower or loan relied on in providing the GFE that changes or is found to be inaccurate. New information regarding the borrower or loan. Changed circumstances do not include: Market price fluctuations. 17 Loan originator errors.

GFE Revision i The exceptions for changed circumstances and borrowerrequested changes operate the same way. If there is a changed circumstance or borrower-requested change, within three business days the loan originator may: Deny the loan (if applicable). Issue a revised GFE, revising only the applicable charges. HUD advises in the FAQs that when a broker and lender are involved, the three business day-period begins to run when either the broker or lender first learns of the changed circumstance or borrower-requested change. 18 The general business day definition applies.

GFE--Revision i If a loan originator provides a revised GFE based on the exceptions, it must document the reason(s) that a new GFE was provided and retain the documentation for no less than three years. HUD advises in the FAQs that if there is a changed circumstance resulting in a revised GFE, the mortgage broker and lender each must retain documentation of the reasons supporting the revision. Presumably, HUD takes the same position with a borrowerrequested change. 19

GFE--Revision i The newly constructed home exception is available when settlement is expected to occur more than 60 days after the GFE is provided. In such a situation, the loan originator may provide along with the GFE a separate, clear and conspicuous disclosure stating that at any time up until 60 calendar days before closing the originator may issue a revised GFE. HUD advises in the FAQs that if a use and occupancy permit has been issued for the home prior to issuance of the GFE, then the home is not considered to be under construction and the transaction would not be a new home purchase for purposes of the exception. 20

Change in Approach to GFE Disclosures Paid outside of closing (POC) items cannot be separately itemized or designated on the GFE. The totals in the GFE include amounts paid at or outside of closing. All charges typically y paid by the borrower must be shown as borrower-paid, even if it is known that a third party, such as the seller, will pay the charges. Fees that typically are charged to a third party, such as the seller, and not to the borrower do not have to be included in the GFE. Caution is advised when excluding fees from the GFE based on the assumption they will be paid by the seller or another third party. 21

Change in Approach to GFE Disclosures Special Rule: Title charges are included in the GFE whether the borrower, seller or loan originator will pay the charges. Apparent exception when a separate charge is imposed on the borrower and on the seller to conduct the settlement, the portion imposed on the seller can be excluded from the GFE. The GFE does not account for all charges that the borrower may have to pay, such as: Property taxes payable at or before closing. Development fees apportioned to a buyer by a builder. The fee for an HOA disclosure package. 22 If there are two separate loans, such as a first lien loan and a piggyback loan, two separate GFEs must be provided.

GFE Form Substantially ti Changed The new GFE form is three pages with 13 main sections. The GFE is a prescribed form. Only expressly authorized changes may be made. Additional pages may not be added to the GFE, and the pagination of the GFE may not be changed. Signature lines may not be added to the GFE. If a borrower separately acknowledges receipt, this is not an expression of intent to proceed. Permitted changes: Additional lines may be added to Blocks 3, 6, and 11. The GFE may be on legal size paper. 23 The shading and margins in the GFE may be changed.

24 GFE Page 1

GFE Important t Dates Float Situation: HUD advises in the FAQs that if a lender does not offer a rate lock, enter Not Applicable or NA. HUD does not provide the same advice when a lender offers rate locks. 25 When floating, no minimum period applies to the period of availability in Line 1.

GFE Important t Dates Float Situation: 26 Line 2 is for non-rate dependent settlement charges and addressed shortly. Line 3 must be completed even when the rate is floating. Use a lock period appropriate for the rate quoted. However, the number of days entered should take into account factors affecting the settlement date, such as the right to rescind. Line 4 indicates the required period to lock before closing.

GFE Important t Dates Float Situation: 27 This is the example from the sample GFE. Line 3: Note that the Line shows the full 30 day lock period upon which the quoted rate is based. The example can reflect a situation ti in which h the loan would not be subject to the right to rescind, or under the lender s lock policy the loan only must close within the lock period.

GFE Important t Dates Lock Situation: If the rate is locked, in: Line 1: Insert the date the lock expires. Line 3: Insert the appropriate number of days based on the rate lock period and taking into account factors affecting the settlement date, such as the right to rescind. Line 4: Insert NA. 28

GFE Important t Dates Settlement Charges: 29 When a GFE is mailed, the minimum 10 business day period for settlement charges in Line 2 is measured from the date the GFE is mailed. If a revised GFE is provided based on a changed circumstance or borrower-requested change after the shopping period ended and the borrower expressed an intent to move forward with the transaction, Line 2 must be completed by entering the same date from the last GFE.

GFE Loan Summary Note, this section may not be changed. For example: All loans must be shown as monthly payment loans. The initial interest is the rate applicable on the closing date. Do not insert the annual percentage rate. 30 The note rate may not be the applicable rate on the closing date.

GFE Loan Summary For the initial monthly payment, show the payment for principal, interest and, if applicable, mortgage insurance. Exception: If higher, show the accrued interest for the first regularly scheduled payment, plus mortgage insurance. 31

GFE Escrow E Account Insert the monthly payment from the Loan Summary. Generally the monthly payment will be the payment for principal, interest and, if applicable, mortgage insurance. Do not include the monthly escrow payment. Simply show whether or not there will be an escrow account. The estimated monthly escrow payment amount is not a GFE item. 32

33 GFE Page 2

GFE Adjusted Origination Charges 34 Block 1 is for Our origination charge and includes all charges that the lender and, if applicable, mortgage broker will receive from any source, except any charge for the specific interest rate chosen (points). This includes processing, application, administration, underwriting, document preparation, wire, lender inspection, mortgage broker, loan handling and other miscellaneous fees, even if paid to a third party.

GFE Adjusted Origination Charges Block 2 is for the credit or charge (points) for the rate chosen. Retail transaction general rule: In a transaction without a mortgage broker, the lender may elect to use either Box 1 or Box 2 or 3. If the lender elects to use Box 1 to reflect that the credit or charge for the rate chosen is included in Block 1, then 0 is entered in Block 2. Exception: If there is no positive or negative amount that 35 would be entered in Block 2, then Box 1 must be used.

GFE Adjusted Origination Charges Wholesale transaction: If there is a mortgage broker, then Box 1 in Block 2 may not be used either Box 2 or Box 3 must be used. Box 2 and Box 3 may not be checked in the same transaction a credit and charge may not occur in the same transaction. HUD advises in the FAQs that there may not be a credit for a yield spread premium and a charge for discount points in 36 the same transaction.

GFE Adjusted Origination Charges 37 The guidance on the determination of whether a credit or charge exists is cumbersome and HUD appears to recognize that more guidance is needed. In the interim, here is a way to think about the credit or charge If the net result of the loan pricing is that the lender: Is contributing to the transaction based on the rate such as by paying the broker and/or paying closing costs, there is a credit. Is requiring the borrower to pay an amount for the rate such as a discount point and/or temporary buy-down fee, there is a charge.

GFE Adjusted Origination Charges Example 1: $100,000 loan. Lender fees of 1% paid by the borrower and broker compensation of 1.5% paid by the lender. Block 1 shows $2,500 ($1,000 in lender fees and $1,500 in broker compensation). Block 2 shows a negative $1,500 (the lender credit). Block A shows the net of $1,000. 38

GFE Adjusted Origination Charges Example 2: $100,000 loan. Lender fees of 1%, broker compensation of 1.5% and 1 discount point. All to be paid by the borrower. Block 1 shows $2,500 ($1,000 in lender fees and $1,500 in broker compensation). Block 2 shows a positive $1,000 (the discount point). Block A shows a total of $3,500. 39

GFE Adjusted Origination Charges Example 3: A loan with $1,115 115 in originator compensation and discount points of $5,978.53. This is the example from the sample GFE. This example will be used later for the walk through h of the HUD-1. 40

GFE Adjusted Origination Charges Tolerances: The 0% tolerance applies to Block 1. The 0% tolerance applies to Blocks 2 and A, when the rate is locked. The 0% tolerance applies to each Block separately. 41

GFE Adjusted Origination Charges 42 The Our origination charge amount in Block 1 may not change based solely on the interest rate going from float to lock. HUD advises in the FAQs that the Our origination charge amount may increase in the following situations: If there is a changed circumstance that t affects the loan amount and all or any portion of the origination charge is calculated as a percentage of the loan amount. If the borrower requests a different loan product or the borrower is no longer eligible for the loan product, but is eligible for a different loan product.

GFE Block 3 Block 3: Includes each service required by the originator for which the originator will select the provider, or require the borrower to choose from a list of providers approved by the originator. Enter each service and the charge for each service, with the total in Block 3. Additional lines may be added if needed to show all charges. 43 The items in Block 3 are subject to the 10% bucket tolerance.

GFE Block 4 Block 4: Enter the total for all title services, premiums and endorsements (but not owner s title), regardless of who selects or pays for the title provider. HUD advises in the FAQs that: Title services include: The charge for conducting the settlement. Processing and administrative services, such as document delivery, preparation and copying, wiring, and notary. 44 The amount in Block 4 is subject to the 10% bucket tolerance, if the consumer uses a title provider identified by the loan originator.

GFE Block 5 Block 5: Enter the total for owner s title premiums and endorsements, regardless of who selects or pays for the title provider. For non purchase transactions, you may enter NA or Not Applicable. Unless you know the consumer wants enhanced coverage, provide the quote for basic coverage. HUD has indicated that if the consumer later indicates that he or she wants enhanced coverage, this would be a changed circumstance. 45 The amount in Block 5 is subject to the 10% bucket tolerance, if the consumer uses a title provider identified by the loan originator.

GFE Block 6 46 Block 6: Includes each service required by the originator for which the originator will permit the consumer to shop for the provider. Enter each service and the charge for each service, with the total in Block 6. Additional lines may be added if needed to show all charges. If youallow the eborrower o tos shop for the epo provider of one eor more oeservices in Blocks 4, 5 or 6, you must provide the consumer with a written list of providers for the applicable services along with the GFE. The items in Block 6 are subject to the 10% bucket tolerance, if the consumer uses providers identified by the loan originator.

GFE Blocks 7 & 8 Block 7: Enter the total t estimated t recording charges. Do not enter transfer taxes. The amount in Block 7 is subject to the 10% bucket tolerance. Block 8: Enter the total estimated transfer taxes. Do not enter recording charges. 47 The amount in Block 8 is subject to the 0% tolerance.

GFE Block 9 Block 9: Enter the total required escrow or impound deposit at closing, taking into account the aggregate adjustment. t 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. 48 The amount in Block 9 may change without limit.

GFE Block 10 Block 10: Enter the total per diem (or daily) interest. In the blanks, enter the amount of interest for each day, the number of days and the estimated settlement date. The amount in Block 10 may change without limit. 49

GFE Block 11 Block 11: Includes each type of required hazard or similar il insurance, such as flood insurance and earthquake insurance. Enter each required insurance and the premium for each insurance, with the total in Block 11. Additional lines may be added if needed to show additional premiums. 50 The amount Block 11 may change without limit.

GFE Blocks B & A + B Block B: Enter the total of the estimated charges that appear in Block 3 through Block 11. Block A + B: Enter the sum of Block A (Your adjusted origination charges) and Block B. 51

52 GFE Page 3

GFE Tolerance Information This section explains the tolerances to the consumer. The loan originator does not enter any information in this section. 53

GFE Tradeoff Table 54 This section is intended to show the relationship between the interest rate and closing costs. The loan originator must complete the left column based on the loan covered by the GFE. The loan originator i does not have to complete the other two columns.

GFE Shopping Chart 55 The loan originator does not enter any information in the shopping chart. HUD intends that consumers can use the chart to compare loans.

GFE Violation and Cure A violation of the GFE requirements will constitute a violation of RESPA Section 5. Currently, there are no express damages or penalties for violations of RESPA Section 5. HUD has asked Congress to change this. RESPA violations often trigger state law violations. An originator i can cure a tolerance violation at or within 30 calendar days after closing. 56 The curing of tolerance violations will be addressed in greater detail later in the presentation.

Thank You Richard Andreano Washington, DC randreano@pattonboggs.com 57

The New RESPA Rule The New HUD-1 Settlement Statement Donald Partington

The New Settlement Statement

HUD-1 Settlement Statement 700 section Real Estate Broker Fees Generally unchanged Percentages removed

HUD-1 Settlement Statement 800 section Lender s Origination Charges All of lender s own charges no itemization Lines 801 and 802 outside borrower s column

HUD-1 Settlement Statement 800 section Lender-Required Services/Lender Required Providers -3 rd party services itemized, amount shown in borrower s column

HUD-1 Settlement Statement 900 section Advance Payments to Lender Daily Interest Charges Mortgage Insurance Premium Homeowner s Insurance

HUD-1 Settlement Statement 1000 section Reserves Deposited with Lender New Roll-up line 1001 aggregates all reserve deposits and aggregate adjustment into one number for comparison to GFE 9. All i di id l id f All individual reserves outside of borrower s column

HUD-1 Settlement Statement 1100 section Title Services and Lender s Title Roll-up in to Line 1101 for comparison to GFE 4 Title Services all services necessary for the closing of the transaction Itemization limited to Closing Fee and Lender s Title

HUD-1 Settlement Statement 1100 section Owner s Title Insurance Separate itemization inside the borrower s column for comparison to GFE 5 Must be shown in the borrower s column regardless of who pays for the policy

HUD-1 Settlement Statement 1100 section Title Agent/Underwriter Split Shows the premium split between underwriter and agent for all title insurance premiums

HUD-1 Settlement Statement 1200 section Government Recording Charges Borrower fees are itemized outside the column and roll-up in to Line 1201 for comparison to GFE 7. Attachments to HUD-1 Attachments to HUD 1 permissible.

HUD-1 Settlement Statement 1200 section

HUD-1 Settlement Statement 1200 section Transfer Taxes Includes Deed and Mortgage Transfer Taxes Transfer taxes may be shown in the seller s column; however, lender beware.

HUD-1 Settlement Statement 1300 section Additional Settlement Charges Required Shopable Services rollup to line 1301 for comparison to GFE 6 Normal use of 1300 section remains- ancillary ypayments, etc.

HUD-1 Settlement Statement Page 3 Loan originators are required to provide all information needed to complete the comparison chart and loan terms disclosure It is expected that lenders will provide information in a variety of ways GFE plus SSPL Supplemental Instructions Proforma HUD-1

HUD-1 Statement 0 Tolerance Comparison Any line where HUD-1 amount is greater than GFE amount is a violation Each line is a separate tolerance No offsets for lower fees on other lines

HUD-1 Statement- 10% Aggregate Tolerance Items Included Government Recording Fees Lender Required Services- Lender Required Provider Lender Required Shopable Services Provider on SSPL Aggregate 10% tolerance offsets from other items permitted Tolerance violation = greater than 10% excess of HUD-1 aggregate v. GFE Aggregate

HUD-1 Statement- 10% Aggregate Tolerance

HUD-1 Statement No Tolerance Items Included Initial Escrow Deposit (Line 1001) Daily Interest t Charges (Line 901) Homeowner s Insurance (Line 903) Lender Required Shopable Services Provider NOT on SSPL Borrower selected services Amount for any HUD-1 charge may exceed the GFE charge by any amount

HUD-1 Statement No Tolerance

Tolerance Violations The lender is responsible for the cure of tolerance violations and they have 30 days after closing to discover and repay the overages Available to lenders if they repay the consumer any charges that exceed tolerances on settlement services in the zero and 10% tolerance categories of the GFE; Otherwise, the overages will be considered a violation of RESPA Closing agents also have 30 days to cure any errors or omissions on the HUD-1 Lenders will likely run most tolerance violation payments through settlement, so an amended HUD-1 can be issued. A tolerance violation does not stop a closing. But.

HUD-1 Statement Loan Terms Page 3 Intended as a comparison of the loan terms quoted at GFE stage to the loan terms at closing GFE loan terms do not match HUD-1 loan terms - Additional i information is required

HUD-1 Statement Loan Terms Page 3

HUD-1 Settlement Statement Page 1 Page 1 Issues Page 1 remains virtually unchanged New/Modified d Uses Secondary Financing Seller adjustments Rule-imposed adjustments Contractual adjustments Tolerance Adjustments/Cures

HUD-1 Settlement Statement Page 1 Secondary Financing No longer appropriate to document two loans on the same HUD-1 One loan One HUD Net Proceeds of 2 nd loan shown in 200 section

HUD-1 Settlement Statement Page 1 Seller Adjustments Rule Imposed Adjustments adjustments for owner s title and title services w/lender s title insurance Contractual Adjustments

HUD-1 Settlement Statement Page 1 Tolerance Cures Documentation of cures through closing and outside of closing (POC) Used for both 10% aggregate and zero tolerance cures Tolerance restitution or penalty?

Average Charge Pricing What is Average Charge Pricing? Allows all settlement service providers to use average charge for services obtained from third parties, such as recording and courier fees Excludes any service based on the value of the property or loan (such as any type of insurance) or charges of the settlement provider itself Imposes a 3 year recordkeeping requirement and the total average charge over the utilized time period must not exceed the total paid for those services to third parties (no upcharge) 85

Average Charge Pricing Which Charges May Not Be Averaged? Any charge that changes based upon the amount of the purchase price or loan amount Transfer Tax Mortgage Tax Insurance Premiums (including title insurance premiums) A provider s own charges 86

Average Charge Pricing How do you calculate an average charge? A specific class of transactions Refinance Resale All Transactions A specific geographic area County State Nationwide! A specific averaging time period From one to six months ALL TRANSACTIONS FITTING THE CRITEREA MUST USE THIS CHARGE 87

RESPA Reform The New RESPA Regulations for Mortgage Finance Are You Ready? Thank you. Donald Partington EVP, Legal and Strategic Affairs Fidelity National Title Group dpartington@fnf.com 88