CUNA Regulatory Comment Call
August 8, 2002
Proposed RESPA Rules
(MAJOR RULE)
EXECUTIVE SUMMARY
- The Department of Housing and Urban (HUD) has issued proposed rules to amend the requirements under the Real Estate Settlement Procedures Act (RESPA) in order to improve the mortgage process and to lower settlement costs for borrowers.
- The proposed rules will make significant changes to the Good Faith Estimate (GFE) form. The changes will result in a new format for the GFE and are also intended to ensure that the estimates are more accurate and delivered in a more timely manner.
- In an effort to simplify the mortgage process, promote competition to lower costs, and to facilitate the ability of borrowers to shop for a loan, the proposed rules will permit lenders to offer borrowers Guaranteed Mortgage Packages. These packages will contain a guaranteed, lump sum price for all loan originator and government-required settlement costs associated with obtaining a mortgage, along with a guaranteed interest rate.
- The proposed rules are also intended to improve disclosures in connection with yield spread premiums, which include lender payments to loan brokers in order to pay for settlement costs, which are then recovered from the borrower in the form of a slightly higher interest rate.
- Comments are due by October 28, 2002. Please submit your comments to CUNA by October 23, 2002.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at
mdunn@cuna.com and to Assistant General Counsel Jeffrey Bloch at
jbloch@cuna.com; or mail them to Mary and Jeff in c/o CUNA’s Regulatory
Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at
800-356-9655, ext. 6032, if you would like a copy of the rules, or you may access them on the Internet at the following address:
http://hudclips.org/sub_nonhud/cgi/pdf/18960.pdf
BACKGROUND
Congress enacted RESPA in 1974 to ensure that borrowers throughout the country are provided with sufficient and timely information on the nature and costs of the settlement process and are protected from unreasonably high settlement charges. HUD’s Regulation X implements these RESPA requirements.
RESPA and Regulation X requires that a standard form be used that itemizes all charges paid by the borrower and the charges paid by the seller in connection with mortgage loans. The HUD-1 form is the standard form now used for most mortgage loans in which there is a seller, and the HUD-1A form is used for refinancing and subordinate loan transaction in which there is no seller.
RESPA further requires that a GFE be provided to the borrower no more than three days of the loan application. HUD has developed the standard form for the GFE and requires lenders to state the amount or range of charges for specific settlement services that the borrower is likely to incur. RESPA also requires that borrowers receive a Special Information Booklet when they apply for a mortgage loan, which has also been developed by HUD.
Here are some additional significant provisions that are included in RESPA and Regulation X:
- Borrowers must be notified whenever the servicing of the loan has been sold or transferred.
- Borrowers may not be required to purchase title insurance on property from any particular title company.
- Limitations on the amounts that lenders or servicers may require borrowers to deposit in escrow accounts and a requirement that borrowers receive an initial and annual escrow statement.
- Lenders and servicers are prohibited from imposing fees for the preparation and submission of a settlement statement, escrow account statements, or disclosures required under the Truth in Lending Act.
Since the mid-1990’s, HUD has been examining ways to improve the mortgage process for borrowers and to lower settlement costs. The most significant effort occurred in 1998 when HUD and the Federal Reserve Board, in response to a Congressional directive, issued a joint report that addressed possible RESPA reforms. Many of the changes in the current proposed rules are derived from recommendations in this report.
DESCRIPTION OF THE PROPOSED RULES
Good Faith Estimate Revisions
The proposed rules are intended to address criticisms with regard to the GFE statement. These criticisms include the following:
- The GFE is often provided after the borrower has already paid significant fees, such as those for appraisals and credit checks. This hinders the borrower’s ability to seek mortgage services at lower prices.
- The current GFE statement lists numerous possible charges that could be imposed. HUD is concerned that some lenders charge unnecessary or “junk” fees to increase profits and this can be done simply by filling in as many blank lines on the form as possible. HUD believes that a more consolidated statement would address this concern.
- The GFE can be unreliable because there are few standards for lenders to follow when calculating these estimated costs or to ensure that there is a relationship between these estimates and the final costs at settlement. RESPA currently provides no sanctions for inaccurate or incomplete GFEs, or even for failure to provide the GFE.
As part of the proposed rules, HUD has developed a new format for the GFE statement and is seeking public comment on this format. The
new GFE form and instructions are in Appendix C of the proposed rules, which can be accessed through the link below:
http://hudclips.org/sub_nonhud/cgi/pdf/18960.pdf
Here are the significant features of the new format:
- The current GFE does not require disclosure of the interest rate. The new GFE will list the note rate, the annual percentage rate (APR), and the loan amount.
- The new GFE will include the mortgage insurance premium and information regarding adjustments that apply to adjustable rate mortgages, applicable prepayment penalties, and balloon payments.
- The new GFE will also include a disclaimer indicating that the interest rate may change between the time the GFE is provided and the settlement date, unless the borrower has locked in the rate.
- The current GFE simply lists estimated charges, or range of charges for settlement services. The new GFE will group and consolidate all fees and charges into major settlement cost categories, with a single total amount estimated for each category. This is intended to reduce incentives for certain lenders to charge “junk” fees that are currently included in the long list of charges under the current format. Here are the proposed categories:
- Fees received by the loan originator, including points and origination charges.
- Interest rate dependent payments, which may include fees paid from the lender to the mortgage broker.
- Lender-required and selected third party services.
- Title charges and title insurance premiums.
- Lender-required third party services in which the borrower may choose the provider.
- State and local government charges.
- Escrow/reserves for taxes and insurance.
- Hazard insurance
- Per-diem interest.
- Optional owner’s title insurance.
The new form will also include a final total for all charges, which borrowers may use to properly compare with other lenders. This new format is also intended to help borrowers shop for settlement services by requiring lenders to separately identify those third party services that the lender has selected and required and those that the borrower may shop for independently. For those services that are required, the lender need only state the service, the name of the provider, and the cost estimate.
The proposed rules will require that the borrower receive the GFE after the borrower has provided basic credit information and the address of the property securing the loan, either in verbal or written form, but before the payment of any significant fee. This basic information will typically include the social security number, a property address, employment information, the property value (or estimate), and the amount of the loan needed.
This timing requirement is intended to ensure that borrowers receive the information in the GFE earlier in the loan process than they currently do so that they can shop around for the lowest mortgage rate and settlement services that meet their needs. The proposed rules will require that the fees charged to borrowers to prepare the GFE will be limited to the amount necessary to provide the GFE itself and will also require that the GFE estimates be valid for at least thirty days.
The new GFE form will include an Attachment A-1 that will include a breakdown of the origination charges into lender and broker charges so that borrowers can understand these respective charges and possibly negotiate these costs. Attachment A-1 also separates title agent services and title insurance into separate subtotals to reflect both the actual insurance and the title agent’s compensation, which often include both direct payments from borrowers and commissions from the insurance premium. Again, this is designed to provide information so that borrowers may compare title agent compensation that are used by various lenders and possibly negotiate these charges.
The proposed rules will also include provisions to ensure that the estimates listed in the GFE form are more accurate. This is intended to address concerns that some lenders have been using estimates significantly lower than the actual cost.
Here are the provisions in the proposed rules that are intended to address this concern:
- Loan originators may not charge more than what is listed on the GFE for: 1) services provided by the originator, 2) for lender- required services, 3) for services provided by a lender selected third party, or 4) for government charges. There will be exceptions for “unforeseeable and extraordinary circumstances” beyond the loan originator’s control, such as acts of God, war, disaster, or an emergency making it impossible or impractical to perform the service at the estimated price.
- There will be an upper limit of 10% so that the actual charges cannot exceed 10% of the estimate for: 1) lender-required third party services in which the borrower has the ability to choose the provider, 2) borrower selected title services and insurance, and 3) reserves/escrow funds. Again, there will be exceptions for “unforeseeable and extraordinary circumstances.” This 10% restriction will not apply to third party services from providers selected by the borrower independently of the originator’s recommendation.
- The proposed rules will include a redisclosure requirement triggered by changed circumstances. If the underwriting process indicates that the borrower is unqualified for the loan, the loan originator must inform the borrower if he or she does not qualify for the loan identified on the GFE form. The borrower must then be given an opportunity to obtain a new GFE if that borrower is qualified for an alternative loan product. Also, if the borrower does qualify for a loan but does not lock in the rate, the borrower must receive an amended GFE when the rate is locked if the rate has changed or if an interest rate dependant payment has changed from that quoted in the original GFE. The amended GFE must identify the cost categories that have changed. Under no circumstances can an amended GFE include increases for costs that are not dependent on the interest rate.
If the cost at settlement exceeds the amount reported on the GFE form, absent unforeseeable and extraordinary circumstances, the borrower may withdraw the application and receive a refund of all loan-related fees. These circumstances must be documented, and the documentation must be retained by the loan originator.
RESPA contains provisions prohibiting referral fees. The proposed rules will clarify that these provisions will not be interpreted to prohibit a settlement service provider from using its market power to negotiate discounted prices, as long as the discounted price is charged to the borrower and is reported on the GFE.
Only minor changes to the HUD 1 or HUD 1A form are being made at this time to assist borrowers in comparing the new GFE with these forms. The new GFE will identify, next to each GFE category, where on the HUD 1 or HUD 1A form the corresponding cost information can be found. The proposed rules will require that all lender payments to borrowers be reflected in the borrower’s column on the HUD 1 or HUD 1A, under the applicable series.
Guaranteed Packaging of Mortgages and Settlement Services
In an effort to simplify the mortgage process, promote competition to lower costs, and to facilitate the ability of borrowers to shop for a loan, the proposed rules will permit lenders to offer borrowers Guaranteed Mortgage Packages (GMPs). These GMPs will contain a guaranteed, lump sum price for all loan originator and government-required settlement costs associated with obtaining a mortgage, along with a guaranteed interest rate. This approach is intended to allow borrowers to rely on the quoted price and rate and will facilitate shopping because borrowers will have fewer figures to compare among lenders. The GMP will not be permitted for high cost loans, as defined under the Home Ownership Equity Protection Act.
In order to provide GMPs, lenders will have to provide the following, without an up-front fee, within three days of a borrower’s application:
- A guaranteed price for the loan origination and virtually all other lender-required settlement services needed to close the mortgage. The lender must disclose to the borrower if certain services, such as pest inspection, appraisal, and lender’s title insurance are not lender-required and, therefore, not included in the GMP.
- A guaranteed interest rate. This rate may change prior to the borrowers locking in the rate but this can only result from a change in an observable and verifiable index or based on other appropriate data. Information will also be included with regard to any adjustable interest rate, prepayment penalties, or balloon payments.
- A GMP agreement, which is a contract containing the maximum settlement costs. This agreement will be binding through settlement.
The GMP offer would remain open for thirty days from when it is delivered or mailed to the borrower. The offer is binding upon acceptance by the borrower and payment of a minimal fee, subject only to underwriting and property appraisal.
The GMP will also include the maximum up-front mortgage insurance costs, based on the estimate of the property value and the amount of the loan. The GMP agreement will inform the borrower that this premium may decrease depending on the final appraisal of the property. Escrowed reserves will also be disclosed and can change by up to 10% without violating the GMP agreement. The 10% limit can be exceeded if there are “unforeseeable and extraordinary circumstances.”
The only costs that can be excluded from the guarantee and not subject to the 10% limit are those that fluctuate depending on the borrower’s choice. This includes items such as hazard insurance, per diem interest, and optional owner’s title insurance.
Some borrowers may elect not to pay for settlement costs up-front and to pay for them in the form of a slightly higher rate. Other borrowers may pay additional amounts to lower the interest rate, in the form of discount points. These situations must be disclosed on the GMP agreement if they are applicable to the particular borrower.
The GMP agreement may be provided to the borrower in lieu of the GFE form. If the borrower and lender elect to use the GMP, the HUD-1 or HUD 1A statement will itemize the settlement services, but not the specific charge for each service. An exception would be for finance charges needed to calculate the annual percentage rate under the Truth in Lending Act, which will need to be itemized.
The proposed rules include a model GMP form, along with instructions. Borrowers will also receive the Special Information Booklet, which will include information on how borrowers can use the guaranteed prices and rates when they shop for mortgage products.
Mortgage Broker Compensation and Lender Payments to Brokers (Yield Spread Premiums)
Under the proposed rules, the GFE will require that mortgage brokers and loan originators describe their services and to advise borrowers that they should shop for the loan products and services that best meet their needs. This advice will be supplemented with additional education through the Settlement Cost Booklet and other means.
The GFE form will also show borrowers the effect of alternative interest rates and their effect on monthly payments and cash needed for settlement. The form will also outline the following options that borrowers have with regard to settlement costs:
- Paying these costs with cash at settlement.
- Borrowing additional funds in order to pay these costs.
- Paying these costs by way of a higher interest rate on the loan, which means a higher monthly payment.
- Paying additional costs at settlement, known as discount points, in order to lower the interest rate and monthly payments.
Mortgage brokers can receive compensation for their services from other parties besides the borrower. Under these circumstances, the compensation often comes from the lender, which is then recovered from the borrower by charging a higher interest rate on the loan. This indirect form of compensation is often referred to as a “yield spread premium (YSP).”
There has been significant litigation in recent years regarding the legality of the YSP. The issue is whether the YSP is a fee for the referral of business, which is prohibited under RESPA. The issue has not been resolved by the courts, but HUD has taken the position that YSPs are acceptable, as long as they are reasonable and that proper disclosure has been provided to the borrower.
Under current RESPA rules, indirect compensation, such as the YSP, is disclosed separately from direct charges on the GFE form. The proposed rules will require disclosure on the GFE form in one location of the total origination fees, both direct and indirect, that are paid by both the mortgage broker and the lender. This will also include a breakdown of the origination fees to show separately the fees charged by the lender and the fees charged by the broker.
The GFE form will show the total origination fee, the amount of this fee that is paid by the lender, and the net amount that is due from the borrower.
The proposed rules outlined above regarding mortgage broker compensation and lender payments, such as the YSP, are not intended to eliminate borrower choices. Borrowers will still have the option to select loans at a slightly higher interest rate in return for not having to pay certain settlement costs at closing by means of the YSP or to lower the interest rate by paying additional discount points. The proposed rules are intended to improve disclosures for borrowers who may choose one of these options and to prevent certain abuses, such as borrowers who select loans with higher rates and still pay significant settlement costs.
QUESTIONS TO CONSIDER REGARDING THE PROPOSED RESPA RULES
(HUD HAS REQUESTED RESPONSES TO THESE SPECIFIC QUESTIONS)
The New Good Faith Estimate (GFE) Requirements
- The proposed GFE form will briefly explain the originator's functions and that the borrower, not the originator, is responsible for
shopping for his or her best loan. Does the language proposed adequately convey this message? What alternative language can be used?
- The proposed rules require that the amounts estimated on the GFE for mortgage broker and lender origination charges may not vary at
settlement absent unforeseeable circumstances. Should the rules provide additional examples? What evidence should a credit union be
required to retain to prove the existence of such circumstances?
- The proposed rules establish a 10% limit, or “tolerance,'' for categories of settlement services and costs by which such costs
cannot exceed the GFE estimates by 10% at settlement, absent unforeseeable and extraordinary circumstances. The rules also establish
zero tolerances for origination charges, lender-required and lender selected third party costs, and government charges. Are these
appropriate tolerances levels or should other tolerance levels be established? Also, should a tolerance be established for borrower's
title insurance? What alternative or additional means might be employed to ensure the integrity of the GFE form?
- The proposed rules will make clear that loan originators may enter into volume arrangements in which such discounted prices are
charged to their customers. Does this have any ramifications for your mortgage lending process?
- The proposed rules require that the tolerances will apply to the GFE from the time the form is given by the loan originator through
settlement, if accepted by the borrower. The rules further provide that the GFE is open for borrower acceptance for a minimum of 30
days from when the document is delivered or mailed to the borrower. Is this expiration date appropriate to protect against unnecessary
costs flowing from an indeterminate liability? Should a borrower's signature be required on the GFE to memorialize acceptance?
- How could the GFE be made even simpler to facilitate borrower shopping? If greater itemization is more desirable than what is
proposed, what should be itemized and why?
- The proposed rules require that on the front of the proposed form mortgage brokers disclose the lender credit right below the total
origination charges to: (a) make the borrower aware of the effect that the credit has to reduce total origination costs; (b) avoid
confusion among borrowers; and (c) avoid giving any competitive disadvantage to either a broker or lender for the same loan. What, if
any, other approach to address these concerns is better and why? Should the new GFE form disclose this credit at the bottom of the
proposed form because the credit can be applied to all settlement costs?
- The proposed rules breaks out on Attachment A-1, rather than on the front of the proposed form, the “`Loan Origination Charges''
into “`Lender Charge'' and “Broker Charge.'' How, if at all, does this approach advantage or disadvantage lenders or confuse borrowers
in comparison-shopping? Would it be better served if there is a breakout of “Lender charges'' and “Broker charges'' on the front of
the form?
- The new GFE will consolidate certain charges into lump sum categories. Should HUD change the HUD-1 form so the fee categories correspond to the groupings on the GFE so that the two documents can be more easily compared? If so, what changes should be made? Should the HUD-1 continue to list all charges for services or should it also be shortened and simplified as well to cover only categories of services?
Guaranteed Mortgage Package Agreements
- The packager must include an interest rate guarantee with a means of assuring that when the rate floats, it must be tied to an
observable index or other appropriate means. What other means could assure borrowers that the rate of a lender was not simply being
increased to increase origination profits? Would constantly making rates public on a web site be a useful control? If an index is the
best approach, how should it be set? If an index approach is approved, should each lender be allowed to pick its own observable index?
- Under the proposed rules, high-cost mortgages with total fees or a rate covered by the Home Ownership and Equity Protection Act
(HOEPA) will not be eligible for the GMP. Is this appropriate?
- The GMP agreement provides that the offer must be open to the borrower for at least 30 days from when the document is delivered or
mailed to the borrower. Is this an appropriate minimum time period to ensure that the borrower has an adequate opportunity to shop?
- The proposed rules provide that the Guaranteed Mortgage Package agreement must indicate that certain reports such as the appraisal,
credit report, and pest inspection are available to the borrower upon the borrower's request. The packagers may decide to forego such
reports or services (i.e. lender's title insurance) and must inform the borrower that such reports or services are not anticipated to be
included in the package price. Are these adequate protections for the borrower?
- Should additional consumer protections be established for packaging? For example, should additional qualifications be established
for packagers to ensure that borrowers are protected against non-performance, including the unavailability of a mortgage that could
result in a borrower “losing'' a house? Could this be addressed by a requirement that a packager must have sufficient financial
resources to credibly back the guarantee? Is it necessary to require a lender signature on the GMP agreement to ensure that the
borrower receives the loan at the time of settlement?
- Are you concerned that packaging will favor large financial institutions, that may be better able to negotiate discount pricing with
settlement service providers, at the expense of smaller institutions, such as credit unions?
Other Questions
- To what extent do inconsistencies currently exist, or will they exist upon promulgation of the proposed rules, between State laws
and RESPA, which would merit preemption?
- The rules propose that the GFE and the GMP agreement be given subject to appraisal and underwriting. How should the final rules
address the matter of loan rejection or threatened rejection as a means of allowing the originator to change the GFE or GMP agreement to
simply earn a higher profit?
- As proposed, the GFE and GMP agreement currently contain sections for loan originators and packagers to indicate the specific loan
terms for adjustable rate mortgages, prepayment penalties, and balloon payments. Are these appropriate loan terms to include on these
forms, and what, if any, other mortgage terms or conditions should be listed on the forms?
- To what extent do the proposed changes regarding the timing and delivery of the GFE impact other federal disclosure requirements,
such as those mandated by the Truth in Lending Act?
- The proposed rules will require a loan originator to provide a prospective borrower, upon the borrower's request, with a new GFE if
the borrower does not qualify for the loan identified on the original GFE but would qualify for an alternative product. Is this
approach appropriate? What other options should be considered when borrowers do not qualify for the loan product initially sought?
- If the borrower elects not to lock-in the interest rate quoted on the original GFE at the time it is provided, the proposed rules
will require loan originators to provide borrowers with an amended GFE, identifying any changes in costs associated with changes in the
interest rate. Is this an appropriate requirement? Are there other alternatives that HUD should consider?
- Other comments?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
