HUD Proposed Rule on RESPA Reform
(Provided by the National Association of Realtors)
HUD recently published its
RESPA reform proposal in the Federal Register. According to HUD, the rule
proposes to create a more "transparent" settlement process to facilitate
consumers' understanding of the true costs of their mortgage, and the functions
of the originator. HUD thinks this new process will facilitate greater choice
for the homebuyer in shopping for lower cast mortgages and settlement service.
To that end, the Department put forward a dual approach to improving the
disclosure process for costs associated with obtaining a mortgage loan, 1) a
guaranteed Mortgage Package, and 2) an Improved Good Faith Estimate. The
proposal also places new disclosure responsibilities on mortgage brokers. The
following summarizes these two key elements of the proposal.
1) Guaranteed Mortgage Package (GMP)- It will grant a Section 8 exemption (safe harbor) to lenders (or others-who must have the approval of a lender and offer a loan with the package) who package all of the settlement services required by the lender and guarantee the cost as well as the interest rate up front to the borrower.
-Packager would offer a lump-sum price for settlement costs, interest rate and points. No upfront fee may be charged to the borrower until the borrower accepts the package.
Requirements for the safe harbor (section 8 exemption):
Packagers would have to offer within 3 days of application and without an upfront fee:
-A guaranteed price for the loan origination and virtually all other lender required settlement services needed to close the mortgage (application, origination, underwriting, appraisal, pest inspection, flood and tax review, title services and insurance, and any other lender required services, including mortgage insurance (will be calculated as the maximum upfront MIP based on the estimate of the property value and the amount that needs to be borrowed)
-Excluded from the guarantee are those items that fluctuate based on the borrowers choice, hazard insurance, per diem interest, and optional owners title insurance
-A mortgage loan with an interest rate guarantee, subject to change (prior to borrower lock in)
only from a change in observable and verifiable index or based on other appropriate data
-A GMP Agreement as a prospective contract that is binding through settlement
No itemization of services required. A lender may decide to forego the following services and if so must disclose this on the GMPA: appraisal, lenders title and pest inspection.
Remedies: Borrowers, individually or where appropriate, as a class may sue pursuant to applicable state contract law. In addition HUD will regard noncompliance as an enforcement priority and those in violation will be subject to Section 8 scrutiny.
[Survey editorís note: Referral fees to real estate brokers and sales agents could result from the Section 8 Safe Harbor, since Section 8 is the part of the rule that outlaws kickbacks and referral fees. To take advantage of the Safe Harbor, agents and brokers would have to provide some service included in the GMP, such as filling our the initial mortgage application. They could not get a referral fee simply for referring the homebuyer to the mortgage company.]
Improved Good Faith Estimate- It
places additional requirements on lenders to stand by their quoted prices for
required services while not relieving them of any obligation to comply with
Section 8 of RESPA. For services outside of their control, it places a tolerance
of 10% for which they cannot exceed at closing.
Establishes a new format for the GFE by creating categories of services. This new form is intended for use in all federally related mortgage transactions. It prohibits a lender from collecting a fee beyond that which is necessary to provide the GFE.
The new GFE will include the following categories of costs:
Loan Terms: Amount, interest rate, APR, Mortgage insurance, loan term, monthly payment.
-Origination services: All Lender costs including broker compensation -lender payments as well as borrower payments
-Lender required and selected third party services-those services required by the lender and selected by the lender, i.e. appraisal, credit reports
-Title Services and Insurance
Lender selected (must be firm)
Borrower selected (subject to 10% tolerance)
-Shoppable Lender Required Services
Third party services required by the lender but which the borrower can shop
(subject to 10% tolerance)
-Government Charges: -taxes, state and local
-Escrows/reserves- (subject to 10% tolerance)
-Per diem interest, hazard insurance and optional owners title insurance- (charges may vary)
Remedies: If the cost at settlement exceeds the amount reported on the GFE, the borrowers may withdraw the application and receive full refund of all loan related fees. Loan originators failing to meet these new requirements will be scrutinized for section 8 violations.
Mortgage Broker Compensation Disclosures
-Mortgage brokers must disclose on the GFE the maximum amount of compensation they could receive from a transaction. They must also disclose on the GFE any payments from a lender to a broker (other than payment for a par value loan), including payments based upon an above par interest rate on the loan be reported as a lender payment to the borrower.
-Mortgage brokers and all other loan originators must describe their services on the GFE
The GFE would inform borrowers that they have the options to pay settlement costs: (1) through cash payments at settlement, (2) by borrowing additional funds to pay settlement costs, (3) through a higher interest rate and higher monthly payments, or by (4) lowering the interest rate and monthly payment by paying discount points