Final Rule on RESPA - Part II
The Department of Housing and Urban Development (HUD) issued its final rule in regards to changes to the Real Estate Settlement Procedures Act (RESPA) in November of 2008. Part I of this article covered changes dealing mostly with the Good Faith Estimate (GFE), which covers estimates of closing costs and disclosures about loan terms. Part II will cover tolerances in fee changes, unforeseeable circumstances that allow for changes in fees, cure provisions, yield spread premiums, new definition of a mortgage broker, and limits on origination fees. Part III covers changes to the settlement statement, the closing script, average cost pricing of settlement services, use of affiliates, and technical amendments.
In order to provide meaningful estimates of fees on the GFE, HUD has implemented the use of tolerances for differences in fees at closing from those on the GFE. The tolerances run from zero to ten percent. For example, title services have a ten percent tolerance while the loan originator’s own charges have a zero tolerance. Recording fees are subject to a ten percent tolerance, but transfer taxes have a zero tolerance. If changed circumstances result in a new GFE, then the comparison is made between the final closing charges and the revised GFE. A violation of the tolerance requirements is a violation of section 5 of RESPA. The loan originator can cure such violations by reimbursing the borrower for the difference at settlement or within 30 calendar days after settlement.
The proposed rule used the term “unforeseeable circumstances” to describe the basis for revising a GFE. However under the final rule the term was replaced with the term “changed circumstances.” Market price fluctuations by themselves are not considered changed circumstances. If information about the borrower is relied upon in providing the GFE and that information materially changes or was inaccurate such that the borrower no longer qualifies for the loan quoted, then a revised GFE could be issued. Loan originators are presumed to have relied on at a minimum, namely, the borrower’s name, monthly income, property address, property value estimate, loan amount and credit report. A revised GFE can be issued based on changes in this information only if the change is substantial. If the borrower requests changes in the loan, the originator may revise the GFE to reflect the changes. Borrowers must express an intent to continue with the loan within 10 business days of receiving the original GFE, or the originator is no longer bound by its terms. If the interest rate is not locked, then interest rate-dependent charges may be revised, and once a rate is locked, a revised GFE should be issued. For new construction, an originator may provide a revised GFE no later than 60 days before closing but must provide a clear and conspicuous disclosure with the original GFE of that possibility or tolerances will be compared with the original GFE. If a GFE is revised, the originator must document the reasons for the changes and retain that information for three years after settlement.
Disclosures regarding yield spread premiums (YSP) are still required on the GFE. A yield spread premium is a fee paid outside of closing to a mortgage broker for which the borrower pays a higher interest rate. The disclosure is made on page 2 of the GFE in the section entitled “Your Adjusted Origination Charges.” Mortgage brokers are required to disclose in block 1 the amount they received for loan origination from the borrower and any payments from the lender to the broker for the origination. In block 2, mortgage brokers disclose any credits (YSP) or charges (points) to the borrower for the specific interest rate chosen which are then subtracted from or added to the origination charge in block 1 to arrive at the adjusted origination charge. Lenders are not required check these boxes about credits or charges unless they separately disclose such items for the loan or they are in fact charging points. If the disclosures are not made, then the first box in block 2 must be checked. Regarding limitations on origination fees, HUD has removed the limits on the amounts that may be charged to borrowers for originating and closing an FHA loan but reserves the right to set limits on those fees.
Finally, the definition of mortgage broker has expanded to include “a person 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 a person or entity that closes the loan in its own name in a table-funded transaction.” This expanded definition includes an exclusive agent of a lender who is not an employee but provides origination services.
A more complete explanation of these changes and the reasoning behind HUD’s decisions regarding the final rule can be found at http://www.hud.gov/offices/hsg/sfh/res/finalrule.pdf
Linda Holder practices in Granite City, Illinois where she handles real estate transactions, probate matters and business organizations. Ms. Holder is the current chair of the ABA General Practice, Solo and Small Firm Division Real Estate Law Committee.
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