Final Rule on RESPA - Part I
On November 17, 2008, the Department of Housing and Urban Development (HUD) issued its final rule in regards to the Real Estate Settlement Procedures Act (RESPA). Changes to the Good Faith Estimate (GFE) and the settlement statements (HUD-1/1A) do not take affect until January 1, 2010, while other provisions in the final rule took effect January 16, 2009. The text of final rule can be found at www.hud.gov/offices/hsg/sfh/res/finalrule.pdf or 73 FR 68204 et seq. This is a three–part series on the final rule. Part I covers changes to the GFE form, redefining what is a loan application, limiting up-front fees, disclosure of loan terms, and how long the GFE terms are available. Part II coming next issue will cover tolerances in fee changes, unforeseeable circumstances that allow for changes in fees, enforcement and 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.
The new GFE form, a sample of which can be found at www.hud.gov/offices/hsg/sfh/res/gfestimate.pdf, is now three pages long. The first page includes a statement on the purpose of the GFE and the importance of shopping for a loan. The important dates’ section on page 1 indicates for how long the interest rate and settlement charges are good and for how long the rate lock is good. There is also a section that includes a summary of loan terms, whether an escrow account is required and a summary of charges from page 2. The origination charges and how they affect the interest rate are included on page 2. Other settlement charges are also itemized here. Page 3 indicates what fees can change at closing and by how much. A tradeoff table compares the quoted loan with a loan that has lower settlement charges and a loan with a lower interest rate. Finally, page 3 includes a “shopping chart” where the consumer can enter loan information from various lenders for comparison.
For the loan application, the loan originator may determine what information to collect and how much of that information to use to issue a GFE. The GFE must be delivered or mailed to the applicant within three business days of receiving the required information. The application is assumed to include at a minimum the borrower’s name, social security number, gross monthly income, property address, property value estimate, and loan amount for purposes of issuing a GFE. The originator is presumed to have relied on these six things as well as information contained in any credit report obtained prior to issuing the GFE. Further the originator cannot require the applicant to provide information to verify the loan application information prior to issuing a GFE but can require verifying information after the GFE is issued to complete the loan process. However, the originator can use its own sources to verify the information provided by the applicant. None of the information supplied and relied upon for the GFE can be the basis for a revised GFE unless the information changes or was found to be incorrect. If the originator receives information that would result in a change to the GFE, then the originator must provide a new GFE within three business days of receiving the information.
The fee an originator can charge to issue a GFE is limited to the cost of a credit report. The originator can no longer collect any other fees prior to the issuance of the GFE, but fees for other services like the appraisal or an inspection can be charged after the GFE is provided to the applicant.
In the “Summary of your loan” section on page 1, the following information must be disclosed: terms of the loan; initial interest rate; and initial amount owed for principal, interest, and any mortgage insurance. Additional disclosures include the existence of prepayment penalties, balloon payments, and any changes in interest rates and corresponding change in payments. Because the annual percentage rate (APR) is included on the TILA (Truth-in-Lending Act) disclosure, it is not required on the GFE.
The form must indicate whether the interest rate is locked and for how long the interest rate is available. After that time, the interest rate; rate–related charges; and loan terms including loan originator charges, per diem interest and monthly payment may change. All other settlement charges and loan terms are good for a minimum of 10 business days.
Loan originators are required to complete the first column of the trade-off table on page 3 for the loan being offered but the columns for a loan with a lower interest rate and a loan with lower settlement charges are optional even if the originator has such loan products for which the applicant may be eligible. However, if the originator completes Columns 2 and 3, the loans should be “otherwise identical” to the GFE loan, meaning that other than the interest rate, the loan terms such as the loan amount, number of payments, nature of the interest rate, and other characteristics of the loan are the same. The purpose of the trade-off table is to help borrowers understand the relationship between settlement costs and interest rates.
A more complete explanation of these changes and the reasoning behind HUD’s decisions regarding the final rule can be found at 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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