Consumer Compliance Outlook
RESPA Changes to the Good Faith Estimate Form
In November 2008, the Department of Housing and Urban Development (HUD) published a final rule1 to amend Regulation X, HUD’s implementing regulation for the Real Estate Settlement Procedures Act (RESPA). The amendment made significant changes to the Good Faith Estimate (GFE) and the HUD-1 and HUD-1A uniform settlement statement forms effective January 1, 2010. The GFE is the form loan originators (lenders and mortgage brokers) must provide to consumers no later than three business days after receiving an application for a “federally related mortgage loan,” as defined in §3500.2(b). The revised GFE is now a three-page form, reflecting the additional information lenders must now disclose.2 HUD had several goals in revising the GFE:
- to reduce settlement costs by making it easier to shop among settlement service providers;
- to increase the accuracy of settlement costs listed on the GFE by improving disclosures of yield spread premiums (YSP);
- to facilitate comparison of the GFE and HUD-1/ HUD-1A forms; and
- to strengthen RESPA’s prohibition against the required use of affiliated businesses.3
This article is the first in a two-part series dealing with HUD’s amendments to Regulation X. Part 1 reviews two important changes to the GFE: 1) changed circumstances, and 2) tolerance and cure. Part 2 will address HUD’s changes to the HUD-1 form.
While the GFE is intended to be an “estimate” of the loan terms and settlement costs and not an exact accounting, it must still be reasonably accurate. To this end, §3500.7(f) provides that “a loan originator is bound, within the tolerances provided in paragraph (e) of this section, to the settlement charges and terms listed on the GFE provided to the borrower, unless a new GFE is provided prior to settlement consistent with this paragraph (f).”
This section establishes that the loan originator is bound by the settlement charges and loan terms in the GFE unless one of the exceptions in §3500.7(f) applies. One important exception is for “changed circumstances.” This term is defined in §3500.2 as:
- an act of God, war, disaster, or other emergency;
- information particular to the borrower or transaction that was relied on in providing the GFE and that changes or is found to be inaccurate after the GFE has been provided. This may include information about the credit quality of the borrower, the amount of the loan, the estimated value of the property, or any other information that was used in providing the GFE;
- new information particular to the borrower or transaction that was not relied on in providing the GFE; or
- other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems.
Section 3500.2(b)(2) clarifies that changed circumstances do not include the borrower’s name, the borrower’s monthly income, the property address, an estimate of the property’s value, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE, unless the information changes or is found to be inaccurate after the GFE has been provided. Also, market price fluctuations do not constitute changed circumstances.
Regulation X places restrictions on the changes loan originators can make to settlement costs and loan terms as a result of changed circumstances. First, when a changed circumstance affects settlement costs or loan terms in excess of the applicable tolerance in §3500.7(e), and the loan originator intends to issue a revised GFE,4 the originator must do so within three business days of receiving the information sufficient to establish the changed circumstance. Second, in revising the settlement costs or loan terms on the GFE because of the changed circumstance, the originator can change only those portions of the GFE directly affected by the changed circumstance. For example, if, after providing a GFE, a lender determines that a borrower’s property is located in a special flood hazard area and requires flood insurance, that would constitute a changed circumstance for settlement costs. The lender would then have three business days to re-issue the GFE to add the cost of flood insurance, beginning from the time the lender discovered flood insurance was required. But the lender would not be allowed to change other settlement cost estimates. For instance, if interest rates increased between the date of the original GFE and the discovery that flood insurance is required, the loan originator could not change the rate on the loan, where the rate was locked in, because the rate was not affected by the changed circumstance of the flood insurance determination. Finally, when a changed circumstance results in a revised GFE, loan originators must retain documentation of the reasons for providing the revised GFE for no less than three years after settlement.
HUD has provided additional guidance about “changed circumstances” in its New RESPA Rule FAQs (FAQs).5 The April 2, 2010 version of the FAQs includes 14 questions and answers on changed circumstances. For example, question 13 on p. 21 states:
Q: If the borrower selects a service provider that was not selected or identified by the loan originator, is this considered a changed circumstance?
A: No, if the borrower selects a service provider that was not selected or identified by the loan originator, it is not considered a changed circumstance.
Readers are encouraged to consult the latest version of the FAQs on HUD’s website for additional guidance on “changed circumstances.”
Tolerance and Cure
To allow borrowers to shop for mortgage loans more easily and to reduce unexpected costs at settlement, the revised GFE rules place restrictions on increases in settlement costs from the amounts listed on the GFE to the amount on the HUD-1 form at settlement. Lenders are now responsible for the estimates of loan officers and mortgage brokers. Under §3500.7(f), the loan originator is bound by the settlement costs and loan terms subject to the tolerances in §3500.7(e). This section creates three buckets of tolerances, depending on the category of the settlement cost:
- zero tolerance for the origination charge, for the interest and adjusted origination charges during an interest rate lock period, and for transfer taxes;
- 10 percent tolerance (in the aggregate) for the following charges:
- when the lender requires the borrower to use a particular third-party settlement service provider;
- when the borrower selects a settlement service provider identified by the loan originator for lender-required services, title services, and required title insurance; and
- for government recording charges; and
- no restrictions for all other settlement charges.
The figures in Block 1 (Our Origination Charge), Block 2 (Your Credit or Charge (Points) for the Specific Interest Rate Chosen), Block A (Your Adjusted Origination Charges), and Block 8 (Transfer Taxes) are origination charges and therefore cannot increase from the GFE. These charges can be decreased and are also subject to the changed circumstances exception discussed earlier. The 10 percent tolerance threshold always applies to Blocks 3 (Required Services That We Select) and 7 (Government Recording Charges) and will apply to Blocks 4 (Title Services and Lender’s Title Insurance), 5 (Owner’s Title Insurance), and 6 (Required Services That You Can Shop For) unless the borrower selects a provider that is not on the “written list.” The 10 percent tolerance never applies to Blocks 9 (Initial Deposit for Your Escrow Account), 10 (Daily Interest Charges), or 11 (Homeowner’s Insurance), although the loan originator must still give estimated costs. The amounts charged for all other settlement costs can change at settlement. All the figures are entered into charts on the top of Page 3 of the HUD-1.
If the settlement costs listed on the HUD-1 exceed the amounts listed on the GFE by more than the applicable tolerance, “the lender is responsible for curing tolerance violations” (April 2, 2010 FAQs, p. 41, Q2). Regarding the amount that must be refunded and its timing, §3500.7(i) specifies that “if any charges at settlement exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator may cure the tolerance violation by reimbursing to the borrower the amount by which the tolerance was exceeded, at settlement or within 30 calendar days after settlement.” This is known as the right to cure. The lender must also disclose the corrected settlement amounts on a revised HUD-1 (April 2, 2010 FAQs, p. 42, Q9).
Note that loan originators cannot require borrowers to use specific providers in every situation. If the loan originator has an affiliate that provides, for example, tax services or a flood certificate, the loan originator may not require borrowers to use the services of affiliates. However, the loan originator may require borrowers to use a nonaffiliated service provider. The loan originator may include any affiliates on the “written list,” provided the loan originator includes an affiliated business arrangement disclosure to the borrower when the GFE is sent to the borrower or the referral is made, whichever is earlier. (The rules governing affiliated business arrangements and required disclosures are in §3500.15.)
Block 4 for title services and lender’s title insurance raises potential issues because this amount is often the largest of the values on the GFE and, therefore, has the largest potential for exceeding the 10 percent tolerance threshold. This can occur when loan originators fail to include all the ancillary items associated with the title service. Block 4 includes all charges associated with the title services and settlement (closing) agent services, including fees for settlement, abstract/ title search, title examination, document preparation, associated attorney or notary fees, commitment/binder fees, wire fees, lender’s title insurance, endorsements, courier/delivery fees, copying fees, electronic transmittal fees, and any other miscellaneous fees associated with title services performed for settlement. The amount in Block 4 should be the total of all of the preceding costs, even if paid to multiple sources. However, if any settlement charges are paid by the seller, they should not be included in Block 4.
Readers should consult the FAQs for additional guidance. The April 2, 2010 version includes 15 questions and answers on the right to cure and tolerance violations for sections 4 and 5.
HUD revised the GFE and HUD-1 forms to make the mortgage loan process more transparent to consumers, with fewer surprises at closing. The next issue of Outlook will discuss the changes to the HUD-1 under HUD’s new Regulation X rules. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.