The U.S. Department of Housing and Urban Development (“HUD”) recently issued a final rule amending Regulation X, which is the regulation that implements the Real Estate Settlement Procedures Act (“RESPA”). The reforms are for the stated objective of giving potential borrowers additional information about their mortgage loans earlier in the process and follows a proposal issued in March 2008 that attracted approximately 12,000 comments.
The final rule requires that lenders and/or mortgage brokers provide consumers with a standard Good Faith Estimate (“GFE”) and HUD1/HUD1A form (“HUD1”) that, in HUD’s view, more clearly discloses loan terms and closing costs and facilitates comparison shopping.
Highlights of the final rule are as follows:
- The final rule requires a standardized three page GFE that is intended to provide clear information on such questions as:
- The term of the loan;
- Whether the interest rate is fixed or variable ;
- The length of time before the first change can occur in the interest rate or monthly payment;
- The extent to which the interest rate or monthly payment can increase;
- Whether the loan balance can increase even if the borrower makes payments on time and the maximum the loan balance can increase over the life of the loan; Whether there is a pre-payment penalty;
- Whether there is a balloon payment;
- Total closing costs.
- The terms of the GFE, other than the interest rate and the charges dependent upon the interest rate, must be available to consumers for ten business days from the date the GFE is received by the consumer.
- The revised GFE consolidates closing costs into major categories to prevent “junk fees” and displays total estimated settlement charges prominently on the first page.
- The new GFE contains a “trade-off table” to assist the consumer in understanding the relationship between higher interest rates and lower settlement costs through a side-by-side comparison.
- HUD has adopted tolerances for certain amounts included on the GFE, absent changed circumstances. Those prohibit charges listed on the GFE from being increased at settlement and limits to 10% the amount other charges may increase from the charge described on the GFE. There is no tolerance for some charges.
- Loan originators are required to provide the GFE within three business days after their receipt of all necessary information from the applicant. To facilitate shopping, loan originators may not require verification of application information (e.g., tax returns) until after the applicant makes the decision to proceed.
- The new rule limits the fee that may be charged for providing the GFE.
- The revised HUD-1 includes conformed terminology and references to the relevant line from the GFE to provide a simple comparison of estimated and actual costs.
- The substantially revised HUD-1 settlement statement contains a chart intended to facilitate easy comparison of final closing costs and loan terms with those provided on the GFE. It replaces, based on comments to the proposed rule, the proposed reading of a “closing script” at the closing table by settlement agents.
- Payments to mortgage brokers, including lender payments (i.e., Yield Spread Premiums), must be disclosed as an origination charge on the revised GFE and treated as a credit toward settlement charges.
- Loan originators will have 30 calendar days from the settlement date to cure any violation of RESPA’s new disclosure and tolerance requirements and reimburse consumers for any overcharges.
- The revised rule is effective January 16, 2009; however, the new standardized GFE and revised HUD-1 will not be required until January 1, 2010.
- HUD estimates that the enhanced disclosures and restrictions on increasing charges from those disclosed will reduce total closing costs almost $700 per loan.