HUD Proposed Rule - July 29, 2002 (PDF 536K)

Monday,

July 29, 2002









Part III



Department of

Housing and Urban

Development

24 CFR Part 3500

Real Estate Settlement Procedures Act

(RESPA); Simplifying and Improving the

Process of Obtaining Mortgages To

Reduce Settlement Costs to Consumers;

Proposed Rule









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49134 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



DEPARTMENT OF HOUSING AND forms and solicits comments on home, which is regulated under RESPA,

URBAN DEVELOPMENT additional changes including changes to 12 U.S.C. 2601 et seq., remains too

HUD’s settlement disclosure form and complicated, too costly, and too opaque

24 CFR Part 3500 disclosure requirements. for many borrowers. The monies needed

[Docket No. FR–4727–P–01] DATES: Comment Due Date: Deadline for to close on a home are a significant

comments on this proposed rule, impediment to homeownership, and

RIN 2502–AH85 including comments on the proposed settlement costs are a significant

information collection requirements: component of these costs. In light of the

Real Estate Settlement Procedures Act October 28, 2002. Administration’s commitment to reach

(RESPA); Simplifying and Improving even higher levels of homeownership,

ADDRESSES: Interested persons are

the Process of Obtaining Mortgages To the RESPA regulatory scheme deserves

invited to submit comments regarding

Reduce Settlement Costs to particular scrutiny and necessary

this proposed rule to the Rules Docket

Consumers reform.

Clerk, Office of General Counsel, Room

AGENCY: Office of the Assistant 10276, Department of Housing and The current disclosure requirements

Secretary for Housing-Federal Housing Urban Development, 451 Seventh Street, under RESPA have not been

Commissioner, HUD. SW., Washington, DC 20410–0500. substantively revised in decades.

Communications should refer to the Although the RESPA disclosures were

ACTION: Proposed rule.

above docket number and title. comprehensively reviewed as recently

SUMMARY: The Department of Housing Facsimile (FAX) comments are not as 1998 by both HUD and the Board of

and Urban Development is issuing this acceptable. A copy of each Governors of the Federal Reserve

proposed rule under the Real Estate communication submitted will be System, the problems identified in that

Settlement Procedures Act (RESPA), to available for public inspection and review remain largely unaddressed.

simplify and improve the process of copying between 7:30 a.m. and 5:30 Recent judicial developments

obtaining home mortgages and reduce p.m. weekdays at the above address. regarding lender 1 payments to mortgage

settlement costs for consumers. The HUD also invites interested persons to brokers 2 (yield spread premiums and

current disclosure requirements under submit comments on the proposed other named payments based on

RESPA have not been substantially information collection requirements of borrowers’ transactions) have

revised in decades. The current this proposed rule. Comments should heightened the importance of increasing

disclosures were comprehensively refer to the above docket number and borrower awareness regarding how

reviewed as recently as 1998 by HUD title, and should be sent to the Office of mortgage brokers are paid and how

and the Board of Governors of the Information and Regulatory Affairs, borrowers can benefit from payments

Federal Reserve System, but the Office of Management and Budget, made by lenders based on mortgages

problems identified then remain. Attention: Desk Officer for HUD, exceeding par interest rate.3 Some

Nevertheless, since 1998, there have Washington, DC 20503. borrowers 4 understand, agree to, and

been continuing changes in the FOR FURTHER INFORMATION CONTACT: Ivy properly use higher interest rates to

marketplace, new products, and greater Jackson, Acting Director, Interstate Land lower up front settlement costs. Others

accessibility of mortgage information via Sales and RESPA Division, Room 9146, report, however, that they paid

the Internet, all of which are reducing U.S. Department of Housing and Urban substantial origination costs in up front

settlement costs and, if properly Development, 451 Seventh Street, SW., fees for mortgages and then learned that

addressed by Government, could result Washington, DC 20410; telephone (202) they were charged interest rates higher

in greater price reductions for 708–0502 (this is not a toll-free number) than those they qualified for merely to

consumers. First, to simplify and or for legal questions Kenneth A. support an additional payment to their

improve the mortgage loan process, this Markison, Assistant General Counsel for mortgage broker.

proposal would address the issue of GSE/RESPA, or Steven J. Sacks or Under the current rules, many

loan originator compensation, Teresa L. Baker (Senior RESPA borrowers are provided estimated

specifically the problem of lender Attorneys); Room 9262, telephone (202) settlement cost information on a GFE

payments to mortgage brokers, by 708–3137. Persons with hearing or only after paying a significant fee

fundamentally changing the way in speech impairments may access this required by a loan originator,5 which

which these payments in brokered number via TTY by calling the toll-free prevents the borrower from shopping

mortgage transactions are recorded and Federal Information Relay Service at among additional originators using the

reported to consumers. Second, it would (800) 877–8339. The address for the

1 The term ‘‘lender’’ is used throughout this

significantly improve HUD’s Good Faith above listed persons is: Department of

document to mean any person who is the ‘‘real

Estimate (GFE) settlement cost Housing and Urban Development, 451 source of funds’’ for a federally related mortgage

disclosure and HUD’s related RESPA Seventh Street, SW., Washington, DC loan.

regulations to make the GFE firmer and 20410. 2 Except as specifically described in footnote 17,



more usable, to facilitate shopping for the term ‘‘mortgage broker’’ is used throughout the

SUPPLEMENTARY INFORMATION: document to mean a person (not an employee of a

mortgages, to make mortgage lender) who table funds or acts an intermediary in

transactions more transparent, and to I. Introduction a federally related mortgage loan. Mortgage brokers

prevent unexpected charges to The American mortgage finance that are the ‘‘real source of funds’’ for a federally

consumers at settlement. Finally, the system is justifiably the envy of the related loan are not regarded as brokers in such

transactions.

rule would promote competition by world. It has offered unparalleled 3 The term ‘‘par interest rate’’ is used throughout

removing regulatory barriers to allow financing opportunities under virtually this document to mean the interest rate at which

guaranteed packages of settlement all economic conditions to a very wide there is not payment made by the lender to the

services and mortgages to be made range of borrowers that, in no small borrower or from the borrower to the lender.

4 The terms ‘‘consumer’’ and ‘‘borrower’’ are used

available to consumers, to simplify part, have led to the highest

interchangeably throughout the document.

shopping by consumers and further homeownership rate in the Nation’s 5 The term ‘‘loan originator’’ is used throughout

reduce settlement costs. The proposed history. At the same time, however, the this document to refer to lenders and mortgage

rule also includes proposed, revised process of financing or refinancing a brokers.







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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49135



GFE. Also, when borrowers receive lowering costs in the settlement process, methods where they should be tested, in

estimated settlement cost information it is not clear that under existing rules the marketplace, to determine which is

after applying for a mortgage, the these benefits are passed on to the more effective in lowering settlement

estimates are often unreliable and prove borrower in the form of lower settlement costs.

too low. Final charges at settlement prices. HUD’s rules implementing Late last year, in Statement of Policy

often include additional surprise ‘‘junk Section 8 of RESPA require originators 2001–1, Clarification of Statement of

fees,’’6 which increase the original to pass through third party costs Policy 1999–1 Regarding Lender

estimates. HUD’s current rules provide without ‘‘mark-ups’’ or ‘‘upcharges,’’ Payments to Mortgage Brokers, and

little guidance on the standards that and generally prohibits volume discount Guidance Concerning Unearned Fees

originators should be held to in arrangements. Many industry and Under Section 8(b), 66 FR 53052

providing good faith settlement cost consumer advocates assert, however, (October 18, 2001), the Secretary

estimates. that these regulatory restrictions prevent announced his intention to make full

By requiring a long listing on the GFE activities and innovations which would use of his regulatory authority to

of each estimated settlement charge, the lower prices to borrowers. Many provide clear requirements and

current disclosure fails to highlight the mortgage industry providers also report guidance regarding the disclosure of

major costs and seems to lead only to a that while they follow the rules, they are mortgage broker fees, and more broadly,

proliferation of charges without any competitively disadvantaged by those to improve the mortgage settlement

actual increase in the work performed or who do not because of the lack of process to better serve borrowers. The

enhanced borrower understanding to adequate enforcement by HUD. Secretary has established the following

assist in shopping for services and guard principles to guide HUD’s RESPA

Specifically, some assert that HUD’s

against unnecessary charges. The reform and enforcement efforts:

RESPA rules impede arrangements for

current requirements allow an 1. Borrowers should receive

the packaging of settlement services,

individual such as a loan originator, to settlement cost information early

which would allow packagers to draw

charge several fees for origination, enough in the process to allow them to

on their knowledge of the market and

document preparation, and document shop for the mortgage product and

familiarity with the products offered by

review. It is difficult for borrowers to settlement services that best meet their

providers of specific services to develop

distinguish or understand the precise needs;

lower settlement cost packages for

purpose of these various itemized 2. Disclosures should be as firm as

borrowers. They assert that such

services provided by the same possible to avoid surprise costs at

originator. Excessive itemization thus packages would increase competition

and enhance borrower shopping, settlement;

enables originators to charge more than 3. Regulatory amendments should be

if the borrower could review and shop lowering costs more effectively than

restrictions against referral fees or utilized to remove unintended barriers

the total origination charges. The same to marketing new products,

holds true for title and other third party unearned fees. In the joint HUD and the

Board of Governors of the Federal competition, and technological

services. The types of fees charged by innovations that could lower settlement

loan originators, title agents and other Reserve System, Joint Report to the

Congress Concerning Reform of the costs;

service providers have multiplied in 4. Many of the current system’s

recent years making it steadily more Truth in Lending Act and the Real

problems derive from the complexity of

difficult for borrowers to compare Estate Settlement Procedures Act, (July

the process; with simplification of

settlement costs. 1998), (hereafter HUD-Federal Reserve

disclosures and better borrower

Industry advocacy groups have Report) both agencies agreed that an

education, the loan origination process

indicated that they support better exemption should be established to

can be improved; and

disclosure of mortgage broker facilitate the provision of settlement

5. RESPA should be vigorously

compensation specifically and loan services and to improve consumers’

enforced to protect borrowers and

origination charges in general. ability to shop effectively for a mortgage

ensure that honest industry providers

Consumer groups have called for loan and thereby allow competitive

have a level, competitive playing field.

protections against yield spread forces to reduce the cost of financing a In accordance with these principles,

premiums that were not bargained for, home. HUD-Federal Reserve Report at this proposed rule would first

more shoppable settlement cost 33. At that time, some settlement service fundamentally change the way in which

disclosures, and much firmer interest providers claimed that such an mortgage broker compensation is

rates and settlement service costs. exemption would legalize kickbacks and reported by requiring, in all loans

Settlement cost disclosures need to be referral fees. HUD has examined this originated by mortgage brokers, that any

improved so that the information they concern and concluded that guaranteed payments from a lender based on a

provide is simpler, clearer, more packaging arrangements should be borrower’s transaction, other than the

reliable, and reasonably available to permitted in a carefully circumscribed payment for the par value 7 of the loan,

facilitate shopping, increase safe harbor. Deregulation, transparency

including payments based upon an

competition, and lower settlement costs. and a free market will wring out

above par interest rate on the loan

Although HUD has called for better kickbacks, referral fees, and other

(payments commonly denominated

disclosures in policy statements and excesses more effectively than the

‘‘yield spread premiums’’), be reported

opinions, its regulations need to be current restrictions and, for this reason,

on the Good Faith Estimate (and the

updated to establish requirements that the establishment of a safe harbor is

HUD–1/1A Settlement Statement) as a

are more useful to consumers. warranted. Under this proposal,

lender payment to the borrower.

While technology and market forces settlement service providers may choose

have played a significant role in Additionally, in brokered loans, any

either to operate using an improved GFE

borrower payments to reduce the

disclosure, or to participate in packages

6 ‘‘Junk fee’’ is a term used throughout this interest rate (‘‘discount points’’) must

qualifying for the safe harbor.

document to mean any fee charged for a service to

a borrower that has little or no value in relation to

Accordingly, this dual approach will 7 The term ‘‘par value’’ of the loan is used



the charge, and/or may be duplicative, to increase provide industry and borrowers alike throughout this document to mean the principal

a loan originator’s profits. with an opportunity to test both amount of the loan.







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49136 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



equal the discount in the price of the HUD–1 Settlement Statement as a settlement charge categories so they do

loan paid by the lender, and be reported lender payment to the borrower and any not exceed those stated on the GFE by

on the GFE (and HUD–1/1A) as discount points charged to the borrower more than 10%; and (5) clarify that loan

borrower payments to the lender. These must equal the discount in the price of originators can make arrangements with

changes would require mortgage brokers the loan paid by the lender and be third party settlement service providers

to disclose, at the outset, the maximum reported on the GFE and the HUD–1 to lower prices for their customers,

amount of compensation they could Settlement Statement as borrower provided that these prices and any

receive from a transaction, and include payments to the lender. These changes charges are reflected accurately on the

the amount in the ‘‘origination fees’’ will ensure that borrowers receive the GFE and are not ‘‘marked up’’ or ‘‘up

block of the GFE and separately on the full benefit of any payments from or to charged.’’

GFE Attachment A–1. They would then lenders in brokered transactions, either Third, the proposed rule would

disclose the amount of the lender by reducing their up front settlement remove regulatory barriers to allow

payment to the borrower that would be costs in exchange for accepting a loan packages of settlement services and

received at the interest rate quoted, if with a higher rate, or by reducing their mortgage loans to be made available to

any. Mortgage brokers would be unable interest rate and monthly payments by borrowers. These transactions would be

to increase their compensation without paying additional amounts to the lender even simpler and more transparent for

the borrower’s knowledge, either by at settlement. borrowers, and would allow market

placing the borrower in an above par The new GFE would also better forces, borrower shopping, and

loan, and receiving a payment from the inform borrowers of the costs of competition to further reduce the costs

lender (yield spread premiums), or by obtaining a mortgage loan from a of settlement services to better achieve

retaining any part of any borrower mortgage broker, as well as from the purposes of the statute.

payment intended to reduce the loan mortgage bankers, lenders or other loan To accomplish this objective, HUD

rate (discount points). originators, and would better protect would establish a carefully

Through these changes in reporting borrowers from unnecessary surprise circumscribed safe harbor under RESPA

requirements, HUD believes that charges at settlement. It would: for ‘‘Guaranteed Mortgage Package’’

virtually all disputes regarding broker (1) Include an interest rate quote in (GMP) transactions. Any entity (a

compensation in table funded the form of the mortgage loan’s note rate lender, broker, other settlement service

transactions and intermediary and APR, and notification of any provider, or other entity), hereinafter a

transactions involving yield spread prepayment penalties, to assist the ‘‘packager,’’ may qualify for the safe

premiums would be resolved. Maximum borrower in shopping among mortgages; harbor as long as it offers a GMP. The

broker compensation would be clear (2) Disclose subtotals of major packager must offer the GMP to a

and brokers would have no incentive to categories of settlement costs (including, borrower following his or her

seek out lenders paying the largest yield for example, loan origination costs and submission of application information,

spread. They would instead be title services) to borrowers to eliminate but before the borrower’s payment of

motivated to find the best loan product the proliferation of fees by individual any fee to the packager. The GMP must

they can for the borrower. At the same settlement service providers, and to include: (1) A guaranteed package price

time, HUD believes that since these new allow borrowers to focus on and for a comprehensive package of loan

disclosure requirements will allow compare major fees; and origination and virtually all other

borrowers to focus on the total (3) Provide additional shopping settlement services required by the

origination costs for shopping purposes, information for borrowers that would lender to close the mortgage (including

they will not disadvantage brokers in provide a breakdown of lender and without limitation, all application,

competition with lenders. broker origination charges, title origination and underwriting services,

Second, the proposed rule would insurance and title agent charges, and the appraisal, pest inspection, flood

improve the existing RESPA disclosure inform the borrower of lender required review, title services and insurance, and

scheme by establishing a new required and selected services and those third any other lender required services

format for the Good Faith Estimate party services that can be shopped for except hazard insurance, per diem

providing greater accuracy and by the borrower. interest, and escrow deposits); (2) a

usefulness for borrowers, which would: The proposed rule would further mortgage loan with an interest rate

(1) Inform the borrower that mortgage improve the existing disclosure scheme, guarantee, whether when the

brokers and other loan originators do by amending Regulation X to establish ‘‘Guaranteed Mortgage Package

not offer loans from all funding sources new rules for the provision of the GFE Agreement’’ (GMPA) is given or subject

and cannot guarantee the lowest price or which would: (1) Clarify the basic to change (prior to borrower lock-in)

best terms available in the market; (2) information needed in an ‘‘application’’ only pursuant to market changes

explain to the borrower the option of to obtain a GFE; (2) limit fees paid by evident from an observable and

paying his or her settlement costs borrowers for the GFE, if any, to the verifiable index or other appropriate

through the use of lender payments amounts necessary to provide the GFE data or means; and (3) a contract offer

based on higher interest rates, or itself and exclude amounts used to in the form of a GMPA to guarantee the

reducing the interest rate by paying the defray later appraisal or underwriting price for settlement services and the

lender additional amounts at settlement; charges, in order to facilitate shopping mortgage interest rate through

(3) disclose the loan originators’ fees, with GFEs; (3) require that loan settlement, if the offer is accepted by the

including the mortgage broker’s and originators not exceed the amounts borrower. Additionally, in order to

lender’s total charges to borrowers; and reported on the GFE regarding their total ensure that the borrower receives the

(4) require, in transactions originated by compensation, lender required and settlement package of services and the

mortgage brokers, that all payments selected third party services, and mortgage loan, the proposed rule would

from a lender other than for the par government charges through settlement require that the packager sign the GMPA

value for the loan (including ‘‘yield (absent unforeseeable and extraordinary agreeing to provide the Guaranteed

spread premiums,’’ servicing release circumstances); (4) require that loan Mortgage Package at the Guaranteed

premiums, and all other payments from originators comply with upper limits or Mortgage Package price and that non-

lenders), be reported on the GFE and the ‘‘tolerances’’ for specified major lender packagers have a lender sign the





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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49137



GMPA after borrower acceptance other things of value between entities In this proposed rule at Appendix C

agreeing to provide the loan included in participating in the package. Section 8 and F, the Department is publishing for

the Guaranteed Mortgage Package. would, however, continue to prohibit comment new proposed required

The GMPA would describe the any payments for the referral of formats for the Good Faith Estimate

package as ‘‘including all services business, kickbacks, splits of fees and (GFE) and new GMPA. HUD believes

required by the lender to close the unearned fees between the packager and that the content of the material in these

mortgage’’ but would not itemize the any of the entities participating in the proposed forms gives the consumer the

specific services to be provided. The package on the one hand and entities information needed to shop for loan

packager would, however, be required outside of the package on the other. products and to assist them during the

to inform the borrower if certain items Under the safe harbor, packagers would settlement process. HUD recognizes that

of interest to the borrower are provide the GMPA in lieu of a GFE. in order for these forms to be useful

anticipated to be excluded from the HUD regards such provision of a GMPA shopping tools, they must be consumer

package, specifically lender’s title as fully, indeed more than, satisfying friendly. The Department seeks public

insurance, pest inspections, and a the requirements of Section 5 of RESPA comment on these proposed forms In

property appraisal. Additionally, where that borrowers receive a Good Faith addition, the Department will arrange

the packager anticipates obtaining a pest Estimate of the amount of charges for focus groups during the comment

inspection, appraisal, or credit report, settlement services the borrower is period to elicit comments on how to

the packager must disclose that likely to incur. HUD believes that the make the material in the new proposed

information on Attachment A–1 and GMPA, by providing a Guaranteed forms as consumer friendly as possible

make such documents available at the Mortgage Package price encompassing including considering, among other

borrower’s request. The HUD–1 would virtually all settlement charges, along things, how the new proposed forms are

list the services ultimately provided, but with a limited number of itemized best compared by consumers to the

not the charges for specific services. charges, including owner’s title HUD–1 and what revisions, if any, to

HUD is requesting comments on insurance, also more than satisfies the the HUD–1 would be most helpful.

whether this approach satisfies, or requirements of Section 4 of RESPA. In addition, the Department will

whether alternative approaches should Nevertheless, as long as the facilitate the provision of web based

be developed, to ensure that consumers’ requirements of the safe harbor are information to consumers on settlement

rights under TILA and HOEPA are satisfied, HUD is also prepared to costs and pursue other efforts to ensure

protected while facilitating packaging. exercise the exemption authority under that RESPA regulation encourages

The Secretary is exercising the Section 19 to create a safe harbor for technological advances to facilitate

exemption authority under Section packagers from the requirements of competition, and lower costs and prices

8(c)(5) and Section 19 of RESPA to Sections 4 and 5 of RESPA, if it deems to consumers. Beyond this rulemaking,

establish this Guaranteed Mortgage the Department is examining possible

such an exemption necessary.

Packaging safe harbor for those changes to its rules to facilitate

The safe harbor is proposed to be

Guaranteed Mortgage Package electronic mortgage transactions

transactions that meet the requirements available only where the transaction

does not result in a high cost loan as consistent with the Electronic

set forth in this rule. The Secretary has Signatures in Global and National

determined that the establishment of that term is defined in the Home

Ownership Equity Protection Act, 15 Commerce Act, Public Law 106–229.

this carefully circumscribed safe harbor

U.S.C.1601(Supp II 1996). The safe The Department will also undertake

is necessary to allow this class of

harbor also may not be available to efforts with Federal and State regulators

transactions to be available to

mortgages that exceed other limits, or and others to better address

consumers and to achieve the purposes

include other features identified technological changes to lower costs.

of the Act. The Secretary has concluded

through this rulemaking, resulting in Additionally, the Department plans to

that the availability of these packages to

unreasonable settlement charges or loan finalize the 1997 Section 6 transfer of

consumers at single guaranteed prices

terms inimical to the purposes of servicing proposed rule; however, in the

with an interest rate guarantee will

RESPA. meantime the Section 6 language in the

simplify consumers’ shopping for

The proposed rule’s new regulatory statute may be provided in conjunction

mortgages and allow them to gain the

requirements will apply to first and with the GFE. Separate from this

benefit of an active competitive

second lien transactions, purchase rulemaking, the Secretary is increasing

marketplace in which market forces

money loans, and refinances. Home the resources dedicated to enforcing and

produce lower settlement costs. For the

equity transactions are addressed in regulating RESPA.

same reasons, the Secretary has

§ 3500.7(f), under current RESPA Following the background materials,

determined that payments among

regulation. At Question 26 the this proposal includes a description of

packagers and participating settlement

Department invites comments on this today’s proposed rule, specific

service providers and the earnings of

issue. questions for public comment, and

packager in Guaranteed Mortgage

The Department also is inviting proposed rule language. Public

Packages, as set forth in this rule, shall

not be construed as prohibited under comments specifically on whether, and comment on this proposal will be

Section 8 of RESPA as long as the to what extent modification of the important to formulating a final rule

requirements in this rule are satisfied. existing HUD–1/1A Settlement that is consistent with RESPA’s

Pursuant to Section 8(c)(5) the Secretary Statement and Instructions, found at 24 purpose, workable in the marketplace,

has undertaken the necessary CFR part 3500, Appendix A, is and best serves the financing needs of

consultation with other agency heads as necessary to make it comparable to the America’s families.

required prior to promulgating this new GFE. HUD also announces that it II. General Background

exemption. plans to revise the Special Information

The safe harbor from Section 8 will Booklet concerning settlement costs A. Legal Authority

permit the packager to charge for consistent with the final rule, and to The Department is proposing this rule

services within the package and will develop new booklets for refinance and in accordance with 5 U.S.C. 552,

permit payments to, or exchanges of junior lien transactions. Sections 19 and 8(c)(5) of the Real Estate





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49138 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



Settlement Procedures Act of 1974 (12 requires the Secretary to develop and Board,10 the Federal Deposit Insurance

U.S.C. 2617). prescribe ‘‘a standard form for the Corporation, the Board of Governors of

statement of settlement costs which the Federal Reserve System and the

RESPA Overview

shall be used * * * as the standard real Secretary of Agriculture.’’ 12 U.S.C.

In 1974, Congress enacted the Real estate settlement form in all transactions 2607(c)(2).

Estate Settlement Procedures Act (Pub. in the United States which involve Section 9 forbids any seller of

L. 93–533, 88 Stat. 1724, 12 U.S.C. 2601 federally related mortgage loans.’’ The property from requiring buyers to

et seq.) after finding that ‘‘significant rule further requires that the form purchase title insurance covering the

reforms in the real estate settlement ‘‘conspicuously and clearly itemize all property from any particular title

process are needed to ensure that charges imposed upon the borrower and company as a condition of sale. Section

borrowers throughout the Nation are 10 limits the amounts that lenders or

all charges imposed upon the seller in

provided with greater and more timely servicers may require borrowers to

connection with the settlement. * * *’’

information on the nature and costs of deposit in escrow accounts, and

Section 5 requires the Secretary to

the settlement process and are protected requires that borrowers be provided

from the unnecessarily high settlement prescribe a Special Information Booklet

for borrowers. Section 5(c) requires that with both initial and annual escrow

charges that have developed in some account statements. Section 12 prohibits

areas of the country.’’ Id. RESPA’s stated a Good Faith Estimate (GFE) be

provided at or within 3 days of loan lenders and loan servicers from

purpose is to ‘‘effect certain changes in imposing any fee or charge on any other

the settlement process for residential application, authorizes the Secretary to

prescribe the contents of the GFE, and person for the preparation and

real estate that will result: submission of the Settlement Statement,

(1) In more effective advance requires that the GFE state ‘‘the amount

or range of charges for specific the escrow account statements required

disclosure to home buyers and sellers of under Section 10(c), or any disclosures

settlement costs; settlement services the borrower is

likely to incur in connection with the required by the Truth in Lending Act.

(2) In the elimination of kickbacks or

settlement as prescribed by the Section 19 of RESPA specifically

referral fees that tend to increase

unnecessarily the costs of certain Secretary.’’ Notice of transfer of authorizes the Secretary ‘‘to prescribe

settlement services; servicing language was added to RESPA such rules and regulations, * * * and to

(3) In a reduction in the amounts at Section 6 in 1990 and amended most grant such reasonable exemptions for

home buyers are required to place in classes of transactions * * *, as may be

recently in 1996, and requires

escrow accounts established to ensure necessary to achieve the purposes of

notification to borrowers at the time of

the payment of real estate taxes and [RESPA].’’

application for the mortgage, and during

insurance; and the life of the loan, of whether the B. Background

(4) In significant reform and servicing of the loan may be or has been

modernization of the local record HUD’s RESPA Rules

assigned, sold, or transferred.

keeping of land title information.’’ Id. In 1975, HUD promulgated its first set

Section 8(a) prohibits any person from

RESPA’s requirements apply to giving and any person from accepting of RESPA rules including limited

transactions involving ‘‘settlement ‘‘any fee, kickback, or thing of value disclosure requirements. Real Estate

services’’ for ‘‘federally related mortgage Settlement Procedures and Cost, 40 F.R.

pursuant to any agreement or

loans.’’ Under the statute the term 22448 (1975). These rules included a

understanding, oral or otherwise,’’ that

‘‘settlement services’’ includes any requirement that the HUD–1 form be

real estate settlement service business

service provided in connection with a given to borrowers within seven days of

shall be referred to any person. 12

real estate settlement.8 The term a loan commitment, with the provision

U.S.C. 2607(a). Section 8(b) prohibits

‘‘federally related mortgage loan’’ is that estimates were permitted for those

anyone from giving or accepting ‘‘any

broadly defined to encompass virtually items the lender could not accurately

portion, split, or percentage of any

all purchase money and refinance provide cost information for at the time

charge made or received’’ for the

mortgages.9 Section 4(a) of RESPA of loan commitment. Congress amended

rendering of a real estate settlement

the RESPA statute in 1976 and included

service ‘‘other than for services actually

8 These services include, but are not limited to,

a requirement that borrowers be

‘‘title searches, title examinations, the provision of performed.’’ 12 U.S.C. 2607(b). Section provided with a Good Faith Estimate

title certificates, title insurance, services rendered 8(c) of RESPA provides, in part, that along with the special information

by an attorney, the preparation of documents, ‘‘[n]othing in [Section 8] shall be

property surveys, the rendering of credit reports or booklet at, or within 3 days of a loan

appraisals, pest and fungus inspections, services construed as prohibiting * * * (2) the application. Following these

rendered by a real estate agent or broker, the payment to any person of a bona fide amendments, HUD promulgated rules in

origination of a federally related mortgage loan salary or compensation or other 1977 that included a suggested format

(including, but not limited to, the taking of loan payment for goods or facilities actually

applications, loan processing, and the underwriting for the GFE and requirements for its

and funding of loans), and the handling of the furnished or for services actually provision to borrowers at or within 3

processing, and closing of settlement.’’ 12 U.S.C. performed.’’ * * * or ‘‘(5) such other days of application, as well as a

2602(3). payments or classes of payments or

9 Specifically, the term covers mortgages ‘‘secured Uniform Settlement Statement,

other transfers as are specified in designated as the HUD–1, to itemize

by a first or subordinate lien on residential real

property (including individual units of regulations prescribed by the Secretary, settlement charges to borrowers in every

condominium and cooperatives) designed after consultation with the Attorney settlement involving a federally related

principally for the occupancy of one to four General, the Secretary of Veterans mortgage loan where there is a borrower

families’’; mortgages made ‘‘in whole or in part by Affairs, the Federal Home Loan Bank

any lender the deposits or accounts of which are

insured by the Federal Government or is made in 10 The Federal Home Loan Bank Board (FHLBB)



whole or in part by any lender which is regulated from which it will be purchased by Freddie Mac, was abolished Effective October 8, 1989, by the

by any agency of the Federal Government’’ or or is made in whole or in part by any loan Financial Institutions Reform, Recovery, and

‘‘insured, guaranteed, supplemented or assisted in originator, among other things, ‘‘who makes or Enforcement Act of 1989, (Pub. L. 101–73). Its

any way by HUD or any officer or agency of the invests in residential real estate loans aggregating successor agency, the Office of Thrift Supervision,

Federal Government,’’ intended to be sold to Fannie more than $1,000,000.00 per year.’’ 12 U.S.C. Department of the Treasury, assumed the FHLBB’s

Mae, Ginnie Mae, Freddie Mac or an institution 2602(3). regulatory functions.







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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49139



and a seller, along with instructions and where the same charge will be disclosed artificial separation and inflation of the

requirements for its use. on the HUD–1 or HUD 1–A at total charges of certain settlement

On November 2, 1992, HUD amended settlement. If the lender requires the use service providers resulting in higher

its rules to implement the 1984 of particular settlement service total costs to borrowers than a more

amendments to RESPA establishing a provider(s) and requires the borrower to consolidated list would provide. For

‘‘controlled business exemption’’ (now pay for any portion of such provider’s example, the current requirements

known as an ‘‘affiliated business services, the rules require that the GFE encourage loan originators to charge for

exemption’’), a controlled (now known state: that the use of the provider is several separate ‘‘services’’—

as an ‘‘affiliated’’) business disclosure to required and that the estimate is based origination, document preparation,

be provided at the time of a referral, and on the selected provider’s price; the document review. Similarly, title

a disclosure of required providers to provider’s name, address and telephone, service providers are required to

accompany the GFE. 57 FR 49600. The and the nature of any relationship separate their charges into ‘‘abstract,’’

1992 amendments also made other between the provider and the lender.13 ‘‘document preparation,’’ ‘‘attorney’s

significant additions and changes, The current GFE does not identify the fees,’’ and other charges. Moreover,

including defining the term mortgage particular items that the borrower may neither the GFE nor the HUD–1 specify

broker,11 and applying disclosure shop for after he has selected a lender the total amount of fees that each major

requirements to mortgage brokers, as or broker, such as a title or settlement recipient receives and retains, including

more fully discussed below. In 1994, at agent, title insurance, and a pest the lender, the broker, and the title

59 FR 6506, HUD amended its rules to inspector. agent. It is reported that some

conform with the 1992 amendments to The HUD–1, described in detail in originators charge ‘‘junk’’ fees for

the law covering refinancings and junior Appendix A of HUD’s RESPA rules, ‘‘services’’ to increase profits by filling

lien transactions. At that time, HUD discloses the charges at settlement in in as many blank lines on the form as

promulgated a new disclosure form, the major groupings or series. The left hand possible. It also has been reported that

HUD–1A, for use in refinancing and column on the front of the HUD–1 some originators compete on rate and

subordinate loan transactions where summarizes the borrower’s transaction, points when giving quotes and then

there is no seller. While the 1992 and listing the cash due at settlement from charge a variety of additional fees to

1994 amendments necessitated the borrower, as a result of the gross increase their profits.

additional disclosures, the formats of amounts due less any amounts paid by

or on behalf of the borrower prior to Provision of the Good Faith Estimate

the GFE and HUD–1, and the disclosure

requirements, have remained settlement. This part of the HUD–1 lists The RESPA rules require that the loan

substantially unchanged since they were credits to the borrower as well as the originator must provide the GFE either

originally established in 1977. total settlement charges due from line by delivering it or placing it in the mail

1400 on the back of the form. The right to the borrower not later than three

Contents of Good Faith Estimate and the hand column on the front of the HUD– business days after a loan application 14

HUD–1 1 summarizes the seller’s transaction, is received or prepared. In practice, loan

HUD’s RESPA rules require that listing the total amount due to the seller originators frequently insist on the

lenders and mortgage brokers who are as the gross amount due to the seller borrower’s completion of a full

not exclusive agents of lenders provide adjusted for items such as settlement application form and payment of a

a GFE to all applicants for federally charges to the seller and the payoff(s) of significant fee to cover the costs of an

related mortgage loans, and contain a any mortgages, and any other items due appraisal and credit check before a GFE

suggested format in Appendix C to 24 from seller (such as taxes), to arrive at is provided. Therefore, by the time that

CFR part 3500. The suggested GFE a total amount due seller. the borrower receives a GFE he or she

format lists twenty common settlement The 700 series of the HUD–1 lists real has typically already selected a

services and provides spaces for the estate broker commissions; the 800 particular loan originator, and paid

charges for such services. The series lists origination fees and certain substantial fees, and is highly unlikely

instructions indicate that any other third party settlement services payable to shop further for another loan

possible services and charges should in connection with the loan; the 900 originator. In addition, because the GFE

also be listed.12 The GFE provides a series lists items required by the lender is not generally provided until the

place for the ‘‘amount of or range’’ of to be paid in advance; the 1000 series borrower applies for a loan, the form

each charge that the borrower is likely lists reserves deposited with lender; the does not provide borrowers with

to incur in connection with the 1100 series lists all title related charges; sufficient opportunity to focus on and

settlement. Between the name and the 1200 series lists government compare the full costs of the originator

amount of each charge is a reference to charges; the 1300 series lists any and other major recipients of fees, nor

additional settlement charges; and line does it indicate clearly other individual

11 HUD’s RESPA rules, found at 24 CFR part 3500 1400 discloses the total settlement settlement services including title

(Regulation X), currently define a ‘‘mortgage charges. services that the borrower may shop for.

broker’’ to be ‘‘a person (not an employee or The current GFE and HUD–1/1A Borrowers must shop on their own

exclusive agent of a lender) who brings a borrower

and lender together to obtain a federally-related

forms require a listing of the settlement without the aid of a GFE.

mortgage loan, and who renders services’’ as charge for each service, which appears

Current Definition of ‘‘Good Faith’’

described in the rule (24 CFR 3500.2(b)). to have led to an increasing proliferation

12 Specifically, the GFE format lists the loan

of enumerated services by individual HUD’s RESPA rules currently require

origination fee, loan discount fee, appraisal fee, settlement service providers (e.g., loan that a GFE must be made in good faith,

credit report, inspection fee, mortgage broker fee, bear a ‘‘reasonable relationship’’ to the

CLO access fee, tax related service fee, interest at originators, title agents, etc.) and an

‘‘dollars’’ per day, mortgage insurance premium, charge the borrower is likely to be

hazard insurance premium, reserves, settlement fee, 13 24 CFR 3500.7(e)(3). Except for a provider that



abstract or title search, document preparation fees, is the lender’s chosen attorney, credit reporting 14 The rules define an ‘‘application’’ as the



attorney’s fee, title insurance, recording fees, city/ agency, or appraiser, if the lender is in an affiliated submission of a borrower’s financial information in

county tax stamps, state tax, survey, pest inspection business relationship with the provider (see anticipation of a credit decision involving a

and the form provides space for additional fees that § 3500.15), the lender may not require the use of federally related loan on a specific property. 24 CFR

may be added. that provider. 3500.2(b).







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49140 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



required to pay at settlement, and ‘‘be HUD’s RESPA rules permit the borrower pursuant to specific agreements with

based upon experience in the locality of to inspect, a day before settlement, the individual wholesale lenders.19

the mortgaged property.’’ 24 CFR HUD–1 or HUD–1A containing those Mortgage brokers have various means

3500.7(c)(2). The rules, however, do not items that are known to the settlement of obtaining funding for the loans they

establish any bright lines or tolerances agent at the time of the inspection. 24 originate. Some mortgage brokers close

to assure that there is, in fact, a CFR 3500.10. mortgage loans in their own name but,

reasonable relationship between these at the time of settlement, transfer the

estimates and final costs at settlement. Mortgage Brokers 17 loan to a lender that simultaneously

Although the rules do require additional At the time RESPA was enacted, advances funds for the loan.

disclosure where the lender requires the single-family mortgages were mainly Immediately after the loan is

use of a particular provider, stating that originated and held by savings and consummated, the mortgage broker

the lender must ‘‘make its estimate loans, commercial banks, and mortgage delivers the loan package to that lender,

based upon the lender’s knowledge of bankers. During the 1980’s and 1990’s, including the promissory note,

the amounts charged by the provider,’’ the rise of secondary mortgage market mortgage, evidence of insurance, and all

the rules do not establish any bright financing resulted in the emergence of rights in the loan that the mortgage

lines for the loan originator with respect new retail entities, notably mortgage broker held. This type of transaction is

to their estimates of these or other third brokers, to compete with traditional known in the lending industry, and

party charges, or even with respect to mortgage originators, lending defined in HUD’s regulations, as ‘‘table

their own charges. Id.15 Under HUD’s institutions, and mortgage bankers. funding.’’

rules, charges on the Good Faith Today, mortgage brokers are estimated Some mortgage brokers function

Estimate are to be disclosed as ‘‘a dollar to originate more than 60% of the purely as intermediaries between

amount or range of each charge’’ which nation’s mortgages. borrowers and lending sources. They

will be listed in section L of the HUD– originate loans by providing loan

1 or HUD–1A. Frequently, borrowers Mortgage brokers essentially provide processing and arranging for the

report to HUD that brokers’ or lenders’ retail lending services, including provision of funds by lenders. Loans

own charges at settlement include one counseling borrowers on loan products, which they originate are closed in the

or more additional fees that were not collecting application information, names of the funding lenders.

disclosed on the GFE, or that the ordering required reports and Other mortgage brokers originate

charges for particular services rendered documents, and otherwise gathering loans that are closed in the mortgage

by or for the loan originator data required to complete the loan brokers’ names, fund the loans

substantially exceed the estimated package and mortgage transaction. As temporarily using their own funds or a

amounts. RESPA contains no sanctions retailers, brokers also provide the warehouse line of credit, and sell the

for inaccurate or incomplete GFEs, or borrower and lender with goods and loans after settlement. These

even for outright failure to provide a facilities such as reports, equipment, transactions by mortgage brokers are

GFE. Bank and other regulators do and office space to carry out retail treated similarly to loans made by

enforce these requirements with respect functions.18 The amount of work mortgage bankers, and other lenders,

to regulated institutions, although other mortgage brokers provide in particular and hence any compensation received

originators are not subject to such transactions depends, in part, on the by the mortgage broker, as a result of the

enforcement. level of difficulty involved in qualifying bona fide transfer of a loan obligation in

applicants for particular loan programs. the secondary market, is not subject to

Use and Provision of the HUD–1, Differences in credit ratings, Section 8 of RESPA due to the

HUD–1A employment status, levels of debt, ‘‘secondary market transaction’’

Settlement agents are required to use assets, and experience frequently exemption. 24 CFR 3500.5(b)(7).

the HUD–1 in every settlement translate into varying degrees of effort

transaction involving a federally related required to originate a loan. Also, Mortgage Broker Functions and

mortgage loan in which there is a mortgage brokers may be required to Compensation

borrower and a seller.16 The settlement perform different components of Since the advent of mortgage brokers

agent is required to complete the HUD– origination services (i.e., underwriting) in the mid-1980s, there has been

1 in accordance with the instructions at confusion among borrowers concerning

Appendix A to HUD’s RESPA rules and 17 In the discussion of mortgage brokers in the

the mortgage broker’s functions and

to deliver a completed HUD–1 (or HUD– background section of this preamble, the term is fees,—i.e., whether brokers do or do not

being used in a broader sense than the proposed

1A where applicable) at or before the amended HUD definition, and the way the term is shop on the borrower’s behalf, as well

settlement to the borrower, the seller (if used throughout the rest of the proposed rule. In as how they are paid and how much

applicable), and the lender (if the lender this section when referring to mortgage brokers the they are paid, and by whom.

is not the settlement agent) or their term also includes those individuals who are the Some mortgage brokers indicate to

real source of funds through a warehouse line of

agents. 24 CFR 3500.8(a). RESPA and credit or otherwise. borrowers that they will, in essence, act

18 HUD Statement of Policy-1999–1 Regarding as their agent to shop for the best

15 While the current rules need improvement,

Lender Payments to Mortgage Brokers provided a mortgage loan for them.20 Other brokers

they are not entirely without standards. They do list of compensable loan origination services state that they work with a number of

require estimates to be in good faith and tell the originally developed by HUD in a response to an

borrower what charges he or she is likely to incur inquiry from the Independent Bankers Association

funding sources to provide loans, and

at settlement based on the originator’s experience. of America (IBAA), which HUD considers relevant

For example, on July 5, 2002, HUD issued a letter in evaluating mortgage broker services. In analyzing 19 The terms ‘‘wholesale lender’’ or ‘‘funding



to the State of Washington that indicated that a each transaction to determine if services are lender’’ are used throughout the document to mean

range of charges of 0–$15,000 on a GFE for points performed by mortgage brokers, HUD stated that it a lender who does not originate the mortgage loan

did not meet these requirements. believes the 1999 Statement of Policy should be but provides funds for the loan and may purchase

16 16 Under current rules, where there is a used as a guide. As stated there, the IBAA list is the loan.

borrower and no seller, such as in a refinance or not exhaustive, and while technology is changing 20 In some states, for example North Carolina,



a subordinate lien loan, the HUD–1 may be utilized the process of performing settlement services, HUD mortgage brokers may be held to have an agency

using the borrower’s side of the HUD–1 statement, believes that the list is still a generally accurate relationship or a legal responsibility to the

or the HUD–1A may be used as an alternative. description of settlement services. borrower.







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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49141



will arrange a favorable loan with one benefit in the form of reduced up front value of the difference between the par

of them for their borrower. Whether costs, and use the YSP payment solely mortgage interest rate and the rate on

brokers serve as the borrower’s agent as or primarily as a means of increasing the loan on one hand, or provide

a strict legal matter, the fact is that many their total compensation. additional compensation to lenders on

brokers are perceived by borrowers as the other.

Current Broker Disclosure Requirements

shopping on their behalf for the best The functional equivalent of a yield

loan to meet the borrower’s needs. This Under HUD’s current rules, where spread premium may also be present in

perception frequently deters borrowers mortgage brokers originate and table loans originated by lenders. Lenders

from shopping themselves for the loan fund loans or act as intermediaries, they routinely offer loans with low or no up

originator and mortgage product that are required to disclose their direct front costs required at settlement. They

best meets their needs. charges and any indirect payments to be can do so just like brokers do by

Mortgage brokers receive made to them on the GFE, and deliver charging higher interest rates for these

compensation for their services by or mail it to the borrower no later than loans and then recouping the costs by

various methods. A broker may be paid 3 days after loan application. 24 CFR selling the loans into the secondary

directly by the borrower, indirectly by 3500.7(a)–(c). Such disclosure must also market for a premium representing the

the lender or wholesale lender who be provided to borrowers, as a final difference between the interest rate on

purchases the mortgage loan, or through figure, at settlement on the HUD–1 and the loan and the par, or wholesale

a combination of both. Brokers may HUD–1A settlement statement. 24 CFR market interest rate. Alternatively, the

charge borrowers directly at or before 3500.8. In table funded and lender can hold the loan and earn the

settlement for loan origination as well as intermediary transactions, direct broker above market return in exchange for any

for other services including the fees are treated like the fees of other lender paid settlement costs.

application, document preparation and settlement service providers, such as HUD’s current rules require lenders to

document review. In some cases, broker title agents, attorneys, appraisers, etc, disclose only direct fees paid to them by

origination charges may be denominated whose fees are disbursed at or before borrowers including origination fees or

as an origination fee and sometimes as settlement. However, HUD’s current ‘‘origination points’’ as well as other

an ‘‘origination point’’ (one point equals rules require that on the GFE and HUD– direct fees for named services and

1% of the loan amount), while other 1, lender-paid (indirect) mortgage broker discount points. However, neither the

fees for named services (e.g., application fees are to be shown as ‘‘Paid Outside current GFE, nor the HUD–1, provides

fees, document preparation fees, of Closing’’ (P.O.C.), listed outside the totals of all charges paid to the lender.

processing fee, etc.) are charged as columns, and excluded from the The rules also do not require lenders to

separate cost items on the GFE.21 Some computation of borrower’s total disclose indirect fees earned in

brokers receive both percentage based settlement costs. 24 CFR 3500.7(a)(2). secondary market transactions from the

fees and fees for named services. This approach does not assure that YSPs sale of borrowers’ loans. This is because

Where brokers receive a payment for are understood and credited to the the compensation earned from the bona

compensation from someone other than borrower to reduce up front settlement fide transfer of the loan obligation in the

the borrower, most commonly the costs. secondary market is exempt from HUD’s

lender, it is called indirect RESPA rules. HUD’s RESPA rules

Disclosure of Fees by Lenders

compensation. Such indirect provide ‘‘[i]n determining what

compensation from lenders is ordinarily Lenders are also compensated by

constitutes a bona fide transfer HUD

based upon an above market interest borrowers through various methods.

will consider the real source of funding

rate on the loan entered into by the When lenders originate mortgage loans,

and the real interest of the funding

broker with the borrower. This type of they may charge borrowers directly at or

lender.’’ 24 CFR 3500.5(b)(7). HUD’s

compensation is often referred to as a before settlement for loan origination as

rules explicitly provide, however, that

‘‘yield spread premium,’’ (YSP) though well as for other services including the

table-funded mortgage broker

it sometimes shows up under a different application, document preparation and

transactions are not secondary market

label, e.g. servicing release premium. document review. In some cases, lender

transactions. Lender sales into the

The use of a YSP can reduce up front origination charges may be denominated

secondary market are considered

settlement costs to a borrower by as an origination fee and sometimes as

secondary market transactions.

building these costs into the borrower’s an ‘‘origination point’’ (one point equals

interest rate and monthly payments over 1% of the loan amount), while other Legality of Mortgage Broker Fees

the life of the borrower’s loan. In issuing fees for named services (e.g., application Over the last decade, there has been

RESPA Policy Statement 2001–1, fees, document preparation fees, persistent litigation concerning the

discussed in greater detail below, HUD processing fee, etc.) are charged as legality of indirect fees to mortgage

stated that borrowers should continue to separate cost items on the GFE.22 brokers. More than 150 lawsuits have

have the choice of paying their total Lenders may also require ‘‘discount been brought since the mid-1990s

settlement costs up-front or using the points’’ from the borrower for the stated seeking class action certification, based

yield spread premium payment as a purpose of lowering the interest rate of in whole or in part on the theory that

credit to pay all or part of these costs. the loan. It is unclear to what extent the indirect fees paid by lenders to

Consumer advocates assert, however, discount points represent the present mortgage brokers are fees for the referral

that all too frequently brokers place the of business in violation of section 8 of

borrower in an above par rate loan 22 Lenders’ fees are not always described in the

RESPA.23

without the borrower’s knowledge, same terms. Sometimes lenders’ fees are expressed

in straight dollar amounts and sometimes as

provide the borrower with little or no ‘‘points.’’ ‘‘Points’’ may be used to describe 23 See e.g., Mentecki v. Saxon Mortgage, No. 96–



‘‘origination fees’’ or ‘‘discount points’’ and both 1629–A, slip op. (E.D. Va. Jan. 10, 1997). The court

21 Mortgage broker fees are not always described types of points may be charged in the same held initially that indirect fees to mortgage brokers

in the same terms. Sometimes mortgage brokers fees transaction. ‘‘Points’’ are just percentage amounts of in the form of ‘‘yield spread premiums’’ violated

are expressed in straight dollar amounts and the borrowers loans, and these ‘‘points,’’ just like section 8(a) of RESPA as referral fees. However,

sometimes as ‘‘points.’’ ‘‘Points’’ are charges based any other terms used to describe fees to loan subsequently, in an order and opinion dated July

on a percentage of the borrower’s loan. Points originators, have a dollar equivalent to the 11, 1997, the Court refused to certify the class.

therefore have a dollar equivalent to the borrower. borrower. Continued









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49142 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



HUD’s RESPA rules, amended in 1992 claiming that payments to mortgage On March 1, 1999, in response to

to require disclosure of indirect fees to brokers by lenders were per se illegal. Congress’s directive, HUD issued

mortgage brokers, did not explicitly take Shortly afterwards, HUD embarked on a RESPA Statement of Policy 1999–1

a position on whether yield spread negotiated rulemaking on these subjects. Regarding Lender Payments to Mortgage

premiums or any other named class of See notices published on October 25, Brokers, following extensive discussions

back-funded or indirect fees paid by 1995 (60 FR 54794) and December 8, with industry, consumer groups, and

lenders to brokers are per se legal or 1995 (60 FR 63008). essential agreement among them on the

illegal. See Illustrations of Requirements The 1995–1996 negotiated rulemaking interpretation embodied in the

of RESPA, Fact Situations 5 and 12 in on mortgage broker fees did not result Statement. The Statement said that, in

Appendix B to 24 CFR part 3500. The in a final rule. It did, however, result in applying Section 8 and HUD’s

rule specifically listed ‘‘servicing release a clear consensus by rulemaking regulations to lender payments to

premiums’’ and ‘‘yield spread participants that borrowers were mortgage brokers, HUD did not consider

premiums’’ as fees required to be confused about the functions of such payments to be legal or illegal per

itemized on the HUD–1/1A Settlement mortgage brokers and the amounts and se. The Statement said that the ‘‘fees in

Statement. Accordingly, while the rule sources of their fees. See Report on cases and classes of transactions are

specifically acknowledged the existence Negotiated Rulemaking on Mortgage illegal if they violate the prohibitions of

of such fees and provided illustrations Broker Disclosure—Final Report, A.L.J. Section 8 of RESPA.’’ 64 FR 10084.

of how they are to be reflected on HUD Alan W. Heifetz, (July 19, 1996). This The Statement established a two-part

disclosure forms, HUD took the position confusion may translate into borrowers test to determine the legality of lender

that the rule does not create a failing to compare services and fees, payments to mortgage brokers under

presumption of per se legality or thereby paying unnecessarily high RESPA which requires that: (1) Goods or

illegality. settlement costs. Most of the rulemaking facilities must actually be furnished or

Between 1992 and 1999, HUD participants, except for the services actually performed for the

provided various interpretations and representative of the mortgage brokerage compensation paid; and (2) payments

other issuances under its RESPA rules industry and one consumer advocate, must be reasonably related to the value

stating the Department’s position that agreed on a regulatory framework that of the goods or facilities that were

the legality of a payment to a mortgage would create a pre-application actually furnished or services that were

broker does not depend on the name of agreement between a borrower and a actually performed. In applying this

the particular fee. Rather, HUD has broker fully disclosing the broker’s test, HUD stated that total compensation

consistently advised that the issue function and compensation, in return should be scrutinized to assure that it is

under RESPA is whether the total for a limited ‘‘safe harbor’’ for reasonably related to goods, facilities, or

compensation to a mortgage broker is transactions where these contracts were services furnished or performed to

reasonably related to the total value of entered into. In 1997, HUD issued a determine whether it is legal under

the goods or facilities actually furnished proposed rule on mortgage broker fees RESPA.24

or services actually performed. If the that would have established a safe As a Statement of Policy, the 1999

compensation, or a portion thereof, is harbor for brokers who contractually Statement interpreted HUD’s existing

not reasonably related to the goods or commit to borrowers regarding their rules. Nonetheless, beyond these rules,

facilities actually furnished or the total compensation, along the lines the Statement emphasized the

services actually performed, there is a agreed to by the majority in the importance of disclosing brokerage fees,

compensated referral or an unearned fee negotiated rulemaking. The proposed including yield spread premiums, to

in violation of Section 8(a) or 8(b) of rule also provided that during the borrowers as early as possible in the

RESPA, whether the compensation rulemaking process, a ceiling on the borrower’s process of shopping for a

results from a direct or indirect payment amount of fees eligible for the safe mortgage. See 64 FR at 10087.

or a combination thereof. harbor would be established to protect The 1999 Statement said:

In 1995, as a result of concerns that There is no requirement under

against predatory lending. The rule was

the requirement that mortgage brokers existing law that consumers be fully

strongly opposed by the mortgage

disclose indirect fees placed mortgage informed of the broker’s services and

brokerage industry and other segments

brokers on an unequal footing with compensation prior to the GFE.

of the mortgage industry. HUD did not

other mortgage loan providers, and that Nevertheless, HUD believes that the

finalize the 1997 rule and efforts to do

information on indirect fees was broker should provide the consumer

so were soon eclipsed by HUD’s effort

confusing to borrowers, HUD issued a with information about the broker’s

to clarify its position on the legality of

proposed rule to obtain the public’s services and compensation, and

mortgage broker fees under existing law.

views on the disclosure and legality of agreement by the consumer to the

broker fees. 60 FR 47650 (September 13, 1999 Statement of Policy on Lender arrangement should occur as early as

1995). At that time, plaintiff borrowers Payments to Mortgage Brokers possible in the process. Mortgage

began initiating class action lawsuits brokers and lenders can improve their

In 1998, in the Conference Report on

ability to demonstrate the

HUD’s 1999 Appropriations Act,

Culpepper v. Inland Mortgage Corp., 953 F.Supp. reasonableness of their fees if the broker

Congress directed HUD to clarify its

367 (N.D. Ala. 1997). The court held that a payment discloses the nature of the broker’s

for a loan above market was permissible under position on the legality of mortgage

services and the various methods of

section 8(c) of RESPA as payment for a ‘‘good.’’ broker fees and to work with industry,

Barbosa v. Target Mortgage, No. 94–1938, U.S.D.C., compensation at the time the consumer

Federal agencies, consumer groups, and

Southern District of Florida; Martinez v.

Weyerhauser Mortgage, No. 94–160, U.S.D.C.,

other interested parties on a statement 24 The 1999 Statement of Policy also said, ‘‘[t]he



Southern District of Florida; Monoz v. Crossland of policy on the subject. The Report also Department considers that higher interest rates

Mortgage Company, Civil Action No. 96–12260, stated that Congress never intended alone cannot justify higher total fees to mortgage

U.S.D.C. for the District of Massachusetts. These payments by lenders for goods or brokers. All fees will be scrutinized as part of total

last two Federal district courts concluded that yield compensation to determine that total compensation

spread premiums (or differentials) were not per se

facilities actually furnished or for is reasonably related to the goods or facilities

violations of RESPA and therefore refused to certify services actually performed to violate actually furnished or services actually performed.’’

class actions on this issue. Section 8(a) or (b) of RESPA. 64 FR 10084.







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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49143



first discusses the possibility of a loan also would support a HUD rule The 2001 Policy Statement also

with the broker. 64 FR at 10087. requiring improved fee disclosure.26 specifically acknowledged the utility to

borrowers of treating and reporting all

Post 1999–1 Statement of Policy Circuit Statement of Policy 2001–1

interest rate based lender payments as

Court Decision On October 17, 2001, the Department monies belonging to the borrower. The

issued Statement of Policy 2001–1, Policy Statement endorsed this

After HUD issued its 1999 Statement Clarification of Statement of Policy

of Policy, most Federal District courts approach, stating:

1999–1 Regarding Lender Payments to

held that yield spread premium Mortgage Brokers, and Guidance [I]t has been suggested to the Department that

payments from lenders to mortgage the yield spread premium should be reported

Concerning Unearned Fees Under as a credit to the borrower in the ‘‘200’’

brokers are legal provided that such Section 8(b). The 2001 Policy Statement

payments meet the test for legality series, among the ‘‘Amounts Paid by or in

reiterated and clarified the test Behalf of Borrowers.’’ The homebuyer or

articulated in the 1999 Statement of articulated in the 1999 Statement of homeowner could then see that the yield

Policy and otherwise comport with Policy that where compensable services spread premium is reducing closing costs,

RESPA. However, in Culpepper v. Irwin are performed, application of both parts and also see the extent of the reduction.

Mortgage Corp., 253 F.3d 1324 (11th Cir. of the HUD test is required before a HUD believes that improved early

2001), the U.S. Court of Appeals for the determination can be made regarding disclosure regarding mortgage broker

Eleventh Circuit upheld class the legality of a lender payment to a compensation and the entry of yield spread

certification in a case alleging that yield mortgage broker. 66 FR 53052, 53054– premiums as credits to borrowers on the GFE

spread premiums violated Section 8 of 55. The 2001 Statement also said: and the HUD–1 settlement statement are both

RESPA where the defendant lender, useful and complementary forms of

[n]either Section 8(a) of RESPA nor the 1999

pursuant to a prior understanding with disclosure. The Department believes that

Statement of Policy supports the conclusion

mortgage brokers, paid yield spread used together these methods of disclosure

that a yield spread premium can be

presumed to be a referral fee based solely offer greater assurance that lender payments

premiums to brokers based on the

upon the fact that the lender pays the broker to mortgage brokers serve borrowers’ best

lender’s use of a rate sheet and the interests. 66 FR 53056.

brokers’ delivery of above par interest a yield spread premium that is based upon

a rate sheet, or because the lender does not

rate loans, without the lender knowing have specific knowledge of what services the C. HUD’s Commitment to Mortgage

whether, or to what extent, the brokers broker has performed. 66 FR 53052, 53055. Reform

had performed services. The court

The 2001 Statement of Policy also The HUD-Federal Reserve Report

concluded that a jury could find that

interpreted HUD’s existing rules then

yield spread premiums were illegal

further detailed what HUD regards as Since the mid-1990s, HUD has been

kickbacks or referral fees under RESPA

meaningful disclosure of mortgage examining ways to improve the

where the lender’s payments were based

broker fees to borrowers: mortgage process for borrowers to lower

exclusively on interest rate differentials

In HUD’s view, meaningful disclosure settlement costs.27 In June of 1998, in

reflected on rate sheets, and the lender

includes many types of information: What response to a Congressional directive in

had no knowledge of what services, if Section 2101 of the Economic Growth

services a mortgage broker will perform, the

any, the brokers had performed. The amount of the broker’s total compensation for and Regulatory Paperwork Reduction

court also said that HUD’s 1999 performing those services (including any Act of 1996 (Pub. L. 104–208, 110 Stat.

Statement of Policy was ambiguous. yield spread premium paid by the lender), 3009), HUD and the Board of Governors

Following Culpepper,25 and whether or not the broker has an agency

or fiduciary relationship with the borrower.

of the Federal Reserve (‘‘the Board’’)

representatives of the mortgage industry The disclosure should also make the issued a joint report on reforming

urged HUD to issue a clarification to the borrower aware that he or she may pay RESPA. The HUD-Federal Reserve

1999 Statement of Policy to make clear higher up front costs for a mortgage with a Report. The Report called for legislative

that the lenders could make payments to lower interest rate, or conversely pay a higher changes to reform both laws. The Report

brokers through rate sheets and that, to interest rate in return for lower up front did not attempt to differentiate where

properly apply the 1999 test, all costs, and should identify the specific trade- changes could be made under existing

payments must be examined, not simply off between the amount of the increase in the

law pursuant to the Board’s and HUD’s

borrower’s monthly payment (and also the

the payment from the lender, to increase in the interest rate) and the amount existing regulatory authorities from

determine if the broker’s total by which up front costs are reduced. HUD areas where new legislation was

compensation is reasonable. These believes that disclosure of this information, required. Subsequently, the Board has

representatives said that if the and written acknowledgment by the borrower exercised its regulatory authority under

Culpepper interpretation prevailed, that he or she has received the information, TILA to effectuate certain of the Report’s

without further guidance from HUD, the should be provided early in the transaction. recommendations. See 66 FR 65604,

Such disclosure facilitates comparison December 20, 2001.

industry could no longer offer yield

shopping by the borrower, to choose the best

spread premiums as an option to combination of up front costs and mortgage Major Findings of the Report

borrowers to lower their up front terms from his or her individual standpoint.

settlement costs. HUD regards full disclosure and written The HUD-Federal Reserve Report

Representatives of the mortgage acknowledgment by the borrower, at the posed and addressed several questions

earliest possible time, as a best practice. 66 involving the disclosure scheme under

industry, including representatives of FR 53056.

the Mortgage Bankers Association and both RESPA and TILA, and both HUD

the National Association of Mortgage 26 Letter to Secretary Martinez, Submitted by



Brokers, assured the Department that America’s Community Bankers, American Banking 27 HUD and others have considered proposals to



following a clarification by HUD, they Association, Consumer Mortgage Coalition, and permit lenders to package settlement services

Mortgage Bankers Association of America almost from the time the law was enacted. Senator

(December 27, 2001); National Association of Proxmire introduced S. 2775 which would have

25 In this proposed rule Culpepper refers to required lenders to bear certain settlement costs

Mortgage Brokers, Position Paper: Prospective HUD

Culpepper v. Irwin Mortgage Corp., 253 F.3d 1324 Rulemaking Concerning Mortgage Originator with the view that the lenders have the

(11th Cir. 2001). There were earlier reported Disclosure, Correspondence to the Department sophistication and bargaining power to keep costs

decisions in this same litigation. (December 4th, 2001). down.







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49144 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



and the Board recommended in part 28 HUD recommended that generic a lump-sum price for settlement costs

that: information, e.g., HUD’s Special and would be held to that figure from

• Loan originators be required to Information Booklet, be given when the the time the package is agreed to

provide firmer quotes for settlement borrower first contacts settlement through settlement. Most charges for

costs disclosed under RESPA; and service providers, including loan services that the borrower currently

• The timing of RESPA and TILA originators and real estate agents. Both pays at settlement for origination, title

disclosures to borrowers be advanced, HUD and the Board also recommended work and insurance, credit report,

so that borrowers receive them earlier that borrowers be given initial appraisal, document review, inspection,

and use them to shop. disclosures, including firm information up front mortgage insurance, pest

In order to achieve firmer cost about settlement costs, interest rates and inspection and flood review, etc., would

information, both agencies also points as early in the shopping process be included in the package.30

recommended that lenders and other as possible so that they can shop and Government charges associated with

providers be given the choice of: make informed choices. The HUD- filing a mortgage or release that can be

• Offering a ‘‘packaging’’ or a Federal Reserve Report at 41. Although determined easily also would be

guaranteed cost approach; or HUD and the Board differed somewhat included. The Report suggested that any

• Providing a GFE where estimated in their approaches, both indicated that costs excluded from the guaranteed

costs would be subject to tolerances, to advances in technology and market settlement costs would be disclosed as

improve the current disclosure scheme competition promised to provide either ‘‘other required costs’’ or as

by reducing the instances in which borrowers better information at or near ‘‘optional costs.’’ ‘‘Other required costs’’

consumers may incur additional costs at the time of application. HUD said that would include charges such as per diem

closing. it supported requiring that estimated interest, which fit the definition of those

Both agencies recommended an costs disclosures be provided earlier costs that the borrower will have to pay

exemption from Section 8 to facilitate than three days after application— at settlement, but the amount of which

packaging. HUD also said that to receive ideally at first contact with lenders. the packager cannot be readily

the exemption, both the settlement costs HUD indicated, however, that while it determined at the time the package is

and the interest rate on a mortgage seeks early disclosures, it recognizes provided to the borrower.31 The Report

should be guaranteed. that sometimes there will be a trade-off suggested, however, that there are

between having an early disclosure and means for per diem interest to be

Timing of Disclosures

ensuring that a disclosure is firm and included in the package; lenders could

The Report observed that in home complete enough to allow borrowers to be required to state a maximum amount

secured transactions, the borrower shop and protect against increases in

currently receives TILA or RESPA costs. In such cases, HUD recommended 30 In developing the Report, the agencies



disclosures at several different times. that timing requirements be flexible to considered whether services should be itemized

within the package. Some entities claim that for

Borrowers receive generic information allow enough time to provide there to be true competition, borrowers must be able

such as HUD’s Special Information guaranteed information. to know what is included in each package to

Booklet at the time of application. Moreover, in the interest of promoting compare. These entities point out that borrowers

Additionally, for residential mortgage shopping, HUD recommended that generally like to know what services are included

in packages and that without itemization lenders

transactions, lenders and brokers borrowers not be required to pay a may choose to forego many services for their

provide through mailing or delivery significant fee to the loan originator packages while insisting that nonlenders have more

within 3 days after application, specific prior to receiving initial cost expansive packages, making borrower information

information including the GFE and the information. Id. at 42. and competition impossible. On the other hand, it

was observed that a requirement for full itemization

initial TILA disclosure disclosing the of services might lead some packagers to create

Providing Firmer Cost Disclosures

finance charge and the ‘‘APR’’ or longer lists, ultimately confusing borrowers and

‘‘annual percentage rate’’ for the In arriving at the recommendation hindering their evaluation of different loans. Also,

mortgage. TILA § 128(b)(2); Reg. Z that cost disclosures must be firmer, the lenders pointed out that services are performed in

Report observed that borrowers reported large measure to protect their security and when the

§ 226.19(a). TILA may require additional initial disclosure is provided they may not know

new disclosures for home-purchase many instances in which the costs what is needed in each case. The Board and HUD

loans if early disclosures have become disclosed on the GFE were significantly concluded that in packages, lenders could disclose

inaccurate. See TILA 128(b) and Reg. Z lower than those actually charged at the guaranteed amount for settlement costs without

any elaboration on the early disclosure, and

§ 226.17(b). A settlement agent gives settlement or that costs were completely subsequently provide a list of services actually

final disclosures on the HUD–1 at left out of the GFE. The HUD-Federal performed on the final settlement disclosure.

settlement based on information Reserve Report at 20. The Report noted Alternatively, lenders could provide a list of

that more reliable settlement cost services that might be performed on the early

provided by the lender. disclosure with an explanation, if appropriate, that

Both agencies recommended that the information could promote shopping. all items may not be performed, and then indicate

disclosure process could be improved Id. at 32. In recommending that the on the settlement statement the services actually

for industry if the timing requirements choice of providing ‘‘guaranteed cost performed. The Report also observed that disclosing

packages’’ or a more reliable GFE the cost of each service also could present

for disclosures were made more problems, particularly where lenders or other

consistent between RESPA and TILA 29 subject to tolerances be offered, the packagers enter into volume-based contracts. The

and it would be improved for borrowers agencies stated that a dual system HUD-Federal Reserve Report at 25–26.

if disclosures were given when they would create an opportunity for the 31 Charges for per diem or ‘‘odd days’’ interest,



market to test whether guaranteed cost which floats along with the interest rate, cover the

would be most useful. In the Report, time between the date of settlement and the date

arrangements offer more economical regular monthly interest starts accruing. As an

28 The Report also concluded that the APR and and efficient means for consumers to illustration, if a loan closes on January 15 and the

finance charge disclosures under TILA should be obtain mortgage loans. first monthly payment (due on March 1) begins to

retained and improved to include all costs required accrue interest on February 1, interest for the days

by the creditor to get the credit and that additional Packages/Guaranteed Costs between January 15 and February 1 is generally

substantive protections should be added to TILA. required to be paid at settlement as per diem

29 Under current TILA rules, Regulation Z, the Under the packaging or guaranteed interest. Some lenders do not collect per diem

TILA disclosure may be given simultaneously along cost approach envisioned in the Report, interest at settlement but add the amount to the first

with the GFE, TILA § 128 (b); Reg. Z § 226.17(b). the lender or other packager would set monthly payment.







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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49145



based on thirty days (a full month) or to lenders will make it difficult for non- forward with the transaction and the

disclose the daily interest to allow lenders to develop any packages other originator will receive compensation.

borrowers to calculate the actual than those the lenders themselves retail,

Section 8 Exemption for Packaging

amount as the date of settlement by refusing to participate in other

becomes certain. The Report also entities’ packages.33 On the other hand, Lenders’ representatives asserted at

suggested that mortgage insurance lenders asserted that since settlement the time of the Report that an exemption

should be included in the package price services are largely required to protect from RESPA’s Section 8 prohibitions is

even though it is difficult to calculate the lender’s security, lenders should not necessary for packaging to work. These

until final underwriting. have to accept unconditionally any representatives pointed out that Section

According to the Report ‘‘optional other settlement service providers’ 8 prohibits volume-based discounts

costs’’ would include charges that settlement packages. In the HUD- between settlement service providers,

depend on whether the borrower Federal Reserve Report HUD since they fear such arrangements

chooses to purchase the service, and on recommended that any entity should be would be viewed as compensated

the level of service chosen. The HUD- permitted to package as long as it can referral arrangements in violation of the

Federal Reserve Report at 27–28. provide a Guaranteed Mortgage Package statute. Also, while Section 8 prohibits

Examples include owner’s title and a mortgage loan at a guaranteed kickbacks, compensated referrals, and

insurance and optional hazard interest rate. unearned fees, the statute provides no

insurance chosen by the borrower. Consumer advocates also supported bright line on how to determine when

The Report observed that packagers packaging, but asserted that any a payment has been earned for goods or

would arrive at their package prices packages must include a loan with an services (which is permissible under

based on their experience or, more interest rate guarantee to be useful to RESPA) or is compensation for a

likely, enter into volume-based borrowers. Although consumer referral, or is an unearned fee (which are

contracts with affiliated and other advocacy groups believed that illegal and subject to criminal sanctions

settlement service providers for those guaranteeing settlement costs has value, and civil action under Section 8).

goods and services required by lenders they noted that these costs are a small Moreover, RESPA prohibits requiring

to close a loan. Id. at 23. portion of the overall cost of a mortgage the use of an affiliated settlement

loan. Advocates said that unless service provider except in limited

Support for Packaging circumstances,34 which can be an

borrowers also receive a firm

Many of the nation’s largest mortgage commitment on the interest rate and any additional impediment to packaging

lenders and their representatives applicable points they cannot truly services. Proponents of packaging

expressed support for a ‘‘packaging’’ comparison shop. Without such a firm further asserted that because of Section

approach. They said that borrowers commitment, consumer advocates said 8’s prohibitions and questions about

rarely shop for individual settlement some lenders may provide the borrower how they apply, lenders and others do

services, and also that borrowers are with a guaranteed settlement cost quote not currently package. These

more interested in the overall price of and then increase the interest rate to proponents said that were an exemption

their mortgage loan than the prices of offset any savings offered to the granted and packaging of services

individual settlement services, and that borrower on the settlement costs. These prevalent, borrowers would benefit

borrowers would shop for mortgages if lenders would then realize additional more from the resulting lower costs than

all they needed to compare was a single profits based on the mortgage’s pricing. they do from RESPA’s current Section 8

guaranteed price for all the settlement These advocates expressed the fear that prohibitions. The HUD-Federal Reserve

services needed to close the loan. unwary borrowers will be lured into Report at 30. Consumer groups generally

Advocates of packaging said that by particular loan products by inexpensive also supported an exemption for

packaging services, discounts that or below-market settlement cost packaging, as long as packagers are

would be secured by lenders under packages and then find themselves in required to guarantee both settlement

these arrangements will be passed on to higher rate loans that more than offset costs and interest rates.

borrowers. Through this dynamic and any purported cost savings. The HUD- Members of the settlement services

by making it easier for borrowers to Federal Reserve Report at 22. industry other than large lenders,

shop, costs would be lowered.32 Lender representatives expressed however, including small lenders and

In the development of the Report, varying views on guaranteeing rates as title companies, expressed strong

entities other than lenders, including part of a specific package. Some lenders concern about and, in some cases,

real estate firms and affinity groups, also stated that underwriting is costly and outright opposition to an exemption

expressed some interest in packaging. time-intensive and that mortgage from Section 8 to encourage packaging.

These entities asserted that if packaging brokers and other retail originators They said that only lenders would offer

was restricted only to lenders, cannot provide guaranteed rates that packages and that the lenders would

competition would be unnecessarily bind lenders early in the mortgage loan squeeze out savings from small

restricted and borrowers could be process. Other industry representatives providers and then retain these savings

deprived of lower prices. Some industry asserted, however, that requiring in the form of higher profits, without

representatives voiced the fear that large passing them on to borrowers. Small

lenders to provide guaranteed rates

settlement service providers also said

along with guaranteed settlement costs

32 For example, a packager could contract to have that the only way they could remain

is viable. Many of today’s mortgage

XYZ Appraisal Company complete all its appraisals competitive would be by offering

for a given period for $300 each rather than the originators provide firm rate

packages themselves, and they

$350 the company normally charges for a standard information to shoppers early in the

expressed serious concern about their

appraisal. The packager could rely on that process based on nearly instantly

discounted contract price in pricing the package of ability to do so. They further asserted

available credit information, without

guaranteed costs to the borrower. With their own

costs negotiated in advance, packagers could any assurance that the borrower will go 34 Generally, under Section 8(c)(4) of RESPA an

disclose the cost for the entire package early in the entity may refer business to an affiliate as long as

borrower’s mortgage shopping process with 33 Nonlenders also suggested that to provide a the affiliate arrangement is disclosed, there is no

certainty, and the borrower then could compare level playing field, the services in the package required use, and the only return to the entity

different vendors’ packages. should be itemized. making the referral is a return on capital.







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49146 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



that borrowers do in fact already shop for referrals to or from the packager of obtain it, borrowers may be disinclined

for settlement services, that prices for settlement services to or from those to seek comparable information from

these services are currently competitive, outside the package would continue to multiple sources. See HUD-Treasury

and that lifting Section 8 restrictions be subject to Section 8. For example a Report, 2000 at 66.

will harm rather than help borrowers real estate agent could not receive a fee The HUD-Treasury Report pointed out

because any savings from packaging will for referring a borrower to a packager. that unscrupulous mortgage brokers

not be passed on to borrowers and fewer Entities that do not meet the ‘‘may receive compensation as a result

providers will be available to compete. requirements of the exemption would be of inflated upfront charges paid by

Id. at 22. subject to Section 8. The HUD-Federal borrowers and indirect fees paid by

During the development of the HUD- Reserve Report at 33. lenders * * *. Brokers and lenders may

Federal Reserve Report the agencies also structure charges so that they are

noted that technology is enabling the A More Reliable GFE

less transparent to the borrower,

provision of earlier, firmer, settlement As an alternative to packaging, both through the use of mechanisms such as

cost information. Id. at 39. Moreover, the Board and HUD also recommended yield spread premiums, which may

during the development of the Report, making disclosures firmer under the disguise the true cost of credit.’’ HUD-

HUD became aware of promising current practice, by requiring a more Treasury Report, 2000, at 80.

proposals that were advanced by reliable GFE, subject to tolerances. The

consumer advocates and some industry HUD-Federal Reserve Report at 31. III. This Proposed Rule

representatives where lenders, after The Report suggested that tolerances With the above background in mind,

obtaining credit reports, would provide could be based on a percentage of the today’s rule proposes a new framework

borrowers guaranteed rate and point total estimated costs; if the actual costs for borrower disclosures under RESPA

information.35 This guarantee would be at settlement exceeded the sum of the that would:

subject to appropriate conditions such estimated costs and the amount of the 1. Address the issue of mortgage

as market changes in the cost of money tolerance, the loan originator would broker compensation, specifically the

(where the rate and points are not generally be held liable. Alternatively, problem of lender payments to mortgage

locked), and verification of the value of the tolerance could apply only to certain brokers, by fundamentally changing the

the collateral and the borrower’s categories of costs such as those within way in which such lender payments in

creditworthiness. HUD supported these the loan originator’s control. The Report brokered mortgage transactions are

and similar efforts because it regards the said that charges imposed directly by recorded and reported to borrowers;

full costs of obtaining a loan—including the loan originator would have to be 2. Significantly improve HUD’s Good

settlement costs, interest rate, and accurate. On the other hand, an increase Faith Estimate (GFE) settlement cost

points—as the information that is in costs resulting from a borrower’s disclosure, and amend HUD’s related

essential to assist borrowers in shopping choice would not count against the loan RESPA regulations, to make the GFE

for a mortgage loan. originator in determining whether the firmer and more usable, to facilitate

HUD concluded that an exemption total costs exceeded the tolerance. The shopping for mortgages, and to avoid

should be provided for packaging to HUD-Federal Reserve Report at 31. unexpected charges to borrowers at

facilitate earlier comparison shopping settlement; and

The HUD-Treasury Report

by borrowers, greater competition 3. Remove regulatory barriers to allow

among mortgage lenders and others, and Early in 2000, HUD, in cooperation guaranteed packages of settlement

guaranteed prices to borrowers from the with the Department of the Treasury, services and mortgages to be made

time the borrower applies for a mortgage reviewed the problem of predatory available to borrowers, to make

through settlement. The Board mortgage lending. Following five borrower shopping for mortgages easier

recommended an exemption to improve hearings in New York, Chicago, Atlanta, and further reduce settlement costs. A

the consumer’s ability to shop Los Angeles and Baltimore, in June, description of each of these aspects of

effectively and to allow competition to HUD and the Treasury issued a major the rule follows.

reduce the cost of financing a home. To report on the subject of predatory

encourage packaging, HUD mortgage lending. The Report, entitled A. Addressing Mortgage Broker

recommended that a Section 8 ‘‘Curbing Predatory Home Mortgage Compensation and Lender Payments to

exemption should be made available to Lending’’ (HUD-Treasury Report), Brokers

loan originators and others who: (1) detailed predatory or abusive lending The proposed rule would

Offer borrowers a comprehensive practices in connection with higher cost fundamentally change the way in which

package of settlement services needed to loans in the mortgage market. In information on the mortgage broker’s

close a loan; (2) provide borrowers with addition, among numerous functions and charges are reported in

a simple prescribed disclosure that gives recommendations to address predatory the Good Faith Estimate as described

the guaranteed maximum price for the lending, the Report reiterated support below.

package of services through settlement; for RESPA/TILA reform along the lines

recommended in the HUD-Federal 1. Describing the Loan Originator’s

and (3) disclose the rate offered to the

Reserve Report. Function

borrower for the loan, with a guarantee

that the rate will not increase, subject to The HUD-Treasury Report stated: Under this proposed rule, the new

prescribed conditions. ‘‘that borrowers need firm information GFE at Section I would require that

The Report suggested that fees paid early in the loan process so that they mortgage brokers and all other loan

and arrangements within packages can compare the products of one originators describe their services. The

would be exempt from Section 8. Fees settlement service provider with proposed form does not ask that only

another. If borrowers receive firm brokers provide this description because

35 At the time of the Report some consumer and information but it comes too late in the the description of other originators’

industry groups discussed the possibility that loan process, they will not have the services is equally useful to borrowers.

borrowers could pay credit repositories the costs of

and arrange the provision of credit information to

opportunity to shop. Moreover, if the The GFE would advise that the loan

lenders to expedite the process and to avoid information is available but the originator performs origination services

significant fees. borrower must pay a significant fee to by arranging funding from one or more





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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49147



sources for the borrower. It also advises the GFE while all indirect payments transfer of a loan is not required to be

that the originator does not shop for nor including yield spread premiums are disclosed under HUD’s RESPA

offer loans from all mortgage funding disclosed separately as ‘‘Paid Outside of regulations. See 24 CFR 3500.5 (b)(7).

sources and the originator cannot Closing’’ (P.O.C.).36 The existing

4. Requiring That in Brokered

guarantee the lowest price or best terms disclosure requirements and

Transactions Lender Payments to the

available in the market. The GFE makes instructions do not make clear to the

Borrower and Borrower Payments to the

clear that the borrower should compare borrower the broker’s total charges so

Lender Be More Appropriately Reported

the prices on the form and shop for the that the borrower can focus on them,

loan originator, mortgage product, and shop among brokers, or negotiate these A major provision of this rule is the

settlement services that best meet the total costs with the broker. Instead, requirement that in all loans originated

borrower’s needs. because of the way indirect broker by mortgage brokers, any payments from

The rule would require that this compensation is currently disclosed, a lender based on a borrower’s

information be provided on the GFE to many borrowers conclude incorrectly transaction, other than a payment to the

effectuate the GFE’s purpose of that such indirect payments have no broker for the par value of the loan,

providing borrowers with settlement effect on their loan costs.37 including payments based upon an

cost information and avoiding confusion Section III A of the GFE, as proposed, above par interest rate on the loan

particularly with respect to the role of would disclose to the borrower as a (including payments formerly

mortgage brokers. This language seeks to consolidated figure the total origination denominated as yield spread premium),

disabuse borrowers of the notion that charges of the mortgage broker and the be reported on the GFE (and the HUD–

brokers or other loan originators are lender. (The zero tolerance applies to 1/1A Settlement Statement) as a lender

their agents, and therefore are the total origination charges of the payment to the borrower. Additionally,

automatically shopping for them, a mortgage broker and the lender rather the rule would require that any

notion that can prevent their own than any split between them.) borrower payments to reduce the

shopping. This new provision will be Additionally, on Attachment A–1 there interest rate (discount points) in

coupled with increased education would be a breakdown of the origination brokered loans must equal the discount

through the Settlement Cost Booklet and charges into the total charges, points paid to the lender, and be

other means to help borrowers. respectively, of the broker and of the reported as such on the GFE (and HUD–

lender. This approach of providing total 1/1A) as a borrower payment to the

2. Explaining to the Borrower the lender. These changes would require

origination charges initially is taken to

Option of Paying Settlement Costs mortgage brokers to disclose the

assist borrowers in comparing total

through the Use of Lender Payments maximum amount of compensation they

origination charges of brokered loans to

Based on Higher Interest Rate could receive from a transaction, by

loans originated by lenders. At the same

The new GFE, at Section IV, would time, it ensures that the borrower knows including the amount in the

clearly show borrowers the effect of the broker’s and lender’s charges. For ‘‘origination charges’’ block of the GFE,

alternative interest rates and their effect mortgage brokers, these charges shall and indicating the amount of the lender

on monthly payments and cash needed include all charges from the borrower payment to borrower that would be

for settlement. The GFE would inform that are paid to the mortgage broker for received at the interest rate quoted, if

borrowers that they have the options to the transaction. For lenders, these any. Mortgage brokers would be unable

pay settlement costs: (1) Through cash charges shall include all or any portion to increase their compensation without

payments at settlement, (2) by of direct charges from the borrower that the borrower’s knowledge, by placing

borrowing additional funds to pay the lender receives for the transaction, the borrower in an above par loan and

settlement costs, (3) by paying other than discount points reported in receiving a payment from the lender

settlement costs through a higher line III B (2). Under the secondary (yield spread premiums), or by retaining

interest rate and higher monthly market exemption, any additional fees any part of any borrower payment

payment, or (4) by lowering the interest realized by a lender from a bona fide intended to reduce the loan rate

rate and monthly payment by paying (discount points).

discount points. These options are 36 HUD’s existing RESPA regulations do not Through these changes in reporting

available in loans from originators other provide explicit guidance on where to place a yield requirements, HUD believes that

spread premium on the GFE, nor is there any virtually all disputes regarding broker

than brokers. The Department in both express reference to such indirect payments on the

the 1999 and 2001 Policy Statements on GFE format. The regulations do suggest generally,

compensation in table-funded

Mortgage Broker Fees especially called however, that Appendix A Instructions for the transactions and intermediary

for the provision of this information to HUD–1 should be followed in completing the GFE. transactions involving yield spread

See 24 CFR 3500.7(c)(1). As described above, these premiums will be resolved. All

borrowers by brokers in brokered loans. Instructions state that a mortgage broker’s fee is to

The provision of this information on be disclosed on one of the blank lines in the 800

mortgage broker compensation will be

the form will help borrowers series. A corresponding line appears on HUD’s reported as direct compensation in the

understand their options for paying current suggested GFE format (Appendix C to origination block of the GFE, maximum

settlement costs and decide whether to Regulation X) for listing such fees. HUD’s broker compensation will be clear and

instructions, however, do not require that the

use any lender payments to the amount to be reported in the 800 series for mortgage

brokers will have no incentive to seek

borrower, discussed in (4) below, to broker fees must include yield spread premiums. To out lenders paying the largest yield

help defray some costs or all of their the contrary, HUD’s Appendix A Instructions spread. They will, instead, be motivated

settlement costs, including but not advise that yield spread premiums and other lender to find the best loan product they can

payments to mortgage brokers should be disclosed

limited to the mortgage broker’s charges. on the HUD–1 as payments by the lender to the

for the borrower.

broker that are ‘‘paid outside of closing’’ (‘‘P.O.C.’’), In requiring this methodology for

3. Disclosing the Loan Originators’ and expressly state that such amounts should not reporting lender payments and discount

Charges—Including the Mortgage be shown in the borrower’s column. 24 CFR part points, it is important to note what the

Broker’s and Lender’s Total Charges to 3500, Appendix A. Department has not done. HUD has not

Borrowers 37 HUD’s Settlement Cost Booklet is also not

taken away from borrowers the ability to

helpful. It suggests, incorrectly, that yield spread

HUD’s current rules require that the premiums are not costs to the borrower. It will be select a higher rate loan in order to pay

broker’s direct charges be disclosed on revised. settlement costs (including, where the





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49148 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



borrower so chooses, broker avoid borrower confusion about the content of the material in these

compensation), or to pay additional mortgage brokers’ charges as compared proposed forms gives the consumer the

sums at settlement in order to lower to other loan originators’ charges and information needed to shop for loan

their interest rate and monthly the impact of a lender payment, the products and to assist them during the

payments. HUD has long recognized proposed rule would require that settlement process. HUD recognizes that

that these financing tools provide immediately following disclosure of the in order for these forms to be useful

flexibility and have value to borrowers lender payment the form will show the shopping tools, they must be consumer

in specific circumstances. The net loan origination charge due from the friendly. The Department seeks public

Department emphasized this point most borrower. It is this number that HUD comment on these forms. In addition,

recently in Statement of Policy 2001–1. intends the borrower to focus on and the Department will arrange focus

HUD’s proposed rule, therefore, HUD seeks to achieve this by groups during the comment period to

preserves these options, but seeks to the highlighting that total on the form, so elicit comments on how to make the

maximum extent possible within the that the borrower understands that the material in the new proposed forms as

Department’s statutory and regulatory payment is applied as a credit to reduce consumer friendly as possible,

framework, to eliminate the possibility the borrower’s total origination charges. including considering how the new

of abuse in the application of these HUD believes that this approach ensures proposed forms are best compared by

financing tools, by ensuring that the full clearer disclosure of all relevant broker consumers to the HUD–1 and what

value of selecting either option is fees and lender payments while revisions, if any, to the HUD–1 would

known and redounds to the borrower. avoiding disadvantaging brokers. With be most helpful.

The Department acknowledges that the understanding provided by the form

the proposed rule results in different 1. The New GFE

the borrower can compare his or her net

treatment of compensation in loans origination charges loan-to-loan, The proposed format for the new GFE

originated by lenders and those originator-to-originator. and Instructions for completing it

originated by mortgage brokers. This is appear as Appendix C to this rule. The

not because the Department believes B. Significantly Improved Good Faith proposed form is intended for use in all

that the latter are necessarily more Estimate (GFE) federally related mortgage transactions.

suspect or susceptible of abuse than the As described in the Background, In addition to the changes to the GFE

former. It results simply from the fact under RESPA and its implementing described in A above, the new required

that the reporting of total lender regulations, loan originators must GFE format would:

compensation cannot be meaningfully provide the GFE either by delivering the

a. Provide the Interest Rate and Costs for

regulated under RESPA, while total GFE or by placing it in the mail to the

loan applicant, not later than 3 business the Loan the Borrower Seeks

broker compensation can be regulated.

This is so for both legal and practical days after an application is received or The current requirements for the GFE

reasons; first, as indicated above, prepared.38 Frequently, a GFE is do not require the inclusion of an

lenders enjoy a secondary market provided only after the borrower pays a interest rate. Nonetheless, borrowers

exemption from RESPA Section 8 significant fee or fees. The current shop for mortgages based on the interest

scrutiny, meaning that under HUD’s suggested GFE calls for a listing of rate as well as settlement costs, and the

regulations any compensation derived charges that may itself lead to a inclusion of this information would be

from the sale of a loan in the secondary proliferation of charges. Moreover, there useful to borrowers. Accordingly, the

market by a lender is outside RESPA’s are few standards for loan originators to new GFE, in Section II, would list the

purview. Second, were there no such follow in calculating estimated costs, note rate, Annual Percentage Rate

exemption, measuring indirect lender which allows the GFE to be unreliable.39 (APR), and loan amount for the loan that

compensation (compensation derived For these reasons, the GFE is generally the GFE is based on. Any mortgage

from the loan rate) would be very not a useful shopping tool to compare insurance premium included in the APR

difficult. A lender may retain the loan the charges of loan originators, other would be separately disclosed in

in its portfolio for the life of the loan, settlement service providers, or loan Section II. Section V would contain

or sell it long after the settlement. products. The GFE, and its attendant information on interest rates and

Payments from lenders to borrowers in rules, also do not effectively prevent adjustments to adjustable rate mortgages

brokered loans, however, based on the surprise costs at settlement. and applicable prepayment penalties

lenders’ rate sheets or otherwise, as well Today’s rule would make the GFE and balloon payments. In Section III, the

as discount points paid to lenders, are firmer and more usable, to facilitate GFE would include a disclaimer

capable of quantification down to the borrower shopping for mortgages by indicating that unless the borrower

last penny. making the mortgage transaction more locks at this time, the interest rate may

Currently, as indicated in the transparent, and to prevent unexpected change.

background, the GFE requires disclosure charges to the borrower at settlement. In

of the lender payment to the borrower order to improve the GFE HUD has b. Simplify and Consolidate Major

(formerly the ‘‘yield spread premium’’) concluded that establishment of a new Categories on the GFE

as a charge that is ‘‘POC’’ or ‘‘paid required GFE format is necessary. As detailed in the Background

outside of closing,’’ which has been a The rule therefore would establish a section, under current RESPA rules, the

cause of confusion for borrowers. The new, more informative, required GFE GFE simply lists estimated charges or

form as proposed would now require format to be provided to borrowers by ranges of charges for settlement services.

that the lender payment be disclosed loan originators in all RESPA covered There is no requirement for grouping or

immediately after the origination transactions and new requirements for subtotaling charges to the same

charges. HUD believes that this new its provision. HUD believes that the recipients. The costs listed on the GFE

location for the disclosure of the lender include loan originator/lender-retained

38 The rule indicates that the GFE must be given

payment will cure any confusion and charges, such as loan origination and

within 3 days of the time an application is received

clearly tell borrowers how much their or prepared to accommodate those instances where underwriting charges; charges by third

mortgage broker is earning from the originators prepare applications for borrowers. parties for lender required services,

transaction. Furthermore in order to 39 See note 13, infra. such as appraisal, title and title





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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49149



insurance fees; state and local charges particular providers of settlement rules at 24 CFR 3500.2(b). The new

imposed at settlement, such as services that they require their definition of application would make

recording fees or city/county stamps; customers to use.41 Attachment A–1 to clear, in accordance with informal HUD

and amounts the borrower is required to the proposed form will list those advice, that an application is deemed to

put into an escrow account, or reserves, ‘‘Required Use’’ providers while also exist whenever a prospective borrower

for items such as property taxes or identifying the services that are provides a loan originator sufficient

hazard insurance. At settlement, required, but which borrowers can shop information (typically a social security

borrowers receive a second RESPA for providers on their own. number, a property address, basic

disclosure—the Uniform Settlement Additionally, the rule proposes to ease employment information, the borrower’s

Statement (the HUD–1/1A)—that the ‘‘Required Use’’ disclosure information on the house price or a best

enumerates the final costs associated requirement, by only requiring the loan estimate on the value of the property,

with both the loan and, if applicable, originator to state the service, the name and the mortgage loan needed), whether

the purchase transaction. of the provider, and the cost estimate. verbally, in writing or computer

As proposed, the revised GFE, in The Department proposes to forego the generated, to enable the loan originator

Section III, would group and requirement that this listing also to make a preliminary credit decision

consolidate all fees and charges into include the lender’s relationship to the concerning the borrower so that the

major settlement cost categories, with a required provider. originator can provide a GFE. See HUD

single total amount estimated for each Attachment A–1 will, as noted, also Old Informal Opinion (March 27, 1980)

category. This approach would reduce include the breakdown of the and HUD Old Informal Opinion

any incentive for loan originators and origination charges into lender and (October 15, 1982). HUD proposes this

others to establish a myriad of ‘‘junk broker charges so that borrowers can new definition to facilitate the provision

fees’’ and provide them in a long list, in better understand the respective lender of GFEs in response to virtually any

order to increase their profits. Loan and broker charges, and where possible type of request for a GFE, in order to

originators would be required to include even negotiate lower costs. In a similar give the borrower the necessary

all fees they receive in their total, vein, Attachment A–1 also breaks out information for shopping. Under current

including all points and origination title agent services and title insurance rules, an application is the ‘‘submission

charges. The interest rate dependent into separate subtotals for the actual of a borrower’s financial information, in

payment would include all fees title insurance versus compensation to anticipation of a credit decision whether

formerly to the mortgage broker from the the title agent. Title agents routinely written or computer generated relating

lender as well as any such fees in the receive direct payments from borrowers to a federally related loan’’ identifying

future. for their services as well as commissions a specific property. The proposed rule

In addition to the loan originator from the insurance premium for the sale would explicitly broaden the definition

charges and the interest rate dependent of insurance. The title agent subtotal to cover verbal and other requests as

payment, the major cost categories on will add up these costs so that the long as these requests contain sufficient

the revised GFE would be: (1) Lender borrower can compare, and possibly information for the originator to provide

required and selected third party negotiate, these charges. a GFE. HUD also will consider

services; (2) title charges and title 2. New GFE Requirements comments on whether it should provide

insurance premiums; (3) shoppable a brief form for the application.

To improve the existing disclosure Under RESPA, a ‘‘Good Faith

lender required third party services; (4)

scheme, this proposed rule would Estimate’’ is to be provided with a

state and local government charges; (5)

amend Regulation X to establish new settlement cost booklet by a lender to

escrow/reserves (for taxes and

rules for the GFE including the each person ‘‘from whom it receives or

insurance); (6) hazard insurance; (7) per

following: for whom it prepares a written

diem interest; and (8) optional owner’s

title insurance. The proposed form then a. Clarifying the Application application.’’ 12 U.S.C. 2604(d). Because

would include a final total of all Requirements an originator begins the process of

settlement charges so the borrower can preparing an application on behalf of

Under the proposed rule, the GFE the borrower when the borrower

focus on the total costs to properly would be delivered or mailed at or

compare offers. submits application information, the

within 3 days of application. The borrower’s information itself need not

c. Identifies Shoppable and Required proposed rule, however, would only be provided in writing.

Services require a borrower to provide basic RESPA’s time limits for delivery of

credit information and a property the GFE would run from the point that

The GFE in Section III E, would aid address in verbal, written or

shopping after application by requiring an originator receives ‘‘an application.’’

computerized form, but before the While the statute allows the loan

loan originators to separately identify payment of any significant fee to the

those third party settlement services originator to mail or deliver the GFE 3

loan originator in order to receive a days after application, it is likely that

that are loan originator selected and GFE. The GFE would be conditioned on

required and those that the borrower the originator will provide the GFE as

the borrower’s credit approval following quickly after the borrower’s request as

may shop for independently.40 This final underwriting and appraisal of the

provision will enable borrowers to shop possible.42 HUD recognizes that the

property to be secured by the mortgage. proposed rule’s change of the definition

for major services to the extent possible, To carry out this approach, the rule

even after the borrower has selected a of application, and the requirement that

proposes to first clarify the definition of

loan originator. As described above, the term application, in HUD’s RESPA 42 As indicated in the background section, supra,

HUD’s current rules at 24 CFR 3500.7(e)

during the development of the HUD/Fed Report,

requires lenders to list on the GFE the 41 HUD’s RESPA regulations contain certain HUD became aware of proposals where borrowers

restrictions on Affiliated Business Arrangements. would arrange and pay for credit reports to loan

40 Lender required, lender selected third party See 24 CFR 3500.15. Section 9 of RESPA also originators of their selection. HUD supports these

services are to include items such as flood prohibits sellers of property from requiring, directly efforts as a way to lessen the burden on the

certification services and mortgage insurance, to the or indirectly, the buyer to purchase title insurance originator’s customers of paying the costs of those

extent an upfront premium is charged. from any particular title company. who are shopping.







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49150 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



GFE be provided to prospective same way other retailers treat shoppers, HUD also believes that recent

borrowers early in the shopping process, where the price of the product includes advances in technology and

frequently before they select a loan marketing expenses and purchasers pay telecommunications in loan processing

originator, may have implications for the costs incurred to serve shoppers make the routine provision of accurate

the content and delivery of required who do not purchase the goods or estimates of third party costs both easier

disclosures under the Truth in Lending services. Such an approach would better and cheaper.

Act (TILA). Question 28 specifically serve the purposes of the statute. Notwithstanding, the GFE has too

seeks comments on how HUD’s often failed to represent an accurate

proposed GFE changes impact other c. Providing an Accurate GFE

estimate of final settlement costs for a

federal disclosure requirements, and As described in the background number of reasons. The absence of more

invites suggestions on ways to section, Regulation X currently defines precise regulatory standards for

consolidate or coordinate existing ‘‘Good faith estimate’’ as ‘‘an estimate, measuring accuracy has not helped

statutory disclosure requirements. prepared in accordance with Section 5 ensure greater accuracy and reliability.

The rule proposes that GFE estimates of RESPA, of charges that a borrower is Beyond that, some originators appear to

would be valid for a minimum of 30 likely to incur in connection with a purposely underestimate settlement

days from when the document is settlement.’’ Pursuant to 24 CFR costs as a means of inducing prospective

delivered or mailed to the borrower. 3500.7(c) of Regulation X, loan borrowers to use their services, or as a

This is proposed in light of the originators are required to state on the way to obfuscate the amounts they plan

tolerances to avoid committing GFE the dollar amount or range of to receive later in the final mortgage

originators indefinitely. Within the 30 charges that the borrower will normally transaction. In too many cases, charges

days the borrower must agree to go pay at or before settlement based upon that never appeared on the GFE

forward and pay any additional money common practice in the locality of the materialize at settlement. Such ‘‘junk

required to complete the underwriting mortgaged property. While the rules fees’’ typically result in additional

process. If the borrower fails to accept require that the estimate be made in compensation for the originator and/or

the offer within 30 days, the borrower ‘‘good faith’’ and ‘‘bear a reasonable third party settlement service providers.

would need to return to the loan relationship’’ to the charges the In light of these considerations, HUD

originator to request the originator to borrower is likely to incur at settlement, believes that in order for the GFE to

provide a new GFE or ratify the there is no further explication of what serve its intended purpose, which is to

previous one. Commenters are asked in a ‘‘Good Faith Estimate’’ demands, apprise prospective borrowers of the

Question 5 below whether this is an either with respect to the loan charges they are likely to incur at

appropriate time period for the GFE. originator’s own charges/compensation, settlement, new standards must be

b. Facilitating Shopping With the GFE or with regard to lender required third established under existing law to better

party charges and other settlement costs. define ‘‘good faith’’ and the standards

As stated above, to achieve the

Three decades of experience has applicable to the GFE.43 Accordingly,

purposes of the Act, the proposed rule

shown that too often the estimates the proposed rule would make a number

would limit fees paid by the borrower

appearing on GFEs are significantly of specific changes to GFE requirements.

for the GFE, if any, to the amounts

lower than the amount ultimately First, the rule would prohibit loan

necessary for the originator to provide

charged at settlement, are not made in originators from exceeding the charges

the GFE itself. The fee could not include

good faith (e.g., a range of $0–$10,000), stated on the GFE for their own services,

amounts to defray later appraisal or

and do not provide meaningful lender required and lender selected

underwriting costs. This approach

guidance on the costs borrowers third party services, and government

would both facilitate shopping and

ultimately will face at settlement. The charges at settlement absent

reduce the possibility that fees for the

Department recognizes that, ‘‘unforeseeable and extraordinary

GFE are unearned, in violation of

RESPA’s proscription against such fees. occasionally, unforeseeable circumstances’’ beyond the loan

While HUD recognizes that there may be circumstances can and do drive up costs originator’s control such as acts of God,

costs attendant to obtaining credit in particular transactions. HUD believes, war, disaster, or any other emergency,

information from third parties and however, that in most cases loan making it impossible or impractical to

evaluating that information manually originators have the ability to estimate perform.

and/or electronically, the provision of final settlement costs with great Second, the rule would establish an

the GFE does not today, and would not accuracy. The loan originator’s own fee/ upper limit, or 10% ‘‘tolerance,’’ so that

in the future, necessitate full compensation, which is entirely within actual charges at settlement for

underwriting and appraisal. These steps the originator’s control, can be stated shoppable lender required third party

come afterwards, and under the with certainty, absent unforeseeable and services, borrower selected title services

approach in this proposal, GFEs extraordinary circumstances. Moreover, and insurance, and reserves/escrow,

explicitly would be given subject to most third party costs such as appraisal cannot vary by more than 10% of the

underwriting and appraisal. Therefore, charges, pest inspection fees, and tax/ estimates of those fees and charges

any charge at the time of application flood reviews, are fixed, and others, 43 Differing editions of Black’s Law Dictionary

should be limited only to those costs such as upfront mortgage insurance have defined ‘‘good faith’’ as ‘‘a state of mind

that result directly from providing the premiums, and title services and consisting in * * * honesty in belief or purpose

GFE. This is not to say that all loan insurance, typically only vary * * * [and faithfulness to one’s duty or obligation,’’

originators would be expected to charge depending on the value of the property and ‘‘freedom from knowledge of circumstances

which ought to put the holder upon inquiry’’ as

for GFEs. HUD would prefer that or the loan amount. State and local well as ‘‘absence of all information, notice, or

originators not impose any charge for a recording charges, stamps, taxes are also benefit or belief of facts which render [a transaction

GFE, since providing a GFE before the generally well known to loan originators unconscientious.’’ Inherent in these definitions is

payment of any fee will further facilitate or, where necessary, can readily be the concept that where a party makes an estimate

in good faith they will take into account all relevant

shopping. HUD believes it would be calculated based on the loan amount or information available to them, and will exercise

reasonable for loan originators to treat estimated precisely, on a pro rata basis, reasonable care in ascertaining and evaluating such

shoppers for mortgages in much the based on a projected settlement date. information before providing such an estimate.







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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49151



stated on the GFE absent unforeseeable borrowers. If the cost at settlement Regulation X to make this clear. HUD

and extraordinary circumstances. The exceeds the amount reported on the also solicits comments on this issue in

10% tolerance applies to all lender Good Faith Estimate, absent Question 4 below.

selected third party services, and to unforeseeable and extraordinary

e. Revising the HUD–1/1A and

third party services from providers who circumstances, the borrower may

Appendix A Instructions

have been suggested to the borrower by withdraw the application and receive a

the loan originator. It does not apply to full refund of all loan-related fees. Such Consistent with the proposed rule’s

third party services from providers circumstances would have to be new approach to the reporting of lender

selected by the borrower independently documented in writing by the loan payments to borrowers, the proposal

of the originator’s recommendation. originator and such documentation would require that on the HUD–1 all

The inclusion of these tolerances will retained by the loan originator. These such payments be reflected in the

assure that borrowers can either find circumstances may be further defined in borrower’s column, in the applicable

prices within the estimates in the HUD’s final regulations, and comments series (e.g., 800 series for payments to

marketplace or return to the lender who are requested in response to Question 2 mortgage brokers; 1300 series for

will identify sources that will honor below on both the definition of payments to other third party settlement

those prices. However, if the borrower unforeseeable and extraordinary service providers). However, inasmuch

chooses to purchase a more expensive circumstances, and borrower rights as there is no place for identifying and

service than is available or than the where there is noncompliance with GFE reporting credits on the HUD–1 A, in

lender can provide, the lender will not requirements. Concurrent with any transaction where there is such

be held to have exceeded the tolerance. finalization of this rule, HUD also will payment, the rule requires that the

The 10% level for tolerances has been establish procedures for closely HUD–1 must be used. The proposed

selected to inject discipline into scrutinizing loan originators that fail to rule’s revisions to the Appendix A

estimates while providing a margin for meet these new GFE requirements for instructions for the HUD–1 appear

legitimate error based on market possible Section 8 violations. immediately following the proposed

changes. Commenters are asked to amendments to Regulation X.

provide their views on whether this is d. Negotiating Discounts From Third Also, the proposed new GFE, while

or is not the appropriate tolerance level, Party Settlement Service Providers reducing the number of cost items

tolerance, and why. The establishment of tolerances under reported on the face page, and

Third, the rule would include the proposal will require that loan consolidating the presentation to the

redisclosure requirements triggered by originators actively follow the market borrower of important cost information,

changed circumstances. Specifically, if, prices for settlement services in their is not readily comparable to either the

after full underwriting, a loan originator communities. HUD recognizes that the HUD–1 or HUD–1A form, which the

selected by a borrower to obtain a new GFE’s tighter requirements on borrower will receive at settlement. This

mortgage loan determines that the estimated third party charges may cause is because certain cost items on the GFE

prospective borrower does not qualify many loan originators not already doing are currently reported in numbered

for the loan product identified in a so to seek to establish pricing sections of the HUD1/1A forms not

previously provided GFE, the loan arrangements with specific third party corresponding to their GFE

originator shall inform the borrower that settlement service providers in advance, counterparts. Thus, for example, while

the loan originator does not offer loan in order both to ensure they are able to the proposed GFE clearly distinguishes

products meeting the borrower’s needs meet the tolerances and to ensure lower between those settlement costs

or credit status. Alternatively if the loan prices for their customers. As part of attributable to the loan originator(s)

originator does offer other products negotiations for such arrangements, (section A. on the new GFE) and other

meeting the borrower’s circumstances, many originators, particularly those lender required third party settlement

the loan originator must so inform the with a substantial volume of business, services (sections C. and E. on the new

borrower and the borrower may request may seek prices from third party GFE), the HUD–1/1A forms combine

a new GFE. Furthermore, when, after providers that are lower than those loan originator costs and some third

receiving a GFE, a borrower selects a providers offer on a retail basis. party costs under the same heading

loan originator to obtain a mortgage loan However, because Section 8 of RESPA (‘‘Items Payable in Connection with the

and qualifies for the loan product broadly prohibits providing a ‘‘thing of Loan’’) and numbered section (800). The

identified, but elects not to lock-in the value,’’ which is specifically defined to HUD1/1–A forms include credit report

interest rate and the interest rate include discounts, in exchange for the fees, appraisal fees, mortgage insurance

dependent payment quoted on the GFE, referral of business, many loan application fees, and inspection fees in

the loan originator shall provide the originators have been reluctant to this category. Other third party services,

borrower with an amended GFE at such openly seek such pricing benefits, even such as pest inspection fees, permit fee,

time as the borrower does lock the rate where any such discount in the price is and surveys are separately reported on

and the interest rate dependent payment passed on to the borrower. HUD the HUD–1/1A (1300). In addition, the

if either has changed from that quoted believes that the fundamental purpose new GFE identifies as separate major

on the original GFE. The amended GFE of RESPA is to lower settlement costs to cost categories some items reported, in

shall identify those cost categories that borrowers, and it is therefore contrary to whole or in part, under the same

have changed as a result of the change the law’s objectives to interpret the anti- heading on the HUD–1/1A. For

in the interest rate. In no case may an referral fee provisions of Section 8 to example, the new GFE lists hazard

amended GFE include increases in cost prohibit one settlement service provider insurance and per diem interest as

categories which are not dependent on from using its market power to negotiate separate categories. However, on the

the interest rate (Section III. B.). discounted prices, as long as the entire HUD–1/1A, where hazard insurance

By limiting the extent to which final discounted price negotiated by the premiums are paid in advance they are

settlement charges can exceed GFE originator is charged to the borrower reported, along with other items such as

estimates, the Department intends to and reported as part of the total charge per diem interest and pre-paid mortgage

render the GFE a much firmer, more within Sections III(C) through (J) as insurance premiums, in section 900,

reliable, and meaningful disclosure for appropriate. The proposed rule amends ‘‘Items Required by Lender to be Paid in





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49152 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



Advance.’’ Moreover, where a portion of 3. Section 6 Transfer of Servicing above), it will not be as easy for

the hazard insurance premium is Language borrowers to shop and compare as it

required to be escrowed, that amount is In 1990, Congress amended RESPA to would be if they could simply

reported on the HUD–1/1A in section include a disclosure, which informs comparison shop for mortgages based on

1000, along with other escrow items, as borrowers that their loan or the a few prices as under this proposal.

‘‘Reserves Deposited With Lender.’’ The Secretary has determined,

servicing of their loan, may be sold. 12

As proposed, the new GFE would therefore, that effective packaging of

U.S.C. 2605, Public Law 93–533 section

consolidate certain charges into lump settlement services will depend on

6 (November 28, 1990). In 1997, HUD

sum categories (e.g. lender required packagers negotiating lower costs with

proposed a rule to implement the

third party services). The Department third party settlement service providers,

amended statute. Many comments were

has made only minor changes to the and then providing borrowers with an

received and the rule was never

HUD–1 instructions, to assist the alternative disclosure, the Guaranteed

finalized. 62 FR 25740. The Department

borrower in comparing the new GFE to Mortgage Package Agreement (GMPA).

plans to finalize the 1997 proposed rule

the HUD–1. The Department took this This proposal will increase the

approach because the HUD–1 is well shortly. However, in the meantime, the opportunities for borrowers to shop

accepted as a listing of settlement Section 6 language in the statute may be among packages fostering competition

service charges by industry and provided in conjunction with the GFE to lower costs further. Under Section

consumers alike and HUD is reluctant to instead of the language currently 8(c)(5) of the Act, the Secretary is

change the form unnecessarily. indicated in § 3500.21 and Appendix authorized to issue regulations that

However, there is a risk that if the forms MS–1. remove certain payments or classes of

are not clearly comparable, lenders C. Remove Regulatory Barriers To Allow payments or other transfers from the

could deviate from the prices given in Guaranteed Packages of Settlement Section 8 prohibitions on kickbacks and

the GFE or GMPA and the borrower Services and Mortgages To Be Made unearned fees after consultation with

would not realize the deviations. Available to Borrowers designated regulatory agencies. Also,

Modifications could be made to the under Section 19 (a) of the Act, the

HUD–1 so that the fee categories on the 1. A New Safe Harbor for Guaranteed Secretary is authorized to grant

new GFE would correspond to similar Mortgage Packages (GMP) Created reasonable exemptions for classes of

groupings on the HUD–1 and the two Through HUD’s Exemption Authority transactions as may be necessary to

documents could be more easily Consistent with its earlier achieve the purposes of the Act.

compared. HUD invites comments in recommendations in the HUD-Federal Accordingly, under these authorities,

Question 9 below on whether or not the Reserve Report, described in the HUD is proposing to establish a

HUD–1 should be modified. HUD plans background section of this rule, the carefully circumscribed safe harbor from

to use focus groups to ensure that the Department believes that the most RESPA’s provisions at Section 8 to

proposed forms are consumer friendly effective means of simplifying the facilitate the development and

including considering, among other process of obtaining a mortgage, marketing of Guaranteed Mortgage

things, how the new proposed forms are promoting competition to lower costs Packages.

best compared by consumers to the and facilitating shopping is to offer 2. Who May Package

HUD–1 and what revisions, if any, to borrowers Guaranteed Mortgage

the HUD–1 would be most helpful. Packages containing a lump sum price The purpose of the Guaranteed

For purposes of TILA, the packager for all loan originator and governmental Mortgage Package safe harbor is to

must list the finance charges needed to required settlement costs associated stimulate competition and improve the

calculate the APR on an addendum to with obtaining a mortgage combined borrower’s ability to shop. Under this

the HUD–1 or HUD–1A and HUD with an interest rate guarantee for the proposal, entities other than lenders

invites comments in Question 20 on this loan. The Department believes that such may qualify as packagers for a safe

issue. The proposed rule seeks comment packages offer borrowers the possibility harbor, as long as their packages include

on whether there should be further of lower prices through innovation by a mortgage and otherwise satisfy the

modifications to the HUD–1/1A forms packagers, the pricing discipline requirements of the safe harbor. In this

so that they more accurately correspond involved in arranging packages, and connection, in order to ensure that the

to the new GFE. However, the competition among packagers. borrower receives the settlement

Department believes that, in the absence Under a Guaranteed Mortgage Package package of services and the mortgage

of further changes to the HUD–1/1A approach packagers would offer a lump- loan, the proposed rule would require

forms, borrowers can be assisted in sum price for settlement costs, and an that the packager sign the GMPA

comparing the two disclosures, and, to interest rate guarantee at no cost to the agreeing to provide the Guaranteed

that end, the new GFE identifies, next borrower until the borrower selects the Mortgage Package at the Guaranteed

to each GFE category, where on the package. The packager would be held to Mortgage Package price and that non-

current HUD–1/1A the corresponding those figures from the time the package lender packagers have a lender sign the

cost information is to be found. As the is agreed to through settlement. This GMPA after borrower acceptance

preceding discussion makes clear, this approach would allow the borrower to agreeing to provide the loan included in

necessitates identifying more than one rely on the quoted price and rate and to the Guaranteed Mortgage Package.

HUD–1/1A section number next to some compare fewer numbers in shopping for 3. Requirements for the Safe Harbor

GFE categories.44 the best loan to meet his or her needs.

Packagers that provide the GMP and

Even with improvements to the current

abide by its terms and the other

44 Specifically, the new GFE contains the

disclosure scheme, including more

following cross-references to the HUD–1/1A for requirements of this rule, along with

reliable quotes for major settlement

each GFE category: A. Origination Fees, 800; C. any settlement service providers

Lender Required/SelectedThird Party Services, 800, costs under the new GFE (see B(2)(c),

participating in such a package, would

900, 1000, 1300; D. Title Services/Insurance, 1100;

E. Lender Required/Shoppable Third Party 1000; H. Per Diem Interest, 900; I. Hazard

receive a safe harbor from scrutiny

Services, 800, 900, 1000, 1300; F. Government Insurance, 900, 1000; J. Optional Owner’s Title, under Section 8 of RESPA as described

Charges—Taxes, 1000, 1200; G. Reserves/Escrow, 1100. below. Specifically, to qualify for the





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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49153



safe harbor, packagers, within 3 days of should be addressed in Guaranteed function of the packager—what the

borrower’s application, would have to Mortgage Package Agreements. packager is providing—and a statement

offer, without an upfront fee: (1) A Under the proposal, reserves that are that the interest rate on the proposed

guaranteed price for the loan origination escrowed would be disclosed on the form, and the settlement costs quotation

and virtually all other lender required GMPA as ‘‘Other Required Costs’’ and (if any), represent an offer to the

settlement services needed to close the subject to a 10% tolerance. The only borrower which is open and guaranteed

mortgage, including without limitation, costs that could be excluded from the for 30 days from when the document is

all application, origination, guarantee and not subject to any delivered or mailed to the borrower, and

underwriting, appraisal, pest inspection, tolerance would be those that fluctuate which will immediately become a

flood and tax review, title services and depending upon the borrower’s choice, binding contractual agreement upon

insurance, and any other lender such as hazard insurance, per diem borrower acceptance and payment of a

required services, and governmental interest, and optional owner’s title minimal engagement fee, subject only to

charges; (2) a mortgage loan with an insurance. However, the Questions acceptable final underwriting and

interest rate guarantee, subject to change below ask commenters whether these property appraisal. The opening

(prior to borrower lock-in) resulting items should also be included in the description also makes clear that any

only from a change in an observable and package at the required minimum required settlement costs not separately

verifiable index or based on other amounts with a notation that ‘‘optional itemized and estimated in Section III of

appropriate data or means to ensure the costs’’ are the responsibility of the the GMPA are the responsibility of the

guarantee; 45 and (3) a Guaranteed borrower. packager.

Mortgage Package Agreement (GMPA) as The proposal does not require Section I of the GMPA provides the

a prospective contract with the borrower packagers to itemize the services interest rate guarantee and APR along

that is binding through settlement included in the GMPA. HUD believes with an explanation that the interest

containing the maximum settlement however, that there are certain rate is guaranteed through settlement if

costs. The GMP offer would remain settlement services that are of specific the borrower agrees now to the GMPA

open as an offer for a minimum of 30 interest and value to the borrower such and locks-in this rate by a specified

days from when the document is as pest inspection, appraisal and the date/time. Any mortgage insurance

delivered or mailed to the borrower. The purchase of lender’s title insurance premium included in the APR would be

GMPA becomes a binding contractual (which may affect the cost of owner’s separately disclosed in Section I. It

commitment immediately upon title insurance). Some lenders may provides that if the borrower does not

borrower acceptance of the package and choose to forego some or all of these choose to commit immediately, it is

payment of a minimal engagement fee, services. Therefore, HUD proposes that guaranteed that the quoted interest rate

subject only to acceptable final if any of these particular services are not will not change except in relation to

underwriting and property appraisal. anticipated to be included in the GMP, changes in a specified index rate (or

The guaranteed package also would this fact must be disclosed on the other such appropriate data or means as

include up-front costs of mortgage GMPA. HUD may determine to assure that

insurance. The cost of mortgage Packagers may in GMP transactions changes in the rate are reflective of the

insurance is based on the ratio of the provide a GMPA in lieu of the GFE. The cost of funds and not simply to increase

loan amount to the value of the property revised instructions for the HUD–1/1A the packager’s compensation).

and is not finally determined with require that in Guaranteed Mortgage Section II of the GMPA states that this

certainty until the lender knows the Packages, the HUD–1/1A must itemize package price covers all services,

property value. In the GMP price, the the services provided, but not the besides those listed in Section III, that

packager shall include any maximum specific charges for those services. are necessary to close the loan. The

upfront mortgage insurance premium However, because the amounts of packager would, however, be required

based upon the borrower’s estimate of certain individual charges needed to to inform the borrower if certain

the property value and the amount that compute the finance charge and the designated items are not anticipated to

needs to be borrowed. The GMPA will APR under TILA and HOEPA, the be included as part of the package

inform the borrower that the upfront packager must list the finance charges including lender’s title insurance, the

mortgage insurance premium, if any, needed to calculate the APR on an pest inspection, and appraisal. Under

may decrease or become unnecessary addendum to the HUD–1 or HUD–1A. the GMPA, any pest inspection report,

depending on the final appraised value At Question 20, commenters are asked credit report, and appraisal would be

of the property. The ‘‘Other Required to provide their views on whether this provided to the borrower upon the

Settlement Costs’’, discussed approach adequately protects and borrower’s request. (On the HUD–1,

immediately below, would include any preserves consumers’ rights under TILA borrowers will receive a listing of the

required reserves for mortgage insurance and HOEPA while facilitating specific services provided, but not the

premiums. Because full underwriting packaging, and to suggest alternatives, if specific prices for each service. The

information will not be available to the needed. Entities that do not choose to total settlement costs will be provided.)

packager at the time the GMPA is seek this safe harbor will continue to Section III of the GMPA provides a

provided, implementation issues are provide the GFE and HUD–1/1A description of ‘‘Other Required

presented. Commenters are invited in disclosure scheme, as amended by this Settlement Costs’’ which are outside the

rule. package and informs the borrower that

Question 21 below to provide their

reserves/escrow are subject to a 10%

views on how mortgage insurance 4. Contents of the Guaranteed Mortgage upper limit, or tolerance, at settlement

Package Agreement absent unforeseeable and extraordinary

45 Through this requirement, discussed infra,



HUD seeks to ensure that the rate of the loan does The premise underpinning packaging circumstances. However, the 10%

not vary after the borrower commits to a packager is that firm, simple, guaranteed price tolerance does not apply to hazard

for reasons other than an increase in the cost of quotes will enable borrowers to shop for insurance and per diem interest in this

funds. There may be a variety of ways to solve this

problem and HUD is seeking comments, in

mortgage loans with much greater category. The GMPA also makes clear

particular, on how to implement an interest rate confidence and certainty. The GMPA that any required settlement cost not

guarantee. starts with a brief description of the specifically identified on the GMPA as





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49154 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



outside a package, and itemized on the an interest rate guarantee. HUD’s This safe harbor will allow packagers

GMPA, is included in the guaranteed rationale for this requirement is that to inject pricing discipline to negotiate

price quote and is the responsibility of both the settlement costs and the firm overall prices for essentially all

the packager. interest rate need to be firm for settlement services and mortgage

Section IV of the GMPA provides the borrowers to compare loan products. interest rates with participating

borrower the cost of owner’s title HUD recognizes, however, that after a settlement service providers. Some

insurance, if available. For any package borrower requests a GMPA but before GMPs may require the use of affiliated

where the packager offers the borrower locking in a rate, the interest rate on a entities, a practice prohibited by Section

the option of paying all or part of the loan may change based on market 8 except in limited circumstances. Other

stated guaranteed and/or estimated forces. Similarly, some borrowers GMPs may involve arrangements

settlement costs through a higher choose to float even after they have between independent providers based

interest rate, that option will be committed to an originator, in the hopes on the projected volume of business to

explained in accordance with Section V that market interest rates will fall. In be referred. The safe harbor will apply

of the GMPA. Similarly, where a such instances, HUD believes that in the in both of these arrangements. Without

packager offers the borrower the option context of GMPs, it is necessary to this safe harbor, Section 8(a)’s

of lowering the stated guaranteed assure that when the borrower is ready prohibition on referral fees may bar

interest rate by paying additional to lock, the interest rate will only be such arrangements and Section 8 (b)’s

amounts at settlement, commonly changed based on observable market prohibitions may deter packagers from

referred to as discount points, that changes, or based on other data or retaining profits that result from

option will also be explained in appropriate means to ensure the packaging, which could be regarded as

accordance with Section V of the guarantee. One possibility is to have the unearned. Outside the safe harbor,

GMPA. rate move with an observable and where loan originators arrange

Section VI provides interest rates and verifiable index. Another is to have a discounted prices that are charged to

adjustment terms related to adjustable rate publicly available. Whatever the consumers, HUD is proposing in this

rate mortgages, applicable prepayment ultimate methodology, it must be easily rulemaking to clarify that Section 8 is

penalties, and balloon payments. useable and verifiable by the borrower not violated (see above). Because HUD

Section VII of the GMPA must be signed and the industry. Commenters are asked believes that the benefits to borrowers of

by an authorized agent of the packager to address Question 13 concerning the packaging outweigh any protections

and the borrower to become a binding use of an index or a substitute therefore offered by Section 8’s provisions, the

contract for the Guaranteed Mortgage to address this problem. Secretary has concluded that such a

Package at the Guaranteed Mortgage carefully circumscribed safe harbor is

Package price. After acceptance by the 6. Scope of the Safe Harbor

appropriate, subject to the eligibility

borrower, non-lender packagers must The Secretary is exercising exemption

conditions set forth in this rule.

ensure that the lender sign the GMPA authority under Section 8(c)(5) and Accordingly, pursuant to Section 19,

agreeing to provide the loan included in Section 19 of RESPA to establish this the Secretary has determined that the

the Guaranteed Mortgage Package. HUD carefully circumscribed guaranteed safe harbor is necessary for these

solicits comments on the issue of lender mortgage packaging safe harbor. The prescribed transactions to achieve the

signatures on the GMPA in Question 18 Secretary is establishing this safe harbor

purposes of the Act. Where the

below. Notwithstanding the basic only for those Guaranteed Mortgage

requirements are met, the safe harbor

objective of packaging, which is to Package transactions that meet the

from Section 8 will permit payments or

dramatically improve the borrower’s requirements set forth in this rule. The

other things of value exchanged

capacity to comparison shop, different Secretary has determined that the

between a packager and entities

entities may offer two types of packages. establishment of this safe harbor is

participating in the package, and will

Some packagers may offer GMPs in necessary to allow this class of

insulate packager earnings from Section

which all settlement costs are included transactions— guaranteed packages of

8 scrutiny. Section 8 would, however,

in the interest rate guarantee (in which settlement services with the protections

continue to prohibit any payments for

case no guaranteed settlement cost required under this rule— to be

available to consumers to achieve the the referral of business, kickbacks, splits

quote will be provided), while other

purposes of the Act. The Secretary has of fees and unearned fees between the

packagers may quote a guaranteed price

concluded that the availability of these packager and any of the entities

for all settlement costs along with a

packages to consumers will simplify participating in the package on the one

(presumably lower) interest rate

their shopping for settlement services hand, and entities outside of the

guarantee. The Special Information

and allow them to gain the benefit of an package on the other.46 As long as the

Booklet and other consumer education

active competitive marketplace where requirements of the safe harbor are

materials will alert borrowers to

market forces lower settlement costs. satisfied, the exemption authority under

compare the combined impact of both

For the same reasons, the Secretary has Section 19 will create a safe harbor for

settlement cost and interest rate

determined that payments and pricing packagers from the Section 8

guarantees when shopping among

arrangements between packagers and requirements.

packagers, and will suggest that a

participating settlement service Under the safe harbor, as noted above,

borrower might wish to compare the

providers for Guaranteed Mortgage packagers would provide the GMPA in

APRs of the two products as well as

Packages as set forth in this rule shall lieu of a GFE. HUD regards the

consider how long the borrower plans to

not be construed as prohibited under provision of a GMPA as fully, indeed,

stay in the property; a longer mortgage

Section 8 of RESPA as long as the more than satisfying the requirements of

term may mitigate in favor of a borrower

requirements in this rule are satisfied. Section 5 of RESPA that borrowers

choosing to pay settlement costs

Pursuant to Section 8(c) (5) the receive a Good Faith Estimate of the

through a higher rate.

Secretary has undertaken the necessary

5. Interest Rate Guarantee consultation with other agency heads as

46 Thus, for example, a real estate agent, outside



of the package, would continue to be subject to

In the rule, HUD is requiring that required prior to promulgating this Section 8 for accepting a payment from a packager

Guaranteed Mortgage Packages include exemption. for referring a customer to a package.







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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49155



amount of charges for settlement F. Preemption absent unforeseen circumstances. Are

services the borrower is likely to incur. Pursuant to Section 18 of RESPA, 12 these appropriate tolerances and

Additionally, HUD believes that the U.S.C. 2616, the Secretary is authorized tolerance levels or should other

GMPA, by itemizing a Guaranteed to determine whether any provisions of tolerances/tolerance levels be

Mortgage Package price encompassing State law are inconsistent with any established for these categories? Also,

virtually all settlement charges, along provision of RESPA. Where such a

should a tolerance be established for

with a limited number of itemized borrower’s title insurance? What

determination is made, after

charges, including owner’s title alternative or additional means might be

consultation with other appropriate

insurance, also more than satisfies the employed to ensure that loan originators

Federal agencies, the Secretary may

requirements of Section 4 of RESPA. take the care necessary to complete the

exempt any person subject to RESPA

Nevertheless, HUD is prepared to GFE to ensure that it represents a Good

from compliance with said State law to

exercise the exemption authority under Faith Estimate of final settlement costs?

the extent such compliance is 4. In Section III.B.(2) d., the proposed

Section 19 to create a safe harbor for

inconsistent with RESPA. Question 22 rule would amend Regulation X to make

packagers from the disclosure

below seeks comments on how this clear that loan originators may enter

requirements of Sections 4 and 5 of

provision of RESPA should be applied into volume arrangements where such

RESPA, if it deems such an exemption

necessary. in light of the provisions in the discounted prices are charged to their

The safe harbor is proposed to be proposed rule. customers. Commenters are invited to

available only where the transaction IV. Questions for Commenters provide their views on the

does not result in a high cost loan as ramifications, if any, of this

Commenters are asked to address the clarification.

that term is defined in the Home

following questions in their comments 5. In Section III.B.(2) c., the proposed

Ownership Equity Protection Act. See

to the extent that they have views on rule requires that the tolerances will

15 U.S.C. 1601 (Supp II 1996). The safe

these subjects. apply to the GFE from the time the form

harbor also may not be available for

mortgages that exceed other limits or The New Good Faith Estimate (GFE) is given by the loan originator through

include other features identified by the Requirements settlement. Also, in case it takes a

Department during the course of this substantial time for the borrower to

1. As proposed in Section III.A.(1), the decide to use the loan originator from

rulemaking as resulting in unreasonable proposed GFE form would briefly

settlement charges or other loan terms the date the form is given, the rule and

explain the originator’s functions and the form provide that the GFE need only

inimical to the purposes of RESPA. that the borrower, not the originator, is

In this rulemaking, in Question 12 be open for borrower acceptance for a

responsible for shopping for his or her minimum of 30 days from when the

below, HUD is soliciting comments on

best loan. Does the language proposed document is delivered or mailed to the

the scope of the safe harbor and in

adequately convey this message? If the borrower. After that time, the GFE could

particular, how the safe harbor should

commenter thinks otherwise, it should be ratified or superseded by the

apply to affiliated business

provide alternative language for the originator at the borrower’s request. Is

arrangements.

form that better explains the loan this expiration date appropriate to

D. Scope of the Proposed Rule originator ’s function to the borrower. protect against unnecessary costs

The proposed rule’s new regulatory Should the form also address agency flowing from an indeterminate liability

requirements will apply to first and requirements under state laws and how? or for other reasons? Is 30 days too long

second lien transactions, purchase 2. In Section III.B.(2) c., the proposed or too short? Another possibility that

money loans, and refinances. Home rule requires that the amounts estimated commenters may consider is whether

equity transactions are addressed in on the GFE for mortgage broker and the numbers on the GFE should apply

§ 3500.7(f), under current RESPA lender origination charges may not vary only from the time the borrower enters

regulations. At Question 26 the at settlement absent unforeseeable into an agreement with the loan

Department invites comments on this circumstances. Should the rule provide originator. HUD also invites

issue. for this ‘‘unforeseeable circumstances’’ commenters’ views on whether HUD

exception? Are the particular now should require a borrower’s

E. Contractual Remedies and circumstances specified in HUD’s signature on the GFE to memorialize

Enforcement Priorities formulation in this proposal sufficiently acceptance and begin the period during

For the safe harbor, the proposed rule encompassing? What evidence should a which the estimates are binding.

intends that borrowers, individually or, broker or lender be required to retain to 6. In Section III.B.(1) b., the proposed

where appropriate, as a class, may sue prove the existence of such rule simplifies the GFE by placing all

for specific performance or for damages circumstances and justify any increase loan origination costs in a small number

pursuant to applicable State contract in charges at settlement? of primary categories. This is intended

law provisions in the event a packager 3. In Section III.B.(2) c., the proposed to facilitate borrower understanding and

breaches a contract entered into rule establishes a 10% limit, or shopping of major loan costs and

pursuant to C., above. ‘‘tolerance,’’ for categories of settlement minimize the proliferation of ‘‘junk

Beyond any contractual remedies services and costs including third party fees’’ and duplicative charges. How

available to borrowers under state laws, services that the borrower shops for and could the GFE be made even simpler to

HUD will regard noncompliance with a escrow/reserves by which such costs facilitate borrower shopping? If the

GMPA as an enforcement priority, and cannot exceed the GFE estimates by commenter believes greater itemization

any entity found in violation of such a 10% at settlement absent unforeseeable is desirable, what should be itemized

contract will not be able to claim a safe and extraordinary circumstances. It also and why?

harbor under Section 8. As a result, establishes zero tolerances for 7. In Section III.A.(3), the proposed

those found in violation of a GMPA will origination charges and lender required rule requires that on the front of the

be subject to Section 8 scrutiny and lender selected third party costs and proposed form mortgage brokers

possible penalties as well as individual government charges that cannot vary disclose the lender credit right below

or class relief. from the estimate through settlement the total origination charges to: (a) Make





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49156 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



the borrower aware of the effect that the disclosure for mortgage brokers would be that any amounts in indirect

credit has to reduce total origination warranted, such as an additional fees could be credited to borrowers

costs; (b) avoid confusion among statement of what the broker’s fees are taking away any incentive for an

borrowers; and (c) avoid giving any and how they function? increase in rates to increase

competitive disadvantage to either a compensation. Should this be offered in

Guaranteed Mortgage Package

broker or lender for the same loan. any event?

Agreements 15. As proposed in Section III. C (6),

What, if any, other approach to address

these concerns is better and why? 11. Is a safe harbor along the lines under the rule, mortgages with total fees

Should the new GFE form disclose this proposed in Section III. C. (1) of this or a rate covered by the Home

credit at the bottom of the proposed rule necessary to allow lump sum Ownership and Equity Protection Act

form because the credit can be applied packages of settlement services to (HOEPA) would be subject to the new

to all settlement costs? become available to borrowers? Would GFE disclosure requirements; however,

8. As proposed in Section III. A. (3), the proposed clarification by HUD that HOEPA loans would not qualify for the

as another step to avoid borrower discounts may be arranged, if passed on guaranteed package safe harbor. Is this

confusion and any competitive to borrowers and not marked up, suffice exclusion appropriate considering, on

disadvantage among lenders and to make packages available to the one hand, that packaging promises

brokers, the proposed rule breaks out on borrowers? Would a rule change to borrowers a simpler way to shop and

Attachment A–1, rather than on the approve volume discounts and/or mark- make transactions more transparent? On

front of the proposed form, the ‘‘Loan ups when a package is involved suffice? the other hand, the safe harbor could be

Origination Charges’’ into ‘‘Lender Would it suffice to trim the disclosure provided for a loan that has very high

Charge’’ and ‘‘Broker Charge.’’ How, if at requirements for packaging and offer the rate and/or fees and may be predatory.

all, does this approach advantage or option of providing a streamlined GFE The proposal also says that during the

disadvantage either lenders or brokers to those who packaged? rulemaking other limitations may be

or confuse borrowers in comparison 12. As proposed in Section III. C. (6) established to exclude high cost and/or

shopping? Would the industry and is the scope of the safe harbor loans with predatory features from the

borrowers be better served if there is a appropriately bounded in applying to packaging provisions. HUD invites

breakout of ‘‘Lender charges’’ and all packagers and participants in comments on whether HOEPA loans,

‘‘Broker charges’’ on the front of the packages? The safe harbor also currently any other loans, or features of loans

form and why? does not apply to referrals to the should be included or excluded from

9. As proposed in Section III. B. (2) e, package. Should there also be a bar the safe harbor and why.

the new GFE will consolidate certain against part time employees of other 16. As proposed in Section III.C (3),

charges into lump sum categories (e.g. providers working for the package to the GMPA provides that the offer must

lender required third party services). To steer business? How should the safe be open to the borrower for at least 30

permit the borrower to compare the new harbor apply to affiliated business days from when the document is

GFE to the HUD–1, it will be necessary arrangements to protect borrowers from delivered or mailed to the borrower. Is

for HUD to establish additional steering? this an appropriate minimum time

instructions to guide the reader so that 13. As proposed in Section III. C (5), period to ensure that the borrower has

the new GFE could be compared to the to qualify for the safe harbor, the an adequate opportunity to shop?

HUD–1. Would it be better to change the packager must include an interest rate 17. As proposed in Section III. C (4),

HUD–1 so the fee categories correspond guarantee with a means of assuring that the rule currently provides that the

to the groupings on the GFE and the two when the rate floats, it reflects changes Guaranteed Mortgage Package

documents can be more easily in the cost of funds not an increase in agreement must indicate that certain

compared? If commenters support originator compensation. For this reports such as the appraisal, credit

changes to the HUD–1 to make it more purpose, the rule suggests tying the rate report, and pest inspection are available

comparable to and compatible with the to an observable index or other to the borrower upon the borrower’s

new GFE, how extensive should these appropriate means. What other means request. Also, packagers may decide to

changes be and in what areas? Should could assure borrowers that the rate of forego such reports or services (i.e.

the HUD–1 continue to list all charges a lender was not simply being increased lender’s title insurance) and must

for services or should it also be to increase origination profits? For inform the borrower that such reports or

shortened and simplified as well to example, would a lender’s commitment services are not anticipated to be

cover only categories of services? to constantly make rates public on a included in the package price. Are these

10. Should a safe harbor from Section web site be a useful control? If an index adequate protections for the borrower?

8 scrutiny be established for is the best approach, how should it be HUD is aware that other laws such as

transactions where the mortgage broker set? If an index approach is approved, Regulation B (ECOA) provide certain

signs and contractually commits to its should each lender be allowed to pick rights to borrowers with respect to

charges on the GFE? The purpose of its own observable index? obtaining some of these reports. In order

proposing this safe harbor would be to 14. As discussed in the preamble to to qualify for the safe harbor HUD has

encourage a firm contractual the rule in Section III. C (5), if an created additional reporting

commitment to borrowers, before they observable index or other appropriate requirements. Are these additional

pay a fee and commit to a particular means of protecting borrowers from reporting requirements appropriate?

mortgage broker, so that the borrower increases in lender compensation when 18. Should additional consumer

can shop among mortgage brokers. the borrower floats in a guaranteed protections be established for

Considering the proposed changes to the packaging approach is not practical, packaging? For example, should

GFE, the proposed packaging safe should HUD provide a packaging safe additional qualifications be established

harbor and HUD’s current guidance on harbor only for mortgage brokers? Such for ‘‘packagers’’ to ensure that borrowers

mortgage broker fees, is this safe harbor a mortgage broker safe harbor would are protected against non-performance

necessary for industry or borrowers and require disclosing the lender credit to including the unavailability of a

why? In light of the proposed rule’s the borrower in broker guaranteed mortgage that could result in a borrower

other provisions is any other additional packages. The theory for the safe harbor ‘‘losing’’ a house? For example, should





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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49157



there be a requirement that a packager insurance in packages of settlement capable of offering an alternative loan

must have sufficient financial resources services? product to provide a prospective

to credibly back the guarantee? Is it 22. To what extent, if any, do borrower, upon the borrower’s request,

necessary to require a lender signature inconsistencies currently exist, or with a new GFE if, after full

on the GMPA to ensure that the would they exist upon promulgation of underwriting, the borrower does not

borrower receives the loan at the time of the proposed rule between State laws qualify for the loan identified on the

settlement? How can the borrower’s and RESPA? Specifically, what types of original GFE. Is this approach

interests be protected without unduly State laws result in such inconsistencies appropriate? What other options should

burdening the process or unduly and merit preemption? What, if any, be considered where borrowers do not

limiting the universe of packagers? provisions of the proposal should be qualify for the loan product initially

19. Consistent with the HUD-Fed revised to facilitate any necessary sought?

Report, the rule proposes that certain preemption? 30. The proposed rule in Section III.

charges, such as hazard insurance and 23. The rule proposes that the GFE B (2) c., would require loan originators

reserves, are outside the package as and the GMPA be given subject to to provide qualified borrowers with an

other or optional costs. Is this the right appraisal and underwriting. How amended GFE, identifying any changes

approach or should these charges be should the final rule address the matter in costs associated with changes in the

disclosed as the minimum amounts of loan rejection or threatened rejection interest rate, where the borrower elects

required by the lender and required to as a means of allowing the originator to not to lock-in the interest rate quoted on

be inside the package? Would the latter change the GFE or GMPA to simply earn the original GFE at the time it is

better serve the objective of establishing a higher profit? provided. Is this an appropriate

a single figure for the borrower to shop 24. To what extent, if any, should requirement? What alternatives, if any,

with? direct loan programs such as those should HUD consider?

20. The rule proposes in Section III. provided by the Rural Housing Service

C (3), that under Guaranteed Mortgage of the Department of Agriculture be V. Findings and Certifications

Packaging, the HUD–1 will list the treated differently under the new The Paperwork Reduction Act

settlement services in the package but regulatory requirements proposed by

not the specific charges for each service. this rule? The information requirements

Certain third party charges are excluded 25. As proposed, the GFE and GMPA contained in this proposed rule have

from the calculation of the finance currently contain sections for loan been submitted to the Office of

charge and the APR under TILA and originators and packagers to indicate the Management and Budget for review in

HOEPA. Commenters are invited to specific loan terms for adjustable rate accordance with the Paperwork

express their views on whether the mortgages, prepayment penalties, and Reduction Act of 1995 (44 U.S.C.

approach in the rule satisfies or whether balloon payments. Are these appropriate Chapter 35). The Real Estate Settlement

alternative approaches to cost loan terms to include on these forms, Procedures Act of 1974 requires

disclosures should be established to and what, if any, other mortgage terms settlement providers to disclose to

ensure consumers’ rights under TILA or conditions should be listed on the homebuyers certain information at or

and HOEPA are protected while forms? before settlement and pursuant to the

facilitating packaging. More broadly, 26. What are the arguments for or servicing of the loan and escrow

commenters are invited to provide their against limiting the proposed rule to account. This includes a Special

views on means of better coordinating purchase money, first and second lien, Information Booklet, a Good Faith

RESPA and TILA disclosures. and refinancing loans as opposed to Estimate, an Initial Servicing Disclosure,

21. Commenters are asked to provide offering it to home equity, reverse a Settlement Statement (the Form HUD–

their views on how the rules should mortgage and other transactions? 1 or Form HUD 1–A), and when

treat mortgage insurance? The rule Should there be any additional applicable an Initial Escrow Account

proposes in Section III. C (3), that the requirements for so-called B, C, and D Statement, an Annual Escrow Account

guaranteed package would include any loans? Statement, an Escrow Account

mortgage insurance premiums in the 27. As proposed, the Guaranteed Disbursement Disclosure, an Affiliated

APR and up-front costs of mortgage Mortgage Package includes one fee for Business Arrangement Disclosure, and a

insurance in the guaranteed package. settlement services required to complete Servicing Transfer/Disclosure. This

‘‘Other Required Costs’’ would include a mortgage loan. The fee for the package information requirement under OMB

reserves for mortgage insurance will include loan origination fees, control number 2502–0265 consolidates

premiums. However, because the typically referred to as ‘‘points.’’ As information previously collected under

packager will not have an appraisal at points are generally deductible under OMB control numbers 2502–0458,

the time the GMPA is provided, the IRS rules, comments are invited as to 2502–0491, 2502–0501, 2502–0516, and

packager may not have firm information how to determine which portion of the 2502–0517.

to provide a definite figure. Another package prices should be deemed to Estimate of the total reporting and

possibility is to exclude mortgage constitute points. recordkeeping burden that will result

insurance from the package but notify 28. To what extent do the proposed from this information requirement is as

the borrower that mortgage insurance changes to the definition of application follows:

may be an ‘‘Other Required Costs’’ and in Section III. B (2) a., and requirements Respondents: Individuals or

present the borrower an estimate subject for delivery of the GFE impact other households, business or other for-profit

to a tolerance, if mortgage insurance is federal disclosure requirements, such as entities.

necessary. This approach would those mandated by the Truth in Lending Frequency of submission: On occasion

exclude a major charge from the Act? How can the disclosure objectives and annually.

package. HUD recognizes that there are of the proposed rule be harmonized Reporting burden: Number of

state laws that prohibit rebates or any with such other disclosure respondents: 20,000, Annual responses:

splitting of commissions for mortgage requirements? 105,300,000, Hours per response: 0.04.

insurance. How, if at all, should this 29. The proposed rule in Section III. Total estimated burden hours:

impact the decision to include mortgage B (2) c., would require a loan originator 6,500,000.





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49158 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



The status of this information Executive Order 12866, Regulatory Congressional Review of Final Rules

collection is that it is a reinstatement, Planning and Review This rule constitutes a ‘‘major rule’’ as

with changes, of a previously approved The Office of Management and Budget defined in the Congressional Review

collection. In accordance with 5 CFR (OMB) reviewed this proposed rule Act (5 U.S.C. Chapter 8). At the final

1320.8(d)(1), HUD is soliciting under Executive Order 12866 (entitled rule stage, this rule will have a 60-day

comments from members of the public ‘‘Regulatory Planning and Review’’), delayed effective date and be submitted

and affected agencies concerning this which the President issued on to the Congress in accordance with the

collection of information to: September 30, 1993. This rule was requirements of the Congressional

(1) Evaluate whether the proposed determined economically significant Review Act.

collection of information is necessary under E.O. 12866. Any changes made to

for the proper performance of the VI. Rule Language

the proposed rule subsequent to its

functions of the agency, including submission to OMB are identified in the List of Subjects in 24 CFR part 3500

whether the information will have docket file, which is available for public Consumer protection, Condominiums,

practical utility; inspection in the office of the Rules Housing, Mortgagees, Mortgage

(2) Evaluate the accuracy of the Docket Clerk, Room 10276, U.S. servicing, Reporting, and recordkeeping

agency’s estimate of the burden of the Department of Housing and Urban requirements.

proposed collection of information; Development, 451 Seventh Street, SW, Accordingly, for the reasons set out in

(3) Enhance the quality, utility, and Washington, DC, 20410–0500. The the preamble, part 3500 of title 24 of the

clarity of the information to be Initial Economic Analysis prepared for Code of Federal Regulations is proposed

collected; and this rule is also available for public to be amended as follows:

(4) Minimize the burden of the inspection in the Office of the Rules 1. The authority citation shall

collection of information on those who Docket Clerk. continue to read as follows:

are to respond; including through the Federalism Impact Authority: 12 U.S.C. 2601 et. seq.; 42

use of appropriate automated collection U.S.C. 3535(d).

techniques or other forms of information This proposed rule does not have

technology, e.g., permitting electronic federalism implications and does not 2. In § 3500.2, paragraph (b) is

submission of responses. impose substantial direct compliance amended by revising the definitions of

Interested persons are invited to costs on State and local governments or Application, Good faith estimate, and

submit comments regarding the preempt State law within the meaning Mortgage broker and adding the

information collection requirements in of Executive Order 13132 (entitled following definitions of Guaranteed

this proposal. Comments must be ‘‘Federalism’’). mortgage package, Loan originator,

received within sixty (60) days from the Mortgage broker loan, No tolerance,

Regulatory Flexibility Act Packager, Packaged services,

date of this proposal. Comments must

refer to the proposal by name and The Secretary, in accordance with the Participating settlement service

docket number (FR–4668) and must be Regulatory Flexibility Act (5 U.S.C. provider, Par value, Tolerance,

sent to: 605(b)), has reviewed and approved this Unforeseeable and extraordinary

proposed rule and has determined that circumstances, and Zero tolerance:

Lauren Wittenberg, HUD Desk Officer, the rule would have a significant

Office of Management and Budget, § 3500.2 Definitions.

economic impact on a substantial

New Executive Office Building, number of small entities within the * * * * *

Washington, DC 20503, meaning of the Regulatory Flexibility (b) * * *

lauren_wittenberg@opm.eop.gov, Fax: Act. Application means the submission of

(202) 395–6974 In accordance with section 603 of the credit information (Social Security

and; Regulatory Flexibility Act, an Initial number, property address, basic income

Gloria Diggs, Reports Liaison Officer, Regulatory Flexibility Analysis (IRFA) information, the borrower’s information

Office of the Assistant Secretary for has been prepared and has been made on the house price or a best estimate on

Housing—Federal Housing part of the Economic Analysis prepared the value of the property, and the

Commissioner, Department of under Executive Order 12866. The IRFA mortgage loan needed) by a borrower in

Housing & Urban Development, 451 portion, however, of the combined anticipation of a credit decision,

Seventh Street, SW, Room 9116, analysis is published as an appendix to whether oral, written or electronic,

Washington, DC 20410. this proposed rule. The IRFA was also relating to a federally related mortgage

submitted to the Chief Counsel for loan. If the submission does not state or

Environmental Impact identify a specific property, the

Advocacy of the Small Business

A Finding of No Significant Impact Administration for review and comment submission is an application for a pre-

with respect to the environment has on its impact on business. qualification and not an application for

been made in accordance with HUD a federally related mortgage loan under

regulations at 24 CFR part 50, which Unfunded Mandates Reform Act this part. The subsequent addition of an

implement section 102(2)(C) of the Title II of the Unfunded Mandates identified property to the submission

National Environmental Policy Act of Reform Act of 1995 (2 U.S.C. 1531– converts the submission to an

1969 (42 U.S.C. 4223). The Finding of 1538) (UMRA) requires Federal agencies application for a federally related

No Significant Impact is available for to assess the effects of their regulatory mortgage loan.

public inspection between the hours of actions on State, local, and tribal * * * * *

7:30 a.m. and 5:30 p.m. weekdays in the governments and on the private sector. Good faith estimate means an estimate

Office of General Counsel, Regulations This proposed rule does not, within the of settlement costs on the required

Division, Room 10276, U.S. Department meaning of the UMRA, impose any format prescribed at Appendix C to this

of Housing and Urban Development, Federal mandates on any State, local, or part prepared in accordance with

451 Seventh Street, SW, Washington, tribal governments nor on the private § 3500.7.

DC 20410–0500. sector. * * * * *





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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49159



Guaranteed mortgage package means a this section, or where a guaranteed an adjustable rate mortgage, contains a

guaranteed package of mortgage related mortgage package agreement is provided prepayment penalty clause or has a

settlement services and an interest rate in accordance with § 3500.16 of this balloon payment, the functions of the

guarantee for a federally related part, the lender shall provide all originator, and the total amount of

mortgage loan that is offered to a applicants for a federally related charges for each category of services:

consumer under a Guaranteed Mortgage mortgage loan with a good faith loan origination, interest rate dependent

Package Agreement (GMPA) in estimate. The lender shall provide the payment, lender required and selected

accordance with § 3500.16. good faith estimate either by delivering third party services, title services and

Loan originator means a lender or the good faith estimate or by placing it title insurance, shoppable lender

mortgage broker. in the mail to the loan applicant, not required third party services,

* * * * * later than three business days after an government services, amounts for

Mortgage broker means a person or application is received or prepared. If escrow/reserves, per diem interest,

entity that renders origination services the application is denied before the end hazard insurance and optional owner’s

in a table funding or intermediary of the three-business-day period, the title insurance. Attachment A–1 of the

transaction. Where a mortgage broker is lender need not provide the denied good faith estimate must indicate the

the source of the funds for a transaction, borrower with a good faith estimate. A subtotals of the origination charges to

the mortgage broker is a ‘‘lender’’ for lender shall not collect any fee in the lender and to the mortgage broker,

purposes of this part. connection with the application or the and the subtotals of all the charges and

good faith estimate beyond that which fees for title and for settlement agent

* * * * *

is necessary to provide the good faith services.

Mortgage broker loan is a federally (d) Accuracy of good faith estimate.

related mortgage loan that is originated estimate.

(1) The amounts of the categories of loan

by a mortgage broker. * * * * *

(2) For all mortgage loans, third party origination charges, lender required and

No tolerance means that the charges selected third party settlement service

may vary without being subject to any settlement services, governmental fees

and charges, any other loan related provider charges, lender selected title

tolerance. services and title insurance, and

Packager means a person or other expenses that are not paid to and

governmental fees and charges reported

entity that offers and provides retained by the originator must be

on the good faith estimate shall not vary

guaranteed mortgage packages to reported in their entirety in the

from the time the good faith estimate is

borrowers in accordance with § 3500.16. appropriate categories on the good faith

given to the borrower and may not be

Packaged services are settlement estimate.

exceeded at settlement absent

services that the lender requires for * * * * * unforeseeable and extraordinary

settlement and includes all services (b) Mortgage broker to provide. In the circumstances. The estimates in the

except per diem interest, hazard event an application is received by a good faith estimate shall be open to the

insurance, escrow/reserves, and mortgage broker who is not an exclusive borrower for a minimum of 30 days

optional settlement services. agent of the lender, the mortgage broker from when the document is delivered or

Participating settlement service must provide a good faith estimate by mailed to the borrower. Within the 30

provider means a settlement service delivering the good faith estimate or by days the borrower must agree to go

provider that provides settlement placing it in the mail to the loan forward and pay the additional money

services in a guaranteed mortgage applicant, not later than three business to complete the underwriting process. If

package and whose charges are included days after an application is received or the offer expires, the borrower may ask

in the guaranteed mortgage package prepared. As long as the mortgage the loan originator to ratify such

price. broker has provided the good faith estimate or request a new one. If the cost

Par value means the principal amount estimate, the funding lender is not at settlement exceeds the estimate

of the loan. required to provide an additional good reported on the good faith estimate,

* * * * * faith estimate, but the funding lender is absent unforeseeable and extraordinary

Tolerance means a variation above an responsible for ascertaining that the circumstances, the borrower may

estimate of a category of settlement good faith estimate has been delivered. withdraw the application and receive a

costs. Tolerance is expressed as a If the application is denied before the full refund of all loan-related fees and

percentage of the estimate. end of the three-business-day period, charges. The loan originator must

Unforeseeable and extraordinary the mortgage broker need not provide document any such circumstances and

circumstances means acts of God, war, the denied borrower with a good faith retain the document in accordance with

disaster, or any other emergency, estimate. A mortgage broker shall not § 3500.10(e).

making it impossible or impractical to collect any fee in connection with the (2) The amounts for lender required

perform. application or the good faith estimate third party services must include an

Zero tolerance means the amount beyond that which necessary to provide estimate of the maximum mortgage

listed may not vary at closing, except in the good faith estimate. insurance premium to be charged

unforeseeable and extraordinary (c) Content of good faith estimate. As upfront to the borrower based upon the

circumstances. prescribed in and completed in borrower’s assertion of the value of the

* * * * * accordance with the instructions in property and loan amount needed and

3. In § 3500.7, paragraph (a) Appendix C to this part, the good faith indicate that the mortgage insurance

introductory text and (a)(2) through (e) estimate must state the property premium may decrease or be removed

are revised, paragraph (f) is redesignated address, loan amount, interest rate used after full underwriting;

as paragraph (g); and a new paragraph to calculate the estimated amounts, the (3) The amounts of the categories of

(f) is added to read as follows: Annual Percentage Rate (APR) for the borrower selected title services and title

loan including mortgage insurance, and insurance, shoppable lender required

§ 3500.7 Good faith estimate the monthly payment for principal and third party services, and reserves/

(a) Lender to provide. Except as interest and mortgage insurance. The escrow deposits charged to a borrower

provided in paragraphs (a), (b) or (f) of form must also state whether the loan is may not vary at settlement by greater





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49160 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



than a tolerance of 10% from the (3) If the lender maintains a (b) Violation and safe harbor. A

amounts for such categories reported on controlled list of required providers guaranteed mortgage package, including

the good faith estimate, except when a (five or more for each discrete service) payments, discounts, pricing

borrower chooses to purchase a more or relies on a list maintained by others, arrangements or any other exchanges of

expensive service, absent unforeseeable and at the time of application the lender things of value by and between persons

and extraordinary circumstances. has not yet decided which provider will or entities offering their services and

(4) The amounts of the categories of be selected from that list, then the compensated through guaranteed

per diem interest, hazard insurance and lender may satisfy the requirements of mortgage packages (hereinafter

optional owner’s title insurance this section if the lender provides the ‘‘packagers’’) and participating

reported on the good faith estimate shall borrower, on the good faith estimate, settlement service providers as part of

be carefully prepared based upon the with the names of the required such a transaction, shall not violate

originator’s knowledge of relevant providers, and the estimated charge for section 8 of RESPA or § 3500.14 and

prices, but are not subject to tolerances, the particular settlement service. satisfies sections 4 and 5 of RESPA if

which means that charges may vary * * * * * the conditions set forth in this section

without being subject to any tolerance. 4. In § 3500.8, the third sentence of are met.

(5) In mortgage broker loans, the paragraph (a) is revised to read as (c) Criteria for guaranteed mortgage

borrower payment to the lender for a follows: package. In order to qualify for the safe

lower interest rate must be paid in full harbor stated in paragraph (b) of this

to the lender and the lender payment to § 3500.8 Use of HUD–1 or HUD–1A

settlement statements. section, packagers must deliver a

the borrower for a higher rate must guaranteed mortgage package offer

include any lender payments for the (a) * * * Alternatively, the form

within 3 days of application or such

transaction other than for the par value HUD–1A may be used for these

time as may be reasonable in special

of the loan. transactions, but not for transactions in

cases but prior to the borrower paying

(6) Loan originators must include all which there is a lender credit to the

any fee, that includes:

charges correctly within their prescribed borrower. * * *

(1) A package of designated lender

category on the good faith estimate and * * * * * required settlement services at a

not include any ‘‘mark ups’’ or ‘‘up 5. In § 3500.10, a new sentence is

charges’’ in their estimates of charges for guaranteed price from the time the

added to paragraph (e) to immediately

categories III(C) through (J) of the good guaranteed mortgage package is offered

follow the second sentence to read as

faith estimate. The Loan originator shall by the packager to the borrower through

follows:

include all of its charges in the settlement provided that the borrower

origination charges and interest rate § 3500.10 One-day advance inspection of accepts the guaranteed mortgage

dependent categories.

HUD–1 or HUD–1A settlement statement; package agreement within 30 days, or

delivery; recordkeeping. such greater period offered by the

(7) No loan originator shall be held

responsible for charges imposed on the (e) * * * Loan originators shall retain packager, from when the document is

borrower at settlement for shoppable documentation of unforeseeable and delivered or mailed to the borrower;

lender required third party services extraordinary circumstances related to (2) A mortgage loan with an interest

unless the borrower asked where the good faith estimates provided to rate guarantee and an Annual

services could be obtained within the borrowers and packagers shall retain Percentage Rate (APR) that is guaranteed

tolerance, used a settlement service documentation of such circumstances through settlement provided that the

provider identified by the originator, related to guaranteed mortgage package borrower accepts the guaranteed

and was charged an amount in excess of agreements provided to borrowers for mortgage package agreement within 30

the tolerance. five years after settlement.* * * days, or such greater period offered by

(e) Form of good faith estimate. A * * * * * the packager, and the interest rate is

good faith estimate required format is 6. In § 3500.14, a new paragraph adjusted only to reflect changes in

set forth in Appendix C to this part. The (g)(1)(viii) is added to read as follows: market interest rates based on

good faith estimate may be provided movement in a observable and verifiable

§ 3500.14 Prohibition against kickbacks index or other appropriate measure; and

together with disclosures required by and unearned fees.

the Truth in Lending Act, 15 U.S.C. (3) A guaranteed mortgage package

* * * * * agreement as prescribed in and

1601 et seq., so long as all required (g)(1)(viii) Any discounts negotiated

material for the good faith estimate is completed in conformity with Appendix

among settlement service providers, F to this part which:

grouped together. packagers, or any other entities for

(f) Particular providers required by (i) Explains that the guaranteed

settlement services provided that the mortgage package includes necessary

lender. (1) If the lender requires the use entire discounted price is charged to the settlement services required by the

(see § 3500.2, ‘‘required use’’) of a borrower and reported as part of the

particular provider of a settlement lender and guarantees a package price

total charge within Sections III(C) for these services through settlement

service, other than the lender’s own through (J) of the good faith estimate as

employees, and also requires the provided that the borrower accepts the

appropriate. GMPA within 30 days, or such greater

borrower to pay any portion of the cost

of such service, the good faith estimate * * * * * period offered by the packager, from

must identify the required settlement § 3500.16 [Redesignated as §3500.20] when the document is delivered or

service provider. 7. In § 3500.16 is redesignated as mailed to the borrower;

(2) Except for a provider that is the § 3500.20 and a new § 3500.16 is added (ii) Commits the packager to provide

lender’s chosen attorney, credit to read as follows: all settlement services and includes all

reporting agency, or appraiser, if the charges required to complete your

lender is in an affiliated business § 3500.16 Guaranteed Mortgage Package— mortgage except those specified as other

relationship (see § 3500.15) with a Safe Harbor. required settlement costs and advises

provider, the lender may not require the (a) General. A guaranteed mortgage the borrower if the packager anticipates

use of that provider. package is defined in § 3500.2. whether a pest inspection, lender’s title





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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49161



insurance, credit report, and/or APR on an addendum to the HUD–1 or lender should not be marked as P.O.C. but

appraisal will be anticipated; HUD–1A. should be shown in the appropriate column

(iii) Identifies and provides estimates (e) Exclusions from safe harbor. and used in computing totals. In loans

for other required settlement costs, such (1) Notwithstanding the existence of a originated through guaranteed mortgage

guaranteed mortgage package, section 8 package agreements, the HUD–1/1-A shall

as per diem interest, reserves/escrow,

indicate through checkmarks in the

and hazard insurance, and optional of RESPA remains applicable to appropriate column which third party

owner’s title insurance and explains payments by and between packagers or settlement services were performed for the

that any required settlement costs not participating settlement service guaranteed mortgage package price. The

separately itemized and estimated are providers and parties outside the guaranteed mortgage package price shall be

the responsibility of the packager; guaranteed mortgage package. shown on line 801. Additionally, the finance

(iv) Identifies and explains any (2) The Affiliated Business charges needed to calculate the APR will be

borrower option to utilize payments to Arrangement (AfBA) exemption disclosed in an addendum on the HUD–1.

or from the lender as a result of the requirements, set forth in § 3500.15, * * * * *

interest rate to pay settlement costs or remain in effect when a borrower is b. The Line Item Instructions for the

adjust the interest rate and mortgage referred to a packager by a person or HUD–1 paragraph describing line 204–

payments; entity not otherwise participating in the 209 are revised to read as follows:

(v) Identifies any reports such as the guaranteed mortgage package who is an * * * * *

pest inspection, lender’s title insurance, affiliate of the packager or any Lines 204–209 are used for other items

appraisal or credit report for the loan participating settlement service paid by or on behalf of the Borrower.

transaction that are available to the provider. Examples include cases in which the Seller

borrower at the borrower’s request; (3) The guaranteed mortgage package has taken a trade-in or other property from

(vi) Specifies that the packager will safe harbor shall not be available where the Borrower in part payment for the

ensure that a mortgage loan is provided property being sold. They may also be used

the rate or points and fees of a Federally in cases in which a Seller (typically a

as part of the package and that, after related mortgage loan make the loan builder) is making an ‘‘allowance’’ to the

acceptance by the borrower and the subject to the Home Ownership Equity Borrower for carpets or drapes which the

lender, the lender participating in the Protection Act (HOEPA). Borrower is to purchase separately. Lines

package shall provide a loan with the 204–209 can also be used to indicate any

same terms as set forth in the § 3500.19 [Amended] Seller financing arrangements or other new

guaranteed mortgage package 8. In § 3500.19(c) the cross references loan not listed in Line 202. For example, if

agreement; to ‘‘§ 3500.16’’ and to ‘‘section 3500.16’’ the Seller takes a note from the Borrower for

(vii) Advises the borrower of whether are both revised to read ‘‘§ 3500.20’’ part of the sales price, insert the principal

the loan is an adjustable rate mortgage 9. Appendix A to part 3500— amount of the note with a brief explanation

and the terms of the mortgage, whether Instructions for Completing HUD–1 and on Lines 204–209. Additionally, a blank line

there is a prepayment penalty and that in this series shall be used to record the total

HUD–1A Settlement Statements is

of all payments from the Lender to the

the borrower can request its terms, amended as follows: Borrower based on the transaction, including

whether there is a balloon payment, payments based on a higher interest rate.

Appendix A to Part 3500—Instructions

whether the guaranteed mortgage

for Completing HUD–1 and HUD 1–A * * * * *

package price includes an upfront c. Following the instructions for

Settlement Statements; Sample HUD–1

maximum mortgage insurance premium HUD–1 Line 603, Section L. Settlement

and HUD 1A Statements

based upon the borrowers assertion of Charges is revised to read as follows:

the value of the property and loan a. The second paragraph of the

amount needed and that the mortgage General Instructions is revised to read as * * * * *

follows: Section L. Settlement charges. For all items

insurance premium may decrease or be except for those paid to and retained by the

removed after full underwriting; and General Instructions Loan Originator, the name of the person or

(viii) Commits the packager to the firm ultimately receiving the payment should

* * * * *

terms of the guaranteed mortgage Except with respect to a loan resulting be shown. In the case of loans where

package agreement upon borrower from a Guaranteed Mortgage package, the settlement services are paid through the

acceptance and payment of any fee, settlement agent shall complete the HUD–1 interest rate, any charges to be paid by the

subject only to acceptable final to itemize all charges imposed upon the lender should be shown in the appropriate

underwriting and property appraisal. Borrower and the Seller by the loan column used in computing totals.

(d) Impact on Good faith estimate and originator and all sales commissions, * * * * *

HUD–1/1A. Where a packager satisfies whether to be paid at settlement or outside d. The paragraph immediately

the criteria in paragraph (c) of this of settlement, and any other charges which following ‘‘Line Item Instructions for

section, the packager shall provide the either the Borrower or the Seller will pay for Completing HUD—1A’’ is revised to

borrower the guaranteed mortgage at settlement. Charges to be paid outside of read as follows:

settlement, including cases where a non-

package agreement in lieu of the good settlement agent (i.e., attorneys, title * * * * *

faith estimate. In loans originated companies, escrow agents, real estate agents Note: HUD–1A is an optional form that

through guaranteed mortgage package or brokers) holds the Borrower’s deposit may be used for refinancing and subordinate

agreements, the HUD–1/1–A shall be against the sales price (earnest money) and lien federally related mortgage loans, as well

completed at settlement by itemizing all applies the entire deposit towards the charge as for any other one-party transaction that

the included services (but not the for the settlement service it is rendering, does not involve the transfer of title to

charges) of third party settlement shall be included on the HUD–1 but marked residential real property or does not involve

service providers that were performed ‘‘P.O.C.’’ for ‘‘Paid Outside of Closing’’ any lender payments to the borrower based

for the guaranteed mortgage package (settlement) and shall not be included in on the transaction, including any payments

computing totals. P.O.C. items should not be based on a higher interest rate. The HUD–1

price. The guaranteed mortgage package placed in the Borrower or Seller columns, but form may also be used for such transactions,

price shall be shown as the origination rather on the appropriate line next to the by utilizing the borrower’s side of the HUD–

fee on line 801 of the HUD–1/HUD–1A. columns. In the case of loans where 1 and following the relevant parts of the Line

Additionally, the packager must list the settlement services are paid through the Item Instructions. The use of the HUD–1 or

finance charges needed to calculate the interest rate, any charges to be paid by the HUD–A is not mandatory for open-end lines







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of credit (home-equity plans), as long as the II. Loan Terms. Loan originators shall fill borrower chooses to purchase a more

provisions of Regulation Z are followed. in the mortgage amount, indicate whether the expensive service.

loan is a fixed or variable loan, specify the III.E. Shoppable Lender Required Third

* * * * * interest rate and Annual Percentage Rate Party Services. Loan originators shall subtotal

e. For HUD 1–A, the second (APR) and fill in the length of the loan (i.e. all charges for loan originator/lender required

paragraph following ‘‘General number of years/months) and the monthly third party services in this section. If services

Instructions’’ is revised to read as payment, including any mortgage insurance. are shoppable by the borrower, and the

follows: III. Settlement Costs. This section covers borrower ultimately elects to obtain some or

* * * * * the settlement costs associated with the all of these services through the loan

The settlement agent shall complete the mortgage loan and warns the borrower that originator, the final amount at settlement

HUD–1A to itemize all charges imposed the costs may change if a different mortgage may not exceed the loan originator’s estimate

upon the borrower by the lender, whether to product is chosen or the interest rate by more than 10% (10% tolerance) absent

be paid at settlement or outside of settlement, changes. unforeseeable and extraordinary

and any other charges that the borrower will III.A. Origination Charges. Loan originators circumstances, except when a borrower

pay for at settlement. For all items except for shall total all origination charges to the chooses to purchase a more expensive

those paid to and retained by the lender, the lender and the broker in this category on the service.

name of the person or firm ultimately form. For mortgage brokers, these charges III.F. Government Charges—Taxes (State

receiving the payment should be shown shall include all charges from the borrower and Local). Loan originators shall subtotal all

together with the total amount paid to such that are paid to the mortgage broker for the state and local fees, charges, and taxes that

person in connection with the transaction. In transaction. For lenders, these charges shall will be required at settlement in this section.

loans originated through guaranteed include all direct charges from the borrower This estimate shall be based on an assumed

mortgage package agreements, the HUD–1A for the transaction, other than discount settlement date that the loan originator will

shall be completed at the time of settlement points reported in line III B (2). The specify on the form. The estimate shall not

by indicated through checkmarks in the estimated total origination charges shall not vary from actual costs at the time of

appropriate column which settlement vary from the actual costs at the time of settlement (0% tolerance) for the assumed

services were performed for the guaranteed settlement (0% tolerance), absent settlement date, absent unforeseeable and

mortgage package price. The guaranteed unforeseeable and extraordinary extraordinary circumstances.

mortgage package price shall be shown on circumstances. III.G. Reserves/Escrow. Loan originators

line 801. Additionally, the finance charges III.B. Interest Rate Dependent Payment. shall subtotal reserves/escrow amounts that

needed to calculate the APR will be disclosed (1) In loans originated by mortgage brokers, will be required by the lender at settlement.

in an addendum on the HUD–1A. mortgage brokers shall subtotal any lender This section shall include only required

payments to the borrower for a higher escrow items such as taxes, hazard insurance,

10. Appendix C to part 3500 is revised interest rate as well as any other lender and mortgage insurance. The estimate shall

in its entirety, including the heading, to payments for the transaction other than for not vary from the actual costs required for

read as follows: the par value of the loan in this category on reserves/escrow at the time of settlement by

the form. more than 10% (10% tolerance) absent

Appendix C to Part 3500—Instructions

(2) In loans originated by mortgage brokers, unforeseeable and extraordinary

for Completing Good Faith Estimate; mortgage brokers shall subtotal any borrower circumstances, except when a borrower

Sample Good Faith Estimate payments to the lender for a lower interest chooses to purchase a more expensive

rate. service.

Instructions for completing the Good Faith The mortgage broker shall include the III.H. Per Diem Interest. Loan originators

Estimate payments in (1) and (2) when computing the shall disclose the estimated cost of the

The following are instructions for net loan origination charge due from minimum amount of per diem interest that

completing the Good Faith Estimate required borrower (Sum of A and B). Lenders may the lender will charge in this section.

under section 5 of RESPA and Regulation X complete this section at their option. Although loan originators are expected to

of the Department of Housing and Urban III.C. Lender Required and Selected Third provide reliable figures in this section based

Development (24 CFR 3500.7). This form is Party Services. Loan originators shall subtotal on their experience, no tolerance applies to

to be used as a statement of estimated all charges for lender required and lender this section, which means that charges may

settlement charges. The instructions for selected third party services in this section vary without being subject to any tolerance.

completion of the Good Faith Estimate are on the form. This subtotal shall cover all III.I. Hazard Insurance. Loan originators

primarily for the benefit of the loan originator such services except for title related services shall disclose the estimated cost of the

who prepares the form and need not be and title insurance in connection with the minimum amount of hazard insurance that

transmitted to the borrower(s) as an integral borrower’s loan and shall not vary from the lender will require in this section.

part of the Good Faith Estimate. actual costs at the time of settlement (0% Although loan originators are expected to

General Instructions tolerance), absent unforeseeable and provide reliable figures in this section based

extraordinary circumstances. on their experience, no tolerance applies to

The loan originator preparing the Good

III.D. Title Services and Title Insurance. this section, which means that charges may

Faith Estimate may fill in information and

Loan originators shall subtotal all fees or vary without being subject to any tolerance.

amounts on the form by typewriter, hand

charges for title and settlement agent services III.J. Optional Owner’s Title Insurance.

printing, computer printing, or any other

and title insurance in this category of the Loan originators shall disclose the estimated

method producing clear and legible results.

form. On the form, the loan originator also subtotal of optional homeowner’s title

Under these instructions the ‘‘form’’ refers to

must indicate whether the services and insurance that the borrower may choose to

the Good Faith Estimate form.

insurance are loan originator selected or purchase. Although loan originators are

All fees and charges shall be disclosed in

borrower selected. If title services and expected to provide reliable figures in this

dollar amounts. Percentages may be added,

insurance are loan originator/lender selected, section based on their experience, no

when applicable.

the estimate shall not vary from actual costs tolerance applies to this section, which

Specific Instructions at the time of settlement (0% tolerance), means that charges may vary without being

I. Our Services. Loan originators shall absent unforeseeable and extraordinary subject to any tolerance.

include a paragraph substantially the same as circumstances. If title services and/or IV. Options to Pay Settlement Costs and

the paragraph set forth on the form in this insurance are shoppable by the borrower, and Lower Your Interest Rate. Loan originators

Appendix. This paragraph explains the the borrower ultimately elects to use a shall explain the borrower’s options for

services provided by the loan originator and provider identified by the loan originator/ paying settlement costs in this section of the

emphasizes that the borrower should shop lender, the final amount at settlement may form by using material that is essentially the

and compare different loans and originators not exceed the estimate by more than 10% same as that contained in paragraphs A, B,

to find the best loan for his or her individual (10% tolerance) absent unforeseeable and C and D of this section at Appendix C along

situation. extraordinary circumstances, except when a with discussing these issues with the







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borrower, as needed. The loan originator categories. Loan originators shall use figures loan originator shall advise the borrower that

must fill in the chart to demonstrate to the relevant to the borrower’s transaction. he or she is entitled to a copy of the

borrower how the borrower’s chosen interest V. Additional Loan Terms. Loan prepayment penalty terms upon request.

rate, monthly payments, and settlement costs originators shall indicate whether the For Adjustable Rate Mortgage Loans, loan

compare to a loan of the same size with a mortgage loan is subject to a prepayment originators must indicate the interest rates

lower and a higher interest rate. The penalty and whether the loan has a balloon and adjustment terms of the adjustable rate

completed chart serves as an example for the payment due at the conclusion of the loan mortgage loan.

loan originator of how to fill out the term. If there is a prepayment penalty, the BILLING CODE 4210–27–P









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Attachment A–1 instructions

Attachment A–1. ‘‘Required Use’’ and Shoppable Third Party Providers.

A. The loan originator must itemize on this form any services that may be independently obtained by the borrower and the

estimated cost (based on local market averages for the area where the property is located). The loan originator must also indicate

(by checking the appropriate box) any lender-required, lender selected services, along with the estimated charge (based on local market

averages for the area where the property is located), and name of the provider.

B. In reporting subtotals for mortgage broker/lender and title agent/title insurance, the loan originator must indicate the names

of the service providers and the subtotals of all their charges and fees.









BILLING CODE 4210–27–C







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11. A New Appendix F to part 3500 Annual Percentage Rate (APR), as well as the in this section on the form. Although loan

is added to read as follows: amount of any mortgage insurance that is the originators are expected to provide reliable

APR, in this section of the form, which the figures in this section based on their

Appendix F to Part 3500—Instructions borrower may accept and lock at application. experience, no tolerance applies to this

for Completing Guaranteed Mortgage While the guaranteed mortgage package section, which means that charges may vary

Package Agreement; Sample agreement offer is open, if the borrower does without being subject to any tolerance.

Guaranteed Mortgage Package not accept or lock, the interest rate shall be IV. Optional Owner’s Title Insurance. The

Agreement tied to an observable and verifiable index, or packager shall estimate the cost of optional

other appropriate data or means, and may not

Instructions for Completing the Guaranteed owner’s title insurance that the borrower may

change except in relation to said index or

Mortgage Package Agreement choose to purchase. Although packagers are

measure during the time the offer is pending.

If the borrower does not apply for a loan expected to provide reliable figures in this

The following are instructions for category, no tolerance applies to this section,

completing the guaranteed mortgage package within 30 days, or such greater period offered

by the packager, the offer will expire. which means that charges may vary without

agreement under Regulation X of the

II. Guaranteed Mortgage Package. The being subject to any tolerance.

Department of Housing and Urban

Development (24 CFR 3500.16(g)(1)(ix)). This packager shall specify a lump sum package V. Options to Pay Settlement Costs and

form is to be used as a statement of price for covered settlement services in this Lower Your Interest Rate. Packagers shall

guaranteed settlement charges, interest rate, section of the form. At a minimum, this explain the borrower’s options for paying

and costs. The instructions for completion of amount must include all origination services, settlement costs in this section by using

the guaranteed mortgage package agreement title services and title insurance, other material that is essentially the same as that

are primarily for the benefit of the packager packager or lender required third party contained in paragraphs A, B, C and D of this

who prepares the form and need not be services, all government charges, and an section at Appendix F, along with discussing

transmitted to the borrower(s) as an integral upfront maximum mortgage insurance these issues with the borrower, as needed.

part of the guaranteed mortgage package premium, if applicable. The packager must fill in the chart to

agreement. III. Other Required Settlement Costs. The demonstrate to the borrower how the

General Instructions packager shall itemize any other required borrower’s chosen interest rate, monthly

settlement charges in this section of the form payments, and settlement costs compare to a

The loan packager preparing the as permitted under § 3500.16. Any settlement

guaranteed mortgage package agreement may loan of the same size with lower and higher

costs not separately itemized in this section interest rates. The completed chart serves as

fill in information and amounts on the form are presumed to be included in the Section

by typewriter, hand printing, computer an example for the packager of how to fill out

II guarantee.

printing, or any other method producing the categories. Packagers shall use figures

III.A. Per Diem Interest. The packager shall

clear and legible results. Under these disclose the estimated cost of the minimum relevant to the borrower’s transaction.

instructions the ‘‘form’’ refers to the amount of per diem interest that the lender VI. Additional Loan Terms. Packagers shall

guaranteed mortgage package agreement will require in this section. Although loan indicate whether the mortgage loan is subject

form. originators are expected to provide reliable to a prepayment penalty and whether the

The guarantee includes all services figures in this section based on their loan has a balloon payment due at the

provided in connection with the mortgage experience, no tolerance applies to this conclusion of the loan term. If there is a

package, except for per diem interest, section, which means that charges may vary prepayment penalty, the packager shall

reserves/escrow, hazard insurance, and without being subject to any tolerance. advise the borrower that he or she is entitled

optional owner’s title insurance. III.B. Reserves/Escrow. The packager shall to a copy of the prepayment penalty terms

Specific Instructions accurately indicate the estimated subtotal for upon request. For Adjustable Rate Mortgage

Packagers shall include a paragraph reserves/escrow in this section on the form. Loans, packagers must indicate the interest

substantially the same as the introductory This estimate shall cover all reserves/escrow rates and adjustment terms of the adjustable

paragraph set forth in Appendix F that deposits required by the lender for such rate mortgage loan.

explains the nature of the package and that items as taxes, hazard insurance, and VII. Guaranteed Mortgage Package

the guaranteed mortgage package agreement mortgage insurance. The final amount Agreement. This section must be signed by

remains open for a minimum of 30 days, or required to be placed in reserves/escrow at an authorized agent of the packager and the

such greater period offered by the packager, settlement may not exceed the estimate by borrower to become a binding contract for the

from when the document is delivered or more than 10% (10% tolerance), absent guaranteed mortgage package at the

mailed to the borrower. Within that time unforeseeable and extraordinary guaranteed mortgage package price. After

period the borrower must accept the circumstances. The packager must document acceptance by the borrower, non-lender

agreement and pay a minimal fee to make it any such circumstances and retain the packagers must ensure that the lender signs

binding. The packager shall fill out the document in accordance with § 3500.10(e) of

the GMPA agreeing to provide the loan

property address and indicate whether the this part.

included in the guaranteed mortgage

transaction is a purchase or refinance. III.C. Hazard Insurance. The packager shall

package.

I. Interest Rate Guarantee. The packager estimate the cost of the minimum amount of

shall specify an interest rate guarantee and hazard insurance that the lender will require BILLING CODE 4210–27–P









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Attachment A–1 instructions

Attachment A–1. The packager shall indicate in the chart (either yes or no) whether specific services are anticipated to be included

in the guaranteed mortgage package price, such as the pest inspection, lender’s title insurance, appraisal, and credit report.









BILLING CODE 4210–27–C will result in better mortgage products at billion to borrowers, with $4.5 billion coming

Dated: July 5, 2002. lower prices for consumers. from originators and $1.8 billion from third

John C. Weicher, • The new GFE format in the proposed party settlement service providers. In

rule simplifies the process of originating addition to these transfers, there are

Assistant Secretary for Housing-Federal mortgages by consolidating costs into a few

Housing Commissioner. efficiency gains: Borrowers realize $826

major cost categories. This is a substantial million in efficiency gains from less time

improvement over today’s GFE, which

Appendix to FR–4727 Proposed Rule contains a long list of individual charges that

spent shopping; and loan originators and

Regulatory Flexibility Analysis encourages fee proliferation and junk fees, third party settlement service providers

and can often overwhelm and confuse experience $1.630 billion in efficiency gains,

Note: This appendix will not appear in the some or all of which have the potential to be

consumers.

Code of Federal Regulations.

• The new GFE contains a statement that passed through to borrowers through

The following Regulatory Flexibility clarifies the role that the originator plays in competition. Costs to originators rise by

Analysis is Chapter 5 of the rule’s Economic the loan process. It states, for example, that approximately $250–$275 million. These

Impact Analysis, which is available for the originator does not distribute the loan estimates are explained further below. While

public inspection. products of all funding sources, that the they are based on specific assumptions (see

Summary of the Rule’s Benefits and Impacts originator does not guarantee the best loan Chapter 3), they provide a sense of the

on Small Businesses terms, and that the consumer should shop. overall effects of the new GFE approach.

This will put all borrowers on notice that • Under one set of assumptions, Chapter 3

The proposed RESPA rule offers a dual they should protect their interests by

approach to problems in the settlement estimates that $7.5 billion of the $15 billion

shopping.

market: A new, simplified GFE combined in total yield premium payments (YSPs) is

• The new GFE also makes cost estimates

with tolerances on final settlement costs and more certain, by requiring that loan not passed through to borrowers to reduce

a new method for reporting wholesale lender originators adhere to amounts reported on closing costs. If the proposed rule results in

payments in broker transactions; and a the GFE for major cost categories (such as half of this $7.5 billion being recaptured by

guaranteed cost approach based on packaging origination fees), and on additional cost borrowers, then the annual impact would be

of settlement services. This chapter provides categories give estimates subject to a 10% $3.75 billion. While this figure will vary

a summary of benefits, costs, transfers, upper limit, or tolerance. This will reduce depending on specific assumptions, it

efficiencies, and market impacts of these two the all too frequent problem of borrowers provides a sense of how large the effects of

approaches, highlighting the effects on small being surprised by additional costs at the proposed rule could be on the return of

businesses. Section I discusses the new GFE settlement. YSPs to borrowers as reduced closing costs.

approach while Section II discusses the • The new GFE will better inform • Direct origination fees are estimated to

guaranteed cost approach, or packaging. The consumers about their financing choices by be $15 billion (which when added to the $15

chapter also summarizes alternative requiring that lenders explain the different billion in YSPs results in total originator

approaches that HUD considered that interest rate and closing cost options compensation of $30 billion). In addition to

potentially impacted small businesses. The available to consumers. For example,

format in this chapter is to list the major the $3.75 billion in YSPs recaptured by

consumers will fully understand the trade-

findings; additional details about the new offs between reducing their closing costs and borrowers, it is also assumed that improved

GFE approach and packaging are available in increasing the interest rate on the mortgage. shopping enables borrowers to capture five

Chapters 3 and 4, respectively. • Altogether, the simplicity and certainty percent (or $0.75 billion) of originators’

offered by the new GFE should improve direct origination fees of $15 billion.

I. New GFE Approach • Chapter 3 estimates that $18 billion in

comparison shopping for mortgage loans,

The main benefits, costs, transfers, and reduce interest rates and settlement prices for third-party fees would be subject to increased

market impacts of the new GFE approach are borrowers, and eliminate surprises at price pressure as a result of the imposition

outlined below, along with the specific settlement. There will be less of the sub- of tolerances and expanded shopping by

impacts on small businesses. Since most optimal consumer shopping that often originators. While it is difficult to estimate

brokers and settlement service providers are characterizes today’s mortgage market. In how much tolerances and expanded

small businesses, the main impacts of the addition, originators will be less able to take originator shopping will reduce the $18

new GFE approach on these entities are advantage of uninformed shoppers. billion, this figure provides a base on which

highlighted below in subsections I.C, I.D and B. Summary of Estimated Benefits, Costs, this effect will be felt. The estimates reported

I.F. Transfers, and Efficiencies below assume that third-party fees would fall

A. Shopping Benefits Chapter 3 provided estimates of the by 10 percent, or $1.8 billion.

The new GFE approach will improve magnitude of the benefits, costs, transfers, • It was estimated that borrowers would

save $6.3 billion in annual settlement

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charges.1 This $6.3 billion represents choose to pay discount points receive the full originators) who have been overcharging

transfers to borrowers from higher priced market benefit in terms of lower mortgage uninformed consumers, through the

producers, with $4.5 billion coming from interest rates. combination of high origination fees and

originators 2 and $1.8 billion from third party • Under these new rules, brokers must yield spread premiums. As noted above, it is

settlement service providers. While these report the total origination fees they receive anticipated that market competition, under

figures will vary depending on specific on the GFE and the HUD–1—rather than their this new GFE approach, will have a similar

assumptions, it provides a sense of how large origination fees net of any yield spread impact on those lenders (non-brokers) who

the effects of the proposed rule could be on premium they receive. Thus, the new GFE have been overcharging consumers through a

settlement charges to borrowers. clarifies what brokers are receiving for loan combination of high yield spread premiums

• In addition to the transfers, there are origination. and origination costs.

several efficiencies associated with the GFE. • Most brokers are small businesses. The • As noted above, according to some

Borrowers realize $826 million savings in above changes in the method for reporting estimates $7.5 billion in YSPs is not passed

time spent shopping for loans and third party wholesale lender payments on the GFE and through to borrowers to reduce closing costs.

services. Loan originators save $1.280 billion HUD–1 will reduce the incomes of those While this figure will vary depending on

in time spent with shoppers, in efforts spent brokers who have been overcharging specific assumptions, it provides a sense of

seeking out vulnerable borrowers, and from consumers by receiving a combination of how large the effects of the proposed rule

the substitution of more efficient for less origination fees and yield spread premium could be on the return of YSPs to borrowers

efficient originators. Third party settlement payments that is greater than that suggested as reduced closing costs.

service providers save $350 million in time by competitive markets. The new GFE will D. Lower Settlement Service Prices

spent with shoppers and from the clearly indicate both (a) the broker’s total

substitution of more efficient for less efficient origination fee received and (b) the net In addition to reducing originator fees, the

third party settlement service providers. upfront origination fee to the borrower, after tighter tolerances of the new GFE approach

Some or all of the $1.280 billion and $350 reduction for any yield spread premium that would result in lower prices for third party

million in efficiency gains have the potential the wholesale lender pays the borrower. settlement services. Settlement service

to be passed through to borrowers through Consumers will have full information about providers who are small businesses would be

competition. broker fees, which will allow them to impacted by any reduction in settlement

• Costs to originators rise by $226 million comparison shop and pay lower fees, service prices arising from the tighter

if it takes 10 extra minutes to handle the compared with the situation they face in tolerances on settlement fees.

forms and by $26 to $52 million to make today’s market. • The imposition of tolerances on fees will

third party arrangements in response to • As explained in the proposed rule, it is encourage originators to seek discounts and

tolerances. (See ‘‘Costs and other Impacts’’ not practical to implement such a system for cut settlement service prices. The proposed

below.) lenders, which means that lenders can rule clarifies that loan originators can make

• As discussed throughout this chapter, continue to report their origination fees on a arrangements with their third party

the benefit, cost, transfer, and efficiency net basis if they so choose.3 However, HUD settlement service providers (appraisers,

estimates are based on specific assumptions. has designed the new GFE form so that it settlement service agents, etc.) to lower

The estimates provide a sense of the overall reduces any anti-competitive effects between prices for their customers (i.e., borrowers),

net benefits of the proposed new GFE provided these prices or any fees on the GFE

brokers and lenders. For purposes of

approach to consumers. The rest of this are not ‘‘marked up’’ or ‘‘up charged.’’

comparing lender and broker offers, the new

summary highlights the main impacts of the • Section V of Chapter 3 examines the

GFE focuses the borrower’s attention on the

new GFE approach. magnitude of third-party fees that would be

right number, which is the subtotal after

subject to increased price pressure as a result

C. New Treatment of Wholesale Lender reducing total origination fees by any lender

of the imposition of tolerances and expanded

Payments and Impacts on Brokers payment to the borrower (i.e. yield spread

shopping by the originator. As noted above,

premium). This should reduce any anti-

An important feature of the new GFE $18 billion in third party fees would fall into

competitive impacts of the proposed rule on

approach is that it addresses the problem of this category. While it is difficult to estimate

small businesses.

lender payments to mortgage brokers. how much tolerances and expanded

• Furthermore, it is anticipated that market

• The proposed rule ensures that in originator shopping will reduce the $18

competition will increase the likelihood that billion, this figure provides a base on which

brokered transactions, borrowers receive the

full benefit of the higher price paid by yield spread premium payments will be this effect will be felt. The estimates reported

wholesale lenders for a loan with an above- passed through to borrowers throughout the above under ‘‘Summary of Estimated

par interest rate, that is, yield spread market, in lender (i.e., non-broker) as well as Impacts’’ assumed that third-party revenues

premiums will go directly to the borrower. broker transactions. The information that would fall by $1.8 billion, or 10 percent.

On both the GFE and HUD–1, the portion of consumers gain from broker transactions • It is estimated that small settlement

any wholesale lender payments that arise concerning the money back on premium service providers would account for $1.3

because a loan has an above-par interest rate loans should make consumers act billion of the $1.8 billion decline in third

is passed through directly to borrowers as a competitively with respect to premiums on party revenues. But as discussed in Chapter

credit against other costs. Thus, there is similar loans from non-brokers. 3, this estimate is subject to variation.

assurance that borrowers who take on an • Brokers as a group will remain highly

competitive actors in the mortgage market. E. Costs and Other Impacts

above-par loan receive funds to offset their

settlement costs. Chapter II discusses the factors that will Chapter 3 identifies several factors might

• Similarly, the proposed rule ensures that continue to keep brokers competitive with impact the costs of handling the new GFE

in brokered transactions, consumers who other lenders. As noted above, HUD has also form. As noted below, many of these factors

designed the GFE to lessen any anti- tend to offset each other with end result

1 As explained in Section IV.C of Chapter 3, the

competitive effects from the different being that annual additional costs appear to

$6.3 billion represents about 13 percent of the reporting requirements of lenders and be small.

baseline settlement costs, which include origination brokers on the new GFE. Therefore, there is • There are some direct costs to originators

fees and selected third party costs (appraisal, credit no evidence to suggest that there would be from complying with the GFE portion of the

report, tax service and flood certificate and title any major anti-competitive impact on the proposed rule. These do not appear to be

insurance and settlement agent charges). Survey, broker industry as a whole from the new GFE very large. While the new GFE format

pest inspection, and mortgage insurance are not provisions in the proposed rule. requires less itemization than today’s GFE,

included, as they are not required on all loans. • Rather, the main impact on brokers (both the HUD–1, with its detailed itemization,

Thus, the $6.3 billion may be a conservative figure.

small and large) of the proposed new remains essentially the same. Originators and

This assumes, of course, that all the other

assumptions underlying this scenario are correct. treatment of payments by wholesale lenders closing agents will have to expend some

2 The $3.75 billion in YSPs recaptured by would be on those brokers (as well as other minimal effort in explaining to consumers

borrowers plus the $0.75 billion in reduced direct the cross walk between the new streamlined

origination fees give $4.5 billion in transfers to 3 This also includes those brokers who have GFE and the more detailed HUD–1. There is

borrowers from originators. wholesale lines of credit. a new page of the GFE showing interest rate







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49172 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



alternatives, which should not impose much comparison shopping. Loans with identical service providers. In addition to these

additional costs, given that most originators origination charges will now have the same transfers, there are efficiency gains:

do that in some form today. Annual costs to numbers presented in the origination charge borrowers realize $1.652 billion in

originators rise by $226 million if it takes 10 whether originated by a broker or lender. efficiencies from less time spent shopping

extra minutes to handle the new GFE form. • The Department considered having zero and loan originators and third party

Chapter 3 also estimates that first-year tolerance on both the lender and broker settlement service providers realize $3.410 in

startup costs could range from $55–$95 components of the origination charge instead efficiency gains, some or all of which have

million. of zero tolerance on the total. Zero tolerance the potential to be passed through to

• There will be some costs to originators on the components would have given brokers borrowers through competition. These

from the need for additional preliminary less flexibility in switching lenders, even if estimates are explained further below. While

underwriting in order to generate new GFEs. the total of the lender and broker fees would they are based on specific assumptions (see

While this underwriting is already occurring remain the same. The method selected makes Chapter 4), they provide a sense of the

for full applications today, it is expected that it easier for brokers to switch lenders, so long overall effects of packaging.

some borrowers under the new GFE will get as the total origination charge does not rise. While these benefits of packaging are

multiple applications and use them to shop. • The Department considered having basically similar to the benefits of the new

However, it is difficult to estimate how many different statements of the services of the Good Faith Estimate approach discussed in

additional GFEs and preliminary originator. The purpose of this section of the Section I, it is anticipated that packaging will

underwritings will result under the new GFE GFE is to alert borrowers to shop in order to improve shopping and lower settlement costs

scheme. In addition, as discussed in Chapter protect their interests. Different statements to an even greater extent than the GFE

3, the number of applicants going to full could favor brokers over lenders, or vice approach. Above, it was estimated that

underwriting could decline under the versa. The Department adopted the idea that borrowers could save $6.3 billion in annual

proposed rule. every originator would have to deliver the settlement costs under the new GFE

• The imposition of zero and 10 percent same message, so that every borrower gets the approach. It is anticipated that a system

tolerances on fees will require lenders to take same warning and no originator is at a based on packaging alone would lead to even

some actions that will increase their costs. disadvantage in delivering the message. greater savings for borrowers, as transfers

For example, arrangements will have to be from firms to borrowers will rise by $4

made with third party settlement service II. Guaranteed Cost Packaging or Packaging

billion for a total of $10.3 billion. Originators

providers, in order for the originator to come The main benefits, costs, transfers, and contribute $6.7 billion of this and third party

up with estimates that can be delivered market impacts of the guaranteed cost or settlement service providers, $3.6 billion.

within the 10 percent tolerance. As noted packaging are outlined below, along with the This benefit to consumers comes from further

above, these are estimated to range from $26 specific impacts on small businesses. Since reductions in overcharges that competition

to $52 million. most brokers and settlement service passes on to borrowers. Under this scenario,

F. Small Business Impacts—A Summary and providers are small businesses, the main the final savings to the borrower would

Alternatives Considered impacts of packaging on these entities are depend on how the market settles down

highlighted below in subsection II.F. between the two methods of loan

Chapter 3 estimates that $3.5 billion of the

$6.3 billion in transfers would come from A. Overview of Packaging Benefits origination—the new GFE approach and

small businesses. The above summary bullets First, guaranteed packaging will improve packaging. If it is half and half, borrower

highlight the mechanisms in which this will and increase borrower shopping for gains are slightly over $8 billion.

happen. Improved consumer shopping mortgages. Basically, guaranteed packaging In addition to the transfers, there are

among originators and more aggressive reduces the loan offer to:a settlement package several efficiencies associated with packaging

competition by originators for settlement price, an interest rate, an APR, and a PMI (see the summary in Section VII in Chapter

services will lead to price reductions. premium rate. The package price and the PMI 4). Borrowers realize $1.652 billion savings

Originators (both small and large) and premium has zero tolerance, and the interest in time spent shopping for loans and third

settlement service providers (both small and rate is guaranteed if locked (otherwise the party services. Loan originators save $2.710

large) that have been charging high prices rate varies with a market index). In addition, billion in time spent with shoppers, in efforts

will experience reductions in their revenues. the offer is free and, if agreed upon by the spent seeking out vulnerable borrowers, and

Of the $3.5 billion impact on small borrower, the offer becomes a contract that is from the substitution of more efficient for

businesses, it is estimated the $2.2 billion enforceable. These are all advantages over less efficient originators. Third party

will come from small originators and $1.3 today’s process of shopping for mortgages. settlement service providers save $700

billion, from small settlement service Economic efficiencies result from easier and million in time spent with shoppers and from

providers. less time consuming shopping under the substitution of more efficient for less

Market impacts on different types of packaging. Borrowers are better informed, efficient third party settlement service

businesses are discussed throughout Chapter shop better, and reach better deals. providers. Some or all of the $2.710 billion

3, as well as in the summary bullets under Second, the guaranteed packing approach and $700 million in efficiency gains have the

C and D above. Chapter 3 also discussed would remove regulatory barriers that are potential to be passed through to borrowers

alternative policies that HUD considered today preventing market competition from through competition.

when developing the rule. Examples of reducing settlement prices. Under current The simplification and other advantages of

alternatives that would impact small law, a providers’ efforts to enter into volume the new GMPA will lead to lower costs than

businesses include: arrangements with settlement service firms under the new GFE. It is assumed that costs

• One alternative considered was to place may be regarded as illegal and restrictions under the GMPA will be the same as today’s

the interest rate dependent payment at the against mark-ups of third party costs may GFE. As discussed in Chapter 4, one area of

bottom of the form rather than directly after impede the packaging of services. Under uncertainty about packaging and the new

the origination charge. This was rejected HUD’s proposed rule, packagers will be able GMPA concerns the index that is used to

since an unsophisticated borrower might to enter into cost-reducing, volume-discount ensure that changes in the interest (note) rate

misinterpret the broker’s higher origination arrangements, and competition among reflect changes in the market. Until the exact

charge (relative to a lender who can net the packagers will pass these lower costs through mechanism is selected, it is difficult to

yield spread premium out of the origination to borrowers at mortgage settlement. determine the effect of the index on

charge rather than list it separately as a packaging.

lender payment to the borrower) as B. Summary of Estimated Benefits, Costs, Concerns have been expressed about the

indicating that the broker’s loan is more Transfers, and Efficiencies impacts of the packaging approach on small

costly. Chapter 4 presents estimates of the lenders and small service providers. Chapter

• The Department considered placing the magnitude of the benefits, costs, transfers, 4 estimated that small businesses (i.e., small

division of the origination charge into broker and efficiencies associated with packaging. originators and small service providers)

and lender portions on the front page of the Transfers total $10.3 billion to borrowers, would account for $5.9 billion of the $10.3

GFE but rejected that idea since the with $6.7 billion coming from originators and billion in transfers. The effects on small

information was not useful in bottom line $3.6 billion from third party settlement businesses are discussed below in II.F.







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Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules 49173



C. Shopping Benefits E. Impact on Business Operations and Market proposed rule asks for comments on how the

Packaging offers numerous shopping Structure interest rate index could be determined.

advantages for consumers, compared to The proposed RESPA rule offers a dual • Originators make a free offer that is also

today’s process of shopping for mortgages. approach to settlement market problems—(1) guaranteed. This will require additional

Under packaging, borrowers are better a new, simplified GFE combining tolerances information gathering and preliminary

informed and better able to comparison shop. on final settlement costs and a new method underwriting to the extent that borrowers

• Guaranteed packaging will improve and for reporting wholesale lender payments; and seek multiple offers, beyond what they do in

increase borrower shopping for mortgages. (2) a guaranteed cost approach based on today’s market. There could also develop

Basically, guaranteed packaging reduces the packaging. Consumers and originators can some degree of uncertainty and costs

loan offer to two numbers (a settlement use either approach, which has the advantage associated with originator’s making

package price and an interest rate), has zero of allowing the market determine the best guaranteed offers based on preliminary

tolerance on the package price, and approach under a given set of circumstances. underwriting, particularly for those

guarantees the interest rate if locked While there are reasons to expect originators borrowers who typically require extensive

(otherwise the rate varies with a market to move toward the packaging approach, it is underwriting. As explained in Chapter 4,

index). In addition, the offer is free and, if difficult to estimate the share of the market however, this would simply result in the

agreed upon by the borrower, the offer that will ultimately fall under packaging, as originator making a new loan offer or sending

becomes a contract that is enforceable. These well as the timing of the move toward their customer elsewhere.

are all advantages over today’s process of packaging. • There will be some costs associated with

shopping for mortgages, as well as over the • An uncertainty with respect to the the arrangements that packagers have to

Good Faith Estimate approach outlined in implementation of packaging concerns the make with third party settlement service

Chapter 3. interest rate index that determines changes in providers, in order for the packager to ensure

• The simplified loan offer under mortgage rates for borrowers who are that there would be no change in the pre-

packaging does away with the proliferation of shopping (before they sign the guaranteed arranged third party prices. But as discussed

fees, including junk fees that often packaging offer) and for borrowers who in Chapter 4, other efficiencies resulting from

characterizes today’s mortgage offers. choose to ‘‘float’’ rather than ‘‘lock-in’’ their packagers dealing with third party providers

• The packaging agreement eliminates the interest rate (at the time they sign the offer). are expected to offset these costs.

separate reporting of the premium or Packaging depends on lenders finding an G. Summary of Small Business Impacts and

discount associated with brokered loans. acceptable interest rate index, or some other Alternatives Considered

This is done to facilitate competition and mechanism for ensuring that any changes in

comparison shopping. the interest rate reflect overall market As noted above, concern has been

• Economic efficiencies result from easier changes. As noted below, there will likely be expressed about the market impacts of

and less time consuming shopping under some costs associated with lenders’ packaging, particularly as they relate to small

packaging. Borrowers are better informed, guaranteeing that interest rates move only businesses. The main findings regarding the

shop better, and reach better deals. with market conditions, depending on the effects of packaging on small businesses are

• In this case, the main transfers will be indexing technique chosen. as follows:

from originators who are charging above • As explained in this chapter, packaging • The nature of locally-provided, third

market prices to borrowers who are more could take several forms—for example, party services (such as appraisal, survey, pest

informed and better able to comparison shop originators could develop their own packages inspection, closing agents) could remain the

(see the $6.7 billion estimate reported above). or specialized firms could develop packages, same under packaging—the main change will

or components of packages, which they involve who purchases these services.

D. Lower Settlement Service Prices Packagers will be the new purchasers of these

would then sell them to originators. The

The packaging approach will result in even section on small business below highlights services, and third party service prices will

lower prices for third party settlement several additional market impacts of be lower.

services than estimated above for the new packaging. • Under packaging, those third party

GFE approach. service providers (both large and small) who

• The Section 8 safe harbor will allow F. Compliance and Other Costs are currently charging high prices for their

greatest protection to entities within the The simplification and other advantages of settlement services would experience

package from charges of illegal referral fees, the new Guaranteed Mortgage Packaging reductions in the prices of their services. To

kickbacks, and unearned fees. This will free Agreement (GMPA) will lead to lower costs the extent that third party settlement service

up packagers to pursue lower prices for third than under the new GFE. providers happen to be small businesses,

party services in their package without • The GMPA and HUD–1 with packaging they would, of course, experience a reduction

concern that the technique used could be a will have substantially fewer numbers and in their revenues. Of the $3.6 billion in price

Section 8 violation. Competition is less detail than the current GFE and HUD– reductions for third party services, the small

substituted for regulation. 1. Only six numbers are required on the first business share is $2.5 billion.

• Thus, packaging will result in lower page of the Guaranteed Mortgage Packaging • It is estimated that small businesses (i.e.,

prices paid for settlement services, as Agreement. This will lead to a more efficient small originators and small service providers)

packagers aggressively seek discounts in origination process since less time will be would account for $5.9 billion of the $10.3

third-party service prices. A better shopper spent by the originator and the borrower in billion in transfers to consumers noted

(the packager) is substituted for the borrower deciphering the proliferation of fees that now above—$3.4 billion of this would come from

as the searcher for third party settlement characterizes the GFE and HUD–1. small originators and $2.5 billion would

services. • Packaging eliminates the reporting of come from small settlement service

• In addition, there are several efficiencies individual fees within the package and in so providers. As in the case with the new GFE

associated with packaging that could lead to doing permits, in effect, average cost pricing. approach, firms suffering losers under

lower costs. Under packaging, originators This reduces costs because firms do not have packaging are originators and third party

may deal with one packager, rather than a to keep up with an itemized, customized cost providers who are currently charging high

whole array of third party providers and the for each borrower. prices for their services.

packager, who specializes in this activity, • As mentioned above, there could be • Still, there is no strong reason to expect

may be more efficient than the originator. some additional costs associated with lenders that locally-based small businesses could not

• Given the likelihood that there will be having to use an as yet undetermined index continue providing third party settlement

competition among a number of packagers, in order to guarantee market interest rates (a) services under packaging, albeit at possibly

the lower third party service prices will be during the time that the consumer is lower prices and revenues, as noted above.

passed through to borrowers as lower costs shopping (after the packager has made the Services that are local in nature (such as

for closing a loan. In this case, the main offer) and (b) during the time between the appraisals) will continue to be demanded

transfers will be from settlement service offer being accepted and final closing for under the packaging approach. Services that

providers to borrowers (see the $3.6 billion those borrowers who choose to ‘‘float’’ rather are national in nature and characterized by

estimate reported above). than ‘‘lock-in’’ their interest rate. The economies of scale (such as credit reporting)







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49174 Federal Register / Vol. 67, No. 145 / Monday, July 29, 2002 / Proposed Rules



are already being conducted by larger firms affords smaller firms the opportunity to offer Lax, Howard, Michael Manti, Paul Raca,

on a national scale. their services and benefit from a packaging and Peter Zorn. 2000. ‘‘Subprime Lending:

• There has also been a concern that small environment. An Investigation of Economic Efficiency.’’

lenders would be placed at a disadvantage Under packaging, there is no separate Unpublished Paper, (February).

under packaging because of the ‘‘bulk’’ treatment of yield spread premiums or Morgan Stanley. 2002. US Mortgage

buying power of large lenders. While this discounts and no special rules for brokers. Finance: The American Dream Industry,

may be the case, it does not have to be. First, Thus, all originators present their loans the 2002–2020 (An industry analysis written by

there is no evidence of this effect today same way and all the market’s competitive

Kenneth A. Posner and Mita Nambiar),

where large lenders can purchase services forces are applied to everything in the

package regardless of the type of originator. (February).

such as appraisals on a ‘‘bulk’’ basis. Second, Olson, David. 2002. Testimony Prepared

if specialized packaging firms develop, it No broker, or any other kind of originator for

that matter, is at a competitive disadvantage. for Hearing on ‘‘Predatory Mortgage Lending

seems reasonable to expect them to offer their

Practices: Abusive Used of Yield Spread

packages to small lenders as well as large References Premiums’’ before U.S. Senate Committee on

lenders. It is difficult to reach firm

Bradley, Donald, S., and Peter Zorn. 1996. Banking, Housing, and Urban Affairs,

conclusions about the magnitude of the

‘‘Fear of Homebuying: Why Financially Able (January 8).

impact on small lenders.

Households May Avoid Ownership.’’ Scheessele, Randall M. 2002. Black and

• Brokers, most of whom are small

Secondary Mortgage Markets. white Disparities in Subprime Mortgage

businesses, could pursue a number of

Forrester Research, Inc., 2001. Resucitating Refinance Lending. Working Paper No. HF–

avenues under packaging. They could

Mortgage Lending, (May). 014. Office of Policy Development and

develop their own package, purchase one Getter, Darryl, E. 2002. ‘‘Credit-Constrained

from specialized firms, or use the package Research, U.S. Department of Housing and

or Less Creditworthy?’’ Unpublished Paper.

offered by the wholesale lender they are Urban Development, (April).

Gramlich, Edward, M. 2002. Remarks

dealing with. Under packaging, brokers will U.S. Department of Housing and Urban

before the National Community

continue their main function of reaching the Reinvestment Coalition, 11th Annual Development and Federal Reserve Board.

consumer, just as they do today. This Conference, (March). 1998. Joint Report to the Congress

customer outreach function is not going to go Jackson, Howell, E. 2002. Testimony Concerning Reform of the Truth and Lending

away with packaging. Prepared for Hearing on ‘‘Predatory Mortgage Act and the Real Estate Settlement

• Furthermore, Chapter 2 of this Economic Lending Practices: Abusive Used of Yield Procedures Act, (July).

Analysis reports that technology Spread Premiums’’ before U.S. Senate U.S. Department of Housing and Urban

improvements and other recent changes in Committee on Banking, Housing, and Urban Development. 2000. Unequal Burnden:

the mortgage market have probably increased Affairs. (January 8). Income and Racial Disparities in Subprime

the competitive position of brokers relative to Jackson, Howell, E., and Jackson Berry. Lending in America, (April).

other originators. These underlying strengths 2002. ‘‘Kickbacks or Compensation: The Case U.S. Department of Housing and Urban

of brokers are also not going to disappear of Yield Spread Premiums.’’ Unpublished Development and U.S. Department of the

with packaging. Paper. Treasury. 2000. Curbing Predatory Home

Chapter 4 discusses alternative policies Jacobides, Michael G., 2001. ‘‘Mortgage Mortgage Lending , (June).

that were considered with respect to Banking Unbundling: Structure, Automation, Woodward, Susan E., 2002. Statement to

packaging. The Department considered and Profit.’’ Mortgage Banking, (January),

the Senate Committee on Banking, Housing,

writing this proposed rule as if only lenders pp.28–40.

and Urban Affairs. Unpublished Paper.

could package. This idea was rejected in LaMalfa, Tom. 2001. ‘‘Who’s Who In

favor of allowing anyone to package so long Wholesale 2000.’’ Mortgage Banking, [FR Doc. 02–18960 Filed 7–26–02; 8:45 am]

as the package contains a loan. This further (March), pp.45–52. BILLING CODE 4210–27–P









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