As of January 1, 2010, the latest changes to the Real
Estate Settlement Procedures Act (RESPA) went into effect for all "loan
originators" — lenders and mortgage brokers — handling federally-
related residential property loans. The RESPA revisions were intended to
provide consumers a means of better understanding the terms of their loan
obligations. The onus for ensuring compliance with these regulations,
however, falls squarely upon lenders.
Good Faith Estimate (GFE)
One of the key revisions included in the new RESPA
regulations is a requirement that lenders provide potential borrowers
with a more thorough, standard good faith estimate. Once a lender has
received an application for a mortgage, the lender has three days to
provide the borrower with a good faith estimate of the terms and costs of
the mortgage, including:
The initial loan amount
The loan term
The initial interest rate
How long the interest rate is good and when it must be locked
Whether the interest rate can rise
Whether the loan balance can rise if payments are made on time
Whether there is a prepayment penalty
Whether there is a balloon payment
Whether an escrow account is required
Additionally, the GFE must include an itemized list of all of the
origination charges (including the yield spread premium, if any) and list
of all settlement charges.
The GFE must be provided on the standardized form authorized by HUD.
Lenders are not allowed to make changes to any of the language on the
form or add additional pages or addendums. If the loan requires a payment
period other than monthly, then the lender must convert the loan to a
monthly payment for purposes of the form.
If the borrower will require two mortgages for a single property, a
GFE must be completed for each loan.
While a mortgage broker can provide the borrower with a copy of the
GFE within the three business day period, the ultimate responsibility to
ensure the borrower received his or her copy within the allotted time
falls on the lender.
HUD-1 Settlement Statement (HUD-1)
The HUD-1 Settlement Statement is provided to the borrower by the
settlement agent at the closing of the loan. The form contains the actual
charges and adjustments paid by the borrower and the seller. (If there is
no seller for the property, then the settlement agent should complete a
HUD-1A form).
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A chart is included in HUD-1 that compares all of the actual costs at
the time of closing to the estimated costs given in the GFE. If any of
the actual costs exceed the estimates provided in the GFE by more than
the assigned tolerance level, then the lender is prohibited from
collecting the overage from the borrower.
The HUD-1 form also must include a final summary of the key terms of
the loan. The lender is required to provide this information to the
settlement agent in a format that allows the agent to fill in the blanks
on HUD-1 without having to refer to the actual loan documents.
Just like the GFE, neither the lender nor the settlement agent may
change the standardized language included on the HUD-1 form. The
borrower should be provided with a copy of the completed and signed form
prior to leaving the closing.
Tolerances
Under the new regulations, certain disclosed charges that appear on
the GFE cannot change or cannot change above a certain tolerance level
from the actual amounts listed on HUD-1.
Zero Tolerance:
Origination charges
Adjusted origination charges after the interest rate has been
locked
Points for the locked interest rate
Government transfer taxes
10% Tolerance:
Lender required settlement services (if the borrower chooses a
servicer provided or identified by the lender)
Lender required title services and title insurance (if the borrower
chooses a servicer provided or identified by the lender)
Owner's title insurance (if the borrower chooses a servicer provided
or identified by the lender)
Government recording charges
Required services that the borrower can shop for if the borrower
chose companies selected or identified by lender
Certain services are not subject to a tolerance and can change
without limitation, including:
Borrower selected required services
Borrower selected title services and lender's title insurance
Borrower selected owner's title insurance
Initial deposit for escrow reserves
Daily interest charges
Homeowner's insurance
Changed Circumstances and Cure
Lenders cannot exceed the limits imposed by the tolerance levels and
will not be able to collect any amounts over these limits from borrowers.
If a tolerance level has been exceeded at the time of closing, then the
lender has 30 days after closing to cure the overcharge and reimburse the
borrower.
If the lender does not cure within this 30 day limit, then RESPA
provides that damages may be collected by the borrower against the
lender in private civil
lawsuit.
The only time the lender may exceed tolerance levels is if there has
been a sufficient "change in circumstances" between the issuance of the
GFE and HUD-1 form. HUD guidelines provide four categories of sufficient
changed circumstances:
Acts of God, war, disaster or other emergencies
Information particular to the borrower or transaction relied upon in
providing the GFE that changes or later is found to be inaccurate after
the GFE has been provided (for example, the borrower's credit score,
amount of loan or estimated value of property).
New information particular to the borrower or transaction that was
not relied upon in providing the GFE
Other circumstances particular to the borrower or transaction
(boundary disputes or environmental problems, for example)
Other duties
Lenders are required to give borrowers "HUD'S Settlement Cost
Booklet" within three days of receipt of the loan application.
The booklet contains information on interest rates, points, prepayment
penalties and the explanation of other terms commonly used in the
mortgage application/closing process that borrowers may be unfamiliar
with.
Lenders cannot charge more than the cost of the credit
report prior to issuing the GFE.
Lenders cannot require borrowers to provide documentation to
verify monthly income, employment, deposits or other information
as a condition to issuing a GFE; however, borrowers may voluntarily
provide this information to lenders.
Conclusion
It is important to remember that RESPA only applies to federally
related loans that are secured by a mortgage or deed of trust on private,
residential housing. It does not apply to private investor loans, cash
deals or commercial property loans.
For more information on RESPA compliance issues, contact an
experienced lawyer today.
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