New RESPA Regulations: What Lenders Should Know
October 15, 2010 By Sally & Fitch LLP
The onus for ensuring compliance with the RESPA revisions falls squarely upon lenders.
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).
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.
ABOUT THE AUTHOR: Sally & Fitch LLP
Sally & Fitch LLP is a litigation law firm distinguished by its preeminent lawyers and the successful results it has achieved for its many clients in diverse and complex cases.
Sally & Fitch LLP has been recognized as an "AV" rated law firm in the Martindale-Hubbell Legal Directory - the highest rating for legal ability and professional ethics - for the last twenty-five years. Our partners and other lawyers at the firm have been singled out for several years as "Massachusetts Super Lawyers" in an annual poll appearing in Boston Magazine. In 2007, Sally & Fitch LLP was recognized as a "Hidden Gem" in a nationwide survey of Fortune 1000 organizations, large privately held companies and major financial services firms.
Copyright Sally & Fitch LLP
More information about Sally & Fitch LLP
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
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).
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.
ABOUT THE AUTHOR: Sally & Fitch LLP
Sally & Fitch LLP is a litigation law firm distinguished by its preeminent lawyers and the successful results it has achieved for its many clients in diverse and complex cases.
Sally & Fitch LLP has been recognized as an "AV" rated law firm in the Martindale-Hubbell Legal Directory - the highest rating for legal ability and professional ethics - for the last twenty-five years. Our partners and other lawyers at the firm have been singled out for several years as "Massachusetts Super Lawyers" in an annual poll appearing in Boston Magazine. In 2007, Sally & Fitch LLP was recognized as a "Hidden Gem" in a nationwide survey of Fortune 1000 organizations, large privately held companies and major financial services firms.
Copyright Sally & Fitch LLP
More information about Sally & Fitch LLP
View all articles published by Sally & Fitch LLP
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
