Effective January 1, 2010
The Real Estate Settlement Procedures Act (RESPA) underwent a facelift one year ago, with changes expected to take effect on January 1, 2010. The Department of Housing and Urban Development’s (HUD) regulation, designed to control costs and prevent deception in home closing procedures, will now go one step further in protecting consumer rights. It will require a three-page Good Faith Estimate (GFE) form presented to buyers up front, disclosing key loan terms and estimated closing costs.
The GFE format will be easy to read and compare with the HUD-1 Settlement Statement, where actual costs are outlined. Corresponding lines on the GFE and HUD-1 will be labeled for comparison purposes. This ease of use is one of the major differences between the new GFE and old GFE form. Additionally, the form is now standardized, fees are grouped together, and there are fewer leniencies for variations in the numbers presented on the GFE at the beginning of the process and the HUD-1 at the end.
This marks the first major change to home closing policies and procedures in nearly 17 years. Government officials say such changes were necessary due to the recent mortgage crisis, which many link to complicated terminology and financial surprises that befuddle would-be homeowners.
“The whole idea of RESPA reform, expressed by then-President Bush and the principals at HUD who were there at the time, was a desire to get consumers a more transparent, clearer and more accurate settlement transaction,” said Phil Schulman, D.C.-based K&L Gates firm partner, in the May edition of RESPA News Monthly.
“The whole idea was to try to create a system that would simplify the process, provide greater transparency and most important, try to get the consumer more accurate figures about what this transaction was going to cost them three days into the process, rather than at the closing table.”
Schulman added, however, that the costs of training staff to follow the new regulations and how to fill out the new GFE form could strain mortgage lenders who are already strapped for cash. President Barack Obama has decided to keep the RESPA reforms in place, with the exception of one provision. He overturned the “required use” clause, which forbade home builders from offering buyers incentives in exchange for the use of certain partnering mortgage and title companies.
The new changes, effective January 1, are widely considered very positive for consumers, with up front language on details that have previously stumped home buyers. It clearly presents any “gotcha” terms and conditions previously buried in the fine print or vaguely stated with confusing industry lingo. The following are some of the key changes expected to benefit home buyers:
- Home buyers will now know up front the term, type and interest rate of their loan, whether the rate is adjustable or fixed, whether there is a prepayment penalty, and exactly how much money is required for closing costs.
- The GFE must be presented to home buyers within three days after receipt of all necessary, relevant information.
- The new GFE form is more concise, only three pages with one additional page of instructions on how to read and understand the form.
- Because fees are grouped into clear categories, “junk fees” will be harder to sneak in. Total estimated closing costs will appear clearly on the front page, for easier comparison of various loan offers.
- At closing, HUD will very closely control which fees can or cannot vary from the amount presented on the GFE in the beginning of the process. If allowing a fee to change, HUD will control how much the fee can change.
- Overall, total closing costs are expected to drop by nearly $700 on average per transaction.
At this time, the actual rule and FAQ’s contains many requirements and limitations pertaining to it. For example, the loan originator must provide a GFE within three business days of the borrower’s application and cannnot charge more for the GFE than the cost of the credit report. Generally, a revised GFE cannot be issued unless there are “changed circumstances”. Change circumstances include the acts of God, war, disaster, other emergencies and situations where information particular to the borrower or the transaction either changes or is later found to be different from what was known at the time the GFE was provided.
Of particular interest, the GFE sets forth three categories of settlement charges and states what changes will be tolerated on the HUD-1.
Cannot Increase (Zero Tolerance). The following cannot increase at settlement:
- Loan origination charge or adjusted origination charges (after the interest rate is locked)
- Borrower’s credit or charge (points) for the interest rate chosen (after the interest rate locked)
- Transfer taxes
Can Increase up to 10% at Settlement. The aggregate total of the following charges can increase up to 10% at settlement:
- Required services that the lender selects
- Title services and lender’s title insurance (if the lender selects them or the borrower uses companies that the lender identifies)
- Owner’s title insurance and required services that the borrower can shop for (if the borrower uses companies which the lender identifies)
- Government recording fees
Can Change. The following can change at settlement:
- Required services that the borrower can shop for, title services and title insurance (if the borrower does not use companies that the lender identifies)
- Initial deposit for escrow account
- Daily interest charges
- Homeowner’s insurance
HUD has also determined that a loan originator may cure a violation of the tolerances simply by reimbursing the borrower the amount by which the tolerances were exceeded.