Sean Kulczycki

On November 17, 2008, the U.S. Department of Housing and Urban Development (HUD) announced final rules making substantial changes to RESPA.  Among other changes, the final rules represent a complete overhaul of the format and requirements associated with providing the Good Faith Estimate (GFE).  Significant changes to the HUD-1 Settlement Statement have also been made, although not to the same extent.  In general, the new requirements do not go into effect until January 1, 2010.  The following is a summary of some of the changes created by the revised regulation.

Revised GFE

The most obvious change to the GFE is its appearance.  Gone is the one-page, matrix-style disclosure with vague instructions on completion.  The new disclosure is three pages long with various sections and detailed instructions on completion.  The new disclosure contains additional information that was not previously required.  Among the new items that must be disclosed are the interest rate, the initial principal and interest payment and whether the loan has a balloon payment.  Once you get past the change in appearance, the devil is in the details.

Perhaps the most significant change to the GFE is that accuracy tolerances will now be imposed.  With certain exceptions described below, the estimate of the charges and terms for settlement services “must be available for at least 10 business days from when the GFE is provided.”  If a borrower does not express an intent to continue with an application within 10 business days, the loan originator is no longer bound by the GFE.

A loan originator also ceases to be bound by the original GFE if it issues a revised GFE.  However, a revised GFE can only be issued in the event of “changed circumstances” or “borrower-requested changes” and documentation of the reason for providing the new GFE must be retained for three years.  The changed circumstances include information particular to the borrower or the transaction that was relied on in providing the GFE that changes or is found to be inaccurate or new information that was not relied on in providing the GFE.  However, the regulation expressly states that changed circumstances do not include the borrower’s name or monthly income, the property address and estimated value, the loan amount sought and any information contained in any credit report obtained by the loan originator prior to providing the GFE, unless the information changes or is found to be inaccurate.

Whether a loan originator is bound by the initial GFE or a revised GFE, the regulation identifies three categories of charges:  charges that cannot increase, charges that can increase by no more than 10% in the aggregate and charges that can increase at settlement.  Charges that cannot increase include the origination charge and any transfer taxes.  Charges limited to an increase of 10% include lender-required settlement services, in which the lender selects the third-party and lender-required services, title services and required title insurance when borrowers use a settlement service provider identified by the loan originator.  Government recording charges also are included in the 10% aggregate limit.

HUD-1 or HUD-1A Settlement Statements

For all the changes to the GFE, the HUD-1 Settlement Statement retains its familiar appearance.  At least the first two pages!  A third page has been added to the revised HUD-1 (and a second page added to the HUD-1A), which contains a comparison of the charges between the GFE and HUD-1 and a description of the loan terms disclosed on the binding GFE.  Instructions for preparation of the HUD-1 state that “the comparison chart must be prepared using the exact information and amounts from the GFE and the actual settlement charges shown on the HUD-1/1A Settlement Statement.”  Regarding the description of the loan terms, HUD-1 instructions state that “the lender must provide this information in a format that permits the settlement agent to simply enter the necessary information in the appropriate spaces, without the settlement agent having to refer to the loan documents themselves.”

Servicing Disclosure Statement (SDS)

Surprising as it may be, the RESPA revisions have made one required disclosure easier.  Rather than providing the SDS at the time of application in a face-to-face interview, it can now be provided within three business days of submitting the application, as is currently required with the GFE.  The required content of the disclosure has also been streamlined.  The sample language included in Appendix MS-1 to the RESPA regulation includes only introductory language and a simple one-sentence statement regarding the lender’s plan for servicing the loan.  As an additional bit of relief, financial institutions no longer have to obtain a signed acknowledgement that borrowers have received a copy of this disclosure.  Revisions to the SDS were effective as of January 16, 2009.

Summary

The above is just a summary of the revisions that HUD has made to the RESPA regulation.  We suggest that you conduct additional analysis of the details of the revisions and how they will affect your financial institution.

To access the final rule, click here.

Contact your BKD advisor if you have additional questions.