RESPA Update: Enforcement Delay a Call to Action
HUD Greets the New Year with a 120-Day Reprieve On Enforcing Its New Final Rule on RESPA.
The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974 to provide consumers with improved disclosure of settlement costs and to reduce the closing costs by the elimination of referral fees and kickbacks. Through the years, the Department of Housing and Urban Development (HUD) has issued several regulations and policy statements to provide guidance to the title and lending industries, and consumers alike.
On November 17, 2008, HUD published a new “final rule,” the stated purpose of which is to, “Simplify and improve the process of obtaining mortgages and reduce consumer settlement costs.” The final rule, which goes into effect on January 1, 2010, mandates the use of a new standard Good Faith Estimate (GFE) form and final “HUD-1” Settlement Statement that clearly discloses key loan terms and closing costs and ensures that yield spread premiums are credited to borrowers in brokered transactions. HUD’s intent in promulgating the new final rule appears to be that yield spread premiums should be passed on to consumers, and not in the form of kickbacks, rebates, or other forms of consideration to brokers, lenders, or other service providers. In short, HUD would like that the consumer be better informed and given the opportunity to shop for the best deal.
While the rules take effect on January 1, on November 13, 2009, HUD announced that for the first four months of 2010, the staff of the Mortgagee Review Board (MRB) will exercise “restraint” in enforcing the new regulatory requirements under RESPA against lenders who have demonstrated that they are making a “good faith effort to comply” with the new requirements. HUD is also asking federal and relevant state enforcement agencies to exercise the same 120-day reprieve in enforcing the new rules.
How will HUD determine whether "good faith efforts" are being made by professionals during the 120-day reprieve period? HUD's Mortgage Review Board will determine whether such service providers are making a "sufficient investment” and “…commitment in technology, training, and quality control designed to comply with the new rule…We will work with those who are making an honest effort to work with us as we implement these important new consumer protections," said HUD Secretary Shaun Donovan. "While we will not delay implementation of RESPA's new requirements, we are sensitive to the concerns of the industry as it integrates these new rules into their day-to-day business practice," Donovan continued.
The final RESPA rule, after considerable input from Congress, consumers, and the real estate industry, is directed to and will significantly impact FHA-approved lenders, non-FHA loan originators, underwritten title companies, loan originators, attorneys and pest control inspectors. A key component of the new rule is a revised GFE form, which must be given to the proposed borrower by the originator within three days after beginning the application process. A major objective in designing the new GFE is to make it easier for the consumer to find answers to such questions as:
- What’s the term of my loan?
- How much interest am I paying?
- Is the loan fixed or variable?
- If I want to refinance, will there be a prepayment penalty and how much will that be?
- How much are my closing costs?
- Am I paying too much for this loan?
- Why has there been a significant increase in the closing costs from what was originally stated in the GFE?
Consumers are now encouraged to ask the last question because the new rule places strict "tolerances" or “caps” on closing costs. These limitations apply to charges for origination, broker fees, and third party service providers. These fees must not only be accurately reported in the GFE, but in several instances, be fair with a pricing formulae based on “third party averages.” The caps are applied differently, depending upon whether the originator/lender or the borrower/consumer selects the service providers.
Fees paid to third party service providers that are recommended or identified by the lender may be increased but are subject to a cumulative ten percent cap. In other words, such third party charges cannot collectively exceed the total dollar amount originally estimated on the GFE by more than ten percent. Notwithstanding any right to cure, if such charges exceed ten percent, the loan originator is solely responsible for their payment.
On the other hand, this cap does not apply to fees charged by such service provider(s) selected by the borrower without input or influence by the lender. This is consistent with encouraging consumer-borrowers to make their own choices. For example, a consumer may desire greater services or increased coverages beyond those that would satisfy minimum lender requirements.
Origination fees or “points,” and any other fees that the lender or broker charges directly to the borrower, are subject to a “zero tolerance” policy, meaning that such charges cannot subsequently be increased at all once they are disclosed on the GFE.
HUD’s 120-day reprieve to learn the new rules should not be greeted with sighs of relief by settlement service providers and the lending industry. Rather, it is a clear signal from HUD that it is taking the new rules seriously. Most likely, they will be strictly enforced. HUD may actually be granting this additional time so as not to be accused of being unfair or “springing new laws” upon the real estate and loan industry. At the end of the day, the reprieve should be a clear warning to brokers, agents, lenders, and title and escrow company personnel.
Know the rules or pay the consequences.
