Loan Originator Compensation: New Rules

On January 24, 2013, as the last of the Final Rules of the Consumer Financial Protection Bureau (CFPB) rolled out, I offered an outline of all of them, entitled "CFPB's Gang of Seven (Final Rules)".*

I listed them in order of issuance, as follows:

1. Ability-to-Repay (ATR)
2. High-Cost Mortgage (HCM)
3. Escrow
4. Servicing
5. Appraisals for High-Risk Mortgages
6. Copies of Appraisals
7. Mortgage Loan Originator Compensation

Having come through the last two months responding to numerous questions about these Final Rules, I have been able to cobble together some of the most salient questions, regulatory features, and concerns that our clients have expressed about them. And when I have spoken to the media types, it seems that they also have a set of questions and interests that are not being fully addressed in the current dialogue. Of abiding interest is the change relating to loan originator compensation.

With that in mind, I want to provide a brief outline of some loan originator compensation issues, offering additional details garnered from two months in the trenches working through these regulatory issues on behalf of our clients. From time to time, I will have more to discuss about many regulatory changes anticipated in 2013 and 2014. I am going to conduct this review topic by topic, rather than just as specific regulations subject to a final rulemaking.

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IN THIS ARTICLE

Terms and Conditions
Retirement Plans
Factors and Proxies
Dual Compensation
Non-loan Originations Services
Points and Fees
Loan Originator Qualifications
Mandatory Arbitration Clause
Single Premium Insurance
Record Retention Requirements

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Terms and Conditions

By now, there is nary a residential mortgage lender or originator that does not know that, under Regulation Z, loan originator compensation is prohibited from being based upon the terms and conditions of a mortgage loan transaction.

The CFPB has provided new nomenclature for the terminology "transaction terms and conditions," without much changing the prohibition and certain exceptions to the standing rule. The new terminology is "term of a transaction," but now with the clarified meaning that term of a transaction means to include "any right or obligation of the parties to a credit transaction."

The usual cast of regulatory prohibitions continue in force. For instance, loan originator compensation is still prohibited from being based on such things as the interest rate of a loan, or upon the inclusion of additional fees or charges for products or services provided by other parties to the transaction.

And the usual cast of regulatory identifiers of a term of a transaction continue in force. Thus, fees or charges are a term of the transaction if they must be disclosed in the Good Faith Estimate (GFE) or HUD-1 or HUD-1A Settlement Statement (HUD-1). That obviously means to include loan originator or creditor fees or charges for the credit transaction or for a product or service provided by the loan originator or creditor that is related to the extension of credit; and it also means those fees or charges of other parties for any product or service required by the lender as a condition of the extension of credit. Keep in mind, however, that just because a fee or charge is stated on the HUD-1 does not in itself make the fee or charge a term of the transaction.

One rather controversial area involves the off-setting of compensation due to increased costs. The standing rule has provided that loan originator compensation is prohibited from being reduced in response to a change in the transaction terms. This has caused lenders all manner of frustration, not to mention loss of revenues and diminished profits. Yet, the new rule would allow compensation to be reduced in order to offset unexpected increases to estimated settlement costs, otherwise known as "unforeseen circumstances." What is a circumstance that is unforeseen? The imagination reels! But since the CFPB has offered no formal guidance to delineate very specifically what may or may not be an unexpected event, the lender must be extremely careful not to enter these dark waters too briskly.

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CFPB's Gang of Seven (Final Rules)

This has been a busy month for the Consumer Financial Protection Bureau (CFPB). Since the advent of the New Year, the CFPB has issued seven Final Rules that impact residential mortgage loan originations.

The finale was on Sunday, January 20, 2013, when the CFPB issued the seventh Final Rule, one day prior to the deadline set forth in the Dodd-Frank Act (Dodd-Frank), in § 1400(c), for automatic implementation of its Title XIV provisions.

By my count, these are the Final Rules, in order of their issuance:

1. Ability-to-Repay (ATR)
2. High-Cost Mortgage (HCM)
3. Escrow
4. Servicing
5. Appraisals for High-Risk Mortgages
6. Copies of Appraisals
7. Mortgage Loan Originator Compensation 

I recently discussed the Final Rule regarding the Ability-to-Repay. I will soon provide an outline of the CFPB's important Final Rule for Mortgage Loan Originator Compensation.

With regards to the latter, we will be updating the FAQs Outline - Loan Originator Compensation for the rule changes affecting loan origination compensation. For your consideration, I plan to provide soon a useful and practical understanding of the compensation revisions. In the near future, I will notify you of and provide access to the forthcoming article I am publishing on these regulatory guidelines.

In this article, I want to briefly outline this Gang of Seven (Final Rules). Please keep in mind that I am providing a broad sketch of the Final Rules. As is the case with many applications of legal and regulatory compliance, there are numerous statutory requirements and implementation guidelines that bring about consideration of some recourse to a competent risk management professional.

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IN THIS ARTICLE

Chart: Final Rules Compliance Dates
Gang Member # 1: Ability-to-Repay (ATR)
Gang Member # 2: High-Cost Mortgage (HCM)
Gang Member # 3: Escrow
Gang Member # 4: Servicing
Gang Member # 5: Appraisals for High-Risk Mortgages
Gang Member # 6: Copies of Appraisals
Gang Member # 7: Mortgage Loan Originator Compensation

Library

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Chart: Final Rules - Compliance Dates

Let's start first with a chart of the Final Rules and their respective compliance effective dates. I realize that there is considerable interest in the RESPA/TILA integration of mortgage disclosures; however, on November 16, 2012 the CFPB published a Final Rule exempting persons from complying with twelve specified Title XIV mortgage disclosure requirements. The RESPA/TILA disclosure integration is now scheduled for completion in September 2013. Without the aforementioned exemption, these twelve disclosure requirements would actually have taken effect on January 21, 2013.

Chart deals with only the Gang of Seven (Final Rules).

CFPB's New "Feedback Tool"

On February 16, 2012, the Consumer Financial Protection Bureau (Bureau or CFPB) launched a new initiative, dubbed the Streamlining Regulations Feedback Web Tool.

According to the Bureau, the tool will enable the public and financial institutions alike to more easily submit suggestions for streamlining regulations that the CFPB received from other Federal agencies on July 21, 2011, which the Bureau calls inherited regulations.

In effect, the Bureau is seeking comments and suggestions about existing regulations. The goal is to identify provisions of the regulations that the CFPB should make the "highest priority" for updating, modifying, or eliminating because they are outdated, unduly burdensome, or unnecessary.

The purpose of the Feedback Tool is to create one means by which the agency may consider ways to reduce the burdens imposed by existing regulations without reducing actual financial protection to consumers.  

This newsletter provides a general outline of the ways and means by which the CFPB will use the information derived from the Feedback Tool, other sources, and an overview of the Federal Register Notice of Streamlining Project of December 5, 2011.

Proposal in the Federal Register
Suggestions Criteria
Suggestions Factors
Potential Streamlining Opportunities
Streamlining Regulations Feedback Web Tool
Public View

Proposal in the Federal Register

On December 5, 2011, the CFPB published in the Federal Register its proposal to streamline regulations it recently inherited from other Federal agencies. The Bureau indicated that it would ask the public to identify provisions of the inherited regulations that the Bureau should make the highest priority for updating, modifying, or eliminating because they are outdated, unduly burdensome, or unnecessary. Comments on the proposal must be submitted by March 5, 2012 and commenters will have 30 additional days (until April 3, 2012) to respond to other comments.

The proposal itself provided several specific requirements that the CFPB believes may warrant review.

For the next year the Bureau is focusing most of its rulemaking resources various mortgage reforms that Congress instructed the Bureau to implement. This focus is dictated by the January 2013 statutory deadline for most of these rules.

After the Bureau receives public input and determines its priorities, the Bureau will consider whether to issue a notice of proposed rulemaking to streamline specific provisions of regulations.

The CFPB will focus on a particular regulation or set of regulations. It will also focus on a market sector and all of the regulations that apply to that sector. The Bureau states that it is interested in "identifying practical measures it can take, apart from revising regulations, to make compliance with the inherited regulations easier." It is also interested in identifying practical measures to be taken to promote, or remove obstacles to, responsible innovation in consumer financial services markets.

The Bureau announced that it will also consider practical measures to make it easier for firms, especially smaller ones, to comply with the inherited regulations.

 Suggestions Criteria

Commenters may consider suggesting provisions of regulations that should be:

• Simplified, rationalized, or consolidated;

• Relaxed, modified, or eliminated, perhaps for smaller firms or certain classes of transactions, without undermining essential protections;

• Updated to reflect current practices and technology;

• Adjusted to avoid unintended consequences; or

Changed to remove an obstacle to responsible innovation.

CFPB: Heat Maps and Mortgage Disclosure

The Consumer Financial Protection Bureau (CFPB) has taken an innovative approach toward designing the forthcoming, combined Good Faith Estimate and Truth in Lending Disclosure (Mortgage Disclosure): it is using heat maps to determine viewer orientation to information stated on the Mortgage Disclosure. This is part of the CFPB's Know Before You Owe project.

The CFPB announced this unique evaluative tool recently in its issuance, entitled Mortgage Disclosure Is Heating Up.

A heat map is a graphical representation of data, where a two-dimensional color table represents certain variable values. It has many uses in numerous fields.
Heat maps can be extrapolated from statistical values, providing feedback based on specific data points.

In our previous newsletter, we discussed the two sample Mortgage Disclosures that were under consideration by the CFPB. These were the subjects of heat map evaluations.
The forms were labeled "Ficus Bank" and "Pecan Bank."

Copies of those forms are available in our Library.

RESPONDENTS

According to the CFPB, more than 14,000 people submitted a choice between the two forms, and 13,000 individual comments were received.

The heat maps, essentially, were generated from the statistical values created by visitors clicking areas of the form.

The CFPB's evaluation process seems to include the heat maps - which provide the ways areas of the forms were experienced - along with the choice of disclosures selected by the visitors, and, importantly, the review of comments that the visitors provided.

HEAT MAP - MORTGAGE DISCLOSURE

The CFPB is using heat maps to display areas of the Mortgage Disclosure most frequently clicked by website visitors who were viewing the forms.

Click Heat Map

LEARNING CURVE

Thus far, the CFPB has determined the following from the use of the heat maps:

Respondents:

• Were interested in the bottom line.

CFPB: "The full loan amount at the top of the page, the projected payments section at the bottom of the page, and the estimated closing payment on the second page all received a lot of clicks."  

• Had a great deal to say about the "Key Loan Terms" and "Cautions" sections.

• Commented on the first page of the draft form much more than on the second.

CFPB: "This is a pretty common occurrence, and on its own, it serves as helpful advice for our designers about where to put certain important information. But the information on the second page (like closing costs, for example) is also an essential part of mortgage disclosure. That's why the next round of testing will focus on the second page."

INITIAL OBSERVATIONS

CFPB observed that the heat maps showed:

• How the two different formats drew attention to different parts of the form.
• Differences between what consumers and lenders commented on. ("For example, industry reviewers were very interested in applicant or lender information at the top of the form. Consumer reviewers paid less attention to that.")
• Differences between what positive and negative reviewers noticed on a form.

LIBRARY

Consumer Financial Protection Bureau
Library Section

Privacy & GLBA: Model Forms

On January 12, 2011, the Office of Thrift Supervision (OTS) published information intended to help small thrifts comply with the obligation to send initial and annual privacy notices to their customers. The agency's Small Entity Compliance Guide for the Model Privacy Notice is aimed at helping small thrifts use the model privacy notice form established by the bank and thrift regulatory agencies in December 2009. Proper use of the model forms provides a safe harbor for compliance with the privacy notice duties.

On December 1, 2009, the agencies published the final rule relating to the model privacy notice. Financial institutions that elect to use the model privacy form may rely on the model privacy form as a safe harbor to comply with the GLBA disclosure requirements.

The effective date of the amendments was December 31, 2009, except for the amendments eliminating the sample clauses and associated guidance, which become effective for notices sent after December 31, 2010.

Timing and Safe Harbor

A model privacy form that meets the privacy regulations' notice content requirements, which institutions may voluntarily rely on as a safe harbor in providing privacy notices as of December 31, 2009, appears in Appendix A to the regulations.

[Sample clauses also relating to the privacy regulations' notice content requirements, applicable in connection with privacy notices provided on or before December 31, 2010, appear in Appendix B to the regulation through December 31, 2011 (and thereafter will be deleted).]

The regulatory agencies have created an on-line form builder that thrifts can use to develop customized versions of the model notices. Although all financial institutions may model forms, they are not required to do so. Other forms, including those that rely on the sample clauses that will be replaced by the model forms, can be used if they comply with the notice requirements. However, only using the model forms will provide a safe harbor after December 31, 2010.

Privacy Notice - Form Requirements

The model privacy form has several versions:

1. If opt out is provided and include affiliate marketing.

2. If opt out is provided and do not include affiliate marketing.

3. If opt out is not provided and include affiliate marketing.

4. If opt out is not provided and do not include affiliate marketing.

5. If opt out is provided and include affiliate marketing, and mail-back form.

6. If opt out is provided and do not include affiliate marketing, and mail-back form.

To prevent identity theft, institutions should use a truncated form of an account number other than a Social Security Number on privacy notices.

Specific disclosure requirements are mandatory, if a financial institution wants to customize the privacy notice. However, the following features are permitted:

• Print the form on both sides of a single sheet of paper (or on two pages)

• Incorporate the form in another document or with other notices, and include additional documents or information so long as the form is presented in a clear and conspicuous manner

• Provide a single form jointly with other affiliated institutions (including affiliated institutions regulated by different agencies), as long as each institution is clearly identified in the correct space of the form

• Include color and logos to create visual interest, provided they do not interfere with the readability of the form

• Use different sizes of paper, provided the paper is large enough to meet the minimum 10-point font size and provide sufficient white space around the model form text

• Include certain information on state and international privacy law in the blank spaces provided

• Include a mail-in version of the opt-out form as described in the rule

• Translate the form into languages other than English

Online Form Builder - Quick Links

On April 15, 2010, the Agencies released an Online Form Builder that financial institutions can download and use to develop and print customized versions of the model consumer privacy notice.

The Online Form Builder, based on the model form regulation published in the Federal Register on December 1, 2009, under the GLB Act, is available with several options. Easy-to-follow instructions for the form builder guide an institution to select the version of the model form that fits its practices.

QUICK LINKS

Online Form Builder

Model Form in PDF

Model Form in HTML

Visit Library Small Entity Compliance Guide for the Model Privacy Notice - OTS January 12, 2011

NEW Risk-Based Pricing Rules - January 1, 2011

MAGAZINE ARTICLE: by JONATHAN FOXX

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President & Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

I think you will be interested in reading my newest article in the National Mortgage Professional Magazine, the national publication that is considered the premier mortgage industry magazine for residential mortgage originators.

In this month's Regulatory Compliance Outlook, I discuss Risk-Based Pricing, which refers to the practice of using a consumer's credit report, reflecting his or her risk of nonpayment, in setting or adjusting the price and other terms of credit offered or extended to a particular consumer.

I consider the use of credit reports or scores in connection with a credit decision, notice requirements, and the disclosure requirements when a lender grants credit on material terms that are not the most favorable terms offered to a substantial proportion of consumers.

TOPICS

• What are Material Terms?
• Who provides the RBP Disclosures?
• Who receives the RBP Disclosures?
• When are the RBP Disclosures sent?
• What are the model forms?
• Are there exceptions?

EXCERPT

WHO PROVIDES THE RBP DISCLOSURES?

Two-Prong Test

There is a two-prong test to determine the RBP compliance requirement, and both conditions must be met:

(1) determine that a consumer report is being used in connection with an application for, or a grant, extension, or other provision of, credit (for personal, household, and family - not business - purposes) to a consumer; and

(2) based in whole or in part on the consumer report, determine if credit is granted, extended, or otherwise provided to that consumer on "material terms" that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through the credit grantor.

I am pleased to share this article with you. I hope you will share it with your colleagues.

We provide expert guidance in all areas of residential mortgage compliance.

If you are not yet a client, shouldn't you become one?

If you have questions about this matter or would like assistance or guidance, please contact me at any time.

Jonathan Foxx
President & Managing Director
(516) 442-3456 X 100

FRB: Publishes TILA Interim Rule - Update

Today, the Federal Reserve Board approved an interim rule amending Regulation Z, which implements the Truth in Lending Act (TILA).

The Board is issuing this interim rule to clarify certain aspects of a September 24, 2010 interim rule, in response to public comments.

The September interim rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) which amended TILA to require mortgage lenders to disclose examples of how a loan's interest rate or monthly payments can change.

Those statutory amendments are effective on January 30, 2011.

Please visit out archive for relevant posts, such as our compliance update of October 14, 2010. (Archive)

The MDIA seeks to alert borrowers to the risks of payment increases before they take out mortgage loans with variable rates or payments. Under the Board's September interim rule, lenders' cost disclosures must include a payment summary in the form of a table stating the initial rate and corresponding periodic payment and, for adjustable rate loans, the maximum rate and payment that can occur during the first five years as well as a "worst case" example showing the maximum rate and payment possible over the life of the loan.

• This interim rule clarifies that creditors' disclosure should reflect the first rate adjustment for a "5/1 ARM" loan because the new rate typically becomes effective within 5 years after the first regular payment due date.

• Today's interim rule also corrects the requirements for interest-only loans to clarify that creditors' disclosures should show the earliest date the consumer's interest rate can change rather than the due date for making the first payment under the new rate.

• The rule also clarifies which mortgage transactions are covered by the special disclosure requirements for loans that allow minimum payments that cause the loan balance to increase.

Creditors have the option of complying with either the Board's September 2010 interim rule as originally published or as revised by this interim rule until October 1, 2011, at which time compliance with this interim rule will become mandatory.

Comment Period Deadline: 60 days after imminent publication in the Federal Register. Contact Information in Federal Register.

Visit Library for Issuance

FRB: TILA Interim Rule - request for public comment.
Clarifying 9/24/10 Interim Rule.
December 22, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Higher Priced Mortgage Loans - Escrow Requirements

by Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group.

Our Regulatory Compliance Outlook column appears monthly in the National Mortgage Professional Magazine, considered one of the country’s premier mortgage industry publications.

In July 2008, the Federal Reserve Board approved a final rule, which amends Regulation Z (Truth in Lending Act) and was adopted under the Home Ownership and Equity Protection Act (HOEPA). At the time, we published an Advisory Bulletin that discussed various features of the revised Regulation Z.

Our Library contains additional Advisory Bulletins on this subject.

The new rule addressed and defined “higher-priced” mortgage loans (HPML), a new category of mortgage loans, while also providing additional protection to consumers.[i]

Most requirements of the rule were to be implemented on October 1, 2009.

Four key protections were provided to consumers:

Borrower Ability. Lenders must take a borrower’s ability to repay the loan from income and assets other than the home's value into account when making the loan.

Verification of Income/Assets. Lenders must verify the income and assets they rely upon to determine repayment ability.

Prepayment Penalty. Prepayment penalties are prohibited if the mortgage payments can change in the first four years; and, for other higher-priced loans a prepayment penalty period cannot last for more than two years.

Escrow Accounts. Lenders must establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

HPML Calculation

Determining if a loan is an HPML origination requires a calculation using a specific “survey-based index,” as follows:

Survey-Based Index The rule establishes a category of “higher-priced mortgage loans” secured by a consumer's principal dwelling, defined as a first-lien mortgage that has an annual percentage rate (APR) that is 1.5 percentage points or more above the “average prime offer rate,” or, if the loan is a subordinate-lien loan, 3.5 percentage points above this survey-based index. The average prime offer rate index is based on a survey published by Freddie Mac, and can be found on Freddie Mac’s website at the following tab: Weekly Primary Mortgage Market Survey

The rule's definition of an HPML origination captures virtually all loans in the subprime market, but generally excludes loans in the prime market.

Effective Date: April 1, 2010

The escrow account requirement must be implemented on April 1, 2010. This deferral of the requirement until April 1, 2010 was given in order to provide originators sufficient time to set up escrow account procedures. Lenders must become familiar with federal and state escrow account requirements.

Implementation Dates

Effective April 1, 2010, lenders will be required to set up an escrow account for residential real estate secured HPMLs.

Effective October 1, 2010, lenders will be required to set up an escrow account for non-real estate secured (principal dwelling) HPMLs (for example, Manufactured Homes).

Escrow Requirements

Effective with the dates indicated above for the respective types of HPMLs, a lender must set up an escrow account for loans subject to the HPML escrow requirements. Escrow mandates only affect first lien transactions. (Exception: escrow is not required for a condominium, if the condominium association maintains a master policy that covers the individual condominium units for items such as homeowner’s insurance and property taxes.)

The HPML origination’s escrow account must be set up to pay items such as property taxes and premiums for mortgage-related insurance (such as homeowner’s insurance) that the lender has required.

RESPA Requirements

Escrow requirements under federal law, such as under the Real Estate Settlement Procedures Act (RESPA), must be implemented. RESPA provides detailed escrow requirements, escrow account calculation methodologies, and also some model forms.[ii]

Some Salient RESPA Requirements for Escrow Accounts

• Disclosure of the initial escrow account statement at the time an escrow account is established.

• Annual escrow account disclosure.

• Certain limitations on how the escrow account is funded, ensuring that the account is not “overfunded” with the borrower’s money.

State Requirements

State law places further requirements on escrow accounts. Some states exceed RESPA’s mandates in limiting the amount of the “escrow cushion.” Additionally, state law might require the lender to pay interest on the amount in the escrow account.

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[i] Compliance with the new rules, other than the escrow requirement, is mandatory for all applications received on or after October 1, 2009. The escrow requirement has an effective date of April 1, 2010 for site-built homes, and October 1, 2010 for manufactured homes.

[ii] See 24 CFR 3500.17, RESPA’s Escrow Requirements section, for further information on RESPA escrow requirements. The Department of Housing and Urban Development (HUD) publishes a number of Public Guidance Documents that illustrate the proper way to fund and manage an escrow account.

New Good Faith Estimate

by Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group.

As published in the December 2009 Edition of National Mortgage Professional Magazine.

The Department of Housing and Urban Development (HUD) published a final regulation on November 17, 2008. This final regulation made substantial changes to Regulation X – the implementing regulation of the Real Estate Settlement Procedures Act (RESPA). Among other things, HUD has made substantial changes to the:

· Good Faith Estimate (GFE)

· HUD–1 Settlement Statement (HUD-1)

· HUD–1A Settlement Statement, and

· Settlement Cost Booklet.

This article will highlight certain features of the new Good Faith Estimate.[1] The next article will highlight changes to the HUD-1Settlement Statement.

Implementation Date: January 1, 2010 [2]

The new GFE is 3 pages in length and contains more information than the previous GFE.

• Main sections of the new GFE:

General headings (originator and borrower information) – Page 1

On the top of page one you will see the General headings information. The left hand side gathers information about the originator, including name, address, phone number, and email address. The right hand side gathers information about the borrowers, including name and address. This section also includes the date that the GFE is prepared.

Purpose (See “Shopping for your loan”)

Shopping for your loan

The “Purpose” and “Shopping for your loan” sections, containing standardized language from HUD. These sections explain to the borrower the purpose of the GFE and how to use it to shop for the loan that is best for that borrower.

Important dates

This section contains dates that are important to the borrower and lender.

Line #1, the originator provides the date (and time, if necessary) through which the disclosed interest rate information is available. NOTE: This is not intended to be an interest rate lock.

Line #2, the originator provides the date through which all settlement service charges disclosed on the GFE are available. HUD requires this date to be at least 10 business days from the date of the GFE, in order to give the borrower time to shop around for the best mortgage.

Line #3, the originator provides information about the rate lock. After the rate has been locked, the borrower will have a stated number of days to go to settlement in order to receive the locked interest rate.

Line #4, the originator lists the number of days before settlement that the interest rate must be locked.

Summary of your loan

This section includes information about the initial loan amount, loan term, initial interest rate, and periodic (i.e., monthly) payment amount.

This section also includes specific “yes or no” questions with regard to whether the interest rate, loan balance, and payment amounts can increase during the life of the loan.

There are specific “yes or no” questions with regard to whether the loan has a prepayment penalty or a balloon payment.

NOTE: If the answer to any of these questions is “yes,” then the new GFE requires additional information about that feature.

There are many calculations in this area that have not been a part of previous RESPA requirements before (i.e., new monthly payment at first interest rate change date, or maximum monthly payment for a variable rate loan). Review carefully.

Escrow account information

The Escrow section discloses if the originator requires an escrow account to be set up to pay such items as hazard insurance, real estate taxes, and so forth. NOTE: The monthly payment amount disclosed here includes only principal, interest, and any mortgage insurance, but does not include taxes and insurance (escrows).

Summary of your settlement charges

This section contains a summary of (A) the adjusted original charge, (B) charges for all other settlement services, and (A + B) the total estimated settlement charges. Detailed information about the charges appears on page 2. The amounts are summarized on page 1 for the convenience of the borrower.

Understanding your estimated settlement charges – Page 2

• Your Adjusted Origination Charge

This subsection consists of blocks.

Block #1: the loan originator discloses all the charges that the loan originator will receive, except for any charges for the specific interest rate chosen (the points). [3]

Block #2: discloses the credit or charge (points) for the specific interest rate chosen. [4]

Transactions not involving a broker. There are 2 choices:

(1) Lender discloses the points or yield spread premium as part of the origination charge in Block #1. If the lender chooses this approach, then in Block #2, the lender should check the box that says, “The credit or charge for the interest rate of ____% is included in ‘Our origination charge.’ (See item 1 above)”

(2) Lender discloses the points or yield spread premium as a separate line item in Block #2. If the lender chooses this approach, then in Block #2, the lender should follow the instructions for transactions involving brokers.

Transactions involving a broker. For transactions involving brokers, brokers do not have the option of using the first check box in Block #2 (to indicate that the credit or charge for the interest rate is included in the origination charge). Brokers must check either the second or the third check box under Block #2.

(1) If there is a yield spread premium being paid, check the box that says, “You receive a credit of $________ for this interest rate of ____%. This credit reduces your settlement charges.”

NOTE: The amount of the credit is listed as a negative number.

(2) If points are paid to the lender, check the box that says, “You pay a charge of $ _____ for this interest rate of _____%. This charge (points) increases your total settlement charges.”

NOTE: The amount of the charge is listed as a positive number.

NOTE: At the bottom of this subsection is a line designated as Line A – “Your Adjusted Origination Charge.” The amount disclosed here is the sum of the “Our origination charge” and the credit or charge for the specific interest rate chosen.

• Your Charges for All Other Settlement Charges

This subsection consists of blocks.

Block #3: the fees disclosed are those fees for which the loan originator chooses the service provider. The individual services and the charges for those services are disclosed and totaled in the right hand column.

Block #4: is for title services and lender’s title insurance. The lender’s title insurance premium is included in this total.

Block #5: includes the owner’s title insurance fees, regardless of who pays for it.

Block #6: is for the required services for which the borrower can choose the service provider. The borrower can choose a service provider from a list that the loan originator may provide, or the borrower can shop for a provider on his/her own. [5]

Block #7: discloses the total of the government recording charge.

Block #8: discloses the total of the transfer taxes.

Block #9: discloses the initial deposit for the escrow account (if applicable).

Block #10: discloses the amount of daily interest charges from the date of settlement until the first day of the next month of the first day of the normal mortgage payment cycle. NOTE: Also discloses the per diem charges, the number of days for interest charges, and the estimated date of settlement.

Block #11: discloses the types and amounts of homeowners insurance that will be required to be paid by settlement and totaled in the right hand column.

NOTE: At the end of this subsection is a line designated as B – “Your Charges for All Other Settlement Charges.” The amount disclosed here is the total of all the charges under “Your Charges for All Other Settlement Charges.” Lines A and B are totaled together to disclose the “Total Estimated Settlement Charges.”

Understanding which charges can change at settlement – Page 3

This section gives information to the borrower to help the borrower understand what to expect for final charges on the HUD–1 Settlement Statement. There are no completion fields in the Understanding section; therefore, it is important to place each fee in the appropriate category.

Charges fall into one of 3 categories:

1. Charges that cannot increase at settlement

2. The total of these charges can increase up to 10% at settlement

3. These charges can change at settlement.

The loan originator is bound by the initial GFE and the tolerances described in the Understanding which charges can change at settlement section. There are a limited number of circumstances under which a revised GFE may be given. The revised RESPA rules refer to this situation as a “changed circumstance.” If a changed circumstance allows for re–disclosure of the GFE, then the charges from the re–disclosed GFE will be used when comparing the GFE charges with the HUD–1 charges. This comparison is found on page 3 of the new HUD-1. [6]

Using the tradeoff table

The table in this section is meant to help the borrower compare the transaction disclosed on the GFE with similar transactions:

The same loan with lower settlement charges but a higher interest rate.

The same loan with a lower interest rate but higher settlement charges.

NOTE: Loan originators have the option of completing this section.

Using the shopping chart

The shopping chart section is meant to give the borrower the ability to compare the information from this GFE with the information from the GFEs of other loan originators.

The “This loan” column is completed by the loan originator. Columns labeled “Loan 2,” “Loan 3,” and “Loan 4” would be completed by the borrower by hand as the borrower shops around with other loan originators.

If your loan is sold in the future

This section informs the borrower that the lender may sell the loan after settlement.

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[1] For more detailed information, please review the following Appendix from the RESPA regulation: Appendix C – Instructions for completing the Good Faith Estimate (GFE)

[2] Lenders can choose to implement the GFE and HUD-1 earlier than January 1, 2010

[3] All of these various charges (i.e., origination fee, application fee, underwriting fee, etc.) – and their impact on APR and Section 32 – are all lumped together into the “origination charge” for purposes of disclosure on the GFE and the HUD-1.

[4] Completed in different ways, depending upon whether a broker is involved in the transaction.

[5] If the loan originator does provide a list of service providers, the loan originator is held accountable for the accuracy of the disclosed charges.

[6] The only fees that may change are fees that were affected by the changed circumstance.