Going after the Big Cheese (PHH takes on CFPB’s Director)

As many of you know, I have been following the PHH dispute with the CFPB virtually from its inception. Although PHH is a large organization, let’s face it, this is still like a mouse (PHH) squeaking at an elephant (CFPB)! The bite, in this instance, happens to be a $109 million penalty that the CFPB is assessing against PHH.

Reduced to the least common denominator, this is a fight against the authority vested in the Director of the CFPB, or, better said, the authority that the Director presumes to have vested in himself versus a play at arrogating to himself certain authority that he simply does not have.

Going after the Big Cheese himself is no mean feat!

But PHH has assembled a highly skilled and prominent legal team.

And there are amici curiae on both sides.

Let me back up a few steps and give a wider angle. PHH appealed to the DC Circuit Court because the Bureau’s Director Richard Cordray raised a $6 million penalty for mortgage insurance kickbacks - such penalty issued by an administrative law judge - to a whopping $109 million.

To ensure that the information presented at bar was applicable to Dodd-Frank, the hearing judges required the Bureau to provide answers in oral arguments regarding substantive provisions as to the president’s authority to remove the CFPB director only for cause, and, importantly, about how the Court should view an administrative agency led by a single director rather than the more typical commission structure.

Today is the day for those oral arguments!

Here’s one bottom line that may come from the foregoing aspects of the dispute: if the Bureau loses, the Director may find that his authority, presumed or otherwise, will be vitiated.

An access point to the litigation is to challenge the constitutionality of the Bureau itself! Areas of contention, right from the inception, have been the supposed, czarist-like construct of having a single director in charge of the Bureau, plus the view that the CFPB’s funding should come from congressional appropriations rather than from the Federal Reserve’s own budget.

Is it surprising that the DC Circuit recently required the Bureau to be prepared to face questions about whether Dodd-Frank’s provision - stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” - passed constitutional muster? Actually, I don’t think so. After all, the Bureau has been challenged on these issues all along and there is clearly an interest in determining the scope of authorities vested in the Director. If adjudication seems to reach to an unassailable decision, the viability of claims involving the CFPB’s constitutionality may be finally resolved. Or maybe not! The Supreme Court would be the next step along this circuitous path to a decision.

Should we be surprised that the Court is looking for answers about potential remedies for any problems that the applicable provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause?

Again, I am not surprised. If it turns out that the cures (remedies) are worse than the infection (overreaching authority) and the treatment needs to be changed, the Court will need to determine the extent to which such changes could affect the Director’s authority.

CFPB’s Mortgage Rules for Readiness

The just released 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide (Guide) from the Consumer Financial Protection Bureau (CFPB) provides, finally, a set of criteria and preparation procedures for residential mortgage lenders and originators. It is Version 1.0 and, like previously issued guides and manuals, the CFPB will update the Guide periodically, using the results from its field examinations to further enhance the audit methodologies.

Note that it is called a “Readiness Guide.” Such documents are not meant to be, and are not, conclusive. Such guides are expected to be sign posts leading the way, a means by which a company may learn of the priorities and exigencies of a regulator’s oversight functions. In other words, as the Guide itself declaims: “The Guide summarizes the mortgage rules finalized by the CFPB in January 2013, but it is not a substitute for the rules.”

To put a finer point on the use of the Guide, please always remember that only the rules and their official interpretations can provide complete and definitive information regarding their requirements.*

These rules can be found at http://www.consumerfinance.gov/regulatory-implementation/.

Each rule in the Guide also includes a hyperlink with additional information, which includes Small Entity Compliance Guides that may make the rule easier to digest. There are links to videos outlining the main elements of the rule. Furthermore, a convenient hyperlink compendium structure is embedded in the Guide, so that the rule headings are themselves hyperlinks directing the reader to the rule-specific CFPB website page.

_____________________________________________________________________________

IN THIS ARTICLE

Sections of the Guide

Summary of the Rules

Questionnaire

Library

_____________________________________________________________________________

SECTIONS OF THE GUIDE

The Guide consists of the following sections:

Part I: Summary of the Rules
Part II: Readiness Questionnaire
Part III: Frequently Asked Questions
Part IV: Tools

Part I (Summary of the Rules) contains an outline of the eight final rules issued in January 2013 concerning mortgage markets in the United States pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) Public Law 111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules).

The rules amend several existing regulations, including Regulation Z, X, and B. Throughout the year, CFPB expects to provide updates to the rules where necessary. Updates will be posted, along with summaries of the changes, on the regulatory implementation CFPB webpage.

The questionnaire in Part II (Readiness Questionnaire) is '”not intended” to encompass all details of a comprehensive compliance program. This should not be interpreted to mean that the questionnaire is a replacement for the examination procedures or regulations. It is intended to serve as a guide in preparing for implementation of the mortgage rules and in performing a self-assessment. Thus, the questionnaire should be used as a self-assessment in determining a company’s progress towards compliance with the new mortgage rules. The questionnaire contains twenty-nine self-assessment questions and numerous subsections. Do not confuse the questionnaire with a proxy examination tool: it will not be added to the Examination Manual. The CFPB views the questionnaire as a “voluntary guide” for preparation. I have no doubt that it will be used by management in their discussions with examiners. The extent of those discussions may be determined by the institution’s size, products offered, risk mitigation, risk profiles, and other factors, such as the overall strength of the compliance management system.

HUD: Will Not Change Interpretive Rule

On June 25, 2010, we notified you about the National Association of Realtors asking the Department of Housing and Urban Development (HUD) for clarification on an unofficial staff interpretation HUD had issued on February 21, 2008 regarding Home Warranty Companies.

In that interpretation, HUD's Office of General Counsel opined that services performed by real estate brokers and agents on behalf of a home warranty company (HWC) are compensable as additional settlement services if the services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and allowed that the real estate broker or agent may accept a portion of the charge for the homeowner warranty only if the broker or agent provides services that are not nominal and for which there is not a duplicative charge.

HUD's Office of General Counsel published an Interpretive Rule which interprets Section 8 of the Real Estate Settlement Procedures Act (RESPA) and HUD's regulations as they apply to the compensation provided by home warranty companies to real estate brokers and agents. Generally, an interpretive rule is exempt from public comment, but HUD offered a comment period.

After reviewing the comments received, on November 23, 2010 HUD determined that changes are not needed to the interpretative rule.

An interpretive rule does not change existing law. It represents HUD's interpretation of its existing regulations.

Therefore, this interpretive rule does not constitute a change in HUD's interpretation of RESPA or the RESPA regulations, but is an "articulation" of HUD's interpretation of RESPA and the implementing regulations that specifically apply to home warranty company payments to real estate brokers and agents.

Highlights

Interpretive Rule

1) A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for referral under Section 8 of RESPA.

2) Depending upon the facts of a particular case, an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge.

3) The amount of compensation from the HWC that is permitted under Section 8 of RESPA for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.

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HUD: RESPA - Home Warranty Companies' Payments to Real Estate Brokers and Agents, Interpretive Rule: Response to Public Comments, Questions and Answers
November 23, 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.

HUD: Solicits Comments on Warehouse Lending

The Department of Housing and Urban Development (HUD) is seeking information on how funding mechanisms have evolved in recent years, and especially on how warehouse lending currently operates within residential real estate mortgage transactions.

HUD is requesting comments from:

· warehouse lenders,

· retail lenders,

· mortgage bankers,

· wholesale lenders,

· correspondent lenders,

· mortgage brokers,

· and others in the mortgage lending industry,

· federal, state, and local consumer protection and enforcement agencies;

· consumer groups;

· and other members of the public.

On November 16, 2010, HUD announced the solicitation of comments from the public regarding the Real Estate Settlement Procedures Act (RESPA) with respect to Warehouse Lending and Other Loan Funding Mechanisms. HUD last issued regulations in this area in 1992 and 1994.

Based on information received in response to this solicitation, HUD intends to decide what, if any, additional guidance is needed on the scope of RESPA as applied to current mortgage funding practices.

Comments can be submitted electronically through the Federal eRulemaking Portal or to the office of General Counsel.

The announcement has not yet been published in the Federal Register.

The comment period will expire 30 days after publication of HUD's announcement in the Federal Register.

HIGHLIGHTS

10 Broad Questions

1. What are the general characteristics of warehouse lending in the context of mortgage loan financing?

2. What particular characteristics distinguish warehouse lending from retail lending? What is the role of warehouse lending within the primary mortgage market versus the secondary market?

3. What distinguishes the funding of a mortgage loan from a sale of the mortgage loan in the secondary market? For example, what characteristics indicate a bona fide transfer of the loan obligation, such that the transaction would be a secondary market transaction that is not covered by HUD's RESPA regulations?

4. What role does a warehouse lender play in a table funded transaction?

5. What, if any, characteristics distinguish a table funded transaction completed by a mortgage broker from a loan made by a mortgage banker who has an advance commitment to sell the loan after settlement?

6. Does a warehouse lender fund mortgage loans within the meaning of "settlement service" as that term is defined in section 2 of RESPA and 24 CFR 3500.2?

7. What factors determine who is identified as the payee on the mortgage loan note?

8. Have concerns about protection under bankruptcy laws influenced changes in how warehouse lenders operate in relation to loan originators?

9. What do warehouse lenders regard as being their obligations for providing the disclosures required under RESPA?

10. Do consumers or others have concerns with regard to mortgage industry participants' current interpretation of HUD's secondary market exemption, including the impact that such interpretations may have on consumers regarding coverage of RESPA disclosures and Section 8 protections against kickbacks and referral fees?

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"Solicitation of Information on Changes in Warehouse Lending
and Other Loan Funding Mechanisms"
RESPA: Notice pending publication in the Federal Register
November 16, 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.

HUD Announces RESPA "Required Use" Prohibition - Rulemaking

Overview

HUD published notification today of an Advance Notice of Proposed Rulemaking (ANPR), which commences the process of initiating rulemaking.

The purpose of the ANPR is to "strengthen and clarify" the prohibition against the ''required use'' of affiliated settlement service providers in residential mortgage transactions under Section 8 of RESPA.

According to HUD, the ANPR is necessary because HUD has received complaints that some home buyers are committing to use a builder's affiliated mortgage lender in exchange for construction discounts or discounted upgrades, without sufficient time to research their contracts or to comparison shop.

Therefore, this ANPR will solicit information that can be used to inform any future revision or clarification of the regulatory definition of the ''required use'' of affiliated settlement service providers in residential mortgage transactions.

By means of issuing the ANPR,  HUD seeks comments from sources that are experienced in affiliated business arrangements in residential mortgage transactions.

Interested persons are invited to submit comments regarding this ANPR to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-0500.

Comment Due Date: September 1, 2010

___________

Highlights

In order to address concerns about the operation and effect of incentivized affiliate referrals, HUD issued a revised definition of ''required use'' in its Final Rule on November 17, 2008, which was to take effect on January 16, 2009. The revised definition of ''required use'' in the November 17, 2008 Final Rule would have provided as follows:

"Required use means a situation in which a person's access to some distinct service, property, discount, rebate, or other economic incentive, or the person's ability to avoid an economic disincentive or penalty, is contingent upon the person using or failing to use a referred provider of settlement services. In order to qualify for the affiliated business exemption under § 3500.15, a settlement service provider may offer a combination of bona fide settlement services at a total price (net of the value of the associated discount, rebate, or other economic incentive) lower than the sum of the market prices of the individual settlement services and will not be found to have required the use of the settlement service providers as long as: (1) The use of any such combination is optional to the purchaser; and (2) the lower price for the combination is not made up by higher costs elsewhere in the settlement process." (See 73 FR 68239-68240)

As a result of litigation challenging the revised definition, HUD deferred the effective date for the revised definition, and subsequently withdrew the revision by a Final Rule published on May 15, 2009 (74 FR 22822). When HUD withdrew the revised definition, it left in place the existing definition of ''required use,'' pending new rulemaking on the subject.

HUD's Final Rule withdrawing the revised definition of ''required use'' noted that public comments received in response to the proposed withdrawal had highlighted the potential complexity of existing affiliated business arrangement practices and the need for further clarity on the application of ''required use'' to such practices. The comments also underscored the need for HUD to continue to pursue reform in this area in order to protect consumers from harmful steering and referral practices.

In withdrawing the definition, HUD stated its intention to pursue new rulemaking on the subject of ''required use.'' In the May 15, 2009, Final Rule, HUD also reiterated its commitment to the goals of RESPA reform and to addressing referral practices that result in required use. This ANPR is in furtherance of that goal.

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‘‘Required Use’’ Prohibition: Advance Notice of Proposed Rulemaking

FR: Vol. 75, No. 106, 31334-31338 (06/03/10)

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.

“Intent to Proceed” and the 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.

Our Regulatory Compliance Outlook column is published monthly in the National Mortgage Professional Magazine.

Since the introduction of the new Good Faith Estimate (GFE), several readers of this monthly column have written to me about their concern regarding HUD’s new requirement for a waiting period to elapse before collecting fees from the consumer, other than the credit report fee.

HUD has taken the recently revised Federal Reserve Board Truth-in-Lending (TILA) regulations – which limit fees, charged in connection with early disclosures, and defines the timely provision of the disclosures – and incorporates this rule into a way of permitting the borrower to shop for a mortgage loan without paying upfront fees that, in HUD’s view, impede shopping. That TILA rule, simply stated, is that creditors are not permitted to impose a fee on a consumer in connection with the consumer’s application for a mortgage before the consumer has received the TILA disclosure. The Federal Reserve Board makes an exception that allows imposition of a fee that is bona fide and reasonable in amount for obtaining the consumer’s credit history. (73 FR 44522, July 30, 2008)

HUD has a public policy goal of creating a “circumstance” where consumers can shop for a mortgage loan without paying significant upfront fees that may impede shopping. Consequently, HUD has in effect adopted the Federal Reserve Board’s rule, limiting the charge originators may impose on consumers for delivery of the GFE.

Intent to Proceed

A loan originator is expressly not permitted to charge, as a condition of providing a GFE, any fee for an appraisal, inspection, or similar settlement service.

To be clear, the loan originator may not accept payment from the consumer – except for the payment of a credit report fee – in any form whatsoever, such as by a post-dated check or an unprocessed credit card impression, or any other kind of payment method which could constitute constructive receipt of payment.

Furthermore, and significantly, HUD has imposed an additional requirement that affects the collection of fees from a consumer: the loan originator may collect fees beyond the cost of a credit report for origination-related services only after a loan applicant both receives a GFE and indicates an intention to proceed with the loan covered by the GFE.

Two Requirements

Note the two requirements:

(1) the delivery of the GFE to the loan applicant, and

(2) the loan applicant’s notification of an intention to proceed with the loan covered by the GFE.

It is not until both conditions are satisfied that a loan originator may collect fees from a loan applicant for services, other than the cost of obtaining a credit report.

Thus, a loan originator must issue a GFE no later than 3 business days after the loan originator receives an application or information sufficient to complete an application AND must be notified of the loan applicant’s intent to proceed before collecting fees, with the exception of the credit report fee.

Remedy

There is a remedy and we have counseled our clients to implement it for their residential mortgage loan applications.

Either by written or verbal methods, our clients now use a form, entitled INTENT TO PROCEED WITH MORTGAGE LOAN APPLICATION.

The written form, subtitled Applicant(s) Certification, contains the following written affirmations, is signed by the loan applicant, and returned with the application package (alternatively, the loan applicant may contact the loan officer to offer verbal affirmations):

• The initial Good Faith Estimate has been provided within three business days of the application date (business days, excluding Sundays and specified, legal Holidays).
• The initial Good Faith Estimate was received.
• I/We intend to proceed with the loan application based on the initial Good Faith Estimate.
• Other than a credit report fee, no fees were charged prior to receiving the Good Faith Estimate.

The third bullet contains the essential words about the applicant’s intention to proceed with the loan application based on the initial Good Faith Estimate.

The verbal form, subtitled Loan Originator Certification, is used by loan officers and requires their signed attestation, and contains the following verbal affirmations:

• The initial Good Faith Estimate was provided to the Applicant(s) within three business days of the application date (business days, excluding Sundays and specified, legal Holidays).
• The Applicant(s) received the initial Good Faith Estimate.
• The Applicant(s) intend to proceed with the loan application based on the initial Good Faith Estimate.
• Other than a credit report fee, no fees were charged to the Applicant(s) prior to receiving the Good Faith Estimate.

It is important that a statement on both the Applicant(s) Certification and Loan Originator Certification forms include, but not be limited to, further indicating that the subject form itself is not a loan commitment; the loan originator cannot guaranty acceptance into any loan program, specific loan terms, or conditions; and the loan application is subject to credit approval, acceptable property appraisal, title report, and satisfactory completion of conditions stated in commitment or approval letter.

New RESPA Reform Rule - Overview

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 January 2010 Edition of National Mortgage Professional Magazine.

[>> Printable Version]

In 2008, the Department of Housing and Urban Development (HUD) issued both technical and substantive amendments to the rule that implements RESPA.[i] The technical changes took effect on January 16, 2009 and substantive changes have taken effect on January 1, 2010.

Recently, I provided a brief analysis of the new Good Faith Estimate (GFE).[ii] In this article I will offer some procedural guidance that incorporates several substantive changes that took effect on January 1, 2010. This analysis is meant as an overview of those changes.[iii]

Notably, the federal regulatory agencies will now begin examining for compliance with the new substantive provisions of the new RESPA Reform Rule on January 1, 2010.[iv]

Among other things, substantial changes have been made to:

• Good Faith Estimate (GFE)
• HUD-1 Settlement Statement (HUD-1)
• HUD-1A Settlement Statement (HUD-1A)
• Settlement Cost Booklet[v]

To facilitate the understanding of this article and the new RESPA Reform Rule, visit HUD’s RESPA section.

My firm’s website Library contains all of the documents listed above, the Final Rule, all New RESPA FAQs updates, as well as RESPA Appendices A and C, respectively, Instructions for completing the HUD-1/1A, and Instructions for completing the Good Faith Estimate, and the revised Settlement Cost Booklet.

I will consider the five following RESPA revisions:[vi]

1. New Good Faith Estimate Form
2. Binding Good Faith Estimate
3. Tolerances on Settlement Costs
4. HUD-1/1A Settlement Statement
5. Settlement Cost Booklet

New Good Faith Estimate form[vii]

As of January 1, 2010, lenders and mortgage brokers[viii] must provide a standard Good Faith Estimate (GFE) form to a borrower within three business days[ix] of receipt of an application for a mortgage loan. The new GFE compares settlement costs and loan terms from various loan originators. Areas covered by the GFE include:

• a summary of loan terms and a summary of estimated settlement charges
• key dates (i.e., expiration dates of the interest rate and settlement charges)
• settlement charges disclosed as subtotals for eleven (11) cost categories
• a table explaining which charges can change at settlement
• a trade-off table showing the relationship between the interest rate and the settlement charges
• a chart for comparing the costs and terms of loans offered by different originators

First Page of GFE

The first page of the GFE discloses identifying information such as the name and address of the “loan originator” which includes the lender or the mortgage broker originating the loan. The “purpose” section indicates what the GFE is about and directs the borrower to the Truth in Lending disclosures and HUD’s Website for more information. The borrower is informed that only the borrower can shop for the best loan and that the borrower should compare loan offers using the shopping chart on the third page of the GFE.

The “important dates” section requires the loan originator to state the expiration date for the interest rate for the loan provided in the GFE as well as the expiration date for the estimate of other settlement charges and the loan terms not dependent upon the interest rate.

While the interest rate stated on the GFE is not required to be honored for any specific period of time, the estimate for the other settlement charges and other loan terms must be honored for at least ten (10) business days from when the GFE is provided.

• The form must state how many calendar days within which the borrower must go to settlement once the interest rate is locked (i.e., rate lock period). The form also requires disclosure of how many days prior to settlement the interest rate would have to be locked, if applicable.

• The “summary of your loan” section requires disclosure of the loan amount; loan term; initial interest rate; initial monthly payment for principal, interest, and any mortgage insurance; whether the interest rate can rise, and if so, the maximum rate to which it can rise over the life of the loan, and the period of time after which the interest rate can first change; whether the loan balance can rise if the payments are made on time, and if so, the maximum amount to which it can rise over the life of the loan; whether the monthly amount owed for principal, interest, and any mortgage insurance can rise even if payments are made on time, and if so, the maximum amount to which the monthly amount owed can ever rise over the life of the loan; whether the loan has a prepayment penalty, and if so, the maximum amount it could be; and, whether the loan has a balloon payment, and if so, the amount of such payment and in how many years it will be due.

• The “escrow account information” section requires the loan originator to indicate whether the loan does or does not have an escrow account to pay property taxes or other property related charges. In addition, this section also requires the disclosure of the monthly amount owed for principal, interest, and any mortgage insurance.

• The bottom of the first page includes subtotals for the adjusted origination charges and charges for all other settlement charges listed on page two, along with the total estimated settlement charges.

Second Page of GFE

The second page of the GFE requires disclosure of all settlement charges. It provides for the estimate of total settlement costs in eleven categories discussed below. The adjusted origination charges are disclosed in “Block A” and all other settlement charges are disclosed in “Block B.” The amounts in the blocks are to be added to arrive at the “total estimated settlement charges” which is required to be listed at the bottom of the page.

Block A - Disclosure of Adjusted Origination Charge

Block A addresses disclosure of origination charges, which include all lender and mortgage broker charges. The “adjusted origination charge” results from the subtraction of a “credit” from the “origination charge” or the addition of a “charge” to the origination charge.

Block 1 – the origination charges, which includes lender processing and underwriting fees and any fees paid to a mortgage broker.

Note: This block requires the disclosure of all charges that all loan originators involved in the transaction will receive for originating the loan (excluding any charges for points). A loan originator may not separately charge any additional fees for getting the loan, such as application, processing or underwriting fees. The amount in Block 1 is subject to zero tolerance (i.e., the amount cannot change at settlement). (See “Tolerances” below.)

Block 2 – a “credit” or “charge” for the interest rate chosen:

Note: Differentiation is made between transactions involving a mortgage broker and transactions that do not involve a mortgage broker.

Transaction Involving a Mortgage Broker. Block 2 requires disclosure of a “credit” or charge (points) for the specific interest rate chosen. The credit or charge for the specific interest rate chosen is the net payment to the mortgage broker (i.e., the sum of all payments to the mortgage broker from the lender, including payments based on the loan amount, a flat rate or any other compensation, and in a table funded transaction, the loan amount less the price paid for the loan by the lender).

When the net payment to the mortgage broker from the lender is positive, there is a “credit” to the borrower and it is entered as a negative amount. [For example, if the lender pays a yield spread premium (YSP) to a mortgage broker for the loan set forth in the GFE, the payment must be disclosed as a “credit” to the borrower for the particular interest rate listed on the GFE (reflected on the GFE at Block 2, checkbox 2). The term “yield spread premium” is not featured on the GFE or the HUD-1 Settlement Statement.]

Note: Points paid by the borrower for the interest rate chosen must be disclosed as a “charge” (reflected on the GFE at Block 2, third checkbox). A loan cannot include both a charge (points) and a credit (yield spread premium).

Transaction Not Involving a Mortgage Broker. For a transaction without a mortgage broker, a lender may choose not to separately disclose any credit or charge for the interest rate chosen for the loan in the GFE. If the lender does not include any credit or charge in Block 2, it must check the first checkbox in Block 2 indicating that “The credit or charge for the interest rate you have chosen is included in ‘our origination charge’ above.” Only one of the boxes in Block 2 may be checked: a credit and charge cannot occur together in the same transaction.

Block B - Disclosure of Charges for All Other Settlement Services

Block B totals the sums for all settlement services (other than the origination charges).

Block 3 – service providers selected by the lender (i.e., appraisal, flood certification fees)

Block 4 – title service fees and the cost of lender’s title insurance

Block 5 – owner’s title insurance

Block 6 – other required services for which the consumer may shop

Block 7 – government recording charges

Block 8 – transfer tax charges

Block 9 – initial deposit for escrow account

Block 10 – daily interest charges

Block 11 – homeowner’s insurance charges

Third Page of GFE

The third page of the GFE includes the following information:

• Tolerance Chart: identifies the charges that can change at settlement (See “Tolerances” below.)
• Trade-Off Table: requires the loan originator to provide information on the loan described in the GFE and at the loan originator’s option, information about alternative loans (i.e., lower settlement charges but a higher interest rate, lower interest rate but higher settlement charges)
• Shopping Chart: allows the consumer to fill in loan terms and settlement charges from other lenders or brokers to use to compare loans
• Disclosure: language indicating that some lenders may sell the loan after settlement, but any fees the lender receives in the future cannot change the borrower’s loan or the settlement charges.

Binding Good Faith Estimate[x]

With limited exceptions, the loan originator will be bound to the settlement charges and loan terms listed on the GFE. For the interest rate, the loan originator will be required to indicate on the GFE the period during which a rate is available. After that period, the interest rate and other rate related charges, the adjusted origination charges, and the per diem interest can change until the interest rate is locked.

For settlement charges and all other loan terms, the loan originator will be required to honor the estimated settlement charges and loan terms for at least 10 business days from the date the GFE is provided. The charges and terms in the GFE will be binding, unless a revised GFE is provided to the borrower prior to settlement based on “changed circumstances” as defined in the rule (see below). NOTE: if a lender accepts a GFE issued by a mortgage broker, the lender is subject to the loan terms and settlement charges listed in the GFE, unless a revised GFE is issued prior to settlement.

Changed Circumstances are:

• Acts of God, war, disaster or other emergency
• Information particular to the borrower or transaction that was relied on in providing the GFE that changes or is found to be inaccurate after the GFE has been provided
• New information particular to the borrower or transaction that was not relied on in providing the GFE
• Other circumstances particular to the borrower or transaction, including boundary disputes, the need for flood insurance or environmental problems

Changed circumstances do not include: borrower’s name, borrower’s monthly income, property address, estimate property value, mortgage loan amount, 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 after the GFE has been provided). Also, market price fluctuations by themselves do not constitute changed circumstances.

Changed circumstances affecting settlement costs are those circumstances that result in increased costs for settlement services such that the charges at settlement would exceed the tolerances or limits on those charges established by the regulations.

Changed circumstances affecting the loan are those circumstances that affect the borrower’s eligibility for the loan. For example, if underwriting and verification indicate that the borrower is ineligible for the loan provided in the GFE, the loan originator would no longer be bound by the original GFE. In such cases, if a new GFE is to be provided, the loan originator must do so within three business days of receiving information sufficient to establish changed circumstances. The loan originator must document the reason that a new GFE was provided and must retain documentation of any reasons for providing a new GFE for no less than three years after settlement.

None of the information collected by the loan originator prior to issuing the GFE may later become the basis for a “changed circumstance” upon which it may offer a revised GFE, unless:

1) it demonstrates that there was a change in the particular information; or

2) the information was inaccurate; or

3) it did not rely on that particular information in issuing the GFE.

A loan originator has the burden of demonstrating non-reliance on the collected information, but may do so through various means (for example, through a documented record in the underwriting file or an established policy of relying on a more limited set of information in providing GFEs).

NOTE: if a loan originator issues a revised GFE based on information previously collected in issuing the original GFE and “changed circumstances,” it must document the reasons for issuing the revised GFE, such as its non-reliance on such information or the inaccuracy of such information.

Tolerances on settlement costs[xi]

Established “tolerances” or limits are placed on the amount actual settlement charges can vary at closing from the amounts stated on the Good Faith Estimate. Three tolerance categories of settlement charges are disclosed. At settlement, if the charges exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator must cure the tolerance violation, at settlement or within 30 calendar days after settlement, by reimbursing to the borrower the amount by which the tolerance was exceeded.

Tolerance Categories

1. Zero tolerance category. This category of fees is subject to a zero tolerance standard. The fees estimated on the GFE may not be exceeded at closing. These fees include:

• the loan originator’s own origination charge, including processing and underwriting fees
• the credit or charge for the interest rate chosen (i.e., yield spread premium or discount points) while the interest rate is locked
• the adjusted origination charge while the interest rate is locked
• state/local property transfer taxes

2. Ten percent tolerance category. For this category of fees, while each individual fee may increase or decrease, the sum of the charges at settlement may not be greater than ten (10%) percent above the sum of the amounts included on the GFE. These fees include:

• loan originator required settlement services, where the loan originator selects the third-party settlement service provider
• loan originator required services, title services, required title insurance and owner’s title insurance when the borrower selects a third-party provider identified by the loan originator
• government recording charges

3. No tolerance category. This category of fees is not subject to any tolerance restriction. The amounts charged for the following settlement services included on the GFE can change at settlement and the amount of the change is not limited. These fees include:

• loan originator required services where the borrower selects his or her own third-party provider
• title services, lender’s title insurance and owner’s title insurance when the borrower selects his or her own provider
• initial escrow deposit
• daily interest charges
• homeowner’s insurance

HUD-1/1A Settlement Statement[xii]

The revised HUD-1/1A Settlement Statement form provides a reference between the HUD-1/1A and the relevant line from the GFE.[xiii] (Inadvertent or technical errors on the HUD-1/1A will not be deemed to be a violation of RESPA, if a revised HUD-1/1A is provided to the borrower within 30 days of settlement.)

Key Enhancements

There are no substantive changes to the first page of the HUD-1/1A form. However, there are changes to the second page of the form to facilitate comparison between the HUD-1/1A and the GFE, as indicated above. Each designated line on the second page of the revised HUD-1/1A includes a reference to the relevant line from the GFE.

• No Cost Loans. Where “no cost” refers only to the loan originator’s fees (see Section L, subsection 800 of the HUD-1 form), the amounts shown for the “origination charge” and the “credit or charge for the interest rate chosen” should offset, so that the “adjusted origination charge” is zero. Where “no cost” encompasses loan originator and third-party fees, all third-party fees must be itemized and listed in the borrower’s column on the HUD-1/1A. These itemized charges must be offset with a negative adjusted origination charge (Line 803) and recorded in the columns.

• Comparisons. The revised HUD-1 includes a new third page (second page of the HUD-1A) that allows borrowers to compare the loan terms and settlement charges listed on the GFE with the terms and charges listed on the closing statement. The first half of the third page includes a comparison chart that sets forth the settlement charges from the GFE and the settlement charges from the HUD-1 to allow the borrower to easily determine whether the settlement charges exceed the charges stated on the GFE.[xiv]

• As indicated above, inadvertent or technical errors on the settlement statement are not deemed to be a violation of Section 3500.4 of RESPA if a revised HUD-1/1A is provided to the borrower within 30 calendar days after settlement.[xv]

• The second half of the third page sets forth the loan terms for the loan received at settlement in a format that reflects the summary of loan terms on the first page of the GFE, but with additional loan related information that would be available at closing. A note at the bottom of the page indicates that the borrower should contact the lender if the borrower has questions about the settlement charges or loan terms listed on the form.

• Section 3500.8(b) of RESPA (“Charges to be stated”) and the instructions for completing the HUD-1/1A Settlement Statement provide that the loan originator shall transmit sufficient information to the settlement agent to allow the settlement agent to complete the “loan terms” section. (The loan originator must provide the information in a format that permits the settlement agent to enter the information in the appropriate spaces on the HUD-1/1A, without having to refer to the loan documents.)

Settlement Cost Booklet[xvi]

A loan originator is required to provide the borrower with a copy of the Settlement Cost Booklet, entitled “Shopping for Your Home Loan,” at the time a written application is submitted, or no later than three business days after the application is received. (If the application is denied before the end of the three-business-day period, the loan originator is not required to provide the booklet.) If the borrower uses a mortgage broker, the broker rather than the lender, must provide the booklet. The booklet does not need to be provided for refinancing transactions, closed-end subordinate lien mortgage loans, and reverse mortgage transactions, or for any other federally related mortgage loan not intended for the purchase of a one-to-four family residential property.

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[i] 73 Fed. Reg. 68204 (Nov. 17, 2008).

[ii] Regulatory Compliance Outlook, National Mortgage Professional Magazine, December 2009, Volume 1, Issue 8,

[iii] For detailed information, review the following Appendices from the RESPA regulation: Appendix A – Instructions for completing the HUD-1 and HUD-1A; Appendix C – Instructions for completing the Good Faith Estimate (GFE).

[iv] Lenders are responsible for the disclosures provided by mortgage brokers and, therefore, should implement procedures to assure that mortgage brokers with whom they do business comply with the new RESPA requirements.

[v] HUD issued the revised Settlement Cost Booklet on December 15, 2009. Entitled “Shopping for Your Home Loan,” the new booklet must be used with the new GFE and HUD–1.

[vi] Portions of this overview incorporate guidance from OTS: Consumer Affair Laws and Regulations, Section 1320.1 (12/2009)

[vii] The GFE must be completed in accordance with the Instructions set forth in Appendix C of 24 CFR Part 3500.

[viii] The RESPA Reform Rule changed the definition of “mortgage broker” to mean a person or entity (not an employee of a lender) that renders origination services and serves as an intermediary between a lender and a borrower in a transaction involving a federally related mortgage loan, including such person or entity that closes the loan in its own name and table funds the transaction. The definition will also apply to a loan correspondent approved under 24 CFR 202.8 for Federal Housing Administration (FHA) programs. The definition would also include an “exclusive agent” who is not an employee of the lender.

[ix] Weekdays, except Sundays and specified, legal Holidays.

[x] See: 24 CFR 3500.7(f)

[xi] See: 24 CFR 3500.7(e) and (i)

[xii] See: 24 CFR 3500.8

[xiii] No settlement statement is required for home equity plans subject to the Truth in Lending Act and Regulation Z.

[xiv] If any charges at settlement exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator may cure the tolerance violation by reimbursing to the borrower the amount by which the tolerance was exceeded. A borrower will be deemed to have received timely reimbursement if the financial institution delivers or places the payment in the mail within 30 calendar days after settlement.

[xv] See: 24 CFR 3500.4: Reliance upon Rule, Regulation or Interpretation by HUD

[xvi] Op. Cit. 5