Introducing the New RESPA Rule
Photo by Marissa DeMott
The U.S. Department of Housing and Urban Development amended its RESPA (“Real Estate Settlement Procedures Act”) Rule back in November of 2008. Since that time, there have been numerous attempts to derail implementation of the new rule, including legal challenges. However, those efforts have failed, and implementation of the new RESPA rule will occur as planned on January 1, 2010. Since we’ll all be off watching football and eating turkey on January 1, let’s just say the big day’s going to be January 2.
The new RESPA rule affects the Good Faith Estimate (“GFE”) and the HUD-1/HUD-1A settlement statement. For those of you who don’t know, a GFE must be given to a borrower during the loan process. The HUD-1 is the settlement statement used for purchase closing, and the HUD-1A may be used in place of the HUD-1 in a refinance closing. This all sounds like alphabet soup, I know, but it’s just not that much fun. Nevertheless, we’ll all have to deal with this major overhaul, so we may as well start trying to figure it out. Even if you’re not a loan originator, if you deal with real estate clients, you’ll have to understand the HUD-1. I’ll be doing a series of posts on the new RESPA Rule between now and January 2. The posts will address GFE and HUD-1/1-A issues.
My mind works best when moving from the general to the specific. Hopefully, yours does as well because before we get into too much detail, I want to do a general overview. First, the purpose of the new rule is:
- To help consumers shop for the best loan. The idea is that shopping leads to greater competition and lower prices.
- To ensure that the key terms of the loan are disclosed to the borrower. Not all states require attorneys to close real estate transactions. Consequently, there have been borrowers who closed on a transaction they did not fully understand. Hopefully, the new rule will help eliminate the “I didn’t know my rate could change” issue as well as the “what about these extra changes?” issue.
The way the new rule attempts to achieve these goals is to make the GFE–with some exceptions–more of a binding quote than a good faith estimate. (Although, I have not heard anyone refer to the GFE as the GFBQ–”Good Faith Binding Quote.”) Accordingly, the new rule:
- Prohibits deviations in the GFE and HUD-1 (settlement statement) charges. What the lender says the fee will be on the GFE must match the actual charges on the HUD. I call this the syncing of the GFE and the HUD. Again, as with almost all things legal, there are some exceptions. And the exceptions in the new rule actually make sense.
- Requires a loan terms summary to be added to both the GFE and the HUD.
- Regulates the disclosure of fees, including the yield spread premium, title charges, and seller-paid items.
On last point to remember: RESPA provides that the HUD-1 must be used in all federally-related mortgage loans. There are exceptions to this, the most notable being loans primarily for business, commercial, or agricultural purposes. For a complete list of exceptions, see 24 C.F.R. 3500.5(b). So we’re talking about residential transactions where federally-related mortgages are involved. In essence, this means a HUD-1 must be used in almost all residential closings, but not in commercial or agricultural closings.
–Russ DeMott
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Comments
You are welcome. I am glad you liked it. Feel free to subscribe. I’ll be posting more as time goes on.
Russ, this information is very helpful. We are being inundated with comments by the Carolina One Mortgage loan orginator who is making it sound like the new rules are very bad. Regardless of whether the changes are good or bad, we have to live and work with them. Thanks!!!
Glenn
Sitting here putting together a power point presentation on the new RESPA rules and how it will affect our closings. Loved your post..thanks.