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Real Estate Settlement Procedures Act (RESPA); Simplifying and Improving the Process of Obtaining Mortgages To Reduce Settlement Costs to Consumers
Note: EPA no longer updates this information, but it may be useful as a reference or resource.
[Federal Register: July 29, 2002 (Volume 67, Number 145)]
[Proposed Rules]
[Page 49133-49174]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jy02-8]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500
[Docket No. FR-4727-P-01]
RIN 2502-AH85
Real Estate Settlement Procedures Act (RESPA); Simplifying and
Improving the Process of Obtaining Mortgages To Reduce Settlement Costs
to Consumers
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: The Department of Housing and Urban Development is issuing
this proposed rule under the Real Estate Settlement Procedures Act
(RESPA), to simplify and improve the process of obtaining home
mortgages and reduce settlement costs for consumers. The current
disclosure requirements under RESPA have not been substantially revised
in decades. The current disclosures were comprehensively reviewed as
recently as 1998 by HUD and the Board of Governors of the Federal
Reserve System, but the problems identified then remain. Nevertheless,
since 1998, there have been continuing changes in the marketplace, new
products, and greater accessibility of mortgage information via the
Internet, all of which are reducing settlement costs and, if properly
addressed by Government, could result in greater price reductions for
consumers. First, to simplify and improve the mortgage loan process,
this proposal would address the issue of loan originator compensation,
specifically the problem of lender payments to mortgage brokers, by
fundamentally changing the way in which these payments in brokered
mortgage transactions are recorded and reported to consumers. Second,
it would significantly improve HUD's Good Faith Estimate (GFE)
settlement cost disclosure and HUD's related RESPA regulations to make
the GFE firmer and more usable, to facilitate shopping for mortgages,
to make mortgage transactions more transparent, and to prevent
unexpected charges to consumers at settlement. Finally, the rule would
promote competition by removing regulatory barriers to allow guaranteed
packages of settlement services and mortgages to be made available to
consumers, to simplify shopping by consumers and further reduce
settlement costs. The proposed rule also includes proposed, revised
forms and solicits comments on additional changes including changes to
HUD's settlement disclosure form and disclosure requirements.
DATES: Comment Due Date: Deadline for comments on this proposed rule,
including comments on the proposed information collection requirements:
October 28, 2002.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Rules Docket Clerk, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW., Washington, DC 20410-0500. Communications should
refer to the above docket number and title. Facsimile (FAX) comments
are not acceptable. A copy of each communication submitted will be
available for public inspection and copying between 7:30 a.m. and 5:30
p.m. weekdays at the above address.
HUD also invites interested persons to submit comments on the
proposed information collection requirements of this proposed rule.
Comments should refer to the above docket number and title, and should
be sent to the Office of Information and Regulatory Affairs, Office of
Management and Budget, Attention: Desk Officer for HUD, Washington, DC
20503.
FOR FURTHER INFORMATION CONTACT: Ivy Jackson, Acting Director,
Interstate Land Sales and RESPA Division, Room 9146, U.S. Department of
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC
20410; telephone (202) 708-0502 (this is not a toll-free number) or for
legal questions Kenneth A. Markison, Assistant General Counsel for GSE/
RESPA, or Steven J. Sacks or Teresa L. Baker (Senior RESPA Attorneys);
Room 9262, telephone (202) 708-3137. Persons with hearing or speech
impairments may access this number via TTY by calling the toll-free
Federal Information Relay Service at (800) 877-8339. The address for
the above listed persons is: Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC 20410.
SUPPLEMENTARY INFORMATION:
I. Introduction
The American mortgage finance system is justifiably the envy of the
world. It has offered unparalleled financing opportunities under
virtually all economic conditions to a very wide range of borrowers
that, in no small part, have led to the highest homeownership rate in
the Nation's history. At the same time, however, the process of
financing or refinancing a home, which is regulated under RESPA, 12
U.S.C. 2601 et seq., remains too complicated, too costly, and too
opaque for many borrowers. The monies needed to close on a home are a
significant impediment to homeownership, and settlement costs are a
significant component of these costs. In light of the Administration's
commitment to reach even higher levels of homeownership, the RESPA
regulatory scheme deserves particular scrutiny and necessary reform.
The current disclosure requirements under RESPA have not been
substantively revised in decades. Although the RESPA disclosures were
comprehensively reviewed as recently as 1998 by both HUD and the Board
of Governors of the Federal Reserve System, the problems identified in
that review remain largely unaddressed.
Recent judicial developments regarding lender \1\ payments to
mortgage brokers \2\ (yield spread premiums and other named payments
based on borrowers' transactions) have heightened the importance of
increasing borrower awareness regarding how mortgage brokers are paid
and how borrowers can benefit from payments made by lenders based on
mortgages exceeding par interest rate.\3\ Some borrowers \4\
understand, agree to, and properly use higher interest rates to lower
up front settlement costs. Others report, however, that they paid
substantial origination costs in up front fees for mortgages and then
learned that they were charged interest rates higher than those they
qualified for merely to support an additional payment to their mortgage
broker.
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\1\ The term ``lender'' is used throughout this document to mean
any person who is the ``real source of funds'' for a federally
related mortgage loan.
\2\ Except as specifically described in footnote 17, the term
``mortgage broker'' is used throughout the document to mean a person
(not an employee of a lender) who table funds or acts an
intermediary in a federally related mortgage loan. Mortgage brokers
that are the ``real source of funds'' for a federally related loan
are not regarded as brokers in such transactions.
\3\ The term ``par interest rate'' is used throughout this
document to mean the interest rate at which there is not payment
made by the lender to the borrower or from the borrower to the
lender.
\4\ The terms ``consumer'' and ``borrower'' are used
interchangeably throughout the document.
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Under the current rules, many borrowers are provided estimated
settlement cost information on a GFE only after paying a significant
fee required by a loan originator,\5\ which prevents the borrower from
shopping among additional originators using the
[[Page 49135]]
GFE. Also, when borrowers receive estimated settlement cost information
after applying for a mortgage, the estimates are often unreliable and
prove too low. Final charges at settlement often include additional
surprise ``junk fees,''\6\ which increase the original estimates. HUD's
current rules provide little guidance on the standards that originators
should be held to in providing good faith settlement cost estimates.
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\5\ The term ``loan originator'' is used throughout this
document to refer to lenders and mortgage brokers.
\6\ ``Junk fee'' is a term used throughout this document to mean
any fee charged for a service to a borrower that has little or no
value in relation to the charge, and/or may be duplicative, to
increase a loan originator's profits.
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By requiring a long listing on the GFE of each estimated settlement
charge, the current disclosure fails to highlight the major costs and
seems to lead only to a proliferation of charges without any actual
increase in the work performed or enhanced borrower understanding to
assist in shopping for services and guard against unnecessary charges.
The current requirements allow an individual such as a loan originator,
to charge several fees for origination, document preparation, and
document review. It is difficult for borrowers to distinguish or
understand the precise purpose of these various itemized services
provided by the same originator. Excessive itemization thus enables
originators to charge more than if the borrower could review and shop
the total origination charges. The same holds true for title and other
third party services. The types of fees charged by loan originators,
title agents and other service providers have multiplied in recent
years making it steadily more difficult for borrowers to compare
settlement costs.
Industry advocacy groups have indicated that they support better
disclosure of mortgage broker compensation specifically and loan
origination charges in general. Consumer groups have called for
protections against yield spread premiums that were not bargained for,
more shoppable settlement cost disclosures, and much firmer interest
rates and settlement service costs.
Settlement cost disclosures need to be improved so that the
information they provide is simpler, clearer, more reliable, and
reasonably available to facilitate shopping, increase competition, and
lower settlement costs. Although HUD has called for better disclosures
in policy statements and opinions, its regulations need to be updated
to establish requirements that are more useful to consumers.
While technology and market forces have played a significant role
in lowering costs in the settlement process, it is not clear that under
existing rules these benefits are passed on to the borrower in the form
of lower settlement prices. HUD's rules implementing Section 8 of RESPA
require originators to pass through third party costs without ``mark-
ups'' or ``upcharges,'' and generally prohibits volume discount
arrangements. Many industry and consumer advocates assert, however,
that these regulatory restrictions prevent activities and innovations
which would lower prices to borrowers. Many mortgage industry providers
also report that while they follow the rules, they are competitively
disadvantaged by those who do not because of the lack of adequate
enforcement by HUD.
Specifically, some assert that HUD's RESPA rules impede
arrangements for the packaging of settlement services, which would
allow packagers to draw on their knowledge of the market and
familiarity with the products offered by providers of specific services
to develop lower settlement cost packages for borrowers. They assert
that such packages would increase competition and enhance borrower
shopping, lowering costs more effectively than restrictions against
referral fees or unearned fees. In the joint HUD and the Board of
Governors of the Federal Reserve System, Joint Report to the Congress
Concerning Reform of the Truth in Lending Act and the Real Estate
Settlement Procedures Act, (July 1998), (hereafter HUD-Federal Reserve
Report) both agencies agreed that an exemption should be established to
facilitate the provision of settlement services and to improve
consumers' ability to shop effectively for a mortgage loan and thereby
allow competitive forces to reduce the cost of financing a home. HUD-
Federal Reserve Report at 33. At that time, some settlement service
providers claimed that such an exemption would legalize kickbacks and
referral fees. HUD has examined this concern and concluded that
guaranteed packaging arrangements should be permitted in a carefully
circumscribed safe harbor. Deregulation, transparency and a free market
will wring out kickbacks, referral fees, and other excesses more
effectively than the current restrictions and, for this reason, the
establishment of a safe harbor is warranted. Under this proposal,
settlement service providers may choose either to operate using an
improved GFE disclosure, or to participate in packages qualifying for
the safe harbor. Accordingly, this dual approach will provide industry
and borrowers alike with an opportunity to test both methods where they
should be tested, in the marketplace, to determine which is more
effective in lowering settlement costs.
Late last year, in Statement of Policy 2001-1, Clarification of
Statement of Policy 1999-1 Regarding Lender Payments to Mortgage
Brokers, and Guidance Concerning Unearned Fees Under Section 8(b), 66
FR 53052 (October 18, 2001), the Secretary announced his intention to
make full use of his regulatory authority to provide clear requirements
and guidance regarding the disclosure of mortgage broker fees, and more
broadly, to improve the mortgage settlement process to better serve
borrowers. The Secretary has established the following principles to
guide HUD's RESPA reform and enforcement efforts:
1. Borrowers should receive settlement cost information early
enough in the process to allow them to shop for the mortgage product
and settlement services that best meet their needs;
2. Disclosures should be as firm as possible to avoid surprise
costs at settlement;
3. Regulatory amendments should be utilized to remove unintended
barriers to marketing new products, competition, and technological
innovations that could lower settlement costs;
4. Many of the current system's problems derive from the complexity
of the process; with simplification of disclosures and better borrower
education, the loan origination process can be improved; and
5. RESPA should be vigorously enforced to protect borrowers and
ensure that honest industry providers have a level, competitive playing
field.
In accordance with these principles, this proposed rule would first
fundamentally change the way in which mortgage broker compensation is
reported by requiring, in all loans originated by mortgage brokers,
that any payments from a lender based on a borrower's transaction,
other than the payment for the par value \7\ of the loan, including
payments based upon an above par interest rate on the loan (payments
commonly denominated ``yield spread premiums''), be reported on the
Good Faith Estimate (and the HUD-1/1A Settlement Statement) as a lender
payment to the borrower. Additionally, in brokered loans, any borrower
payments to reduce the interest rate (``discount points'') must
[[Page 49136]]
equal the discount in the price of the loan paid by the lender, and be
reported on the GFE (and HUD-1/1A) as borrower payments to the lender.
These changes would require mortgage brokers to disclose, at the
outset, the maximum amount of compensation they could receive from a
transaction, and include the amount in the ``origination fees'' block
of the GFE and separately on the GFE Attachment A-1. They would then
disclose the amount of the lender payment to the borrower that would be
received at the interest rate quoted, if any. Mortgage brokers would be
unable to increase their compensation without the borrower's knowledge,
either by placing the borrower in an above par loan, and receiving a
payment from the lender (yield spread premiums), or by retaining any
part of any borrower payment intended to reduce the loan rate (discount
points).
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\7\ The term ``par value'' of the loan is used throughout this
document to mean the principal amount of the loan.
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Through these changes in reporting requirements, HUD believes that
virtually all disputes regarding broker compensation in table funded
transactions and intermediary transactions involving yield spread
premiums would be resolved. Maximum broker compensation would be clear
and brokers would have no incentive to seek out lenders paying the
largest yield spread. They would instead be motivated to find the best
loan product they can for the borrower. At the same time, HUD believes
that since these new disclosure requirements will allow borrowers to
focus on the total origination costs for shopping purposes, they will
not disadvantage brokers in competition with lenders.
Second, the proposed rule would improve the existing RESPA
disclosure scheme by establishing a new required format for the Good
Faith Estimate providing greater accuracy and usefulness for borrowers,
which would: (1) Inform the borrower that mortgage brokers and other
loan originators do not offer loans from all funding sources and cannot
guarantee the lowest price or best terms available in the market; (2)
explain to the borrower the option of paying his or her settlement
costs through the use of lender payments based on higher interest
rates, or reducing the interest rate by paying the lender additional
amounts at settlement; (3) disclose the loan originators' fees,
including the mortgage broker's and lender's total charges to
borrowers; and (4) require, in transactions originated by mortgage
brokers, that all payments from a lender other than for the par value
for the loan (including ``yield spread premiums,'' servicing release
premiums, and all other payments from lenders), be reported on the GFE
and the HUD-1 Settlement Statement as a lender payment to the borrower
and any discount points charged to the borrower must equal the discount
in the price of the loan paid by the lender and be reported on the GFE
and the HUD-1 Settlement Statement as borrower payments to the lender.
These changes will ensure that borrowers receive the full benefit of
any payments from or to lenders in brokered transactions, either by
reducing their up front settlement costs in exchange for accepting a
loan with a higher rate, or by reducing their interest rate and monthly
payments by paying additional amounts to the lender at settlement.
The new GFE would also better inform borrowers of the costs of
obtaining a mortgage loan from a mortgage broker, as well as from
mortgage bankers, lenders or other loan originators, and would better
protect borrowers from unnecessary surprise charges at settlement. It
would:
(1) Include an interest rate quote in the form of the mortgage
loan's note rate and APR, and notification of any prepayment penalties,
to assist the borrower in shopping among mortgages;
(2) Disclose subtotals of major categories of settlement costs
(including, for example, loan origination costs and title services) to
borrowers to eliminate the proliferation of fees by individual
settlement service providers, and to allow borrowers to focus on and
compare major fees; and
(3) Provide additional shopping information for borrowers that
would provide a breakdown of lender and broker origination charges,
title insurance and title agent charges, and inform the borrower of
lender required and selected services and those third party services
that can be shopped for by the borrower.
The proposed rule would further improve the existing disclosure
scheme, by amending Regulation X to establish new rules for the
provision of the GFE which would: (1) Clarify the basic information
needed in an ``application'' to obtain a GFE; (2) limit fees paid by
borrowers for the GFE, if any, to the amounts necessary to provide the
GFE itself and exclude amounts used to defray later appraisal or
underwriting charges, in order to facilitate shopping with GFEs; (3)
require that loan originators not exceed the amounts reported on the
GFE regarding their total compensation, lender required and selected
third party services, and government charges through settlement (absent
unforeseeable and extraordinary circumstances); (4) require that loan
originators comply with upper limits or ``tolerances'' for specified
major settlement charge categories so they do not exceed those stated
on the GFE by more than 10%; and (5) clarify that loan originators can
make arrangements with third party settlement service providers to
lower prices for their customers, provided that these prices and any
charges are reflected accurately on the GFE and are not ``marked up''
or ``up charged.''
Third, the proposed rule would remove regulatory barriers to allow
packages of settlement services and mortgage loans to be made available
to borrowers. These transactions would be even simpler and more
transparent for borrowers, and would allow market forces, borrower
shopping, and competition to further reduce the costs of settlement
services to better achieve the purposes of the statute.
To accomplish this objective, HUD would establish a carefully
circumscribed safe harbor under RESPA for ``Guaranteed Mortgage
Package'' (GMP) transactions. Any entity (a lender, broker, other
settlement service provider, or other entity), hereinafter a
``packager,'' may qualify for the safe harbor as long as it offers a
GMP. The packager must offer the GMP to a borrower following his or her
submission of application information, but before the borrower's
payment of any fee to the packager. The GMP must include: (1) A
guaranteed package price for a comprehensive package of loan
origination and virtually all other settlement services required by the
lender to close the mortgage (including without limitation, all
application, origination and underwriting services, the appraisal, pest
inspection, flood review, title services and insurance, and any other
lender required services except hazard insurance, per diem interest,
and escrow deposits); (2) a mortgage loan with an interest rate
guarantee, whether when the ``Guaranteed Mortgage Package Agreement''
(GMPA) is given or subject to change (prior to borrower lock-in) only
pursuant to market changes evident from an observable and verifiable
index or other appropriate data or means; and (3) a contract offer in
the form of a GMPA to guarantee the price for settlement services and
the mortgage interest rate through settlement, if the offer is accepted
by the borrower. Additionally, in order to ensure that the borrower
receives the settlement package of services and the mortgage loan, the
proposed rule would require that the packager sign the GMPA agreeing to
provide the Guaranteed Mortgage Package at the Guaranteed Mortgage
Package price and that non-lender packagers have a lender sign the
[[Page 49137]]
GMPA after borrower acceptance agreeing to provide the loan included in
the Guaranteed Mortgage Package.
The GMPA would describe the package as ``including all services
required by the lender to close the mortgage'' but would not itemize
the specific services to be provided. The packager would, however, be
required to inform the borrower if certain items of interest to the
borrower are anticipated to be excluded from the package, specifically
lender's title insurance, pest inspections, and a property appraisal.
Additionally, where the packager anticipates obtaining a pest
inspection, appraisal, or credit report, the packager must disclose
that information on Attachment A-1 and make such documents available at
the borrower's request. The HUD-1 would list the services ultimately
provided, but not the charges for specific services. HUD is requesting
comments on whether this approach satisfies, or whether alternative
approaches should be developed, to ensure that consumers' rights under
TILA and HOEPA are protected while facilitating packaging.
The Secretary is exercising the exemption authority under Section
8(c)(5) and Section 19 of RESPA to establish this Guaranteed Mortgage
Packaging safe harbor for those Guaranteed Mortgage Package
transactions that meet the requirements set forth in this rule. The
Secretary has determined that the establishment of this carefully
circumscribed safe harbor is necessary to allow this class of
transactions to be available to consumers and to achieve the purposes
of the Act. The Secretary has concluded that the availability of these
packages to consumers at single guaranteed prices with an interest rate
guarantee will simplify consumers' shopping for mortgages and allow
them to gain the benefit of an active competitive marketplace in which
market forces produce lower settlement costs. For the same reasons, the
Secretary has determined that payments among packagers and
participating settlement service providers and the earnings of packager
in Guaranteed Mortgage Packages, as set forth in this rule, shall not
be construed as prohibited under Section 8 of RESPA as long as the
requirements in this rule are satisfied. Pursuant to Section 8(c)(5)
the Secretary has undertaken the necessary consultation with other
agency heads as required prior to promulgating this exemption.
The safe harbor from Section 8 will permit the packager to charge
for services within the package and will permit payments to, or
exchanges of other things of value between entities participating in
the package. Section 8 would, however, continue to prohibit any
payments for the referral of business, kickbacks, splits of fees and
unearned fees between the packager and any of the entities
participating in the package on the one hand and entities outside of
the package on the other. Under the safe harbor, packagers would
provide the GMPA in lieu of a GFE. HUD regards such provision of a GMPA
as fully, indeed more than, satisfying the requirements of Section 5 of
RESPA that borrowers receive a Good Faith Estimate of the amount of
charges for settlement services the borrower is likely to incur. HUD
believes that the GMPA, by providing a Guaranteed Mortgage Package
price encompassing virtually all settlement charges, along with a
limited number of itemized charges, including owner's title insurance,
also more than satisfies the requirements of Section 4 of RESPA.
Nevertheless, as long as the requirements of the safe harbor are
satisfied, HUD is also prepared to exercise the exemption authority
under Section 19 to create a safe harbor for packagers from the
requirements of Sections 4 and 5 of RESPA, if it deems such an
exemption necessary.
The safe harbor is proposed to be available only where the
transaction does not result in a high cost loan as that term is defined
in the Home Ownership Equity Protection Act, 15 U.S.C.1601(Supp II
1996). The safe harbor also may not be available to mortgages that
exceed other limits, or include other features identified through this
rulemaking, resulting in unreasonable settlement charges or loan terms
inimical to the purposes of RESPA.
The proposed rule's new regulatory requirements will apply to first
and second lien transactions, purchase money loans, and refinances.
Home equity transactions are addressed in Sec. 3500.7(f), under current
RESPA regulation. At Question 26 the Department invites comments on
this issue.
The Department also is inviting comments specifically on whether,
and to what extent modification of the existing HUD-1/1A Settlement
Statement and Instructions, found at 24 CFR part 3500, Appendix A, is
necessary to make it comparable to the new GFE. HUD also announces that
it plans to revise the Special Information Booklet concerning
settlement costs consistent with the final rule, and to develop new
booklets for refinance and junior lien transactions.
In this proposed rule at Appendix C and F, the Department is
publishing for comment new proposed required formats for the Good Faith
Estimate (GFE) and new GMPA. HUD believes that the content of the
material in these proposed forms gives the consumer the information
needed to shop for loan products and to assist them during the
settlement process. HUD recognizes that in order for these forms to be
useful shopping tools, they must be consumer friendly. The Department
seeks public comment on these proposed forms In addition, the
Department will arrange focus groups during the comment period to
elicit comments on how to make the material in the new proposed forms
as consumer friendly as possible including considering, among other
things, how the new proposed forms are best compared by consumers to
the HUD-1 and what revisions, if any, to the HUD-1 would be most
helpful.
In addition, the Department will facilitate the provision of web
based information to consumers on settlement costs and pursue other
efforts to ensure that RESPA regulation encourages technological
advances to facilitate competition, and lower costs and prices to
consumers. Beyond this rulemaking, the Department is examining possible
changes to its rules to facilitate electronic mortgage transactions
consistent with the Electronic Signatures in Global and National
Commerce Act, Public Law 106-229. The Department will also undertake
efforts with Federal and State regulators and others to better address
technological changes to lower costs.
Additionally, the Department plans to finalize the 1997 Section 6
transfer of servicing proposed rule; however, in the meantime the
Section 6 language in the statute may be provided in conjunction with
the GFE. Separate from this rulemaking, the Secretary is increasing the
resources dedicated to enforcing and regulating RESPA.
Following the background materials, this proposal includes a
description of today's proposed rule, specific questions for public
comment, and proposed rule language. Public comment on this proposal
will be important to formulating a final rule that is consistent with
RESPA's purpose, workable in the marketplace, and best serves the
financing needs of America's families.
II. General Background
A. Legal Authority
The Department is proposing this rule in accordance with 5 U.S.C.
552, Sections 19 and 8(c)(5) of the Real Estate
[[Page 49138]]
Settlement Procedures Act of 1974 (12 U.S.C. 2617).
RESPA Overview
In 1974, Congress enacted the Real Estate Settlement Procedures Act
(Pub. L. 93-533, 88 Stat. 1724, 12 U.S.C. 2601 et seq.) after finding
that ``significant reforms in the real estate settlement process are
needed to ensure that borrowers throughout the Nation are provided with
greater and more timely information on the nature and costs of the
settlement process and are protected from the unnecessarily high
settlement charges that have developed in some areas of the country.''
Id. RESPA's stated purpose is to ``effect certain changes in the
settlement process for residential real estate that will result:
(1) In more effective advance disclosure to home buyers and sellers
of settlement costs;
(2) In the elimination of kickbacks or referral fees that tend to
increase unnecessarily the costs of certain settlement services;
(3) In a reduction in the amounts home buyers are required to place
in escrow accounts established to ensure the payment of real estate
taxes and insurance; and
(4) In significant reform and modernization of the local record
keeping of land title information.'' Id.
RESPA's requirements apply to transactions involving ``settlement
services'' for ``federally related mortgage loans.'' Under the statute
the term ``settlement services'' includes any service provided in
connection with a real estate settlement.\8\ The term ``federally
related mortgage loan'' is broadly defined to encompass virtually all
purchase money and refinance mortgages.\9\ Section 4(a) of RESPA
requires the Secretary to develop and prescribe ``a standard form for
the statement of settlement costs which shall be used * * * as the
standard real estate settlement form in all transactions in the United
States which involve federally related mortgage loans.'' The rule
further requires that the form ``conspicuously and clearly itemize all
charges imposed upon the borrower and all charges imposed upon the
seller in connection with the settlement. * * *'' Section 5 requires
the Secretary to prescribe a Special Information Booklet for borrowers.
Section 5(c) requires that a Good Faith Estimate (GFE) be provided at
or within 3 days of loan application, authorizes the Secretary to
prescribe the contents of the GFE, and requires that the GFE state
``the amount or range of charges for specific settlement services the
borrower is likely to incur in connection with the settlement as
prescribed by the Secretary.'' Notice of transfer of servicing language
was added to RESPA at Section 6 in 1990 and amended most recently in
1996, and requires notification to borrowers at the time of application
for the mortgage, and during the life of the loan, of whether the
servicing of the loan may be or has been assigned, sold, or
transferred.
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\8\ These services include, but are not limited to, ``title
searches, title examinations, the provision of title certificates,
title insurance, services rendered by an attorney, the preparation
of documents, property surveys, the rendering of credit reports or
appraisals, pest and fungus inspections, services rendered by a real
estate agent or broker, the origination of a federally related
mortgage loan (including, but not limited to, the taking of loan
applications, loan processing, and the underwriting and funding of
loans), and the handling of the processing, and closing of
settlement.'' 12 U.S.C. 2602(3).
\9\ Specifically, the term covers mortgages ``secured by a first
or subordinate lien on residential real property (including
individual units of condominium and cooperatives) designed
principally for the occupancy of one to four families''; mortgages
made ``in whole or in part by any lender the deposits or accounts of
which are insured by the Federal Government or is made in whole or
in part by any lender which is regulated by any agency of the
Federal Government'' or ``insured, guaranteed, supplemented or
assisted in any way by HUD or any officer or agency of the Federal
Government,'' intended to be sold to Fannie Mae, Ginnie Mae, Freddie
Mac or an institution from which it will be purchased by Freddie
Mac, or is made in whole or in part by any loan originator, among
other things, ``who makes or invests in residential real estate
loans aggregating more than $1,000,000.00 per year.'' 12 U.S.C.
2602(3).
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Section 8(a) prohibits any person from giving and any person from
accepting ``any fee, kickback, or thing of value pursuant to any
agreement or understanding, oral or otherwise,'' that real estate
settlement service business shall be referred to any person. 12 U.S.C.
2607(a). Section 8(b) prohibits anyone from giving or accepting ``any
portion, split, or percentage of any charge made or received'' for the
rendering of a real estate settlement service ``other than for services
actually performed.'' 12 U.S.C. 2607(b). Section 8(c) of RESPA
provides, in part, that ``[n]othing in [Section 8]
shall be construed
as prohibiting * * * (2) the payment to any person of a bona fide
salary or compensation or other payment for goods or facilities
actually furnished or for services actually performed.'' * * * or ``(5)
such other payments or classes of payments or other transfers as are
specified in regulations prescribed by the Secretary, after
consultation with the Attorney General, the Secretary of Veterans
Affairs, the Federal Home Loan Bank Board,\10\ the Federal Deposit
Insurance Corporation, the Board of Governors of the Federal Reserve
System and the Secretary of Agriculture.'' 12 U.S.C. 2607(c)(2).
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\10\ The Federal Home Loan Bank Board (FHLBB) was abolished
Effective October 8, 1989, by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, (Pub. L. 101-73). Its
successor agency, the Office of Thrift Supervision, Department of
the Treasury, assumed the FHLBB's regulatory functions.
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Section 9 forbids any seller of property from requiring buyers to
purchase title insurance covering the property from any particular
title company as a condition of sale. Section 10 limits the amounts
that lenders or servicers may require borrowers to deposit in escrow
accounts, and requires that borrowers be provided with both initial and
annual escrow account statements. Section 12 prohibits lenders and loan
servicers from imposing any fee or charge on any other person for the
preparation and submission of the Settlement Statement, the escrow
account statements required under Section 10(c), or any disclosures
required by the Truth in Lending Act.
Section 19 of RESPA specifically authorizes the Secretary ``to
prescribe such rules and regulations, * * * and to grant such
reasonable exemptions for classes of transactions * * *, as may be
necessary to achieve the purposes of [RESPA].''
B. Background
HUD's RESPA Rules
In 1975, HUD promulgated its first set of RESPA rules including
limited disclosure requirements. Real Estate Settlement Procedures and
Cost, 40 F.R. 22448 (1975). These rules included a requirement that the
HUD-1 form be given to borrowers within seven days of a loan
commitment, with the provision that estimates were permitted for those
items the lender could not accurately provide cost information for at
the time of loan commitment. Congress amended the RESPA statute in 1976
and included a requirement that borrowers be provided with a Good Faith
Estimate along with the special information booklet at, or within 3
days of a loan application. Following these amendments, HUD promulgated
rules in 1977 that included a suggested format for the GFE and
requirements for its provision to borrowers at or within 3 days of
application, as well as a Uniform Settlement Statement, designated as
the HUD-1, to itemize settlement charges to borrowers in every
settlement involving a federally related mortgage loan where there is a
borrower
[[Page 49139]]
and a seller, along with instructions and requirements for its use.
On November 2, 1992, HUD amended its rules to implement the 1984
amendments to RESPA establishing a ``controlled business exemption''
(now known as an ``affiliated business exemption''), a controlled (now
known as an ``affiliated'') business disclosure to be provided at the
time of a referral, and a disclosure of required providers to accompany
the GFE. 57 FR 49600. The 1992 amendments also made other significant
additions and changes, including defining the term mortgage broker,\11\
and applying disclosure requirements to mortgage brokers, as more fully
discussed below. In 1994, at 59 FR 6506, HUD amended its rules to
conform with the 1992 amendments to the law covering refinancings and
junior lien transactions. At that time, HUD promulgated a new
disclosure form, the HUD-1A, for use in refinancing and subordinate
loan transactions where there is no seller. While the 1992 and 1994
amendments necessitated additional disclosures, the formats of the GFE
and HUD-1, and the disclosure requirements, have remained substantially
unchanged since they were originally established in 1977.
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\11\ HUD's RESPA rules, found at 24 CFR part 3500 (Regulation
X), currently define a ``mortgage broker'' to be ``a person (not an
employee or exclusive agent of a lender) who brings a borrower and
lender together to obtain a federally-related mortgage loan, and who
renders services'' as described in the rule (24 CFR 3500.2(b)).
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Contents of Good Faith Estimate and the HUD-1
HUD's RESPA rules require that lenders and mortgage brokers who are
not exclusive agents of lenders provide a GFE to all applicants for
federally related mortgage loans, and contain a suggested format in
Appendix C to 24 CFR part 3500. The suggested GFE format lists twenty
common settlement services and provides spaces for the charges for such
services. The instructions indicate that any other possible services
and charges should also be listed.\12\ The GFE provides a place for the
``amount of or range'' of each charge that the borrower is likely to
incur in connection with the settlement. Between the name and amount of
each charge is a reference to where the same charge will be disclosed
on the HUD-1 or HUD 1-A at settlement. If the lender requires the use
of particular settlement service provider(s) and requires the borrower
to pay for any portion of such provider's services, the rules require
that the GFE state: that the use of the provider is required and that
the estimate is based on the selected provider's price; the provider's
name, address and telephone, and the nature of any relationship between
the provider and the lender.\13\ The current GFE does not identify the
particular items that the borrower may shop for after he has selected a
lender or broker, such as a title or settlement agent, title insurance,
and a pest inspector.
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\12\ Specifically, the GFE format lists the loan origination
fee, loan discount fee, appraisal fee, credit report, inspection
fee, mortgage broker fee, CLO access fee, tax related service fee,
interest at ``dollars'' per day, mortgage insurance premium, hazard
insurance premium, reserves, settlement fee, abstract or title
search, document preparation fees, attorney's fee, title insurance,
recording fees, city/county tax stamps, state tax, survey, pest
inspection and the form provides space for additional fees that may
be added.
\13\ 24 CFR 3500.7(e)(3). Except for a provider that is the
lender's chosen attorney, credit reporting agency, or appraiser, if
the lender is in an affiliated business relationship with the
provider (see Sec. 3500.15), the lender may not require the use of
that provider.
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The HUD-1, described in detail in Appendix A of HUD's RESPA rules,
discloses the charges at settlement in major groupings or series. The
left hand column on the front of the HUD-1 summarizes the borrower's
transaction, listing the cash due at settlement from the borrower, as a
result of the gross amounts due less any amounts paid by or on behalf
of the borrower prior to settlement. This part of the HUD-1 lists
credits to the borrower as well as the total settlement charges due
from line 1400 on the back of the form. The right hand column on the
front of the HUD-1 summarizes the seller's transaction, listing the
total amount due to the seller as the gross amount due to the seller
adjusted for items such as settlement charges to the seller and the
payoff(s) of any mortgages, and any other items due from seller (such
as taxes), to arrive at a total amount due seller.
The 700 series of the HUD-1 lists real estate broker commissions;
the 800 series lists origination fees and certain third party
settlement services payable in connection with the loan; the 900 series
lists items required by the lender to be paid in advance; the 1000
series lists reserves deposited with lender; the 1100 series lists all
title related charges; the 1200 series lists government charges; the
1300 series lists any additional settlement charges; and line 1400
discloses the total settlement charges.
The current GFE and HUD-1/1A forms require a listing of the
settlement charge for each service, which appears to have led to an
increasing proliferation of enumerated services by individual
settlement service providers (e.g., loan originators, title agents,
etc.) and an artificial separation and inflation of the total charges
of certain settlement service providers resulting in higher total costs
to borrowers than a more consolidated list would provide. For example,
the current requirements encourage loan originators to charge for
several separate ``services''-- origination, document preparation,
document review. Similarly, title service providers are required to
separate their charges into ``abstract,'' ``document preparation,''
``attorney's fees,'' and other charges. Moreover, neither the GFE nor
the HUD-1 specify the total amount of fees that each major recipient
receives and retains, including the lender, the broker, and the title
agent. It is reported that some originators charge ``junk'' fees for
``services'' to increase profits by filling in as many blank lines on
the form as possible. It also has been reported that some originators
compete on rate and points when giving quotes and then charge a variety
of additional fees to increase their profits.
Provision of the Good Faith Estimate
The RESPA rules require that the loan originator must provide the
GFE either by delivering it or placing it in the mail to the borrower
not later than three business days after a loan application \14\ is
received or prepared. In practice, loan originators frequently insist
on the borrower's completion of a full application form and payment of
a significant fee to cover the costs of an appraisal and credit check
before a GFE is provided. Therefore, by the time that the borrower
receives a GFE he or she has typically already selected a particular
loan originator, and paid substantial fees, and is highly unlikely to
shop further for another loan originator. In addition, because the GFE
is not generally provided until the borrower applies for a loan, the
form does not provide borrowers with sufficient opportunity to focus on
and compare the full costs of the originator and other major recipients
of fees, nor does it indicate clearly other individual settlement
services including title services that the borrower may shop for.
Borrowers must shop on their own without the aid of a GFE.
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\14\ The rules define an ``application'' as the submission of a
borrower's financial information in anticipation of a credit
decision involving a federally related loan on a specific property.
24 CFR 3500.2(b).
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Current Definition of ``Good Faith''
HUD's RESPA rules currently require that a GFE must be made in good
faith, bear a ``reasonable relationship'' to the charge the borrower is
likely to be
[[Page 49140]]
required to pay at settlement, and ``be based upon experience in the
locality of the mortgaged property.'' 24 CFR 3500.7(c)(2). The rules,
however, do not establish any bright lines or tolerances to assure that
there is, in fact, a reasonable relationship between these estimates
and final costs at settlement. Although the rules do require additional
disclosure where the lender requires the use of a particular provider,
stating that the lender must ``make its estimate based upon the
lender's knowledge of the amounts charged by the provider,'' the rules
do not establish any bright lines for the loan originator with respect
to their estimates of these or other third party charges, or even with
respect to their own charges. Id.\15\ Under HUD's rules, charges on the
Good Faith Estimate are to be disclosed as ``a dollar amount or range
of each charge'' which will be listed in section L of the HUD-1 or HUD-
1A. Frequently, borrowers report to HUD that brokers' or lenders' own
charges at settlement include one or more additional fees that were not
disclosed on the GFE, or that the charges for particular services
rendered by or for the loan originator substantially exceed the
estimated amounts. RESPA contains no sanctions for inaccurate or
incomplete GFEs, or even for outright failure to provide a GFE. Bank
and other regulators do enforce these requirements with respect to
regulated institutions, although other originators are not subject to
such enforcement.
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\15\ While the current rules need improvement, they are not
entirely without standards. They do require estimates to be in good
faith and tell the borrower what charges he or she is likely to
incur at settlement based on the originator's experience. For
example, on July 5, 2002, HUD issued a letter to the State of
Washington that indicated that a range of charges of 0-$15,000 on a
GFE for points did not meet these requirements.
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Use and Provision of the HUD-1,
HUD-1A
Settlement agents are required to use the HUD-1 in every settlement
transaction involving a federally related mortgage loan in which there
is a borrower and a seller.\16\ The settlement agent is required to
complete the HUD-1 in accordance with the instructions at Appendix A to
HUD's RESPA rules and to deliver a completed HUD-1 (or HUD-1A where
applicable) at or before the settlement to the borrower, the seller (if
applicable), and the lender (if the lender is not the settlement agent)
or their agents. 24 CFR 3500.8(a). RESPA and HUD's RESPA rules permit
the borrower to inspect, a day before settlement, the HUD-1 or HUD-1A
containing those items that are known to the settlement agent at the
time of the inspection. 24 CFR 3500.10.
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\16\ 16 Under current rules, where there is a borrower and no
seller, such as in a refinance or a subordinate lien loan, the HUD-1
may be utilized using the borrower's side of the HUD-1 statement, or
the HUD-1A may be used as an alternative.
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Mortgage Brokers \17\
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\17\ In the discussion of mortgage brokers in the background
section of this preamble, the term is being used in a broader sense
than the proposed amended HUD definition, and the way the term is
used throughout the rest of the proposed rule. In this section when
referring to mortgage brokers the term also includes those
individuals who are the real source of funds through a warehouse
line of credit or otherwise.
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At the time RESPA was enacted, single-family mortgages were mainly
originated and held by savings and loans, commercial banks, and
mortgage bankers. During the 1980's and 1990's, the rise of secondary
mortgage market financing resulted in the emergence of new retail
entities, notably mortgage brokers, to compete with traditional
mortgage originators, lending institutions, and mortgage bankers.
Today, mortgage brokers are estimated to originate more than 60% of the
nation's mortgages.
Mortgage brokers essentially provide retail lending services,
including counseling borrowers on loan products, collecting application
information, ordering required reports and documents, and otherwise
gathering data required to complete the loan package and mortgage
transaction. As retailers, brokers also provide the borrower and lender
with goods and facilities such as reports, equipment, and office space
to carry out retail functions.\18\ The amount of work mortgage brokers
provide in particular transactions depends, in part, on the level of
difficulty involved in qualifying applicants for particular loan
programs. Differences in credit ratings, employment status, levels of
debt, assets, and experience frequently translate into varying degrees
of effort required to originate a loan. Also, mortgage brokers may be
required to perform different components of origination services (i.e.,
underwriting) pursuant to specific agreements with individual wholesale
lenders.\19\
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\18\ HUD Statement of Policy-1999-1 Regarding Lender Payments to
Mortgage Brokers provided a list of compensable loan origination
services originally developed by HUD in a response to an inquiry
from the Independent Bankers Association of America (IBAA), which
HUD considers relevant in evaluating mortgage broker services. In
analyzing each transaction to determine if services are performed by
mortgage brokers, HUD stated that it believes the 1999 Statement of
Policy should be used as a guide. As stated there, the IBAA list is
not exhaustive, and while technology is changing the process of
performing settlement services, HUD believes that the list is still
a generally accurate description of settlement services.
\19\ The terms ``wholesale lender'' or ``funding lender'' are
used throughout the document to mean a lender who does not originate
the mortgage loan but provides funds for the loan and may purchase
the loan.
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Mortgage brokers have various means of obtaining funding for the
loans they originate. Some mortgage brokers close mortgage loans in
their own name but, at the time of settlement, transfer the loan to a
lender that simultaneously advances funds for the loan. Immediately
after the loan is consummated, the mortgage broker delivers the loan
package to that lender, including the promissory note, mortgage,
evidence of insurance, and all rights in the loan that the mortgage
broker held. This type of transaction is known in the lending industry,
and defined in HUD's regulations, as ``table funding.''
Some mortgage brokers function purely as intermediaries between
borrowers and lending sources. They originate loans by providing loan
processing and arranging for the provision of funds by lenders. Loans
which they originate are closed in the names of the funding lenders.
Other mortgage brokers originate loans that are closed in the
mortgage brokers' names, fund the loans temporarily using their own
funds or a warehouse line of credit, and sell the loans after
settlement. These transactions by mortgage brokers are treated
similarly to loans made by mortgage bankers, and other lenders, and
hence any compensation received by the mortgage broker, as a result of
the bona fide transfer of a loan obligation in the secondary market, is
not subject to Section 8 of RESPA due to the ``secondary market
transaction'' exemption. 24 CFR 3500.5(b)(7).
Mortgage Broker Functions and Compensation
Since the advent of mortgage brokers in the mid-1980s, there has
been confusion among borrowers concerning the mortgage broker's
functions and fees,--i.e., whether brokers do or do not shop on the
borrower's behalf, as well as how they are paid and how much they are
paid, and by whom.
Some mortgage brokers indicate to borrowers that they will, in
essence, act as their agent to shop for the best mortgage loan for
them.\20\ Other brokers state that they work with a number of funding
sources to provide loans, and
[[Page 49141]]
will arrange a favorable loan with one of them for their borrower.
Whether brokers serve as the borrower's agent as a strict legal matter,
the fact is that many brokers are perceived by borrowers as shopping on
their behalf for the best loan to meet the borrower's needs. This
perception frequently deters borrowers from shopping themselves for the
loan originator and mortgage product that best meets their needs.
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\20\ In some states, for example North Carolina, mortgage
brokers may be held to have an agency relationship or a legal
responsibility to the borrower.
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Mortgage brokers receive compensation for their services by various
methods. A broker may be paid directly by the borrower, indirectly by
the lender or wholesale lender who purchases the mortgage loan, or
through a combination of both. Brokers may charge borrowers directly at
or before settlement for loan origination as well as for other services
including the application, document preparation and document review. In
some cases, broker origination charges may be denominated as an
origination fee and sometimes as an ``origination point'' (one point
equals 1% of the loan amount), while other fees for named services
(e.g., application fees, document preparation fees, processing fee,
etc.) are charged as separate cost items on the GFE.\21\ Some brokers
receive both percentage based fees and fees for named services.
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\21\ Mortgage broker fees are not always described in the same
terms. Sometimes mortgage brokers fees are expressed in straight
dollar amounts and sometimes as ``points.'' ``Points'' are charges
based on a percentage of the borrower's loan. Points therefore have
a dollar equivalent to the borrower.
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Where brokers receive a payment for compensation from someone other
than the borrower, most commonly the lender, it is called indirect
compensation. Such indirect compensation from lenders is ordinarily
based upon an above market interest rate on the loan entered into by
the broker with the borrower. This type of compensation is often
referred to as a ``yield spread premium,'' (YSP) though it sometimes
shows up under a different label, e.g. servicing release premium.
The use of a YSP can reduce up front settlement costs to a borrower
by building these costs into the borrower's interest rate and monthly
payments over the life of the borrower's loan. In issuing RESPA Policy
Statement 2001-1, discussed in greater detail below, HUD stated that
borrowers should continue to have the choice of paying their total
settlement costs up-front or using the yield spread premium payment as
a credit to pay all or part of these costs. Consumer advocates assert,
however, that all too frequently brokers place the borrower in an above
par rate loan without the borrower's knowledge, provide the borrower
with little or no benefit in the form of reduced up front costs, and
use the YSP payment solely or primarily as a means of increasing their
total compensation.
Current Broker Disclosure Requirements
Under HUD's current rules, where mortgage brokers originate and
table fund loans or act as intermediaries, they are required to
disclose their direct charges and any indirect payments to be made to
them on the GFE, and deliver or mail it to the borrower no later than 3
days after loan application. 24 CFR 3500.7(a)-(c). Such disclosure must
also be provided to borrowers, as a final figure, at settlement on the
HUD-1 and HUD-1A settlement statement. 24 CFR 3500.8. In table funded
and intermediary transactions, direct broker fees are treated like the
fees of other settlement service providers, such as title agents,
attorneys, appraisers, etc, whose fees are disbursed at or before
settlement. However, HUD's current rules require that on the GFE and
HUD-1, lender-paid (indirect) mortgage broker fees are to be shown as
``Paid Outside of Closing'' (P.O.C.), listed outside the columns, and
excluded from the computation of borrower's total settlement costs. 24
CFR 3500.7(a)(2). This approach does not assure that YSPs are
understood and credited to the borrower to reduce up front settlement
costs.
Disclosure of Fees by Lenders
Lenders are also compensated by borrowers through various methods.
When lenders originate mortgage loans, they may charge borrowers
directly at or before settlement for loan origination as well as for
other services including the application, document preparation and
document review. In some cases, lender origination charges may be
denominated as an origination fee and sometimes as an ``origination
point'' (one point equals 1% of the loan amount), while other fees for
named services (e.g., application fees, document preparation fees,
processing fee, etc.) are charged as separate cost items on the
GFE.\22\
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\22\ Lenders' fees are not always described in the same terms.
Sometimes lenders' fees are expressed in straight dollar amounts and
sometimes as ``points.'' ``Points'' may be used to describe
``origination fees'' or ``discount points'' and both types of points
may be charged in the same transaction. ``Points'' are just
percentage amounts of the borrowers loans, and these ``points,''
just like any other terms used to describe fees to loan originators,
have a dollar equivalent to the borrower.
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Lenders may also require ``discount points'' from the borrower for
the stated purpose of lowering the interest rate of the loan. It is
unclear to what extent discount points represent the present value of
the difference between the par mortgage interest rate and the rate on
the loan on one hand, or provide additional compensation to lenders on
the other.
The functional equivalent of a yield spread premium may also be
present in loans originated by lenders. Lenders routinely offer loans
with low or no up front costs required at settlement. They can do so
just like brokers do by charging higher interest rates for these loans
and then recouping the costs by selling the loans into the secondary
market for a premium representing the difference between the interest
rate on the loan and the par, or wholesale market interest rate.
Alternatively, the lender can hold the loan and earn the above market
return in exchange for any lender paid settlement costs.
HUD's current rules require lenders to disclose only direct fees
paid to them by borrowers including origination fees or ``origination
points'' as well as other direct fees for named services and discount
points. However, neither the current GFE, nor the HUD-1, provides
totals of all charges paid to the lender. The rules also do not require
lenders to disclose indirect fees earned in secondary market
transactions from the sale of borrowers' loans. This is because the
compensation earned from the bona fide transfer of the loan obligation
in the secondary market is exempt from HUD's RESPA rules. HUD's RESPA
rules provide ``[i]n determining what constitutes a bona fide transfer
HUD will consider the real source of funding and the real interest of
the funding lender.'' 24 CFR 3500.5(b)(7). HUD's rules explicitly
provide, however, that table-funded mortgage broker transactions are
not secondary market transactions. Lender sales into the secondary
market are considered secondary market transactions.
Legality of Mortgage Broker Fees
Over the last decade, there has been persistent litigation
concerning the legality of indirect fees to mortgage brokers. More than
150 lawsuits have been brought since the mid-1990s seeking class action
certification, based in whole or in part on the theory that the
indirect fees paid by lenders to mortgage brokers are fees for the
referral of business in violation of section 8 of RESPA.\23\
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\23\ See e.g., Mentecki v. Saxon Mortgage, No. 96-1629-A, slip
op. (E.D. Va. Jan. 10, 1997). The court held initially that indirect
fees to mortgage brokers in the form of ``yield spread premiums''
violated section 8(a) of RESPA as referral fees. However,
subsequently, in an order and opinion dated July 11, 1997, the Court
refused to certify the class. Culpepper v. Inland Mortgage Corp.,
953 F.Supp. 367 (N.D. Ala. 1997). The court held that a payment for
a loan above market was permissible under section 8(c) of RESPA as
payment for a ``good.'' Barbosa v. Target Mortgage, No. 94-1938,
U.S.D.C., Southern District of Florida; Martinez v. Weyerhauser
Mortgage, No. 94-160, U.S.D.C., Southern District of Florida; Monoz
v. Crossland Mortgage Company, Civil Action No. 96-12260, U.S.D.C.
for the District of Massachusetts. These last two Federal district
courts concluded that yield spread premiums (or differentials) were
not per se violations of RESPA and therefore refused to certify
class actions on this issue.
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[[Page 49142]]
HUD's RESPA rules, amended in 1992 to require disclosure of
indirect fees to mortgage brokers, did not explicitly take a position
on whether yield spread premiums or any other named class of back-
funded or indirect fees paid by lenders to brokers are per se legal or
illegal. See Illustrations of Requirements of RESPA, Fact Situations 5
and 12 in Appendix B to 24 CFR part 3500. The rule specifically listed
``servicing release premiums'' and ``yield spread premiums'' as fees
required to be itemized on the HUD-1/1A Settlement Statement.
Accordingly, while the rule specifically acknowledged the existence of
such fees and provided illustrations of how they are to be reflected on
HUD disclosure forms, HUD took the position that the rule does not
create a presumption of per se legality or illegality.
Between 1992 and 1999, HUD provided various interpretations and
other issuances under its RESPA rules stating the Department's position
that the legality of a payment to a mortgage broker does not depend on
the name of the particular fee. Rather, HUD has consistently advised
that the issue under RESPA is whether the total compensation to a
mortgage broker is reasonably related to the total value of the goods
or facilities actually furnished or services actually performed. If the
compensation, or a portion thereof, is not reasonably related to the
goods or facilities actually furnished or the services actually
performed, there is a compensated referral or an unearned fee in
violation of Section 8(a) or 8(b) of RESPA, whether the compensation
results from a direct or indirect payment or a combination thereof.
In 1995, as a result of concerns that the requirement that mortgage
brokers disclose indirect fees placed mortgage brokers on an unequal
footing with other mortgage loan providers, and that information on
indirect fees was confusing to borrowers, HUD issued a proposed rule to
obtain the public's views on the disclosure and legality of broker
fees. 60 FR 47650 (September 13, 1995). At that time, plaintiff
borrowers began initiating class action lawsuits claiming that payments
to mortgage brokers by lenders were per se illegal. Shortly afterwards,
HUD embarked on a negotiated rulemaking on these subjects. See notices
published on October 25, 1995 (60 FR 54794) and December 8, 1995 (60 FR
63008).
The 1995-1996 negotiated rulemaking on mortgage broker fees did not
result in a final rule. It did, however, result in a clear consensus by
rulemaking participants that borrowers were confused about the
functions of mortgage brokers and the amounts and sources of their
fees. See Report on Negotiated Rulemaking on Mortgage Broker
Disclosure--Final Report, A.L.J. Alan W. Heifetz, (July 19, 1996). This
confusion may translate into borrowers failing to compare services and
fees, thereby paying unnecessarily high settlement costs. Most of the
rulemaking participants, except for the representative of the mortgage
brokerage industry and one consumer advocate, agreed on a regulatory
framework that would create a pre-application agreement between a
borrower and a broker fully disclosing the broker's function and
compensation, in return for a limited ``safe harbor'' for transactions
where these contracts were entered into. In 1997, HUD issued a proposed
rule on mortgage broker fees that would have established a safe harbor
for brokers who contractually commit to borrowers regarding their total
compensation, along the lines agreed to by the majority in the
negotiated rulemaking. The proposed rule also provided that during the
rulemaking process, a ceiling on the amount of fees eligible for the
safe harbor would be established to protect against predatory lending.
The rule was strongly opposed by the mortgage brokerage industry and
other segments of the mortgage industry. HUD did not finalize the 1997
rule and efforts to do so were soon eclipsed by HUD's effort to clarify
its position on the legality of mortgage broker fees under existing
law.
1999 Statement of Policy on Lender Payments to Mortgage Brokers
In 1998, in the Conference Report on HUD's 1999 Appropriations Act,
Congress directed HUD to clarify its position on the legality of
mortgage broker fees and to work with industry, Federal agencies,
consumer groups, and other interested parties on a statement of policy
on the subject. The Report also stated that Congress never intended
payments by lenders for goods or facilities actually furnished or for
services actually performed to violate Section 8(a) or (b) of RESPA.
On March 1, 1999, in response to Congress's directive, HUD issued
RESPA Statement of Policy 1999-1 Regarding Lender Payments to Mortgage
Brokers, following extensive discussions with industry, consumer
groups, and essential agreement among them on the interpretation
embodied in the Statement. The Statement said that, in applying Section
8 and HUD's regulations to lender payments to mortgage brokers, HUD did
not consider such payments to be legal or illegal per se. The Statement
said that the ``fees in cases and classes of transactions are illegal
if they violate the prohibitions of Section 8 of RESPA.'' 64 FR 10084.
The Statement established a two-part test to determine the legality
of lender payments to mortgage brokers under RESPA which requires that:
(1) Goods or facilities must actually be furnished or services actually
performed for the compensation paid; and (2) payments must be
reasonably related to the value of the goods or facilities that were
actually furnished or services that were actually performed. In
applying this test, HUD stated that total compensation should be
scrutinized to assure that it is reasonably related to goods,
facilities, or services furnished or performed to determine whether it
is legal under RESPA.\24\
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\24\ The 1999 Statement of Policy also said, ``[t]he Department
considers that higher interest rates alone cannot justify higher
total fees to mortgage brokers. All fees will be scrutinized as part
of total compensation to determine that total compensation is
reasonably related to the goods or facilities actually furnished or
services actually performed.'' 64 FR 10084.
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As a Statement of Policy, the 1999 Statement interpreted HUD's
existing rules. Nonetheless, beyond these rules, the Statement
emphasized the importance of disclosing brokerage fees, including yield
spread premiums, to borrowers as early as possible in the borrower's
process of shopping for a mortgage. See 64 FR at 10087.
The 1999 Statement said:
There is no requirement under existing law that consumers be fully
informed of the broker's services and compensation prior to the GFE.
Nevertheless, HUD believes that the broker should provide the consumer
with information about the broker's services and compensation, and
agreement by the consumer to the arrangement should occur as early as
possible in the process. Mortgage brokers and lenders can improve their
ability to demonstrate the reasonableness of their fees if the broker
discloses the nature of the broker's services and the various methods
of compensation at the time the consumer
[[Page 49143]]
first discusses the possibility of a loan with the broker. 64 FR at
10087.
Post 1999-1 Statement of Policy Circuit Court Decision
After HUD issued its 1999 Statement of Policy, most Federal
District courts held that yield spread premium payments from lenders to
mortgage brokers are legal provided that such payments meet the test
for legality articulated in the 1999 Statement of Policy and otherwise
comport with RESPA. However, in Culpepper v. Irwin Mortgage Corp., 253
F.3d 1324 (11th Cir. 2001), the U.S. Court of Appeals for the Eleventh
Circuit upheld class certification in a case alleging that yield spread
premiums violated Section 8 of RESPA where the defendant lender,
pursuant to a prior understanding with mortgage brokers, paid yield
spread premiums to brokers based on the lender's use of a rate sheet
and the brokers' delivery of above par interest rate loans, without the
lender knowing whether, or to what extent, the brokers had performed
services. The court concluded that a jury could find that yield spread
premiums were illegal kickbacks or referral fees under RESPA where the
lender's payments were based exclusively on interest rate differentials
reflected on rate sheets, and the lender had no knowledge of what
services, if any, the brokers had performed. The court also said that
HUD's 1999 Statement of Policy was ambiguous.
Following Culpepper,\25\ representatives of the mortgage industry
urged HUD to issue a clarification to the 1999 Statement of Policy to
make clear that the lenders could make payments to brokers through rate
sheets and that, to properly apply the 1999 test, all payments must be
examined, not simply the payment from the lender, to determine if the
broker's total compensation is reasonable. These representatives said
that if the Culpepper interpretation prevailed, without further
guidance from HUD, the industry could no longer offer yield spread
premiums as an option to borrowers to lower their up front settlement
costs.
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\25\ In this proposed rule Culpepper refers to Culpepper v.
Irwin Mortgage Corp., 253 F.3d 1324 (11th Cir. 2001). There were
earlier reported decisions in this same litigation.
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Representatives of the mortgage industry, including representatives
of the Mortgage Bankers Association and the National Association of
Mortgage Brokers, assured the Department that following a clarification
by HUD, they also would support a HUD rule requiring improved fee
disclosure.\26\
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\26\ Letter to Secretary Martinez, Submitted by America's
Community Bankers, American Banking Association, Consumer Mortgage
Coalition, and Mortgage Bankers Association of America (December 27,
2001); National Association of Mortgage Brokers, Position Paper:
Prospective HUD Rulemaking Concerning Mortgage Originator
Disclosure, Correspondence to the Department (December 4th, 2001).
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Statement of Policy 2001-1
On October 17, 2001, the Department issued Statement of Policy
2001-1, Clarification of Statement of Policy 1999-1 Regarding Lender
Payments to Mortgage Brokers, and Guidance Concerning Unearned Fees
Under Section 8(b). The 2001 Policy Statement reiterated and clarified
the test articulated in the 1999 Statement of Policy that where
compensable services are performed, application of both parts of the
HUD test is required before a determination can be made regarding the
legality of a lender payment to a mortgage broker. 66 FR 53052, 53054-
55. The 2001 Statement also said:
[n]either Section 8(a) of RESPA nor the 1999 Statement of Policy
supports the conclusion that a yield spread premium can be presumed
to be a referral fee based solely upon the fact that the lender pays
the broker a yield spread premium that is based upon a rate sheet,
or because the lender does not have specific knowledge of what
services the broker has performed. 66 FR 53052, 53055.
The 2001 Statement of Policy also interpreted HUD's existing rules
then further detailed what HUD regards as meaningful disclosure of
mortgage broker fees to borrowers:
In HUD's view, meaningful disclosure includes many types of
information: What services a mortgage broker will perform, the
amount of the broker's total compensation for performing those
services (including any yield spread premium paid by the lender),
and whether or not the broker has an agency or fiduciary
relationship with the borrower. The disclosure should also make the
borrower aware that he or she may pay higher up front costs for a
mortgage with a lower interest rate, or conversely pay a higher
interest rate in return for lower up front costs, and should
identify the specific trade-off between the amount of the increase
in the borrower's monthly payment (and also the increase in the
interest rate) and the amount by which up front costs are reduced.
HUD believes that disclosure of this information, and written
acknowledgment by the borrower that he or she has received the
information, should be provided early in the transaction. Such
disclosure facilitates comparison shopping by the borrower, to
choose the best combination of up front costs and mortgage terms
from his or her individual standpoint. HUD regards full disclosure
and written acknowledgment by the borrower, at the earliest possible
time, as a best practice. 66 FR 53056.
The 2001 Policy Statement also specifically acknowledged the
utility to borrowers of treating and reporting all interest rate based
lender payments as monies belonging to the borrower. The Policy
Statement endorsed this approach, stating:
[I]t has been suggested to the Department that the yield spread
premium should be reported as a credit to the borrower in the
``200'' series, among the ``Amounts Paid by or in Behalf of
Borrowers.'' The homebuyer or homeowner could then see that the
yield spread premium is reducing closing costs, and also see the
extent of the reduction.
HUD believes that improved early disclosure regarding mortgage
broker compensation and the entry of yield spread premiums as
credits to borrowers on the GFE and the HUD-1 settlement statement
are both useful and complementary forms of disclosure. The
Department believes that used together these methods of disclosure
offer greater assurance that lender payments to mortgage brokers
serve borrowers' best interests. 66 FR 53056.
C. HUD's Commitment to Mortgage Reform
The HUD-Federal Reserve Report
Since the mid-1990s, HUD has been examining ways to improve the
mortgage process for borrowers to lower settlement costs.\27\ In June
of 1998, in response to a Congressional directive in Section 2101 of
the Economic Growth and Regulatory Paperwork Reduction Act of 1996
(Pub. L. 104-208, 110 Stat. 3009), HUD and the Board of Governors of
the Federal Reserve (``the Board'') issued a joint report on reforming
RESPA. The HUD-Federal Reserve Report. The Report called for
legislative changes to reform both laws. The Report did not attempt to
differentiate where changes could be made under existing law pursuant
to the Board's and HUD's existing regulatory authorities from areas
where new legislation was required. Subsequently, the Board has
exercised its regulatory authority under TILA to effectuate certain of
the Report's recommendations. See 66 FR 65604, December 20, 2001.
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\27\ HUD and others have considered proposals to permit lenders
to package settlement services almost from the time the law was
enacted. Senator Proxmire introduced S. 2775 which would have
required lenders to bear certain settlement costs with the view that
the lenders have the sophistication and bargaining power to keep
costs down.
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Major Findings of the Report
The HUD-Federal Reserve Report posed and addressed several
questions involving the disclosure scheme under both RESPA and TILA,
and both HUD
[[Page 49144]]
and the Board recommended in part \28\ that:
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\28\ The Report also concluded that the APR and finance charge
disclosures under TILA should be retained and improved to include
all costs required by the creditor to get the credit and that
additional substantive protections should be added to TILA.
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Loan originators be required to provide firmer quotes for
settlement costs disclosed under RESPA; and
The timing of RESPA and TILA disclosures to borrowers be
advanced, so that borrowers receive them earlier and use them to shop.
In order to achieve firmer cost information, both agencies also
recommended that lenders and other providers be given the choice of:
Offering a ``packaging'' or a guaranteed cost approach; or
Providing a GFE where estimated costs would be subject to
tolerances, to improve the current disclosure scheme by reducing the
instances in which consumers may incur additional costs at closing.
Both agencies recommended an exemption from Section 8 to facilitate
packaging. HUD also said that to receive the exemption, both the
settlement costs and the interest rate on a mortgage should be
guaranteed.
Timing of Disclosures
The Report observed that in home secured transactions, the borrower
currently receives TILA or RESPA disclosures at several different
times. Borrowers receive generic information such as HUD's Special
Information Booklet at the time of application. Additionally, for
residential mortgage transactions, lenders and brokers provide through
mailing or delivery within 3 days after application, specific
information including the GFE and the initial TILA disclosure
disclosing the finance charge and the ``APR'' or ``annual percentage
rate'' for the mortgage. TILA Sec. 128(b)(2); Reg. Z Sec. 226.19(a).
TILA may require additional new disclosures for home-purchase loans if
early disclosures have become inaccurate. See TILA 128(b) and Reg. Z
Sec. 226.17(b). A settlement agent gives final disclosures on the HUD-1
at settlement based on information provided by the lender.
Both agencies recommended that the disclosure process could be
improved for industry if the timing requirements for disclosures were
made more consistent between RESPA and TILA \29\ and it would be
improved for borrowers if disclosures were given when they would be
most useful. In the Report, HUD recommended that generic information,
e.g., HUD's Special Information Booklet, be given when the borrower
first contacts settlement service providers, including loan originators
and real estate agents. Both HUD and the Board also recommended that
borrowers be given initial disclosures, including firm information
about settlement costs, interest rates and points as early in the
shopping process as possible so that they can shop and make informed
choices. The HUD-Federal Reserve Report at 41. Although HUD and the
Board differed somewhat in their approaches, both indicated that
advances in technology and market competition promised to provide
borrowers better information at or near the time of application. HUD
said that it supported requiring that estimated costs disclosures be
provided earlier than three days after application--ideally at first
contact with lenders. HUD indicated, however, that while it seeks early
disclosures, it recognizes that sometimes there will be a trade-off
between having an early disclosure and ensuring that a disclosure is
firm and complete enough to allow borrowers to shop and protect against
increases in costs. In such cases, HUD recommended that timing
requirements be flexible to allow enough time to provide guaranteed
information.
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\29\ Under current TILA rules, Regulation Z, the TILA disclosure
may be given simultaneously along with the GFE, TILA Sec. 128 (b);
Reg. Z Sec. 226.17(b).
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Moreover, in the interest of promoting shopping, HUD recommended
that borrowers not be required to pay a significant fee to the loan
originator prior to receiving initial cost information. Id. at 42.
Providing Firmer Cost Disclosures
In arriving at the recommendation that cost disclosures must be
firmer, the Report observed that borrowers reported many instances in
which the costs disclosed on the GFE were significantly lower than
those actually charged at settlement or that costs were completely left
out of the GFE. The HUD-Federal Reserve Report at 20. The Report noted
that more reliable settlement cost information could promote shopping.
Id. at 32. In recommending that the choice of providing ``guaranteed
cost packages'' or a more reliable GFE subject to tolerances be
offered, the agencies stated that a dual system would create an
opportunity for the market to test whether guaranteed cost arrangements
offer more economical and efficient means for consumers to obtain
mortgage loans.
Packages/Guaranteed Costs
Under the packaging or guaranteed cost approach envisioned in the
Report, the lender or other packager would set a lump-sum price for
settlement costs and would be held to that figure from the time the
package is agreed to through settlement. Most charges for services that
the borrower currently pays at settlement for origination, title work
and insurance, credit report, appraisal, document review, inspection,
up front mortgage insurance, pest inspection and flood review, etc.,
would be included in the package.\30\ Government charges associated
with filing a mortgage or release that can be determined easily also
would be included. The Report suggested that any costs excluded from
the guaranteed settlement costs would be disclosed as either ``other
required costs'' or as ``optional costs.'' ``Other required costs''
would include charges such as per diem interest, which fit the
definition of those costs that the borrower will have to pay at
settlement, but the amount of which the packager cannot be readily
determined at the time the package is provided to the borrower.\31\ The
Report suggested, however, that there are means for per diem interest
to be included in the package; lenders could be required to state a
maximum amount
[[Page 49145]]
based on thirty days (a full month) or to disclose the daily interest
to allow borrowers to calculate the actual amount as the date of
settlement becomes certain. The Report also suggested that mortgage
insurance should be included in the package price even though it is
difficult to calculate until final underwriting.
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\30\ In developing the Report, the agencies considered whether
services should be itemized within the package. Some entities claim
that for there to be true competition, borrowers must be able to
know what is included in each package to compare. These entities
point out that borrowers generally like to know what services are
included in packages and that without itemization lenders may choose
to forego many services for their packages while insisting that
nonlenders have more expansive packages, making borrower information
and competition impossible. On the other hand, it was observed that
a requirement for full itemization of services might lead some
packagers to create longer lists, ultimately confusing borrowers and
hindering their evaluation of different loans. Also, lenders pointed
out that services are performed in large measure to protect their
security and when the initial disclosure is provided they may not
know what is needed in each case. The Board and HUD concluded that
in packages, lenders could disclose the guaranteed amount for
settlement costs without any elaboration on the early disclosure,
and subsequently provide a list of services actually performed on
the final settlement disclosure. Alternatively, lenders could
provide a list of services that might be performed on the early
disclosure with an explanation, if appropriate, that all items may
not be performed, and then indicate on the settlement statement the
services actually performed. The Report also observed that
disclosing the cost of each service also could present problems,
particularly where lenders or other packagers enter into volume-
based contracts. The HUD-Federal Reserve Report at 25-26.
\31\ Charges for per diem or ``odd days'' interest, which floats
along with the interest rate, cover the time between the date of
settlement and the date regular monthly interest starts accruing. As
an illustration, if a loan closes on January 15 and the first
monthly payment (due on March 1) begins to accrue interest on
February 1, interest for the days between January 15 and February 1
is generally required to be paid at settlement as per diem interest.
Some lenders do not collect per diem interest at settlement but add
the amount to the first monthly payment.
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According to the Report ``optional costs'' would include charges
that depend on whether the borrower chooses to purchase the service,
and on the level of service chosen. The HUD-Federal Reserve Report at
27-28. Examples include owner's title insurance and optional hazard
insurance chosen by the borrower.
The Report observed that packagers would arrive at their package
prices based on their experience or, more likely, enter into volume-
based contracts with affiliated and other settlement service providers
for those goods and services required by lenders to close a loan. Id.
at 23.
Support for Packaging
Many of the nation's largest mortgage lenders and their
representatives expressed support for a ``packaging'' approach. They
said that borrowers rarely shop for individual settlement services, and
also that borrowers are more interested in the overall price of their
mortgage loan than the prices of individual settlement services, and
that borrowers would shop for mortgages if all they needed to compare
was a single guaranteed price for all the settlement services needed to
close the loan. Advocates of packaging said that by packaging services,
discounts that would be secured by lenders under these arrangements
will be passed on to borrowers. Through this dynamic and by making it
easier for borrowers to shop, costs would be lowered.\32\
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\32\ For example, a packager could contract to have XYZ
Appraisal Company complete all its appraisals for a given period for
$300 each rather than the $350 the company normally charges for a
standard appraisal. The packager could rely on that discounted
contract price in pricing the package of guaranteed costs to the
borrower. With their own costs negotiated in advance, packagers
could disclose the cost for the entire package early in the
borrower's mortgage shopping process with certainty, and the
borrower then could compare different vendors' packages.
---------------------------------------------------------------------------
In the development of the Report, entities other than lenders,
including real estate firms and affinity groups, also expressed some
interest in packaging. These entities asserted that if packaging was
restricted only to lenders, competition would be unnecessarily
restricted and borrowers could be deprived of lower prices. Some
industry representatives voiced the fear that large lenders will make
it difficult for non-lenders to develop any packages other than those
the lenders themselves retail, by refusing to participate in other
entities' packages.\33\ On the other hand, lenders asserted that since
settlement services are largely required to protect the lender's
security, lenders should not have to accept unconditionally any other
settlement service providers' settlement packages. In the HUD-Federal
Reserve Report HUD recommended that any entity should be permitted to
package as long as it can provide a Guaranteed Mortgage Package and a
mortgage loan at a guaranteed interest rate.
---------------------------------------------------------------------------
\33\ Nonlenders also suggested that to provide a level playing
field, the services in the package should be itemized.
---------------------------------------------------------------------------
Consumer advocates also supported packaging, but asserted that any
packages must include a loan with an interest rate guarantee to be
useful to borrowers. Although consumer advocacy groups believed that
guaranteeing settlement costs has value, they noted that these costs
are a small portion of the overall cost of a mortgage loan. Advocates
said that unless borrowers also receive a firm commitment on the
interest rate and any applicable points they cannot truly comparison
shop. Without such a firm commitment, consumer advocates said some
lenders may provide the borrower with a guaranteed settlement cost
quote and then increase the interest rate to offset any savings offered
to the borrower on the settlement costs. These lenders would then
realize additional profits based on the mortgage's pricing. These
advocates expressed the fear that unwary borrowers will be lured into
particular loan products by inexpensive or below-market settlement cost
packages and then find themselves in higher rate loans that more than
offset any purported cost savings. The HUD-Federal Reserve Report at
22.
Lender representatives expressed varying views on guaranteeing
rates as part of a specific package. Some lenders stated that
underwriting is costly and time-intensive and that mortgage brokers and
other retail originators cannot provide guaranteed rates that bind
lenders early in the mortgage loan process. Other industry
representatives asserted, however, that requiring lenders to provide
guaranteed rates along with guaranteed settlement costs is viable. Many
of today's mortgage originators provide firm rate information to
shoppers early in the process based on nearly instantly available
credit information, without any assurance that the borrower will go
forward with the transaction and the originator will receive
compensation.
Section 8 Exemption for Packaging
Lenders' representatives asserted at the time of the Report that an
exemption from RESPA's Section 8 prohibitions is necessary for
packaging to work. These representatives pointed out that Section 8
prohibits volume-based discounts between settlement service providers,
since they fear such arrangements would be viewed as compensated
referral arrangements in violation of the statute. Also, while Section
8 prohibits kickbacks, compensated referrals, and unearned fees, the
statute provides no bright line on how to determine when a payment has
been earned for goods or services (which is permissible under RESPA) or
is compensation for a referral, or is an unearned fee (which are
illegal and subject to criminal sanctions and civil action under
Section 8). Moreover, RESPA prohibits requiring the use of an
affiliated settlement service provider except in limited
circumstances,\34\ which can be an additional impediment to packaging
services. Proponents of packaging further asserted that because of
Section 8's prohibitions and questions about how they apply, lenders
and others do not currently package. These proponents said that were an
exemption granted and packaging of services prevalent, borrowers would
benefit more from the resulting lower costs than they do from RESPA's
current Section 8 prohibitions. The HUD-Federal Reserve Report at 30.
Consumer groups generally also supported an exemption for packaging, as
long as packagers are required to guarantee both settlement costs and
interest rates.
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\34\ Generally, under Section 8(c)(4) of RESPA an entity may
refer business to an affiliate as long as the affiliate arrangement
is disclosed, there is no required use, and the only return to the
entity making the referral is a return on capital.
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Members of the settlement services industry other than large
lenders, however, including small lenders and title companies,
expressed strong concern about and, in some cases, outright opposition
to an exemption from Section 8 to encourage packaging. They said that
only lenders would offer packages and that the lenders would squeeze
out savings from small providers and then retain these savings in the
form of higher profits, without passing them on to borrowers. Small
settlement service providers also said that the only way they could
remain competitive would be by offering packages themselves, and they
expressed serious concern about their ability to do so. They further
asserted
[[Page 49146]]
that borrowers do in fact already shop for settlement services, that
prices for these services are currently competitive, and that lifting
Section 8 restrictions will harm rather than help borrowers because any
savings from packaging will not be passed on to borrowers and fewer
providers will be available to compete. Id. at 22.
During the development of the HUD-Federal Reserve Report the
agencies noted that technology is enabling the provision of earlier,
firmer, settlement cost information. Id. at 39. Moreover, during the
development of the Report, HUD became aware of promising proposals that
were advanced by consumer advocates and some industry representatives
where lenders, after obtaining credit reports, would provide borrowers
guaranteed rate and point information.\35\ This guarantee would be
subject to appropriate conditions such as market changes in the cost of
money (where the rate and points are not locked), and verification of
the value of the collateral and the borrower's creditworthiness. HUD
supported these and similar efforts because it regards the full costs
of obtaining a loan--including settlement costs, interest rate, and
points--as the information that is essential to assist borrowers in
shopping for a mortgage loan.
---------------------------------------------------------------------------
\35\ At the time of the Report some consumer and industry groups
discussed the possibility that borrowers could pay credit
repositories the costs of and arrange the provision of credit
information to lenders to expedite the process and to avoid
significant fees.
---------------------------------------------------------------------------
HUD concluded that an exemption should be provided for packaging to
facilitate earlier comparison shopping by borrowers, greater
competition among mortgage lenders and others, and guaranteed prices to
borrowers from the time the borrower applies for a mortgage through
settlement. The Board recommended an exemption to improve the
consumer's ability to shop effectively and to allow competition to
reduce the cost of financing a home. To encourage packaging, HUD
recommended that a Section 8 exemption should be made available to loan
originators and others who: (1) Offer borrowers a comprehensive package
of settlement services needed to close a loan; (2) provide borrowers
with a simple prescribed disclosure that gives the guaranteed maximum
price for the package of services through settlement; and (3) disclose
the rate offered to the borrower for the loan, with a guarantee that
the rate will not increase, subject to prescribed conditions.
The Report suggested that fees paid and arrangements within
packages would be exempt from Section 8. Fees for referrals to or from
the packager of settlement services to or from those outside the
package would continue to be subject to Section 8. For example a real
estate agent could not receive a fee for referring a borrower to a
packager. Entities that do not meet the requirements of the exemption
would be subject to Section 8. The HUD-Federal Reserve Report at 33.
A More Reliable GFE
As an alternative to packaging, both the Board and HUD also
recommended making disclosures firmer under the current practice, by
requiring a more reliable GFE, subject to tolerances. The HUD-Federal
Reserve Report at 31.
The Report suggested that tolerances could be based on a percentage
of the total estimated costs; if the actual costs at settlement
exceeded the sum of the estimated costs and the amount of the
tolerance, the loan originator would generally be held liable.
Alternatively, the tolerance could apply only to certain categories of
costs such as those within the loan originator's control. The Report
said that charges imposed directly by the loan originator would have to
be accurate. On the other hand, an increase in costs resulting from a
borrower's choice would not count against the loan originator in
determining whether the total costs exceeded the tolerance. The HUD-
Federal Reserve Report at 31.
The HUD-Treasury Report
Early in 2000, HUD, in cooperation with the Department of the
Treasury, reviewed the problem of predatory mortgage lending. Following
five hearings in New York, Chicago, Atlanta, Los Angeles and Baltimore,
in June, HUD and the Treasury issued a major report on the subject of
predatory mortgage lending. The Report, entitled ``Curbing Predatory
Home Mortgage Lending'' (HUD-Treasury Report), detailed predatory or
abusive lending practices in connection with higher cost loans in the
mortgage market. In addition, among numerous recommendations to address
predatory lending, the Report reiterated support for RESPA/TILA reform
along the lines recommended in the HUD-Federal Reserve Report.
The HUD-Treasury Report stated: ``that borrowers need firm
information early in the loan process so that they can compare the
products of one settlement service provider with another. If borrowers
receive firm information but it comes too late in the loan process,
they will not have the opportunity to shop. Moreover, if the
information is available but the borrower must pay a significant fee to
obtain it, borrowers may be disinclined to seek comparable information
from multiple sources. See HUD-Treasury Report, 2000 at 66.
The HUD-Treasury Report pointed out that unscrupulous mortgage
brokers ``may receive compensation as a result of inflated upfront
charges paid by borrowers and indirect fees paid by lenders * * *.
Brokers and lenders may also structure charges so that they are less
transparent to the borrower, through the use of mechanisms such as
yield spread premiums, which may disguise the true cost of credit.''
HUD-Treasury Report, 2000, at 80.
III. This Proposed Rule
With the above background in mind, today's rule proposes a new
framework for borrower disclosures under RESPA that would:
1. Address the issue of mortgage broker compensation, specifically
the problem of lender payments to mortgage brokers, by fundamentally
changing the way in which such lender payments in brokered mortgage
transactions are recorded and reported to borrowers;
2. Significantly improve HUD's Good Faith Estimate (GFE) settlement
cost disclosure, and amend HUD's related RESPA regulations, to make the
GFE firmer and more usable, to facilitate shopping for mortgages, and
to avoid unexpected charges to borrowers at settlement; and
3. Remove regulatory barriers to allow guaranteed packages of
settlement services and mortgages to be made available to borrowers, to
make borrower shopping for mortgages easier and further reduce
settlement costs. A description of each of these aspects of the rule
follows.
A. Addressing Mortgage Broker Compensation and Lender Payments to
Brokers
The proposed rule would fundamentally change the way in which
information on the mortgage broker's functions and charges are reported
in the Good Faith Estimate as described below.
1. Describing the Loan Originator's Function
Under this proposed rule, the new GFE at Section I would require
that mortgage brokers and all other loan originators describe their
services. The proposed form does not ask that only brokers provide this
description because the description of other originators' services is
equally useful to borrowers. The GFE would advise that the loan
originator performs origination services by arranging funding from one
or more
[[Page 49147]]
sources for the borrower. It also advises that the originator does not
shop for nor offer loans from all mortgage funding sources and the
originator cannot guarantee the lowest price or best terms available in
the market. The GFE makes clear that the borrower should compare the
prices on the form and shop for the loan originator, mortgage product,
and settlement services that best meet the borrower's needs.
The rule would require that this information be provided on the GFE
to effectuate the GFE's purpose of providing borrowers with settlement
cost information and avoiding confusion particularly with respect to
the role of mortgage brokers. This language seeks to disabuse borrowers
of the notion that brokers or other loan originators are their agents,
and therefore are automatically shopping for them, a notion that can
prevent their own shopping. This new provision will be coupled with
increased education through the Settlement Cost Booklet and other means
to help borrowers.
2. Explaining to the Borrower the Option of Paying Settlement Costs
through the Use of Lender Payments Based on Higher Interest Rate
The new GFE, at Section IV, would clearly show borrowers the effect
of alternative interest rates and their effect on monthly payments and
cash needed for settlement. The GFE would inform borrowers that they
have the options to pay settlement costs: (1) Through cash payments at
settlement, (2) by borrowing additional funds to pay settlement costs,
(3) by paying settlement costs through a higher interest rate and
higher monthly payment, or (4) by lowering the interest rate and
monthly payment by paying discount points. These options are available
in loans from originators other than brokers. The Department in both
the 1999 and 2001 Policy Statements on Mortgage Broker Fees especially
called for the provision of this information to borrowers by brokers in
brokered loans.
The provision of this information on the form will help borrowers
understand their options for paying settlement costs and decide whether
to use any lender payments to the borrower, discussed in (4) below, to
help defray some costs or all of their settlement costs, including but
not limited to the mortgage broker's charges.
3. Disclosing the Loan Originators' Charges--Including the Mortgage
Broker's and Lender's Total Charges to Borrowers
HUD's current rules require that the broker's direct charges be
disclosed on the GFE while all indirect payments including yield spread
premiums are disclosed separately as ``Paid Outside of Closing''
(P.O.C.).\36\ The existing disclosure requirements and instructions do
not make clear to the borrower the broker's total charges so that the
borrower can focus on them, shop among brokers, or negotiate these
total costs with the broker. Instead, because of the way indirect
broker compensation is currently disclosed, many borrowers conclude
incorrectly that such indirect payments have no effect on their loan
costs.\37\
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\36\ HUD's existing RESPA regulations do not provide explicit
guidance on where to place a yield spread premium on the GFE, nor is
there any express reference to such indirect payments on the GFE
format. The regulations do suggest generally, however, that Appendix
A Instructions for the HUD-1 should be followed in completing the
GFE. See 24 CFR 3500.7(c)(1). As described above, these Instructions
state that a mortgage broker's fee is to be disclosed on one of the
blank lines in the 800 series. A corresponding line appears on HUD's
current suggested GFE format (Appendix C to Regulation X) for
listing such fees. HUD's instructions, however, do not require that
the amount to be reported in the 800 series for mortgage broker fees
must include yield spread premiums. To the contrary, HUD's Appendix
A Instructions advise that yield spread premiums and other lender
payments to mortgage brokers should be disclosed on the HUD-1 as
payments by the lender to the broker that are ``paid outside of
closing'' (``P.O.C.''), and expressly state that such amounts should
not be shown in the borrower's column. 24 CFR part 3500, Appendix A.
\37\ HUD's Settlement Cost Booklet is also not helpful. It
suggests, incorrectly, that yield spread premiums are not costs to
the borrower. It will be revised.
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Section III A of the GFE, as proposed, would disclose to the
borrower as a consolidated figure the total origination charges of the
mortgage broker and the lender. (The zero tolerance applies to the
total origination charges of the mortgage broker and the lender rather
than any split between them.) Additionally, on Attachment A-1 there
would be a breakdown of the origination charges into the total charges,
respectively, of the broker and of the lender. This approach of
providing total origination charges initially is taken to assist
borrowers in comparing total origination charges of brokered loans to
loans originated by lenders. At the same time, it ensures that the
borrower knows the broker's and lender's charges. For mortgage brokers,
these charges shall include all charges from the borrower that are paid
to the mortgage broker for the transaction. For lenders, these charges
shall include all or any portion of direct charges from the borrower
that the lender receives for the transaction, other than discount
points reported in line III B (2). Under the secondary market
exemption, any additional fees realized by a lender from a bona fide
transfer of a loan is not required to be disclosed under HUD's RESPA
regulations. See 24 CFR 3500.5 (b)(7).
4. Requiring That in Brokered Transactions Lender Payments to the
Borrower and Borrower Payments to the Lender Be More Appropriately
Reported
A major provision of this rule is the requirement that in all loans
originated by mortgage brokers, any payments from a lender based on a
borrower's transaction, other than a payment to the broker for the par
value of the loan, including payments based upon an above par interest
rate on the loan (including payments formerly denominated as yield
spread premium), be reported on the GFE (and the HUD-1/1A Settlement
Statement) as a lender payment to the borrower. Additionally, the rule
would require that any borrower payments to reduce the interest rate
(discount points) in brokered loans must equal the discount points paid
to the lender, and be reported as such on the GFE (and HUD-1/1A) as a
borrower payment to the lender. These changes would require mortgage
brokers to disclose the maximum amount of compensation they could
receive from a transaction, by including the amount in the
``origination charges'' block of the GFE, and indicating the amount of
the lender payment to borrower that would be received at the interest
rate quoted, if any. Mortgage brokers would be unable to increase their
compensation without the borrower's knowledge, by placing the borrower
in an above par loan and receiving a payment from the lender (yield
spread premiums), or by retaining any part of any borrower payment
intended to reduce the loan rate (discount points).
Through these changes in reporting requirements, HUD believes that
virtually all disputes regarding broker compensation in table-funded
transactions and intermediary transactions involving yield spread
premiums will be resolved. All mortgage broker compensation will be
reported as direct compensation in the origination block of the GFE,
maximum broker compensation will be clear and brokers will have no
incentive to seek out lenders paying the largest yield spread. They
will, instead, be motivated to find the best loan product they can for
the borrower.
In requiring this methodology for reporting lender payments and
discount points, it is important to note what the Department has not
done. HUD has not taken away from borrowers the ability to select a
higher rate loan in order to pay settlement costs (including, where the
[[Page 49148]]
borrower so chooses, broker compensation), or to pay additional sums at
settlement in order to lower their interest rate and monthly payments.
HUD has long recognized that these financing tools provide flexibility
and have value to borrowers in specific circumstances. The Department
emphasized this point most recently in Statement of Policy 2001-1.
HUD's proposed rule, therefore, preserves these options, but seeks to
the maximum extent possible within the Department's statutory and
regulatory framework, to eliminate the possibility of abuse in the
application of these financing tools, by ensuring that the full value
of selecting either option is known and redounds to the borrower.
The Department acknowledges that the proposed rule results in
different treatment of compensation in loans originated by lenders and
those originated by mortgage brokers. This is not because the
Department believes that the latter are necessarily more suspect or
susceptible of abuse than the former. It results simply from the fact
that the reporting of total lender compensation cannot be meaningfully
regulated under RESPA, while total broker compensation can be
regulated. This is so for both legal and practical reasons; first, as
indicated above, lenders enjoy a secondary market exemption from RESPA
Section 8 scrutiny, meaning that under HUD's regulations any
compensation derived from the sale of a loan in the secondary market by
a lender is outside RESPA's purview. Second, were there no such
exemption, measuring indirect lender compensation (compensation derived
from the loan rate) would be very difficult. A lender may retain the
loan in its portfolio for the life of the loan, or sell it long after
the settlement. Payments from lenders to borrowers in brokered loans,
however, based on the lenders' rate sheets or otherwise, as well as
discount points paid to lenders, are capable of quantification down to
the last penny.
Currently, as indicated in the background, the GFE requires
disclosure of the lender payment to the borrower (formerly the ``yield
spread premium'') as a charge that is ``POC'' or ``paid outside of
closing,'' which has been a cause of confusion for borrowers. The form
as proposed would now require that the lender payment be disclosed
immediately after the origination charges. HUD believes that this new
location for the disclosure of the lender payment will cure any
confusion and clearly tell borrowers how much their mortgage broker is
earning from the transaction. Furthermore in order to avoid borrower
confusion about the mortgage brokers' charges as compared to other loan
originators' charges and the impact of a lender payment, the proposed
rule would require that immediately following disclosure of the lender
payment the form will show the net loan origination charge due from the
borrower. It is this number that HUD intends the borrower to focus on
and HUD seeks to achieve this by highlighting that total on the form,
so that the borrower understands that the payment is applied as a
credit to reduce the borrower's total origination charges. HUD believes
that this approach ensures clearer disclosure of all relevant broker
fees and lender payments while avoiding disadvantaging brokers. With
the understanding provided by the form the borrower can compare his or
her net origination charges loan-to-loan, originator-to-originator.
B. Significantly Improved Good Faith Estimate (GFE)
As described in the Background, under RESPA and its implementing
regulations, loan originators must provide the GFE either by delivering
the GFE or by placing it in the mail to the loan applicant, not later
than 3 business days after an application is received or prepared.\38\
Frequently, a GFE is provided only after the borrower pays a
significant fee or fees. The current suggested GFE calls for a listing
of charges that may itself lead to a proliferation of charges.
Moreover, there are few standards for loan originators to follow in
calculating estimated costs, which allows the GFE to be unreliable.\39\
For these reasons, the GFE is generally not a useful shopping tool to
compare the charges of loan originators, other settlement service
providers, or loan products. The GFE, and its attendant rules, also do
not effectively prevent surprise costs at settlement.
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\38\ The rule indicates that the GFE must be given within 3 days
of the time an application is received or prepared to accommodate
those instances where originators prepare applications for
borrowers.
\39\ See note 13, infra.
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Today's rule would make the GFE firmer and more usable, to
facilitate borrower shopping for mortgages by making the mortgage
transaction more transparent, and to prevent unexpected charges to the
borrower at settlement. In order to improve the GFE HUD has concluded
that establishment of a new required GFE format is necessary.
The rule therefore would establish a new, more informative,
required GFE format to be provided to borrowers by loan originators in
all RESPA covered transactions and new requirements for its provision.
HUD believes that the content of the material in these proposed forms
gives the consumer the information needed to shop for loan products and
to assist them during the settlement process. HUD recognizes that in
order for these forms to be useful shopping tools, they must be
consumer friendly. The Department seeks public comment on these forms.
In addition, the Department will arrange focus groups during the
comment period to elicit comments on how to make the material in the
new proposed forms as consumer friendly as possible, including
considering how the new proposed forms are best compared by consumers
to the HUD-1 and what revisions, if any, to the HUD-1 would be most
helpful.
1. The New GFE
The proposed format for the new GFE and Instructions for completing
it appear as Appendix C to this rule. The proposed form is intended for
use in all federally related mortgage transactions. In addition to the
changes to the GFE described in A above, the new required GFE format
would:
a. Provide the Interest Rate and Costs for the Loan the Borrower Seeks
The current requirements for the GFE do not require the inclusion
of an interest rate. Nonetheless, borrowers shop for mortgages based on
the interest rate as well as settlement costs, and the inclusion of
this information would be useful to borrowers. Accordingly, the new
GFE, in Section II, would list the note rate, Annual Percentage Rate
(APR), and loan amount for the loan that the GFE is based on. Any
mortgage insurance premium included in the APR would be separately
disclosed in Section II. Section V would contain information on
interest rates and adjustments to adjustable rate mortgages and
applicable prepayment penalties and balloon payments. In Section III,
the GFE would include a disclaimer indicating that unless the borrower
locks at this time, the interest rate may change.
b. Simplify and Consolidate Major Categories on the GFE
As detailed in the Background section, under current RESPA rules,
the GFE simply lists estimated charges or ranges of charges for
settlement services. There is no requirement for grouping or
subtotaling charges to the same recipients. The costs listed on the GFE
include loan originator/lender-retained charges, such as loan
origination and underwriting charges; charges by third parties for
lender required services, such as appraisal, title and title
[[Page 49149]]
insurance fees; state and local charges imposed at settlement, such as
recording fees or city/county stamps; and amounts the borrower is
required to put into an escrow account, or reserves, for items such as
property taxes or hazard insurance. At settlement, borrowers receive a
second RESPA disclosure--the Uniform Settlement Statement (the HUD-1/
1A)--that enumerates the final costs associated with both the loan and,
if applicable, the purchase transaction.
As proposed, the revised GFE, in Section III, would group and
consolidate all fees and charges into major settlement cost categories,
with a single total amount estimated for each category. This approach
would reduce any incentive for loan originators and others to establish
a myriad of ``junk fees'' and provide them in a long list, in order to
increase their profits. Loan originators would be required to include
all fees they receive in their total, including all points and
origination charges. The interest rate dependent payment would include
all fees formerly to the mortgage broker from the lender as well as any
such fees in the future.
In addition to the loan originator charges and the interest rate
dependent payment, the major cost categories on the revised GFE would
be: (1) Lender required and selected third party services; (2) title
charges and title insurance premiums; (3) shoppable lender required
third party services; (4) state and local government charges; (5)
escrow/reserves (for taxes and insurance); (6) hazard insurance; (7)
per diem interest; and (8) optional owner's title insurance. The
proposed form then would include a final total of all settlement
charges so the borrower can focus on the total costs to properly
compare offers.
c. Identifies Shoppable and Required Services
The GFE in Section III E, would aid shopping after application by
requiring loan originators to separately identify those third party
settlement services that are loan originator selected and required and
those that the borrower may shop for independently.\40\ This provision
will enable borrowers to shop for major services to the extent
possible, even after the borrower has selected a loan originator. As
described above, HUD's current rules at 24 CFR 3500.7(e) requires
lenders to list on the GFE the particular providers of settlement
services that they require their customers to use.\41\ Attachment A-1
to the proposed form will list those ``Required Use'' providers while
also identifying the services that are required, but which borrowers
can shop for providers on their own. Additionally, the rule proposes to
ease the ``Required Use'' disclosure requirement, by only requiring the
loan originator to state the service, the name of the provider, and the
cost estimate. The Department proposes to forego the requirement that
this listing also include the lender's relationship to the required
provider.
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\40\ Lender required, lender selected third party services are
to include items such as flood certification services and mortgage
insurance, to the extent an upfront premium is charged.
\41\ HUD's RESPA regulations contain certain restrictions on
Affiliated Business Arrangements. See 24 CFR 3500.15. Section 9 of
RESPA also prohibits sellers of property from requiring, directly or
indirectly, the buyer to purchase title insurance from any
particular title company.
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Attachment A-1 will, as noted, also include the breakdown of the
origination charges into lender and broker charges so that borrowers
can better understand the respective lender and broker charges, and
where possible even negotiate lower costs. In a similar vein,
Attachment A-1 also breaks out title agent services and title insurance
into separate subtotals for the actual title insurance versus
compensation to the title agent. Title agents routinely receive direct
payments from borrowers for their services as well as commissions from
the insurance premium for the sale of insurance. The title agent
subtotal will add up these costs so that the borrower can compare, and
possibly negotiate, these charges.
2. New GFE Requirements
To improve the existing disclosure scheme, this proposed rule would
amend Regulation X to establish new rules for the GFE including the
following:
a. Clarifying the Application Requirements
Under the proposed rule, the GFE would be delivered or mailed at or
within 3 days of application. The proposed rule, however, would only
require a borrower to provide basic credit information and a property
address in verbal, written or computerized form, but before the payment
of any significant fee to the loan originator in order to receive a
GFE. The GFE would be conditioned on the borrower's credit approval
following final underwriting and appraisal of the property to be
secured by the mortgage.
To carry out this approach, the rule proposes to first clarify the
definition of the term application, in HUD's RESPA rules at 24 CFR
3500.2(b). The new definition of application would make clear, in
accordance with informal HUD advice, that an application is deemed to
exist whenever a prospective borrower provides a loan originator
sufficient information (typically a social security number, a property
address, basic employment information, the borrower's information on
the house price or a best estimate on the value of the property, and
the mortgage loan needed), whether verbally, in writing or computer
generated, to enable the loan originator to make a preliminary credit
decision concerning the borrower so that the originator can provide a
GFE. See HUD Old Informal Opinion (March 27, 1980) and HUD Old Informal
Opinion (October 15, 1982). HUD proposes this new definition to
facilitate the provision of GFEs in response to virtually any type of
request for a GFE, in order to give the borrower the necessary
information for shopping. Under current rules, an application is the
``submission of a borrower's financial information, in anticipation of
a credit decision whether written or computer generated relating to a
federally related loan'' identifying a specific property. The proposed
rule would explicitly broaden the definition to cover verbal and other
requests as long as these requests contain sufficient information for
the originator to provide a GFE. HUD also will consider comments on
whether it should provide a brief form for the application.
Under RESPA, a ``Good Faith Estimate'' is to be provided with a
settlement cost booklet by a lender to each person ``from whom it
receives or for whom it prepares a written application.'' 12 U.S.C.
2604(d). Because an originator begins the process of preparing an
application on behalf of the borrower when the borrower submits
application information, the borrower's information itself need not be
provided in writing.
RESPA's time limits for delivery of the GFE would run from the
point that an originator receives ``an application.'' While the statute
allows the loan originator to mail or deliver the GFE 3 days after
application, it is likely that the originator will provide the GFE as
quickly after the borrower's request as possible.\42\ HUD recognizes
that the proposed rule's change of the definition of application, and
the requirement that
[[Page 49150]]
GFE be provided to prospective borrowers early in the shopping process,
frequently before they select a loan originator, may have implications
for the content and delivery of required disclosures under the Truth in
Lending Act (TILA). Question 28 specifically seeks comments on how
HUD's proposed GFE changes impact other federal disclosure
requirements, and invites suggestions on ways to consolidate or
coordinate existing statutory disclosure requirements.
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\42\ As indicated in the background section, supra, during the
development of the HUD/Fed Report, HUD became aware of proposals
where borrowers would arrange and pay for credit reports to loan
originators of their selection. HUD supports these efforts as a way
to lessen the burden on the originator's customers of paying the
costs of those who are shopping.
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The rule proposes that GFE estimates would be valid for a minimum
of 30 days from when the document is delivered or mailed to the
borrower. This is proposed in light of the tolerances to avoid
committing originators indefinitely. Within the 30 days the borrower
must agree to go forward and pay any additional money required to
complete the underwriting process. If the borrower fails to accept the
offer within 30 days, the borrower would need to return to the loan
originator to request the originator to provide a new GFE or ratify the
previous one. Commenters are asked in Question 5 below whether this is
an appropriate time period for the GFE.
b. Facilitating Shopping With the GFE
As stated above, to achieve the purposes of the Act, the proposed
rule would limit fees paid by the borrower for the GFE, if any, to the
amounts necessary for the originator to provide the GFE itself. The fee
could not include amounts to defray later appraisal or underwriting
costs. This approach would both facilitate shopping and reduce the
possibility that fees for the GFE are unearned, in violation of RESPA's
proscription against such fees. While HUD recognizes that there may be
costs attendant to obtaining credit information from third parties and
evaluating that information manually and/or electronically, the
provision of the GFE does not today, and would not in the future,
necessitate full underwriting and appraisal. These steps come
afterwards, and under the approach in this proposal, GFEs explicitly
would be given subject to underwriting and appraisal. Therefore, any
charge at the time of application should be limited only to those costs
that result directly from providing the GFE. This is not to say that
all loan originators would be expected to charge for GFEs. HUD would
prefer that originators not impose any charge for a GFE, since
providing a GFE before the payment of any fee will further facilitate
shopping. HUD believes it would be reasonable for loan originators to
treat shoppers for mortgages in much the same way other retailers treat
shoppers, where the price of the product includes marketing expenses
and purchasers pay the costs incurred to serve shoppers who do not
purchase the goods or services. Such an approach would better serve the
purposes of the statute.
c. Providing an Accurate GFE
As described in the background section, Regulation X currently
defines ``Good faith estimate'' as ``an estimate, prepared in
accordance with Section 5 of RESPA, of charges that a borrower is
likely to incur in connection with a settlement.'' Pursuant to 24 CFR
3500.7(c) of Regulation X, loan originators are required to state on
the GFE the dollar amount or range of charges that the borrower will
normally pay at or before settlement based upon common practice in the
locality of the mortgaged property. While the rules require that the
estimate be made in ``good faith'' and ``bear a reasonable
relationship'' to the charges the borrower is likely to incur at
settlement, there is no further explication of what a ``Good Faith
Estimate'' demands, either with respect to the loan originator's own
charges/compensation, or with regard to lender required third party
charges and other settlement costs.
Three decades of experience has shown that too often the estimates
appearing on GFEs are significantly lower than the amount ultimately
charged at settlement, are not made in good faith (e.g., a range of $0-
$10,000), and do not provide meaningful guidance on the costs borrowers
ultimately will face at settlement. The Department recognizes that,
occasionally, unforeseeable circumstances can and do drive up costs in
particular transactions. HUD believes, however, that in most cases loan
originators have the ability to estimate final settlement costs with
great accuracy. The loan originator's own fee/compensation, which is
entirely within the originator's control, can be stated with certainty,
absent unforeseeable and extraordinary circumstances. Moreover, most
third party costs such as appraisal charges, pest inspection fees, and
tax/flood reviews, are fixed, and others, such as upfront mortgage
insurance premiums, and title services and insurance, typically only
vary depending on the value of the property or the loan amount. State
and local recording charges, stamps, taxes are also generally well
known to loan originators or, where necessary, can readily be
calculated based on the loan amount or estimated precisely, on a pro
rata basis, based on a projected settlement date.
HUD also believes that recent advances in technology and
telecommunications in loan processing make the routine provision of
accurate estimates of third party costs both easier and cheaper.
Notwithstanding, the GFE has too often failed to represent an
accurate estimate of final settlement costs for a number of reasons.
The absence of more precise regulatory standards for measuring accuracy
has not helped ensure greater accuracy and reliability. Beyond that,
some originators appear to purposely underestimate settlement costs as
a means of inducing prospective borrowers to use their services, or as
a way to obfuscate the amounts they plan to receive later in the final
mortgage transaction. In too many cases, charges that never appeared on
the GFE materialize at settlement. Such ``junk fees'' typically result
in additional compensation for the originator and/or third party
settlement service providers.
In light of these considerations, HUD believes that in order for
the GFE to serve its intended purpose, which is to apprise prospective
borrowers of the charges they are likely to incur at settlement, new
standards must be established under existing law to better define
``good faith'' and the standards applicable to the GFE.\43\
Accordingly, the proposed rule would make a number of specific changes
to GFE requirements.
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\43\ Differing editions of Black's Law Dictionary have defined
``good faith'' as ``a state of mind consisting in * * * honesty in
belief or purpose * * * [and faithfulness to one's duty or
obligation,'' and ``freedom from knowledge of circumstances which
ought to put the holder upon inquiry'' as well as ``absence of all
information, notice, or benefit or belief of facts which render [a
transaction unconscientious.'' Inherent in these definitions is the
concept that where a party makes an estimate in good faith they will
take into account all relevant information available to them, and
will exercise reasonable care in ascertaining and evaluating such
information before providing such an estimate.
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First, the rule would prohibit loan originators from exceeding the
charges stated on the GFE for their own services, lender required and
lender selected third party services, and government charges at
settlement absent ``unforeseeable and extraordinary circumstances''
beyond the loan originator's control such as acts of God, war,
disaster, or any other emergency, making it impossible or impractical
to perform.
Second, the rule would establish an upper limit, or 10%
``tolerance,'' so that actual charges at settlement for shoppable
lender required third party services, borrower selected title services
and insurance, and reserves/escrow, cannot vary by more than 10% of the
estimates of those fees and charges
[[Page 49151]]
stated on the GFE absent unforeseeable and extraordinary circumstances.
The 10% tolerance applies to all lender selected third party services,
and to third party services from providers who have been suggested to
the borrower by the loan originator. It does not apply to third party
services from providers selected by the borrower independently of the
originator's recommendation.
The inclusion of these tolerances will assure that borrowers can
either find prices within the estimates in the marketplace or return to
the lender who will identify sources that will honor those prices.
However, if the borrower chooses to purchase a more expensive service
than is available or than the lender can provide, the lender will not
be held to have exceeded the tolerance. The 10% level for tolerances
has been selected to inject discipline into estimates while providing a
margin for legitimate error based on market changes. Commenters are
asked to provide their views on whether this is or is not the
appropriate tolerance level, tolerance, and why.
Third, the rule would include redisclosure requirements triggered
by changed circumstances. Specifically, if, after full underwriting, a
loan originator selected by a borrower to obtain a mortgage loan
determines that the prospective borrower does not qualify for the loan
product identified in a previously provided GFE, the loan originator
shall inform the borrower that the loan originator does not offer loan
products meeting the borrower's needs or credit status. Alternatively
if the loan originator does offer other products meeting the borrower's
circumstances, the loan originator must so inform the borrower and the
borrower may request a new GFE. Furthermore, when, after receiving a
GFE, a borrower selects a loan originator to obtain a mortgage loan and
qualifies for the loan product identified, but elects not to lock-in
the interest rate and the interest rate dependent payment quoted on the
GFE, the loan originator shall provide the borrower with an amended GFE
at such time as the borrower does lock the rate and the interest rate
dependent payment if either has changed from that quoted on the
original GFE. The amended GFE shall identify those cost categories that
have changed as a result of the change in the interest rate. In no case
may an amended GFE include increases in cost categories which are not
dependent on the interest rate (Section III. B.).
By limiting the extent to which final settlement charges can exceed
GFE estimates, the Department intends to render the GFE a much firmer,
more reliable, and meaningful disclosure for borrowers. If the cost at
settlement exceeds the amount reported on the Good Faith Estimate,
absent unforeseeable and extraordinary circumstances, the borrower may
withdraw the application and receive a full refund of all loan-related
fees. Such circumstances would have to be documented in writing by the
loan originator and such documentation retained by the loan originator.
These circumstances may be further defined in HUD's final regulations,
and comments are requested in response to Question 2 below on both the
definition of unforeseeable and extraordinary circumstances, and
borrower rights where there is noncompliance with GFE requirements.
Concurrent with finalization of this rule, HUD also will establish
procedures for closely scrutinizing loan originators that fail to meet
these new GFE requirements for possible Section 8 violations.
d. Negotiating Discounts From Third Party Settlement Service Providers
The establishment of tolerances under the proposal will require
that loan originators actively follow the market prices for settlement
services in their communities. HUD recognizes that the new GFE's
tighter requirements on estimated third party charges may cause many
loan originators not already doing so to seek to establish pricing
arrangements with specific third party settlement service providers in
advance, in order both to ensure they are able to meet the tolerances
and to ensure lower prices for their customers. As part of negotiations
for such arrangements, many originators, particularly those with a
substantial volume of business, may seek prices from third party
providers that are lower than those providers offer on a retail basis.
However, because Section 8 of RESPA broadly prohibits providing a
``thing of value,'' which is specifically defined to include discounts,
in exchange for the referral of business, many loan originators have
been reluctant to openly seek such pricing benefits, even where any
such discount in the price is passed on to the borrower. HUD believes
that the fundamental purpose of RESPA is to lower settlement costs to
borrowers, and it is therefore contrary to the law's objectives to
interpret the anti-referral fee provisions of Section 8 to prohibit one
settlement service provider from using its market power to negotiate
discounted prices, as long as the entire discounted price negotiated by
the originator is charged to the borrower and reported as part of the
total charge within Sections III(C) through (J) as appropriate. The
proposed rule amends Regulation X to make this clear. HUD also solicits
comments on this issue in Question 4 below.
e. Revising the HUD-1/1A and Appendix A Instructions
Consistent with the proposed rule's new approach to the reporting
of lender payments to borrowers, the proposal would require that on the
HUD-1 all such payments be reflected in the borrower's column, in the
applicable series (e.g., 800 series for payments to mortgage brokers;
1300 series for payments to other third party settlement service
providers). However, inasmuch as there is no place for identifying and
reporting credits on the HUD-1 A, in any transaction where there is
such payment, the rule requires that the HUD-1 must be used. The
proposed rule's revisions to the Appendix A instructions for the HUD-1
appear immediately following the proposed amendments to Regulation X.
Also, the proposed new GFE, while reducing the number of cost items
reported on the face page, and consolidating the presentation to the
borrower of important cost information, is not readily comparable to
either the HUD-1 or HUD-1A form, which the borrower will receive at
settlement. This is because certain cost items on the GFE are currently
reported in numbered sections of the HUD1/1A forms not corresponding to
their GFE counterparts. Thus, for example, while the proposed GFE
clearly distinguishes between those settlement costs attributable to
the loan originator(s) (section A. on the new GFE) and other lender
required third party settlement services (sections C. and E. on the new
GFE), the HUD-1/1A forms combine loan originator costs and some third
party costs under the same heading (``Items Payable in Connection with
the Loan'') and numbered section (800). The HUD1/1-A forms include
credit report fees, appraisal fees, mortgage insurance application
fees, and inspection fees in this category. Other third party services,
such as pest inspection fees, permit fee, and surveys are separately
reported on the HUD-1/1A (1300). In addition, the new GFE identifies as
separate major cost categories some items reported, in whole or in
part, under the same heading on the HUD-1/1A. For example, the new GFE
lists hazard insurance and per diem interest as separate categories.
However, on the HUD-1/1A, where hazard insurance premiums are paid in
advance they are reported, along with other items such as per diem
interest and pre-paid mortgage insurance premiums, in section 900,
``Items Required by Lender to be Paid in
[[Page 49152]]
Advance.'' Moreover, where a portion of the hazard insurance premium is
required to be escrowed, that amount is reported on the HUD-1/1A in
section 1000, along with other escrow items, as ``Reserves Deposited
With Lender.''
As proposed, the new GFE would consolidate certain charges into
lump sum categories (e.g. lender required third party services). The
Department has made only minor changes to the HUD-1 instructions, to
assist the borrower in comparing the new GFE to the HUD-1. The
Department took this approach because the HUD-1 is well accepted as a
listing of settlement service charges by industry and consumers alike
and HUD is reluctant to change the form unnecessarily. However, there
is a risk that if the forms are not clearly comparable, lenders could
deviate from the prices given in the GFE or GMPA and the borrower would
not realize the deviations. Modifications could be made to the HUD-1 so
that the fee categories on the new GFE would correspond to similar
groupings on the HUD-1 and the two documents could be more easily
compared. HUD invites comments in Question 9 below on whether or not
the HUD-1 should be modified. HUD plans to use focus groups to ensure
that the proposed forms are consumer friendly including considering,
among other things, how the new proposed forms are best compared by
consumers to the HUD-1 and what revisions, if any, to the HUD-1 would
be most helpful.
For purposes of TILA, the packager must list the finance charges
needed to calculate the APR on an addendum to the HUD-1 or HUD-1A and
HUD invites comments in Question 20 on this issue. The proposed rule
seeks comment on whether there should be further modifications to the
HUD-1/1A forms so that they more accurately correspond to the new GFE.
However, the Department believes that, in the absence of further
changes to the HUD-1/1A forms, borrowers can be assisted in comparing
the two disclosures, and, to that end, the new GFE identifies, next to
each GFE category, where on the current HUD-1/1A the corresponding cost
information is to be found. As the preceding discussion makes clear,
this necessitates identifying more than one HUD-1/1A section number
next to some GFE categories.\44\
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\44\ Specifically, the new GFE contains the following cross-
references to the HUD-1/1A for each GFE category: A. Origination
Fees, 800; C. Lender Required/SelectedThird Party Services, 800,
900, 1000, 1300; D. Title Services/Insurance, 1100; E. Lender
Required/Shoppable Third Party Services, 800, 900, 1000, 1300; F.
Government Charges--Taxes, 1000, 1200; G. Reserves/Escrow, 1000; H.
Per Diem Interest, 900; I. Hazard Insurance, 900, 1000; J. Optional
Owner's Title, 1100.
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3. Section 6 Transfer of Servicing Language
In 1990, Congress amended RESPA to include a disclosure, which
informs borrowers that their loan or the servicing of their loan, may
be sold. 12 U.S.C. 2605, Public Law 93-533 section 6 (November 28,
1990). In 1997, HUD proposed a rule to implement the amended statute.
Many comments were received and the rule was never finalized. 62 FR
25740. The Department plans to finalize the 1997 proposed rule shortly.
However, in the meantime, the Section 6 language in the statute may be
provided in conjunction with the GFE instead of the language currently
indicated in Sec. 3500.21 and Appendix MS-1.
C. Remove Regulatory Barriers To Allow Guaranteed Packages of
Settlement Services and Mortgages To Be Made Available to Borrowers
1. A New Safe Harbor for Guaranteed Mortgage Packages (GMP) Created
Through HUD's Exemption Authority
Consistent with its earlier recommendations in the HUD-Federal
Reserve Report, described in the background section of this rule, the
Department believes that the most effective means of simplifying the
process of obtaining a mortgage, promoting competition to lower costs
and facilitating shopping is to offer borrowers Guaranteed Mortgage
Packages containing a lump sum price for all loan originator and
governmental required settlement costs associated with obtaining a
mortgage combined with an interest rate guarantee for the loan. The
Department believes that such packages offer borrowers the possibility
of lower prices through innovation by packagers, the pricing discipline
involved in arranging packages, and competition among packagers.
Under a Guaranteed Mortgage Package approach packagers would offer
a lump-sum price for settlement costs, and an interest rate guarantee
at no cost to the borrower until the borrower selects the package. The
packager would be held to those figures from the time the package is
agreed to through settlement. This approach would allow the borrower to
rely on the quoted price and rate and to compare fewer numbers in
shopping for the best loan to meet his or her needs. Even with
improvements to the current disclosure scheme, including more reliable
quotes for major settlement costs under the new GFE (see B(2)(c),
above), it will not be as easy for borrowers to shop and compare as it
would be if they could simply comparison shop for mortgages based on a
few prices as under this proposal.
The Secretary has determined, therefore, that effective packaging
of settlement services will depend on packagers negotiating lower costs
with third party settlement service providers, and then providing
borrowers with an alternative disclosure, the Guaranteed Mortgage
Package Agreement (GMPA). This proposal will increase the opportunities
for borrowers to shop among packages fostering competition to lower
costs further. Under Section 8(c)(5) of the Act, the Secretary is
authorized to issue regulations that remove certain payments or classes
of payments or other transfers from the Section 8 prohibitions on
kickbacks and unearned fees after consultation with designated
regulatory agencies. Also, under Section 19 (a) of the Act, the
Secretary is authorized to grant reasonable exemptions for classes of
transactions as may be necessary to achieve the purposes of the Act.
Accordingly, under these authorities, HUD is proposing to establish a
carefully circumscribed safe harbor from RESPA's provisions at Section
8 to facilitate the development and marketing of Guaranteed Mortgage
Packages.
2. Who May Package
The purpose of the Guaranteed Mortgage Package safe harbor is to
stimulate competition and improve the borrower's ability to shop. Under
this proposal, entities other than lenders may qualify as packagers for
a safe harbor, as long as their packages include a mortgage and
otherwise satisfy the requirements of the safe harbor. In this
connection, in order to ensure that the borrower receives the
settlement package of services and the mortgage loan, the proposed rule
would require that the packager sign the GMPA agreeing to provide the
Guaranteed Mortgage Package at the Guaranteed Mortgage Package price
and that non-lender packagers have a lender sign the GMPA after
borrower acceptance agreeing to provide the loan included in the
Guaranteed Mortgage Package.
3. Requirements for the Safe Harbor
Packagers that provide the GMP and abide by its terms and the other
requirements of this rule, along with any settlement service providers
participating in such a package, would receive a safe harbor from
scrutiny under Section 8 of RESPA as described below. Specifically, to
qualify for the
[[Page 49153]]
safe harbor, packagers, within 3 days of borrower's application, would
have to offer, without an upfront fee: (1) A guaranteed price for the
loan origination and virtually all other lender required settlement
services needed to close the mortgage, including without limitation,
all application, origination, underwriting, appraisal, pest inspection,
flood and tax review, title services and insurance, and any other
lender required services, and governmental charges; (2) a mortgage loan
with an interest rate guarantee, subject to change (prior to borrower
lock-in) resulting only from a change in an observable and verifiable
index or based on other appropriate data or means to ensure the
guarantee; \45\ and (3) a Guaranteed Mortgage Package Agreement (GMPA)
as a prospective contract with the borrower that is binding through
settlement containing the maximum settlement costs. The GMP offer would
remain open as an offer for a minimum of 30 days from when the document
is delivered or mailed to the borrower. The GMPA becomes a binding
contractual commitment immediately upon borrower acceptance of the
package and payment of a minimal engagement fee, subject only to
acceptable final underwriting and property appraisal.
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\45\ Through this requirement, discussed infra, HUD seeks to
ensure that the rate of the loan does not vary after the borrower
commits to a packager for reasons other than an increase in the cost
of funds. There may be a variety of ways to solve this problem and
HUD is seeking comments, in particular, on how to implement an
interest rate guarantee.
---------------------------------------------------------------------------
The guaranteed package also would include up-front costs of
mortgage insurance. The cost of mortgage insurance is based on the
ratio of the loan amount to the value of the property and is not
finally determined with certainty until the lender knows the property
value. In the GMP price, the packager shall include any maximum upfront
mortgage insurance premium based upon the borrower's estimate of the
property value and the amount that needs to be borrowed. The GMPA will
inform the borrower that the upfront mortgage insurance premium, if
any, may decrease or become unnecessary depending on the final
appraised value of the property. The ``Other Required Settlement
Costs'', discussed immediately below, would include any required
reserves for mortgage insurance premiums. Because full underwriting
information will not be available to the packager at the time the GMPA
is provided, implementation issues are presented. Commenters are
invited in Question 21 below to provide their views on how mortgage
insurance should be addressed in Guaranteed Mortgage Package
Agreements.
Under the proposal, reserves that are escrowed would be disclosed
on the GMPA as ``Other Required Costs'' and subject to a 10% tolerance.
The only costs that could be excluded from the guarantee and not
subject to any tolerance would be those that fluctuate depending upon
the borrower's choice, such as hazard insurance, per diem interest, and
optional owner's title insurance. However, the Questions below ask
commenters whether these items should also be included in the package
at the required minimum amounts with a notation that ``optional costs''
are the responsibility of the borrower.
The proposal does not require packagers to itemize the services
included in the GMPA. HUD believes however, that there are certain
settlement services that are of specific interest and value to the
borrower such as pest inspection, appraisal and the purchase of
lender's title insurance (which may affect the cost of owner's title
insurance). Some lenders may choose to forego some or all of these
services. Therefore, HUD proposes that if any of these particular
services are not anticipated to be included in the GMP, this fact must
be disclosed on the GMPA.
Packagers may in GMP transactions provide a GMPA in lieu of the
GFE. The revised instructions for the HUD-1/1A require that in
Guaranteed Mortgage Packages, the HUD-1/1A must itemize the services
provided, but not the specific charges for those services. However,
because the amounts of certain individual charges needed to compute the
finance charge and the APR under TILA and HOEPA, the packager must list
the finance charges needed to calculate the APR on an addendum to the
HUD-1 or HUD-1A. At Question 20, commenters are asked to provide their
views on whether this approach adequately protects and preserves
consumers' rights under TILA and HOEPA while facilitating packaging,
and to suggest alternatives, if needed. Entities that do not choose to
seek this safe harbor will continue to provide the GFE and HUD-1/1A
disclosure scheme, as amended by this rule.
4. Contents of the Guaranteed Mortgage Package Agreement
The premise underpinning packaging is that firm, simple, guaranteed
price quotes will enable borrowers to shop for mortgage loans with much
greater confidence and certainty. The GMPA starts with a brief
description of the function of the packager--what the packager is
providing--and a statement that the interest rate on the proposed form,
and the settlement costs quotation (if any), represent an offer to the
borrower which is open and guaranteed for 30 days from when the
document is delivered or mailed to the borrower, and which will
immediately become a binding contractual agreement upon borrower
acceptance and payment of a minimal engagement fee, subject only to
acceptable final underwriting and property appraisal. The opening
description also makes clear that any required settlement costs not
separately itemized and estimated in Section III of the GMPA are the
responsibility of the packager.
Section I of the GMPA provides the interest rate guarantee and APR
along with an explanation that the interest rate is guaranteed through
settlement if the borrower agrees now to the GMPA and locks-in this
rate by a specified date/time. Any mortgage insurance premium included
in the APR would be separately disclosed in Section I. It provides that
if the borrower does not choose to commit immediately, it is guaranteed
that the quoted interest rate will not change except in relation to
changes in a specified index rate (or other such appropriate data or
means as HUD may determine to assure that changes in the rate are
reflective of the cost of funds and not simply to increase the
packager's compensation).
Section II of the GMPA states that this package price covers all
services, besides those listed in Section III, that are necessary to
close the loan. The packager would, however, be required to inform the
borrower if certain designated items are not anticipated to be included
as part of the package including lender's title insurance, the pest
inspection, and appraisal. Under the GMPA, any pest inspection report,
credit report, and appraisal would be provided to the borrower upon the
borrower's request. (On the HUD-1, borrowers will receive a listing of
the specific services provided, but not the specific prices for each
service. The total settlement costs will be provided.)
Section III of the GMPA provides a description of ``Other Required
Settlement Costs'' which are outside the package and informs the
borrower that reserves/escrow are subject to a 10% upper limit, or
tolerance, at settlement absent unforeseeable and extraordinary
circumstances. However, the 10% tolerance does not apply to hazard
insurance and per diem interest in this category. The GMPA also makes
clear that any required settlement cost not specifically identified on
the GMPA as
[[Page 49154]]
outside a package, and itemized on the GMPA, is included in the
guaranteed price quote and is the responsibility of the packager.
Section IV of the GMPA provides the borrower the cost of owner's
title insurance, if available. For any package where the packager
offers the borrower the option of paying all or part of the stated
guaranteed and/or estimated settlement costs through a higher interest
rate, that option will be explained in accordance with Section V of the
GMPA. Similarly, where a packager offers the borrower the option of
lowering the stated guaranteed interest rate by paying additional
amounts at settlement, commonly referred to as discount points, that
option will also be explained in accordance with Section V of the GMPA.
Section VI provides interest rates and adjustment terms related to
adjustable rate mortgages, applicable prepayment penalties, and balloon
payments. Section VII of the GMPA must be signed by an authorized agent
of the packager and the borrower to become a binding contract for the
Guaranteed Mortgage Package at the Guaranteed Mortgage Package price.
After acceptance by the borrower, non-lender packagers must ensure that
the lender sign the GMPA agreeing to provide the loan included in the
Guaranteed Mortgage Package. HUD solicits comments on the issue of
lender signatures on the GMPA in Question 18 below. Notwithstanding the
basic objective of packaging, which is to dramatically improve the
borrower's capacity to comparison shop, different entities may offer
two types of packages. Some packagers may offer GMPs in which all
settlement costs are included in the interest rate guarantee (in which
case no guaranteed settlement cost quote will be provided), while other
packagers may quote a guaranteed price for all settlement costs along
with a (presumably lower) interest rate guarantee. The Special
Information Booklet and other consumer education materials will alert
borrowers to compare the combined impact of both settlement cost and
interest rate guarantees when shopping among packagers, and will
suggest that a borrower might wish to compare the APRs of the two
products as well as consider how long the borrower plans to stay in the
property; a longer mortgage term may mitigate in favor of a borrower
choosing to pay settlement costs through a higher rate.
5. Interest Rate Guarantee
In the rule, HUD is requiring that Guaranteed Mortgage Packages
include an interest rate guarantee. HUD's rationale for this
requirement is that both the settlement costs and the interest rate
need to be firm for borrowers to compare loan products. HUD recognizes,
however, that after a borrower requests a GMPA but before locking in a
rate, the interest rate on a loan may change based on market forces.
Similarly, some borrowers choose to float even after they have
committed to an originator, in the hopes that market interest rates
will fall. In such instances, HUD believes that in the context of GMPs,
it is necessary to assure that when the borrower is ready to lock, the
interest rate will only be changed based on observable market changes,
or based on other data or appropriate means to ensure the guarantee.
One possibility is to have the rate move with an observable and
verifiable index. Another is to have a rate publicly available.
Whatever the ultimate methodology, it must be easily useable and
verifiable by the borrower and the industry. Commenters are asked to
address Question 13 concerning the use of an index or a substitute
therefore to address this problem.
6. Scope of the Safe Harbor
The Secretary is exercising exemption authority under Section
8(c)(5) and Section 19 of RESPA to establish this carefully
circumscribed guaranteed mortgage packaging safe harbor. The Secretary
is establishing this safe harbor only for those Guaranteed Mortgage
Package transactions that meet the requirements set forth in this rule.
The Secretary has determined that the establishment of this safe harbor
is necessary to allow this class of transactions-- guaranteed packages
of settlement services with the protections required under this rule--
to be available to consumers to achieve the purposes of the Act. The
Secretary has concluded that the availability of these packages to
consumers will simplify their shopping for settlement services and
allow them to gain the benefit of an active competitive marketplace
where market forces lower settlement costs. For the same reasons, the
Secretary has determined that payments and pricing arrangements between
packagers and participating settlement service providers for Guaranteed
Mortgage Packages as set forth in this rule shall not be construed as
prohibited under Section 8 of RESPA as long as the requirements in this
rule are satisfied. Pursuant to Section 8(c) (5) the Secretary has
undertaken the necessary consultation with other agency heads as
required prior to promulgating this exemption.
This safe harbor will allow packagers to inject pricing discipline
to negotiate firm overall prices for essentially all settlement
services and mortgage interest rates with participating settlement
service providers. Some GMPs may require the use of affiliated
entities, a practice prohibited by Section 8 except in limited
circumstances. Other GMPs may involve arrangements between independent
providers based on the projected volume of business to be referred. The
safe harbor will apply in both of these arrangements. Without this safe
harbor, Section 8(a)'s prohibition on referral fees may bar such
arrangements and Section 8 (b)'s prohibitions may deter packagers from
retaining profits that result from packaging, which could be regarded
as unearned. Outside the safe harbor, where loan originators arrange
discounted prices that are charged to consumers, HUD is proposing in
this rulemaking to clarify that Section 8 is not violated (see above).
Because HUD believes that the benefits to borrowers of packaging
outweigh any protections offered by Section 8's provisions, the
Secretary has concluded that such a carefully circumscribed safe harbor
is appropriate, subject to the eligibility conditions set forth in this
rule.
Accordingly, pursuant to Section 19, the Secretary has determined
that the safe harbor is necessary for these prescribed transactions to
achieve the purposes of the Act. Where the requirements are met, the
safe harbor from Section 8 will permit payments or other things of
value exchanged between a packager and entities participating in the
package, and will insulate packager earnings from Section 8 scrutiny.
Section 8 would, however, continue to prohibit any payments for the
referral of business, kickbacks, splits of fees and unearned fees
between the packager and any of the entities participating in the
package on the one hand, and entities outside of the package on the
other.\46\ As long as the requirements of the safe harbor are
satisfied, the exemption authority under Section 19 will create a safe
harbor for packagers from the Section 8 requirements.
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\46\ Thus, for example, a real estate agent, outside of the
package, would continue to be subject to Section 8 for accepting a
payment from a packager for referring a customer to a package.
---------------------------------------------------------------------------
Under the safe harbor, as noted above, packagers would provide the
GMPA in lieu of a GFE. HUD regards the provision of a GMPA as fully,
indeed, more than satisfying the requirements of Section 5 of RESPA
that borrowers receive a Good Faith Estimate of the
[[Page 49155]]
amount of charges for settlement services the borrower is likely to
incur. Additionally, HUD believes that the GMPA, by itemizing a
Guaranteed Mortgage Package price encompassing virtually all settlement
charges, along with a limited number of itemized charges, including
owner's title insurance, also more than satisfies the requirements of
Section 4 of RESPA. Nevertheless, HUD is prepared to exercise the
exemption authority under Section 19 to create a safe harbor for
packagers from the disclosure requirements of Sections 4 and 5 of
RESPA, if it deems such an exemption necessary.
The safe harbor is proposed to be available only where the
transaction does not result in a high cost loan as that term is defined
in the Home Ownership Equity Protection Act. See 15 U.S.C. 1601 (Supp
II 1996). The safe harbor also may not be available for mortgages that
exceed other limits or include other features identified by the
Department during the course of this rulemaking as resulting in
unreasonable settlement charges or other loan terms inimical to the
purposes of RESPA.
In this rulemaking, in Question 12 below, HUD is soliciting
comments on the scope of the safe harbor and in particular, how the
safe harbor should apply to affiliated business arrangements.
D. Scope of the Proposed Rule
The proposed rule's new regulatory requirements will apply to first
and second lien transactions, purchase money loans, and refinances.
Home equity transactions are addressed in Sec. 3500.7(f), under current
RESPA regulations. At Question 26 the Department invites comments on
this issue.
E. Contractual Remedies and Enforcement Priorities
For the safe harbor, the proposed rule intends that borrowers,
individually or, where appropriate, as a class, may sue for specific
performance or for damages pursuant to applicable State contract law
provisions in the event a packager breaches a contract entered into
pursuant to C., above.
Beyond any contractual remedies available to borrowers under state
laws, HUD will regard noncompliance with a GMPA as an enforcement
priority, and any entity found in violation of such a contract will not
be able to claim a safe harbor under Section 8. As a result, those
found in violation of a GMPA will be subject to Section 8 scrutiny and
possible penalties as well as individual or class relief.
F. Preemption
Pursuant to Section 18 of RESPA, 12 U.S.C. 2616, the Secretary is
authorized to determine whether any provisions of State law are
inconsistent with any provision of RESPA. Where such a determination is
made, after consultation with other appropriate Federal agencies, the
Secretary may exempt any person subject to RESPA from compliance with
said State law to the extent such compliance is inconsistent with
RESPA. Question 22 below seeks comments on how this provision of RESPA
should be applied in light of the provisions in the proposed rule.
IV. Questions for Commenters
Commenters are asked to address the following questions in their
comments to the extent that they have views on these subjects.
The New Good Faith Estimate (GFE) Requirements
1. As proposed in Section III.A.(1), the proposed GFE form would
briefly explain the originator's functions and that the borrower, not
the originator, is responsible for shopping for his or her best loan.
Does the language proposed adequately convey this message? If the
commenter thinks otherwise, it should provide alternative language for
the form that better explains the loan originator 's function to the
borrower. Should the form also address agency requirements under state
laws and how?
2. In Section III.B.(2) c., the proposed rule requires that the
amounts estimated on the GFE for mortgage broker and lender origination
charges may not vary at settlement absent unforeseeable circumstances.
Should the rule provide for this ``unforeseeable circumstances''
exception? Are the particular circumstances specified in HUD's
formulation in this proposal sufficiently encompassing? What evidence
should a broker or lender be required to retain to prove the existence
of such circumstances and justify any increase in charges at
settlement?
3. In Section III.B.(2) c., the proposed rule establishes a 10%
limit, or ``tolerance,'' for categories of settlement services and
costs including third party services that the borrower shops for and
escrow/reserves by which such costs cannot exceed the GFE estimates by
10% at settlement absent unforeseeable and extraordinary circumstances.
It also establishes zero tolerances for origination charges and lender
required lender selected third party costs and government charges that
cannot vary from the estimate through settlement absent unforeseen
circumstances. Are these appropriate tolerances and tolerance levels or
should other tolerances/tolerance levels be established for these
categories? Also, should a tolerance be established for borrower's
title insurance? What alternative or additional means might be employed
to ensure that loan originators take the care necessary to complete the
GFE to ensure that it represents a Good Faith Estimate of final
settlement costs?
4. In Section III.B.(2) d., the proposed rule would amend
Regulation X to make clear that loan originators may enter into volume
arrangements where such discounted prices are charged to their
customers. Commenters are invited to provide their views on the
ramifications, if any, of this clarification.
5. In Section III.B.(2) c., the proposed rule requires that the
tolerances will apply to the GFE from the time the form is given by the
loan originator through settlement. Also, in case it takes a
substantial time for the borrower to decide to use the loan originator
from the date the form is given, the rule and the form provide that the
GFE need only be open for borrower acceptance for a minimum of 30 days
from when the document is delivered or mailed to the borrower. After
that time, the GFE could be ratified or superseded by the originator at
the borrower's request. Is this expiration date appropriate to protect
against unnecessary costs flowing from an indeterminate liability or
for other reasons? Is 30 days too long or too short? Another
possibility that commenters may consider is whether the numbers on the
GFE should apply only from the time the borrower enters into an
agreement with the loan originator. HUD also invites commenters' views
on whether HUD now should require a borrower's signature on the GFE to
memorialize acceptance and begin the period during which the estimates
are binding.
6. In Section III.B.(1) b., the proposed rule simplifies the GFE by
placing all loan origination costs in a small number of primary
categories. This is intended to facilitate borrower understanding and
shopping of major loan costs and minimize the proliferation of ``junk
fees'' and duplicative charges. How could the GFE be made even simpler
to facilitate borrower shopping? If the commenter believes greater
itemization is desirable, what should be itemized and why?
7. In Section III.A.(3), the proposed rule requires that on the
front of the proposed form mortgage brokers disclose the lender credit
right below the total origination charges to: (a) Make
[[Page 49156]]
the borrower aware of the effect that the credit has to reduce total
origination costs; (b) avoid confusion among borrowers; and (c) avoid
giving any competitive disadvantage to either a broker or lender for
the same loan. What, if any, other approach to address these concerns
is better and why? Should the new GFE form disclose this credit at the
bottom of the proposed form because the credit can be applied to all
settlement costs?
8. As proposed in Section III. A. (3), as another step to avoid
borrower confusion and any competitive disadvantage among lenders and
brokers, the proposed rule breaks out on Attachment A-1, rather than on
the front of the proposed form, the ``Loan Origination Charges'' into
``Lender Charge'' and ``Broker Charge.'' How, if at all, does this
approach advantage or disadvantage either lenders or brokers or confuse
borrowers in comparison shopping? Would the industry and borrowers be
better served if there is a breakout of ``Lender charges'' and ``Broker
charges'' on the front of the form and why?
9. As proposed in Section III. B. (2) e, the new GFE will
consolidate certain charges into lump sum categories (e.g. lender
required third party services). To permit the borrower to compare the
new GFE to the HUD-1, it will be necessary for HUD to establish
additional instructions to guide the reader so that the new GFE could
be compared to the HUD-1. Would it be better to change the HUD-1 so the
fee categories correspond to the groupings on the GFE and the two
documents can be more easily compared? If commenters support changes to
the HUD-1 to make it more comparable to and compatible with the new
GFE, how extensive should these changes be and in what areas? Should
the HUD-1 continue to list all charges for services or should it also
be shortened and simplified as well to cover only categories of
services?
10. Should a safe harbor from Section 8 scrutiny be established for
transactions where the mortgage broker signs and contractually commits
to its charges on the GFE? The purpose of proposing this safe harbor
would be to encourage a firm contractual commitment to borrowers,
before they pay a fee and commit to a particular mortgage broker, so
that the borrower can shop among mortgage brokers. Considering the
proposed changes to the GFE, the proposed packaging safe harbor and
HUD's current guidance on mortgage broker fees, is this safe harbor
necessary for industry or borrowers and why? In light of the proposed
rule's other provisions is any other additional disclosure for mortgage
brokers warranted, such as an additional statement of what the broker's
fees are and how they function?
Guaranteed Mortgage Package Agreements
11. Is a safe harbor along the lines proposed in Section III. C.
(1) of this rule necessary to allow lump sum packages of settlement
services to become available to borrowers? Would the proposed
clarification by HUD that discounts may be arranged, if passed on to
borrowers and not marked up, suffice to make packages available to
borrowers? Would a rule change to approve volume discounts and/or mark-
ups when a package is involved suffice? Would it suffice to trim the
disclosure requirements for packaging and offer the option of providing
a streamlined GFE to those who packaged?
12. As proposed in Section III. C. (6) is the scope of the safe
harbor appropriately bounded in applying to all packagers and
participants in packages? The safe harbor also currently does not apply
to referrals to the package. Should there also be a bar against part
time employees of other providers working for the package to steer
business? How should the safe harbor apply to affiliated business
arrangements to protect borrowers from steering?
13. As proposed in Section III. C (5), to qualify for the safe
harbor, the packager must include an interest rate guarantee with a
means of assuring that when the rate floats, it reflects changes in the
cost of funds not an increase in originator compensation. For this
purpose, the rule suggests tying the rate to an observable index or
other appropriate means. What other means could assure borrowers that
the rate of a lender was not simply being increased to increase
origination profits? For example, would a lender's commitment to
constantly make rates public on a web site be a useful control? If an
index is the best approach, how should it be set? If an index approach
is approved, should each lender be allowed to pick its own observable
index?
14. As discussed in the preamble to the rule in Section III. C (5),
if an observable index or other appropriate means of protecting
borrowers from increases in lender compensation when the borrower
floats in a guaranteed packaging approach is not practical, should HUD
provide a packaging safe harbor only for mortgage brokers? Such a
mortgage broker safe harbor would require disclosing the lender credit
to the borrower in broker guaranteed packages. The theory for the safe
harbor would be that any amounts in indirect fees could be credited to
borrowers taking away any incentive for an increase in rates to
increase compensation. Should this be offered in any event?
15. As proposed in Section III. C (6), under the rule, mortgages
with total fees or a rate covered by the Home Ownership and Equity
Protection Act (HOEPA) would be subject to the new GFE disclosure
requirements; however, HOEPA loans would not qualify for the guaranteed
package safe harbor. Is this exclusion appropriate considering, on the
one hand, that packaging promises borrowers a simpler way to shop and
make transactions more transparent? On the other hand, the safe harbor
could be provided for a loan that has very high rate and/or fees and
may be predatory. The proposal also says that during the rulemaking
other limitations may be established to exclude high cost and/or loans
with predatory features from the packaging provisions. HUD invites
comments on whether HOEPA loans, any other loans, or features of loans
should be included or excluded from the safe harbor and why.
16. As proposed in Section III.C (3), the GMPA provides that the
offer must be open to the borrower for at least 30 days from when the
document is delivered or mailed to the borrower. Is this an appropriate
minimum time period to ensure that the borrower has an adequate
opportunity to shop?
17. As proposed in Section III. C (4), the rule currently provides
that the Guaranteed Mortgage Package agreement must indicate that
certain reports such as the appraisal, credit report, and pest
inspection are available to the borrower upon the borrower's request.
Also, packagers may decide to forego such reports or services (i.e.
lender's title insurance) and must inform the borrower that such
reports or services are not anticipated to be included in the package
price. Are these adequate protections for the borrower? HUD is aware
that other laws such as Regulation B (ECOA) provide certain rights to
borrowers with respect to obtaining some of these reports. In order to
qualify for the safe harbor HUD has created additional reporting
requirements. Are these additional reporting requirements appropriate?
18. Should additional consumer protections be established for
packaging? For example, should additional qualifications be established
for ``packagers'' to ensure that borrowers are protected against non-
performance including the unavailability of a mortgage that could
result in a borrower ``losing'' a house? For example, should
[[Page 49157]]
there be a requirement that a packager must have sufficient financial
resources to credibly back the guarantee? Is it necessary to require a
lender signature on the GMPA to ensure that the borrower receives the
loan at the time of settlement? How can the borrower's interests be
protected without unduly burdening the process or unduly limiting the
universe of packagers?
19. Consistent with the HUD-Fed Report, the rule proposes that
certain charges, such as hazard insurance and reserves, are outside the
package as other or optional costs. Is this the right approach or
should these charges be disclosed as the minimum amounts required by
the lender and required to be inside the package? Would the latter
better serve the objective of establishing a single figure for the
borrower to shop with?
20. The rule proposes in Section III. C (3), that under Guaranteed
Mortgage Packaging, the HUD-1 will list the settlement services in the
package but not the specific charges for each service. Certain third
party charges are excluded from the calculation of the finance charge
and the APR under TILA and HOEPA. Commenters are invited to express
their views on whether the approach in the rule satisfies or whether
alternative approaches to cost disclosures should be established to
ensure consumers' rights under TILA and HOEPA are protected while
facilitating packaging. More broadly, commenters are invited to provide
their views on means of better coordinating RESPA and TILA disclosures.
21. Commenters are asked to provide their views on how the rules
should treat mortgage insurance? The rule proposes in Section III. C
(3), that the guaranteed package would include any mortgage insurance
premiums in the APR and up-front costs of mortgage insurance in the
guaranteed package. ``Other Required Costs'' would include reserves for
mortgage insurance premiums. However, because the packager will not
have an appraisal at the time the GMPA is provided, the packager may
not have firm information to provide a definite figure. Another
possibility is to exclude mortgage insurance from the package but
notify the borrower that mortgage insurance may be an ``Other Required
Costs'' and present the borrower an estimate subject to a tolerance, if
mortgage insurance is necessary. This approach would exclude a major
charge from the package. HUD recognizes that there are state laws that
prohibit rebates or any splitting of commissions for mortgage
insurance. How, if at all, should this impact the decision to include
mortgage insurance in packages of settlement services?
22. To what extent, if any, do inconsistencies currently exist, or
would they exist upon promulgation of the proposed rule between State
laws and RESPA? Specifically, what types of State laws result in such
inconsistencies and merit preemption? What, if any, provisions of the
proposal should be revised to facilitate any necessary preemption?
23. The rule proposes that the GFE and the GMPA be given subject to
appraisal and underwriting. How should the final rule address the
matter of loan rejection or threatened rejection as a means of allowing
the originator to change the GFE or GMPA to simply earn a higher
profit?
24. To what extent, if any, should direct loan programs such as
those provided by the Rural Housing Service of the Department of
Agriculture be treated differently under the new regulatory
requirements proposed by this rule?
25. As proposed, the GFE and GMPA currently contain sections for
loan originators and packagers to indicate the specific loan terms for
adjustable rate mortgages, prepayment penalties, and balloon payments.
Are these appropriate loan terms to include on these forms, and what,
if any, other mortgage terms or conditions should be listed on the
forms?
26. What are the arguments for or against limiting the proposed
rule to purchase money, first and second lien, and refinancing loans as
opposed to offering it to home equity, reverse mortgage and other
transactions? Should there be any additional requirements for so-called
B, C, and D loans?
27. As proposed, the Guaranteed Mortgage Package includes one fee
for settlement services required to complete a mortgage loan. The fee
for the package will include loan origination fees, typically referred
to as ``points.'' As points are generally deductible under IRS rules,
comments are invited as to how to determine which portion of the
package prices should be deemed to constitute points.
28. To what extent do the proposed changes to the definition of
application in Section III. B (2) a., and requirements for delivery of
the GFE impact other federal disclosure requirements, such as those
mandated by the Truth in Lending Act? How can the disclosure objectives
of the proposed rule be harmonized with such other disclosure
requirements?
29. The proposed rule in Section III. B (2) c., would require a
loan originator capable of offering an alternative loan product to
provide a prospective borrower, upon the borrower's request, with a new
GFE if, after full underwriting, the borrower does not qualify for the
loan identified on the original GFE. Is this approach appropriate? What
other options should be considered where borrowers do not qualify for
the loan product initially sought?
30. The proposed rule in Section III. B (2) c., would require loan
originators to provide qualified borrowers with an amended GFE,
identifying any changes in costs associated with changes in the
interest rate, where the borrower elects not to lock-in the interest
rate quoted on the original GFE at the time it is provided. Is this an
appropriate requirement? What alternatives, if any, should HUD
consider?
V. Findings and Certifications
The Paperwork Reduction Act
The information requirements contained in this proposed rule have
been submitted to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter
35). The Real Estate Settlement Procedures Act of 1974 requires
settlement providers to disclose to homebuyers certain information at
or before settlement and pursuant to the servicing of the loan and
escrow account. This includes a Special Information Booklet, a Good
Faith Estimate, an Initial Servicing Disclosure, a Settlement Statement
(the Form HUD-1 or Form HUD 1-A), and when applicable an Initial Escrow
Account Statement, an Annual Escrow Account Statement, an Escrow
Account Disbursement Disclosure, an Affiliated Business Arrangement
Disclosure, and a Servicing Transfer/Disclosure. This information
requirement under OMB control number 2502-0265 consolidates information
previously collected under OMB control numbers 2502-0458, 2502-0491,
2502-0501, 2502-0516, and 2502-0517.
Estimate of the total reporting and recordkeeping burden that will
result from this information requirement is as follows:
Respondents: Individuals or households, business or other for-
profit entities.
Frequency of submission: On occasion and annually.
Reporting burden: Number of respondents: 20,000, Annual responses:
105,300,000, Hours per response: 0.04.
Total estimated burden hours: 6,500,000.
[[Page 49158]]
The status of this information collection is that it is a
reinstatement, with changes, of a previously approved collection. In
accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments from
members of the public and affected agencies concerning this collection
of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond; including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
Interested persons are invited to submit comments regarding the
information collection requirements in this proposal. Comments must be
received within sixty (60) days from the date of this proposal.
Comments must refer to the proposal by name and docket number (FR-4668)
and must be sent to:
Lauren Wittenberg, HUD Desk Officer, Office of Management and Budget,
New Executive Office Building, Washington, DC 20503,
lauren_wittenberg@opm.eop.gov, Fax: (202) 395-6974
and;
Gloria Diggs, Reports Liaison Officer, Office of the Assistant
Secretary for Housing--Federal Housing Commissioner, Department of
Housing & Urban Development, 451 Seventh Street, SW, Room 9116,
Washington, DC 20410.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations at 24 CFR part 50,
which implement section 102(2)(C) of the National Environmental Policy
Act of 1969 (42 U.S.C. 4223). The Finding of No Significant Impact is
available for public inspection between the hours of 7:30 a.m. and 5:30
p.m. weekdays in the Office of General Counsel, Regulations Division,
Room 10276, U.S. Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC 20410-0500.
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this proposed
rule under Executive Order 12866 (entitled ``Regulatory Planning and
Review''), which the President issued on September 30, 1993. This rule
was determined economically significant under E.O. 12866. Any changes
made to the proposed rule subsequent to its submission to OMB are
identified in the docket file, which is available for public inspection
in the office of the Rules Docket Clerk, Room 10276, U.S. Department of
Housing and Urban Development, 451 Seventh Street, SW, Washington, DC,
20410-0500. The Initial Economic Analysis prepared for this rule is
also available for public inspection in the Office of the Rules Docket
Clerk.
Federalism Impact
This proposed rule does not have federalism implications and does
not impose substantial direct compliance costs on State and local
governments or preempt State law within the meaning of Executive Order
13132 (entitled ``Federalism'').
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this proposed rule and has
determined that the rule would have a significant economic impact on a
substantial number of small entities within the meaning of the
Regulatory Flexibility Act.
In accordance with section 603 of the Regulatory Flexibility Act,
an Initial Regulatory Flexibility Analysis (IRFA) has been prepared and
has been made part of the Economic Analysis prepared under Executive
Order 12866. The IRFA portion, however, of the combined analysis is
published as an appendix to this proposed rule. The IRFA was also
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for review and comment on its impact on business.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) (UMRA) requires Federal agencies to assess the effects of
their regulatory actions on State, local, and tribal governments and on
the private sector. This proposed rule does not, within the meaning of
the UMRA, impose any Federal mandates on any State, local, or tribal
governments nor on the private sector.
Congressional Review of Final Rules
This rule constitutes a ``major rule'' as defined in the
Congressional Review Act (5 U.S.C. Chapter 8). At the final rule stage,
this rule will have a 60-day delayed effective date and be submitted to
the Congress in accordance with the requirements of the Congressional
Review Act.
VI. Rule Language
List of Subjects in 24 CFR part 3500
Consumer protection, Condominiums, Housing, Mortgagees, Mortgage
servicing, Reporting, and recordkeeping requirements.
Accordingly, for the reasons set out in the preamble, part 3500 of
title 24 of the Code of Federal Regulations is proposed to be amended
as follows:
1. The authority citation shall continue to read as follows:
Authority: 12 U.S.C. 2601 et. seq.; 42 U.S.C. 3535(d).
2. In Sec. 3500.2, paragraph (b) is amended by revising the
definitions of Application, Good faith estimate, and Mortgage broker
and adding the following definitions of Guaranteed mortgage package,
Loan originator, Mortgage broker loan, No tolerance, Packager, Packaged
services, Participating settlement service provider, Par value,
Tolerance, Unforeseeable and extraordinary circumstances, and Zero
tolerance:
Sec. 3500.2 Definitions.
* * * * *
(b) * * *
Application means the submission of credit information (Social
Security number, property address, basic income information, the
borrower's information on the house price or a best estimate on the
value of the property, and the mortgage loan needed) by a borrower in
anticipation of a credit decision, whether oral, written or electronic,
relating to a federally related mortgage loan. If the submission does
not state or identify a specific property, the submission is an
application for a pre-qualification and not an application for a
federally related mortgage loan under this part. The subsequent
addition of an identified property to the submission converts the
submission to an application for a federally related mortgage loan.
* * * * *
Good faith estimate means an estimate of settlement costs on the
required format prescribed at Appendix C to this part prepared in
accordance with Sec. 3500.7.
* * * * *
[[Page 49159]]
Guaranteed mortgage package means a guaranteed package of mortgage
related settlement services and an interest rate guarantee for a
federally related mortgage loan that is offered to a consumer under a
Guaranteed Mortgage Package Agreement (GMPA) in accordance with
Sec. 3500.16.
Loan originator means a lender or mortgage broker.
* * * * *
Mortgage broker means a person or entity that renders origination
services in a table funding or intermediary transaction. Where a
mortgage broker is the source of the funds for a transaction, the
mortgage broker is a ``lender'' for purposes of this part.
* * * * *
Mortgage broker loan is a federally related mortgage loan that is
originated by a mortgage broker.
No tolerance means that the charges may vary without being subject
to any tolerance.
Packager means a person or other entity that offers and provides
guaranteed mortgage packages to borrowers in accordance with
Sec. 3500.16.
Packaged services are settlement services that the lender requires
for settlement and includes all services except per diem interest,
hazard insurance, escrow/reserves, and optional settlement services.
Participating settlement service provider means a settlement
service provider that provides settlement services in a guaranteed
mortgage package and whose charges are included in the guaranteed
mortgage package price.
Par value means the principal amount of the loan.
* * * * *
Tolerance means a variation above an estimate of a category of
settlement costs. Tolerance is expressed as a percentage of the
estimate.
Unforeseeable and extraordinary circumstances means acts of God,
war, disaster, or any other emergency, making it impossible or
impractical to perform.
Zero tolerance means the amount listed may not vary at closing,
except in unforeseeable and extraordinary circumstances.
* * * * *
3. In Sec. 3500.7, paragraph (a) introductory text and (a)(2)
through (e) are revised, paragraph (f) is redesignated as paragraph
(g); and a new paragraph (f) is added to read as follows:
Sec. 3500.7 Good faith estimate
(a) Lender to provide. Except as provided in paragraphs (a), (b) or
(f) of this section, or where a guaranteed mortgage package agreement
is provided in accordance with Sec. 3500.16 of this part, the lender
shall provide all applicants for a federally related mortgage loan with
a good faith estimate. The lender shall provide the good faith estimate
either by delivering the good faith estimate or by placing it in the
mail to the loan applicant, not later than three business days after an
application is received or prepared. If the application is denied
before the end of the three-business-day period, the lender need not
provide the denied borrower with a good faith estimate. A lender shall
not collect any fee in connection with the application or the good
faith estimate beyond that which is necessary to provide the good faith
estimate.
* * * * *
(2) For all mortgage loans, third party settlement services,
governmental fees and charges, any other loan related expenses that are
not paid to and retained by the originator must be reported in their
entirety in the appropriate categories on the good faith estimate.
* * * * *
(b) Mortgage broker to provide. In the event an application is
received by a mortgage broker who is not an exclusive agent of the
lender, the mortgage broker must provide a good faith estimate by
delivering the good faith estimate or by placing it in the mail to the
loan applicant, not later than three business days after an application
is received or prepared. As long as the mortgage broker has provided
the good faith estimate, the funding lender is not required to provide
an additional good faith estimate, but the funding lender is
responsible for ascertaining that the good faith estimate has been
delivered. If the application is denied before the end of the three-
business-day period, the mortgage broker need not provide the denied
borrower with a good faith estimate. A mortgage broker shall not
collect any fee in connection with the application or the good faith
estimate beyond that which necessary to provide the good faith
estimate.
(c) Content of good faith estimate. As prescribed in and completed
in accordance with the instructions in Appendix C to this part, the
good faith estimate must state the property address, loan amount,
interest rate used to calculate the estimated amounts, the Annual
Percentage Rate (APR) for the loan including mortgage insurance, and
the monthly payment for principal and interest and mortgage insurance.
The form must also state whether the loan is an adjustable rate
mortgage, contains a prepayment penalty clause or has a balloon
payment, the functions of the originator, and the total amount of
charges for each category of services: loan origination, interest rate
dependent payment, lender required and selected third party services,
title services and title insurance, shoppable lender required third
party services, government services, amounts for escrow/reserves, per
diem interest, hazard insurance and optional owner's title insurance.
Attachment A-1 of the good faith estimate must indicate the subtotals
of the origination charges to the lender and to the mortgage broker,
and the subtotals of all the charges and fees for title and for
settlement agent services.
(d) Accuracy of good faith estimate. (1) The amounts of the
categories of loan origination charges, lender required and selected
third party settlement service provider charges, lender selected title
services and title insurance, and governmental fees and charges
reported on the good faith estimate shall not vary from the time the
good faith estimate is given to the borrower and may not be exceeded at
settlement absent unforeseeable and extraordinary circumstances. The
estimates in the good faith estimate shall be open to the borrower for
a minimum of 30 days from when the document is delivered or mailed to
the borrower. Within the 30 days the borrower must agree to go forward
and pay the additional money to complete the underwriting process. If
the offer expires, the borrower may ask the loan originator to ratify
such estimate or request a new one. If the cost at settlement exceeds
the estimate reported on the good faith estimate, absent unforeseeable
and extraordinary circumstances, the borrower may withdraw the
application and receive a full refund of all loan-related fees and
charges. The loan originator must document any such circumstances and
retain the document in accordance with Sec. 3500.10(e).
(2) The amounts for lender required third party services must
include an estimate of the maximum mortgage insurance premium to be
charged upfront to the borrower based upon the borrower's assertion of
the value of the property and loan amount needed and indicate that the
mortgage insurance premium may decrease or be removed after full
underwriting;
(3) The amounts of the categories of borrower selected title
services and title insurance, shoppable lender required third party
services, and reserves/escrow deposits charged to a borrower may not
vary at settlement by greater
[[Page 49160]]
than a tolerance of 10% from the amounts for such categories reported
on the good faith estimate, except when a borrower chooses to purchase
a more expensive service, absent unforeseeable and extraordinary
circumstances.
(4) The amounts of the categories of per diem interest, hazard
insurance and optional owner's title insurance reported on the good
faith estimate shall be carefully prepared based upon the originator's
knowledge of relevant prices, but are not subject to tolerances, which
means that charges may vary without being subject to any tolerance.
(5) In mortgage broker loans, the borrower payment to the lender
for a lower interest rate must be paid in full to the lender and the
lender payment to the borrower for a higher rate must include any
lender payments for the transaction other than for the par value of the
loan.
(6) Loan originators must include all charges correctly within
their prescribed category on the good faith estimate and not include
any ``mark ups'' or ``up charges'' in their estimates of charges for
categories III(C) through (J) of the good faith estimate. The Loan
originator shall include all of its charges in the origination charges
and interest rate dependent categories.
(7) No loan originator shall be held responsible for charges
imposed on the borrower at settlement for shoppable lender required
third party services unless the borrower asked where the services could
be obtained within the tolerance, used a settlement service provider
identified by the originator, and was charged an amount in excess of
the tolerance.
(e) Form of good faith estimate. A good faith estimate required
format is set forth in Appendix C to this part. The good faith estimate
may be provided together with disclosures required by the Truth in
Lending Act, 15 U.S.C. 1601 et seq., so long as all required material
for the good faith estimate is grouped together.
(f) Particular providers required by lender. (1) If the lender
requires the use (see Sec. 3500.2, ``required use'') of a particular
provider of a settlement service, other than the lender's own
employees, and also requires the borrower to pay any portion of the
cost of such service, the good faith estimate must identify the
required settlement service provider.
(2) Except for a provider that is the lender's chosen attorney,
credit reporting agency, or appraiser, if the lender is in an
affiliated business relationship (see Sec. 3500.15) with a provider,
the lender may not require the use of that provider.
(3) If the lender maintains a controlled list of required providers
(five or more for each discrete service) or relies on a list maintained
by others, and at the time of application the lender has not yet
decided which provider will be selected from that list, then the lender
may satisfy the requirements of this section if the lender provides the
borrower, on the good faith estimate, with the names of the required
providers, and the estimated charge for the particular settlement
service.
* * * * *
4. In Sec. 3500.8, the third sentence of paragraph (a) is revised
to read as follows:
Sec. 3500.8 Use of HUD-1 or HUD-1A settlement statements.
(a) * * * Alternatively, the form HUD-1A may be used for these
transactions, but not for transactions in which there is a lender
credit to the borrower. * * *
* * * * *
5. In Sec. 3500.10, a new sentence is added to paragraph (e) to
immediately follow the second sentence to read as follows:
Sec. 3500.10 One-day advance inspection of HUD-1 or HUD-1A settlement
statement; delivery; recordkeeping.
(e) * * * Loan originators shall retain documentation of
unforeseeable and extraordinary circumstances related to good faith
estimates provided to borrowers and packagers shall retain
documentation of such circumstances related to guaranteed mortgage
package agreements provided to borrowers for five years after
settlement.* * *
* * * * *
6. In Sec. 3500.14, a new paragraph (g)(1)(viii) is added to read
as follows:
Sec. 3500.14 Prohibition against kickbacks and unearned fees.
* * * * *
(g)(1)(viii) Any discounts negotiated among settlement service
providers, packagers, or any other entities for settlement services
provided that the entire discounted price is charged to the borrower
and reported as part of the total charge within Sections III(C) through
(J) of the good faith estimate as appropriate.
* * * * *
Sec. 3500.16 [Redesignated as Sec. 3500.20]
7. In Sec. 3500.16 is redesignated as Sec. 3500.20 and a new
Sec. 3500.16 is added to read as follows:
Sec. 3500.16 Guaranteed Mortgage Package--Safe Harbor.
(a) General. A guaranteed mortgage package is defined in
Sec. 3500.2.
(b) Violation and safe harbor. A guaranteed mortgage package,
including payments, discounts, pricing arrangements or any other
exchanges of things of value by and between persons or entities
offering their services and compensated through guaranteed mortgage
packages (hereinafter ``packagers'') and participating settlement
service providers as part of such a transaction, shall not violate
section 8 of RESPA or Sec. 3500.14 and satisfies sections 4 and 5 of
RESPA if the conditions set forth in this section are met.
(c) Criteria for guaranteed mortgage package. In order to qualify
for the safe harbor stated in paragraph (b) of this section, packagers
must deliver a guaranteed mortgage package offer within 3 days of
application or such time as may be reasonable in special cases but
prior to the borrower paying any fee, that includes:
(1) A package of designated lender required settlement services at
a guaranteed price from the time the guaranteed mortgage package is
offered by the packager to the borrower through settlement provided
that the borrower accepts the guaranteed mortgage package agreement
within 30 days, or such greater period offered by the packager, from
when the document is delivered or mailed to the borrower;
(2) A mortgage loan with an interest rate guarantee and an Annual
Percentage Rate (APR) that is guaranteed through settlement provided
that the borrower accepts the guaranteed mortgage package agreement
within 30 days, or such greater period offered by the packager, and the
interest rate is adjusted only to reflect changes in market interest
rates based on movement in a observable and verifiable index or other
appropriate measure; and
(3) A guaranteed mortgage package agreement as prescribed in and
completed in conformity with Appendix F to this part which:
(i) Explains that the guaranteed mortgage package includes
necessary settlement services required by the lender and guarantees a
package price for these services through settlement provided that the
borrower accepts the GMPA within 30 days, or such greater period
offered by the packager, from when the document is delivered or mailed
to the borrower;
(ii) Commits the packager to provide all settlement services and
includes all charges required to complete your mortgage except those
specified as other required settlement costs and advises the borrower
if the packager anticipates whether a pest inspection, lender's title
[[Page 49161]]
insurance, credit report, and/or appraisal will be anticipated;
(iii) Identifies and provides estimates for other required
settlement costs, such as per diem interest, reserves/escrow, and
hazard insurance, and optional owner's title insurance and explains
that any required settlement costs not separately itemized and
estimated are the responsibility of the packager;
(iv) Identifies and explains any borrower option to utilize
payments to or from the lender as a result of the interest rate to pay
settlement costs or adjust the interest rate and mortgage payments;
(v) Identifies any reports such as the pest inspection, lender's
title insurance, appraisal or credit report for the loan transaction
that are available to the borrower at the borrower's request;
(vi) Specifies that the packager will ensure that a mortgage loan
is provided as part of the package and that, after acceptance by the
borrower and the lender, the lender participating in the package shall
provide a loan with the same terms as set forth in the guaranteed
mortgage package agreement;
(vii) Advises the borrower of whether the loan is an adjustable
rate mortgage and the terms of the mortgage, whether there is a
prepayment penalty and that the borrower can request its terms, whether
there is a balloon payment, whether the guaranteed mortgage package
price includes an upfront maximum mortgage insurance premium based upon
the borrowers assertion of the value of the property and loan amount
needed and that the mortgage insurance premium may decrease or be
removed after full underwriting; and
(viii) Commits the packager to the terms of the guaranteed mortgage
package agreement upon borrower acceptance and payment of any fee,
subject only to acceptable final underwriting and property appraisal.
(d) Impact on Good faith estimate and HUD-1/1A. Where a packager
satisfies the criteria in paragraph (c) of this section, the packager
shall provide the borrower the guaranteed mortgage package agreement in
lieu of the good faith estimate. In loans originated through guaranteed
mortgage package agreements, the HUD-1/1-A shall be completed at
settlement by itemizing all the included services (but not the charges)
of third party settlement service providers that were performed for the
guaranteed mortgage package price. The guaranteed mortgage package
price shall be shown as the origination fee on line 801 of the HUD-1/
HUD-1A. Additionally, the packager must list the finance charges needed
to calculate the APR on an addendum to the HUD-1 or HUD-1A.
(e) Exclusions from safe harbor.
(1) Notwithstanding the existence of a guaranteed mortgage package,
section 8 of RESPA remains applicable to payments by and between
packagers or participating settlement service providers and parties
outside the guaranteed mortgage package.
(2) The Affiliated Business Arrangement (AfBA) exemption
requirements, set forth in Sec. 3500.15, remain in effect when a
borrower is referred to a packager by a person or entity not otherwise
participating in the guaranteed mortgage package who is an affiliate of
the packager or any participating settlement service provider.
(3) The guaranteed mortgage package safe harbor shall not be
available where the rate or points and fees of a Federally related
mortgage loan make the loan subject to the Home Ownership Equity
Protection Act (HOEPA).
Sec. 3500.19 [Amended]
8. In Sec. 3500.19(c) the cross references to ``Sec. 3500.16'' and
to ``section 3500.16'' are both revised to read ``Sec. 3500.20''
9. Appendix A to part 3500--Instructions for Completing HUD-1 and
HUD-1A Settlement Statements is amended as follows:
Appendix A to Part 3500--Instructions for Completing HUD-1 and HUD
1-A Settlement Statements; Sample HUD-1 and HUD 1A Statements
a. The second paragraph of the General Instructions is revised to
read as follows:
General Instructions
* * * * *
Except with respect to a loan resulting from a Guaranteed
Mortgage package, the settlement agent shall complete the HUD-1 to
itemize all charges imposed upon the Borrower and the Seller by the
loan originator and all sales commissions, whether to be paid at
settlement or outside of settlement, and any other charges which
either the Borrower or the Seller will pay for at settlement.
Charges to be paid outside of settlement, including cases where a
non-settlement agent (i.e., attorneys, title companies, escrow
agents, real estate agents or brokers) holds the Borrower's deposit
against the sales price (earnest money) and applies the entire
deposit towards the charge for the settlement service it is
rendering, shall be included on the HUD-1 but marked ``P.O.C.'' for
``Paid Outside of Closing'' (settlement) and shall not be included
in computing totals. P.O.C. items should not be placed in the
Borrower or Seller columns, but rather on the appropriate line next
to the columns. In the case of loans where settlement services are
paid through the interest rate, any charges to be paid by the lender
should not be marked as P.O.C. but should be shown in the
appropriate column and used in computing totals. In loans originated
through guaranteed mortgage package agreements, the HUD-1/1-A shall
indicate through checkmarks in the appropriate column which third
party settlement services were performed for the guaranteed mortgage
package price. The guaranteed mortgage package price shall be shown
on line 801. Additionally, the finance charges needed to calculate
the APR will be disclosed in an addendum on the HUD-1.
* * * * *
b. The Line Item Instructions for the HUD-1 paragraph describing
line 204-209 are revised to read as follows:
* * * * *
Lines 204-209 are used for other items paid by or on behalf of
the Borrower. Examples include cases in which the Seller has taken a
trade-in or other property from the Borrower in part payment for the
property being sold. They may also be used in cases in which a
Seller (typically a builder) is making an ``allowance'' to the
Borrower for carpets or drapes which the Borrower is to purchase
separately. Lines 204-209 can also be used to indicate any Seller
financing arrangements or other new loan not listed in Line 202. For
example, if the Seller takes a note from the Borrower for part of
the sales price, insert the principal amount of the note with a
brief explanation on Lines 204-209. Additionally, a blank line in
this series shall be used to record the total of all payments from
the Lender to the Borrower based on the transaction, including
payments based on a higher interest rate.
* * * * *
c. Following the instructions for HUD-1 Line 603, Section L.
Settlement Charges is revised to read as follows:
* * * * *
Section L. Settlement charges. For all items except for those
paid to and retained by the Loan Originator, the name of the person
or firm ultimately receiving the payment should be shown. In the
case of loans where settlement services are paid through the
interest rate, any charges to be paid by the lender should be shown
in the appropriate column used in computing totals.
* * * * *
d. The paragraph immediately following ``Line Item Instructions for
Completing HUD--1A'' is revised to read as follows:
* * * * *
Note: HUD-1A is an optional form that may be used for
refinancing and subordinate lien federally related mortgage loans,
as well as for any other one-party transaction that does not involve
the transfer of title to residential real property or does not
involve any lender payments to the borrower based on the
transaction, including any payments based on a higher interest rate.
The HUD-1 form may also be used for such transactions, by utilizing
the borrower's side of the HUD-1 and following the relevant parts of
the Line Item Instructions. The use of the HUD-1 or HUD-A is not
mandatory for open-end lines
[[Page 49162]]
of credit (home-equity plans), as long as the provisions of
Regulation Z are followed.
* * * * *
e. For HUD 1-A, the second paragraph following ``General
Instructions'' is revised to read as follows:
* * * * *
The settlement agent shall complete the HUD-1A to itemize all
charges imposed upon the borrower by the lender, whether to be paid
at settlement or outside of settlement, and any other charges that
the borrower will pay for at settlement. For all items except for
those paid to and retained by the lender, the name of the person or
firm ultimately receiving the payment should be shown together with
the total amount paid to such person in connection with the
transaction. In loans originated through guaranteed mortgage package
agreements, the HUD-1A shall be completed at the time of settlement
by indicated through checkmarks in the appropriate column which
settlement services were performed for the guaranteed mortgage
package price. The guaranteed mortgage package price shall be shown
on line 801. Additionally, the finance charges needed to calculate
the APR will be disclosed in an addendum on the HUD-1A.
10. Appendix C to part 3500 is revised in its entirety, including
the heading, to read as follows:
Appendix C to Part 3500--Instructions for Completing Good Faith
Estimate; Sample Good Faith Estimate
Instructions for completing the Good Faith Estimate
The following are instructions for completing the Good Faith
Estimate required under section 5 of RESPA and Regulation X of the
Department of Housing and Urban Development (24 CFR 3500.7). This
form is to be used as a statement of estimated settlement charges.
The instructions for completion of the Good Faith Estimate are
primarily for the benefit of the loan originator who prepares the
form and need not be transmitted to the borrower(s) as an integral
part of the Good Faith Estimate.
General Instructions
The loan originator preparing the Good Faith Estimate may fill
in information and amounts on the form by typewriter, hand printing,
computer printing, or any other method producing clear and legible
results. Under these instructions the ``form'' refers to the Good
Faith Estimate form.
All fees and charges shall be disclosed in dollar amounts.
Percentages may be added, when applicable.
Specific Instructions
I. Our Services. Loan originators shall include a paragraph
substantially the same as the paragraph set forth on the form in
this Appendix. This paragraph explains the services provided by the
loan originator and emphasizes that the borrower should shop and
compare different loans and originators to find the best loan for
his or her individual situation.
II. Loan Terms. Loan originators shall fill in the mortgage
amount, indicate whether the loan is a fixed or variable loan,
specify the interest rate and Annual Percentage Rate (APR) and fill
in the length of the loan (i.e. number of years/months) and the
monthly payment, including any mortgage insurance.
III. Settlement Costs. This section covers the settlement costs
associated with the mortgage loan and warns the borrower that the
costs may change if a different mortgage product is chosen or the
interest rate changes.
III.A. Origination Charges. Loan originators shall total all
origination charges to the lender and the broker in this category on
the form. For mortgage brokers, these charges shall include all
charges from the borrower that are paid to the mortgage broker for
the transaction. For lenders, these charges shall include all direct
charges from the borrower for the transaction, other than discount
points reported in line III B (2). The estimated total origination
charges shall not vary from the actual costs at the time of
settlement (0% tolerance), absent unforeseeable and extraordinary
circumstances.
III.B. Interest Rate Dependent Payment.
(1) In loans originated by mortgage brokers, mortgage brokers
shall subtotal any lender payments to the borrower for a higher
interest rate as well as any other lender payments for the
transaction other than for the par value of the loan in this
category on the form.
(2) In loans originated by mortgage brokers, mortgage brokers
shall subtotal any borrower payments to the lender for a lower
interest rate.
The mortgage broker shall include the payments in (1) and (2)
when computing the net loan origination charge due from borrower
(Sum of A and B). Lenders may complete this section at their option.
III.C. Lender Required and Selected Third Party Services. Loan
originators shall subtotal all charges for lender required and
lender selected third party services in this section on the form.
This subtotal shall cover all such services except for title related
services and title insurance in connection with the borrower's loan
and shall not vary from actual costs at the time of settlement (0%
tolerance), absent unforeseeable and extraordinary circumstances.
III.D. Title Services and Title Insurance. Loan originators
shall subtotal all fees or charges for title and settlement agent
services and title insurance in this category of the form. On the
form, the loan originator also must indicate whether the services
and insurance are loan originator selected or borrower selected. If
title services and insurance are loan originator/lender selected,
the estimate shall not vary from actual costs at the time of
settlement (0% tolerance), absent unforeseeable and extraordinary
circumstances. If title services and/or insurance are shoppable by
the borrower, and the borrower ultimately elects to use a provider
identified by the loan originator/lender, the final amount at
settlement may not exceed the estimate by more than 10% (10%
tolerance) absent unforeseeable and extraordinary circumstances,
except when a borrower chooses to purchase a more expensive service.
III.E. Shoppable Lender Required Third Party Services. Loan
originators shall subtotal all charges for loan originator/lender
required third party services in this section. If services are
shoppable by the borrower, and the borrower ultimately elects to
obtain some or all of these services through the loan originator,
the final amount at settlement may not exceed the loan originator's
estimate by more than 10% (10% tolerance) absent unforeseeable and
extraordinary circumstances, except when a borrower chooses to
purchase a more expensive service.
III.F. Government Charges--Taxes (State and Local). Loan
originators shall subtotal all state and local fees, charges, and
taxes that will be required at settlement in this section. This
estimate shall be based on an assumed settlement date that the loan
originator will specify on the form. The estimate shall not vary
from actual costs at the time of settlement (0% tolerance) for the
assumed settlement date, absent unforeseeable and extraordinary
circumstances.
III.G. Reserves/Escrow. Loan originators shall subtotal
reserves/escrow amounts that will be required by the lender at
settlement. This section shall include only required escrow items
such as taxes, hazard insurance, and mortgage insurance. The
estimate shall not vary from the actual costs required for reserves/
escrow at the time of settlement by more than 10% (10% tolerance)
absent unforeseeable and extraordinary circumstances, except when a
borrower chooses to purchase a more expensive service.
III.H. Per Diem Interest. Loan originators shall disclose the
estimated cost of the minimum amount of per diem interest that the
lender will charge in this section. Although loan originators are
expected to provide reliable figures in this section based on their
experience, no tolerance applies to this section, which means that
charges may vary without being subject to any tolerance.
III.I. Hazard Insurance. Loan originators shall disclose the
estimated cost of the minimum amount of hazard insurance that the
lender will require in this section. Although loan originators are
expected to provide reliable figures in this section based on their
experience, no tolerance applies to this section, which means that
charges may vary without being subject to any tolerance.
III.J. Optional Owner's Title Insurance. Loan originators shall
disclose the estimated subtotal of optional homeowner's title
insurance that the borrower may choose to purchase. Although loan
originators are expected to provide reliable figures in this section
based on their experience, no tolerance applies to this section,
which means that charges may vary without being subject to any
tolerance.
IV. Options to Pay Settlement Costs and Lower Your Interest
Rate. Loan originators shall explain the borrower's options for
paying settlement costs in this section of the form by using
material that is essentially the same as that contained in
paragraphs A, B, C and D of this section at Appendix C along with
discussing these issues with the
[[Page 49163]]
borrower, as needed. The loan originator must fill in the chart to
demonstrate to the borrower how the borrower's chosen interest rate,
monthly payments, and settlement costs compare to a loan of the same
size with a lower and a higher interest rate. The completed chart
serves as an example for the loan originator of how to fill out the
categories. Loan originators shall use figures relevant to the
borrower's transaction.
V. Additional Loan Terms. Loan originators shall indicate
whether the mortgage loan is subject to a prepayment penalty and
whether the loan has a balloon payment due at the conclusion of the
loan term. If there is a prepayment penalty, the loan originator
shall advise the borrower that he or she is entitled to a copy of
the prepayment penalty terms upon request.
For Adjustable Rate Mortgage Loans, loan originators must indicate
the interest rates and adjustment terms of the adjustable rate
mortgage loan.
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Attachment A-1 instructions
Attachment A-1. ``Required Use'' and Shoppable Third Party
Providers.
A. The loan originator must itemize on this form any services
that may be independently obtained by the borrower and the estimated
cost (based on local market averages for the area where the property
is located). The loan originator must also indicate (by checking the
appropriate box) any lender-required, lender selected services,
along with the estimated charge (based on local market averages for
the area where the property is located), and name of the provider.
B. In reporting subtotals for mortgage broker/lender and title
agent/title insurance, the loan originator must indicate the names
of the service providers and the subtotals of all their charges and
fees.
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TP29JY02.002
BILLING CODE 4210-27-C
[[Page 49167]]
11. A New Appendix F to part 3500 is added to read as follows:
Appendix F to Part 3500--Instructions for Completing Guaranteed
Mortgage Package Agreement; Sample Guaranteed Mortgage Package
Agreement
Instructions for Completing the Guaranteed Mortgage Package
Agreement
The following are instructions for completing the guaranteed
mortgage package agreement under Regulation X of the Department of
Housing and Urban Development (24 CFR 3500.16(g)(1)(ix)). This form
is to be used as a statement of guaranteed settlement charges,
interest rate, and costs. The instructions for completion of the
guaranteed mortgage package agreement are primarily for the benefit
of the packager who prepares the form and need not be transmitted to
the borrower(s) as an integral part of the guaranteed mortgage
package agreement.
General Instructions
The loan packager preparing the guaranteed mortgage package
agreement may fill in information and amounts on the form by
typewriter, hand printing, computer printing, or any other method
producing clear and legible results. Under these instructions the
``form'' refers to the guaranteed mortgage package agreement form.
The guarantee includes all services provided in connection with
the mortgage package, except for per diem interest, reserves/escrow,
hazard insurance, and optional owner's title insurance.
Specific Instructions
Packagers shall include a paragraph substantially the same as
the introductory paragraph set forth in Appendix F that explains the
nature of the package and that the guaranteed mortgage package
agreement remains open for a minimum of 30 days, or such greater
period offered by the packager, from when the document is delivered
or mailed to the borrower. Within that time period the borrower must
accept the agreement and pay a minimal fee to make it binding. The
packager shall fill out the property address and indicate whether
the transaction is a purchase or refinance.
I. Interest Rate Guarantee. The packager shall specify an
interest rate guarantee and Annual Percentage Rate (APR), as well as
the amount of any mortgage insurance that is the APR, in this
section of the form, which the borrower may accept and lock at
application. While the guaranteed mortgage package agreement offer
is open, if the borrower does not accept or lock, the interest rate
shall be tied to an observable and verifiable index, or other
appropriate data or means, and may not change except in relation to
said index or measure during the time the offer is pending. If the
borrower does not apply for a loan within 30 days, or such greater
period offered by the packager, the offer will expire.
II. Guaranteed Mortgage Package. The packager shall specify a
lump sum package price for covered settlement services in this
section of the form. At a minimum, this amount must include all
origination services, title services and title insurance, other
packager or lender required third party services, all government
charges, and an upfront maximum mortgage insurance premium, if
applicable.
III. Other Required Settlement Costs. The packager shall itemize
any other required settlement charges in this section of the form as
permitted under Sec. 3500.16. Any settlement costs not separately
itemized in this section are presumed to be included in the Section
II guarantee.
III.A. Per Diem Interest. The packager shall disclose the
estimated cost of the minimum amount of per diem interest that the
lender will require in this section. Although loan originators are
expected to provide reliable figures in this section based on their
experience, no tolerance applies to this section, which means that
charges may vary without being subject to any tolerance.
III.B. Reserves/Escrow. The packager shall accurately indicate
the estimated subtotal for reserves/escrow in this section on the
form. This estimate shall cover all reserves/escrow deposits
required by the lender for such items as taxes, hazard insurance,
and mortgage insurance. The final amount required to be placed in
reserves/escrow at settlement may not exceed the estimate by more
than 10% (10% tolerance), absent unforeseeable and extraordinary
circumstances. The packager must document any such circumstances and
retain the document in accordance with Sec. 3500.10(e) of this part.
III.C. Hazard Insurance. The packager shall estimate the cost of
the minimum amount of hazard insurance that the lender will require
in this section on the form. Although loan originators are expected
to provide reliable figures in this section based on their
experience, no tolerance applies to this section, which means that
charges may vary without being subject to any tolerance.
IV. Optional Owner's Title Insurance. The packager shall
estimate the cost of optional owner's title insurance that the
borrower may choose to purchase. Although packagers are expected to
provide reliable figures in this category, no tolerance applies to
this section, which means that charges may vary without being
subject to any tolerance.
V. Options to Pay Settlement Costs and Lower Your Interest Rate.
Packagers shall explain the borrower's options for paying settlement
costs in this section by using material that is essentially the same
as that contained in paragraphs A, B, C and D of this section at
Appendix F, along with discussing these issues with the borrower, as
needed. The packager must fill in the chart to demonstrate to the
borrower how the borrower's chosen interest rate, monthly payments,
and settlement costs compare to a loan of the same size with lower
and higher interest rates. The completed chart serves as an example
for the packager of how to fill out the categories. Packagers shall
use figures relevant to the borrower's transaction.
VI. Additional Loan Terms. Packagers shall indicate whether the
mortgage loan is subject to a prepayment penalty and whether the
loan has a balloon payment due at the conclusion of the loan term.
If there is a prepayment penalty, the packager shall advise the
borrower that he or she is entitled to a copy of the prepayment
penalty terms upon request. For Adjustable Rate Mortgage Loans,
packagers must indicate the interest rates and adjustment terms of
the adjustable rate mortgage loan.
VII. Guaranteed Mortgage Package Agreement. This section must be
signed by an authorized agent of the packager and the borrower to
become a binding contract for the guaranteed mortgage package at the
guaranteed mortgage package price. After acceptance by the borrower,
non-lender packagers must ensure that the lender signs the GMPA
agreeing to provide the loan included in the guaranteed mortgage
package.
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Attachment A-1 instructions
Attachment A-1. The packager shall indicate in the chart (either
yes or no) whether specific services are anticipated to be included
in the guaranteed mortgage package price, such as the pest
inspection, lender's title insurance, appraisal, and credit report.
[GRAPHIC]
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TP29JY02.005
BILLING CODE 4210-27-C
Dated: July 5, 2002.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
Appendix to FR-4727 Proposed Rule Regulatory Flexibility Analysis
Note: This appendix will not appear in the Code of Federal
Regulations.
The following Regulatory Flexibility Analysis is Chapter 5 of
the rule's Economic Impact Analysis, which is available for public
inspection.
Summary of the Rule's Benefits and Impacts on Small Businesses
The proposed RESPA rule offers a dual approach to problems in
the settlement market: A new, simplified GFE combined with
tolerances on final settlement costs and a new method for reporting
wholesale lender payments in broker transactions; and a guaranteed
cost approach based on packaging of settlement services. This
chapter provides a summary of benefits, costs, transfers,
efficiencies, and market impacts of these two approaches,
highlighting the effects on small businesses. Section I discusses
the new GFE approach while Section II discusses the guaranteed cost
approach, or packaging. The chapter also summarizes alternative
approaches that HUD considered that potentially impacted small
businesses. The format in this chapter is to list the major
findings; additional details about the new GFE approach and
packaging are available in Chapters 3 and 4, respectively.
I. New GFE Approach
The main benefits, costs, transfers, and market impacts of the
new GFE approach are outlined below, along with the specific impacts
on small businesses. Since most brokers and settlement service
providers are small businesses, the main impacts of the new GFE
approach on these entities are highlighted below in subsections I.C,
I.D and I.F.
A. Shopping Benefits
The new GFE approach will improve consumer shopping for
mortgages, which will result in better mortgage products at lower
prices for consumers.
The new GFE format in the proposed rule simplifies the
process of originating mortgages by consolidating costs into a few
major cost categories. This is a substantial improvement over
today's GFE, which contains a long list of individual charges that
encourages fee proliferation and junk fees, and can often overwhelm
and confuse consumers.
The new GFE contains a statement that clarifies the
role that the originator plays in the loan process. It states, for
example, that the originator does not distribute the loan products
of all funding sources, that the originator does not guarantee the
best loan terms, and that the consumer should shop. This will put
all borrowers on notice that they should protect their interests by
shopping.
The new GFE also makes cost estimates more certain, by
requiring that loan originators adhere to amounts reported on the
GFE for major cost categories (such as origination fees), and on
additional cost categories give estimates subject to a 10% upper
limit, or tolerance. This will reduce the all too frequent problem
of borrowers being surprised by additional costs at settlement.
The new GFE will better inform consumers about their
financing choices by requiring that lenders explain the different
interest rate and closing cost options available to consumers. For
example, consumers will fully understand the trade-offs between
reducing their closing costs and increasing the interest rate on the
mortgage.
Altogether, the simplicity and certainty offered by the
new GFE should improve comparison shopping for mortgage loans,
reduce interest rates and settlement prices for borrowers, and
eliminate surprises at settlement. There will be less of the sub-
optimal consumer shopping that often characterizes today's mortgage
market. In addition, originators will be less able to take advantage
of uninformed shoppers.
B. Summary of Estimated Benefits, Costs, Transfers, and Efficiencies
Chapter 3 provided estimates of the magnitude of the benefits,
costs, transfers, and efficiencies. Transfers totaled $6.3 billion
to borrowers, with $4.5 billion coming from originators and $1.8
billion from third party settlement service providers. In addition
to these transfers, there are efficiency gains: Borrowers realize
$826 million in efficiency gains from less time spent shopping; and
loan originators and third party settlement service providers
experience $1.630 billion in efficiency gains, some or all of which
have the potential to be passed through to borrowers through
competition. Costs to originators rise by approximately $250-$275
million. These estimates are explained further below. While they are
based on specific assumptions (see Chapter 3), they provide a sense
of the overall effects of the new GFE approach.
Under one set of assumptions, Chapter 3 estimates that
$7.5 billion of the $15 billion in total yield premium payments
(YSPs) is not passed through to borrowers to reduce closing costs.
If the proposed rule results in half of this $7.5 billion being
recaptured by borrowers, then the annual impact would be $3.75
billion. While this figure will vary depending on specific
assumptions, it provides a sense of how large the effects of the
proposed rule could be on the return of YSPs to borrowers as reduced
closing costs.
Direct origination fees are estimated to be $15 billion
(which when added to the $15 billion in YSPs results in total
originator compensation of $30 billion). In addition to the $3.75
billion in YSPs recaptured by borrowers, it is also assumed that
improved shopping enables borrowers to capture five percent (or
$0.75 billion) of originators' direct origination fees of $15
billion.
Chapter 3 estimates that $18 billion in third-party
fees would be subject to increased price pressure as a result of the
imposition of tolerances and expanded shopping by originators. While
it is difficult to estimate how much tolerances and expanded
originator shopping will reduce the $18 billion, this figure
provides a base on which this effect will be felt. The estimates
reported below assume that third-party fees would fall by 10
percent, or $1.8 billion.
It was estimated that borrowers would save $6.3 billion
in annual settlement
[[Page 49171]]
charges.\1\ This $6.3 billion represents transfers to borrowers from
higher priced producers, with $4.5 billion coming from originators
\2\ and $1.8 billion from third party settlement service providers.
While these figures will vary depending on specific assumptions, it
provides a sense of how large the effects of the proposed rule could
be on settlement charges to borrowers.
---------------------------------------------------------------------------
\1\ As explained in Section IV.C of Chapter 3, the $6.3 billion
represents about 13 percent of the baseline settlement costs, which
include origination fees and selected third party costs (appraisal,
credit report, tax service and flood certificate and title insurance
and settlement agent charges). Survey, pest inspection, and mortgage
insurance are not included, as they are not required on all loans.
Thus, the $6.3 billion may be a conservative figure. This assumes,
of course, that all the other assumptions underlying this scenario
are correct.
\2\ The $3.75 billion in YSPs recaptured by borrowers plus the
$0.75 billion in reduced direct origination fees give $4.5 billion
in transfers to borrowers from originators.
---------------------------------------------------------------------------
In addition to the transfers, there are several
efficiencies associated with the GFE. Borrowers realize $826 million
savings in time spent shopping for loans and third party services.
Loan originators save $1.280 billion in time spent with shoppers, in
efforts spent seeking out vulnerable borrowers, and from the
substitution of more efficient for less efficient originators. Third
party settlement service providers save $350 million in time spent
with shoppers and from the substitution of more efficient for less
efficient third party settlement service providers. Some or all of
the $1.280 billion and $350 million in efficiency gains have the
potential to be passed through to borrowers through competition.
Costs to originators rise by $226 million if it takes
10 extra minutes to handle the forms and by $26 to $52 million to
make third party arrangements in response to tolerances. (See
``Costs and other Impacts'' below.)
As discussed throughout this chapter, the benefit,
cost, transfer, and efficiency estimates are based on specific
assumptions. The estimates provide a sense of the overall net
benefits of the proposed new GFE approach to consumers. The rest of
this summary highlights the main impacts of the new GFE approach.
C. New Treatment of Wholesale Lender Payments and Impacts on Brokers
An important feature of the new GFE approach is that it
addresses the problem of lender payments to mortgage brokers.
The proposed rule ensures that in brokered
transactions, borrowers receive the full benefit of the higher price
paid by wholesale lenders for a loan with an above-par interest
rate, that is, yield spread premiums will go directly to the
borrower. On both the GFE and HUD-1, the portion of any wholesale
lender payments that arise because a loan has an above-par interest
rate is passed through directly to borrowers as a credit against
other costs. Thus, there is assurance that borrowers who take on an
above-par loan receive funds to offset their settlement costs.
Similarly, the proposed rule ensures that in brokered
transactions, consumers who choose to pay discount points receive
the full market benefit in terms of lower mortgage interest rates.
Under these new rules, brokers must report the total
origination fees they receive on the GFE and the HUD-1--rather than
their origination fees net of any yield spread premium they receive.
Thus, the new GFE clarifies what brokers are receiving for loan
origination.
Most brokers are small businesses. The above changes in
the method for reporting wholesale lender payments on the GFE and
HUD-1 will reduce the incomes of those brokers who have been
overcharging consumers by receiving a combination of origination
fees and yield spread premium payments that is greater than that
suggested by competitive markets. The new GFE will clearly indicate
both (a) the broker's total origination fee received and (b) the net
upfront origination fee to the borrower, after reduction for any
yield spread premium that the wholesale lender pays the borrower.
Consumers will have full information about broker fees, which will
allow them to comparison shop and pay lower fees, compared with the
situation they face in today's market.
As explained in the proposed rule, it is not practical
to implement such a system for lenders, which means that lenders can
continue to report their origination fees on a net basis if they so
choose.\3\ However, HUD has designed the new GFE form so that it
reduces any anti-competitive effects between brokers and lenders.
For purposes of comparing lender and broker offers, the new GFE
focuses the borrower's attention on the right number, which is the
subtotal after reducing total origination fees by any lender payment
to the borrower (i.e. yield spread premium). This should reduce any
anti-competitive impacts of the proposed rule on small businesses.
---------------------------------------------------------------------------
\3\ This also includes those brokers who have wholesale lines of
credit.
---------------------------------------------------------------------------
Furthermore, it is anticipated that market competition
will increase the likelihood that yield spread premium payments will
be passed through to borrowers throughout the market, in lender
(i.e., non-broker) as well as broker transactions. The information
that consumers gain from broker transactions concerning the money
back on premium loans should make consumers act competitively with
respect to premiums on similar loans from non-brokers.
Brokers as a group will remain highly competitive
actors in the mortgage market. Chapter II discusses the factors that
will continue to keep brokers competitive with other lenders. As
noted above, HUD has also designed the GFE to lessen any anti-
competitive effects from the different reporting requirements of
lenders and brokers on the new GFE. Therefore, there is no evidence
to suggest that there would be any major anti-competitive impact on
the broker industry as a whole from the new GFE provisions in the
proposed rule.
Rather, the main impact on brokers (both small and
large) of the proposed new treatment of payments by wholesale
lenders would be on those brokers (as well as other originators) who
have been overcharging uninformed consumers, through the combination
of high origination fees and yield spread premiums. As noted above,
it is anticipated that market competition, under this new GFE
approach, will have a similar impact on those lenders (non-brokers)
who have been overcharging consumers through a combination of high
yield spread premiums and origination costs.
As noted above, according to some estimates $7.5
billion in YSPs is not passed through to borrowers to reduce closing
costs. While this figure will vary depending on specific
assumptions, it provides a sense of how large the effects of the
proposed rule could be on the return of YSPs to borrowers as reduced
closing costs.
D. Lower Settlement Service Prices
In addition to reducing originator fees, the tighter tolerances
of the new GFE approach would result in lower prices for third party
settlement services. Settlement service providers who are small
businesses would be impacted by any reduction in settlement service
prices arising from the tighter tolerances on settlement fees.
The imposition of tolerances on fees will encourage
originators to seek discounts and cut settlement service prices. The
proposed rule clarifies that loan originators can make arrangements
with their third party settlement service providers (appraisers,
settlement service agents, etc.) to lower prices for their customers
(i.e., borrowers), provided these prices or any fees on the GFE are
not ``marked up'' or ``up charged.''
Section V of Chapter 3 examines the magnitude of third-
party fees that would be subject to increased price pressure as a
result of the imposition of tolerances and expanded shopping by the
originator. As noted above, $18 billion in third party fees would
fall into this category. While it is difficult to estimate how much
tolerances and expanded originator shopping will reduce the $18
billion, this figure provides a base on which this effect will be
felt. The estimates reported above under ``Summary of Estimated
Impacts'' assumed that third-party revenues would fall by $1.8
billion, or 10 percent.
It is estimated that small settlement service providers
would account for $1.3 billion of the $1.8 billion decline in third
party revenues. But as discussed in Chapter 3, this estimate is
subject to variation.
E. Costs and Other Impacts
Chapter 3 identifies several factors might impact the costs of
handling the new GFE form. As noted below, many of these factors
tend to offset each other with end result being that annual
additional costs appear to be small.
There are some direct costs to originators from
complying with the GFE portion of the proposed rule. These do not
appear to be very large. While the new GFE format requires less
itemization than today's GFE, the HUD-1, with its detailed
itemization, remains essentially the same. Originators and closing
agents will have to expend some minimal effort in explaining to
consumers the cross walk between the new streamlined GFE and the
more detailed HUD-1. There is a new page of the GFE showing interest
rate
[[Page 49172]]
alternatives, which should not impose much additional costs, given
that most originators do that in some form today. Annual costs to
originators rise by $226 million if it takes 10 extra minutes to
handle the new GFE form. Chapter 3 also estimates that first-year
startup costs could range from $55-$95 million.
There will be some costs to originators from the need
for additional preliminary underwriting in order to generate new
GFEs. While this underwriting is already occurring for full
applications today, it is expected that some borrowers under the new
GFE will get multiple applications and use them to shop. However, it
is difficult to estimate how many additional GFEs and preliminary
underwritings will result under the new GFE scheme. In addition, as
discussed in Chapter 3, the number of applicants going to full
underwriting could decline under the proposed rule.
The imposition of zero and 10 percent tolerances on
fees will require lenders to take some actions that will increase
their costs. For example, arrangements will have to be made with
third party settlement service providers, in order for the
originator to come up with estimates that can be delivered within
the 10 percent tolerance. As noted above, these are estimated to
range from $26 to $52 million.
F. Small Business Impacts--A Summary and Alternatives Considered
Chapter 3 estimates that $3.5 billion of the $6.3 billion in
transfers would come from small businesses. The above summary
bullets highlight the mechanisms in which this will happen. Improved
consumer shopping among originators and more aggressive competition
by originators for settlement services will lead to price
reductions. Originators (both small and large) and settlement
service providers (both small and large) that have been charging
high prices will experience reductions in their revenues. Of the
$3.5 billion impact on small businesses, it is estimated the $2.2
billion will come from small originators and $1.3 billion, from
small settlement service providers.
Market impacts on different types of businesses are discussed
throughout Chapter 3, as well as in the summary bullets under C and
D above. Chapter 3 also discussed alternative policies that HUD
considered when developing the rule. Examples of alternatives that
would impact small businesses include:
One alternative considered was to place the interest
rate dependent payment at the bottom of the form rather than
directly after the origination charge. This was rejected since an
unsophisticated borrower might misinterpret the broker's higher
origination charge (relative to a lender who can net the yield
spread premium out of the origination charge rather than list it
separately as a lender payment to the borrower) as indicating that
the broker's loan is more costly.
The Department considered placing the division of the
origination charge into broker and lender portions on the front page
of the GFE but rejected that idea since the information was not
useful in bottom line comparison shopping. Loans with identical
origination charges will now have the same numbers presented in the
origination charge whether originated by a broker or lender.
The Department considered having zero tolerance on both
the lender and broker components of the origination charge instead
of zero tolerance on the total. Zero tolerance on the components
would have given brokers less flexibility in switching lenders, even
if the total of the lender and broker fees would remain the same.
The method selected makes it easier for brokers to switch lenders,
so long as the total origination charge does not rise.
The Department considered having different statements
of the services of the originator. The purpose of this section of
the GFE is to alert borrowers to shop in order to protect their
interests. Different statements could favor brokers over lenders, or
vice versa. The Department adopted the idea that every originator
would have to deliver the same message, so that every borrower gets
the same warning and no originator is at a disadvantage in
delivering the message.
II. Guaranteed Cost Packaging or Packaging
The main benefits, costs, transfers, and market impacts of the
guaranteed cost or packaging are outlined below, along with the
specific impacts on small businesses. Since most brokers and
settlement service providers are small businesses, the main impacts
of packaging on these entities are highlighted below in subsection
II.F.
A. Overview of Packaging Benefits
First, guaranteed packaging will improve and increase borrower
shopping for mortgages. Basically, guaranteed packaging reduces the
loan offer to:a settlement package price, an interest rate, an APR,
and a PMI premium rate. The package price and the PMI premium has
zero tolerance, and the interest rate is guaranteed if locked
(otherwise the rate varies with a market index). In addition, the
offer is free and, if agreed upon by the borrower, the offer becomes
a contract that is enforceable. These are all advantages over
today's process of shopping for mortgages. Economic efficiencies
result from easier and less time consuming shopping under packaging.
Borrowers are better informed, shop better, and reach better deals.
Second, the guaranteed packing approach would remove regulatory
barriers that are today preventing market competition from reducing
settlement prices. Under current law, a providers' efforts to enter
into volume arrangements with settlement service firms may be
regarded as illegal and restrictions against mark-ups of third party
costs may impede the packaging of services. Under HUD's proposed
rule, packagers will be able to enter into cost-reducing, volume-
discount arrangements, and competition among packagers will pass
these lower costs through to borrowers at mortgage settlement.
B. Summary of Estimated Benefits, Costs, Transfers, and Efficiencies
Chapter 4 presents estimates of the magnitude of the benefits,
costs, transfers, and efficiencies associated with packaging.
Transfers total $10.3 billion to borrowers, with $6.7 billion coming
from originators and $3.6 billion from third party settlement
service providers. In addition to these transfers, there are
efficiency gains: borrowers realize $1.652 billion in efficiencies
from less time spent shopping and loan originators and third party
settlement service providers realize $3.410 in efficiency gains,
some or all of which have the potential to be passed through to
borrowers through competition. These estimates are explained further
below. While they are based on specific assumptions (see Chapter 4),
they provide a sense of the overall effects of packaging.
While these benefits of packaging are basically similar to the
benefits of the new Good Faith Estimate approach discussed in
Section I, it is anticipated that packaging will improve shopping
and lower settlement costs to an even greater extent than the GFE
approach. Above, it was estimated that borrowers could save $6.3
billion in annual settlement costs under the new GFE approach. It is
anticipated that a system based on packaging alone would lead to
even greater savings for borrowers, as transfers from firms to
borrowers will rise by $4 billion for a total of $10.3 billion.
Originators contribute $6.7 billion of this and third party
settlement service providers, $3.6 billion. This benefit to
consumers comes from further reductions in overcharges that
competition passes on to borrowers. Under this scenario, the final
savings to the borrower would depend on how the market settles down
between the two methods of loan origination--the new GFE approach
and packaging. If it is half and half, borrower gains are slightly
over $8 billion.
In addition to the transfers, there are several efficiencies
associated with packaging (see the summary in Section VII in Chapter
4). Borrowers realize $1.652 billion savings in time spent shopping
for loans and third party services. Loan originators save $2.710
billion in time spent with shoppers, in efforts spent seeking out
vulnerable borrowers, and from the substitution of more efficient
for less efficient originators. Third party settlement service
providers save $700 million in time spent with shoppers and from the
substitution of more efficient for less efficient third party
settlement service providers. Some or all of the $2.710 billion and
$700 million in efficiency gains have the potential to be passed
through to borrowers through competition.
The simplification and other advantages of the new GMPA will
lead to lower costs than under the new GFE. It is assumed that costs
under the GMPA will be the same as today's GFE. As discussed in
Chapter 4, one area of uncertainty about packaging and the new GMPA
concerns the index that is used to ensure that changes in the
interest (note) rate reflect changes in the market. Until the exact
mechanism is selected, it is difficult to determine the effect of
the index on packaging.
Concerns have been expressed about the impacts of the packaging
approach on small lenders and small service providers. Chapter 4
estimated that small businesses (i.e., small originators and small
service providers) would account for $5.9 billion of the $10.3
billion in transfers. The effects on small businesses are discussed
below in II.F.
[[Page 49173]]
C. Shopping Benefits
Packaging offers numerous shopping advantages for consumers,
compared to today's process of shopping for mortgages. Under
packaging, borrowers are better informed and better able to
comparison shop.
Guaranteed packaging will improve and increase borrower
shopping for mortgages. Basically, guaranteed packaging reduces the
loan offer to two numbers (a settlement package price and an
interest rate), has zero tolerance on the package price, and
guarantees the interest rate if locked (otherwise the rate varies
with a market index). In addition, the offer is free and, if agreed
upon by the borrower, the offer becomes a contract that is
enforceable. These are all advantages over today's process of
shopping for mortgages, as well as over the Good Faith Estimate
approach outlined in Chapter 3.
The simplified loan offer under packaging does away
with the proliferation of fees, including junk fees that often
characterizes today's mortgage offers.
The packaging agreement eliminates the separate
reporting of the premium or discount associated with brokered loans.
This is done to facilitate competition and comparison shopping.
Economic efficiencies result from easier and less time
consuming shopping under packaging. Borrowers are better informed,
shop better, and reach better deals.
In this case, the main transfers will be from
originators who are charging above market prices to borrowers who
are more informed and better able to comparison shop (see the $6.7
billion estimate reported above).
D. Lower Settlement Service Prices
The packaging approach will result in even lower prices for
third party settlement services than estimated above for the new GFE
approach.
The Section 8 safe harbor will allow greatest
protection to entities within the package from charges of illegal
referral fees, kickbacks, and unearned fees. This will free up
packagers to pursue lower prices for third party services in their
package without concern that the technique used could be a Section 8
violation. Competition is substituted for regulation.
Thus, packaging will result in lower prices paid for
settlement services, as packagers aggressively seek discounts in
third-party service prices. A better shopper (the packager) is
substituted for the borrower as the searcher for third party
settlement services.
In addition, there are several efficiencies associated
with packaging that could lead to lower costs. Under packaging,
originators may deal with one packager, rather than a whole array of
third party providers and the packager, who specializes in this
activity, may be more efficient than the originator.
Given the likelihood that there will be competition
among a number of packagers, the lower third party service prices
will be passed through to borrowers as lower costs for closing a
loan. In this case, the main transfers will be from settlement
service providers to borrowers (see the $3.6 billion estimate
reported above).
E. Impact on Business Operations and Market Structure
The proposed RESPA rule offers a dual approach to settlement
market problems--(1) a new, simplified GFE combining tolerances on
final settlement costs and a new method for reporting wholesale
lender payments; and (2) a guaranteed cost approach based on
packaging. Consumers and originators can use either approach, which
has the advantage of allowing the market determine the best approach
under a given set of circumstances. While there are reasons to
expect originators to move toward the packaging approach, it is
difficult to estimate the share of the market that will ultimately
fall under packaging, as well as the timing of the move toward
packaging.
An uncertainty with respect to the implementation of
packaging concerns the interest rate index that determines changes
in mortgage rates for borrowers who are shopping (before they sign
the guaranteed packaging offer) and for borrowers who choose to
``float'' rather than ``lock-in'' their interest rate (at the time
they sign the offer). Packaging depends on lenders finding an
acceptable interest rate index, or some other mechanism for ensuring
that any changes in the interest rate reflect overall market
changes. As noted below, there will likely be some costs associated
with lenders' guaranteeing that interest rates move only with market
conditions, depending on the indexing technique chosen.
As explained in this chapter, packaging could take
several forms--for example, originators could develop their own
packages or specialized firms could develop packages, or components
of packages, which they would then sell them to originators. The
section on small business below highlights several additional market
impacts of packaging.
F. Compliance and Other Costs
The simplification and other advantages of the new Guaranteed
Mortgage Packaging Agreement (GMPA) will lead to lower costs than
under the new GFE.
The GMPA and HUD-1 with packaging will have
substantially fewer numbers and less detail than the current GFE and
HUD-1. Only six numbers are required on the first page of the
Guaranteed Mortgage Packaging Agreement. This will lead to a more
efficient origination process since less time will be spent by the
originator and the borrower in deciphering the proliferation of fees
that now characterizes the GFE and HUD-1.
Packaging eliminates the reporting of individual fees
within the package and in so doing permits, in effect, average cost
pricing. This reduces costs because firms do not have to keep up
with an itemized, customized cost for each borrower.
As mentioned above, there could be some additional
costs associated with lenders having to use an as yet undetermined
index in order to guarantee market interest rates (a) during the
time that the consumer is shopping (after the packager has made the
offer) and (b) during the time between the offer being accepted and
final closing for those borrowers who choose to ``float'' rather
than ``lock-in'' their interest rate. The proposed rule asks for
comments on how the interest rate index could be determined.
Originators make a free offer that is also guaranteed.
This will require additional information gathering and preliminary
underwriting to the extent that borrowers seek multiple offers,
beyond what they do in today's market. There could also develop some
degree of uncertainty and costs associated with originator's making
guaranteed offers based on preliminary underwriting, particularly
for those borrowers who typically require extensive underwriting. As
explained in Chapter 4, however, this would simply result in the
originator making a new loan offer or sending their customer
elsewhere.
There will be some costs associated with the
arrangements that packagers have to make with third party settlement
service providers, in order for the packager to ensure that there
would be no change in the pre-arranged third party prices. But as
discussed in Chapter 4, other efficiencies resulting from packagers
dealing with third party providers are expected to offset these
costs.
G. Summary of Small Business Impacts and Alternatives Considered
As noted above, concern has been expressed about the market
impacts of packaging, particularly as they relate to small
businesses. The main findings regarding the effects of packaging on
small businesses are as follows:
The nature of locally-provided, third party services
(such as appraisal, survey, pest inspection, closing agents) could
remain the same under packaging--the main change will involve who
purchases these services. Packagers will be the new purchasers of
these services, and third party service prices will be lower.
Under packaging, those third party service providers
(both large and small) who are currently charging high prices for
their settlement services would experience reductions in the prices
of their services. To the extent that third party settlement service
providers happen to be small businesses, they would, of course,
experience a reduction in their revenues. Of the $3.6 billion in
price reductions for third party services, the small business share
is $2.5 billion.
It is estimated that small businesses (i.e., small
originators and small service providers) would account for $5.9
billion of the $10.3 billion in transfers to consumers noted above--
$3.4 billion of this would come from small originators and $2.5
billion would come from small settlement service providers. As in
the case with the new GFE approach, firms suffering losers under
packaging are originators and third party providers who are
currently charging high prices for their services.
Still, there is no strong reason to expect that
locally-based small businesses could not continue providing third
party settlement services under packaging, albeit at possibly lower
prices and revenues, as noted above. Services that are local in
nature (such as appraisals) will continue to be demanded under the
packaging approach. Services that are national in nature and
characterized by economies of scale (such as credit reporting)
[[Page 49174]]
are already being conducted by larger firms on a national scale.
There has also been a concern that small lenders would
be placed at a disadvantage under packaging because of the ``bulk''
buying power of large lenders. While this may be the case, it does
not have to be. First, there is no evidence of this effect today
where large lenders can purchase services such as appraisals on a
``bulk'' basis. Second, if specialized packaging firms develop, it
seems reasonable to expect them to offer their packages to small
lenders as well as large lenders. It is difficult to reach firm
conclusions about the magnitude of the impact on small lenders.
Brokers, most of whom are small businesses, could
pursue a number of avenues under packaging. They could develop their
own package, purchase one from specialized firms, or use the package
offered by the wholesale lender they are dealing with. Under
packaging, brokers will continue their main function of reaching the
consumer, just as they do today. This customer outreach function is
not going to go away with packaging.
Furthermore, Chapter 2 of this Economic Analysis
reports that technology improvements and other recent changes in the
mortgage market have probably increased the competitive position of
brokers relative to other originators. These underlying strengths of
brokers are also not going to disappear with packaging.
Chapter 4 discusses alternative policies that were considered
with respect to packaging. The Department considered writing this
proposed rule as if only lenders could package. This idea was
rejected in favor of allowing anyone to package so long as the
package contains a loan. This further affords smaller firms the
opportunity to offer their services and benefit from a packaging
environment.
Under packaging, there is no separate treatment of yield spread
premiums or discounts and no special rules for brokers. Thus, all
originators present their loans the same way and all the market's
competitive forces are applied to everything in the package
regardless of the type of originator. No broker, or any other kind
of originator for that matter, is at a competitive disadvantage.
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[FR Doc. 02-18960 Filed 7-26-02; 8:45 am]
BILLING CODE 4210-27-P