On November 12, 2008, the Department of Housing and Urban Development (HUD) announced the final results of its efforts to overhaul and reform the Real Estate Settlement Procedures Act (RESPA) in order to address claims that fraud, deception and general consumer ignorance were contributing factors in the catastrophic outcome of the real estate lending bubble.
With an initial proposal issued on March 14, 2008, HUD sought to clarify various terms and conditions for the consummation of a residential loan typically set forth in the Good Faith Estimate (GFE) prepared by a lender and delivered to a borrower after receipt of the borrower's application. Addressing concerns that the GFE format was not sufficiently "user-friendly," HUD proposed a complete overhaul of the form. HUD also proposed a means to create a relationship between the HUD-1 Settlement Sheet (a document which sets forth all of the settlement charges for a transaction also called the "HUD-1") and the GFE with the establishment of a third page to the HUD-1 called the HUD-1A, thus eradicating the need for a closing script.
HUD's final rule presents a myriad of questions for lenders and consumers. This reference guide seeks to address these questions, with a primary focus on the changes to the GFE and the HUD-1(A).
What Is The "New" GFE?
Along with its publication of the new RESPA rule, HUD posted the finalized form of the new GFE, now three pages in length. The first page contains general information regarding the Lender and Borrower, along with the important dates for when the stated interest rate and fee estimates expire, similar to the original form. Changes are evident, however, in "Summary of Your Loan" located in the center of the first page. The general loan information of principal, interest and term is provided; however, the following new fields have been added:
• Initial monthly payment for principal, interest and private mortgage insurance (PMI).
• The Lender must indicate whether the loan's interest rate is adjustable by checking a "yes" or "no" box. If "yes," the maximum rate that interest can adjust to must be supplied.
• If adjustable, Lenders must provide the full dollar amount to which a monthly payment of principal, interest and PMI (if applicable) can rise, along with the first interest rate adjustment dollar amount.
HUD noted that these changes were made to address concerns that consumers did not fully comprehend the ramifications that an adjustable interest rate could have on monthly mortgage payments. Item 6 highlights another departure from the original form. This field provides for a listing of all settlement charges that the consumer may "shop around." HUD wanted consumers to be aware that there were services that they could obtain from vendors other than those contacted by the bank.
The third page of the new GFE functions as a worksheet for a consumer's own cost-benefit analysis. The page commences with a comparison chart of charges that will be due at settlement, sorted according to three headings:
1. charges that cannot increase at settlement;
2. charges that can increase up to 10 percent at settlement; and
3. charges that can change at settlement.
Following this chart is another item entitled, "tradeoff table," which shows current loan terms and then calculates the costs in the event that: (a) the consumer is seeking lower settlement charges; or (b) the consumer is seeking a lower interest rate.
Finally, the form provides a chart wherein a consumer is able to enter in the terms of other GFEs from different Lenders. This chart, titled the "shopping chart," encourages consumers to shop around for the best loan package. HUD believes that these new features, if utilized, can save a consumer up to $700-800 in settlement charges.
What Is The "New" HUD-1(A)?
The new RESPA rule also sought to establish a connection between the estimated closing charges set forth in the GFE and the actual closing charges disclosed in the HUD-1. With this purpose in mind, HUD made two major changes to the settlement documents provided at closing. First, the HUD-1 Settlement Statement (utilized when there is a buyer and a seller) was updated by adding a third page that contains a full comparison of the GFE charges and those set forth on the HUD-1 and a final statement of the key terms of the loan (principal, interest, monthly payment). Thus, after closing, a consumer has a quick reference point for clear loan terms. An alternate version of the revised HUD-1(A) was also prepared for those transactions that are without sellers.
Factors That Shaped HUD's Final Decision
HUD's final rule balances the interest of protecting consumers against the concerns of the lending industry. The final GFE is an evolution from what was initially proposed in March 2008. In the preamble to the final rule, HUD discussed varying perspectives that arose during the comment period on the initially proposed GFE form, showing that HUD's initially proposed changes were met with mixed reactions, largely predicated upon the commentators' position in the industry. Feedback from The Center for Responsible Lending (CRL) played a strong role in the formulation of the final form. HUD noted CRL's recommendation that the first page of the GFE include the annual percentage rate (APR) instead of the loan rate because the APR is the standardized measurement of cost in the industry and captures the total cost of the loan. CRL also pressed for clear disclosure of the date when a mortgage interest adjusts, an explanation of prepayment penalties, clarification of broker's fees and clear demarcation of those mortgage terms that are negotiable. The majority of CRL's comments were received positively by HUD.
The National Consumer Law Center (NCLC), while largely in support of HUD's proposed changes, presented comments that HUD did not integrate. HUD noted NCLC's concern that the proposed GFE gave greater prominence to settlement costs than to interest. NCLC's comments centered largely on efforts to increase the focus on interest costs, proposing a reduction in the font size and elimination of the bold type for settlement costs. NCLC also supported a longer GFE with a more comprehensive summary sheet. It wanted the summary sheet to contain separate disclosures for the origination and total settlement costs rather than only a total of estimated settlement charges.
Overall, the mortgage lending industry was not receptive to the proposed GFE changes. The American Bankers Association called the proposed GFE overly prescriptive. The Mortgage Bankers Association (MBA) voiced concern that the proposed length would be confusing to consumers, and submitted an alternative two-page GFE, similar to a combination of the RESPA and Truth In Lending Act (TILA) disclosures. Other industry representatives also urged a melding of TILA and RESPA disclosure forms, pushing HUD and the Federal Reserve Board to work together to decrease the amount of paperwork presented to borrowers at closings. In particular, MBA strongly objected to the "shopping around" portions of the revised GFE, noting that these provisions would be better suited to a Special Information Booklet provided to potential borrowers.
While these recommendations were not integrated, HUD did address the industry representatives' concerns over the proposed length. Without making reference to any specific parties, HUD refers to several instances where a "major lender" expressed concern over the length. HUD notably referenced the National Association of Realtors (NAR) assertion that the proposed GFE's length would serve as overwhelming and as a "psychological barrier" to consumers. NAR's comments were seconded by the Credit Union National Association and by the National Association of Federal Credit Unions.
The Federal Deposit Insurance Corporation (FDIC) and the Federal Trade Commission (FTC) also expressed length, concerns pointing to possible consumer confusion. However, in a departure from the industry commentators' positions, both the FDIC and the FTC were largely supportive of the concept of giving consumers tangible information to utilize in cost comparisons.
The concerns about the proposed GFE's length impacted HUD's final decision, as the original four-page proposed form was trimmed to three pages. However, HUD retained the "shopping around" concept, despite the fact that many industry commentators questioned whether the average consumer was sophisticated enough to access alternate services providers. ALTA in particular questioned whether the average consumer would actively shop for title insurance even if informed that he/she had the option of doing so. Those concerns aside, HUD highlighted the importance of enshrining a consumer's rights to cost comparison in the revised GFE.
While HUD upheld this consumer right, it abandoned the concept of the GFE application. In the initially proposed rule, the borrower would provide its general information to the Lender and this initial information would be deemed a "GFE application." If the consumer did not provide this information in writing, the lender would have had to transcribe it into a written record. If a borrower was deemed creditworthy, the borrower would then provide additional information via a mortgage application. A borrower could potentially be rejected pursuant to a GFE application, but only if a mortgage application was not filed. This process could have acted as a quick screening process for lenders; however, lenders asserted that this process was unwieldy. They argued that the initial GFE application did not provide enough information to determine suitability of a particular loan for a particular borrower. Lenders also feared that a bifurcation of the application process would slow down the progress of loan approval and further overwhelm consumers. HUD accepted the validity of these concerns.
Potential Pitfalls Of The New RESPA Rule
The new RESPA rules will go into effect January 1, 2010. This deadline should afford Lenders time to train their staff and successfully implement the new changes to the GFE form as well as the changes to the HUD-1. While a good deal of thought and care has gone into the revisions to the GFE and the HUD-1, there are still issues.
First, the new RESPA rule does not include any penalty provisions in the event that a lender is not compliant with the regulations. This is undoubtedly based on the absence of penalty provisions in the RESPA statute itself. According to Surety Title Corporation's RESPA News Monthly, November 2008 edition, Ivy Jackson, director of HUD's Office of RESPA noted that, "Currently, there are no penalty provisions under RESPA for not giving a GFE or for the estimate not being correct. [However, it] is something we are interested in doing via legislative change."
Second, while RESPA may not currently provide specific penalties for violating the new rules, potential for other liabilities remains.One potential fallout of the revised RESPA rule is an increase in litigation brought by consumers against lenders who have failed to update their GFE forms and HUD-1 attachment. This litigation might be brought on bases other than the RESPA statute such as state unfair credit practices or consumer practices statutes or rules. Such suits might be brought on a class action basis, and where such suits are valid, the statutes often also provide for recovery of plaintiffs' attorneys' fees. It is with this in mind that a lender must weigh the costs and benefits of overall compliance.
Finally, there remains the stark reality that HUD's efforts could all be for naught. Lending industry commentators repeatedly stated that the new GFE will provide nothing more than a source of confusion for consumers. While issues of length may have been addressed, one cannot help but ponder whether the "shopping around" feature in the GFE hurts more than it helps. Time will tell if the revised GFE will be the proverbial lifeline to consumers' rights HUD aspires for it to be. In the interim, both lenders and consumer advocates will be observing the outcome and weighing their next steps.
Published February 1, 2009.
