How the New RESPA Rule Impacts Wholesale Lending

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How the New RESPA Rule Impacts Wholesale Lending
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Overview of Presentation

• Focus on certain aspects of revised RESPA
  regulation, Regulation X, that are scheduled to
  become effective on January 1, 2010.
• Still in statutory Congressional review period.
• Obama administration is reviewing all regulatory
  efforts near end of Bush administration.
• Two lawsuits filed so far.
• Change in definition of mortgage broker.
• Review of new GFE and related rules.
• Examine impact on wholesale lending.
• Brief summary of HUD-1 changes.

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Mortgage Broker Definition

• The definition of mortgage broker was revised
  A person (not an employee of a lender) or
  entity that renders origination services and
  serves as an intermediary between a borrower and
  a lender in a transaction involving a federally
  related mortgage loan, including such a person or
  entity that closes the loan in its own name in a
  table funded transaction. A loan correspondent
  approved under 24 CFR 202.8 for Federal Housing
  Administration programs is a mortgage broker for
  purposes of this part.
• Exclusion for exclusive agent of a lender was
  removed.
• Now includes an express statement regarding
  table funding, but clarification needed.
• Use of undefined term intermediary.
• Use of new defined term origination service.
• Origination service Any service involved in
  the creation of a mortgage loan, including but
  not limited to the taking of the loan
  application, loan processing, and the
  underwriting and funding of the loan, and the
  processing and administrative services required
  to perform these functions.
• Scheduled effective date of new definitions is
  January 1, 2010.

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New GFEOverview

• Significant change in format.
• Three page form with thirteen main sections.
• To be provided by the loan originator, which is
  defined as a lender or mortgage broker.
• If the mortgage broker provides a GFE, the
  lender is not required to provide another GFE.
• The lender is responsible for ascertaining that
  a GFE was provided.
• The scheduled compliance date for the new GFE
  and related rules is January 1, 2010.
• If you use the new GFE before that date, you
  still must comply with all the related rules.
• If you use the new GFE before that date, the
  revised HUD-1 or HUD-1A must be used.

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New GFEApplication Trigger

• A loan originator must provide a GFE not later
  than 3 business days after it receives an
  application or information sufficient to complete
  an application.
• An application The submission of a borrowers
  financial information in anticipation of a credit
  decision, which shall include
• Borrowers name.
• Borrowers monthly income.
• Borrowers social security number to obtain a
  credit report.
• Property address.
• Estimate of the propertys value.
• Mortgage loan amount sought.
• Any other information deemed necessary by the
  loan originator.
• No fee may be charged as a condition for
  providing a GFE, except a fee limited to the cost
  of a credit report.

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New GFEPage One

• 1. Transaction Identification Section
•  Originator name and contact Information.
• Borrower name and subject property.
• GFE date, which will be key in defining the
  period that the GFE terms are available.
• 2. Purpose Section
• Explains the purpose of the GFE, identifies
  sources of additional information and advises how
  to proceed.
• 3. Shopping for Your Loan Section
• Advises that only the consumer can shop for the
  best loan for him or her.

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New GFEPage One

• 4. Important Dates Section
• Specify the date and, at your option, the time
  through which the interest rate and certain
  rate-dependent charges are available.
• Interest rate-dependent charges
• The credit or charge for the interest rate
  chosen.
• The adjusted originated charges.
• The per diem interest.
• The loan originator is free to specify the rate
  availability period before the rate lock.
• The rate lock governs once the rate is locked.
• Specify the date through which all other charges
  are available.
• Minimum 10 business day period.
• Specify rate lock timeframes.
• Provide the rate lock period that will apply
  once the rate is locked.
• If applicable, note the minimum time to lock
  before settlement.

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New GFEPage One

• 5. Summary of Your Loan Terms Section
• Addresses nine elements of the loan. For the
  interest rate, you enter the note rate and not
  the APR.
• 6. Escrow Account Information Section
• Addresses whether the loan includes a monthly
  escrow or impound account for payment of taxes
  and insurance.
• 7. Summary of Your Settlement Charges Section
• Block A The adjusted origination charges from
  Block A on page 2
• Block B The total of all other settlement
  charges from Block B on page 2.
• Block AB The sum of the two amounts.

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New GFEPage Two

• 8. Your Adjusted Origination Charges Section
• HUDs intent is to reflect the relationship
  between the interest rate and the settlements
  costs, including a yield spread premium paid to a
  mortgage broker, and to combine all of the
  various loan origination charges into a single
  charge.
• Block 1 Subject to an exception, this block
  must include all origination charges of the
  lender and, if applicable, the mortgage broker
  (e.g., application fee, processing fee,
  origination fee, underwriting fee, etc.).
• When there is no mortgage broker, the lender can
  elect to (a) include in the Block 1 amount any
  credit for the interest rate chosen, or (b)
  disclose any such credit in Block 2.
• When there is a mortgage broker, any credit
  (such as a yield spread premium) must be
  disclosed in Block 2.
• Block 2
• To reflect that there is a credit for the rate
  chosen, check the second box and insert the
  dollar amount of the credit and the interest rate
  in the applicable blanks. In Block 2, enter the
  credit as a negative dollar amount.
• To reflect that there is a charge (or points)
  for the rate chosen, check the third box and
  insert the dollar amount of the points and the
  interest rate in the applicable blanks. In Block
  2, enter the charge as a positive dollar amount.
• The second and third boxes are like radio
  buttons. You can check one or the other, not
  both.
• Block A The total of Block 1 and Block 2.

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New GFEPage Two

• 8. Your Adjusted Origination Charges
  SectionExamples
• Example 1 100,000 loan with no points, total
  lender fees of 1.5 and the only broker
  compensation is a yield spread premium of 2.
• Block 1, Our origination charge Enter 3,500
  (1,500 in lender fees plus the 2,000 yield
  spread premium).
• Block 2, Your credit or charge (points) for the
  specific interest rate chosen Complete the
  second check box, and enter a credit of 2,000
  and the note rate in the blanks. In Block 2
  enter a negative 2,000 (the 2,000 yield spread
  premium).
• Block A, Your Adjusted Origination Charges
  Enter 1,500 (3,500 from Block 1, less 2,000
  from Block 2).
• Example 2 100,000 loan with 2 points to buy
  down the rate, total lender fees of 1.5 and a
  broker fee of 1.0
• Block 1, Our origination charge Enter 2,500
  (1,500 in lender fees plus the 1,000 broker
  fee).
• Block 2, Your credit or charge (points) for the
  specific interest rate chosen Complete the
  third check box, and enter a charge of 2,000 and
  the note rate in the blanks. In Block 2 enter
  2,000 (the 2,000 in points).
• Block A, Your Adjusted Origination Charges
  Enter 4,500 (2,500 from Block 1, plus 2,000
  from Block 2).
• For the loan originator compensation, the
  revised HUD-1 follows the format of the new GFE
  and provides for disclosure of Our origination
  charge, Your credit or charge (points) for the
  specific interest rate chosen, and Your adjusted
  origination charges.
• As we will address, tolerances (i.e., limits on
  changes) apply to these charges and other GFE
  charges.

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New GFEPage Two

• 9. Your Charges for All Other Settlement
  Services Section
• Block 3. Required services that we select
• For the services required by the loan originator
  for which the originator will select the
  provider, list each applicable service and the
  estimated charge for each service and enter the
  total amount in Block 3.
• Block 4. Title services and lenders title
  insurance
• Enter the total estimated charge for all title
  services, premiums and endorsements in Block 4.
• Block 5. Owners title insurance
• For purchase transactions, enter the total
  estimated charge for all title premiums and
  endorsements in Block 5.
• For non-purchase transactions, you may enter
  NA or Not Applicable.

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New GFEPage Two

• 9. Your Charges for All Other Settlement
  Services Section
• Block 6. Required services that you can shop
  for
• For the services required by the loan originator
  for which the borrower can select the provider,
  list each applicable service and the estimated
  charge for each service, and enter the total
  amount in Block 6.
• The loan originator must provide the borrower
  with a separate list of the applicable providers.
• Block 7. Government recording charges
• Enter the total estimated recording charges in
  Block 7. Do not enter transfer taxes.
• Block 8. Transfer taxes
• Enter the total estimated transfer taxes in
  Block 8.
• Block 9. Initial deposit for your escrow
  account
• Enter the total required escrow or impound
  deposit at closing in Block 9.
• Indicate if the required escrow or impound
  deposits are for all property taxes, all
  insurance and any other specified items.
• If deposits are required for some, but not all,
  property taxes or insurance, do not use the all
  box. Check the other box and identify the
  applicable taxes or insurance.

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New GFEPage Two

• 9. Your Charges for All Other Settlement
  Services Section
• Block 10. Daily interest charges
• Enter the total daily or per diem interest in
  Block 10. In the blanks enter the amount of
  interest for each day, the number of estimated
  days and the anticipated settlement date.
• Block 11. Homeowners insurance
• List each required hazard or similar insurance,
  such as flood insurance, and the estimated
  premium for each required insurance. Enter the
  total of the estimated premiums in Block 11.
• Block B. Your Charges for All Other Settlement
  Services
• Enter the total estimated charges from Block 3
  through Block 11.
• Block A B, Total Estimated Settlement Charges
• Enter the sum of Block A (Your Adjusted
  Origination Charges) and Block B.

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New GFEPage Three

• 10. Understanding Which Charges Can Change at
  Settlement Section
• This section explains the applicable limits, or
  tolerances, on changes in estimated fees.
• There is no need to enter information in this
  section.

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New GFEPage Three

• 11. Using the Tradeoff Table Section
• The intent of this section is to demonstrate the
  relationship between the interest rate and the
  settlement costs.
• The loan originator must enter basic information
  about the loan covered by the GFE in the left
  column.
• The completion of the remainder of the table is
  optional.
• The center column is for an alternate loan with
  lower settlement charges and a higher interest
  rate.
• The right column is for an alternate loan with
  higher settlement charges and a lower interest
  rate.
• If you elect to add information on alternate
  loans
• The information must be for loans that you
  actually would offer.
• The alternate loans must be identical to the
  loan covered by the GFE, except for the interest
  rate and settlement costs.

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New GFEPage Three

• 12. Using the Shopping Chart Section
• This section is for completion by the consumer
  as a loan comparison tool.
• There is no need for you to enter information in
  this section.
• 13. If Your Loan is Sold in the Future Section
• This section notes that a future loan sale will
  not change the loan or the charges paid at
  settlement.

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New GFEAcceptance/Tolerances

• If the borrower expresses an intent to continue
  with the application within the 10 business day
  period after the GFE is issued (or longer period,
  if applicable), then the loan originator is bound
  by the GFE, subject to tolerances and exceptions.
• The new GFE rules divide charges into three
  categories
• Charges that may not change unless an exception
  applies.
• Charges that, as a group, may not increase more
  than 10, unless an exception applies.
• Charges that may change without limitation.
• 0 Tolerance Unless an exception applies, the
  following charges may not increase
• Government transfer taxes.
• The origination charge.
• When the interest rate is locked
• The charge for the rate chosen (if there is a
  credit for the rate chosen, it may not decrease).
• The adjusted origination charge.

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New GFETolerances

• 10 Tolerance Unless an exception applies, the
  following charges may not, as a whole, increase
  by more than 10
• Charges for loan originator-required settlement
  services, when the loan originator selects the
  settlement service provider.
• Charges for loan originator-required settlement
  services, title services, required title
  insurance and owners title insurance, when the
  borrower uses a settlement service provider
  identified by the loan originator.
• Government recording charges.
• No Limitation Any remaining settlement service
  charges may change without limitation.
• Statutory requirement to provide a good faith
  estimate still will apply.

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New GFETolerances, Exceptions

• If an exception applies, then charges affected
  by the exception may change without regard to the
  tolerances.
• The exceptions
• Changed circumstances.
• Borrower-requested changes.
• New home purchases.
• Changed circumstances definition
• Acts of God, war, disaster, or other emergency.
• Information particular to the borrower or
  transaction that was relied on in providing the
  GFE and that changes or is found to be inaccurate
  after the GFE has been provided. (This may
  include information about the credit quality of
  the borrower, the amount of the loan, the
  estimated value of the property, or any other
  information that was used in providing the GFE.)
• New information particular to the borrower or
  transaction that was not relied on in providing
  the GFE.
• Other circumstances that are particular to the
  borrower or transaction, including boundary
  disputes, the need for flood insurance, or
  environmental problems.

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New GFETolerances, Exceptions

• Changed circumstances do not include
• The minimum elements that trigger the need to
  provide a GFEthe borrowers name, the borrowers
  monthly income, the property address, an estimate
  of the propertys value, the mortgage loan amount
  sought, any information contained in any credit
  report obtained prior to providing the GFE,
  unless the information changes or is found to be
  inaccurate after the GFE is provided.
• Basically, you are deemed to have relied on this
  information.
• What if you received other information before
  providing a GFE and relied on the information?
• What if you received other information before
  providing a GFE, but did not rely on the
  information?
• Market price fluctuations by themselves.
• Example, the appraisal firm that the loan
  originator intends to use raises its prices by
  50 after the GFE is issued.

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New GFETolerances, Exceptions

• Changed circumstances affecting settlement
  costs
• If changed circumstances would increase
  settlement charges beyond the applicable
  tolerance(s), a revised GFE may be provided.
• If a revised GFE is provided, it must be
  provided within 3 business days of receiving
  information sufficient to establish changed
  circumstances.
• The revised GFE may increase charges only to the
  extent the changed circumstances actually result
  in higher charges.
• Changed circumstances affecting loan
• If changed circumstances result in a change in
  the borrowers eligibility for the specific loan
  terms identified in the GFE, a revised GFE may be
  provided.
• If a revised GFE is provided, it must be
  provided within 3 business days of receiving
  information sufficient to establish changed
  circumstances.
• When there are changed circumstances, an
  originator can deny the loanissuing a revised
  GFE is not required.
• To issue a revised GFE based on changed
  circumstances, you must document the reasons for
  the revision and retain the documentation for 3
  years.

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New GFETolerances, Exceptions

• Borrower-requested changes
• If the borrower requests changes to the mortgage
  loan identified in the GFE that change the
  settlement charges or terms of the loan, a
  revised GFE may be provided.
• When the borrower requests a change, an
  originator can deny the loanissuing a revised
  GFE is not required.
• If a revised GFE is provided, it must be
  provided within 3 business days of the borrowers
  request.
• New home purchase
• When the settlement on a newly constructed home
  is anticipated to occur more than 60 days from
  the time that a GFE is provided, the loan
  originator may provide the GFE to the borrower
  with a separate, clear and conspicuous disclosure
  stating that at anytime up until 60 days prior to
  closing the loan originator may issue a revised
  GFE.
• If such a separate disclosure is not provided, a
  revised GFE may not be issued pursuant to this
  exception.
• To issue a revised GFE based on the
  borrower-requested change or new home exceptions,
  you must document the reasons for the revision
  and retain the documentation for 3 years.

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New GFEViolation and Cure

• A violation of the GFE requirements will be
  considered a violation of RESPA Section 5.
• Currently there are no express statutory damages
  or penalties applicable to a Section 5 violation.
• HUD plans to request that Congress revise RESPA
  to add damages and/or penalties for violations.
• The Housing and Economic Recovery Act of 2008
  requires HUD to submit to Congress by January 30,
  2009 recommendations on reforms to RESPA to
  promote more transparent disclosures that would
  allow consumers to better shop and compare
  mortgage terms and settlement costs.
• The new rule includes a cure provision
• If the charges at settlement exceed the GFE
  charges by more than the permitted tolerances,
  the loan originator may cure the tolerance
  violation by reimbursing the borrower the amount
  by which the tolerance was exceeded.
• The reimbursement must be made at or within 30
  calendar days after settlement.
• A borrower is deemed to have received timely
  reimbursement if the loan originator delivers or
  places the payment in the mail within 30 calendar
  days after settlement.

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New GFEWhy is the NAMB Suing

• This is why Your Adjusted Origination Charges
  Section of the new GFE, and corresponding
  provisions of the revised HUD-1.
• As noted above, HUDs intent is to reflect the
  relationship between the interest rate and the
  settlements costs, including a yield spread
  premium paid to a mortgage broker, and to combine
  all of the various loan origination charges into
  a single charge.
• When there is a mortgage broker, there must be
  separate disclosures of the origination charge
  and the charge or credit for the interest rate
  chosen.
• When there is only a lender, there is the option
  to disclose the charge or credit for the interest
  rate chosen as part of the origination charge, or
  to disclose the charge or credit separately.
• The NAMB is challenging the more detailed
  disclosure requirement for mortgage brokers.
• The NAMB believes that the required disclosures
  will confuse consumers and detract from their
  ability to comprehend mortgage loans and
  comparison shop.

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New GFELenders and Brokers

• As noted above, the new rule provides that if
  the mortgage broker provides a GFE, the lender is
  not required to provide another GFE.
• The lender is responsible for ascertaining
  whether a GFE was provided.
• The new rule does not detail the interaction
  between a broker and lender regarding the
  issuance of a GFE by a broker and the acceptance
  of a GFE by a lender.
• It appears that if a lender accepts the GFE
  issued by a broker, the lender is bound by the
  GFE as if the lender had issued the GFE.
• A lender likely would not accept a broker-issued
  GFE unless the GFE accurately reflects the
  lenders loan products and charges.
• The new rule does not expressly address what
  happens if no lender will accept the GFE issued
  by a broker.
• The new rule also does not expressly address
  whether a lender can accept a broker-issued GFE
  subject to revisions.
• HUD has advised informally that lenders and
  brokers need to coordinate the issuance of GFEs.

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New GFELenders and Brokers

• Coordination certainly will be key.
• Need to determine what information will be
  required to constitute an application upon which
  a GFE is issued.
• The information a broker must collect to
  estimate fees and provide loan details likely
  will differ depending on the potential lender(s).
• Limits on fee changes and the need for loan
  details requires greater broker knowledge of
  lender fees, loan products and related policies.
• Trade off tableinclusion of alternate loans.
• Lenders may impose restrictions regarding
  settlement service providers selected or
  identified to the borrower by the broker, because
  the fees of such providers are subject to the 10
  tolerance.
• If the new GFE is used the new HUD-1 also must
  be used, so brokers, lenders and settlement
  agents need to coordinate implementation of the
  new forms.

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New GFELenders and Brokers

• The new GFE requirements likely will change many
  lender-broker relationships.
• It is likely that many wholesale lenders will
• Evaluate the number of broker relationships that
  they maintain.
• Evaluate broker qualification requirements.
• Evaluate broker agreements and broker
  obligations.
• Because of this, brokers need to be proactive
  rather than reactive.

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Revised HUD-1/HUD-1AOverview

• While the HUD-1 and HUD-1A were revised, the
  basic format of the forms remains intact.
• The forms still provide for the itemization of
  fees.
• The changes include
• A cross reference on various lines to the
  appropriate GFE Block in which the corresponding
  estimated fee was disclosed.
• A different approach to itemizing certain
  charges.
• The addition of a new page that compares the GFE
  and HUD-1/HUD-1A charges and summarizes the loan.
• The scheduled compliance date for the revised
  HUD-1/HUD-1A and related rules is January 1,
  2010.
• If you use the revised HUD-1/HUD-1A before that
  date, you still must comply with all the related
  rules.
• You cannot use the revised HUD-1/HUD-1A before
  that date unless the new GFE is used as well.