Penner Law Firm Home > Blog Home > Sweeping Changes to the Closing Process: Dr. StrangeHUD, or How I Learned to Stop Worrying and Love the New HUD

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  1. Sweeping Changes to the Closing Process: Dr. StrangeHUD, or How I Learned to Stop Worrying and Love the New HUD

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    January 5, 2010 by Jamie Feigelson under RESPA

    This article is part three of a three part series by Attorney Jamie Feigelson.

    The final chapter of the three part blog is here. At closing, one of the most important documents a borrower will sign is the HUD-1 settlement statement (“HUD”). The HUD-1 is critical, because it contains all the expenses associated with the transaction, cumulating in how much the borrower must pay. The old HUD was two pages; the new one is now three. The primary improvement to the new HUD is that it clearly shows how the numbers on the HUD should match the numbers you were given on your Good Faith Estimate (see previous blog), and the new third page illustrates the comparison for borrowers to review.

    The big change for 2010 is this: most of the entries on the HUD direct you to the specific line on your Good Faith Estimate (“GFE”), for the corresponding number. In the past, lenders did not always require a GFE to be signed at closing. Now, however, not only must a GFE be signed, but it also must be compared side-by-side to the HUD at closing. Borrowers must sign both at closing; brokers and lenders alike must provide these documents for a borrower at closing.

    The new HUD also has a section that reconciles any differences between the final numbers and those provided on the GFE. It is now easier to see if the lender might owe a refund to a borrower because of an inaccurate estimate. Plus, the final page of the HUD includes a summary of the loan terms, so there’s no confusion about the loan terms when a borrower reaches to closing table.

    In summary, the changes HUD has made to these important lending and settlement documents appear to be positive for borrowers and banks alike. Everyone involved in a closing process is now fully informed of all fees before closing. At Penner Law Firm, we now have “guarantees closing costs” for our clients and service providers, thus ensuring costs for all parties.

    My prediction: there are always those borrowers out there who seem to find some sport in trying to subvert the system. This also will create a learning curve, as HUD begins to deal with people who try to resist the new requirements. However, having worked with a new HUD, I see a positive change that will help consumers be better informed. We now have uniformity for the real estate closing process; something we all can agree is a good thing.

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  2. Enforcement of RESPA 2010

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    January 4, 2010 by Beth Grassette under RESPA

    Slated to go into effect on January 1, 2010, the amended Real Estate Settlement Procedures Act (RESPA), promises borrowers new found freedom in the ability to comparison shop when seeking a home mortgage. The 2010 amendments to RESPA change the way in which lenders must complete disclosures required under the Act, allowing for no more than a ten-percent (10%) difference between many amounts initially quoted on the Good Faith Estimate (GFE), a document showing the costs that a lender will charge the borrower in conjunction with the loan, and those listed on the Settlement Statement (HUD-1), a document that provides an itemized listing of the funds that were paid at closing. These new and more stern requirements have been enacted with the hope that forcing lenders to be more upfront with borrowers about possible costs associated with the origination of a mortgage will allow borrowers to compare the settlement charges of numerous lenders and result in lower overall costs to the consumer.

    An important aspect of any piece of legislation, essential to its success or failure, is the manner in which it will be enforced. The U.S. Department of Housing and Urban Development’s (HUD) Office of RESPA and Interstate Land Sales is responsible for enforcement of the new RESPA amendments. The HUD Reform Act of 1989 created the Mortgagee Review Board (“MRB”), which functions to provide administrative sanctions to HUD/FHA-approved mortgagees or lenders who knowingly and materially violate legislation such as RESPA. On November 13, 2009 HUD announced a delay in the enforcement of the new RESPA rules for 120 days on FHA loans for all mortgage professionals making a good faith effort to comply with the new requirements. In addition, HUD requested that other enforcement agencies exercise the same restraint with respect to non-FHA loan originators and settlement service providers. The delay in enforcement will offer a small reprieve for the lending industry, however, the four month period will not delay potential civil litigation based on RESPA 2010 violations.

    The enforcement mechanisms of RESPA 2010 were more clearly articulated in HUD’s informational pamphlet called the “New RESPA Rule FAQs” (FAQs). The FAQs address many questions posed by the lending industry regarding the new legislation, including enforcement provisions. One such question addressed by the FAQs, and particularly relevant during the infancy of the new requirements, is the result in the event of an inadvertent or technical error on a required document. The FAQs provide a rather relieving answer to this question, stating that as long as a revised copy of any error-ridden documentation, such as a HUD-1, is provided within thirty days of closing, a lender will not be in danger of receiving reprimand for violation of the new RESPA requirements.

    The FAQs also allow settlement agents, such as Penner Law Firm, to breathe a sigh of relief in regards to potential RESPA violations. The FAQs dictate that a lender is the responsible party for curing tolerance violations, such as differences of more than ten-percent (10%) between figures listed on the GFE and HUD-1. The FAQs also dictate that a settlement agent is under no obligation to stop a closing when a toleration violation is recognized, because it is the duty of the lender to cure the potential violation within 30 days of the closing. These safety valve provisions in the new legislation, as well as the temporary enforcement reprieve, will hopefully serve to lessen the delay in closing loans after the January 1, 2010 effective date of RESPA 2010.

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  3. Sweeping Changes to the Closing Process: Gotta Have Faith, Good Faith

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    December 31, 2009 by Jamie Feigelson under RESPA

    This article is part two of a three part series by Attorney Jamie Feigelson.

    As we last discussed, the new HUD rules are set to go into effect on January 1, 2010, but the enforcement of such rules will not be implemented until April 2010 to give time to settlement agents and lenders to adjust to the changes. The changes to both the Good Faith Estimate (“GFE”) and HUD settlement statement will have a tremendous impact on the entire settlement process.

    To begin, the first change is that all residential lenders and mortgage brokers will be required to use a new GFE that clearly discloses loan terms and closing costs. Settlement agents and attorneys will also be using a new settlement statement for all residential loan closings. The statement will mirror the GFE and disclose any variances from the original figures. The main differences between the new and old GFEs are the standardization of the form; the grouping of fees; and the tolerance for variations from the GFE amounts at settlement.

    The new GFE is a three page standardized document (as opposed to the old four-page version) that gives loan terms and an estimate of settlement charges.  The consumer should easily be able to compare GFEs from various lenders when shopping for loans. On a new third page, there is a comparison of the original GFE figures and the settlement statement figures, with an explanation of the tolerances. There is also a summary of the loan, including amount, term, rates, initial monthly payment, prepayment penalties and other loan terms.

    In addition, on the new GFE, certain fees have been grouped together.  This allows the consumer to see a total cost for each category, rather than a random list of fees. The fees are broken down into four categories:

    1. The “Origination Charge” is the total of all fees incurred for originating the loan.  Only one origination charge is disclosed and includes all service charges (charges paid to the lender/broker, including the YSP, and all junk fees lumped into one amount) and the charge or credits for the interest rate chosen is added to or subtracted from the service charge to arrive at one lump origination charge.
    2. “Required Services Selected by the Lender”, such as appraisals, credit reports, and flood certifications and tax service fees are grouped, but each charge is listed separately.
    3. “Title Services” includes the settlement agent’s charges for lender’s title insurance, the settlement fee, title searches, title examinations, commitments, and ALL other charges payable to the settlement agent.  There is a separate line item for Owner’s title insurance, since this is an optional purchase.
    4. “Required Services that You Can Shop For”, which includes surveys, home warranties, pest reports, etc.

    In addition to these groupings, there are separate line items for “Government Recording Charges”, “Transfer Taxes”, “Initial Escrow Deposit”, “Daily Interest” and “Homeowner’s Insurance”. This process will allow the borrowers to fully understand their fees during the application process, and it will help to eliminate junk fees.

    Lastly, the new rules mandate that the final charges on the settlement statement can vary from those on the GFE only as follows:

    1. For the Origination Charge and Transfer Taxes:  Zero Tolerance.  The GFE and settlement statement must match exactly.
    2. For Required Services selected by the Lender, Title Services, Owner Title Insurance, Required Services That You Can Shop For (if you use companies identified by the lender) and Government recording charges:  There is a tolerance for a 10% increase for the total of these charges.
    3. For the Initial Escrow Deposit, Daily Interest and Homeowner’s Insurance:  There is an unlimited tolerance for increases from the GFE.

    NOTE – There are no restrictions on decreases of fees. Borrowers must love the sound of that.

    After this GFE is completed, it is given to the borrower for review. At closing, the settlement agent or closing attorney will be required to put together a HUD which matches the GFE (see variances above). There should be no surprises by the time the closing happens, unless borrowers decide to not read the GFE at all. But HUD is here to protect the borrowers, and it appears they will achieve that. As for the closing agents and attorneys, that will be covered on the next blog. Part III of the blog will discuss the HUD form and the changes to it (tentatively entitled “A Rock and a HUD Place”).

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  4. RESPA 2010 and Reverse Mortgages

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    December 30, 2009 by Beth Grassette under RESPA

    A reverse mortgage, also known as a reverse-annuity mortgage or a home equity conversion mortgage, is a special type of home equity loan for individuals age sixty-two (62) and older. Reverse mortgages allow owners to convert a portion of the equity in their homes to cash, in order to subsidize living expenses and other monetary needs. Typically, the loan proceeds do not have to be repaid during the homeowner’s lifetime, are not counted as taxable income, and do not affect the homeowner’s eligibility for Social Security or Medicare benefits.

    Reverse mortgages were created as a mechanism to reduced financial stress on aging Americans who seek to convert the equity in their homes into a stream of income without having to sell their residence or relocate. A reverse mortgage functions similarly to a line of credit, with the lender making payments to the home owner, only instead of requiring repayment during lifetime, the lender receives a claim to the homeowner’s property after death.

    For many elderly individuals within the United States this system is particularly attractive as a means for securing an enjoyable retirement and ensuring that all lifetime needs are met. Certain protections are afforded to homeowners electing to utilize the benefits of a reverse mortgage, including the security that the lender may never force the sale of the property, and the homeowner and their heirs may never be forced to repay additional sums to the lender which exceed the value of the property.

    The 2010 amendments to the Real Estate Settlement Procedures Act (RESPA) change the way in which lenders must complete disclosures required under the Act, affording lenders less wiggle-room in their estimation of costs to the borrower, in an attempt to ease the mortgage shopping process for consumers. Traditionally, RESPA has required that a lender provide all borrowers with a Good Faith Estimate (GFE), a document showing the costs that a lender will charge the borrower in conjunction with the loan, as well as a Settlement Statement (HUD-1), a document that provides an itemized listing of the funds that were paid at closing. Under the new legislation, the GFE and the HUD-1 forms must essentially match, as the new RESPA amendments allow for no more than a ten-percent (10%) difference between many amounts initially quoted on a GFE and those listed on the HUD-1 at the closing table.

    The unconventional nature of a reverse mortgage, in addition to the new more stringent reporting requirements under the 2010 amendments, have caused many lenders to question how the costs should be reported on the GFE and HUD-1. On November 16, 2009, in an attempt to quell industry anxiety over the new requirements, the U.S. Department of Housing and Urban Development (HUD) released its “New RESPA Rule FAQs” (FAQs).

    The informational pamphlet attempts to address many questions regarding completion of the GFE and HUD-1 in the case of reverse mortgages. For instance, unlike conventional mortgages, a reverse mortgage does not have a traditional “loan amount,” which is a required figure on both the GFE and HUD-1. The FAQs dictate, that on the GFE and HUD-1, lenders must list the initial principal limit calculated for the reverse mortgage, as opposed to a traditional loan amount. The FAQS also reveal that the unforeseen nature of many occurrences affecting a reverse mortgage, such as the loan term conditioned on the lifespan of the homeowner, will not be a hindrance to the proper completion of the GFE and HUD-1, because the lender may list “Not Applicable” or “N/A” for these required line items under which a reverse mortgage does not seem to fit.

    In the face of the apprehension harbored by many lenders over compliance with the new RESPA requirements, these FAQs are extremely helpful in reducing noticeable industry tension. While these answers ease worries about compliance with the new RESPA amendments, they do little to forecast how helpful the changes will be in protecting homeowners seeking to utilize the benefits of a reverse mortgage. With so many sections of the GFE and HUD-1 settlement statement clearly not applicable to the unique circumstances surrounding a reverse mortgage, it remains to be seen how helpful these documents will actually be in protecting consumers and allowing borrowers to shop for the lowest loan costs.

    For additional information, please see the U.S. Department of Housing and Urban Development’s “New RESPA Rule FAQs” at: http://nhl.gov/offices/hsg/ramh/res/resparulefaqs.pdf

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