RESPA regulations apply to first lien residential mortgage loans made to finance the purchases of one to four family homes, cooperatives, and condominiums, for either investment or occupancy, as well as second or subordinate liens for home equity loans when a purchase is financed by a federally related mortgage loan. Federally related loans are those made by banks, savings and loan associations, or other lenders whose deposits are insured by federal agencies; loans insured by the FHA and guaranteed by the Department of Veterans Affairs (VA); loans administered by HUD; and loans intended to be sold by the lenders to Fannie Mae, Ginnie Mae, or Freddie Mac. RESPA is administered by HUD
RESPA does not apply to the following settlements:
- Loans on large properties (i.e., more than 25 acres)
- Loans for business or agricultural purposes
- Construction loans or other temporary financing
- Loans for business or agricultural purposes
- Construction loans or other temporary financing
- Vacant land (unless a dwelling will he placed on the lot within two years)
- A transaction financed solely by a purchase-money mortgage taken back by the seller
- An installment contract (contract for deed)
- A buyer’s assumption of a seller’s existing loan (If the terms of the assumed loan are modified, or if the lender charges more than $50 for the assumption, the transaction is subject to RESPA regulations.)
RESPA prohibits certain practices that increase the cost of settlement services:
- Section 8 prohibits kickbacks and fee-splitting for referrals of settlement services and unearned fees for services not actually performed. Violations are subject to criminal and civil penalties, including fines up to $10,000 and/or imprisonment up to one year. Consumers may privately pursue a violator in court; the violator may be liable for an amount up to three times the amount of the charge paid for the service.
- Section 9 prohibits home sellers from requiring that homebuyers buy title insurance from a particular company. Buyers may sue the seller for such a violation; violators are liable for up to three times the amount of all charges paid for the title insurance.
- Section 10 prohibits lenders from requiring excessive escrow account deposits, money set aside to pay taxes, hazard insurance, and other charges related to the property.
Sweeping changes required by January 1, 2010, include the mandatory use of the new Good Faith Estimate (GFE) and the modified HUD-1 form. To make it easier for borrowers to understand costs, the new rules and forms require lenders to provide a standard GFE, provided by HUD, which clearly discloses key loan terms and closing costs. More important, most of these disclosed costs cannot vary greatly between the time that the GFE is issued and closing.
Controlled Business Arrangements
To streamline the settlement process, a real estate firm, title insurance company, mortgage broker, home inspection company, or even a moving company may agree to offer a package of services to consumers, a system known as a controlled business arrangement (CBA).
RESPA permits a CBA as long as:
- a consumer is clearly informed of the relationship among the service providers,
- that participation is not required,
- that other providers are available,
- that the only thing of value received by one business entity from others, in addition to permitted payments for services provided, is a return on ownership interest or franchise relationship.
Fees must be reasonably related to the value of the services provided and not be fees exchanged among the affiliated companies simply for referring business to one another. This referral-fee prohibition may be a particularly important issue for licensees who offer computerized loan origination (CLO) services to their clients and customers. CLOs that provide services to consumers may charge for the services provided; the fees must be disclosed on the HUD-1 or HUD 1A settlement statement. While a borrower’s ability to comparison shop for a loan may be enhanced by a CLO system, the range of choices must not be limited. Consumers must be informed of the availability and costs of other lenders.
Disclosure Requirements
Lenders and settlement agents have the following disclosure obligations at the time of loan application and loan closing or within three business days of receiving the loan application. If the lender denies the loan within three days, then RESPA does not require that the lender provide the following documents:
Special information booklet This HUD booklet, which must be given at the time of application or provided within three days of loan application, provides the borrower with general information about settlement (closing) costs. It also explains the various provisions of RESPA, including a line-by-line description of the Uniform Settlement Statement.
Good Faith Estimate of Lending Costs — Summary of base interest, term, down payment, loan origination fee, points, discount points, credit report and any other miscellaneous costs.
Issuing a new GFE triggers a new three-day waiting period; in which case, closing may not occur until after three days have passed.
The new GFE indicates which closing costs may or may not change prior to settlement and, if they do, by how much. The fees are divided into three categories:
- No tolerance —fees that may not increase before closing:
- lender charges for taking, underwriting, and processing the loan application,
- including points,
- origination fees, and
- yield spread premiums
- 10 percent tolerance—fees that cannot increase by more than 10 percent in any given category:
- settlement services for which the lender selects the provider or for which the borrower selects the provider from the lender’s list,
- title services and title insurance if the lender selects the provider, and recording fees
- Unlimited tolerance —fees for services that are out of the lender’s control: services for which the borrower chooses the provider :
- such as escrow charges
- title insurance fees
- impounds for taxes, mortgage interest
- the cost of homeowners’ insurance
Mortgage servicing disclosure statement This statement tells the borrower whether the lender intends to service the loan or to transfer it to another lender. It will also provide information about resolving complaints.
The last page of the GFE is a worksheet consumers can use to compare different loans and terms to aid in price shopping. The lender is responsible for the accuracy of the GFE and the actual costs that the lender charges on the HUD-1.
Uniform Settlement Statement (HUD-1) RESPA requires that the Uniform Settlement Statement itemize all charges that are normally paid by a borrower and a seller in connection with settlement, whether required by the lender or another party, or paid by the lender or any other person. The third page of the new HUD-1 form provides for a comparison of the original GFE estimates to the actual charges appearing on the HUD-1. Lenders are permitted to “correct” any violation of the tolerances by reimbursing the borrower within 30 days of settlement.
Accounts for taxes and insurance While RESPA does not require that escrow accounts be set up, certain government loan programs and some lenders require escrow accounts as a condition of the loan. RESPA places limits on the amounts that a lender may require:
- On a monthly basis, the lender may require only one-twelfth of the total of the disbursements for the year, plus an amount necessary to cover a shortage in the account.
- No more than one-sixth of the year’s total disbursements may be held as a cushion (a cushion is not required).
- Once a year, the lender must perform an escrow account analysis and return any amount over $50 to the borrower.
By law, borrowers have the right to inspect a completed HUD-1 form, to the extent that the figures are available, one business day before the closing. (Sellers are not entitled to this privilege.)
Kickbacks and referral fees RESPA prohibits the payment of kickbacks, or unearned fees, in any real estate settlement service. It prohibits referral fees when no services are actually rendered. The payment or receipt of a fee, kickback, or anything of value for referrals for settlement services includes activities such as mortgage loans, title searches, title insurance, attorney services, surveys, credit reports, and appraisals.
TILA-RESPA INTEGRATED DISCOSURE RULE (TRID)
A new closing Settlement Statement Procedure was initiated in October of 2015. It has replaced the old Uniform Settlement Statement or HUD 1 procedure. The new rule covering Closing Settlement Procedures was initiated by the Consumer Financial Protection Bureau (CFPB), which was established after the meltdown in 2008, and changes how closing procedures for residential real estate transactions involving mortgages are handled. The new rules became effective October 3, 2015
The new rules are also known as the CFPB’s “Know Before You Owe” procedure and include several new forms. The new rules and disclosures are intended to be more understandable for consumers, however they have a very significant impact on closing procedures, since they change closing procedures and forms that have been used by the industry for many years.
As of October 3, 2015, the use of the old GFE (GOOD FAITH ESTIMATE), HUD-1 FORM and TRUTH IN LENDING FORM are no longer used for most mortgage loans. The new INTEGRATED DISCLOSURES must be now provided by a creditor or mortgage broker that receives an application from a CONSUMER for a closed-end credit transaction secured by real property.
RULE NAMES
The formal title of the new RULE is “The Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) (2013). Other references to this new RULE include:
CFPB Rule
TILA-RESPA Rule
Integrated Disclosures or Integrated Mortgage Disclosures
CDs or Combined Disclosures or Combined Mortgage Disclosures
TRANSACTIONS COVERED BY THE NEW RULE
Most loans secured by residential properties
Vacant Lot loans
Construction Loans for residential properties
Purchase and Refinance of residential properties
RULE EXCEPTIONS
Home Equity Lines of Credit
Reverse Mortgages
Mobile Homes or Dwellings not permanently attached to land
Creditors who provide 5 or fewer loans per year
NEW FORMS
The Good Faith Estimate Form and the Initial Truth in Lending (TIL) form become the “LOAN ESTIMATE”
The HUD-1 Form and the Final Truth in Lending (TIL) form become the “CLOSING DISCLOSURE”
NOTE: The HUD-1 Form is not completely disappearing
NEW TERMINOLOGY IN MORTGAGE FORMS
Lender
Borrower
Closing/Settlement/Signing
Tolerances
Creditor
Consumer
Consummation
Variations
In normal loan application procedures, the Creditor (Borrower) fills out worksheets provided by the lender, to facilitate an analysis of the Creditor’s (Borrower’s) ability to qualify for a loan. However the Consumer Financial Protection Bureau (CFPB) wants Creditors (Borrowers) to know that these worksheets and forms are NOT and official LOAN ESTIMATE (of loan costs). As a result, the CFPB wants lenders to insert a disclaimer on the top of the worksheets, etc, as follows:
“YOUR ACTUAL RATE, PAYMENT AND COST COULD BE HIGHER. GET AN OFFICIAL “LOAN ESTIMATE” BEFORE CHOOSING A LOAN”
INFORMATION NEEDED TO APPLY FOR A LOAN UNDER THE NEW TILA RULES
Less information will be required under the new rules than under the old RESPA rules. The new rules require the lender to provide the LOAN ESTIMATE (COSTS) within THREE DAYS after receiving all of the following information:
- The Consumer’s (Borrower’s) NAME
- The Consumer’s (Borrower’s) INCOME
- The Consumer’s (Borrower’s) SOCIAL SECURITY NUMBER (for obtaining a credit report)
- The Consumer’s (Borrower’s) PROPERTY ADDRESS
- The ESTIMATED VALUE OF THE PROPERTY being purchased by the Consumer (Borrower)
- The LOAN AMOUNT that is being requested by the Consumer (Borrower)
DIFFERENCE BETWEEN THE NEW LOAN ESTIMATE AND LOAN DISCLOSURE
In essence the new LOAN ESTIMATE is the initial estimate of the loan costs. The new LOAN DISCLOSURE is the final estimate of the loan costs.
- Replaces the old Good Faith Estimate and Initial Truth in Lending (TIL) form.
- Lender has to ensure that the LOAN ESTIMATE is delivered or placed in the mail no later than the third business day after receiving the (CLOSING) completed Consumer’s (Borrower’s) Application.
- Additionally, as a final protection for CLOSING The Consumer (Borrower) the LOAN ESTIMATE must be delivered or placed In the mail no later than the seventh business day before the CONSUMMATION (CLOSING) OF THE LOAN TRANSACTION
- Replaces the HUD-1 Settlement Statement and the Final Truth in Lending (TIL) form
- Lender has to ensure that the Consumer (Borrower) receives the CLOSING (LOAN) DISCLOSURE no later than THREE BUSINESS DAYS before the CONSUMATION
- The loan cannot be CONSUMATED (CLOSED) LESS THAN THREE DAYS AFTER THE (LOAN) DISCLOSURE is received by the CONSUMER (BORROWER)
COMMUNICATION OF THE CONSUMATION (CLOSING) DATES
The new rules dictated that the CONSUMER (BORROWER) receive the CLOSING (LOAN) DISCLOSURE at least 3 business days before closing. The CREDITOR (LENDER) can provide this disclosure in person and/or receive a receipt of the delivery of the CLOSING (LOAN) DISCLOSURE to the CONSUMER (BORROWER).
Where the CLOSING (LOAN) DISCLOSURE is sent to the CONSUMER (BORROWER), it is presumed to be received by the CONSUMER 9 BORROWER) three business days after it has been sent. This applies to situations where the CLOSING (LOAN) DISCLOSURE has been sent by either E Mail or standard mail (USPS). In order to adhere to this three day rule, lenders may send the CLOSING (LOAN) DISCLOSURE by standard mail (USPS) up to a week before CONSUMATION (CLOSING)
RECOMMENDATIONS FOR REAL ESTATE AGENTS
- The new procedures add time to the processing of the loan documents and communication between the CREDITOR (LENDER) and the CONSUMER (BORROWER). It is recommended that you should allow at least 60 DAYS to CONSUMATE (CLOSE) a contract
- You should AVOID 30 DAY OR SHORT CLOSING DATES IN CONTRACTS because of the additional time it takes for the new procedures.
POTENTIAL PROBLEMS WITH THE NEW TILA PROCEDURES
1. CHANGES IN THE PROCEDURE FOR PREPARING THE CONSUMATION (CLOSING) STATEMENTS
THE LENDER NOW PREPARES THE CONSUMMATION (CLOSING) STATEMENT FOR THE BORROWER
THE CLOSING AGENT WILL CONTINUE TO PREPARE THE CONSUMATION (CLOSING) STATEMENT FOR THE SELLER.
(THE CLOSING AGENT PREVIOUSLY PREPARED THE CONSUMATION (CLOSING) STATEMENTS FOR BOTH THE BUYER AND SELLER AND COULD SPOT ANY INCONSISTENICES/ERRORS IN EITHER OR BOTH CONSUMATION (CLOSING STATEMENTS)
UNDER THE NEW PROCEDURES, SINCE THE CLOSING STATEMENTS ARE PREPARED BY TWO DIFFERENT PARTIES, THEY MAY NOT AGREE AND DELAYS IN THE CONSUMATION (CLOSING) MAY OCCUR WHILE THESE INCONSISTENCIES ARE IRONED OUT.
2. BROKER INFORMATION HAS TO BE INCLUDED IN THE CONSUMATION (CLOSING) DOCUMENTATION
BROKER’S ARE NOW REQUIRED TO PROVIDE CONTACT INFORMATION AND LICENSE NUMBERS TO THE LENDER FOR INCLUSION IN THE CONSUMATION (CLOSING) DOCUMENTATION. BOTH THE BUYER BOKER AND SELLER BROKER ARE REQUIRED TO PROVICE THIS INFORMATION. IF THIS INFORMATION IS NOT PROVIDED IN A TIMELY MANNER IT CAN DELAY A CONSUMATION (CLOSING).
