BCAC—May 21, 2009 RESPA: Revisions & Washington Update

1. BCAC—May 21, 2009 RESPA: Revisions & Washington Update Rod Alba, ABA Richard Andreano, WBSK

2. Overview • Summary of January 2010 changes: • Revised definition of mortgage broker. • Revised definition of application. • Revised Good Faith Estimate (GFE) rules and form. • Revised HUD-1/HUD-1A rules and forms. • Summary of key January 2009 changes. • Certain implications presented by new rule.

3. January 1, 2010 Changes • Revised definitions of: • Mortgage broker. • Application. • Revised GFE rules and form. • Revised HUD-1/HUD-1A rules and forms.

4. Revised Definitions • Definition of “Mortgage Broker” was revised to: • Eliminate the exclusion for a party who is an exclusive agent of a lender. • Add the concept of an “intermediary”. • No guidance on this concept in the new rule. • Add an express statement that a party closing in its own name with table funding is a broker. • HUD needs to clarify the intent of this revision.

5. Revised Definitions • The need to provide a GFE is triggered by receipt of an application. • Definition of “Application” was revised to: • Provide that a minimum of the following six items are needed to have an application: • Borrower’s name, monthly income and SSN to obtain a credit report. • Property address and estimated value. • Loan amount sought. • Provide that a loan originator can specify additional items of information that are necessary to have an application. • Must consider tolerance implications of specifying additional items of information.

6. New GFE—Overview • Significant change in format. • Three page form with thirteen main sections. • To be provided by the loan originator, which is defined to include a mortgage broker and a lender. • If you use the new GFE before the January 1, 2010 compliance date: • You must comply with the new GFE rules. • You must use the new HUD-1 or HUD-1A. • The disclosures for particular settlement service providers required by the lender are removed. • May provide GFE: • By hand or mail. • If the consumer agrees, by fax, email or other electronic means.

7. New GFE—Fee Restriction • Other than a credit report fee, no fee may be imposed on the consumer before receipt of a GFE. • If the GFE is mailed, the consumer is deemed to receive the GFE three calendar days after mailing, exclusive of: • Sundays and legal public holidays specified in 5 USC 6103(a). • MDIA imposes a corresponding fee restriction with respect to initial TIL effective July 30, 2009. • Consumer is deemed to receive initial TIL three business days after mailing. • Business day is defined as all days other than Sundays and legal public holidays specified in 5 USC 6103(a). • There may be a difference in application of the respective mailing rules.

8. New GFE—Availability of Terms • Initially, the terms in a GFE must be available for at least 10 business days, except for the interest rate and rate-dependent charges. • The rate-dependent charges include: • The credit or charge for the rate chosen. • The adjusted origination charges. • Per diem interest. • There is no minimum period of availability for the interest rate and rate-dependent charges. • If the consumer expresses an intent to continue with an application within the period that the GFE terms are available, the originator is bound by the GFE (subject to tolerances and exceptions). • The rule does not address how a consumer expresses such an intent.

9. New GFE—Availability of Terms • As noted, there is no minimum period of availability for the interest rate and rate-dependent charges. • If a consumer expresses an intent to continue with an application after the rate and rate-dependent charges are no longer available, but within the period that the other GFE terms are available, the rate and rate-dependent charges float until the rate is locked. • Once the interest rate is locked, a new GFE is issued that reflects the rate and the rate-dependent charges based on the lock.

10. New GFE—Tolerances • Once the originator is bound by the GFE, charges are divided into three tolerance categories: • 0% tolerance—no increase permitted. • 10% bucket tolerance—charges in total may not increase by more than 10%. • No limit on changes to individual charges within bucket. • No tolerance—no limit on increase. • 0% tolerance: • Government transfer taxes. • Origination charge. • Credit or charge for rate chosen, if rate locked. • Adjusted origination charges, if rate locked.

11. New GFE—Tolerances • 10 % bucket tolerance: • Government recording charges. • Charges for loan originator-required settlement services, when originator selects provider. • Charges for loan originator-required settlement services, title services, required title insurance and owner’s title insurance, when borrower uses a provided identified by the originator. • If the originator allows the borrower to shop for services, the originator must provide a list of available providers for the applicable services. • Rule does not address whether a minimum number of providers must be identified for each service.

12. New GFE—Tolerances • No tolerance: • Charges not subject to the 0% and 10% tolerances may increase without any limit. • Statutory obligation to estimate charges in good faith still applies. • 0% and 10% tolerances apply to increases in charges. • There is no limit on decreases in charges. • If there is a credit for the rate chosen, that cannot decrease (because effectively an increase in charges would result).

13. New GFE—Tolerance Exceptions • Subject to the tolerances, an originator is bound by the GFE unless, based on changed circumstances or other exceptions, the originator is permitted to reject the loan or issue a new GFE. • Changed circumstances include: • Acts of God, war, disaster or other emergency. • Information regarding the borrower or loan relied on in providing GFE that changes or is found to be inaccurate. • New information regarding the borrower or loan. • Changed circumstances do not include: • Market price fluctuations. • The information required by the originator to constitute an application, unless the information changes or is found to be inaccurate.

14. New GFE—Tolerance Exceptions • As noted above: • A minimum of the following six items are needed to have an application: • Borrower’s name, monthly income and SSN to obtain a credit report. • Property address and estimated value. • Loan amount sought. • A loan originator can specify additional items of information that are necessary to have an application. • An originator is deemed to rely on the items of information required for an application. • This means an originator cannot claim there are changed circumstances based on this information unless the information changes or is found to be inaccurate.

15. New GFE—Tolerance Exceptions • If there are changed circumstances, the originator may: • Deny the loan based on the change, or • Issue a new GFE within three business days. • If a new GFE is issued, charges may increase only to the extent the changed circumstances resulted in higher charges. • The originator must document the reasons for the change and retain the documentation for three years after settlement.

16. New GFE—Tolerance Exceptions • Other Exceptions: • If a borrower requests changes, the originator may: • Deny the loan based on the change, or • Issue a new GFE within three business days. • The originator must document the reasons for the change and retain the documentation for three years after settlement. • For a new home being constructed when closing is anticipated to occur more than 60 days after the GFE is issued, an originator may: • Provide the borrower with a clear and conspicuous disclosure advising that a revised GFE may be issued. • Issue a revised GFE up until 60 days before closing.

17. New GFE—Violations • A violation of the GFE requirements will constitute a violation of RESPA Section 5. • Currently there are no express damages or penalties for Section 5 violations. • HUD has asked Congress to change this. • An originator could cure a tolerance violation at or within 30 calendar days after settlement.

18. New GFE—Page One • 1. Transaction Identification Section: • Originator name and contact Information. • Borrower name and subject property. • GFE date, which is key for 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.

19. New GFE—Page 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. • No minimum period of availability required for the interest rate and rate-dependent charges. • After period of availability, the interest rate and rate-dependent charges float until locked. • For all other charges, specify the date through which the 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.

20. New GFE—Page 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 A+B: The sum of the Block A and Block B amounts.

21. New GFE—Page Two • 8. Your Adjusted Origination Charges Section: • HUD’s 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.). • If there is no mortgage broker, the lender can elect to (a) include in the Block 1 amount any credit or charge for the interest rate chosen, or (b) disclose any such credit or charge in Block 2 or Block 3, respectively. • If there is a mortgage broker, any credit or charge for the rate chosen 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.

22. New GFE—Page Two • 8. Your Adjusted Origination Charges Section—Examples: • 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.

23. New GFE—Page 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 lender’s title insurance: • Enter the total estimated charge for all title services, premiums and endorsements in Block 4, regardless of who selects the provider. • Block 5. Owner’s title insurance: • For purchase transactions, enter the total estimated charge for all title premiums and endorsements in Block 5, regardless of who selects the provider. • For non-purchase transactions, you may enter “NA” or “Not Applicable”.

24. New GFE—Page 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. • 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.

25. New GFE—Page 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. Homeowner’s 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.

26. New GFE—Page 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.

27. New GFE—Page 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.

28. New GFE—Page 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.

29. New HUD-1/HUD-1A—Overview • While the HUD-1 and HUD-1A were revised, the basic format of the forms remains intact. • The compliance date for new HUD-1/HUD-1A and related rules is January 1, 2010. • If you use the new HUD-1/HUD-1A before that date, you must comply with all the related rules. • You cannot use the new HUD-1/HUD-1A before that date unless the new GFE is used as well. • As noted above, the GFE may be provided by hand or mail or, if the consumer agrees, by fax, email or other electronic means. • There is no corresponding electronic delivery rule for the HUD-1/HUD-1A. • However, the new rule provides that The Electronic Signatures in Global and National Commerce Act (ESIGN) applies to RESPA.

30. New HUD-1/HUD-1A—Overview • The changes to the HUD-1/HUD-1A include: • A cross reference on various lines to the appropriate GFE Block in which the corresponding estimated fee was disclosed. • The addition of a new page that compares the GFE and HUD-1/HUD-1A charges and summarizes the loan. • A combination of disclosing lump sum and itemized charges. • A requirement to show who paid a POC item. • The disclosure of seller-paid fees as buyer-paid with a corresponding credit from the seller to the buyer. • This creates an issue with FHA loans that is being examined.

31. New HUD-1—Violation and Cure • A violation of the HUD-1 requirements will be considered a violation of RESPA Section 4. • Currently there are no express statutory damages or penalties applicable to a Section 4 violation. • HUD has asked Congress to change this. • An inadvertent or technical error in completing the HUD-1 or HUD-1A would not be deemed a violation of RESPA Section 4 if a revised HUD-1 or HUD-1A is provided in accordance with the requirements of the new rule within 30 calendar days after settlement.

32. New HUD-1—Page One • Both the HUD-1 and HUD-1A have a transaction identification section at the top of the forms.

33. New HUD-1—Page One • The HUD-1 includes a summary of the borrower’s and seller’s transaction on the first page. • The HUD-1A includes only a summary of the borrower’s transaction (as the form may be used only when there is no seller involved).

34. New HUD-1—Page Two • Both the second page of the HUD-1 and first page of the HUD-1A still provide for the listing of settlement charges. • 700. Total Real Estate Broker Fees: • This series is not included in the HUD-1A. • 800. Items Payable in Connection with Loan: • Lines 801 to 803 follow the three part approach of the GFE to disclose the lender’s and broker’s origination charges. • For lines 801 and 802, the applicable amount is disclosed to the left of the borrower’s column. • For line 803, the amount must be listed in the borrower’s column, and can be a negative number (if there is a credit), positive number (if there is a charge) or zero (if there is no credit or charge). • For lines 804 to 808, disclose the applicable amount in the borrower’s column, or to the left of the column, based on whether the charge is paid at or outside of closing. • For charges paid outside of closing, the party paying the charge must be shown. For example, “P.O.C. (borrower)”.

35. New HUD-1—Page Two • 900. Items Required by Lender to Be Paid in Advance: • The applicable amounts paid at settlement are reflected in the borrower’s column. • Do not include any amounts for deposit into the escrow or impound account. • 1000. Reserves Deposited with Lender: • This series is for the disclosure of the amounts for deposit into the escrow or impound account. • The total deposit is entered on line 1001. • The amounts entered on lines 1002 to 1007 are an itemization of the total deposit in line 1001. The amounts are entered to the left of the borrower’s column. • Note that line 1007 is for the aggregate accounting adjustment, which is a negative number or zero.

36. New HUD-1—Page Two • 1100. Title Charges: • The title services charge and premium for lender’s title insurance are disclosed in the borrower’s column on line 1101. • If the settlement or closing fee is included in the amount disclosed on line 1101, then it is disclosed to the left of the borrower’s column on line 1102. If not, then the fee is disclosed in the borrower’s column. • The owner’s title charge is disclosed in the borrower’s column on line 1103. • The charge for lender’s title insurance is disclosed to the left of the borrower’s column on line 1104 (the amount already is included in the charge disclosed on line 1101). • The lender’s and owner’s title policy limits, and the agent’s and underwriter’s portions of the insurance premium, are disclosed to the left of the borrower’s column on lines 1105 to 1108. • 1200. Government Recording and Transfer Charges • The total recording charges are disclosed in the borrower’s column on line 1201. • The itemized recording charges are disclosed to the left of the borrower’s column on line 1202. • The total transfer taxes are disclosed in the borrower’s column on line 1203. • The itemized transfer taxes are disclosed to the left of the borrower’s column on lines 1204 and 1205.

37. New HUD-1—Page Two • 1300. Additional Settlement Charges: • The total of the required services that the borrower can shop for is included in the borrower’s column on Line 1301. • The individual services are itemized on the lines that follow, with the amounts entered to the left of the borrower’s column. • The 1300 series also can be used to reflect miscellaneous itemized settlement charges that are not included in any specific category, such as a charge for a warranty plan. • The amounts for these items are entered in the borrower’s or seller’s columns. • Line 1400. Total Settlement Charges: • Enter the total amount of the charges disclosed in the columns for the 700 to 1300 series. • Seller paid fees: • Except as noted for the miscellaneous fees in the 1300 series, there is a special rule to disclose amounts paid by the seller. The purpose of the special rule is to provide for the comparison of the GFE charges and HUD-1 charges. • Even if the seller pays a charge, the charge must be recorded in the borrower’s column on the appropriate line. On page 1, a credit to the borrower in the amount of the charge must be entered in the 200 series and a corresponding charge to the seller must be entered in the 500 series.

38. New HUD-1—Page Three • Both the new third page of the HUD-1 and new second page of the HUD-1A contain a “crosswalk” to provide for a comparison between the GFE charges and charges on the settlement statement. • The “crosswalk” presents the comparison of charges in three parts, based on the tolerances: • Charges That Cannot Increase. • Charges That in Total Cannot Increase More Than 10%. • Government recording charges. • Required services when the originator selects the provider. • Required services, required title insurance and owner’s title insurance, when the borrower selects a provider identified by the originator. • Charges That Can Change.

39. New HUD-1—Page Three • Both the third page of the HUD-1 and second page of the HUD-1A also contain a summary of the loan terms. • Although similar to the summary of loan terms in the GFE, this summary includes further detail because the terms of the loan are known. • If applicable, the specific date on which the interest rate can first change must be provided, along with the period between subsequent rate changes and the maximum rate movement on a change date. • If applicable, the amount of the monthly escrow or impound account payment must be provided. • If applicable, the specific date on which a balloon payment is due must be provided.

40. Key January 16, 2009 Changes • Average Charge Pricing Exception: • Amount of fee disclosed in a HUD-1/HUD-1A may not exceed actual fee unless exception is used. • Exception is not available for charges that vary based on loan amount or property value. • Significant limits and requirements: • Must define class of transactions to which the average charge applies by timeframe, geography and loan type. • Must use same average charge for each particular transaction class. • Average charge to borrowers may not exceed average amount paid for the service. • Total charge to borrowers may not exceed total of amounts paid for the service.

41. Key January 16, 2009 Changes • Average Charge Pricing Exception: • Significant limits and requirements (continued): • Three year record retention requirement. • State law implications.

42. Key January 16, 2009 Changes • Initial Servicing Disclosure Statement: • Congress substantially simplified the initial statement in 1996. • HUD now has revised Regulation X to implement the statutory simplification. • Detailed information on servicing transfer practices and intentions is replaced with simple statement of intent. • Requirement to deliver at the time of a face-to-face application is eliminated. • Acknowledgment requirement is eliminated. • If consumer agrees, may deliver statement by facsimile, email or other electronic means.

43. Key January 16, 2009 Changes • Required Use Definition: • HUD revised the definition to: • Reflect position of HUD that avoidance of economic disincentives or penalties based on the use of an particular settlement service provider is a required use of the provider. • Limit the exception for incentives to settlement service providers. • This effectively would prohibit builders from offering incentives based on the use of an affiliated settlement service provider. • NAHB sued HUD in December 2008. • HUD delayed the effective date in January 2009 and again in March 2009. • HUD withdrew the revised definition in May 2009.

44. Implications—GFE • Relationship with mortgage brokers: • The new rule provides that if the mortgage broker provides a GFE, the lender is not required to provide another GFE, but 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. • HUD has advised informally that lenders and brokers need to coordinate the issuance of GFEs. • 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. • An interesting scenario is one in which a broker issues a GFE and no lender will accept the GFE.

45. Implications—GFE • Relationship with settlement service providers: • Charges of settlement service providers selected or identified by the loan originator are subject to the 10% bucket tolerance. • If borrower is allowed to shop for providers of services, a list of providers for the applicable services must be given to the borrower.

46. Implications—HUD-1/HUD-1A • Relationship with settlement agents: • Implementation. • MDIA pre-closing disclosure requirement for TIL.

47. Thank you. Rod Alba American Bankers Association Washington, DC ralba@aba.com Richard Andreano, Jr. Weiner Brodsky Sidman Kider PC Washington, DC andreano@wbsk.com