respa: update and best practices ruth a. dillingham, esq. first american title insurance co
TRANSCRIPT
Real Estate Settlement Procedures Act (RESPA)
Became law (RESPA) 1975Regulator-U.S. Department of Housing and
Urban Development (HUD) Regulation X
Re-Issued 1996; amended 2008Enforced by HUDIntent:
Help consumers better shop for settlement services Eliminate increases in costs of settlement services
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Covered Transactions
• Mortgage loans secured by:• First or subordinate mortgage: including
– Refinances– Assumptions (where lender permission needed)– Home Equity Loans
• Residential property• One- to four-family
– Including condos and coops• Reverse Mortgage• Made by a ‘creditor’ (TILA)
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Transactions NOT Covered• Primarily for:
– Business– Commercial – Agricultural purpose (TILA)
• 25 acres or more• Vacant Land• Temporary/Construction loan
– Unless loan converts to permanent or made to first user of constructed improvement
• No ‘Creditor’– Cash sale– Seller financing
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Sections of the Act/Regulation
• Section 4- Settlement Statement– 3500.8-12 HUD-1 Form
• Section 5- Information Booklets & GFE– 3500.6-7 GFE and Settlement Charges
Booklet• Section 6/10- Servicing Issues
– 3500.21 Transfers of Servicing – 3500.17 Escrow Accounts
• Section 8- Kickbacks and Unearned Fees– 3500.14-Prohibited Payments– 3500.15-Affiliated Business Arrangements
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Required Disclosures
RESPA requires that borrower receive different disclosures at various times:
• When loan application is made• At settlement• After settlement
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Disclosures at Loan Application
Borrower must receive:– Special Information Booklet– Good Faith Estimate (GFE) of Settlement
Costs– Mortgage Servicing Disclosure Statement
If the borrowers do not get these documents at time of application, lender must mail them within 3 business days of receiving the applicationAffiliated Business Arrangement (AfBA)
Disclosure
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Disclosures at SettlementHUD-1 Settlement Statement
Shows actual settlement costs of transaction
Initial Escrow Statement Itemizes estimated taxes, insurance
premiums, and other charges anticipated to be paid from escrow account during first 12 months of the loan.
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Disclosures After Settlement
Annual Escrow Statement− Summarizes all escrow account
deposits and payments during the servicer’s 12-month computation year
Servicing Transfer Statement− Required if the loan servicer sells or
assigns the servicing rights to a borrower’s loan to another loan servicer
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RESPA Rule Effective Dates
January 1, 2010All residential real estate loans get new
GFEAll loans with new GFE must close with
new HUD -1New Rules for:
Cost Disclosures Vendor Relationships
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New GFE- “Application”
• Name• Social Security Number• Loan Amount• Property Value• Monthly Income• Property Address
• No charge to the consumer prior to receipt except Credit Report
• Can’t substitute ‘worksheet’ instead
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New Disclosures - Timing
Within 3 days of application:GFETIL HUD Settlement Cost BookletList of Providers:
If do not allow borrower to shop• No list• All have 10 % tolerance (in the aggregate)
If do allow borrower to shop• Must provide list of Providers which• Contains one 10% tolerance provider for those
services
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Truth in Lending/RESPA: The New Timelines
Sunday Monday Tuesday Wednesday Thursday Friday Saturday
1Application is Made
2^1
3
4 5^2
6^3Must Mail TIL/GFE
7*1
8*2
9*3TIL/GFE is “received”
10*4OK to collect fees
11 12*5
13*6
14*7
Earliest Date Loan can Close
15*8
16*9
17*10
GFE terms expire
13This lender is closed for general business purposes on Saturday
GFE Page 1
Interest Rate DateOther Fees DateRate Lock DateRate Lock-in Date
Summary of Loan Terms
Summary of Loan Costs
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GFE Page 2
Loan Origination Charges-No Increase
Lender Costs-Most Capped (10%)
Other Costs-Some Capped
(10%)Some UnlimitedDepends on who
selects provider
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This slide is for purposes of Notes View ONLY
the text is a continuation of that used for the previous
slide
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Zero Tolerance
• Lender charges for– Taking– Underwriting– Processing the application
• Points or origination fees (including yield spread premium)
• Real property transfer tax– Is state specific-statutory
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10% Increase Permitted
• Total (aggregate) all charges– Lender required settlement services
• Where lender selects provider– Lender required settlement services
• Where borrower selects provider from lender’s list
– Title services and title insurance• Where lender selects the provider
– Title services and title insurance• Where borrower selects provider from
lender’s list– Recording fees
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Unlimited Change Permitted
• Services where borrower selects provider– Including title and title insurance
• Escrow account amounts• Per diem interest• Homeowners insuranceFinal page of the GFE also contains
worksheet- like charts to compare different loans and terms
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New GFE - Impact
All charges Except for
• Interest rate • Charges related to the interest rate• Per diem interest
When the rate is not locked
Must be available for at least 10 business days after the issuance of the GFE
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Not bound by GFE?
Changed Circumstances affecting settlement costs
Changed Circumstances affecting loan
Borrower Request
GFE Expires
Interest Rate locked
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New GFE?
Changed Circumstances: Acts of God Inaccurate Information used to prepare
the GFE New Information not relied on to prepare
the GFE Particular Information regarding the
transaction (ie- ‘boundary line disputes’)
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If New GFE
Within 3 business days of new informationOnly increase fees that reflect the new
informationRetain documentation establishing
change for 3 years Both lender and broker
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GFE/HUD-1
• Variation on the tolerances– Not a violation– If Lender
•Reimburses borrower•Any amount by which the tolerances
were exceeded–At settlement–Within 30 calendar days after
settlement
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In Practice?
What to do with a borrower who is “just shopping?” pre-approvals?
How to confirm the borrower has/has not “expressed intent to continue with application?”
What do you do to show all costs? 1003; your internal forms?
When is a list of providers, not a ‘list’?
New HUD-1
• Page 1- No Major Changes• Page 2- Aligns GFE with HUD• Page 3- Comparison of GFE with HUD• If differences-
– Lender must make revisions– Lender must reimburse borrower– Lender cannot change GFE unless
• Borrower Request• “Changed Circumstances”
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HUD-1 Page 1
Add settlement agent phone number
Adjustments-
Buyer/Seller
No longer Seller
costs on Page 2
Deposits
Summary of Costs
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HUD-1 Page 2
Broker Commissions-700’s
Lender Charges- 800’s Origination Costs 3rd Party Costs
Prepaids/Escrows-900/1000
Closing Attorney/Title Insurance Fees- 1100’s
Recording Fees- 1200’s Other Fees- 1300’s
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This slide is for purposes of Notes View ONLY
the text is a continuation of that used for the previous
slide
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New HUD-1: 800 Series: “Items Payable in Connection with
Loan” 801 “Outside the Column” (in text area)
– Total Cost of Origination Charges– Including all origination charges and YSP
802 “Outside the Column”– “Credit” for YSP– “Cost” of Discount Points– Other Credits for Closing Costs
803 In Column– Must match the GFE page 2 Sections 1 and 2
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New HUD-1: 800 Series: “Items Payable in Connection with
Loan” 804-807
Costs for 3rd party providers Must be exact costs from lender file If pre-paid show as POC
NOTE: If credit for cost in 801, not in 802 Can be credit on line 204
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This slide is for purposes of Notes View ONLY
the text is a continuation of that used for the previous
slide
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New 1101
• Total of all charges formerly itemized in the 1100 series:– Title search– Examination– Document preparation– Fee for conducting the closing
(including attorneys fees to represent a lender/buyer)
– Lender’s title insurance premium
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Itemization of 1100’s
• 1102 Settlement/Closing Fee• 1103 Owners Title Insurance Premium• 1104 Lenders Title Insurance Premium• 1105 and 1106
– Amount of Coverage
• 1107 and 1108– Commission Split (agent/underwriter)
• 1109 Other Legal Costs (P&S; Seller)
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Itemization of 1100’s
–Disbursements to third parties•Itemized
–Amount–Payee
•May be–Included in the amount at 1101–Listed separately in the 1100 series
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Calculating the Title Premiums
Sale Transaction: First- amount for owners and lenders
simultaneous issue (based on sales/loan) Second- amount for lenders only (loan) Difference equals cost of Owners
Example: Loan and Owners= $400. Loan only= $145. Owners= $ 255.
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Other Line Items
• 1200 series– Amounts for recording fees
(subject to the 10% tolerance) – Transfer tax- check the GFE
(zero tolerance)
• 1300 series – Other services you can shop for – Relate to GFE Block 6
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Transfer Tax
Transfer Tax defined (GFE Block 8 #1) Treatment (#2):
• See state or local law- only include if buyer/borrower pays
• If law is unclear-disclosure depends on “common practice or experience in the locality of the property”
• If seller pays and not on GFE-put in seller column of HUD-1
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Settlement/Title Fees
The provider as ‘identified’ party• On GFE-only total amount for Block 4• On written list- identified by name and
amount– Can break down into-
• Settlement (or closing)• Title Insurance
– With associated fees
• Can still go off list if lender permits
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Personal Representation
Where the borrower or seller has own attorney
• can’t be for the RESPA related charges
• The cost is not estimated on GFE• Shown on final HUD-1 on line 1109 (or
beyond)• Itemize the service and identify the
provider• Not included in tolerances
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HUD-1 Page 3
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GFE estimates left column
HUD-1 actual right column
Group 1- Charges that cannot change
Group 2- Charges that cannot change by no more than 10%
Group 3- Charges that can change
Recap of Loan Terms
Bifurcation of Lender Charges
How to show on HUD/correspond to GFEThe GFE is a single amount
The written list of providers shows individual costs
The final HUD-1 shows single cost (1101) 1102 shows settlement agent 1107 shows title agent
Presume same entity in Block H page 1
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In Practice?
We just forgot to put the [xx] on the GFE…
The investor insists on a final GFE at closing even if no tolerance issue
They don’t want the owners policy so the tolerance saves the day
The credit is too much, so decrease 802
At and After-ServicingInitial Escrow Disclosure
Project cash in/cash out for escrow accounts
Annual Escrow Disclosure Reflect Actual cash in/cash out of account Make adjustments
Servicing Transfers Good Bye Letters Hello Letters
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Kickbacks & Referral Fees
RESPA, Reg. X Prohibit Payment of:
• Kickbacks • Referral Fees • Unearned Fees• Duplicate FeesStrict InterpretationNarrow Exceptions allowed
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Kickbacks & Referral Fees
Given Or Received For ActualOr Anticipated Referral of Business 1-4 family propertyBetween/Among settlement
service providers
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Kickbacks & Referral Fees
Examples:Payment or Gifts for referralsTrips/Recreation ExpensesOffice ExpensesClosed lotteries/contests
“You can beg; but you cannot pay”
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Unearned & Duplicate Fees
Unearned:• Little or No work Done• Fee paid
Duplicate:• Work done by second party• Unnecessarily• Fee paid
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Permitted Payments
Work, actually done, With Commensurate
Payment
Normal Business Marketing Expenses
Normal Educational Expenses
Employers to Employees
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New “Services” or Sham?
• FHA approved lender pays mortgage broker $1,500 to bring in refinance candidates– HUD aggressively cancelling FHA
approvals
• Hazard disclosure company pays RE broker $100 for every property report referred– HUD maintains services covered even if
not ‘on list’
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New “Services” or Sham
RealtySouth (Alabama)Class Action- 30,000 consumersRESPA (section 8) violation
• 11th Circuit upheld Class Certification$149 “Administrative Brokerage Commission”
• Charged as separate item on Settlement statement
• Allegation: No Service performed
• Testimony:“Fee went to our overhead and bottom line”; “No benefit provided to consumers”
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Must the fee be split?
The 4th, 5th, 7th and 8th Circuits have held that a fee must be split in order to violate Section 8(b) of RESPA. In contrast, the 2nd, 3rd and 11th Circuits have indicated that this section may apply to a single-party fee
MA, RI NH and ME in 1st (no opinion)NY, VT and CT in 2nd
Joint Advertising/Marketing
Whose Ad is it?– Joint Advertising/Co Branding ok– Must be paid for jointly– Proportional to business featured– Must it benefit the Payor?
• Who is the target market??
HUD issues new guidance on marketing of Home Warranties
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Joint Advertising/Marketing
Marketing Fair Market Value Unrelated to Business Volume
• HUD settlement:• Title Agency ‘employs’ Company for
Title Marketing • Pays percentage of title premiums to
Marketing Company• HUD collects $100,000 in fines
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RESPA Provisions
Section 8: Affiliated Business ArrangementsNarrow exception for certain business modelsMust be disclosed at application
Relationship Range of costs
Cannot require provider be used
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New Issues
‘Required Use?’ Builder gives $10,000 discount to buyer
towards closing costs if buyer uses builder’s affiliated mortgage company
HUD addressed in Final Rule Home Builders filed suit
• New Rule suspended• Rule Making anticipated
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Who Can Enforce?
Section 8 violations
HUD-Civil and Criminal ActionsFine up to $10,000.00Imprisoned for up to one year
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Who Can Enforce?
Private law suit under RESPAFined up to 3 times the amount of the
charge paid for the serviceState Law-statutory, regulatory, case
Unfair and Deceptive Individual Suits Class Actions
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RESPA: Tolerance Differences6) Q: If a loan originator pressures a settlement
agent to reduce their charges or to ‘cover the difference‘ to bring the costs into compliance with the tolerances, is that considered a violation of RESPA Section 8(a)?
A: If a loan originator (or other settlement service provider) pressures a settlement agent (or other settlement service provider) to reduce their charges or otherwise ’cover the difference‘ to bring the costs into compliance with the tolerances as a condition of receiving future referrals of business, it may be considered a potential violation of RESPA Section 8(a). Please contact the Office of RESPA and ILS to file a complaint.
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RESPA: Enforcement12) Q: If I suspect someone is violating RESPA, is there a
phone number I can call to make a complaint to HUD?
A: We encourage anyone that suspects someone is potentially violating RESPA to contact us. You may either call 1-202-708-0502 or you may send your complaint to: Director, Office of RESPA and Interstate Land Sales US Department of Housing and Urban Development Room 9154 451 7th Street, SW Washington, DC 20410
For more information, please visit our website at www.hud.gov/respa or email our office at [email protected].
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You Be the Judge-OK?
Lender keeps all business cards from every new application and uses them to send email newsletter of real estate issues to RE agents
Attorney sends out mailer reminding RE agents of June 1 tax rebate expiration; “Every deal you send between now and then makes enters you in our drawing to win dinner for two”
YES
NO
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You Be the Judge-OK?
Attorney brings in cold cuts and soda to RE agents while conducting “Lunch and Learn” about Condominium law
Lender pays all RE agents’ office’s costs for “Staff Appreciation” party, but does not attend
Attorney pays RE agent for Conference room rental in RE agent’s office to conduct closings
YES
NO
YES
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You Be the Judge-OK?
Lender creates pads and pens with own logo; leaves at RE agents office
Lender creates pads and pens with RE agentslogo; leaves at RE agents office
Attorney makes contribution to Lender’s favorite charity every time Lender sends a closing
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YES
NO
NO
You Be the Judge-OK?Lender purchases list of “leads” from company based on public records to send out refinance solicitations
Lender pays RE agent marketing fee which requires agent to recommend only that lender and distribute only that lenders materials
Title Agent hires Marketing Consultant to use contacts with RE agents for business development and pays a percentage of the title premium for all closed transactions.
YES
NO
NO
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You Be the Judge-OK?
Attorney pays RE Agent $100 for every “pre-title order” she completes at time of contract completion
FHA-Approved Lender pays Mortgage Brokers a third party originator fee for all FHA loans referred and closed
RE Agent charges Admin Fee to cover ‘internal expenses’
NO
NO
NO
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You Be the Judge-OK?
Lender quotes cost on GFE; fee exceeds quote beyond tolerance; Lender pays borrower to reimburse
Lender uses Vendor Manager to distribute appraisals; all are same (list) price regardless of complexity/time
Lender uses Vendor Manager to distribute closings; Manager pays difference to Closer if fees exceed GFE to maintain tolerance
YES
YES
NO
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You Be the Judge-OK?
Attorney prepays Greens Fees and Lunch at Club; leaves note and Pro Shop Gift Certificate at Mortgage Broker’s office
Attorney invites 3 RE agents to join foursome at Red Cross Charity Golf Event
Lender and Attorney go out after work every Friday; take turns picking up tab
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NO
YES
YES