17 November 2008
[Federal Register: November 17, 2008 (Volume 73, Number 222)]
[Rules and Regulations]
[Page 68203-68288]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17no08-27]
[[Page 68203]]
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Part IV
Department of Housing and Urban Development
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24 CFR Parts 203 and 3500
Real Estate Settlement Procedures Act (RESPA): Rule To Simplify and
Improve the Process of Obtaining Mortgages and Reduce Consumer
Settlement Costs; Final Rule
[[Page 68204]]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 203 and 3500
[Docket No. FR-5180-F-03]
RIN 2502-AI61
Real Estate Settlement Procedures Act (RESPA): Rule To Simplify
and Improve the Process of Obtaining Mortgages and Reduce Consumer
Settlement Costs
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: This final rule amends HUD's regulations to further RESPA's
purposes by requiring more timely and effective disclosures related to
mortgage settlement costs for federally related mortgage loans to
consumers. The changes made by this final rule are designed to protect
consumers from unnecessarily high settlement costs by taking steps to:
improve and standardize the Good Faith Estimate (GFE) form to make it
easier to use for shopping among settlement service providers; ensure
that page 1 of the GFE provides a clear summary of the loan terms and
total settlement charges so that borrowers will be able to use the GFE
to identify a particular loan product and comparison shop among loan
originators; provide more accurate estimates of costs of settlement
services shown on the GFE; improve disclosure of yield spread premiums
(YSPs) to help borrowers understand how YSPs can affect borrowers'
settlement charges; facilitate comparison of the GFE and the HUD-1/HUD-
1A Settlement Statements; ensure that at settlement borrowers are aware
of final costs as they relate to their particular mortgage loan and
settlement transaction; clarify HUD-1 instructions; expressly state
that RESPA permits the listing of an average charge on the HUD-1; and
strengthen the prohibition against requiring the use of affiliated
businesses.
This final rule follows a March 14, 2008, proposed rule and makes
changes in response to public comment and further consideration of
certain issues by HUD. In addition, this rule provides for an
appropriate transition period. Compliance with the new requirements
pertaining to the GFE and settlement statements is not required until
January 1, 2010. However, certain provisions are to be implemented upon
the effective date of the final rule.
DATES: Effective Date: This rule is effective on January 16, 2009.
FOR FURTHER INFORMATION CONTACT: Ivy Jackson, Director, or Barton
Shapiro, Deputy Director, Office of RESPA and Interstate Land Sales,
Office of Housing, Department of Housing and Urban Development, 451 7th
Street, SW., Room 9158, Washington, DC 20410-8000; telephone number
202-708-0502. For legal questions, contact Paul S. Ceja, Assistant
General Counsel; Joan Kayagil, Deputy Assistant General Counsel; or
Rhonda L. Daniels, Attorney-Advisor, for GSE/RESPA, Department of
Housing and Urban Development, 451 7th Street, SW., Room 9262,
Washington, DC 20410-0500; telephone number 202-708-3137. These
telephone numbers are not toll-free. Persons with hearing or speech
impairments may access these numbers through TTY by calling the toll-
free Federal Information Relay Service at 800-877-8339.
SUPPLEMENTARY INFORMATION:
Background
On March 14, 2008 (73 FR 14030), HUD published a proposed rule
(March 2008 proposed rule) that submitted for public comment changes to
HUD's regulations designed to improve certain disclosures required to
be provided under RESPA (12 U.S.C. 2601-2617). The RESPA disclosure
requirements apply in almost all transactions involving mortgages that
secure loans on one-to four-family residential properties. HUD's
regulations implementing the RESPA requirements are codified in 24 CFR
part 3500. The revisions to the regulations adopted by HUD in this
final rule are intended to make the process of obtaining mortgage
financing clearer and, ultimately, less costly for consumers.
The preamble of the March 2008 proposed rule presents an overview
of the statutory requirements under RESPA, as well as a detailed
account of HUD's efforts to initiate regulatory changes commencing in
2002. HUD refers the reader to the March 2008 proposed rule for a
detailed description of the background of this rulemaking. The
principles that guided HUD in the development of this rule are also
included in the March 2008 proposed rule.
The preamble to this final rule highlights some of the more
significant changes made at this final rule stage in response to public
comment and upon further consideration of certain issues by HUD,
summarizes the public comments received on the March 2008 proposed
rule, and provides HUD's response to those comments. The following
table of contents is provided to assist the reader in identifying where
certain topics are discussed in this preamble. This final rule is also
accompanied by a final regulatory impact analysis and regulatory
flexibility analysis, which are addressed in sections VIII and IX of
this preamble.
Table of Contents
I. Significant Changes from March 2008 Proposed Rule
II. Overview of Commenters
III. GFE and GFE Requirements--Discussion of Public Comments
A. Overall Comments on the Proposed Required GFE Form
B. Changes to Facilitate Shopping
1. New Definitions for ``GFE Application'' and ``Mortgage
Application.''
2. Up-Front Fees That Impede Shopping
3. Introductory Language on the GFE Form
4. Terms on the GFE (Summary of Loan Details)
5. Period During Which the GFE Terms Are Available to the
Borrower
6. Option to Pay Settlement Costs
7. Establishing Meaningful Standards for GFEs
a. Tolerances
b. Unforeseeable Circumstances
8. Lender Disclosure
9. Enforcement and Cure
10. Implementation Period
C. Lender Payments to Mortgage Brokers--Yield Spread Premiums
(YSPs)
1. Disclosure of YSP on GFE
2. Definition of ``Mortgage Broker.''
3. FHA Limitation on Origination Fees of Mortgagees
IV. Modification of HUD-1/1A Settlement Statement
A. Overall Comments on Proposed Changes to HUD-1/1A Settlement
Statement
B. Proposed Addendum to the HUD-1, the Closing Script
V. Permissibility of Average Cost Pricing and Negotiated Discounts--
Discussion of Public Comments
A. Overview and Definition of ``Thing of Value''
B. Methodology for Average Cost Pricing
VI. Prohibition Against Requiring the Use of Affiliates--Discussion
of Public Comments
VII. Technical Amendments
VIII. Regulatory Flexibility Act--Comments of the Office of Advocacy
of the Small Business Administration
IX. Findings and Certifications
I. Significant Changes From March 2008 Proposed Rule
RESPA is a consumer protection statute, and, as further described
in this preamble, consumer groups were, in general, very supportive of
the basic goals and key components of the March 2008 proposed rule. For
example, the National Consumer Law Center, in a joint comment with
Consumer Action, the Consumer Federation of America, and the National
Association of Consumer Advocates, stated, ``HUD has done an excellent
job in moving the ball toward greater protection for consumers in the
settlement process.'' In addition,
[[Page 68205]]
the Center for Responsible Lending, in its comment concluded: ``[W]e
applaud HUD for addressing the challenge of reforming RESPA. We believe
HUD's proposed GFE provides important improvements over existing
requirements.''
HUD received adverse comments about many aspects of the proposed
rule, primarily from mortgage industry representatives, including
requests that HUD withdraw its proposal entirely or that HUD postpone
its current efforts in order to work with the Federal Reserve Board to
arrive at a joint regulatory approach. HUD takes these comments very
seriously and appreciates the concerns raised by these commenters.
HUD's view continues to be, however, that improvements in disclosures
to consumers about critical information relating to the costs of
obtaining a home mortgage, often the most significant financial
transaction a consumer will enter into, are needed, and that such
disclosures are a central purpose of RESPA. Most commenters--including
consumers, industry representatives, and federal and state regulatory
agencies--supported the concept of better disclosures in general, and
commended both HUD's efforts and particular provisions in the proposed
rule.
Moreover, given the current mortgage crisis, the foreclosure
situation many homeowners are now facing because they entered into
mortgage transactions that they did not fully understand, and the
prospect that future homeowners may find themselves in this same
situation, HUD believes that it is very important that the improvements
in mortgage disclosures made by this final rule move forward
immediately. Nevertheless, as noted in the preamble to the March 2008
proposed rule, HUD will continue to work with the Federal Reserve Board
to achieve coordination and consistency between the Board's current
regulatory efforts and HUD's requirements.
HUD has made many changes to the March 2008 proposed rule in
response to public comment and further consideration of certain issues
by HUD. Some of the provisions in the March 2008 proposed rule have
been revised in this final rule and others have been withdrawn for
further consideration. HUD believes that the result is a final rule
that will give borrowers additional and more reliable information about
their mortgage loans earlier in the application process, and will
better assure that the mortgage loans to which they commit at
settlement will be the loans of their choice. At the same time, in
recognition of the concerns raised by industry commenters about the
need for sufficient time for the industry to make systems and
operational changes necessary to meet the requirements of the new rule,
the final rule provides that the new GFE and HUD-1 will not be required
until January 1, 2010. However, certain other provisions of the rule
will take effect 60 days from the publication date of the final rule.
The following are some of the most significant changes made at this
final rule stage, and are discussed in more detail in the discussion of
public comment.
A GFE form that is shorter than had been proposed.
Allowing originators the option not to fill out the
tradeoff table on the GFE form.
A revised definition of ``application'' to eliminate the
separate GFE application process.
Adoption of requirements for the GFE that are similar to
recently revised Federal Reserve Board Truth-in-Lending regulations
which limit fees charged in connection with early disclosures and
defining timely provision of the disclosures.
Clarification of terminology that describes the process
applicable to, and the terms of, an applicant's particular loan.
Inclusion of a provision to allow lenders a short period
of time in which to correct certain violations of the new disclosure
requirements.
A revised HUD-1/1A settlement statement form that includes
a summary page of information that provides a comparison of the GFE and
HUD-1/1A list of charges and a listing of final loan terms as a
substitute for the proposed closing script addition.
Elimination of the requirement for a closing script to be
completed and read by the closing agent.
A simplified process for utilizing an average charge
mechanism.
No regulatory change in this rulemaking regarding
negotiated discounts, including volume based discounts.
II. Overview of Commenters
The public comment period on the March 2008 proposed rule was
originally scheduled to close on May 13, 2008. In response to numerous
requests, including congressional requests, to extend the comment
period, and HUD's desire to develop a better rule, HUD announced an
extension of the comment period. This announcement was made on both
HUD's Web site and by publication of a notice in the Federal Register
on May 12, 2008 (73 FR 26953). At the close of the extended public
comment period on June 12, 2008, HUD had received approximately 12,000
comments. Approximately two-thirds of the comments received were
duplicative or repeat comments; i.e., individuals or organizations who
submitted identical or virtually identical comments. For example,
members of certain trade organizations, or employees of certain
companies, frequently submitted identical comments.
HUD received comments from homeowners, prospective homeowners,
organizations representative of consumers, and numerous industry
organizations involved in the settlement process, including lending
institutions, mortgage brokers, real estate agents, lawyers, title
agents, escrow agents, closing agents and notaries, community
development corporations, and major organizations representative of key
industry areas such as bankers, mortgage bankers, mortgage brokers,
realtors, and title and escrow agents, as well as from state and
federal regulators.
HUD appreciates all those who took the time to review the March
2008 proposed rule and submit comments.
In addition to submission of comments, HUD representatives accepted
invitations to participate in public forums and panel discussions about
RESPA and HUD's March 2008 proposed rule. HUD also met, at HUD
Headquarters or at the offices of the Office of Management and Budget
(OMB), with interested parties, requesting meetings as provided by
Executive Order 12866 (Regulatory Planning and Review), who highlighted
for HUD and OMB areas of concern and support for various aspects of the
rule.
All of this input contributed to HUD's decisions that resulted in
this final rule.
HUD also received approximately 100 public comments that were
submitted after the deadline. To the extent feasible, HUD reviewed late
comments to determine if issues were raised that were not addressed in
comments submitted by the deadline.
III. GFE and GFE Requirements--Discussion of Public Comments
A. Overall Comments on the Proposed Required GFE Form
Proposed Rule. HUD proposed a four-page GFE form. The first page of
the GFE included a summary chart with key terms and information about
the loan for which the GFE was provided, including initial loan
balance; loan term; initial interest rate; initial amount owed for
principal, interest, and any mortgage insurance; rate lock period;
whether the interest rate can rise; whether the loan balance can rise;
whether the monthly
[[Page 68206]]
amount owed for principal, interest, and any mortgage insurance can
rise; whether the loan has a prepayment penalty; whether the loan has a
balloon payment; and whether the loan includes a monthly escrow payment
for property taxes and possibly other obligations. The first page of
the form also included information regarding the length of time the
interest rate for the GFE was valid; the length of time the other
settlement charges were valid; information about when settlement must
occur if the borrower proceeds with the loan; and information
concerning how many days the interest rate must be locked before
settlement. At the bottom of the first page, the GFE included a summary
of the settlement charges. The adjusted origination charges listed on
the second page, along with the charges for all other settlement
charges listed on the second page, would have been totaled and listed
on this page.
The second page of the GFE included a listing of estimated
settlement charges. The loan originator's service charge would have
been required to be listed at the top of page two, and the credit or
charge (points) for the specific interest rate chosen would have been
required to be subtracted or added to the service charge to arrive at
the adjusted origination charge, which would have been shown on the top
of page two. Page two of the GFE also would have required an estimate
for all other settlement services. The GFE included categories for
other settlement services including: Required services that the loan
originator selected; title services and lender's title insurance;
required services that the borrower would have been able to shop for;
government recording and transfer charges; reserves or escrow; daily
interest charges; homeowner's insurance; and optional owner's title
insurance. The GFE would have required these charges to be subtotaled
at the bottom of page two. The sum of the adjusted origination charges
and the charges for all other settlement services would have been
required to be listed on the bottom of page 2.
The third page of the GFE would have required information
concerning shopping for a loan offer. In addition, page three would
have included information about which settlement charges could change
at settlement, and by how much such charges could change. Page 3 also
would have required the loan originator to include information about
loans for which a borrower would have qualified that would increase or
decrease settlement charges, with a corresponding change in the
interest rate of the loan. (See section III.B.6 of this preamble
below.)
The fourth page of the GFE included a discussion of financial
responsibilities of a homeowner. The loan originator would have been
required to state the annual property taxes and annual homeowner's
flood, and other required property protection insurance, but would not
have been required to state estimates for other charges such as annual
homeowner's association or condominium fees. The GFE included a section
that advised borrowers that the type of loan chosen could affect
current and future monthly payments. The proposed GFE also indicated
that the borrower could ask the loan originator for more information
about loan types and could look at several government publications,
including HUD's Special Information Booklet on settlement charges,
Truth in Lending Act (TILA) disclosures, and consumer information
publications of the Federal Reserve Board. The March 2008 proposed rule
invited comments on possible additional ways to increase consumer
understanding of adjustable rate mortgages.
Page 4 also would have included information about possible lender
compensation after settlement. In addition, page 4 would have included
a shopping chart to assist the borrower in comparing GFEs from
different loan originators and information about how to apply for the
loan for which the GFE had been provided.
Comments
Consumer Representatives
Consumer representatives generally supported the proposed
standardized GFE, while offering specific recommendations for
improvement. The National Community Reinvestment Coalition recommended
inclusion of the annual percentage rate (APR) on the GFE. The Center
for Responsible Lending (CRL) stated that it believed that the proposed
GFE has the potential to significantly improve current disclosure
requirements because it offers a standardized shopping tool with better
linkages to the HUD-1, requires that terms be binding, and takes
important steps toward trying to alert consumers to the risky features
of their loans. However, according to CRL, most consumers will not have
the capacity to absorb everything in a four-page GFE and therefore it
proposed an alternative two-page GFE.
CRL noted that a new GFE should ensure that consumers have the best
chance possible to understand the riskiest features of their loans. CRL
commended HUD for adding several features that highlight risk to the
first page of the GFE: The prepayment penalty, the balloon payment, the
maximum possible loan balance, the maximum monthly payment, and whether
certain fees are escrowed. CRL stated that knowing the maximum monthly
payment of principal, interest, and mortgage insurance is critical to
the consumer's ability to determine whether or not the loan is
sustainable. It recommended that other features be added to page 1,
including increased emphasis on total monthly payment. It also
recommended that the monthly payment amount include an estimate of
property taxes, property insurance, and the other charges listed on
page 4 of the proposed GFE as one total line item, on page 1.
CRL also recommended that page 1 of the GFE include the annual
percentage rate (APR) instead of the note rate because the APR is the
standardized measurement of loan cost in the industry, and because the
APR captures the total cost of the loan. CRL further recommended that
given that credit cost comprises the largest component of total loan
cost, the form's emphasis on settlement costs should be reduced.
In addition, CRL recommended that the first page of the GFE also
include information on the first possible date on which the interest
rate can rise; an explanation of what prepayment penalties are and how
they are triggered; simplified broker compensation; and notification
that mortgage terms are negotiable. While CRL supported aggregating
fees on page 2 of the GFE to promote mortgage loan shopping, it
recommended that the tradeoff table on page 3 be revamped in order to
force the rate/point tradeoff that it is intended to disclose.
The GFE proposed by CRL includes the APR, for reasons stated above.
In addition, the GFE proposed by CRL includes the first date the
interest rate can rise. CRL also included on page 1, ``estimated
required additional housing expenses'' as well as ``total estimated
maximum monthly housing costs.'' CRL stated that while it understands
that consumers should not compare loans based on total estimated
maximum monthly housing costs, CRL believes that it is critical that
consumers, particularly those in the subprime market, begin evaluating
their ability to afford the loan at the outset of the loan process.
CRL's proposed GFE also includes a broader prepayment penalty
disclosure than the prepayment penalty disclosure on the proposed GFE.
In addition, CRL's proposed GFE includes a broker compensation
disclosure, a
[[Page 68207]]
notice that the consumer can negotiate settlement charges and a summary
of charges to facilitate reconciliation to the HUD-1.
Comments by the National Consumer Law Center (NCLC) (filed on
behalf of NCLC and Consumer Action, the Consumer Federation of America,
and the National Association of Consumer Advocates) stated that the
proposed standardization of the GFE, the increased linkage between the
GFE and the settlement statement, and the proposed requirement that
some terms on the GFE be binding, are important changes that should
increase consumer understanding and competition in the mortgage
marketplace. NCLC recommended that HUD go further by requiring the
prominent disclosure of the APR on the GFE instead of the interest
rate. According to NCLC, failure to include the APR on the GFE obscures
the cost of credit and hinders consumer shopping.
NCLC expressed concern that the proposed GFE gives far greater
prominence to settlement costs than to interest. NCLC stated that if
the GFE is successful in getting consumers to shop on settlement costs,
there is a risk that consumers will neglect the primary cost component
of loans, interest. According to NCLC, while settlement costs matter,
they matter most not as a stand-alone cost, but in relation to the
interest rate. NCLC recommended that the GFE be revised by reducing the
focus on settlement costs through reduction of the font size and
elimination of the bold type for settlement costs. NCLC also
recommended that HUD work with the Federal Reserve Board to produce
disclosures that are not misleading or that obscure the actual cost of
credit. In addition, NCLC recommended that the first page of the GFE
provide only a total for all settlement costs, without breaking out the
origination costs.
NCLC supported the loan summary on page 1 and recommended that the
summary sheet refer to the APR instead of to the interest rate. NCLC
also recommended that the first page provide only a total of the
estimated settlement charges, not separate lines for the origination
and total settlement costs.
Industry Representatives
Generally, lenders and their associations opposed the proposed GFE
on the grounds that the form is too lengthy and, in their opinion,
would only confuse borrowers. The American Bankers Association
commented that the proposed GFE is overly prescriptive. The Mortgage
Bankers Association (MBA) stated that the length of the form will cause
borrowers to ignore its important information. MBA submitted a two-page
GFE as an alternative to the proposed GFE that combines the RESPA and
TILA disclosures. While lenders and their associations expressed
general support for the goals of the proposed rule, many lenders
recommended that HUD work together with the Federal Reserve Board to
produce a combined RESPA and TILA disclosure and to implement this
combined product simultaneously, to replace the current RESPA and TILA
disclosures provided at the time of application.
MBA stated that it generally supports grouping of the amount or
ranges of specific services on the GFE in a manner that is
comprehensible and comparable, but recommended that the form be
modified so that it is mainly a list of charges with minimal
supplementary material, as on the GFE form submitted by MBA. MBA
recommended that the material on page 3 and page 4 of the proposed GFE
be moved to explanatory materials such as the Special Information
Booklet. While MBA stated that a summary of loan terms could be useful,
it recommended that the summary be removed from the GFE and issued by
the Federal Reserve Board in consultation with HUD. MBA further
recommended the deletion of the term ``adjusted origination charge''
from the bottom of page 1.
A major lender expressed the concern that the proposed form is so
laden with information that lenders cannot convey key cost information
in a clear and conspicuous manner. This commenter stated that the
proposed form would pose a significant compliance burden for lenders
and would not provide borrowers with any greater understanding of their
loan. Specifically, the lender objected to the disclosures required on
page 3 of the proposed form.
The National Association of Mortgage Brokers (NAMB) generally
supported the inclusion of information listed on page 4 of the proposed
GFE. However, NAMB objected to consolidating major categories on the
GFE on the grounds that such categories tend to lead to consumer
confusion since components are not evident to consumers until presented
with the HUD-1, on which they are disclosed separately. NAMB also
asserted that the proposed GFE is in conflict with the current RESPA
requirements on affiliated business disclosure, because the proposed
GFE eliminates the name of the provider on the GFE. NAMB submitted, in
place of the proposed GFE, a model that provides symmetrical disclosure
of originator compensation. NAMB stated that its model form not only
remedies the disparity among originator disclosures, it more closely
mirrors the HUD-1 than the proposed GFE; it does not create groupings
of disclosures that must be broken out; and it is one page, making it
more user friendly.
Other Commenters
Many other commenters also expressed concern about the length of
the form. The National Association of Realtors (NAR) stated that the
proposed GFE fails to achieve the right balance between providing the
necessary information and presenting such information simply in a
manner to be useful to the consumer. NAR asserted that the disclosures,
tables, and instructions in the proposed GFE will serve as a
``psychological barrier'' to many consumers who will feel overwhelmed
with having to read, comprehend, and act on this amount of information.
NAR stated that the decision not to include itemized costs in the
proposed GFE will result in consumers getting less than the full
disclosure Congress intended in the original statute. NAR asserted that
the proposed GFE creates the opportunity to bury additional,
undisclosed fees into ``packages'' and prevents individual provider
cost comparison to the detriment of consumers.
NAR also recommended that the proposed GFE and the HUD-1 mirror
each other in order to assist consumers in understanding whether the
terms and expenses that were disclosed at loan application are those
that are the governing terms at closing. NAR noted that, along with
CRL, it previously recommended that HUD provide consumers a summary GFE
accompanied by a full GFE with detailed explanations of each
subcategory of fees to help consumers understand the services and fees
for which they are being charged. NAR reiterated this recommendation
for the final rule and, along with the American Land Title Association
(ALTA), submitted a summary GFE and a full GFE for HUD's consideration.
The Credit Union National Association (CUNA) opposed increasing the
GFE to the proposed four-page form. CUNA stated that the proposed form
would not benefit borrowers who could be confused by the additional
information, rather than helped in understanding their loan options.
The National Association of Federal Credit Unions (NAFCU) stated that
the length of the proposed form is too long for the purpose of the GFE,
which is simply to provide a good faith estimate of settlement costs.
NAFCU recommended that pages 3 and 4 of the proposed form
[[Page 68208]]
be consolidated into one page by removing the section on page 3
entitled ``understanding which charges can change at settlement'' and
the section on page 4 entitled ``using the shopping chart.'' NAFCU
suggested that the information contained in these sections should be
provided in the Special Information Booklet.
The Conference of State Bank Supervisors (CSBS), the American
Association of Residential Mortgage Regulators (AARMR), and the
National Association of Consumer Credit Administrators (NACCA) stated
that they support HUD's goal to provide clear and valuable information
to consumers regarding adjustable rate mortgages on the GFE. These
commenters recommended that HUD work with the Federal Reserve Board to
develop coordinated, consistent, and cooperative disclosures to ensure
that consumers are not confused. They recommended that the GFE contain
an estimate of taxes and insurance even when there will be no reserve
for taxes and insurance in the monthly payment. According to these
commenters, if the estimate is not included in the monthly payment
amount, the borrower will not clearly understand whether they can
afford the monthly payment. While these commenters indicated their
general support for the grouping of fees and charges on the proposed
GFE into major settlement cost categories, they expressed concern that
some in the industry might take advantage of this format by putting
additional fees and charges in a totaled category.
ALTA stated that page 1 of the proposed GFE presents the summary of
loan terms and the total costs for settlement services in an
understandable format. However, ALTA urged HUD to improve the
individual fee disclosures by using a page that is identical to page 2
of the current HUD-1. ALTA stated that revising page 2, as it
recommended, would allow consumers to know all fees included within the
total amount listed on the GFE summary page and to more directly
compare these fees to the final charges and closing.
With respect to the categorization of fees on page 2 of the
proposed GFE, ALTA objected to the proposed requirement that a single
fee be disclosed for title services and lender's title insurance on
Block 4 and for primary title services in the 1100 section of the HUD-
1. ALTA stated that the elimination of required itemization of these
fees is of concern and can only serve to lessen, rather than enhance,
competition for these services.
ALTA asserted that HUD's views that consumers: (1) Shop among
lenders based on the lender's estimates of charges in the 1100 series
on the HUD-1, and (2) have no need to know the amounts of the various
charges that comprise the aggregate amount, are in error. ALTA stated
that with regard to the itemization of individual costs that comprise
the aggregate Block 4 charge, consumers who want to shop for these
services will be seriously disadvantaged because there is no way to
determine the lender's estimated price for the title company, escrow
company, attorney, or surveyor.
ALTA also stated that the disclosure of a single fee for title
insurance fails to recognize that, in most areas of the country, the
seller generally pays a substantial portion of the title insurance
charges. ALTA noted that the March 2008 proposed rule failed to provide
instruction as to how to disclose title-related fees when these costs
are paid by the seller. ALTA expressed concern that if the GFE and HUD-
1 do not itemize the fees for title insurance services, the possibility
exists that the borrower could pay for services for which sellers
currently assume payment, and this would result in higher costs to the
borrower. ALTA requested that HUD continue to require title insurance
fees disclosed in the 1100 series of the HUD-1 to be separately
itemized on both the GFE and HUD-1.
With respect to the category for owner's title insurance on page 2
of the GFE, ALTA requested that the word ``optional'' be dropped from
the disclosure on both the proposed GFE and the proposed HUD-1. ALTA
expressed concern that, by including the word ``optional'' in both
disclosures, HUD appears to be suggesting that a consumer does not need
separate coverage for title insurance, which may discourage borrowers
from obtaining owner's coverage. ALTA also noted that owner's title
insurance is required in residential real estate transactions in many
states and that, by labeling owner's title insurance as optional on
both the GFE and the HUD-1, HUD's requirement would directly conflict
with various state requirements.
Federal Agencies
The Federal Deposit Insurance Corporation (FDIC) also expressed
concern about the length of the proposed GFE. While considering the
proposed GFE to be an improvement over the current model form, the FDIC
expressed concern about whether the proposed GFE provides information
that consumers will understand in an easily understandable format. The
FDIC also commented that more information about potential payment shock
and the adjustment of interest rates should be included on the GFE.
Specifically, the FDIC recommended that the GFE explain when an initial
interest rate expires and when monthly payments increase.
The Federal Trade Commission (FTC) staff comment stated that the
proposed GFE form offers several features that will benefit consumers.
These features include a summary overview of loan terms and charges on
the first page; the additional details regarding categories of fees and
shopping options on subsequent pages; and the focus on total settlement
costs, rather than itemized costs. However, FTC staff stated that the
form raises concerns that warrant clarification or modification. For
example, FTC staff stated that consumers may be confused based on the
differences between the GFE and the HUD-1 disclosures and the TILA
forms they receive, particularly the difference in monthly amounts.
Rather than explain the differences in the Special Information Booklet,
FTC staff recommended that HUD provide a clear explanation of the
difference between the forms on the GFE and the closing script, or use
an alternative disclosure on the GFE and closing script to ensure as
much consistency with the TILA disclosures as possible.
The Office of Thrift Supervision (OTS) commented that HUD should
consider revising its settlement cost booklet to include illustrations
reflecting the impact that loan features and terms can have on the cost
of the mortgage. In particular, OTS stated that such illustrations
would be particularly useful in reflecting payment shock, among other
features, that a borrower may experience when rates reset.
HUD Determination
In response to comments, HUD has made a number of changes to the
revised GFE, including shortening the form from four pages to three and
clarifying important information for borrowers throughout the form.
While HUD recognizes that too much information on the form may
overwhelm borrowers, HUD is also cognizant that borrowers need to be
aware of the important aspects of the loan, as well as the settlement
costs. While HUD considered all of the various alternative forms
submitted by commenters, HUD determined that its proposed GFE, with
certain modifications made at this final rule stage, would best meet
the needs of borrowers to shop and compare loans from different loan
originators. As
[[Page 68209]]
demonstrated by the testing of the form conducted by HUD's forms
contractor, consumers liked the general format of the form and were not
overwhelmed by its length. Accordingly, HUD has maintained several
important features of the proposed GFE in the final form. Other
features from the proposed form have been removed from the form, as
revised at this final rule stage, and will be included in the revised
Special Information Booklet. The final GFE continues to inform
borrowers about critical loan and settlement cost information and
allows borrowers to effectively shop among loan originators without
burdening them with extraneous information.
The top of page 1 of the revised form continues to include blank
spaces for the loan originator's name, address, phone number, and email
address, as well as the borrower's name, the property address, and the
date of the GFE. In addition, the top of the revised page 1 includes a
statement about the purpose of the GFE, and information on how to shop
for a loan offer. This section of the form also references HUD's
Special Information Booklet on settlement charges, as well as Truth in
Lending disclosures and information available at http://www.hud.gov/
respa. Such information was included on page 4 of the proposed form.
While the revised page 1 also continues to include information about
important dates, such as how long the interest rate is available and
how long the estimate for all other settlement charges is available,
the rate lock period information that was included in the loan summary
chart on the proposed GFE has been moved from the summary chart to the
``important dates'' block on the revised form. This change was made to
consolidate all the information about dates in one section of the form
and to minimize potential borrower confusion.
The revised page 1 also includes a summary chart of the loan on
which the GFE is based, but this section of the form is now referred to
as ``summary of your loan'' instead of ``summary of your loan terms,''
as proposed. The revised summary continues to include key terms and
information about the loan for which the GFE was provided, but certain
changes were made to headings on the chart to address specific
comments. While the proposed GFE included information about the monthly
escrow payment in the summary chart, the revised form includes a
separate section concerning the escrow account. This section, referred
to as ``escrow account information,'' informs the borrower that some
lenders require an escrow account to hold funds for paying property
taxes or other property-related charges in addition to the monthly
payment. The section includes a disclosure as to whether an escrow
account is required for the loan described in the GFE. If no escrow
account is included for the loan, this section informs the borrower
that the additional charges must be paid directly when due. If the loan
includes an escrow account, the section informs the borrower that it
may or may not cover all additional charges.
The bottom of page 1 on the revised form retains the ``summary of
your settlement charges'' section, as set forth in the proposed GFE.
The summary includes the amount from Block A on page 2, ``your adjusted
origination charges''; the amount from Block B on page 2, ``your
charges for all other settlement services'' ; and reflects the ``total
estimated settlement charges'' as the sum of Blocks A and B.
Page 2 of the revised GFE, like page 2 of the proposed form,
contains a listing of estimated settlement charges. The top of the
second page continues to require that the origination charge be listed,
and the credit or charge for the specific interest rate is required to
be subtracted or added to the origination charge to arrive at the
adjusted origination charge. However, this portion of the second page
includes some minor changes from the proposed form. First, Block 2 now
references ``points'' after the ``charge'' in the heading, rather than
at the end of the sentence, to better inform the borrower. The heading
now reads, ``Your credit or charge (points) for the specific interest
rate chosen.'' In addition, to draw the borrower's attention to the
effect of the credit in Block 2, the term ``reduces'' is now bolded in
box 2. To draw the borrower's attention to the effect of the charge in
Block 2, the term ``increases'' is now bolded in box 3 of the second
block. Finally, the second sentence in box 2 and box 3 in Block 2
refers to ``settlement'' charges rather than ``upfront'' charges, in
order to be consistent with other language on the form.
Page 2 of the revised GFE, like the second page of the proposed
GFE, also contains an estimate for all other settlement services. While
the categories from the proposed form have generally been retained on
the final form, certain changes have been made to the categories to
streamline the form in response to comments. Block 10 of the proposed
form ``optional owner's title insurance'' is now Block 5 of the revised
form and informs the borrower that the borrower may purchase owner's
title insurance to protect the borrower's interest in the property.
Block 6 of the revised form, ``Required services that you can shop
for,'' is the same as Block 5 of the proposed form. While Block 6 of
the proposed form included both government recording charges and
transfer taxes, in response to comments, government recording charges
are now listed in Block 7 of the revised form, along with the
explanation that ``these charges are state and local fees to record
your loan and title documents.'' Block 8 now lists transfer taxes with
the explanation that ``these charges are state and local fees on
mortgages and home sales.'' This change was made in response to
comments so that these two different types of government fees could be
treated differently with respect to tolerances, as explained below.
Block 7 of the proposed form, ``Reserves or escrow,'' is now Block
9 of the revised form and is now listed as ``initial deposit for your
escrow account.'' The sentence below the title now explains that the
charge is held in an escrow account to pay future recurring charges on
the property and includes check boxes to indicate whether the escrow
includes all property taxes, all insurance or other payments. The
``other'' category may include non-tax and non-insurance escrowed
items, and/or specify which taxes or insurance payments are included in
the escrow if the escrow does not include all such payments.
Block 8 of the proposed form, ``Daily interest charges,'' is now
Block 10 of the revised form. Block 9 of the proposed form,
``Homeowner's insurance'' is now Block 11 of the revised form.
The revised GFE requires the charges in Blocks 3 through 11 to be
subtotaled at the bottom of page 2. The sum of the adjusted origination
charges and the charges for all other settlement services are required
to be listed on the bottom of page 2. This figure will also be listed
on the bottom of page 1, in the block ``Total Estimated Settlement
Charges.''
In light of comments received on various aspects of the proposed
form, page 3 of the revised form has been redesigned to include the
most important information from pages 3 and 4 of the proposed form. At
the top of the redesigned page 3, the section ``Understanding which
charges can change at settlement'' includes information to assist the
borrower in comparing charges on the GFE with the charges listed on the
HUD-1 settlement statement. Next, the tradeoff table provides
information on different loans for which the borrower is qualified that
would increase or decrease settlement
[[Page 68210]]
charges, with a corresponding change in the interest rate of the loan.
Completing this tradeoff table is now optional. This table is intended
to be read in conjunction with the section on ``adjusted origination
charges'' on page 2 of the form. The tradeoff table on the final form
has been modified to require ``your initial loan amount'' in the first
category, as opposed to ``your initial loan balance'' on the proposed
form, to be consistent with the change in terminology on the first page
of the form.
Page 3 of the revised form also includes the shopping chart
included on page 4 of the proposed form, to assist borrowers in
comparing GFEs from different loan originators. Finally, the lender
disclosure that was included on the proposed form has been retained on
the revised form, as discussed below.
B. Changes to Facilitate Shopping
1. New Definitions for ``GFE Application'' and ``Mortgage
Application''
Proposed Rule. The March 2008 proposed rule provided separate
definitions for a ``GFE application'' and a ``mortgage application'' in
an effort to promote shopping. Under the proposed rule, a loan
originator would have provided a borrower a GFE once the borrower
provided the originator six pieces of information that included:
Borrower's name, Social Security Number, property address, gross
monthly income, borrower's information on the house price or best
estimate of the value of the property, and the amount of the mortgage
loan sought. The rule provided that the GFE application would have to
be in written form and, if provided orally, would have to be reduced to
a written or electronic record. Under the March 2008 proposed rule, a
separate GFE would have to be provided for each loan where a
transaction involved more than one mortgage loan.
The proposed rule would have required that once a borrower chose to
proceed with a particular loan originator, the loan originator could
require the borrower to provide additional information through a
``mortgage application'' in order to complete final underwriting. This
additional information could be used to verify the GFE, and could
include income and employment verification, property valuation, an
updated credit analysis, and the borrower's assets and liabilities.
The March 2008 proposed rule provided that a borrower could be
rejected at the GFE application stage if the loan originator determined
that the borrower was not creditworthy. The borrower could not be
rejected at the mortgage application stage unless the originator
determined there was a change in the borrower's eligibility based on
final underwriting, as compared to information developed for such
application prior to the time the borrower chose the particular
originator. Under the proposed rule, the originator would have been
required to document the basis for such a determination and maintain
the records for no less than 3 years after settlement.
The March 2008 proposed rule also provided that where a borrower
was rejected for a loan for which a GFE had been issued, but the
borrower qualified for a different loan program, the originator would
have to provide a revised GFE. If a borrower was rejected for a loan
and no other loan product could be offered, the borrower would have to
be notified within one business day and the applicable notice
requirements satisfied.
Under the March 2008 proposed rule, for loans covered by RESPA, the
TILA disclosures would be provided within 3 days of a written GFE
application, unless the creditor, i.e. the loan originator, determined
that the application could not be approved on the terms requested. The
proposed rule indicated that based on consultations with the Federal
Reserve Board, when a GFE application is submitted, an initial TILA
disclosure would also have to be provided, so long as the application
was in writing, or, in the case of an oral application, committed to
written or electronic form. HUD noted that whether a GFE application
under a particular set of facts triggered the Home Mortgage Disclosure
Act (HMDA) or the Equal Credit Opportunity Act (ECOA) requirements
would be determined under Regulation B and Regulation C, as interpreted
in the Federal Reserve Board's official staff commentary.
Comments
Consumer Representatives
Consumer representatives supported early delivery of the GFE,
which, under the proposed rule, would be issued when a lender receives
the proposed ``GFE Application.'' However, they emphasized that
enforcement and private rights of action are necessary to ensure that a
meaningful GFE will be provided to consumers early in the mortgage
application process.
Consumer representatives also raised the issue of whether HUD's
definition of ``GFE Application'' triggers other regulatory
requirements. They recognized the Federal Reserve Board's rulemaking
authority under ECOA and the Fair Credit Reporting Act (FCRA) and
indicated that requirements under these statutes and their implementing
regulations would be triggered by the newly defined GFE application.
They noted that current definitions in both statutes and their
implementing regulations cover the GFE application.
According to their comments, the application of ECOA and FCRA to
the GFE application is important because such application ensures
binding and accurate disclosures. These commenters recommended that HUD
coordinate with the Federal Reserve Board to ensure that the GFE
application remains covered by ECOA and FCRA.
Industry Representatives
Industry representatives expressed significant concerns about the
``GFE Application'' and ``Mortgage Application'' approach under the
March 2008 RESPA proposal. Specifically, they expressed concerns about
the limited information originators would be permitted to collect in
order to conduct preliminary underwriting before issuing a GFE. One
commenter stated that this limitation precludes an originator from
considering, at the GFE application stage, important information that a
lender currently collects early in the transaction in order to develop
a GFE. Some of those additional items include loan product type sought,
purpose of loan, and information to compute the loan-to-value ratio.
The commenters claimed that limiting consideration of this type of
information would make it difficult for originators to provide a
meaningful GFE, because they would be unable to provide any reliable
estimate of cost or determine a borrower's ability to repay the loan.
They also stated that the inability to consider important underwriting
information until the mortgage application stage would result in the
issuance of more than one GFE. The net result, they concluded, would
lead to borrower confusion and increased costs to the borrower.
Industry commenters also expressed further operational concerns
related to the limitations on underwriting information at the GFE
stage. They stated that the limitation on information that loan
originators can take into consideration, in developing a GFE, would
force lenders to develop systems that could underwrite based on very
limited information. They further stated that the originator would not
have sufficient information to determine the type of property the
consumer is considering--such as whether the property is commercial,
industrial,
[[Page 68211]]
vacation, or residential--or the type of loan the consumer is
considering, such as a purchase money loan, refinance, or home equity
loan. They stated it is important for the lender to have this
information because the lender may not engage in the kind of lending a
consumer seeks.
In addition, industry commenters expressed confusion over whether a
credit report was one of the six pieces of information they could
collect as part of the GFE application, and requested that HUD provide
clarification on this subject.
Industry representatives also requested that HUD permit borrowers
to expedite the application process and proceed to the mortgage
application stage, when the borrower so desires due to timing or other
concerns.
Industry representatives stated that the new application
definitions in the March 2008 proposed rule would present uncertainty
in complying with other mortgage-related statutes and regulations. They
commented that compliance with other statutes and regulations is
triggered by a mortgage ``application.'' Because HUD's proposal
included both a ``GFE Application'' and a ``Mortgage Application,''
they commented that it is not clear which one is the ``application''
for purposes of compliance with other regulations. In particular,
lenders expressed concern with the possibility that the ``GFE
Application'' would trigger compliance obligations under FCRA, ECOA,
HMDA, and the TILA requirements. They requested that ambiguities
surrounding compliance with these statutes and other laws be addressed
to provide clarity and mitigate litigation exposure. For example, one
lender noted that to calculate the spread for high-cost loans under
Regulation Z and many state predatory lending laws, the index used is
based on the month in which the ``application'' for credit is received
by the creditor. This lender stated that it was not clear from the
proposed rule whether the GFE application is an application for
purposes of Regulation Z.
Industry commenters expressed confusion about preamble statements
regarding whether HMDA or ECOA is triggered by the GFE Application.
They indicated that the preamble stated that whether HMDA or ECOA is
triggered by the GFE Application should be determined under Regulations
C and B, as interpreted by the Board. They noted, however, that the
preamble stated that based on consultations with the Federal Reserve
Board, TILA disclosures would be provided within 3 days of a written
GFE application unless the creditor determines that the application
cannot be approved on the terms requested. The commenters further noted
that the Regulatory Impact Analysis states ``[t]he proposed rule
clarifies that only the mortgage application would be subject to
Regulations B (ECOA) and C (HMDA), which is the current situation
today.'' These commenters requested clarification of this matter.
Industry representatives questioned HUD's legal authority to: limit
information originators can request to underwrite a loan; require that
originators accept an abbreviated application from which to complete a
GFE; require a new GFE when a counteroffer is made; and require a
consumer to be notified within one business day of a lender's decision
to reject an application, among other concerns.
Additionally, one lender commented that under HUD's March 2008
proposed rule, lenders would be required to retain the GFE application
for 3 years, which is different from the 25-month retention requirement
by TILA or ECOA. The lender commented that this difference presents
additional expense without a substantive benefit to the consumer.
Other Commenters
The FTC staff recommended that HUD reevaluate the proposed ``GFE
application,'' as this terminology is new and could generate consumer
confusion in the already complex mortgage process. FTC staff suggested
that HUD characterize it as the ``GFE application'' concept so that
consumers do not confuse it with the mortgage application. They also
recommended that HUD educate consumers about these two components of
the mortgage lending process. Further, FTC indicated that the industry
would also benefit from guidance on how the GFE application relates to
other mortgage lending laws that include an ``application'' concept.
CSBS, AARMR, and NACCA also expressed concern over the creation of
a ``GFE application'' and a ``mortgage application'' because, they
asserted, these application concepts will cause consumer confusion.
They recommended that HUD coordinate with other federal regulatory
agencies to ensure consistency and clarity to regulatory requirements
from loan application to loan closing.
HUD Determination
To address the concerns raised by the commenters about the
bifurcated application approach set forth in the proposed rule, HUD has
adopted a single application process for the final rule. Under this
approach, at the time of application, the loan originator will decide
what application information it needs to collect from a borrower, and
which of that collected application information it will use, in order
to issue a meaningful GFE. However, before providing the GFE, the loan
originator will be assumed to have collected at least the following six
items of information: the borrower's name, Social Security Number, and
gross monthly income; the property address; an estimate of the value of
the property; and the amount of the mortgage loan sought. The
borrower's Social Security Number would be collected for purposes of
obtaining a credit report. The final rule now defines ``application''
to include at least these six items of information. Therefore, under
this single application process, a loan originator may ask for, or a
borrower may choose to submit, more information than the loan
originator intends to use to process the GFE, for example the
information on a standard 1003 mortgage loan application form, but
beyond the six items of information, the loan originator will determine
what it needs to issue a GFE. HUD strongly urges loan originators to
develop consistent policies or procedures concerning what information
it will require to minimize delays in issuing GFEs.
In order to prevent overburdensome documentation demands on
mortgage applicants, and to facilitate shopping by borrowers, the final
rule specifically prohibits the loan originator from requiring an
applicant, as a condition for providing a GFE, to submit supplemental
documentation to verify the information provided by the applicant on
the application. Loan originators, however, can require applicants to
provide such verification information after the GFE has been provided,
in order to complete final underwriting. In addition, the rule does not
bar a loan originator from using its own sources before issuing a GFE
to independently verify the information provided by the applicant.
Once the applicant submits to the loan originator all the mortgage
application information deemed necessary by the loan originator to
process the GFE, the originator will be required to deliver or mail a
GFE to the applicant within 3 business days. HUD is now also limiting
the fee that may be charged for providing the GFE, consistent with the
Federal Reserve Board's recently finalized rule limiting the fees that
consumers can be charged for the delivery of TILA disclosures (see
[[Page 68212]]
revisions of 12 CFR 226.119(a), 73 FR 44522, July 30, 2008).
After the GFE has been received, the loan originator may collect
additional fees needed to proceed to final underwriting for borrowers
who decide to proceed with a loan from that originator. As noted, at
that time, verification information or any other information could be
required from the applicant, such as bank statements and W-2 forms, to
confirm representations made by the applicant in the application.
None of the information collected by the originator prior to
issuing the GFE may later become the basis for a ``changed
circumstance'' upon which a loan originator may offer a revised GFE,
unless the loan originator can demonstrate that there was a change in
the particular information or that it was inaccurate, or that the loan
originator did not rely on that particular information in issuing the
GFE. A loan originator would have the burden of demonstrating
nonreliance on the collected information, but may do so by various
means, including through, for example, a documented record in the
underwriting file or an established policy of relying on a more limited
set of information in providing GFEs. If a loan originator issues a
revised GFE based on information previously collected in issuing the
original GFE and ``changed circumstances,'' it must document the
reasons for issuing the revised GFE, including, for example, its
nonreliance on that information or the inaccuracy of the information,
and retain that documentation for at least 3 years. Additional guidance
on what constitutes ``changed circumstances'' will be provided by HUD
during the implementation period.
Furthermore, the loan originator is presumed to have relied on the
borrower's name, the borrower's monthly income, the property address,
an estimate of the value of the property, the mortgage loan amount
sought, and any information contained in any credit report obtained by
the loan originator before providing the GFE. The loan originator
cannot base a revision of the GFE on this information, unless it
changes or is later found to be inaccurate. HUD determined that this
approach provides the flexibility originators need to properly
underwrite, while limiting bait-and-switch methods whereby the
originator uses the GFE to draw in a borrower and, after a significant
application fee is paid or burdensome documentation demands are made,
claims that a material change has resulted in a more expensive loan
offering.
If a loan originator receives information indicating that changed
circumstances necessitate the issuance of a new GFE, such new GFE must
be provided to the borrower within 3 business days of receipt of such
information. The 3-day requirement is in response to comments on the
proposed rule that stated that providing a new GFE within one day is
not workable.
The approach set forth in this rule furthers HUD's goal to promote
consumer shopping among mortgage originators, because it does not
overly burden a consumer at an early stage. Rather, a consumer provides
information that is easily communicated and pays a nominal fee in order
to get a GFE.
As noted, this public policy is further supported by the Federal
Reserve Board through its recently issued final rule limiting fees that
can be charged for the delivery of the TILA disclosure. Under this
rule, borrowers must receive the TILA disclosure before paying or
incurring any fee imposed by a creditor or other person in connection
with the consumer's application for a closed-end mortgage, except that
creditors may charge a bona fide and reasonable fee for obtaining the
consumer's credit history. Whether an application under a particular
set of facts triggers ECOA or HMDA requirements must be determined
under Regulation B or Regulation C, as interpreted by the Federal
Reserve Board's Official Staff Commentary.
2. Up-Front Fees That Impede Shopping
Proposed Rule. The March 2008 proposed rule provided that a loan
originator, at its option, could collect a fee limited to the cost of
providing the GFE, including the cost of an initial credit report, as a
condition of providing the GFE to a prospective borrower. The loan
originator was not permitted to collect, as a condition of providing a
GFE, any fee for an appraisal, inspection, or other similar service
needed for final underwriting.
Comments
Consumer Representatives
Consumer representatives expressed concerns about the opportunity
for consumers to be charged a fee for a GFE and a credit report. They
are concerned such costs would discourage borrowers from shopping for a
mortgage. They stated that lenders would charge a fee for the GFE to
offset lenders' costs for issuing the GFE, because the cost of
preparation of the GFE cannot otherwise be passed on to consumers.
Consumer advocates pointed out that some states prohibit the collection
of an application fee before credit has been extended and that HUD's
proposal would be inconsistent with such laws. The consumer advocates
asserted that HUD's proposal could be read to preempt these state laws.
The consumer advocates recommended that HUD remain silent on the
collection of such fees in relation to the GFE and should in no way
support it.
Industry Representatives
Industry comments reflected some confusion as to whether and to
what extent fees can be charged in connection with the GFE. Some
industry commenters understood the proposal to mean that lenders can
charge a fee once a borrower submits a ``mortgage application.'' Other
industry commenters sought clarification about what exactly can be
charged in connection with the GFE. They indicated that meeting the 3-
business day requirement for delivery of the GFE to the borrower and
completing the lengthy GFE form would be time consuming and costly.
Further, in a situation in which a borrower seeks an accelerated
process for getting a loan, industry representatives stated that the
borrower should be able to pay necessary fees for such items as, for
example, an appraisal. Industry representatives also opined that under
RESPA, HUD has no authority in their view to require lenders to offer
GFEs without adequate compensation.
Other Commenters
CSBS, AARMR, and NACCA commented that a consumer should not be
charged for the GFE because to do so locks the consumer into the
transaction. These commenters stated that if HUD insists on permitting
a fee to be charged, the fee charged should be limited to a credit
report.
HUD Determination
HUD has long supported a public policy goal of creating a
circumstance where consumers can shop for a mortgage loan among loan
originators without paying significant upfront fees that impede
shopping. To this end, and consistent with the Federal Reserve Board's
recently issued revised regulations limiting the fees that a consumer
may be charged for the delivery of TILA disclosures (73 FR 44522, July
30, 2008), HUD, in this final rule, is limiting the charge originators
may impose on consumers for delivery of the GFE.
[[Page 68213]]
The Federal Reserve Board's rule restricts creditors from imposing
a fee on a consumer in connection with the consumer's application for a
mortgage before the consumer has received the TILA disclosure. The
Federal Reserve Board makes an exception that allows imposition of a
fee that is bona fide and reasonable in amount for obtaining the
consumer's credit history. In an effort to create consistency among
regulatory requirements and serve the best interests of consumers, HUD
is similarly limiting the fee for the GFE to the cost of a credit
report. Also, as in the proposed rule, a loan originator is expressly
not permitted to charge, as a condition of providing a GFE, any fee for
an appraisal, inspection, or similar settlement service.
3. Introductory Language on the GFE Form
Proposed Rule. The March 2008 proposed rule included a proposed
required GFE form that explained to the borrower: (1) On page 1, the
purpose of the GFE, i.e., that it is an ``* * * estimate of your
settlement costs and loan terms if you are approved for this loan'';
and (2) on page 3, that the borrower is the ``* * * only one who can
shop for the best loan for you. You should shop and compare this GFE
with other loan offers. By comparing loan offers, you can shop for the
best loan.''
Comments
Consumers did not comment on this issue. NAMB stated that the
introductory language of the GFE and the language encouraging
comparative shopping should be improved. Specifically, NAMB stated that
the language encouraging comparative shopping incorrectly characterizes
the GFE as a ``loan offer.'' NAMB stated that this is misleading
because it leaves borrowers with the impression that they have been
approved for the loan and that is not the case. NAMB suggested that the
``loan offer'' reference be changed to ``other estimates.''
NAMB also recommended that the language encouraging comparative
shopping be made more conspicuous and informative. NAMB encouraged HUD
to adopt language set forth in the prototype disclosure forms developed
by FTC. Those forms include prominent legends in large typeface that
expressly advise borrowers that mortgage originators, including both
brokers and lenders, do not represent borrowers, and that the ``lender
or broker providing this loan is not necessarily shopping on your
behalf or providing you with the lowest cost loan.'' The FTC prototype
forms also encourage borrowers to comparison shop to find the best
deal.
NAMB urged HUD to adopt the FTC prototype disclosures in place of
the proposed mortgage broker compensation language. However, NAMB
recommended that, if the FTC forms are not adopted in their entirety,
HUD should incorporate the FTC language in the GFE earlier than on page
3, and in a more prominent typeface than the typeface used for the
proposed language on comparative shopping.
HUD Determination
HUD's consumer testing of the form demonstrated that consumers
better understood the function of the GFE and its role in the shopping
process as a result of language on the form. Accordingly, HUD has
determined to maintain the language on the form that describes the
purpose of the GFE and informs the borrower that only they can shop for
the best loan for them. However, in the interest of streamlining the
form, the revised form now includes, on page 1, the information about
shopping for a loan that was on page 3 of the proposed GFE.
4. Terms on the GFE (Summary of Loan Details)
Proposed Rule. The proposed GFE included a summary of the key loan
terms. The form required the disclosure of the initial loan amount; the
loan term; the initial interest rate on the loan; the initial monthly
payment owed for principal, interest, and any mortgage insurance; and
the rate lock period. The form also required the loan originator to
disclose whether the interest rate could rise; whether the loan balance
could rise; whether the monthly amount owed for principal, interest,
and any mortgage insurance could rise; whether the loan had a
prepayment penalty or a balloon payment; and whether the loan included
a monthly escrow payment for property taxes and possibly other
obligations. The proposed rule required the terms ``prepayment
penalty'' and ``balloon payment'' to be interpreted consistent with
TILA (15 U.S.C. 1601 et seq.). The APR was not included on the proposed
GFE.
Comments
Consumer Representatives
As part of their general support for the proposed rule, consumer
advocacy organizations were positive about the inclusion of loan terms
on the GFE. NCLC, in a joint letter with Consumer Action, Consumer
Federation of America, and National Association of Consumer Advocates,
commented that ``[p]lacing the most critical information in consumers'
hands in a consistent, user-friendly format should facilitate consumer
shopping, market competition and transparency.'' They characterized
HUD's summary sheet as striking a balance between disclosing critical
information and preventing information overload.
CRL presented a legal argument supporting HUD's authority to
require disclosure of loan terms. CRL pointed out that settlement costs
are so intertwined with loan terms that those terms must be disclosed
for the settlement costs to have any meaning. Other consumer groups
also pointed out that these terms affect the overall price and risk for
the consumer. CRL, which is affiliated with a small nonprofit lender
that will have to comply with the new rule, stated that the rule is
administratively feasible for larger and smaller lenders.
In addition to supporting loan terms disclosure, consumer advocacy
organizations suggested several changes to make disclosure even more
effective. They suggested that there should be a more strict legal
mechanism for binding originators to the loan terms after disclosing
them. Some consumer advocates argued for inclusion of the APR on the
GFE, perhaps instead of the note rate, stating that inclusion of the
APR would make comparisons easier. Some suggested that the adjustable
rate disclosure should include the date when the first adjustment
happens, in order to help avoid payment shock. Commenters pointed out
that a monthly payment disclosure that includes taxes and different
types of insurance will be more useful in judging affordability and for
making comparisons to the current mortgage, when applying to refinance.
They also suggested that the maximum interest rate disclosure is not
likely to help borrowers and may be misleading. The commenters stated
that actual dollar figures are more readily understandable. The
commenters also stated that the GFE should include a clear statement
that loan terms are negotiable, and all the disclosures should be more
carefully harmonized with TILA.
NCLC, Consumer Action, the Consumer Federation of America, and the
National Association of Consumer Advocates stated that they ``applaud''
inclusion of the maximum payment amount and the maximum loan balance
because these help consumers understand a loan's risks, especially the
risks of nontraditional loans, and help consumers judge a loan's
affordability. However, these organizations suggested that HUD provide
guidance to originators on how to calculate
[[Page 68214]]
maximum payment and maximum loan balance.
One consumer organization pointed out that much research, including
an FTC study, found that borrowers often do not understand exactly what
``prepayment penalties'' are and how they work. Therefore, the
organization recommended that HUD include in the prepayment penalty
disclosure the following brief explanation: ``[p]ayment to lender if
you refinance, sell home, or pay your loan off early''.
Consumer groups were concerned that, because the proposed GFE
highlighted settlement costs, it might mislead borrowers into believing
that interest costs are less important. They suggested that interest is
usually much more expensive than closing costs, and should be more
effectively emphasized.
Industry Representatives
Most lenders and lender organizations urged that loan terms be left
off the GFE, submitting that loan terms are more properly viewed as
TILA disclosures. These commenters stated that double disclosure of
loan terms will be confusing to borrowers, especially since much of the
terminology proposed to be used in HUD's GFE is different from that
used in the TILA (e.g., ``loan amount'' vs. ``amount financed'') and
some calculations are different. These organizations suggested that
loan term disclosures should be coordinated with TILA, and be less
lengthy. A lender proposed that originators should be allowed to
substitute early TILA disclosure for the loan terms sheet. Another
lender organization stated that loan terms should be included only if
there is a combined RESPA/TILA form. Some credit unions stated that the
APR should be included in the GFE loan terms.
Some lenders stated other aspects of the loan terms disclosure
would confuse borrowers. A lender organization suggested that use of
the format ``Your * * * is'' to describe the loan details would create
misunderstanding, because these were loan terms being applied for, not
final loan terms. The same organization also believed that inclusion of
mortgage insurance in the monthly payment, without disclosing whether
mortgage insurance is required, would confuse borrowers. In addition,
the organization stated that some of the mechanisms behind these loan
terms are too complex for single-line disclosure.
Many lenders and lender organizations submitted that HUD has no
authority under RESPA to require disclosure of loan terms, because loan
terms are not part of the settlement process. These lenders submitted
that HUD has the authority to require disclosure of settlement costs
only, and that loan terms are not settlement costs. They stated that
the disclosures required by HUD would overlap or conflict with
disclosures under TILA and potentially with ECOA and HMDA. One lender
also stated that some of these disclosures would overlap with state-
mandated disclosures.
Industry representatives commented that the Federal Reserve Board
and lenders have experience and expertise in developing disclosures and
informational materials on adjustable rate mortgages, and that HUD
should coordinate efforts to provide improved disclosures and
informational materials. Industry commenters also stated that
disclosures related to ARMs give rise to different concerns than
settlement costs under RESPA and that HUD should follow the Federal
Reserve Board's lead in this respect. A lender stated that the rate
adjustment disclosure on the proposed GFE is biased against ARMs, since
it only shows that payments can increase, not decrease. This same
lender suggested that it would be better to have full ARM disclosure,
which industry needs because current ARM disclosures are inadequate.
NAMB supported HUD's inclusion of loan terms on the GFE, and
suggested that more monthly expenses should be disclosed, such as
homeowner's association dues, if applicable.
The Mortgage Insurance Companies of America (MICA) objected to the
fact that mortgage insurance costs were included in the monthly payment
for purposes of the question, ``Can your monthly amount owed for
principal, interest, and any mortgage insurance rise? '' MICA commented
that this disclosure may mislead borrowers into believing that their
mortgage insurance payments can rise, when they are in fact set at the
time of origination. MICA also suggested that mortgage insurance would
be disclosed in the ``Required services that the loan originator
selects'' category, and would also be included in the escrow
disclosure.
Other Commenters
CSBS, AARMR, and NACCA commented that HUD should be aware that
several states already require loan originators to disclose various
loan terms, and that the GFE should avoid conflicting with these
requirements. This group also suggested that, in order to avoid
consumer confusion, HUD should coordinate more closely with the Federal
Reserve Board's TILA disclosures.
Federal Agencies
FTC staff stated that its experience and research suggest that
``consumers in both the prime and subprime markets would benefit most
from the development of a single mortgage disclosure document that
consolidates information on the key costs and features of their loans,
presents the information in a language and format that is easy to
understand, and is provided early in the transaction to aid consumer
shopping.'' However, FTC staff stated their belief that HUD's GFE did
not go far enough in requiring these disclosures, and that even the GFE
and the TILA form together did not disclose the necessary information.
FTC staff also stated that inconsistencies between the GFE and TILA
forms could lead to consumer confusion.
The FDIC commended HUD for proposing revisions to its RESPA
regulations, and stated that ``[t]he earlier availability of and more
relevant information on the GFE should promote comparative shopping
that will enable consumers to make more informed financing decisions.''
Like the consumer organizations, the FDIC expressed its view that the
GFE needs to include disclosure of when the first interest rate
adjustment happens, in order to avoid payment shock.
The Federal Reserve Board staff agreed with the need for disclosure
of the first rate adjustment, and stated that because the GFE's ARM
disclosures are less complete than TILA disclosures, the GFE's ARM
disclosures may not be as beneficial to consumers' understanding of how
their loans work. The Federal Reserve Board staff's main concern,
though, was that duplication of disclosures and information, and, in
some instances, inconsistency between the loan terms on the GFE and the
TILA form will create confusion for consumers. The Federal Reserve
Board staff suggested that because RESPA and TILA overlap, the Federal
Reserve Board and HUD should work together to develop a single RESPA/
TILA form. In addition, the Federal Reserve Board staff stated, similar
to a consumer organization comment, that the absence of taxes and
insurance in the monthly payment disclosure will interfere with
borrowers' ability to gauge affordability.
HUD Determination
After reviewing the comments, HUD continues to believe that
consumer understanding of mortgage loans and of their settlement costs
will be greatly enhanced by requiring disclosure of certain loan terms
in a clear, user-friendly format on the GFE. Therefore,
[[Page 68215]]
the final rule includes the proposed loan summary chart on the first
page of the revised GFE, with some revisions to address commenters'
suggestions. To fully understand the cost of a loan for which a
borrower is paying, the borrower needs to know the terms of the loan
product. Loan terms, such as the interest rate, can have a direct
relationship to the borrower's settlement costs, including mortgage
broker compensation and other loan origination charges. HUD has
emphasized the importance of disclosing the relationship between the
interest rate and settlement charges in statements of policy on
mortgage broker compensation and past RESPA rulemaking efforts.
Disclosure of this relationship continues to be a central element of
this rule.
Making it easier to understand the relationship between loan terms
and loan costs is a key element in enhancing a borrower's ability to
shop for the best-priced loan, including settlement charges. A borrower
should know that a loan may have certain features--for example, a
prepayment penalty or a balloon payment--that may affect the borrower's
charges for that loan, including by affecting the mortgage broker's
indirect compensation or other, direct loan origination charges. The
new GFE brings together all of the relevant pricing information,
including certain loan terms, on one form, thus allowing the consumer
to understand and compare loans much more easily. As stated by the
National Consumer Law Center, in its comment on behalf of itself,
Consumer Action, the Consumer Federation of America, and the National
Association of Consumer Advocates:
``Using a loan summary sheet is a terrific advance. As HUD
recognizes, consumer shopping is facilitated when loan information
is condensed and summarized. Placing the most critical information
in consumers' hands in a consistent, user friendly format should
facilitate consumer shopping, market competition, and
transparency.''
HUD has determined that disclosure of major loan terms on the GFE
is necessary to provide effective advanced disclosure to homebuyers of
settlement costs, which is a key purpose of RESPA. HUD disagrees with
those industry commenters that asserted that the GFE cannot list loan
terms associated with settlement costs because the TILA disclosure is
the appropriate form for loan terms. The Federal Reserve Board, in its
comment on the rule, noted an ``overlap'' between the RESPA and TILA's
purposes in this regard: ``Although RESPA's purpose is to inform
consumers about settlement costs, and TILA's is to inform consumers
about loan terms, these purposes overlap. Settlement costs may include
loan origination fees, and consumers may finance their settlement
costs.'' Under section 19(a) of RESPA, the Secretary of HUD has the
authority to issue such regulations ``as may be necessary to achieve
the purposes of this Act.'' The added information provided by the new
GFE clearly furthers RESPA's purpose to ``provide more effective
advance disclosure to homebuyers and sellers of settlement costs.'' HUD
agrees with those commenters who asserted that disclosure of other
settlement costs is meaningless (and therefore ineffective), absent the
context provided by simultaneous disclosure of some loan terms. More
effective disclosure also leads to, through borrowers' improved ability
to shop for mortgages, reduced mortgage settlement costs for borrowers,
a key purpose behind RESPA. HUD believes its new GFE, and its enhanced
usefulness to borrowers as a shopping document, will provide an
effective complement to the TILA disclosure, to provide borrowers with
a more complete picture of their mortgage loans.
Some commenters, primarily industry, requested that HUD delay its
disclosure reform efforts in this rulemaking, pending a joint effort at
disclosure reform with the Federal Reserve Board. HUD remains ready to
coordinate with the Federal Reserve Board to ensure consistency in
mortgage disclosure forms. As discussed earlier in this preamble,
however, HUD determined that it must move forward with this rulemaking
to provide prospective homebuyers and other mortgage borrowers the
benefits of the better disclosure provided by the revised forms and
requirements in this rule. These revisions are particularly important
given the current mortgage crisis, which is due in part to borrowers'
misunderstanding or lack of knowledge about the fundamental details of
their mortgage loans.
HUD also examined the comments regarding its authority to require
disclosure of loan terms on the GFE, and concludes that it does have
such authority. Section 5(c) of RESPA provides for ``a good faith
estimate of the amount or range of charges for specific settlement
services the borrower is likely to incur in connection with the
settlement as prescribed by the Secretary.'' Because, under RESPA's
definitions, loan origination, or the making of a mortgage loan, is a
``settlement service,'' HUD determined that it is within its authority
to require that a good faith estimate of the costs associated with this
specific settlement service include key information about the
``specific'' service. Without this information, the origination charges
and other fees associated with the loan will be meaningless. Through
RESPA, Congress entrusts HUD with establishing the contents of the GFE,
and it is within HUD's discretion, and its responsibilities under
RESPA, to ensure that consumers receive enough information to make
intelligent shopping decisions about the costs of their loans. As noted
previously in this preamble, given the current problems in the mortgage
market, HUD decided to move forward with its improved mortgage
disclosures, including this new first page of the GFE. The CRL, in its
comment on the 2008 proposed rule, stated:
``In today's mortgage market, settlement costs are so
intertwined with loan terms, and the illusory trade-off between rate
and points is so problematic * * * loan terms simply must be
included for the disclosure of settlement costs to be even remotely
effective. HUD's authority to require them, therefore, is
unambiguous.''
In response to comments, HUD has revised several aspects of the
loan summary chart on page 1 of the GFE, to better inform borrowers of
the key loan terms. First, the title of this section of the GFE has
been simplified to ``Summary of your loan.'' To improve clarity, the
summary chart now refers to ``initial loan amount'' instead of
``initial loan balance.'' As in the proposed rule, the revised form
requires disclosure of the terms of the loan; initial interest rate;
and initial amount owed for principal, interest, and any mortgage
insurance. However, the information on the rate lock period has been
moved out of this section of the GFE and into the ``Important dates''
section.
While some commenters recommended that the ``annual percentage
rate'' or ``APR'' be added to the summary chart, HUD has determined not
to add ``APR'' to the GFE. HUD recognizes that APR is a complex term,
calculated without the inclusion of certain significant costs in a
mortgage loan transaction, and has a unique purpose as a broad cost-of-
credit measure central to the TILA disclosure. Consumers will be
apprised of the APR on the TILA disclosure they receive at the same
time that they receive the GFE. Accordingly, due to the specific TILA
purposes of the APR and its inclusion on the concurrent TILA
disclosure, HUD does not believe it is necessary to include the APR on
the GFE.
HUD has, however, included on the GFE form other terms that are
included
[[Page 68216]]
in the TILA disclosure required by the Federal Reserve Board, but that
are important to borrowers' understanding the costs of their mortgage
loans. For example, the GFE requires a general disclosure about the
existence of prepayment penalties and balloon payments. Under the final
rule, HUD would continue to interpret these terms consistent with TILA,
as HUD had indicated it would do in its March 2008 proposed rule (73 FR
at 14036).
Some commenters recommended that the form warn borrowers about the
first change in the interest rate, to prevent payment shock. The
revised form requires disclosure of the length of time before that
first change. In addition, the revised form clarifies whether, even
when the borrower makes payments on time, the loan balance can rise and
the monthly amount owed for principal, interest, and any mortgage
insurance can rise. The revised form also requires disclosure of the
period of time of the first possible increase in the monthly amount
owed, the amount to which it can rise at that time, and the maximum to
which it can ever rise. The final rule requires the same information as
in the proposed form about prepayment penalties and balloon payments.
Finally, the final rule, with some revision of the proposed rule
language, requires information on whether the lender requires an escrow
account for the loan, for the payment of property taxes and possibly
other obligations.
5. Period During Which the GFE Terms Are Available to the Borrower
Proposed Rule. Under the proposed rule, the interest rate stated on
the GFE would be available until a date set by the loan originator for
the loan. After that date, the interest rate, some of the loan
originator charges, the per diem interest, and the monthly payment
estimate for the loan could change until the interest rate is locked.
The proposed rule also provided that the estimate for all the other
charges would be available until 10 business days from when the GFE is
provided, but could remain available longer, if the loan originator
extended the period of availability.
Comments
Consumer Representatives
NCRC, CRL, and NCLC all stated that a 10-business-day time period
is insufficient for shopping and recommended a 30-day binding period as
more fair to consumers. NCLC stated that the 10-business day period
does not seem to be sufficient time for consumers to shop for a
different mortgage, obtain alternative GFEs, compare them, and then
make a decision to return to a particular originator, particularly
without an interest rate lock. NCLC noted that industry practice
generally assumes that, in the purchase money context, a minimum of 30
days is needed to shop for and obtain a binding mortgage commitment.
CRL also noted that the 10-business-day period does not apply to
the interest rate, which can come with no guarantee at all. NCLC and
CRL stated that an interest rate lock must be required in order for the
GFE to be effective. According to CRL, not including a requirement for
an interest rate lock will force consumers to shop on settlement costs
alone, which are a relatively small component of the total home
settlement cost. CLR stated that, in addition, not requiring a rate
lock makes it too easy for loan originators to engage in baiting and
switching; that is, offering low settlement costs, only to recoup those
costs by increasing the interest rate when the consumer returns 3
business days later. NCLC stated that, because interest is the largest
component of the price of a mortgage, if interest rates are allowed to
float, while settlement costs are fixed, consumers will be encouraged
to shop on the smallest portion of mortgage costs, the settlement
costs, and that lenders will be encouraged to play bait and switch
games with the offered interest rate. Thus, according to NCLC, in order
for the GFE to be an effective shopping tool, all costs must be fixed
at the time the GFE is delivered.
Industry Representatives
MBA stated that the information concerning how long the costs and
interest rate are open to borrower acceptance needs greater
clarification and could be provided in accompanying materials, and not
the GFE. MBA stated that if such information is included on the GFE,
the rule should make clear that the interest rate on the GFE may be
available until a specified hour and date, since interest rates
frequently change several times a day.
The Consumer Mortgage Coalition (CMC) stated that RESPA already
provides for good faith estimates of closing costs, and that it is
unreasonable to interpret RESPA to limit changes in closing costs where
the estimates were made in good faith. In addition, according to CMC,
nothing in RESPA would appear to justify requiring lenders to keep an
interest rate available for a potential borrower who has not actually
applied for a loan. Therefore, CMC recommended that the ``important
dates'' section on the proposed GFE be removed.
NAMB stated that it is meaningless, and potentially misleading, to
suggest that a borrower would receive a specific interest rate prior to
final application. NAMB recommended that more specific language be
included on the form indicating that the rate may change until locked.
They also recommended that the 10-business-day period during which
estimated settlement charges would be available, be changed to 10
``calendar'' days, since this would conform more closely to market
realities.
HUD Determination
HUD has determined to retain the time periods set forth in the
proposed rule. A central purpose of RESPA regulatory reform is to
facilitate shopping in order to lower settlement costs, and there is
legitimate concern that requiring GFEs to be open for too long a
shopping period could unintentionally operate to increase borrower
costs. This could occur if loan originators are required to commit to
prices for too long a period or if the length of the period
necessitates that originators make contingency plans for a large number
of loans, when the yield of actual borrowers that can be expected to
commit to the originator is uncertain. Accordingly, the final rule
provides that the interest rate stated on the GFE will be available
until a date set by the loan originator for the loan. HUD is not
requiring the interest rate to be available for any specific length of
time. The final rule provides that the loan originator indicate on the
GFE the period during which the interest rate is available. After that
time period, the interest rate, the interest rate related charges, and
loan terms, including some of the loan originator charges, the per diem
interest, and the monthly payment estimate for the loan could change
until the interest rate is locked. The final rule also provides that
the estimate for all other settlement charges and loan terms must be
available for 10 business days from when the GFE is provided, but could
remain available longer if the loan originator chooses to extend the
period of availability. The 10-business day requirement for settlement
costs essentially provides that the GFE will be available for 2 weeks,
thereby providing borrowers with sufficient time to shop among various
providers.
6. Option To Pay Settlement Costs
Proposed Rule. The proposed GFE advised the borrower regarding how
the interest rate would affect a borrower's settlement costs. The
proposed GFE would have required the loan originator to complete a
tradeoff table that informed the borrower that the borrower
[[Page 68217]]
could choose from among the following: (1) The loan presented in the
GFE; (2) an otherwise identical loan with a lower interest rate and
monthly payments that will raise settlement costs by a specific amount;
or (3) an otherwise identical loan with a higher interest rate and
monthly payments that will lower settlement costs by a specific amount.
If a higher or lower interest rate was not in fact available from the
originator, the originator would have been required to provide those
options that are available and indicate ``not available'' on the form,
for those options that were not available. The proposed rule invited
comments on whether the loan originator should be required to include a
``no cost loan'' on the tradeoff table as one of the alternative loans
if the loan offered to the borrower is not the loan for which the GFE
is written.
Comments
Consumer Representatives
Consumer representatives supported the concept of the tradeoff
table but recommended some changes. They stated that only loans for
which the borrower actually qualifies should be included in the table.
They also stated that shopping on monthly payments through the tradeoff
table, proposed in HUD's RESPA rule, only works if the loan terms are
the same. If loan terms vary, shopping on the monthly payment can be
misleading to consumers and have devastating results. These commenters
also expressed concerns about the definition of ``otherwise
identical,'' which anticipates that the loans offered on the tradeoff
chart would vary only by interest rate. As outlined by these
commenters, the problem is that if the lender pays the closing costs,
the interest rate will be higher, and, if the borrower pays the closing
costs, in many cases, the borrower will finance such costs through a
higher loan amount. The commenters stated that the tradeoff table would
not address this circumstance.
These commenters also recommend that the definition of ``otherwise
identical'' be clarified, to include loans where the number and
schedule of payments, the nature of the interest rate, whether fixed or
adjustable, the index and margin for any adjustable rate mortgage, and
the other loan characteristics, are held constant, with the exception
that the interest rate and loan amount can be lower or higher than the
loan reflected in the GFE.
Consumer representatives also expressed concerns that the
introductory language on the tradeoff table implies that there is a
one-to-one relationship between the interest rate and the settlement
costs. They stated this is not the case, and, in many circumstances,
the lender-paid broker compensation leads to both higher settlement
charges and higher interest rates. In addition, they stated that the
tradeoff table cannot effectively disclose the tradeoffs when lender-
paid broker compensation is based on loan features other than an
increase in the interest rate; as for example, lenders that commonly
pay brokers for loans with prepayment penalties.
Some consumer representatives expressed support for a requirement
that an originator be required to offer a no-cost loan on the tradeoff
table if the originator has that type of product available and the
borrower qualifies for such a loan. These commenters also stated that a
meaningful tradeoff between settlement charges and interest rates would
arise in the context of a no-cost loan.
Industry Representatives
Industry representatives recommended that the tradeoff table on
page 3 of the GFE be moved to explanatory materials, including the
special information booklet. One lender expressed confusion over what
HUD intended by ``two other options.'' The lender stated that it was
not clear whether HUD meant different loan types, rate/point
structures, down payment amounts, or something else. A major lender
trade organization commented that lenders should not be required to
offer a no-cost loan on the tradeoff table. A major lender stated that
since HUD has not defined what it means by ``no cost,'' it is difficult
to provide a comment. This lender stated that many lenders now offer
no-cost loan products and to force these lenders into making such
disclosures would only result in consumer confusion.
One lender commented that disclosing two mortgage products on the
tradeoff table, in addition to the product contemplated on the GFE,
would be problematic, because this particular lender offers only two
mortgage products.
Other Commenters
CSBS, AARMR and NACCA commented that the tradeoff table does not
disclose that the choice a borrower makes between a charge and a credit
will have an impact on the overall amount of the loan or monthly
payment. The disclosure should reflect such a choice.
HUD Determination
HUD has determined to retain the tradeoff table on the GFE.
However, recognizing that not all loan originators offer various loan
products, full completion of the table is at the option of the loan
originator. While a loan originator is required to complete the left
hand column of the table that describes the loan offered in the GFE, it
is not required to complete the table with respect to the middle column
reflecting a loan with a lower interest rate, or the right hand column,
reflecting a loan with lower settlement charges. Filling out these last
two columns is optional for the loan originator, even if the loan
originator has another loan for which the borrower may be eligible.
However, HUD encourages loan originators to complete the tradeoff
table, in light of HUD's consumer testing of the form that revealed
that consumers found the tradeoff table to be one of the most useful
and informative aspects of the GFE. The tradeoff table focuses
consumers' attention on the information in the box on the top of page 2
of the GFE, empowering them to better shop for a mortgage. HUD strongly
urges loan originators to fill out the tradeoff table in its entirety
so that borrowers can better understand: (1) The disclosure of the
``charge or credit (points) for the specific interest rate chosen'' on
page 2 of the GFE, and (2) what other loans may be available.
As many commenters expressed concern and confusion over the
requirement to provide information about alternative loans and about
``otherwise identical'' loans, HUD is clarifying the scope of what
qualifies as an ``otherwise identical'' loan. Should a loan originator
determine to complete the table, the loan originator has to disclose
only those loans for which the borrower would qualify under the
lender's underwriting practices. For purposes of completing the
tradeoff table, an ``otherwise identical'' loan is a loan where the
loan amount, the number and schedule of payments, the nature of the
interest rate, the index and margin for any adjustable rate mortgage,
the loan terms, and characteristics such as whether there is a
prepayment penalty or a balloon payment are consistent with the loan
presented in the GFE. The only loan characteristic that may vary from
the loan presented in the GFE is the interest rate.
No-cost loans are not required to be presented as one of the
alternative loans. However, if the baseline GFE is for a no-cost loan
so that the origination charge in Box 1 or the credit shown in Box 2 of
the GFE offset the total of other
[[Page 68218]]
settlement service charges in Boxes 3 through 11 (i.e., total estimated
settlement costs are zero), the originator would complete the tradeoff
table by showing the same loan amount with positive closing costs
(effectively the positive difference between the charge or credit for
the GFE interest rate and that for the specified lower interest rate)
as the first alternative to the GFE loan, and the same loan with a
higher interest rate and negative closing costs (effectively the
negative difference between the charge or credit for the GFE interest
rate and that for the specified lower interest rate) as the second
alternative. The primary purpose of the GFE tradeoff table is to ensure
that borrowers understand there is a trade off between interest rates
and settlement costs and to help them better understand the ``Your
credit or charge (points) for the specific interest rate'' disclosure
on page 2. It may also help borrowers become aware of alternative loans
that are potentially available. However, it is not meant to be an
exhaustive range of potential alternative loan products to the
borrower. Loan originators are encouraged to discuss any alternative
loan products with borrowers and provide them with their own versions
of tradeoff tables showing the effects of the alternative loan terms on
interest rates, monthly payments, loan amounts, and settlement costs.
7. Establishing Meaningful Standards for GFEs
a. Tolerances
Proposed Rule. Under the March 2008 proposed rule, loan originators
would have been prohibited from exceeding at settlement the amount
listed as ``our service charge'' on the GFE, absent unforeseeable
circumstances. The proposed rule also would have prohibited the amount
listed as the charge or credit to the borrower for the interest rate
chosen, if the interest rate was locked, absent unforeseeable
circumstances, from being exceeded at settlement. In addition, the
proposed rule would have prohibited Item A on the GFE, ``Your Adjusted
Origination Charges,'' from increasing at settlement once the interest
rate was locked. The proposed rule also would have prohibited
government and recording fees from increasing at settlement, absent
unforeseeable circumstances.
Under the March 2008 proposed rule, the sum of all the other
services subject to a tolerance (originator-required services where the
originator selects the third party provider, originator-required
services where the borrower selects from a list of third party
providers identified by the originator, and optional owner's title
insurance, if the borrower uses a provider identified by the
originator) would have been prohibited from increasing at settlement by
more than 10 percent of the sum for services presented on the GFE,
absent unforeseeable circumstances. Thus, a specific charge would have
been able to increase by more than 10 percent, so long as the sum of
all the services subject to the 10 percent tolerance did not increase
by more than 10 percent.
Comments
Supporters of Tolerances
Many commenters expressed various degrees of support for the
concept of tolerances. A trade group, representing mortgage brokers as
well as some large lenders, expressed support for the concept of
tolerances, albeit with certain clarifications or modifications.
However, the strongest support for tolerances came from federal banking
regulators and groups representing consumer interests. These commenters
agreed that unexpected increases in costs between those provided in the
GFE and those actually charged at settlement are a significant problem
for prospective borrowers, and that the tolerances proposed by HUD
would be an effective way of preventing such surprises. These
commenters made various suggestions for strengthening the tolerance
provisions to provide additional protections for borrowers. Suggestions
included calculating the tolerances item-by-item rather than by
grouping certain items together and strengthening enforcement.
Opponents of Tolerances
Most lenders, trade groups representing lenders, and trade groups
representing other settlement service providers were generally opposed
to the proposed tolerance provisions. These commenters stated that
tolerances and particularly the zero tolerance for loan originator
charges are equivalent to a settlement cost guarantee, and therefore
conflict with the explicit statutory requirement for an estimate of
settlement charges. Several commenters reviewed the legislative history
of section 5 of RESPA, emphasizing that the statute was designed ``to
provide the prospective homebuyer with general information as to what
their costs will be at the time of settlement.'' (See H.R. Rep. No.
667, 94th Cong., 1st Sess., at 2, 1975 U.S.C.C.A.N. 2448, 2449 (Nov.
14, 1975) (emphasis added).) These commenters also stated that
tolerances may be inconsistent with the statutory provision permitting
disclosure of a range of charges for settlement services.
Trade groups representing other settlement servicer providers,
especially realtors and title companies, focused on the alleged
potential anticompetitive effects of the tolerance provisions. These
groups suggested that large lenders would seek to manage the risks
associated with tolerances by contracting with large third party
settlement service providers, thereby placing small settlement service
providers at a competitive disadvantage.
Lenders and trade groups representing lenders and some other
settlement service providers also strongly supported removing
government recording and transfer charges from the tolerances. They
stated that these charges are outside of the control of the loan
originator and cannot be known with any certainty at the time the GFE
is provided.
Several lenders and trade groups representing lenders suggested
alternatives to the proposed tolerance provisions. For example, certain
trade groups representing lenders recommended that tolerances not apply
to the initial GFE, which would be used as a shopping tool, but
tolerances would apply only to a ``final'' GFE that would be provided
after a full mortgage application had been completed. These trade
groups also supported more flexibility in the tolerance for the loan
originator's own charges, and suggested a 5 percent tolerance rather
than a ``zero tolerance.'' Another alternative suggested by at least
one lender was to evaluate overall compliance with tolerances rather
than compliance on a loan-by-loan basis. This suggestion, according to
the commenter, would alleviate many of the difficulties in anticipating
unusual aspects of individual loans but still hold lenders accountable
for providing GFEs that, as a rule, accurately reflect charges at
settlement. Another suggestion offered was to make providing a list of
third party settlement service providers to prospective borrowers
optional, with tolerances applying only where the loan originator
selected the service provider or where the loan originator provided a
list of service providers.
HUD Determination
Based on the comments received in response to the proposed rule,
HUD has revised a number of provisions dealing with the tolerances. In
particular, HUD has clarified the situations where the loan originator
would no longer be bound by the tolerances. However, HUD has determined
that only limited changes are necessary in the tolerance
[[Page 68219]]
amounts for settlement service categories in the rule. The final rule
seeks to balance the borrower's interest in receiving an accurate GFE
early in the application process to enable the borrower to shop
effectively, with the lender's interest in maintaining flexibility to
address the many issues that can arise in a complex process such as
loan origination.
Many commenters recommended changes to the size of the tolerances
for different categories of settlement costs, especially the zero
tolerance for loan originator charges. With one exception described
below, the final rule does not change the amounts of the tolerances
permitted for the different categories of settlement costs. As noted in
the proposed rule, HUD considered the best available data on the
variation in the costs of settlement services, in particular, for title
services, in determining that a 10 percent tolerance is reasonable. No
commenters submitted or identified any alternative data sources that
would support expanding the tolerances beyond 10 percent.
With respect to the zero tolerance for a loan originator's own
charges, HUD recognizes the comments characterizing the tolerance as a
potential settlement cost guarantee. However, the final rule provides
substantial flexibility to loan originators in providing a revised GFE
when circumstances necessitate changes. By providing such flexibility,
HUD intends to prevent only those increases in the loan originator's
charges that are made in ``bad faith.'' Section 19(a) provides explicit
authority for the Secretary to make such interpretations as may be
necessary to achieve the purposes of RESPA. Providing a clear,
objective standard for what constitutes ``good faith'' under section 5
of RESPA is necessary to provide more effective advance disclosure to
homebuyers and sellers of settlement costs, and as such, falls directly
within the Secretary's interpretive authority under section 19(a). In
the context of residential mortgage negotiations, HUD finds that the
term ``good faith'' requires that, once a loan provider has quoted in
writing a certain price as the cost of its own services in a specific
transaction and absent the ``changed circumstances'' provided for
elsewhere in the rule, the provider must adhere to the quoted price.
The one exception to the amounts of the tolerances remaining the
same as in the proposed rule is the tolerance for the government
recording and transfer charges. HUD has adjusted how these charges are
treated under the tolerances. The final rule splits the government
recording and transfer charges into two categories: government
recording charges, and transfer taxes.
Transfer taxes should generally be known at the time the GFE is
provided, so those taxes continue to be subject to a zero tolerance. If
there are changes in the tax rates or in the price of the property
after a GFE is provided, those changes would either constitute changed
circumstances or new information that would be the basis for providing
a revised GFE. It is HUD's view that these provisions will provide
sufficient flexibility to protect loan originators from changes outside
their control, while still preventing loan originators from providing
``low-ball'' estimates of transfer taxes on the GFE that could mislead
prospective borrowers. Government recording charges, in contrast, often
may not be known with any certainty at the time the GFE is provided,
and in many cases not until close to, or at, closing. Therefore, HUD
has determined that these charges should be included with the third
party charges that are subject to an overall 10 percent tolerance.
Because the government recording charges typically are small in
relation to other settlement costs, this should provide ample
flexibility to loan originators on these charges without unduly
impacting the permitted tolerances for other third party settlement
charges.
As noted earlier in this preamble, HUD has made a number of changes
to the tolerances provisions to clarify and provide additional
flexibility in managing the tolerances. As in the proposed rule, the
final rule adds a paragraph to the current regulations that provides
that a loan originator that violates the GFE requirements, which
include the tolerance requirements, shall be deemed to have violated
section 5 of RESPA. However, the final rule also provides a loan
originator with an opportunity to cure any violation of the tolerance
by reimbursing the borrower any amount by which the tolerances were
exceeded. This reimbursement may be made at settlement or within 30
calendar days after settlement. HUD will deem a payment to have been
provided in a timely fashion if it is placed in the mail by the loan
originator within 30 calendar days after settlement. HUD has
determined, based on the comments received, that 30 calendar days
provides sufficient time for loan originators to identify and cure any
tolerance violations through their post-closing review process. In most
cases, HUD expects that violations will be identified at or before
settlement when completing the revised HUD-1 form, which provides a
clear format for comparing the charges estimated on the GFE with those
actually imposed at settlement.
The opportunity to cure violations of the tolerances is an
important tool for loan originators to manage compliance with the
tolerance requirements. Many lenders and groups representing lenders
and other settlement service providers objected to the imposition of
tolerances because of the difficulty of providing accurate estimates to
prospective borrowers early in the application process. The opportunity
to cure will permit loan originators to give an estimate of expected
settlement charges in good faith, without subjecting them to harsh
penalties if the estimate turns out to be lower than the actual charges
at settlement.
HUD has also made clarifying changes to the proposed provision
describing the circumstances in which the GFE can be revised. As
described in more detail below, changed circumstances that result in
higher costs can be a basis for providing a revised GFE. In addition,
information that was either not known or not relied on at the time the
original GFE was provided may also be the basis for providing a
modified GFE.
b. Unforeseeable Circumstances
Proposed Rule. The March 2008 proposed rule provided that loan
originators would not be held to tolerances where actions by the
borrower or circumstances concerning the borrower's particular
transaction result in higher costs that could not have reasonably been
foreseen at the time of the GFE application, or where other legitimate
circumstances beyond the originator's control result in such higher
costs. The proposed rule also provided that if unforeseeable
circumstances would result in a change in the borrower's eligibility
for the specific loan terms identified in the GFE, the borrower must be
notified of the rejection for the loan and be provided a new GFE if
another loan is made available.
Comments
Most of the commenters who commented on unforeseeable circumstances
generally supported the proposed rule's provision on this matter, but
many recommended changes or additions to the proposed definition of
unforeseeable circumstances. Several lenders and trade groups
representing lenders indicated that, while ``unforeseeable
circumstances'' encompasses many things that would fall under the
statutory requirement that estimates of settlement costs be in ``good
faith,'' the two concepts are not always equivalent. Some commenters
suggested
[[Page 68220]]
that the definition be expanded or clarified to include any situation
that is outside the lender's control, even if such a situation involves
a change that occurs often enough to be ``foreseeable'' in some sense.
An example offered of such situation is one in which the changes in the
price of the property or in the estimated value of the collateral may
necessitate new information about the credit quality of the borrower
that is developed during the underwriting process, or any other
situation for which there is a reasonable explanation and that is still
consistent with ``good faith.''
Several commenters, including FTC staff and a trade group
representing mortgage brokers, found the proposed definition of
``unforeseeable circumstances'' to be vague. They suggested adding
specific examples of common situations to clarify the scope of
``unforeseeable circumstances.''
These commenters also offered suggestions regarding the definition.
A group representing consumer interests recommended that HUD carefully
monitor how often unforeseeable circumstances override the tolerance
requirements, to ensure that the exception does not swallow the rule. A
joint comment letter from groups representing state regulators
suggested that a provision be included requiring loan originators to
provide written notice to borrowers describing the ``unforeseeable
circumstance'' that resulted in the higher costs.
HUD Determination
Based on the comments received in response to the proposed rule,
HUD has made a number of changes to the proposed provisions describing
the circumstances in which the GFE can be revised. HUD has determined
that changes are needed to the proposed grounds for providing a revised
GFE.
The final rule clarifies the different types of circumstances
(``changed circumstances'') that can be a basis for providing a revised
GFE. The final rule continues to emphasize that market price
fluctuations by themselves are not changed circumstances. For example,
if an appraiser that a loan originator intends to use for a particular
transaction raises its prices by $50 after the loan originator has
already provided a GFE, that increase would not have constituted an
unforeseeable circumstance under the proposed rule. This result would
continue under the final rule, i.e., such a price increase by the
appraiser would not be a ``changed circumstance'' allowing the issuance
of a new GFE.
HUD recognizes that numerous commenters recommended elaborations
of, or technical changes to, the definition of unforeseeable
circumstances. Because many of the changes described in the proposed
definition of ``unforeseeable circumstances'' happen frequently enough
that they could be ``reasonably foreseen,'' the final rule replaces the
definition of ``unforeseeable circumstances'' with a new definition for
``changed circumstances.'' However, the types of circumstances included
in the new definition are similar to the types of circumstances that
were included in the proposed rule. The first clause in the new
definition of ``changed circumstances'' in the final rule still
includes acts of God, war, disaster, or other emergencies as was
included in the proposed rule. The final rule clarifies that the other
circumstances in the second clause are separate from and in additi |