[Federal Register: March 14, 2008 (Volume 73, Number 51)]
[Proposed Rules]
[Page 14029-14124]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14mr08-25]
[[Page 14029]]
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Part III
Department of Housing and Urban Development
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24 CFR Parts 203 and 3500
Real Estate Settlement Procedures Act (RESPA): Proposed Rule To
Simplify and Improve the Process of Obtaining Mortgages and Reduce
Consumer Settlement Costs; Proposed Rule
[[Page 14030]]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 203 and 3500
[Docket No. FR-5180-P-01]
RIN 2502-AI61
Real Estate Settlement Procedures Act (RESPA): Proposed 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: Proposed rule.
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SUMMARY: This proposed rule presents HUD's proposal to simplify and
improve the disclosure requirements for mortgage settlement costs under
the Real Estate Settlement Procedures Act of 1974 (RESPA), to protect
consumers from unnecessarily high settlement costs. This proposed rule
takes into consideration: discussions during HUD's RESPA Reform
Roundtables held in July and August 2005; public comments in response
to HUD's July 29, 2002, proposed rule that addressed RESPA reform; and
comments received and views expressed through congressional hearings;
meetings with affected parties; and consultation with other federal
agencies, including the Small Business Administration Office of
Advocacy.
HUD's objective in proposing these revisions is 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 one 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 comparison shop among loan originators for a mortgage loan; provide
more accurate estimates of costs of settlement services shown on the
GFE; improve disclosure of yield spread premiums to help borrowers
understand how they can affect their settlement charges; facilitate
comparison of the GFE and the HUD-1/HUD-1A Settlement Statements (HUD-1
settlement statement or HUD-1); ensure that at settlement borrowers are
made aware of final loan terms and settlement costs, by reading and
providing a copy of a ``closing script'' to borrowers; clarify HUD-1
instructions; clarify HUD's current regulations concerning discounts;
and expressly state when RESPA permits certain pricing mechanisms that
benefit consumers, including average cost pricing and discounts,
including volume based discounts.
DATES: Comment Due Date: May 13, 2008.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule. There are two methods for comments to be submitted
as public comments and to be included in the public comment docket for
this rule. Regardless of the method selected, all submissions must
refer to the above docket number and title.
1. Submission of Comments by Mail. Comments may be submitted by
mail to the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 Seventh Street, SW., Room 10276,
Washington, DC 20410-0001.
2. Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission of comments allows
commenters maximum time to prepare and submit comments, ensures timely
receipt by HUD, and enables HUD to make them immediately available to
the public. Comments submitted electronically through the
www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments must
be submitted through one of the two methods specified above. Again,
all submissions must refer to the docket number and title of the
rule. No Facsimile Comments. Facsimile (FAX) comments are not
acceptable.
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available, without
charge, for public inspection and copying between 8 a.m. and 5 p.m.
weekdays at the above address. Due to security measures at the HUD
Headquarters building, an advance appointment to review the public
comments must be scheduled by calling the Regulations Division at (202)
708-3055 (this is not a toll-free number). Individuals with speech or
hearing impairments may access this number through TTY by calling the
toll-free Federal Information Relay Service at (800) 877-8339. Copies
of all comments submitted are available for inspection and downloading
at www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Ivy Jackson, Director, or Barton
Shapiro, Deputy Director, Office of RESPA and Interstate Land Sales,
U.S. Department of Housing and Urban Development, 451 Seventh Street,
SW., Room 9158, Washington, DC 20410; telephone number (202) 708-0502
(this is not a toll-free number). For legal questions, contact Paul S.
Ceja, Assistant General Counsel for GSE/RESPA, Joan L. Kayagil, Deputy
Assistant General Counsel for GSE/RESPA or Rhonda L. Daniels, Attorney-
Advisor for GSE/RESPA, Room 9262; telephone number (202) 708-3137.
Persons with hearing or speech impairments may access this number via
TTY by calling the toll-free Federal Information Relay Service at (800)
877-8339. The address for the above listed persons is: Department of
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC
20410.
SUPPLEMENTARY INFORMATION:
I. Introduction and Principles
The process for disclosing settlement costs in the financing or
refinancing of a home is regulated under RESPA, 12 U.S.C. 2601-2617.
HUD seeks to make improvements to its regulations implementing RESPA
(24 CFR part 3500), to make the process clearer and more useful and
ultimately less costly for consumers. The mortgage industry has changed
considerably since RESPA was enacted in 1974, and the regulations
implementing RESPA's original disclosure requirements are no longer
adequate.
The settlement costs associated with a mortgage loan are
significant. In the case of purchase transactions, these costs can
become an impediment to homeownership, particularly for low- and
moderate-income households. HUD's current RESPA rules do not facilitate
shopping or competition to lower these costs. HUD estimates that with
the changes proposed to its RESPA regulations in this rulemaking,
settlement costs will be lowered by $6.5 to $8.4 billion annually, with
an average savings of $518 to $670 per transaction.
RESPA's purposes include the provision of effective advance
disclosure of settlement costs and elimination of practices that tend
to unnecessarily increase the costs of settlement services. Similarly,
the Administration is committed to extending homeownership
opportunities. HUD's regulatory reform and enforcement efforts for
RESPA
[[Page 14031]]
remain guided by the following principles:
1. Borrowers should receive loan terms and settlement cost
information early enough in the process to allow them to shop for the
mortgage product and settlement services that best meet their needs;
2. Costs should be disclosed and should be as firm as possible to
avoid surprise charges at settlement;
3. Many of the current problems arise from the complexity of the
mortgage loan settlement process. The process can be improved with
simplification of disclosures and better borrower information;
4. Increased shopping by borrowers will lead to greater pricing
competition, so that market forces will lower prices and lessen the
need for regulatory enforcement;
5. The key final terms of the loan a borrower receives should be
disclosed to the borrower in an understandable way at closing; and
6. HUD will continue to vigorously enforce RESPA to protect
borrowers and ensure that honest settlement service providers can
compete for business on a level playing field.
II. RESPA Overview
Congress enacted the Real Estate Settlement Procedures Act of 1974
(Pub. L. 93-533, 88 Stat. 1724, 12 U.S.C. 2601-2617) after finding that
``significant reforms in the real estate settlement process are needed
to ensure that consumers throughout the Nation are provided with
greater and more timely information on the nature and costs of the
settlement process and are protected from unnecessarily high settlement
charges caused by certain abusive practices * * *.'' (12 U.S.C.
2601(a)). RESPA's stated purpose is to ``effect certain changes in the
settlement process for residential real estate that will result:
``(1) In more effective advance disclosure to home buyers and
sellers of settlement costs;
``(2) In the elimination of kickbacks or referral fees that tend
to increase unnecessarily the costs of certain settlement services;
``(3) In a reduction in the amounts home buyers are required to
place in escrow accounts established to insure the payment of real
estate taxes and insurance; and
``(4) In significant reform and modernization of local
recordkeeping of land title information.'' (12 U.S.C. 2601(b)).
RESPA's requirements apply to transactions involving ``settlement
services'' for ``federally related mortgage loans.'' Under the statute,
the term ``settlement services'' includes any service provided in
connection with a real estate settlement.\1\ The term ``federally
related mortgage loan'' is broadly defined to encompass virtually all
purchase money and refinance mortgages.\2\
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\1\ ``Settlement services'' include ``* * * title searches,
title examinations, the provision of title certificates, title
insurance, services rendered by an attorney, the preparation of
documents, property surveys, the rendering of credit reports or
appraisals, pest and fungus inspections, services rendered by a real
estate agent or broker, the origination of a federally related
mortgage loan (including, but not limited to, the taking of loan
applications, loan processing, and the underwriting and funding of
loans), and the handling of the processing, and closing of
settlement.'' 12 U.S.C. 2602(3). The term is further defined at 24
CFR 3500.2.
\2\ The term ``federally related mortgage loan'' generally
includes a loan that both: (i) Is ``secured by a first or
subordinate lien on residential real property (including individual
units of condominiums and cooperatives) designed principally for the
occupancy of from one to four families''; and (ii) is ``made in
whole or in part by any lender the deposits or accounts of which are
insured by any agency of the Federal Government, or is made in whole
or in part by any lender which is regulated by any agency of the
Federal Government''; or ``is made * * * or insured, guaranteed,
supplemented, or assisted in any way, by [HUD] or any other officer
or agency of the Federal Government or * * * in connection with a
housing or urban development program administered by [HUD]'' or
other federal officer or agency; or ``is intended to be sold * * *
to [Fannie Mae, Ginnie Mae, Freddie Mac], or a financial institution
from which it is to be purchased by [Freddie Mac]; or is made in
whole or in part by any creditor * * * who makes or invests in
residential real estate loans aggregating more than $1,000,000 per
year * * *.'' 12 U.S.C. 2602(1).
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Section 4(a) of RESPA (12 U.S.C. 2603(a)) requires the Secretary to
develop and prescribe ``a standard form for the statement of settlement
costs which shall be used * * * as the standard real estate settlement
form in all transactions in the United States which involve federally
related mortgage loans.'' The law further requires that the form
``conspicuously and clearly itemize all charges imposed upon the
borrower and all charges imposed upon the seller in connection with the
settlement * * *'' (Id).
Section 5 of RESPA (12 U.S.C. 2604) requires the Secretary to
prescribe a Special Information Booklet for borrowers. Sections 5(c)
and (d) of RESPA require each lender to provide a Good Faith Estimate
(GFE), as prescribed by the Secretary, within 3 days of loan
application, and that the GFE state ``the amount or range of charges
for specific settlement services the borrower is likely to incur in
connection with the settlement * * *.''
In 1990, language was added in Section 6 of RESPA (12 U.S.C. 2605)
to require certain disclosures to each borrower, both at the time of
loan application and during the life of the loan, about the servicing
of the loan.
Section 8(a) of RESPA (12 U.S.C. 2607(a)) prohibits persons from
giving and from accepting ``any fee, kickback, or thing of value
pursuant to any agreement or understanding, oral or otherwise, that
[real estate settlement service business] shall be referred to any
person'' (12 U.S.C. 2607(a)). Section 8(b) of RESPA prohibits persons
from giving and from accepting ``any portion, split, or percentage of
any charge made or received for the rendering of a real estate
settlement service * * * other than for services actually performed''
(12 U.S.C. 2607(b)). Section 8(c) provides, in part, that ``[n]othing
in [Section 8] shall be construed as prohibiting * * * (2) the payment
to any person of a bona fide salary or compensation or other payment
for goods or facilities actually furnished or for services actually
performed, * * * or (5) such other payments or classes of payments or
other transfers as are specified in regulations prescribed by the
Secretary, after consultation with the Attorney General, the
Administrator of Veterans' Affairs, the Federal Home Loan Bank
Board,\3\ the Federal Deposit Insurance Corporation, the Board of
Governors of the Federal Reserve System, and the Secretary of
Agriculture'' (12 U.S.C. 2607(c)(2)).
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\3\ The Federal Home Loan Bank Board (FHLBB) was abolished
effective October 8, 1989, by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) (Pub. L. 101-73, 103
Stat. 183). Its successor agency, the Office of Thrift Supervision,
Department of the Treasury, assumed the FHLBB's regulatory
functions. 12 U.S.C. 1462a(e).
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Section 9 of RESPA (12 U.S.C. 2608) forbids any seller of property
from requiring, directly or indirectly, buyers to purchase title
insurance covering the property from any particular title company.
Section 10 of RESPA (12 U.S.C. 2609) limits the amounts that lenders or
servicers may require borrowers to deposit in escrow accounts, and
requires servicers to provide borrowers with both initial and annual
escrow account statements. Section 12 of RESPA (12 U.S.C. 2610)
prohibits lenders and loan servicers from imposing any fee or charge on
any other person for the preparation and submission of the uniform
settlement statement required under Section 4 of RESPA or the escrow
account statements required under Section 10(c) of RESPA, or for any
statements required by the Truth in Lending Act (TILA).
Section 18 of RESPA (12 U.S.C. 2616) provides that the Act does not
annul, alter, affect, or exempt any person from complying with the laws
of any State with respect to settlement practices,
[[Page 14032]]
``except to the extent that those laws are inconsistent with any
provision of [RESPA], and then only to the extent of the
inconsistency.'' Section 18 further authorizes the Secretary to
determine whether such inconsistencies exist, but provides that the
Secretary may not determine a State law to be inconsistent with RESPA
if the Secretary determines the State law gives greater protection to
consumers.
Section 19 of RESPA (12 U.S.C. 2617), among other provisions,
authorizes the Secretary to seek to achieve the purposes of RESPA by
prescribing regulations, making interpretations, and granting
reasonable exemptions for classes of transactions.
III. Overview of HUD's Efforts Since 2002
On July 29, 2002 (67 FR 49134), HUD issued a proposed RESPA reform
rule ``Real Estate Settlement Procedures Act (RESPA); Simplifying and
Improving the Process of Obtaining Mortgages to Reduce Settlement Costs
to Consumers'' (2002 Proposed Rule) that would have provided for a
revised GFE that would have simplified and standardized estimated
settlement cost disclosures to make such estimates more reliable, as
well as to prevent unexpected charges at settlement. In addition, the
2002 Proposed Rule would have modified mortgage broker compensation
disclosure requirements and would have provided an exemption from
Section 8 of RESPA for guaranteed packages of settlement services.
The 2002 Proposed Rule followed several years of consultation with
industry, consumer, and government groups on changes to RESPA. The 2002
Proposed Rule also followed two reports to Congress that examined ideas
to improve the mortgage loan settlement process: The 1998 joint report
by HUD and the Board of Governors of the Federal Reserve (Federal
Reserve or the Board) on reform of RESPA and the Truth in Lending Act;
and the 2000 HUD-Treasury Report on Predatory Lending. Both of these
reports are described in more detail in the 2002 Proposed Rule (see 67
FR at 49143-6).
In response to the 2002 Proposed Rule, HUD received over 40,000
comments, of which 400 contained in-depth discussions of various issues
raised by the proposal. Comments were submitted by real estate,
mortgage broker, banking, mortgage lending, financial services, and
title industry trade groups; consumer advocacy organizations; mortgage
companies; settlement service providers; banks; credit unions and
related organizations; State agencies; Members of Congress; lawyers;
and other concerned persons.
Generally, the extensive comment letters supported the overall
goals of the proposal, but disagreed with or expressed reservations
concerning specific aspects of the proposal. For example, some lender
organizations (including the Mortgage Bankers Association) strongly
supported the packaging proposal, while the National Association of
Realtors supported the GFE changes. Consumer advocacy organizations
(including AARP and the National Consumer Law Center) largely supported
the mortgage broker compensation disclosure changes, the other GFE
changes; and, subject to some exceptions, the packaging proposal.
Several industry organizations supported better disclosure of total
mortgage broker compensation. On the other hand, the National
Association of Mortgage Brokers opposed HUD's proposed approach to
disclosing the yield spread premium as part of the total mortgage
broker compensation, and the American Land Title Association opposed
HUD's packaging proposal and offered a two-package approach as an
alternative.
In response to the considerable and varied comments from the
public, as well as from other federal agencies and Congress, the
Secretary withdrew the proposed rule in early 2004. At that time, the
Secretary committed HUD to gather additional information about
settlement service costs and the process of obtaining mortgages, as
well as to engage in outreach to Congress, members of potentially
affected industries, consumers, and other federal agencies, before
proceeding with any proposed changes related to HUD's RESPA
regulations.
In June 2004, in preparation for outreach to the industry and
consumer groups, HUD began consulting with its federal agency partners,
including the Small Business Administration (SBA) Office of Advocacy,
on RESPA reform. These meetings continued through 2005. In Spring 2005,
HUD also consulted with Members of Congress and congressional staff on
RESPA reform.
After these initial consultations, in July and August 2005, HUD
held a series of seven consumer and industry roundtables both at HUD
Headquarters in Washington, DC, and jointly with the SBA Office of
Advocacy in Chicago, Los Angeles, and Fort Worth. As discussed in the
public notice announcing the roundtables (70 FR 37646, June 29, 2005),
in selecting participants for the roundtables, HUD sought a cross-
section of representatives of consumer advocacy organizations, all
segments of the settlement services industry, State mortgage industry
regulators, and other interested persons who had analyzed the 2002
Proposed Rule or had offered alternative proposals for HUD's
consideration. Over 150 companies, organizations, and other persons
were invited to attend, and 122 of these attended at least one of the
roundtables.
At the roundtables, HUD presented an overview of an approach to
RESPA reform that included revision of the GFE, clarification of the
yield spread premium disclosure, and the option of providing an
exemption from the Section 8 provisions prohibiting referral fees,
kickbacks, and unearned fees to encourage packaging of settlement
services. After HUD's presentation, participants were encouraged to
present their views on RESPA reform issues.
Participants generally agreed that HUD should pursue revision of
the GFE. Many participants stated that the GFE should reflect the HUD-1
settlement statement, so that borrowers could better compare the GFE to
the HUD-1. Consumer representatives stated that disclosure of the yield
spread premium (YSP) is necessary, while mortgage brokers recommended
that the YSP disclosure be dropped from the GFE. Mortgage broker
participants noted that lenders are not required to disclose any
secondary market fees on otherwise identical loans. Mortgage brokers
expressed concern that focusing on a requirement for more effective
disclosure of YSPs puts mortgage brokers at a severe disadvantage, as
compared to lenders, in originating a loan. Lenders maintained that it
would be impractical for a lender to disclose on the GFE how much a
lender would earn if or when the loan is sold on the secondary market.
These concepts also are discussed in more detail in HUD's Real Estate
Settlement Procedures Act Statement of Policy 2001-1 (66 FR 53052, at
53256-7, October 18, 2001).
With respect to packaging, small business representatives asserted
that a Section 8 exemption for packaging would be harmful to small
business providers of settlement services because lenders would
dominate packaging and would extract kickbacks from small businesses in
exchange for inclusion in a package. Consumer groups opposed packaging
with a Section 8 exemption on the grounds that the exemption would
provide a safe harbor for loans with high costs and fees and other
potentially predatory features. These groups also asserted that there
would be no way to determine costs and fees for packaged loans for
purposes of determining compliance with the Truth
[[Page 14033]]
in Lending Act. Lender representatives generally supported packaging
under a Section 8 exemption as the most efficient method to ensure cost
savings to consumers, but some indicated that packaging could also be
delivered with limited Section 8 relief, such as for volume-based
discounts and average cost pricing.
IV. This Proposed Rule
A. Generally
Today's proposed rule builds on all of this history and
specifically recognizes many of the suggestions made at the roundtables
with respect to the GFE and comparability of the HUD-1. The rule
proposes a new framework under RESPA that would:
(1) Improve and standardize the GFE form to make it easier to use
for shopping among settlement service providers;
(2) Ensure that page one of the GFE provides a clear summary of
loan terms and total settlement charges so that borrowers will be able
to use the GFE to comparison shop among loan originators for a mortgage
loan;
(3) Provide more accurate estimates of costs of settlement services
shown on the GFE;
(4) Improve the disclosure of yield spread premiums to help
borrowers understand how they can affect their settlement charges;
(5) Facilitate comparison of the GFE and the HUD-1/HUD-1A
Settlement Statements (HUD-1 settlement statement or HUD-1);
(6) Ensure that at settlement, borrowers are aware of final loan
terms and settlement costs, by reading and providing a copy of a
``closing script'' to borrowers;
(7) Clarify HUD-1 instructions;
(8) Clarify HUD's current regulations concerning discounts; and
(9) Expressly state when RESPA permits certain pricing mechanisms
that benefit consumers, including average cost pricing and discounts,
including volume-based discounts.
A detailed description of each aspect of the proposed rule that
involves these concepts follows in Sections B-E of this preamble.
This proposal also includes certain technical amendments to the
current RESPA rules, as set forth below.
B. Legislative Proposals Related to RESPA Reform
In order to further bolster consumer protection, as well as to
ensure uniform and consistent enforcement under RESPA, HUD intends to
seek legislative changes to RESPA that will complement the regulatory
improvements made in this rule. HUD firmly believes that the proposed
rule will improve the mortgage loan settlement process through better
disclosures to consumers, but greater consumer protection can be
achieved by also strengthening certain statutory disclosure
requirements and improving the remedies available under RESPA.
In today's proposed rule, HUD seeks to ensure that consumers are
provided with meaningful and timely information. While HUD can make
certain regulatory improvements to the disclosures that will help
consumers shop for mortgage loans, HUD needs additional statutory
authority to make further warranted improvements in disclosures that
will help consumers understand the final terms of the loans and costs
to which they commit at closing. Moreover, as currently framed, RESPA
establishes limited and inconsistent enforcement authority, and does
not provide HUD with any enforcement authority for key disclosure
provisions. The 1998 joint report by HUD and the Federal Reserve on
reform of RESPA and the Truth in Lending Act recommended that RESPA be
amended to provide for more effective enforcement.\4\ In its April 2007
report on the title insurance industry, the Government Accountability
Office recommended that Congress consider whether modifications to
RESPA are needed to better achieve its purposes, including by providing
HUD with increased enforcement authority.\5\
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\4\ See Section III of this preamble.
\5\ Title Insurance: Actions Needed to Improve Oversight of the
Title Industry and Better Protect Consumers, Government
Accountability Office, April 2007, GAO-07-401.
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As part of its efforts to improve the protections provided under
RESPA, HUD intends to seek statutory modifications that would include
the following provisions: (1) Authority for the Secretary to impose
civil money penalties for violations of specific RESPA sections,
including sections 4 (provision of uniform settlement statement), 5
(GFE and special information (settlement costs) booklet), 6
(servicing), 8 (prohibition against kickbacks, referral fees, and
unearned fees), 9 (title insurance), and portions of 10 (escrow
accounts), as well as authority for the Secretary and State regulators
to seek injunctive and equitable relief for violations of RESPA; (2)
requiring delivery of the HUD-1 to the borrower 3 days prior to
closing; and (3) a uniform and expanded statute of limitations
applicable to governmental and private actions under RESPA.
RESPA does not currently provide HUD with enforcement mechanisms
for some of the most important consumer disclosures, including the
section 4 requirements related to provision of the HUD-1, and section 5
requirements related to provision of the GFE and the special
information (settlement costs) booklet. HUD believes that a lack of
enforcement authority and of clear remedies for violations of critical
sections of RESPA negatively impacts consumers and diminishes the
effectiveness of the statute. Accordingly, HUD intends to seek
authority to impose civil money penalties to enforce violations of
RESPA. In addition to civil money penalty authority, HUD intends to
seek authority for additional injunctive and equitable remedies for
violations of RESPA.
Improving the ability of consumers to shop for the best mortgage
loan and control settlement costs--using the new GFE form and comparing
it to the HUD-1 at closing--is a key component of today's proposed
rule. Additional statutory authority would enable HUD to improve its
efforts at providing borrowers with necessary and timely information
about their mortgage loans and other settlement services. Section 4 of
RESPA currently provides that a borrower may request to inspect the
HUD-1 the day before settlement, but many borrowers are unaware of this
right, and the time currently provided to inspect the HUD-1 allows
little margin for identifying and challenging problematic charges
before settlement.
HUD also intends to seek reform of the statute of limitations
provisions of RESPA. Currently, there are different limitation periods
depending on which section of the statute is alleged to have been
violated, and who is pursuing a remedy of the violation. HUD believes
that enforcement efforts would be enhanced, and the requirements of the
statute simplified, by standardizing the statute of limitations.
C. Federal Reserve Board Proposed Rule Amending Regulation Z
On January 9, 2008, the Federal Reserve Board (Board) issued a
proposed rule that would amend its Regulation Z which implements the
Truth in Lending Act, 16 U.S.C. 1601, et seq. (73 FR 1672, January 9,
2008). The proposed rule is intended to accomplish three goals: (1) To
protect consumers in the mortgage market from unfair, abusive, or
deceptive lending and servicing practices while preserving responsible
lending and sustainable homeownership; (2) to ensure that mortgage loan
advertisements provide accurate and balanced information and
[[Page 14034]]
do not include misleading or deceptive representations; and (3) to
require earlier mortgage disclosures for non-purchase money mortgage
transactions which would include mortgage refinancings, closed-end home
equity loans, and reverse mortgages (73 FR 1672).
In its proposal, the Board would establish new protections for
higher-priced mortgages, a newly defined category of loans, and for all
mortgage loans. The proposed rule contains four key protections for
higher-priced mortgage loans to prohibit creditors from: (1) Engaging
in a pattern or practice of extending credit based on the collateral
without regard to the consumer's ability to repay; (2) making a loan
without verifying the income and assets relied upon to make the loan;
(3) imposing prepayment penalties in certain circumstances; and (4)
making loans without establishing escrows for taxes and insurance (73
FR 1673).
The Board also proposes, for all mortgage transactions, to prohibit
creditors from paying mortgage brokers more than the consumer agreed
the broker would receive. Specifically, the proposed rule would
prohibit a creditor from making a payment, ``directly or indirectly, to
a mortgage broker unless the broker enters into an agreement with a
consumer'' (73 FR 1725). Further, a creditor payment to a mortgage
broker could not exceed the total amount of compensation stated in the
written agreement, reduced by any amounts paid directly by the consumer
or by any other source (Id).
In proposing the mortgage broker agreement, the Board recognizes
HUD's current policy statements and regulatory requirements regarding
disclosure of mortgage broker compensation and noted that HUD had
announced its intention to propose improved disclosures under RESPA (73
FR 1700). The Board stated that it intends that its proposal ``* * *
would complement any proposal by HUD and operate in combination with
that proposal to meet the agencies' shared objectives of fair and
transparent markets for mortgage loans and for mortgage brokerage
services.''
HUD believes its proposals regarding the GFE and mortgage broker
compensation are consistent with those of the Board. As HUD moves
forward to finalize this rule, it will continue to work with the Board
to make the respective rules consistent, comprehensive, and
complementary.
D. Planned Implementation of Final Rule
Given the significant changes that would be made in its RESPA
regulations by this proposed rule, the Department intends to include a
transition period in the final rule. During the 12-month transition
period, settlement service providers and other persons may comply with
either the current requirements or the revised requirements of the
amended provisions. HUD is seeking comments on whether such a
transition period is appropriate.
E. The GFE and GFE Requirements
Problems Identified with the Existing GFE. Under RESPA, loan
originators must provide a GFE of the borrower's settlement costs
(along with HUD's Special Information Booklet in home purchase
transactions) at or within 3 days of a mortgage loan application. RESPA
authorizes HUD to prescribe regulations concerning the GFE, and HUD's
regulations at 24 CFR 3500.7, along with the suggested format set forth
in Appendix C to the regulations, constitute the current GFE guidance.
At the closing, a borrower must receive the Uniform Settlement
Statement (HUD-1 or HUD-1A), which itemizes final settlement charges to
borrowers. The regulations at 24 CFR 3500.8-3500.10 and the
instructions in Appendix A to the regulations specify HUD's
requirements for the HUD-1/1A.
HUD believes that the GFE could better facilitate borrowers
shopping for the best loan. Further, the GFE could better achieve the
statute's purposes of preventing unnecessarily high settlement costs by
requiring a more accurate and consistent presentation of costs. The
regulations do not require that the GFE be given to the borrower until
after he or she submits a full application to an originator. This can
result in a borrower paying significant fees before receiving a GFE,
inhibiting the possibility of shopping beyond the provider with whom
the applicant first applies. HUD's RESPA regulations require that the
GFE include a list of charges but they do not prescribe a standard
form. Consequently, it is virtually impossible to shop and compare the
charges of various originators and settlement service providers using
the GFE, because different originators may list different types or
categories of charges, or may identify specific charges by different
names, or both. The current regulations also do not require that the
GFE contain information on the terms of loans, such as the loan's
interest rate, for purposes of comparison. Further, while the HUD
Special Information Booklet supplements the GFE, the GFE does not
provide certain important explanatory information to the borrower
including, for example, how the borrower can use the document to shop
and compare loans. The GFE also does not make clear the relationship
between the closing costs and the interest rate on a loan.
HUD's current regulations require loan originators to list on the
GFE the ``amount of or range of'' each charge that the borrower is
likely to incur in connection with the settlement.\6\ The suggested GFE
format, found in Appendix C to the regulations, lists 20 common
settlement services. The suggested format also provides a space for
listing any other applicable services and charges. These requirements
have led, in many instances, to a proliferation of charges for separate
``services'' without any actual increase in the work performed by
individual settlement service providers.
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\6\ 24 CFR 3500.7(a).
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The RESPA regulations do not require that the GFE clearly identify
the total charges of major providers of settlement services, including
lenders and brokers (loan originators), title agents and insurers
(title charges), and other third party settlement service providers.
Without the simplification provided by presenting totals for major
items, it is difficult for borrowers to know how much they are paying
for major items, including origination and title related charges, or
how they can compare loans and select among service providers to get
the best value.
The estimated costs on GFEs are frequently unreliable or
incomplete, or both, and final charges at settlement often include
significant increases in items that were estimated on the GFE, as well
as additional surprise ``junk fees,'' which can add substantially to
the consumer's ultimate closing costs.
New GFE Requirements. In light of these considerations, HUD
believes that in order for the GFE to better serve its intended
purpose, which is to apprise borrowers of the charges they are likely
to incur at settlement, a number of specific changes to the GFE
requirements are required to make it firmer and more useable.
Accordingly, today's proposed rule would establish a new required GFE
form to be provided to borrowers by loan originators in all RESPA
covered transactions.\7\ HUD
[[Page 14035]]
believes that the content of the material in the proposed form gives
the consumer the information needed to shop for loan products and to
assist them during the settlement process. The Department seeks public
comment on the proposed GFE, as well as the proposed HUD-1/1A
Settlement Statement forms. The following sections address the proposed
changes, and, where appropriate, include a summary of comments received
on the issue in response to the 2002 Proposed Rule, as well as comments
voiced during the 2005 RESPA Reform Roundtables.
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\7\ HUD's RESPA rules currently provide that in the case of a
federally related mortgage loan involving an open-end line of credit
(home equity plan) covered under the Truth in Lending Act and
Regulation Z, a lender or broker that provides the borrower with the
disclosures required by 12 CFR 226.5b of Regulation Z at the time
the borrower applies for such loan shall be deemed to comply with
GFE requirements set forth at 24 CFR 3500.7. Nothing in this
proposed rule is intended to change this provision.
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1. Changes to Facilitate Shopping
The Proposed Rule. Today's rule proposes to establish a new
definition for a ``GFE application'' and a separate new definition for
``mortgage application.'' The GFE application would be comprised of
those items of information that the borrower would submit to receive a
GFE. Such an application would include only such information as the
originator considered necessary to arrive at a preliminary credit
decision and provide the borrower a GFE. Specifically, a GFE
application would include six items of information (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) in order to
enable a loan originator to make a preliminary credit decision
concerning the borrower. The proposed rule will also require that the
GFE application be in writing or in computer-generated form. Oral
applications can be accepted at the option of the lender. In such
cases, the lender must reduce the oral application to a written or
electronic record.
The proposed rule also provides that when a borrower chooses to
proceed with a particular loan originator, the loan originator may
require that the borrower provide a ``mortgage application'' to begin
final underwriting. The mortgage application will ordinarily expand on
the information provided in the GFE application, including bank and
security accounts and employment information as well as asset and
liability information and all the other information that the originator
requires to underwrite the loan.
To facilitate shopping and lower the cost burden of shopping on
consumers and industry alike, the proposed rule would not require that
all underwriting information be supplied at the GFE application stage.
Nevertheless, borrowers must be protected against ``bait and switch.''
Accordingly, the proposed rule provides that during final underwriting,
the originator may verify the information in and developed from the GFE
application, including employment and income information, ascertain the
value of the property to secure the loan, update the credit analysis,
and analyze any relevant information collected in the entire
application process, including, but not limited to, information on the
borrower's assets and liabilities. However, borrowers may not be
rejected unless the originator determines that there is a change in the
borrower's eligibility based on final underwriting, as compared to
information provided in the GFE application and credit information
developed for such application prior to the time the borrower chooses
the particular originator.\8\ The originator must document the basis
for any such determination and keep these records for no less than 3
years after settlement, in accordance with proposed subsection 24 CFR
3500.7(f)(1)(iii).
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\8\ Unforeseeable circumstances resulting in a change in the
borrower's eligibility may also be a basis for rejecting the
borrower. Unforeseeable circumstances are also discussed in Section
8(b) below.
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Where a borrower is rejected for a loan for which a GFE has been
issued, and another loan product is available to the borrower, the loan
originator must provide the borrower with a revised GFE. Where a
borrower is rejected, the borrower must be notified within one business
day and the applicable notice requirements satisfied.
Loan originators will provide GFEs based on the GFE applications
that are memorialized in writing or electronic form. A separate GFE
must be provided for each loan where a transaction will involve more
than one mortgage loan. For loans covered by RESPA, Truth in Lending
Act (TILA) disclosures would also be provided within 3 days of a
written GFE application, unless the creditor, i.e., loan originator,
determines that the application cannot be approved on the terms
requested. (See comments 19(a)(1)-3 and 4 of the Federal Reserve
Board's Official Staff Commentary on the Truth in Lending Act (TILA).)
Based on consultations with representatives of the Federal Reserve,
when a GFE application is submitted, an initial TILA disclosure should
also be provided so long as the application is in writing, or, in the
case of an oral application, committed to written or electronic form.
By obtaining multiple GFEs, borrowers will be in a position to
decide which loan provider and which mortgage product they wish to
select. When the borrower makes those decisions, the borrower will
notify the originator, who may then require a more comprehensive
``mortgage application,'' and possibly a fee or fees, to initiate the
loan origination. As indicated, this application would consist of the
more detailed information required by the originator, submitted in
order to obtain a final underwriting decision, leading to origination
of a mortgage loan.\9\
---------------------------------------------------------------------------
\9\ HUD anticipates that in most cases a mortgage application
will be the Uniform Residential Loan Application, Freddie Mac Form
65, or Fannie Mae Form 1003.
---------------------------------------------------------------------------
Discussion. Under RESPA, a GFE must be provided to a borrower at or
within 3 days of application. HUD's current regulations define an
application as the ``submission of a borrower's financial information
in anticipation of a credit decision, whether written or computer
generated, relating to a federally related mortgage loan'' identifying
a specific property.\10\ The 2002 Proposed Rule sought to make GFEs
more readily available to consumers and, therefore, more useful as a
shopping tool by clarifying the minimum information needed to obtain a
GFE and by broadening the rules to allow oral applications, consistent
with earlier informal interpretations by HUD, so long as such requests
contained sufficient information for the originator to provide a GFE.
Accordingly, the 2002 Proposed Rule also revised the definition of
``application'' in the regulations to make it clear that an application
would be deemed to exist, and that the GFE should be provided once the
consumer provided sufficient information to enable a loan originator to
make an initial determination regarding the borrower's creditworthiness
(typically, a Social Security number, a property address, basic income
information, the borrower's information on the house price or best
estimate of the value of the property, and the mortgage loan amount
needed), whether orally, in writing or computer-generated. The GFE
would be given to the borrower, conditioned on final loan approval
following full underwriting and appraisal of the property securing the
mortgage.
---------------------------------------------------------------------------
\10\ 24 CFR 3500.2.
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HUD acknowledged in the 2002 Proposed Rule that the proposed
changes in the definition of ``application'' and the requirement that a
GFE be provided to prospective borrowers early in the shopping process
[[Page 14036]]
might have implications for the content and delivery of required
disclosures under TILA requirements. As a result, HUD invited comments
on how the proposed GFE changes might impact other disclosure
requirements, and also invited comments on how the proposed GFE changes
could be harmonized with the other disclosure requirements.
As indicated above, under today's proposal, the definition of ``GFE
application'' provides the trigger for initial RESPA disclosures. After
a consumer decides to proceed with a particular loan originator's GFE,
the loan originator will generally require a separate ``mortgage
application'' as defined under this proposed rule, before making a
credit decision. Consumer representatives recommended that HUD consult
with the Federal Reserve Board to coordinate the timing of RESPA and
TILA disclosures. Industry commenters on the 2002 Proposed Rule were
generally concerned that HUD's proposal to require disclosures earlier
in consumers' process of shopping for a mortgage would trigger
requirements under the Home Mortgage Disclosure Act (HMDA) and the
Equal Credit Opportunity Act (ECOA).
By refining the definition of ``application'' under RESPA, and
dividing the application process as described, HUD believes that
today's proposal will facilitate the availability of shopping
information and avoid unnecessary regulatory burden on the industry and
an unwarranted increase in notices of loan denials to borrowers.
Whether a GFE application under a particular set of facts triggers HMDA
or ECOA requirements must be determined under Regulation B and
Regulation C, as interpreted in the Federal Reserve Board's official
staff commentary. It should be noted that by proposing such a change to
the current definition of ``application,'' HUD does not intend to
prevent a loan originator from prequalifying a borrower for a mortgage
loan.
2. Addressing Up-Front Fees That Impede Shopping
The Proposed Rule. The proposal would allow a loan originator, at
its option, to collect a fee limited to the cost of providing the GFE,
including the cost of an initial credit report, as a condition for
providing a GFE to the prospective borrower.
Discussion. HUD would prefer that originators not impose any
charges for a GFE, since providing a GFE before the payment of any fee
will further facilitate shopping. HUD believes it would be reasonable
for loan originators to treat shoppers for mortgages in much the same
way other retailers treat shoppers, where the price of the product
includes marketing expenses and purchasers pay the cost incurred to
serve shoppers who do not purchase the goods or services. Such an
approach would better serve the purposes of the statute. However, HUD
recognizes that there may be incidental or nominal costs to provide
GFEs to prospective borrowers. Therefore, in order to facilitate
shopping using GFEs, the proposed rule would allow a loan originator,
at its option, to collect a fee limited to the cost of providing the
GFE, including the cost of an initial credit report, as a condition for
providing a GFE to a prospective borrower. HUD is interested in
receiving comments on this approach.
3. Introductory Language
The Proposed Rule. The proposed GFE explains to the borrower: (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) informs the borrower that he or she is the ``* * * only one who can
shop for the best loan for you. You should compare this GFE with other
loan offers. By comparing loan offers, you can shop for the best
loan.''
Discussion. The GFE proposed today informs the borrower that he or
she is the only one who can shop for the best loan. HUD believes that
this formulation should be useful to consumers dealing with all types
of loan originators.
The 2002 Proposed Rule had included language in this section of the
previously proposed GFE that was intended to describe the role of the
loan originator and to encourage borrowers to shop for themselves.
Comments both from consumer groups and industry generally favored
removing language on the GFE that discussed the role of the loan
originator, on the grounds that the language was misleading, confusing,
and might conflict with state law. AARP, however, supported retaining
the portion of the proposed language that encourages the borrower to
shop among loan originators.
In light of the comments received on the 2002 proposal, today's
proposed GFE does not include any language on the role of the loan
originator. Instead, the language on the proposed GFE informs the
consumer that he or she is the only one who can shop for the best loan.
4. Terms on the GFE (Summary of Loan Details)
The Proposed Rule. The proposed GFE includes a summary of the key
terms of the loan. The form discloses 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 discloses whether the interest rate
can rise, whether the loan balance can rise; whether the monthly amount
owed for principal, interest and any mortgage insurance can rise;
whether the loan has a prepayment penalty or a balloon payment and
whether the loan includes a monthly escrow payment for property taxes
and possibly other obligations. HUD is requiring the terms ``prepayment
penalty'' and ``balloon payment'' to be interpreted consistent with
TILA (15 U.S.C. 1601 et seq.). The Annual Percentage Rate (APR) is not
included on the proposed GFE.
Discussion. One of HUD's objectives in proposing revisions to the
current RESPA regulations is to ensure that consumers are able to use
page one of the GFE to comparison shop among loan originators for a
mortgage loan. Accordingly, page one of the proposed GFE contains a
summary of the loan terms and details, as well as a summary of the
total estimated settlement charges for the loan. The new summary format
of page one of the proposed GFE with its list of important loan terms
will increase consumer awareness and allow borrowers the opportunity to
shop among loan originators and easily compare various loan offers.
The proposed GFE is designed to provide clear information on both
fixed and adjustable rate mortgages. The disclosure of terms on the
latter is complicated due to their variable structure and to future
changes in interest rates. Adjustable rate mortgages have recently
experienced high default rates. HUD seeks comment on possible
additional ways to increase consumer understanding of adjustable rate
mortgages.
The 2002 proposed GFE advised the borrower of the terms of the
mortgage and included the interest rate and the APR. It also advised
the borrower whether or not the loan had a prepayment penalty or
balloon payment, and whether the loan had an adjustable rate and, if
so, its terms. Comments on the 2002 GFE primarily concerned whether it
should include information also appearing on the TILA disclosure.
Consumers generally supported the inclusion of TILA disclosure
information on the GFE. Lenders generally recommended that information
appearing on TILA disclosures should be removed from the GFE because
borrowers will continue to receive separate TILA disclosure forms, and
inclusion on the GFE is unnecessary and would potentially lead
[[Page 14037]]
to borrower confusion. Some participants at the RESPA Reform
Roundtables suggested that more information on new loan products such
as interest-only loans should be included on the GFE.
While mindful of the need to present consumers with key loan
information on the GFE, HUD has determined not to include the APR on
today's proposed GFE. The APR is central to the TILA disclosure that
will be provided in purchase transactions at the same time as the GFE
and ordinarily at the same time in other transactions. However, the
terms ``prepayment penalty'' and ``balloon payment'' have been retained
on the form to facilitate consumer shopping, even though these terms
are also included on the TILA disclosure.
With respect to today's proposed GFE, HUD notes that there are
differences between how the GFE discloses the monthly payment and how
the TILA form will disclose the monthly payment. Specifically, the
proposed GFE requires disclosure of principal, interest, and any
mortgage insurance, while the TILA disclosure may include amounts for
taxes. HUD will revise its Special Information Booklet to explain this
difference, to avoid consumer confusion.
The interest rate listed on the GFE will reflect the loan offered
at the time the GFE is given. Until locked in, the interest rate will
float. For loans originated by mortgage brokers, the amount of any
``charge or credit to the borrower for the specific interest rate
chosen'' will float with the wholesale market.\11\ This is because
mortgage brokers must report the precise difference between the price
of the loan and its par value in the ``charge or credit for the
specific interest rate chosen.'' As a result, borrowers who use brokers
as defined in this proposed rule and choose to float will float
according to wholesale lenders' changes.
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\11\ The ``charge or credit for the interest rate chosen''
concerns the discount points and the yield spread premium that are
further discussed in Section C of this preamble.
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Current federal regulations allow originators to provide GFE and
TILA information together.\12\ However, the proposed GFE is designed as
a distinct, required form to promote shopping by consumers. HUD
believes it is best complemented by providing a separate TILA
disclosure along with the GFE.
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\12\ 24 CFR 3500.7(d).
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5. Period During Which the GFE Terms Are Available to the Borrower
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 estimate of the charges
for all other settlement services would be available until 10 business
days from when the GFE is provided, but it may remain available longer,
if the loan originator extends the period of availability.
Discussion. In order to promote competition while avoiding
committing originators to open-ended offers, the 2002 Proposed Rule
would have required that the GFE be held open for a minimum of 30 days.
Commenters on the 2002 Proposed Rule were specifically asked whether 30
days was an appropriate period, and considerable comment was elicited
on this subject. A major consumer group supported the 30-day period,
while the majority of lenders commenting on the 2002 proposal
recommended a 10-day shopping period or less.
Today's proposed rule reflects HUD's determination that the
appropriate period for which GFE terms are generally to be available is
10 business days, excluding the interest rate of the loan set forth in
the GFE, some of the loan origination charges related to the interest
rate, the per diem interest, and the monthly payment estimate. 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.
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. By requiring
that the GFE terms be generally available for 10 business days, GFEs
will be effectively open for 2 weeks, thereby providing borrowers with
sufficient time to shop among various offers and providers. Borrowers
may request, and originators at their option may lengthen the shopping
period for a loan or loans beyond 10 business days. In such cases, the
originator should note and initial the increased duration the GFE is
open on the borrower's GFE.
6. Consolidating Major Categories on the GFE
The Proposed Rule. The proposed GFE would group and consolidate all
fees and charges into major settlement cost categories, with a single
total amount estimated for each category.
Discussion. Under current RESPA rules, the GFE simply lists
estimated charges or ranges of charges for settlement services. There
is no requirement for grouping or subtotaling charges to the same
recipients. The costs listed on the GFE include loan originator charges
such as loan origination and underwriting charges; charges by third
parties for lender-required services, such as appraisal, title, and
title insurance fees; state and local charges imposed at settlement
such as recording fees or city/county stamps; and amounts the borrower
is required to put into an escrow account, or reserves, for items such
as property taxes or hazard insurance. At settlement, borrowers receive
a second RESPA disclosure--the Uniform Settlement Statement (the HUD-1/
1A) that enumerates the final costs associated with both the loan and,
if applicable, the purchase transaction.
The proposed GFE would group and consolidate all fees and charges
into major settlement cost categories, with a single total amount
estimated for each category. This approach would reduce any incentive
for loan originators and others to establish a myriad of ``junk fees''
and provide them in a long list in order to increase their profits.
In the 2002 Proposed Rule, HUD had proposed a GFE that grouped and
consolidated charges into major cost categories, with a single total
amount for each category. In commenting on the 2002 proposal, consumer
groups were split on the best approach to addressing fee proliferation
on the GFE. AARP strongly supported consolidation of major cost
categories, and recommended that HUD's proposed categories be further
consolidated into three categories for enhanced consumer comprehension.
The National Consumer Law Center (NCLC) filed comments on its own
behalf, and on behalf of the Consumer Federation of America, National
Association of Consumer Advocates, Consumers Union, and U.S. Public
Interest Research Group. These commenters noted that while subtotaling
is helpful to consumers, itemization on the HUD-1 is necessary to
ensure that compliance with TILA and the Home Ownership and Equity
Protection Act (HOEPA) can be determined. The National Community
Reinvestment Coalition and the National Center on Poverty Law indicated
their belief that the
[[Page 14038]]
tolerance \13\ levels will address the issue of proliferation of fees,
and commented that the GFE must be as similar as possible to the HUD-1
for comparison purposes. Lenders who commented on this proposed change
to the GFE in 2002 expressed concern that lumping costs together in
large categories will confuse consumers when they compare data on the
GFE with data on the HUD-1/1A.
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\13\ ``Tolerance'' refers to the maximum amount by which the
charge for a category of settlement costs may exceed the amount of
the estimate for such category on a GFE, and is expressed as a
percentage of an estimate. See Section (h) below.
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Having considered the results of consumer testing of the forms as
detailed below in Section F and comments received on the 2002 Proposed
Rule, HUD has determined to propose a standardized GFE, containing
major cost categories, to facilitate better borrower understanding of
settlement services and their costs, and empower borrowers to shop,
compare, and negotiate major cost items where possible. HUD is not
proposing to further consolidate the categories, because it believes
that each of the proposed categories provides useful information to
borrowers. Although today's proposed GFE does not itemize the services
required in each category, it does explain to the borrower the exact
nature of each category of services. For example, origination services
are characterized as the services and charges to obtain and process the
loan for the borrower. HUD also regards the information on required
services that can and cannot be shopped for as useful information that
borrowers should have in choosing an originator and later to facilitate
shopping for services to lower costs.
HUD's current RESPA regulations require that the GFE include a list
of any lender-required providers, including the name, address and
telephone number of the provider and the nature of the lender's
relationship with the provider. Under today's proposed rule, if the
lender requires the use of a particular provider other than its own
employees, and requires the borrower to pay any portion of such
service, the lender must identify on the GFE the service, and the
estimated cost or range of charges for the service. HUD has determined
to eliminate the requirement to identify the name of the required
service provider, because it believes that consumers will use the GFE
to shop among loan originators based on cost rather than on the
identity of individual settlement service providers.
Where a lender permits a borrower to shop for a required settlement
service, under today's proposed rule the lender must provide the
borrower with a written list of identified providers at the time the
GFE is provided. Such a list may be included on the GFE form or on a
separate sheet of paper.
The GFE set forth in the 2002 Proposed Rule would also have
referenced the corresponding series on the HUD-1, to facilitate
comparison between the GFE and HUD-1. While these references have been
removed in the GFE proposed today in the interest of simplifying the
form, HUD is also proposing changes to the HUD-1/1A to facilitate
comparison of the GFE to the HUD-1/1A. Section II.D. of this preamble
discusses today's proposed changes to the HUD-1/1A.
Pursuant to 24 CFR 3500.15, originators seeking to satisfy the
requirements for the affiliated business exemption must provide the
requisite affiliated business arrangement disclosure at the time of any
referral to an affiliated settlement service provider. The GFE proposed
by today's Proposed Rule does not attempt to include this information.
However, under HUD's existing RESPA regulations, the affiliated
business disclosure must be given on a separate form consistent with
Appendix D of HUD's existing regulations. Where such a referral occurs
at the time a GFE is given, the affiliated business disclosure must be
given along with the GFE.
7. Option to Pay Settlement Costs
The Proposed Rule. The GFE Form shall advise the borrower how the
interest rate of the loan affects the borrower's settlement costs, and
shall include actual available options in this regard on the form.
Discussion. In addressing the problem of lender payments to
mortgage brokers in the 1999 and 2001 Policy Statements,\14\ HUD made
it clear that consumers should be advised as early as possible when
shopping for a loan of how their interest rate affects their settlement
costs and that their options in this regard should be presented on the
GFE form. In order to decide which rate/cost combination is best, HUD
regards it as essential that borrowers be presented actual offers of
the loan originator on the chart on page 3 of today's proposed GFE. The
GFE would inform borrowers that: (1) They can choose the loan presented
in the GFE; (2) they can choose an otherwise identical loan with a
lower interest rate and monthly payments that will raise settlement
costs by a specific amount; or (3) they can choose 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 is not in fact available from the originator, the
originator must provide those options that are available and indicate
``not available'' on the form for those options that are not available.
While some commenters on the 2002 Proposed Rule recommended that HUD
require loan originators to feature specific types of loans on the loan
option chart on the GFE, HUD does not believe that it should impose
requirements on loan originators on what types of loans are offered to
borrowers. Therefore, HUD does not propose such requirements in today's
proposed rule. HUD's consumer testing has demonstrated that consumers
responded very positively to the trade-off chart on the GFE that
presents information on different interest rates and up-front fees. In
fact, this was the feature that consumers liked best about the form.
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\14\ 64 FR 10080 (March 1, 1999), 66 FR 53052 (October 18,
2001).
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The provision of this information on page 3 of the form will help
borrowers understand their options for paying settlement costs. If the
borrower chooses one of the two alternative options presented on the
form, the borrower must receive a new GFE.
8. Establishing Meaningful Standards for GFEs
a. Tolerances.
The Proposed Rule. The proposal would prohibit loan originators
from exceeding at settlement the amount listed as ``our service
charge'' on the GFE, absent unforeseeable circumstances. The charge or
the credit to the borrower for the interest rate chosen, if the
interest rate is locked, absent unforeseeable circumstances, also
cannot be exceeded at settlement. The proposal would also prohibit Item
A on the GFE, ``Your Adjusted Origination Charges'' from increasing at
settlement once the interest rate is locked. In addition, the proposal
would prohibit government recording and transfer charges from
increasing at settlement, absent unforeseeable circumstances. The
proposal would prohibit 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) from increasing at settlement
by more than 10 percent absent unforeseeable
[[Page 14039]]
circumstances. Thus, a specific charge may increase by more than 10
percent at settlement, so long as the sum of all the services subject
to the 10 percent tolerance does not increase by more than 10 percent.
Discussion. Current RESPA regulations at 24 CFR 3500.7(a) require a
lender to provide a ``good faith estimate'' of the ``amount of or range
of charges for the specific settlement services the borrower is likely
to incur in connection with the settlement.'' While the rules require
that the estimate be made ``in good faith'' and ``bear a reasonable
relationship'' to the charges the borrower is likely to incur at
settlement, HUD is proposing to clarify what a ``Good Faith Estimate''
demands, both with regard to the loan originator's own charges, as well
as to lender-selected, third party charges and other settlement costs.
Estimates appearing on the GFEs can be significantly lower than the
amount ultimately charged at settlement and do not provide meaningful
guidance on the costs borrowers will incur at settlement. While
unforeseeable circumstances can drive up costs in particular
circumstances, in most cases loan originators have the ability to
estimate final settlement costs with great accuracy. The loan
originator's own charges, which are entirely within the originator's
control, can be stated with certainty, absent unforeseeable
circumstances. Government recording and transfer charges are well known
to loan originators or can be calculated based on the purchase price or
value of the property. Moreover, many third party costs such as credit
report fees, pest inspection fees, tax services, and flood reviews are
readily ascertainable. Other third party costs such as title services
and title insurance and up-front mortgage insurance premiums, typically
only vary depending on the value of the property or the loan amount.
HUD also is aware that recent advances in technology and
telecommunications in loan processing make routine provision of
accurate estimates of third party costs easier and cheaper.
Some borrowers have indicated that the GFE has often failed to
represent an accurate estimate of final settlement costs, for a number
of reasons. In too many cases, fees that were not included on the GFE
materialize at settlement. These unexpected fees often result in extra
compensation for the originator and/or the third party settlement
service providers and in higher charges to the borrower. The absence of
more precise regulatory standards for providing a good faith estimate
of final settlement costs has not helped ensure greater accuracy and
reliability.
In light of these considerations, HUD believes that in order for
the GFE to serve its intended purpose, which is to apprise prospective
borrowers of the charges they are likely to incur at settlement, new
standards must be established under existing law to better define good
faith'' and the standards applicable to the GFE.\15\ Accordingly, the
proposed rule states that loan originators may not increase their own
charges (the service charge) from that stated on the GFE, absent
``unforeseeable circumstances.'' Government recording and transfer
charges would also not be able to increase at settlement, absent
``unforeseeable circumstances.'' While the interest rate is locked, the
charge or the credit to the borrower for the interest rate chosen also
cannot be exceeded at settlement, absent ``unforeseeable
circumstances.'' While fees for the service charge have a ``zero
tolerance'' under the proposed rule, absent unforeseeable
circumstances, the sum of all the other services subject to a
tolerance--required services the loan originator selects, title and
closing services, lender's title insurance and optional owner's title
insurance if chosen or identified by the originator, and required
services that borrowers can shop for when the borrower elects to use
the provider identified by the originator--would be subject to a single
overall 10 percent tolerance. Thus, a specific charge may increase by
more than 10 percent, so long as the total does not increase by more
than 10 percent.
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\15\ Differing editions of Black's Law Dictionary have defined
``good faith'' as a ``state of mind consisting in * * * honesty in
belief or purpose * * * and faithfulness to one's duty or
obligation,'' and ``freedom from knowledge of circumstances which
ought to put the holder upon inquiry,'' as well as ``absence of all
information, notice, or benefit or belief of facts which render a
transaction unconscientious.'' Inherent in these definitions is the
concept that where a party makes an estimate in good faith, the
party will take into account all available relevant information, and
will exercise reasonable care in evaluating such information before
providing such an estimate.
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The subject of tolerances received considerable attention from
commenters in the 2002 proposed RESPA rulemaking, as well as during the
RESPA Reform Roundtables. Generally, lending industry groups commenting
on the 2002 Proposed Rule opposed tolerances on the grounds that
settlement costs are extremely variable and subject to change after
appraisal and underwriting. Many other comments from lenders on the
2002 Proposed Rule noted that costs often change after property
appraisal and as a result of borrower product changes or changes in the
loan amount or closing date. Consumer groups, on the other hand,
supported tolerances as a means to prevent ``bait and switch'' tactics
by loan originators. Regulators, including the Conference of State Bank
Supervisors and the American Association of Residential Mortgage
Regulators, were generally supportive of tolerances. During the RESPA
reform roundtables, many participants who expressed comments on the
need for tolerances agreed that it is possible to get solid estimates
of costs at the GFE stage, while others expressed concern that a 10
percent tolerance level is too strict.
In its written comments in response to the 2002 Proposed Rule, the
American Land Title Association (ALTA) questioned HUD's authority to
adopt tolerances in light of the legislative history of the good faith
estimate requirement in Section 5(c) of RESPA. ALTA noted that as part
of the original RESPA statute, Congress enacted a separate section that
required lenders, at the time of loan commitment, but not later than 12
days prior to settlement, to provide the prospective buyer and seller
with an ``itemized disclosure in writing of each charge arising in
connection with the settlement.'' Section 6 of the original statute
imposed a duty on the lender to obtain from persons who were to provide
services in connection with the settlement ``the amount of each charge
they intend to make.'' If the exact charge was not available, a good
faith estimate could be provided. Section 6(b) provided for lender
liability to the buyer or seller for failure to provide the requisite
disclosures in the amount of actual damages or $500, whichever was
greater, and, if the action was successful, attorney's fees and court
costs.
ALTA noted that due to concerns raised by lenders about Section 6,
that provision of RESPA was repealed within one year of enactment.
Congress substituted for Section 6 the language of Section 5(c)
requiring lenders to provide a good faith estimate of settlement costs,
along with a Special Information Booklet, within 3 days of loan
application. ALTA also noted that Congress did not impose any sanctions
for violations of the Section 5(c) obligation. In light of this
legislative history, ALTA contends that HUD does not have statutory
authority to adopt tolerances as proposed.
While mindful of the legislative history of RESPA with respect to
the enactment and later repeal of the section requiring lenders to
provide disclosures of the amount of each charge arising in
[[Page 14040]]
connection with the settlement, HUD believes that the tolerance
approach it is proposing today is distinguishable from the requirement
to provide an itemized disclosure of each charge. Unlike the
requirement in the original Section 6 of RESPA that required lenders to
provide exact figures for individual settlement charges, today's
proposed approach permits considerable flexibility. The proposal would
permit all charges to decrease between the time the GFE is provided and
the date of settlement; all charges may increase in the event of
unforeseeable circumstances; and some third party charges such as
homeowners' insurance are not subject to any tolerance. Moreover,
individual charges for certain third party services that originators
require and either select or identify may increase by more than 10
percent at settlement, as long as the sum of such charges increases by
no more than 10 percent at settlement.
In considering the appropriate tolerance for third party settlement
services on the GFE, HUD considered the available data on the variation
in the cost of title services within individual market areas. Title
services is the largest component of third party settlement service
costs, accounting for slightly over two-thirds of the total among the
sample of Federal Housing Administration (FHA) insured-loans discussed
in the Economic Analysis. A study by Consumers Union on the dispersion
of title costs within each of five large California metropolitan areas
provides the best available data. Consumers Union found that, for four
of the five metropolitan areas--Los Angeles, San Francisco, San Diego,
and Sacramento--the highest reported prices for title services were
between 9.95 percent and 13.84 percent above the average price in the
local market. The exception is Fresno, where the highest price is 27.90
percent above the average. These data indicate that a title insurance
company should be able to remain within about 10 percent of its
originally quoted price, in the event that a particular loan turns out
to involve more extensive title work than originally anticipated. HUD
therefore has concluded that a 10 percent tolerance is reasonable. To
provide a further margin for unexpected cost increases, HUD extended
the 10 percent tolerance per service in the 2002 Proposed Rule to a 10
percent tolerance for the combined total cost of all third party
settlement services selected by the lender. Other services are a much
smaller share of the total cost of third party settlement services, and
therefore increases in their cost are likely to have a much smaller
impact on the combined total cost of all third party settlement
services covered by the 10 percent tolerance.
The proposal also clarifies that if the borrower requests a change
in the type of loan, loan amount, or loan product, or otherwise makes a
change to the mortgage transaction, the originator is not bound by the
original GFE. However, because the borrower is in effect initiating a
new application, today's proposed rule would require that the
originator must either adhere to the original GFE or must redisclose to
the borrower by providing a new GFE, and the originator would then be
subject to the tolerances applicable to that GFE, provided the
originator chooses to accommodate the change and the borrower qualifies
for the change.
In addition, to meet the tolerances, today's proposed rule provides
that originators must include all charges correctly within their
prescribed category on the GFE (and the HUD-1/1A). This means that
third party fees estimated on the GFE must be reported as the estimated
prices to be paid to third parties only, and fees reported on the HUD-
1/1A must not exceed those actually paid to third parties, except where
the prices are based on an average calculated in accordance with
proposed Sec. 3500.8(b)(2). (See Section G discussion on average cost
pricing in this preamble.)
While loan originators are expected to issue a GFE of settlement
costs where a borrower submits a GFE application, in the case of new
construction, settlement costs can change between the time a purchase
contract is signed and settlement. Such estimates are subject to the
provisions regarding unforeseeable circumstances and the provision for
borrower requested changes, including the documentation requirements
discussed below. The proposed rule provides that the loan originator
may provide the GFE to the borrower with a clear and conspicuous
disclosure stating that at any time up until 60 days prior to closing,
the loan originator may issue a revised GFE. If no such disclosure is
provided with the initial GFE, the loan originator would not be able to
issue a revised GFE except as otherwise provided in the rule.
b. Unforeseeable Circumstances
The Proposed Rule. The proposal provides that loan originators
should 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
proposal also provides that if unforeseeable circumstances 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.
Discussion. While tolerances are necessary to provide ``bright
line'' standards for consumers and industry alike, HUD recognizes that
there may be circumstances under which loan originators should not be
held to tolerances. The proposed rule details the circumstances under
which tolerances may not apply, but indicates further that if it is
possible for the loan originator to perform at all in such
circumstances, the loan originator's charges may increase only to the
extent caused by the particular circumstances.
Today's proposed rule defines ``unforeseeable circumstances'' as
either: (1) Acts of God, war, disaster, or other type of emergency that
makes it impossible or impracticable for the originator to perform; or
(2) circumstances that could not be reasonably foreseen at the time of
the GFE application, that are particular to the transaction and that
result in increased costs, such as a change in the property purchase
price, boundary disputes, or environmental problems that were not
described to the loan originator in the GFE application; the need for a
second appraisal; and flood insurance. As with any business
transaction, the borrower has the ability to call off the transaction
in such circumstances. The proposed rule specifically excludes market
fluctuations from being regarded as unforeseeable circumstances.
Where an originator cannot perform or meet the tolerances because
of unforeseeable circumstances, the originator must document the costs
occasioned by the unforeseeable circumstances, and, as indicated,
charge the borrower only the increased costs caused by such
circumstances. Additionally, as indicated, when an increase in costs is
necessary because of unforeseeable circumstances beyond the
originator's control, the borrower should be notified within 3 days of
such charges--as though a new application was filed--before any
additional costs are incurred, and a new GFE reflecting the charges
must be provided to the borrower. Finally, when unforeseeable
circumstances result in a change in a borrower's eligibility for the
loan identified in the GFE, the borrower
[[Page 14041]]
should be notified within one business day of the decision to reject
the loan, and, if another loan is made available to the borrower, a new
GFE must be provided to the borrower. In all cases, the loan originator
must retain appropriate documentation explaining any unforeseeable
circumstances for a transaction for no less than 3 years after
settlement.
9. Important Information for Borrowers
Page 4 of the GFE provides important information for the borrower,
including information on how to apply for the loan set forth in the
GFE. Page 4 also informs borrowers that they may wish to consult
government publications about loans and settlement charges that have
been published by HUD and the Federal Reserve Board. In addition, Page
4 provides important information to borrowers about their financial
responsibilities as homeowners. This section of the GFE notifies the
borrower that in addition to the monthly loan payment for principal,
interest, and mortgage insurance, the borrower will be required to pay
other annual charges to keep the property. The section provides the
borrower with an estimate for annual property taxes, along with
homeowner's flood, and other required property protection insurance,
but estimates for other annual charges such as homeowner's association
fees or condominium fees are not required to be provided on the form.
The section informs the borrower that the borrower may have to identify
such other charges and ask for additional estimates from other sources.
The section also states that such charges will not change based on the
loan originator chosen by the borrower and advises the borrower not to
consider the loan originator's estimates of such charges, when shopping
for the best loan.
Page 4 also notes that lenders can receive additional fees from
other sources by selling the loan at some future date after settlement.
However, the borrower is informed that once the loan is obtained at
settlement, the loan terms, the borrower's adjusted origination
charges, and total settlement charges cannot change.
Page 4 also includes a mortgage shopping chart that allows
borrowers to compare GFEs from different loan originators.
10. Enforcement
The Proposed Rule. Today's proposed rule provides that charging a
fee in excess of the tolerance, or any other failure to follow the GFE
requirements, constitutes a violation of Section 5 of RESPA. As
discussed below, HUD is also considering a provision that would allow
loan originators a limited period of time to remedy any potential
violations of the tolerances established under the rule, and thereby
ease their possible exposure to liability for such violations.
Discussion. In enacting RESPA, Congress sought to protect consumers
from unnecessarily high settlement charges. Accordingly, HUD believes
that charging of a fee in excess of the tolerance, or other failure to
follow the GFE requirements, constitutes a violation of Section 5 of
RESPA.
HUD is soliciting comments on whether to add a provision to HUD's
regulations that would allow loan originators, for a limited time after
closing, to address the failure to comply with tolerances under HUD's
GFE requirements, and if so, how such a provision should be structured.
HUD is considering providing in the final rule that if, within a
specified period (such as 14 business days) after the closing, a loan
originator identifies a charge that exceeded the tolerance and repays
the excess amount of the charge to the consumer within the specified
period, the loan originator would be in compliance with Section 5. HUD
is interested in commenters' views on whether such a procedure would be
useful, and if so, what would be the appropriate time frame for finding
and refunding excess charges. HUD is also soliciting comments on
whether such a provision could be abused and therefore harmful to
consumers, and whether the ability of prosecutors to exercise
enforcement discretion obviates the need for such a provision.
F. Lender Payments to Mortgage Brokers--Yield Spread Premium (YSP)
Background. Lenders routinely provide the funds for mortgages that
mortgage brokers originate for borrowers. Mortgage brokers also may be
compensated for their services in originating the mortgage by the
borrower and/or the lender. When the interest rate on the loan exceeds
the par interest rate of the lender, the lender pays the broker at
closing an amount in excess of the principal amount of the loan, and
this excess is commonly referred to in the mortgage industry as a
``yield spread premium'' (YSP). For the past decade, such payments have
been the subject of numerous lawsuits and consumer complaints,
typically because consumers claim they were unaware that their broker
was receiving such compensation, in addition to the direct compensation
they paid the broker. Moreover, these consumers assert that such
payments resulted from their being placed in mortgages with higher than
necessary interest rates without their knowledge. Some consumer
advocates have argued that all such payments should be treated as
referral fees or kickbacks and thus should be illegal per se under
RESPA.
HUD has taken the position, however, that YSPs can be useful and
should remain available as an option for mortgage borrowers to help pay
their closing costs, particularly those borrowers with limited
available cash who choose to pay some or all closing costs through a
higher interest rate. HUD made its position on the issue clear in HUD's
Policy Statement 2001-1 (2001 Policy Statement).\16\ In the 2001 Policy
Statement, HUD restated its view \17\ that as long as the broker's
compensation is for services, and total compensation is reasonable,
interest rate-based lender payments to the mortgage broker are legal
under RESPA. HUD did not mandate new disclosure requirements in the
2001 Policy Statement, but did commit itself to making full use of its
regulatory authority to establish clearer requirements for disclosure
of mortgage broker fees, and to improve the settlement process for
lenders, mortgage brokers, and consumers.\18\ In the 2001 Policy
Statement, HUD stressed that disclosure of broker compensation was
``extremely important and that many of the concerns expressed by
borrowers over YSPs can be addressed by disclosing YSPs, borrower
compensation to the broker, and the terms of the mortgage loan, so that
the borrower may evaluate and choose among alternative loan options.''
\19\ In brief, it has been HUD's consistent position that the existence
of a YSP in any loan should be at the borrower's choice, based upon a
complete understanding of the trade-off between up-front settlement
costs and the interest rate.
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\16\ Real Estate Settlement Procedures Act Statement of Policy
2001-1, Clarification of Statement of Policy 1999-1 Regarding Lender
Payments to Mortgage Brokers, and Guidance Concerning Unearned Fees
under Section 8(b), published October 18, 2001, at 66 FR 53052.
\17\ 66 FR 53052.
\18\ 66 FR 53052.
\19\ 66 FR 53056.
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HUD's current RESPA regulations require that a rate-based payment
from a lender to a broker be reported on the GFE, and later on the HUD-
1. Such payments are frequently characterized on the GFE and HUD-1 as a
``YSP'' or ``yield spread premium,'' and then are designated as a
``paid outside closing''
[[Page 14042]]
or ``POC.'' \20\ The YSP is not often understood by the borrower. In
addition, it is not listed as an expense to the borrower. At the same
time, many brokers hold themselves out as shopping among various
funding sources for the best loan for the borrower, and do not explain
to the borrower that the payment they receive from the lender is
derived from the borrower's interest rate. Some may even assert that
the YSP is not a payment the borrower needs to be concerned with. The
2001 Policy Statement emphasized that earlier disclosure and the entry
of yield spread premiums, as credits to borrowers would ``offer greater
assurance that lender payments to mortgage brokers serve borrowers'
best interests.'' \21\
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\20\ ``YSP POC'' sometimes appears on the second page of the
HUD-1/1-A to represent ``Yield Spread Premium Paid Outside of
Closing,'' which is rarely understood by borrowers as a payment they
make out of their above-par interest rate.
\21\ 66 FR 53056.
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2002 Proposed Rule. The 2002 Proposed Rule provided that on the
GFE, all brokers first disclose their total compensation charges and
disclose any YSP as a lender payment to the borrower and discount
points as additional borrower payments. The amounts of any lender
payment or discount points would be combined with the total origination
charges, to arrive at a net origination charge. It was this final
figure that was to be emphasized and highlighted for borrower
comparison among lenders and brokers.
The purpose of these changes in the GFE disclosure requirements, as
proposed by the 2002 Proposed Rule, was to: (a) Make the borrower aware
of the fact that the lender payments were a part of total origination
costs, since they were directly related to the borrower's choice of a
higher interest rate and monthly payment; (b) ensure that these
payments worked to reduce out of pocket costs of the borrower; and (c)
encourage the borrower to compare net origination costs of all loans
whether from a lender or a broker, in order to select the loan product
that best meets the borrower's needs. The rationale for the disclosure
changes was to promote transparency, reduce borrower confusion,
facilitate shopping, and, at the same time, avoid giving any
competitive advantage to brokers or lenders in the marketplace.
Nearly all commenters on the 2002 Proposed Rule that discussed YSPs
other than individual mortgage brokers or their national and state
associations expressed support for greater broker fee disclosure.
Consumer representatives, in particular, were strong supporters of
disclosure along the lines that HUD proposed, and offered suggestions
for making the requirements more enforceable. Consumer groups recounted
the class action litigation that resulted from the payment of yield
spread premiums and HUD's past statements committing the Department to
ensuring better disclosure of yield spread premiums. The National
Consumer Law Center (NCLC) said that to date, yield spread premiums are
generally paid by the lender solely as compensation for a higher
interest rate loan. In most cases, according to NCLC, the borrower is
not only paying an up-front fee, but is also paying a higher interest
rate as a result of being steered into above-par loans. Consumer groups
asserted that the YSP should be defined for the consumer in simple,
easy-to-understand language on the GFE.
Lenders and their trade groups, on the other hand, tended to favor
HUD's requiring a separate Mortgage Broker Fee Agreement, as proposed
by the lending industry in the last few years, which would be entered
into by brokers and their customers, in addition to the GFE.
Mortgage brokers and their trade groups expressed vigorous
opposition to disclosing the YSP as a credit to the borrower. They
maintained that such a characterization is misleading, unfair, and
anti-small business. The brokers stated that HUD's proposal: (1)
Created confusion for the borrower; (2) would unnecessarily increase
HOEPA transactions; (3) would stifle FHA and low/moderate-income
lending; (4) would unfairly target brokers; (5) would create an uneven
playing field with retail lenders; and (6) could adversely affect tax
treatment of borrowers.
FHA Issue. Currently, FHA regulations limit origination fees for
loans insured under the FHA program generally to one percent of the
mortgage amount (see 24 CFR 203.27(a)(2)(i)). FHA does not have
authority under the National Housing Act (12 U.S.C. 1709(b)(2)) to
limit payments between loan originators, and yield spread premiums are
not included in calculating the FHA limits on origination fees. Some
industry commenters argued that the YSP disclosure, as proposed in
2002, would have adversely affected the origination of FHA loans.
Specifically, the National Association of Mortgage Brokers (NAMB)
commented that if the 2002 Proposed Rule were finalized, many mortgage
brokers would cease to originate FHA loans because of the origination
fee limitation. The MBA and some of its member firms argued for removal
or adjustment of the FHA origination fee cap.
RESPA Roundtables. At the 2005 RESPA Reform Roundtables, consumer
representatives generally continued to support disclosure of yield
spread premium on the GFE. Mortgage broker representatives maintained
their opposition to any yield spread premium disclosure on the GFE on
the grounds that disclosure would put mortgage brokers at a competitive
disadvantage as compared to lenders. Mortgage brokers also stated that
if brokers are required to disclose yield spread premiums, lenders
should also be required to disclose par, plus pricing, and gain on
sales in the secondary market. Many lender representatives at the
roundtables noted that it would be difficult for a lender to disclose
any profit on a loan sold in the secondary market on the GFE, since the
amount could not be ascertained with any certainty in advance, but in
general, they did not express support for or opposition to a
requirement for broker disclosure of the yield spread premium. Some
participants at the roundtables, including consumer as well as industry
representatives, recommended the use of a separate mortgage broker fee
agreement in lieu of the yield spread premium disclosure requirement.
The Proposed Rule. Lender payments to mortgage brokers in table
funded and intermediary transactions should be clearly disclosed to
consumers on the GFE, and on the HUD-1 settlement statements as set
forth below. The proposed rule would also streamline the current
regulatory definition of ``mortgage broker.''
Discussion. For the past decade, HUD has required the disclosure of
YSPs on the GFE and HUD-1 documents as a ``payment outside closing'' or
``POC.'' This means of disclosure proved to be of little use to
consumers. Moreover, notwithstanding that lender payments to brokers
are directly based on the rate of the borrower's loan, under current
HUD guidance, such lender payments are not required to be included in
the calculation of the broker's total charges for the transaction, nor
are they clearly listed as an expense to the borrower. The confusion
that can result when borrowers do not understand that mortgage brokers'
total compensation includes lender payments derived from the interest
rate is exacerbated by the fact that many brokers hold themselves out
as shopping among various funding sources for the best loan for the
borrower, while failing to explain to the borrower that the payment
they receive from the lender is derived from the borrower's interest
rate. On the other hand, some brokers tell their customers
[[Page 14043]]
how they can use lender payments to lower the customer's up-front
settlement costs.
The 2001 Policy Statement made clear that earlier disclosure and
the entry of yield spread premiums as credits to borrowers would
``offer greater assurance that lender payments to mortgage brokers
serve borrowers' best interests.'' \22\ HUD could not mandate new
disclosure requirements in the 2001 Policy Statement. HUD did, however,
commit itself in the 2001 Policy Statement to making full use of its
regulatory authority to establish clearer requirements for disclosure
of mortgage broker fees, and to improve the settlement process for
lenders, mortgage brokers, and consumers.\23\
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\22\ 66 FR 53056.
\23\ 66 FR 53053.
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It is for this reason that HUD proposed its new disclosure
requirements in the July 2002 Proposed Rule. Having carefully
considered the NAMB's and other comments in response to the 2002
proposal, as well as the comments presented at the RESPA Roundtables,
and the results of consumer testing by the Federal Trade Commission
(FTC) and HUD, as discussed below, HUD maintains that while YSPs to
mortgage brokers must be clearly disclosed to borrowers, at the same
time, mortgage brokers also must not be disadvantaged in the
marketplace, since such disadvantage will only result in decreased
competition and higher costs to consumers. Many mortgage brokers offer
products that are competitive with and frequently lower priced than the
products of retail lenders, as evidenced by brokers' large and growing
share of the loan origination market, and HUD wishes to preserve
continued competition and lower cost choices for consumers.
Today's proposed rule also streamlines the current regulatory
definition of ``mortgage broker.'' Under the proposed definition,
``mortgage broker'' means a person (not an employee of the lender) or
entity that renders origination services in a table funded or
intermediary transaction. The definition would also apply to a loan
correspondent approved under 24 CFR 202.8 for FHA programs.
The proposed definition would eliminate the current exclusion of an
``exclusive agent'' of a lender from the definition of ``mortgage
broker.'' The current definition essentially excludes some persons who
perform the same services as mortgage brokers as defined in 24 CFR
3500.2. In order to improve disclosure of settlement charges and
increase transparency, HUD believes that all persons who perform
mortgage broker services should be subject to the disclosure
requirements. Therefore, an ``exclusive agent'' of a lender who is not
an employee of the lender, but who renders origination services in a
table funded or intermediary transaction, would be subject to the
mortgage broker disclosure requirements set forth in this proposed
rule.
HUD Research on Mortgage Broker Disclosures
1. HUD's Testing of the GFE. In October 2002, HUD contracted with a
communication and consumer testing expert, Kleimann Communication
Group, to revise and test the GFE and mortgage package forms,\24\ in
order to assure that the forms were user-friendly and enabled consumers
to identify the least expensive loan. With respect to the GFE, the
testing had the additional purpose of showing and explaining yield
spread premiums and discount points to borrowers. New homebuyers and
experienced homebuyers were part of the groups tested. The groups
included members from diverse racial and ethnic groups, the elderly,
and low-education and low-income groups. The testing of the GFE form
was conducted in two phases.
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\24\ As noted in Section III above (Overview of HUD's Efforts
Since 2002), the 2002 Proposed Rule included a ``guaranteed mortgage
package agreement'' or ``GMPA,'' and HUD's contractor initially
tested both the GFE and GMPA forms. In subsequent rounds of testing,
the name of the GMPA form was changed to ``mortgage package offer''
or ``MPO'' and is referred to in this document as ``MPO.''
---------------------------------------------------------------------------
2. Phase 1 HUD Testing. In Phase 1, the contractor conducted three
rounds of one-on-one testing interviews to collect data about form
comprehension and potential sources of confusion. The goal of the
testing was to fine-tune and develop the GFE form and ensure that
consumers can use the GFE in the way intended. Testing in this phase
solicited consumer feedback through individual interviews with
consumers as they actually used the GFEs in the simulated task of
buying a home and needed to select between several loan offers. The
data provide guidance about problems consumers have and the reasons for
those problems. This phase consisted of three rounds of testing.
Each of the first two rounds of testing involved interviews with a
total of 45 consumers in three cities. The contractor made several
format and language changes to the form, as it was published in the
July 2002, proposed rule, to improve readability and clarity. Among
other changes, a summary page was developed and tested, with the
specific charges for individual categories of settlement services
appearing on a second page of the form. Kleimann then developed a
comprehensive testing protocol that addressed the key objectives of the
GFE form for consumers. The interviews with each participant lasted for
90 minutes with a 10-minute break. The interviews had two parts, one
unstructured and one structured. In the unstructured portion of the
interview, participants were asked to think aloud as they looked at
each form for the first time. This unstructured and unprompted portion
of the interview allowed Kleimann to capture users' initial reactions,
including to areas that they responded well, to areas they did not
understand, and to areas they questioned. The unstructured portion also
ensured that the testers did not influence the comments of the
participants by leading them to discuss information they would not have
noticed on their own.
In the structured portion of the interview, Kleimann gave each
consumer completed GFEs (as well as MPOs) and asked targeted questions
to determine how well participants understood certain areas of the
forms, whether the consumers could determine the least expensive loan,
and how the forms might be improved. The study design focused on how
the forms performed as stand-alone documents. The interviewer neither
helped the participant understand any of the information on the forms
nor answered any questions the participant asked to clarify
information.
In these tests, 90 percent of participants chose the least
expensive loan, when confronted with a choice between a GFE
representing a loan from a lender (with no YSP shown) and a GFE
representing a loan from a broker (with the YSP disclosed). The
percentage increased slightly to 93 percent when an MPO was included as
a third option.
Participants also understood the forms well. They could identify
the basic loan costs and loan features. Over 90 percent could identify
the total estimated settlement charges. The tested forms retained the
trade-off table shown on the forms in the 2002 Proposed Rule, showing
borrowers that if they wanted to receive a lower interest rate, they
would have to pay more at settlement, and vice versa; 90 percent
understood the trade-off table. About two-thirds of the participants
could distinguish between items they, as consumers, could shop for and
items for which they would use the broker's or lender's
[[Page 14044]]
providers; almost two-thirds could explain the adjusted origination
charge; and 70 percent of participants were able to identify the
tolerances correctly in round 2 testing.
During the testing, Kleimann asked participants a number of
questions about how they felt about the forms--how comfortable or
uncomfortable they felt with the forms, what they liked and disliked,
and how they perceived the information and the level of writing.
Participants reacted very positively to the GFE layout and language,
and to the clear delineation of charges. They found the summary page on
page 1, the breakdown of charges on page 2, and the trade-off table on
page 3 to be particularly useful. In round 2 of testing, 86 percent
said the GFE had the right information for them, almost 90 percent said
the GFE was written at the right level for them, and about two-thirds
of participants said they were comfortable with the forms.
This testing was designed to see how the GFE form would perform as
a stand-alone document. The interviewer neither coached nor led the
participant by asking questions before the participant could work alone
with the document. While this technique identifies how well
participants use the GFE form as a stand-alone in a testing situation,
consumers using these forms in the context of actual situations may
perform even better. First, this testing involved no interaction at all
between the potential borrower and a loan originator. In an actual
situation, a loan originator would be able to answer borrower questions
about the information on the forms and improve the borrower's
understanding of it. Of course, some originators might try to confuse
the borrower in order to collect higher fees, but a competitor might be
more than willing to clear up that confusion, since doing so might get
him the borrower's business. In addition to the help coming from the
originator, borrowers could always ask someone else for help: A spouse,
friend, their real estate agent, etc. Moreover, local consumer groups
that focus on lending issues will also assist borrowers in
understanding the new, streamlined GFE form. Since none of these
sources were available during the testing, the Kleimann results should
be viewed as underestimates of how much the new forms will help
consumers once the forms are placed in an actual context of obtaining
financing to purchase a home or refinance an existing loan. The third
round of testing consisted of 60 participants, with 15 each in four
cities, following the same procedures as in the first two rounds of
testing.\25\ The GFE form was changed in order to consider whether an
alternative presentation of the discount points and yield spread
premium, suggested by the National Association of Mortgage Brokers,
would increase consumer understanding. The yield spread premium (YSP)
and discount point disclosure was removed from the top of page 2, where
it had been integrated into the calculation of total up-front charges
to the borrower, and moved to page 3. As a consequence, page 2 included
only the adjusted origination charge at the top. Thus, otherwise
identical loans from a broker and a lender would have identical figures
on page 2 as well as on page 1 of the summary. Page 3 contained the YSP
and discount points. The form did not include a full calculation of
total broker compensation, and thus differed from both the proposed
rule and the first two rounds of testing.
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\25\ The cities were Wilmington (Delaware), Tulsa, Minneapolis,
and Los Angeles.
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The results showed that participants could continue to identify the
cheapest loan: 93 percent of the participants correctly selected the
broker loan as the cheaper loan as opposed to 90 percent in round 2.
Also, in round 3 of testing, 89 percent of participants would have
chosen the cheaper broker loan as opposed to 86 percent in round 2.
None of the differences between these percentages in round 2 and round
3 is statistically significant. Also, as in the first two rounds,
participants generally liked the form and would use it to comparison
shop. They could identify the basic terms of the mortgage and the
estimate of total settlement costs, and 86 percent understood the
trade-off table. The material seemed to be presented at the right level
and to be clearly laid out. Participants again identified the summary
page, the breakdown of charges, and the trade-off table as useful.
However, participants had trouble understanding the concepts of YSP
and discount points.\26\ Only 3 percent and 30 percent, respectively,
of the participants could paraphrase what YSPs and discount points
represented, leaving over two-thirds of the participants unable to
paraphrase. Participants did not understand how these two concepts (now
located on page 3) related to other settlement charges (on page 2).
Essentially, placing these terms outside the calculation of origination
charges (that is, on page 3 instead of page 2 as in the first two
testing rounds) seems to decrease participants' understanding of how
the YSP and discount points fit into total loan costs. Since there was
no significant improvement in participants' ability to determine the
cheapest loan, and most participants did not understand the concept of
YSP, HUD decided to keep the YSP on page 2 in the calculation in the
2005 Proposed Rule, as was the case in the 2002 Proposed Rule.
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\26\ These results are consistent with the work of Jackson and
Berry (2001) and Woodward (2003a).
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3. FTC Testing. During the same period that HUD was developing the
revised GFE, FTC tested the effect of YSP disclosure to see if the
disclosure had an adverse effect on the consumer's ability to
comparison shop. Using a variation on the GFE form tested by Kleimann
in round 2 testing, FTC extracted and tested a portion of the form. The
first page of the extract consisted of an abbreviated version of the
Summary Table from page 1 of the GFE. The second page of the extract
contained the ``Your Charges for Loan Origination'' box and an
abbreviated version of the ``Your Charges for All Other Settlement
Services'' box from page 2 of the GFE. As a control, FTC took these
same two extracts and eliminated the YSP and service charge, producing
a second set of extracts. Thus, FTC isolated elements of the proposed
GFE and created two variations of their extracts: with the YSP and
without the YSP. FTC also tested the YSP disclosure from the GFE in
HUD's 2002 Proposed Rule, and an alternative disclosure using language
developed by FTC to describe the YSP and other loan terms.
FTC testers gave each participant a pair of loan extracts to
evaluate: one had no YSP and thus represented a lender loan, and the
other contained a YSP and thus represented a broker loan. The broker
loan was $300 less than the lender loan. FTC asked participants which
loan was cheaper and also which loan the participant would choose. Each
participant also received a second set of extracts in which each loan
offer was the same cost. The participants were asked the same two
questions: which loan was cheaper and which loan would the participant
choose.
FTC tested five groups with 103 or 104 participants per group. The
results using the GFE variation of HUD's second round of testing are
most relevant to the 2005 Proposed Rule. When the YSP was disclosed and
the broker loan offer was cheaper, 72 percent of participants could
correctly identify the broker loan as the cheaper loan; 17 percent
incorrectly identified the lender loan as cheaper. Asked to identify
which loan offer they would choose, 70 percent of participants
[[Page 14045]]
would have chosen the cheaper broker loan; and 16 percent would have
chosen the lender loan. In contrast, when the form extract did not
disclose the YSP, 90 percent correctly identified the broker loan as
cheaper, and 85 percent would have chosen it. Disclosing the YSP caused
an 18 percent drop in participants correctly identifying the cheaper
loan and a 14 percent drop in the number who would choose it in the
market. When costs of the broker and lender loans were the same on GFE
forms that contained the YSP, participant performance decreased. Fifty-
three percent reported that the loan costs were a tie; 30 percent
believed the lender was cheaper; 11 percent believed the broker was
cheaper. When asked to identify which loan offer they would choose, 25
percent of the participants chose either the lender or the broker loan
offers; 46 percent selected the lender loan offer; and 17 percent
selected the broker offer. In contrast, when the form omitted the YSP,
96 percent correctly identified the tie, and 78 percent chose one or
the other as their preference.
FTC concluded that the YSP disclosure on the GFE form extract it
tested had two drawbacks. First, its YSP disclosure impaired the
ability of borrowers to comparison shop leading many to choose the more
costly alternative. Second, the YSP disclosure introduced bias in the
selection process that favored lenders over brokers. The Department's
goal is to promote consumer shopping for mortgages and to prevent bias
against any loan originator.
4. Phase 2 HUD Testing. FTC conducted its tests in February and
March of 2003, and briefed HUD on the results during the summer of
2003. HUD decided to undertake additional testing and to incorporate
the FTC test results in the further testing. For round 4 of testing,
HUD asked Kleimann Communication Group to parallel aspects of the FTC
study, including the questions asked, the difference between the
amounts of each offer, and the length of the test situation.\27\ HUD
continued to test a full-length GFE rather than the portion tested by
FTC, because HUD thought that the context of the entire form might
provide a more accurate measure of participants' understanding of the
GFE.
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\27\ Kleimann's report, entitled Consumer Testing Results for
HUD's Good Faith Estimate (GFE) Form: Rounds 4 & 5 (dated March 19,
2004), provides information on the specific characteristics of the
consumers tested, revisions that Kleimann made to the form and the
reasons for those revisions, the specific cities where the tests
were conducted, the testing protocols, testing conditions, and the
main results from each round of testing.
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For round 4 of testing, 600 participants were selected; all
received full GFEs. The control group received GFEs that omitted the
YSP disclosure, while the experimental group received GFEs with the YSP
disclosed. Each participant was given two pairs of loans: one in which
the broker loan was $300 less than the lender and one in which the
broker and lender loan offers were the same cost. Each participant was
asked three questions for each set of GFEs: (1) Which offer was cheaper
or if they cost the same, (2) which offer would they choose, and (3)
why they made that choice. The results of this testing showed both
consistency with and divergence from the FTC results.
When the YSP was disclosed, 83 percent of the participants
correctly identified the broker loan as cheaper, and 8 percent
incorrectly identified the lender as cheaper. These results were an
improvement over the FTC results of 72 percent and 17 percent. In this
GFE scenario, 72 percent of the participants said they would choose the
broker offer and 11 percent said they would choose the lender.
Similarly, in the FTC study, 70 percent of the participants chose the
broker offer and 16 percent chose the lender offer.
When the YSP disclosure was removed, 92 percent correctly
identified the broker loan as cheaper, and 1 percent incorrectly
identified the lender as cheaper. These results are quite similar to
FTC's results of 90 percent and 4 percent. When asked to choose a loan,
88 percent of participants chose the broker offer, while 1 percent
chose the lender loan. These results compare to 85 percent and 3
percent respectively in the FTC testing.
When given same cost loan offers with a YSP, 81 percent correctly
identified both loans as costing the same; 15 percent incorrectly
identified the lender as cheaper; and 3 percent incorrectly identified
the broker as cheaper. In contrast, in the FTC study, only 53 percent
correctly identified the offers as costing the same; 30 percent
incorrectly identified the lender as cheaper; and 11 percent
incorrectly identified the broker as cheaper. In this GFE scenario, 50
percent of participants would have chosen either offer; 39 percent
chose the lender offer; and only 5 percent chose the broker's. In
contrast in the FTC study, only 25 percent chose either offer; 46
percent chose the lender offer; and 17 percent chose the broker's
offer.
Of particular concern was the difference between participants who
could identify the cheapest loan offer, but did not choose it. Analysis
of the participant responses to the open-ended question of ``why did
you choose that offer'' led to further modifications of the GFE to
address this concern and to a fifth round of testing. In many comments,
participants stated that they chose a particular offer because they did
not want the ``higher interest rate'' indicated on page 2 of the GFE.
They concluded from the language on the YSP disclosure that the
interest rate was higher than the rate cited on page 1 under ``Loan
Details.'' Also, many of those who had no preference for the cheaper
broker loan indicated that $300 was not a sufficient difference to be a
deciding factor.
As a result of the testing and analysis, revisions were made to the
GFE. First, the language in box 2 on page 2 of the GFE referring to the
``higher interest rate'' and ``lower interest rate'' was modified to
reduce the possibility of borrowers'' misinterpreting that the interest
rate had changed from what was reported on the first page. Second, a
third option was added to the YSP/discount points section on page 2 so
a lender could indicate that its credits or charges were already
included in ``Our Service Charge.'' This addition was designed to
ensure that participants would understand that a lender's origination
charge might include a YSP or discount points, even though the YSP or
points would not necessarily be known at the time of settlement,
because the loan would not have been sold into the secondary market.
The third option thus creates a closer parallel between broker and
lender loans. Third, arrows were added on pages 1 and 2 to focus the
borrower's attention on the subtotals and the total estimated charges,
rather than on individual components. In addition, the typeface point
size in the Total Estimated Settlement Charges on the bottom of page 1
was increased to further draw attention to the bottom-line.
For purposes of testing, three other changes were made to the GFEs.
First, the difference in the total cost was changed to $500, to
increase the likelihood that the difference would be a deciding factor.
Second, another pair of loan options was added in which the lender
offer was $500 less than the broker offer. This addition was intended
to identify any bias for or against the broker and lender options.
Finally, a set of four loans was added, to investigate whether the
comparison across more than two offers increased or decreased
participant performance. No version was tested without the YSP and
discount points language.
[[Page 14046]]
For round 5 of testing, 600 participants were divided into two
groups, both of which received the revised GFE.\28\ The first group
received the revised GFE with changed language and with the addition of
a third option so that lenders could indicate that YSP and discount
points had been included in ``Our Service Charge.'' The second group
received the identical revised GFE, but the third option box was
removed. All participants received three pairs of loans, one with the
broker offer being lower by $500, one with the lender offer being lower
by $500, and one in which both offers were the same. In addition, each
participant received a set of four offers to compare.
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\28\ Participants were chosen for demographic diversity in the
same five cities: Atlanta, Boston, Denver, Seattle, and Tulsa. No
participant from round 4 was permitted to participate in round 5.
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The three option GFE and the two option GFE performed quite
similarly with the three option form consistently getting slightly
better results. The proposed rule therefore discusses only the three
option form, and that form is included in the proposed rule.
In the GFE in which the broker was cheaper, 92 percent of the
participants correctly identified the broker as the cheaper loan offer.
This result represents an improvement over the 72 percent reported by
the FTC study and the 83 percent reported in the round 4 results. Only
3 percent of the participants incorrectly identified the lender as the
cheaper loan offer, compared to the 17 percent reported by the FTC and
8 percent in round 4. When asked to choose a loan, 87 percent of the
participants chose the cheaper broker loan as compared to 70 percent of
the participants in the FTC study and 72 percent of the participants in
round 4. These results of round 5 of testing are significantly better
than the FTC's results and are based on a much larger sample.
In the GFE in which the lender was cheaper, 92 percent of the
participants correctly identified the lender as the cheaper loan offer.
Only 1 percent incorrectly identified the broker as cheaper. When asked
to choose a loan, 89 percent of the participants chose the lender loan
and less than 1 percent chose the broker.
The purpose of testing the case in which the lender was cheaper
than the broker was to test for bias by seeing if the GFE forms
performed equally well when either the lender or broker was the cheaper
loan. A comparison of the results indicates that there