On a refinance, should you disclose on the GFE the cost of property insurance and the 6 mos. property taxes that are coming due if you are requiring the borrower pay them in order to do the loan? It seems to me that you should since you would not be making the loan if the borrower was delinquent on these. Given everything I have been reading lately, it seems that most regulators would be looking for both of these items to be there. Any guidance would be appreciated!

The GFE should include any costs the applicant is reasonably expected to incur. If you know or can reasonable estimate what the costs will be, the safe bet is to include. It does not have to be exact, however, the regulators don't want to see "boiler plate" GFE's.

HUD has opined that the costs of required insurance should go on the HUD-1 or HUD-1A. The same reasoning puts them on the GFE. However, here you are truly estimating because you have to provide an approximate number to the applicant before you really have the opportunity to find out much from them. So, include the costs on the GFE but be very careful to lable them as estimates.

I have no problem with disclosing taxes and insurance on a loan IF I will require the borrower to pay them as part of the costs settled at closing. And then the GFE should only show the amount that will be required to be paid AT closing.

The area that I think is just too weird is the notion that on a junior lien, you must also list a years worth of taxes and insurance and show them as "POC." The senior lienholder is already requiring those items to be paid. If you show taxes and insurance as "Paid Outside Closing", how many people do you think will then ASSUME that you have paid these fees for them?

And what happens when they incur a tax penalty because they thought you had paid their taxes? Sounds like a lawsuit waiting to happen.

A lawsuit might be a stretch here because a borrower would have no reason to believe you would pay their taxes for them. Also, when entering into the transaction, wouldn't you either:

1. Look for evidence of payment as a condition of the loan;
2. Ask the borrower how much their yearly taxes were/are;
3. Determine if the borrower is paying taxes through an escrow agreement with the senior lender;
4. Escrow for their payment; etc.

Although I'm not an attorney, a lawsuit under these conditions would seem to be unreasonable, unless of course a lender told the borrower that the bank would incur the tax liability and there was "sufficient" evidence that the promise was made.

"Wierd" may describe it, but disclosing the insurance and tax costs on the loan, regardless of lien position, is what HUD requires under RESPA. The practical result is that when the lender is making both the first and second mortgage, such as a purchase mortgage and a second trust, the lender must disclose those costs twice, one on each HUD-1.

De Vonne - Normally, for a garden-variety Home Equity Loan, we just check a "Lot Book" report to see if taxes are current and ask for a copy of the Dec page of the insurance policy so we can be added as Additional Insured.

In just about every case, the borrower is current on their taxes and insurance. And it makes sense that they would be since their is a senior lienholder that is monitoring to make sure the taxes are paid and the insurance is current.

So to disclose those items on a GFE and HUD-1A for a home equity loan just seems absurd. Afterall, you don't provide a GFE or HUD-1A on an equity line of credit even though you wouldn't grant the line if taxes were delinquent and the property had no insurance.

This interpretation just strikes me as someone at HUD having way too much time on their hands to analyze a problem that doesn't exist.

I agree with you. What kills me is having to include cost estimates as "POC" even when the charges are not assessed and not "built into" the interest rate for such products as our no cost home equity loans.

If the applicants want to comparison-shop, why would they need to see "costs" of a product where there are no costs? Its like a car dealer telling you that the mustang is going to cost $15,000 but if you want to look at a dealer across the street, pretend that the cost is $30,000.

Thanks for all of the input. It helped to know that I was on track wanting this shown on the GFE.

Lucy - could you please further expand your comments on HUD requiring real estate tax estimates on the GFE? Once a purchase money mortgage loan has proceeded to the point of the Settlement Agent preparing the HUD-1, I fully understand how the amounts will be determined.

But for GFEs of purchase money mortgages, are we required to estimate a pro-rated tax amount due to the seller at time of closing? If yes - any suggestions on how to do this? We will not know if the seller has paid any partial-year taxes or not, since it is not typically disclosed on RE sales contracts in our area.

For refinance mortgages and home equity loans/lines of credit, is the bank required to include on the GFE an estimate of taxes that MAY be due and payable at the time of closing which the bank would require to be paid? This would apply to taxes that have actually been billed to the homeowner as of the time of loan application, but the homeowner has not yet paid (discount period). Does the answer vary if the bank makes paying these taxes a condition of the loan closing? If these billed, but yet unpaid, taxes have to be included on the GFE, how are we to estimate this amount at time of application?

Our bank's market area is 8 counties located in 2 states & all have different tax collection periods, some require taxes to be paid a year in advance and others are paid in arrears, etc. Determining real estate tax estimates for GFEs will not be an easy task.

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Any opinion stated above is mine alone and not my employer's.

The questions you raise are precisely why this position of HUD's is so nonsensical. The only thing you can do is estimate. I would base this estimate on typical insurance costs for the market area. Whether the customer has paid, has an opportunity to prepay and get a discount, or other options is not really important for the GFE. What HUD wants you to show is that they have to pay for hazard insurance. For that purpose, an estimate of the annual cost should be sufficient -- and as a practical matter it is really all you can do.

While none of this makes sense to bankers, the Fed, at least the Chicago Fed has been writing up banks in its area for over a year for failure to include 1 year hazard insurance premium and 1 year propety tax on both the Good Faith and on the HUD-1, if the bank requires that these items be paid in its loan documents. Exact line numbers and other details area given in the Chicago Fed Regulatory Update of August 18, 2000 Vol. 3 No. 8 available from their web site. The FDIC in this area are not currently including taxes in thier exams, but are insisting upon a "name" in the appraiser section of the GFE. Fun, yes?

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Gerald Stewart, CRCM

Here's a link to the Chicago Fed update Gerald mentions:

http://www.chicagofed.org/publications/regulatoryupdates/2000/aug182000.cfm#200025>RU2000-25

[This message has been edited by Cathy H (edited 03-06-2001).]

How about owner's title insurance? Obviously it is optional and would be paid at closing. However, client's (at least ours) tend to get upset when they see this cost on the GFE (even though a note says "optional"). We are doing high end mortgages and it gets costly.

I read the instructions and recent bankers' assn comments to mean it should be included. Am I correct or can we drop it?