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RESPA & Indirect Home Improvement Financing

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Question: 
I have two questions regarding RESPA issues related to indirect home improvement financing. First, we are paying a broker - who is not an employee of the bank - for signing up contractors to submit credit applications on their customers to us. Since most of these loans are secured by a mortgage on a primary residence and we are paying the broker a percentage of total loan volume generated, how do we treat this with respect to the Good Faith Estimate and HUD-1A? Secondly, since we require hazard insurance coverage from an insurer chosen by the borrower, is it not permissible under RESPA to provide only an estimate of the annual hazard insurance cost on both the GFE and HUD-1A forms? We are being told that the GFE can reflect an estimate, but that the HUD-1A must be the actual annual premium amount being paid by a given borrower. This presents a problem, in that, since the program is indirect, we do not know what the actual premium cost is for any given borrower and , therefore, use an estimated cost amount on both documents. Are we in compliance?
Answer: 

First, the broker fee. Any fee paid to a broker must be disclosed as such on the GFE and the HUD-1. In addition, it is a finance charge under Truth in Lending if the customer pays it. However, you should look hard at this fee. From your description, it sounds like a fee for a referral which would be illegal under Section 8 of RESPA. Unless there is work performed other than the referral, you cannot legally pay for the service.

As for hazard insurance, you would be showing an estimate on the GFE. However, the HUD-1 should have final numbers and these numbers must be precise. It means that you must obtain the information on the insurance premium from the borrower.

First published on BankersOnline.com 10/21/02

First published on 10/21/2002

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