by Lorie Garland
In 1974, the Real Estate Settlement and Procedures Act (RESPA) was enacted to simplify the mortgage settlement process and prevent abusive practices by settlement service providers that unnecessarily increased settlement costs. It is RESPA that requires use of the Good Faith Estimate and HUD-1 Settlement Statement. It is also the federal law that prohibits referral fees between settlement service providers.
In March of 2008, HUD issued a proposed rule to improve RESPA’s requirements for disclosing settlement costs. In the rule, HUD identified problems with the current settlement process that the rule was designed to improve. One problem identified was that often a buyer’s actual settlement costs listed on the HUD-1 were higher (sometimes substantially higher) than the estimated costs listed on that buyer’s Good Faith Estimate. HUD’s goal was for the Good Faith Estimate to more accurately reflect a buyer’s actual settlement costs. Another goal of the RESPA changes was to give buyers the ability to shop for the best loan terms. The current regulations did not allow buyers to easily shop loans.
The proposed rule was the result of six years of consumer and industry input on needed changes to the RESPA regulations. HUD received over 12,000 public comments regarding the proposed rule. The majority of the comments opposed provisions of the rule. One controversial provision in the proposed rule was a closing script that the closing agent would be required to read at the closing. The closing script included a comparison of the Good Faith Estimate and the HUD-1 and a summary of the borrower’s loan terms. It was estimated that it would take the closing agent 45 minutes to provide the closing script to the borrower. Industry groups, including NAR, as well as two thirds of the members of Congress requested that HUD withdraw the rule. However, after taking into consideration the comments received, HUD modified the rule and filed its final rule on Nov. 12, 2008.
The most significant change provided in the final rule is a new standardized Good Faith Estimate form and a new HUD-1 Settlement Statement. Both documents are effective on Jan. 1, 2010. HUD wanted to give the industry time to make system and operational changes to accommodate the new forms and their requirements.
The new Good Faith Estimate form contains three pages and must be provided by the loan originator within three days of receiving a loan application. The GFE provides a summary of the key terms of the loan and an estimate of the settlement charges. Settlement charges are divided into three categories depending on whether the charge could increase at settlement or not. Some charges cannot increase, some can increase by 10 percent and other charges can increase without restriction. The first page of the GFE contains a total of the estimated settlement charges to allow the borrower to shop for the best loan terms at the lowest cost.
The new HUD-1 Settlement Statement contains three pages. Charges listed on the HUD-1 provide a reference to the relevant line for that charge on the Good Faith Estimate. The third page provides a side by side comparison of the GFE charges and the HUD-1 charges. It also provides a summary of the borrower’s loan terms. HUD added a third page to the HUD-1 and eliminated the controversial closing script that was required in the proposed rule.
The final rule allows lenders to correct violations of RESPA’s new disclosure and cost tolerance requirements. Lenders will have 30 days from the date of closing to correct violations and repay the borrower any overcharges.
The final rule and the new Good Faith Estimate and HUD-1 Settlement Statement forms are available in the RESPA section of HUD’s Web site: www.hud.gov.