After December 31, 2009 you will see a new Settlement Statement at the closing table. The US Department of Housing and Development (HUD) has for sometime been working to revise the Real Estate Settlement Procedures Act (RESPA). The new revisions were just recently finalized. Part of the revision requires that mortgage originators (lenders) provide potential borrowers with a new form Good Faith Estimate (GFE) and that final settlement figures be provided on a new form Settlement Statement (Form HUD-1).
Loan charges and settlement fees will be clearer on revised version of the GFE form that is now required to be provided to borrowers within three days of their mortgage application. Charges on the form will fall into three categories:
- Fees that cannot increase from the initial estimates to final closing.
- Fee estimates that may increase by as much as 10 percent in total from the initial estimates.
- Fees that can increase without limit, mainly because the lender has no control over them or because they are difficult to predict weeks in advance.
Charges in the zero-increase category include lender and broker mortgage origination, processing and underwriting fees and costs. Also in this category are lender or broker loan discount charges or “points” based on the interest rate quoted to the borrower.
Charges in the 10 percent category include services required by the lender but where the lender chooses the service provider, such as appraisals, lender’s title insurance and settlement services where the borrower chooses a provider on a list approved by the lender, owner’s title insurance when the borrower chooses a insurer on the lender’s approved list, and state and local recording fees.
Though any one of these items can increase more than 10 percent from the initial estimate to closing, the combined total of all the fees in this category cannot increase by more than 10 percent.
Charges that can increase without limit include lender-required services when the borrower chooses a title insurance agent, escrow or other settlement company that is not on the lender’s list, the cost of homeowners insurance, per diem interest charges on the loan, and the amount of the initial deposit by the borrower into a pre-paid escrow account.
If any of the fees in the zero-increase change or in the 10% category change by more than 10% the lender is obligated to re-disclose those changes to the borrower and the closing cannot occur before 3 days of that re-disclosure.
The intent of the new good-faith estimate is to encourage borrowers to shop for a lender to work with. The form includes space for comparing up to four competing lender estimates on interest rates, rate locks, prepayment penalties or mortgage insurance, and other terms.
The cost estimates from each competitor are required to remain available for 10 business days. Interest rates can change unless locked by the lender and borrower.
The new standard settlement statement, the HUD-1 is unlike the settlement statements in use today, the revised HUD-1 refers directly to the final GFE to allow borrowers to compare what they were quoted by the lender with their figures at closing. The final page of the new HUD-1 itemizes the three categories of fees from the GFE and compares them line-by-line with the actual fees at closing. The new HUD-1 also requires disclosure of the fee splits of title insurance premiums between the title insurance underwriter and the title insurance agent, who is often the settlement agent.
The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974. The Act covers loans secured with a mortgage placed on a one-to-four family residential property. This includes most every congenital residential real estate mortgage. The purposes of the act is to help consumers become better shoppers for settlement services and to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
If you have questions about the new GFE, HUD-1 or revised RESA requirements please contact me.