4/15/08

Laura Pringle Partner, Pringle and Pringle Law Firm

Introduction

The long-awaited proposal from the Department of Housing and Urban Development (“HUD”) to amend the Real Estate Settlement Procedures Act’s (“RESPA”) implementing regulation (Regulation X) was issued March 14, 2008, and remains out for comment until May 13, 2008.  Several of the proposed revisions follow the lead of the Federal Reserve in its proposed rules to prohibit unfair or deceptive practices in connection with mortgage loans pursuant to the Truth in Lending Act’s (“TILA”) Regulation Z.  The Federal Reserve’s proposal was published January 9, 2008, with a comment period which expired April 8, 2008.
 
The U.S. Department of Treasury’s “Blueprint for Modernized Financial Regulatory Structure” issued March 31, 2008, barely mentioned HUD, but that proposal did refer to HUD and state that “with respect to mortgages, both TILA and RESPA provide separate and important disclosures” and “combining regulatory authority over disclosures in one agency could make efforts to harmonize and improve the mortgage disclosure process easier to accomplish” and referred to the proposed Conduct of Business Regulatory Agency (“CBRA”).  While the CBRA is a long-term proposal, let’s take a look at what we can expect in the short term with the proposed rewriting of mortgage lending rules and how to best prepare for these changes in making mortgage loans.

New TILA and RESPA Rules

The Federal Reserve’s proposed revisions to Regulation Z to prohibit unfair or deceptive practices in connection with mortgage loans have been mirrored by HUD in several respects in HUD’s proposed revisions to the RESPA rules.  While the Federal Reserve’s proposal addressed protections covering higher-priced mortgage loans (those covered by the Home Ownership and Equity Protection Act, known as “HOEPA”), the proposal also includes mortgage loan advertising rules as well as new protections covering all consumer-purpose, closed-end loans secured by a consumer’s principal dwelling.  These broad new protections in Regulation Z include clear disclosures of compensation to be received by mortgage brokers and the costs of this compensation to the borrower as well as a prohibition on the creditor paying more to the broker than stated in a written agreement prior to the consumer paying any fees or submitting a written loan application.  The Federal Reserve also has stated that it is testing transaction-specific mortgage disclosures such as the APR (annual percentage rate) and payment schedule to be given no later than 3 days after application, and before the consumer pays any fee except a reasonable fee for the originator’s review of the consumer’s credit history, as well as other “improved disclosures” for publication as proposed rules in a separate rulemaking.

HUD’s proposed RESPA rules would require that a new good faith estimate (“GFE”) form with specific information in a required format be provided for “shopping” purposes when a “GFE application” is submitted.  No more than the prospective borrower’s name, Social Security number, property address, monthly income, the borrower’s best estimate of the value of the property, and the mortgage amount sought by the borrower could be required in this new “GFE application.”  The GFE form triggered by the GFE application must be provided within a 3-business-day period without any fee except for the cost of providing the GFE including the cost of an initial credit report.  The GFE must include delineated information including, for loans originated by mortgage brokers, the amount of all charges received by the broker and any other originator including any payments from the lender to the broker and specific information on the impact of these payments on the terms of the loan.  Unlike the Federal Reserve proposal, these disclosures would not include the APR.  The disclosures for closing are also to be in a revised form comparable to the GFE form and the amounts in the new categories disclosed generally must match and cannot exceed (with limited tolerance exceptions) the amounts disclosed on the GFE given for shopping purposes.

The GFE required for shopping purposes would include a summary of the key terms of the loan.  The form as proposed would disclose the loan amount and 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; 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.  The disclosed charges/fees must be locked for at least 10 business days and a subsequent mortgage application can be required and must be accepted unless there is a change in the borrower’s eligibility as compared to the information provided by the borrower in the GFE application for shopping purposes.

While currently the RESPA good faith estimate and TILA information can be provided together, this new GFE proposed by HUD for shopping purposes is to be separate from the required TILA disclosures.  However, as proposed, this new form would include a number of the disclosures which would have been part of the TILA disclosures.

Other RESPA Disclosure Changes and Limitations

The new disclosure forms proposed for both the shopping GFE and the final RESPA disclosures would not itemize the charges and services.  Instead, new categories would be required to be used for disclosure purposes and the exact nature of each category would be explained.  The GFE form also will advise the borrower how the interest rate of the loan affects the borrower’s settlement costs and include available options and redisclosure requirements.

The proposed rule generally would prohibit loan originators from exceeding at settlement the amounts disclosed in the shopping GFE “absent unforeseen circumstances” which is a very narrowly defined term and does not include market fluctuations.  There is a limited tolerance for the disclosures for charges by third party service providers of ten percent per charge as long as a ten percent overall increase is not exceeded.

Much more information is to be provided in the shopping GFE including information on how to apply for the loan disclosed in GFE and other charges (property taxes, flood and other insurance), and a mortgage shopping chart.  Yield Spread Premiums (“YSP”) continue to be a very important and not a fully resolved disclosure issue in this proposal.

The proposal also provides that the current HUD-1/1A Settlement Statements would be revised to allow easier comparison (“crosswalk”) with the GFE and to add an addendum to compare charges and describe the specific mortgage terms; the settlement agent would be required by this proposal to provide a copy and to read the addendum to the borrower at settlement.  This is a new “closing script” which would compare the loan terms and settlement charges on the GFE with those on the HUD-1/1A and describe the loan terms.  The borrower must be apprised as to whether the tolerances imposed by the proposed GFE have been met; the closing script to be read aloud to the borrower is to explain any differences and whether the tolerances have been met.  This closing script addendum would have to be made available for review by the borrower 24 hours prior to the settlement and instructions for the preparer of the closing script as well as examples are provided in Appendix A to the proposed rule.

There are proposals in the rules to be considered for average cost pricing for third party services which allow a recent 6-month period to be used to calculate the average price.  There is also a revised definition readdressing and clarifying limitations on the “required use” of affiliates.

Costs and Timing of Making Changes

There are significant software, training, legal, and other costs associated with the HUD proposal to amend RESPA.  While the proposed twelve (12) month period to allow compliance with new requirements provides a permissive transition period, some lenders may choose to adopt some proposals now and others may choose to take a “wait and see” position.  The twelve (12) month period is the first of several issues for which comment is specifically requested in HUD’s RESPA proposal and may be revised before any rule is finalized.

In the publication of HUD’s RESPA proposal, HUD is required to address the costs of compliance.  New software costs to generate the new GFE, disclose consolidated expense categories, and provide the additional information to be disclosed as well as monitoring to track information on GFE’s and ensure that tolerances are not exceeded are discussed in the proposal.  Additional legal costs are also presented for review.  The costs of the “crosswalk” from the shopping GFE and settlement and the new closing script are also presented.

Meanwhile, since the comment period has closed on the Federal Reserve’s proposal, a final rule can be published.  Under the TILA, the Federal Reserve’s disclosure regulations are to have an effective date with at least a 6-month period for compliance; however, the Federal Reserve has the discretion to lengthen the implementation to allow for compliance with form revisions and to shorten the period if necessary to prevent unfair or deceptive practices.  Thus, after the comments are considered, there may be different effective dates for compliance with the disclosure provisions than the other proposed provisions, e.g., the provisions for loans covered by HOEPA and the new advertising rules.  Since current early TILA disclosures are only required for home-purchase loans, providing the proposed disclosures in the near term for all consumer-purpose, closed-end loans secured by a consumer’s principal dwelling may be determined to be important. 

Some lenders are already limiting fees brokers receive and requiring disclosures of brokers’ compensation.  Many of the Federal Reserve’s proposed provisions for loans covered by HOEPA and for advertising are now being fully met by the vast majority of financial institutions but not necessarily by other mortgage lenders and originators. 

Enforcement of TILA and RESPA Rules

The new disclosures and consumer protections proposed by the Federal Reserve would be enforceable as part of Regulation Z.  HUD stated in its proposal to revise RESPA rules that it intends to seek legislative changes to provide HUD broad enforcement tools including the imposition of civil money penalties for violations of many RESPA provisions.  However, currently the TILA and RESPA rules are the subjects of enforcement actions pursued by the Federal Reserve and other federal banking regulatory agencies and compliance examinations of financial institutions already include very thorough reviews of the accuracy of TILA and RESPA disclosures and the timing of those disclosures.

Conclusion

Opportunities are available to enter the home mortgage lending market and to retool products to make residential mortgage loans as other mortgage lenders and originators leave the marketplace.  Financial institutions will want to be aware of and prepare for the proposed rule changes which can be expected to impact these products.

The Federal Reserve and other financial institutions’ regulatory agencies continue to be in the forefront of addressing residential mortgage issues and the TILA proposals provide guidance on issues found also in the HUD’s proposed RESPA rule changes.  The timeframes for compliance with these rules when finalized can be expected to provide flexibility to make changes voluntarily before mandatory compliance dates.  The Federal Reserve’s testing of revised disclosures may provide additional options for financial institutions to consider during the implementation periods.  Also, legislative action may dictate additional rule changes and may impact product options.

Some of the proposed limitations and prohibitions as well as new disclosures can be adhered to currently but disclosure revisions requiring software changes may be accomplished most cost effectively after these proposed rules are finalized.  The proposed RESPA rules should be considered as one of several sets of changes which may be required to be implemented for residential mortgage lenders and caution is appropriate in reviewing the various proposals and when implementing changes.

PRINGLE® Compliance and Safety and Soundness Programs contain policies and audit procedures to comply with RESPA and the Truth in Lending Act.