HUD Final Rule 2009

Monday,
November 17, 2008
Part IV
Department of
Housing and Urban
Development
24 CFR Parts 203 and 3500
Real Estate Settlement Procedures Act
(RESPA): Rule To Simplify and Improve
the Process of Obtaining Mortgages and
Reduce Consumer Settlement Costs; Final
Rule
sroberts on PROD1PC70 with RULES
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68204 Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Rules and Regulations
DEPARTMENT OF HOUSING AND FOR FURTHER INFORMATION CONTACT: Ivy preamble. This final rule is also
URBAN DEVELOPMENT Jackson, Director, or Barton Shapiro, accompanied by a final regulatory
Deputy Director, Office of RESPA and impact analysis and regulatory
24 CFR Parts 203 and 3500 Interstate Land Sales, Office of Housing, flexibility analysis, which are addressed
[Docket No. FR–5180–F–03] Department of Housing and Urban in sections VIII and IX of this preamble.
Development, 451 7th Street, SW., Table of Contents
RIN 2502–AI61 Room 9158, Washington, DC 20410–
8000; telephone number 202–708–0502. I. Significant Changes from March 2008
Real Estate Settlement Procedures Act Proposed Rule
For legal questions, contact Paul S. Ceja, II. Overview of Commenters
(RESPA): Rule To Simplify and Assistant General Counsel; Joan Kayagil,
Improve the Process of Obtaining III. GFE and GFE Requirements—Discussion
Deputy Assistant General Counsel; or of Public Comments
Mortgages and Reduce Consumer Rhonda L. Daniels, Attorney-Advisor, A. Overall Comments on the Proposed
Settlement Costs for GSE/RESPA, Department of Housing Required GFE Form
AGENCY: Office of the Assistant and Urban Development, 451 7th Street, B. Changes to Facilitate Shopping
SW., Room 9262, Washington, DC 1. New Definitions for ‘‘GFE Application’’
Secretary for Housing—Federal Housing and ‘‘Mortgage Application.’’
Commissioner, HUD. 20410–0500; telephone number 202–
708–3137. These telephone numbers are 2. Up-Front Fees That Impede Shopping
ACTION: Final rule. 3. Introductory Language on the GFE Form
not toll-free. Persons with hearing or 4. Terms on the GFE (Summary of Loan
SUMMARY: This final rule amends HUD’s speech impairments may access these Details)
regulations to further RESPA’s purposes numbers through TTY by calling the 5. Period During Which the GFE Terms Are
by requiring more timely and effective toll-free Federal Information Relay Available to the Borrower
disclosures related to mortgage Service at 800–877–8339. 6. Option to Pay Settlement Costs
settlement costs for federally related SUPPLEMENTARY INFORMATION: 7. Establishing Meaningful Standards for
GFEs
mortgage loans to consumers. The Background a. Tolerances
changes made by this final rule are b. Unforeseeable Circumstances
designed to protect consumers from On March 14, 2008 (73 FR 14030),
8. Lender Disclosure
unnecessarily high settlement costs by HUD published a proposed rule (March
9. Enforcement and Cure
taking steps to: improve and standardize 2008 proposed rule) that submitted for 10. Implementation Period
the Good Faith Estimate (GFE) form to public comment changes to HUD’s C. Lender Payments to Mortgage Brokers—
make it easier to use for shopping regulations designed to improve certain Yield Spread Premiums (YSPs)
among settlement service providers; disclosures required to be provided 1. Disclosure of YSP on GFE
ensure that page 1 of the GFE provides under RESPA (12 U.S.C. 2601–2617). 2. Definition of ‘‘Mortgage Broker.’’
The RESPA disclosure requirements 3. FHA Limitation on Origination Fees of
a clear summary of the loan terms and Mortgagees
total settlement charges so that apply in almost all transactions
involving mortgages that secure loans IV. Modification of HUD–1/1A Settlement
borrowers will be able to use the GFE Statement
to identify a particular loan product and on one-to four-family residential
A. Overall Comments on Proposed Changes
comparison shop among loan properties. HUD’s regulations to HUD–1/1A Settlement Statement
originators; provide more accurate implementing the RESPA requirements B. Proposed Addendum to the HUD–1, the
are codified in 24 CFR part 3500. The Closing Script
estimates of costs of settlement services
revisions to the regulations adopted by V. Permissibility of Average Cost Pricing and
shown on the GFE; improve disclosure
HUD in this final rule are intended to Negotiated Discounts—Discussion of
of yield spread premiums (YSPs) to help
make the process of obtaining mortgage Public Comments
borrowers understand how YSPs can A. Overview and Definition of ‘‘Thing of
financing clearer and, ultimately, less
affect borrowers’ settlement charges; Value’’
costly for consumers.
facilitate comparison of the GFE and the The preamble of the March 2008 B. Methodology for Average Cost Pricing
HUD–1/HUD–1A Settlement proposed rule presents an overview of VI. Prohibition Against Requiring the Use of
Statements; ensure that at settlement the statutory requirements under Affiliates—Discussion of Public
borrowers are aware of final costs as Comments
RESPA, as well as a detailed account of VII. Technical Amendments
they relate to their particular mortgage HUD’s efforts to initiate regulatory
loan and settlement transaction; clarify VIII. Regulatory Flexibility Act—Comments
changes commencing in 2002. HUD of the Office of Advocacy of the Small
HUD–1 instructions; expressly state that refers the reader to the March 2008 Business Administration
RESPA permits the listing of an average proposed rule for a detailed description IX. Findings and Certifications
charge on the HUD–1; and strengthen of the background of this rulemaking.
the prohibition against requiring the use I. Significant Changes From March
The principles that guided HUD in the
of affiliated businesses. 2008 Proposed Rule
development of this rule are also
This final rule follows a March 14, included in the March 2008 proposed RESPA is a consumer protection
2008, proposed rule and makes changes rule. statute, and, as further described in this
in response to public comment and The preamble to this final rule preamble, consumer groups were, in
further consideration of certain issues highlights some of the more significant general, very supportive of the basic
by HUD. In addition, this rule provides changes made at this final rule stage in goals and key components of the March
for an appropriate transition period. response to public comment and upon 2008 proposed rule. For example, the
Compliance with the new requirements further consideration of certain issues National Consumer Law Center, in a
pertaining to the GFE and settlement by HUD, summarizes the public joint comment with Consumer Action,
statements is not required until January comments received on the March 2008 the Consumer Federation of America,
1, 2010. However, certain provisions are proposed rule, and provides HUD’s and the National Association of
to be implemented upon the effective response to those comments. The Consumer Advocates, stated, ‘‘HUD has
date of the final rule. following table of contents is provided done an excellent job in moving the ball
DATES: Effective Date: This rule is to assist the reader in identifying where toward greater protection for consumers
effective on January 16, 2009. certain topics are discussed in this in the settlement process.’’ In addition,
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Rules and Regulations 68205
the Center for Responsible Lending, in industry commenters about the need for comment period on June 12, 2008, HUD
its comment concluded: ‘‘[W]e applaud sufficient time for the industry to make had received approximately 12,000
HUD for addressing the challenge of systems and operational changes comments. Approximately two-thirds of
reforming RESPA. We believe HUD’s necessary to meet the requirements of the comments received were duplicative
proposed GFE provides important the new rule, the final rule provides that or repeat comments; i.e., individuals or
improvements over existing the new GFE and HUD–1 will not be organizations who submitted identical
requirements.’’ required until January 1, 2010. or virtually identical comments. For
HUD received adverse comments However, certain other provisions of the example, members of certain trade
about many aspects of the proposed rule will take effect 60 days from the organizations, or employees of certain
rule, primarily from mortgage industry publication date of the final rule. The companies, frequently submitted
representatives, including requests that following are some of the most identical comments.
HUD withdraw its proposal entirely or significant changes made at this final HUD received comments from
that HUD postpone its current efforts in rule stage, and are discussed in more homeowners, prospective homeowners,
order to work with the Federal Reserve detail in the discussion of public organizations representative of
Board to arrive at a joint regulatory comment. consumers, and numerous industry
approach. HUD takes these comments • A GFE form that is shorter than had organizations involved in the settlement
very seriously and appreciates the been proposed. process, including lending institutions,
concerns raised by these commenters. • Allowing originators the option not mortgage brokers, real estate agents,
HUD’s view continues to be, however, to fill out the tradeoff table on the GFE lawyers, title agents, escrow agents,
that improvements in disclosures to form. closing agents and notaries, community
consumers about critical information • A revised definition of development corporations, and major
relating to the costs of obtaining a home ‘‘application’’ to eliminate the separate organizations representative of key
mortgage, often the most significant GFE application process. industry areas such as bankers,
financial transaction a consumer will • Adoption of requirements for the mortgage bankers, mortgage brokers,
enter into, are needed, and that such GFE that are similar to recently revised realtors, and title and escrow agents, as
disclosures are a central purpose of Federal Reserve Board Truth-in-Lending well as from state and federal regulators.
RESPA. Most commenters—including regulations which limit fees charged in HUD appreciates all those who took
consumers, industry representatives, connection with early disclosures and the time to review the March 2008
and federal and state regulatory defining timely provision of the proposed rule and submit comments.
agencies—supported the concept of disclosures. In addition to submission of
better disclosures in general, and • Clarification of terminology that comments, HUD representatives
commended both HUD’s efforts and describes the process applicable to, and accepted invitations to participate in
particular provisions in the proposed the terms of, an applicant’s particular public forums and panel discussions
rule. loan. about RESPA and HUD’s March 2008
Moreover, given the current mortgage • Inclusion of a provision to allow proposed rule. HUD also met, at HUD
crisis, the foreclosure situation many lenders a short period of time in which Headquarters or at the offices of the
homeowners are now facing because to correct certain violations of the new Office of Management and Budget
they entered into mortgage transactions disclosure requirements. (OMB), with interested parties,
that they did not fully understand, and • A revised HUD–1/1A settlement requesting meetings as provided by
the prospect that future homeowners statement form that includes a summary Executive Order 12866 (Regulatory
may find themselves in this same page of information that provides a Planning and Review), who highlighted
situation, HUD believes that it is very comparison of the GFE and HUD–1/1A for HUD and OMB areas of concern and
important that the improvements in list of charges and a listing of final loan support for various aspects of the rule.
mortgage disclosures made by this final terms as a substitute for the proposed All of this input contributed to HUD’s
rule move forward immediately. closing script addition. decisions that resulted in this final rule.
Nevertheless, as noted in the preamble • Elimination of the requirement for a HUD also received approximately 100
to the March 2008 proposed rule, HUD closing script to be completed and read public comments that were submitted
will continue to work with the Federal by the closing agent. after the deadline. To the extent
Reserve Board to achieve coordination • A simplified process for utilizing an feasible, HUD reviewed late comments
and consistency between the Board’s average charge mechanism. to determine if issues were raised that
current regulatory efforts and HUD’s • No regulatory change in this
were not addressed in comments
requirements. rulemaking regarding negotiated
HUD has made many changes to the submitted by the deadline.
discounts, including volume based
March 2008 proposed rule in response discounts. III. GFE and GFE Requirements—
to public comment and further Discussion of Public Comments
consideration of certain issues by HUD. II. Overview of Commenters
Some of the provisions in the March The public comment period on the A. Overall Comments on the Proposed
2008 proposed rule have been revised in March 2008 proposed rule was Required GFE Form
this final rule and others have been originally scheduled to close on May 13, Proposed Rule. HUD proposed a four-
withdrawn for further consideration. 2008. In response to numerous requests, page GFE form. The first page of the
HUD believes that the result is a final including congressional requests, to GFE included a summary chart with key
rule that will give borrowers additional extend the comment period, and HUD’s terms and information about the loan for
and more reliable information about desire to develop a better rule, HUD which the GFE was provided, including
their mortgage loans earlier in the announced an extension of the comment initial loan balance; loan term; initial
application process, and will better period. This announcement was made interest rate; initial amount owed for
assure that the mortgage loans to which on both HUD’s Web site and by principal, interest, and any mortgage
they commit at settlement will be the publication of a notice in the Federal insurance; rate lock period; whether the
loans of their choice. At the same time, Register on May 12, 2008 (73 FR 26953). interest rate can rise; whether the loan
in recognition of the concerns raised by At the close of the extended public balance can rise; whether the monthly
amount owed for principal, interest, and the interest rate of the loan. (See section commended HUD for adding several
any mortgage insurance can rise; III.B.6 of this preamble below.) features that highlight risk to the first
whether the loan has a prepayment The fourth page of the GFE included page of the GFE: The prepayment
penalty; whether the loan has a balloon a discussion of financial responsibilities penalty, the balloon payment, the
payment; and whether the loan includes of a homeowner. The loan originator maximum possible loan balance, the
a monthly escrow payment for property would have been required to state the maximum monthly payment, and
taxes and possibly other obligations. annual property taxes and annual whether certain fees are escrowed. CRL
The first page of the form also included homeowner’s flood, and other required stated that knowing the maximum
information regarding the length of time property protection insurance, but monthly payment of principal, interest,
the interest rate for the GFE was valid; would not have been required to state and mortgage insurance is critical to the
the length of time the other settlement estimates for other charges such as consumer’s ability to determine whether
charges were valid; information about annual homeowner’s association or or not the loan is sustainable. It
when settlement must occur if the condominium fees. The GFE included a recommended that other features be
borrower proceeds with the loan; and section that advised borrowers that the added to page 1, including increased
information concerning how many days type of loan chosen could affect current emphasis on total monthly payment. It
the interest rate must be locked before and future monthly payments. The also recommended that the monthly
settlement. At the bottom of the first proposed GFE also indicated that the payment amount include an estimate of
page, the GFE included a summary of borrower could ask the loan originator property taxes, property insurance, and
the settlement charges. The adjusted for more information about loan types the other charges listed on page 4 of the
origination charges listed on the second and could look at several government proposed GFE as one total line item, on
page, along with the charges for all other publications, including HUD’s Special page 1.
settlement charges listed on the second Information Booklet on settlement CRL also recommended that page 1 of
page, would have been totaled and charges, Truth in Lending Act (TILA) the GFE include the annual percentage
listed on this page. disclosures, and consumer information rate (APR) instead of the note rate
The second page of the GFE included publications of the Federal Reserve because the APR is the standardized
a listing of estimated settlement charges. Board. The March 2008 proposed rule measurement of loan cost in the
The loan originator’s service charge invited comments on possible industry, and because the APR captures
would have been required to be listed at additional ways to increase consumer the total cost of the loan. CRL further
understanding of adjustable rate recommended that given that credit cost
the top of page two, and the credit or
mortgages. comprises the largest component of total
charge (points) for the specific interest
Page 4 also would have included loan cost, the form’s emphasis on
rate chosen would have been required to
information about possible lender settlement costs should be reduced.
be subtracted or added to the service In addition, CRL recommended that
charge to arrive at the adjusted compensation after settlement. In
addition, page 4 would have included a the first page of the GFE also include
origination charge, which would have information on the first possible date on
been shown on the top of page two. Page shopping chart to assist the borrower in
comparing GFEs from different loan which the interest rate can rise; an
two of the GFE also would have explanation of what prepayment
required an estimate for all other originators and information about how
penalties are and how they are triggered;
settlement services. The GFE included to apply for the loan for which the GFE
simplified broker compensation; and
categories for other settlement services had been provided.
notification that mortgage terms are
including: Required services that the Comments negotiable. While CRL supported
loan originator selected; title services aggregating fees on page 2 of the GFE to
and lender’s title insurance; required Consumer Representatives
promote mortgage loan shopping, it
services that the borrower would have Consumer representatives generally recommended that the tradeoff table on
been able to shop for; government supported the proposed standardized page 3 be revamped in order to force the
recording and transfer charges; reserves GFE, while offering specific rate/point tradeoff that it is intended to
or escrow; daily interest charges; recommendations for improvement. The disclose.
homeowner’s insurance; and optional National Community Reinvestment The GFE proposed by CRL includes
owner’s title insurance. The GFE would Coalition recommended inclusion of the the APR, for reasons stated above. In
have required these charges to be annual percentage rate (APR) on the addition, the GFE proposed by CRL
subtotaled at the bottom of page two. GFE. The Center for Responsible includes the first date the interest rate
The sum of the adjusted origination Lending (CRL) stated that it believed can rise. CRL also included on page 1,
charges and the charges for all other that the proposed GFE has the potential ‘‘estimated required additional housing
settlement services would have been to significantly improve current expenses’’ as well as ‘‘total estimated
required to be listed on the bottom of disclosure requirements because it maximum monthly housing costs.’’ CRL
page 2. offers a standardized shopping tool with stated that while it understands that
The third page of the GFE would have better linkages to the HUD–1, requires consumers should not compare loans
required information concerning that terms be binding, and takes based on total estimated maximum
shopping for a loan offer. In addition, important steps toward trying to alert monthly housing costs, CRL believes
page three would have included consumers to the risky features of their that it is critical that consumers,
information about which settlement loans. However, according to CRL, most particularly those in the subprime
charges could change at settlement, and consumers will not have the capacity to market, begin evaluating their ability to
by how much such charges could absorb everything in a four-page GFE afford the loan at the outset of the loan
change. Page 3 also would have required and therefore it proposed an alternative process. CRL’s proposed GFE also
the loan originator to include two-page GFE. includes a broader prepayment penalty
information about loans for which a CRL noted that a new GFE should disclosure than the prepayment penalty
borrower would have qualified that ensure that consumers have the best disclosure on the proposed GFE. In
would increase or decrease settlement chance possible to understand the addition, CRL’s proposed GFE includes
charges, with a corresponding change in riskiest features of their loans. CRL a broker compensation disclosure, a
notice that the consumer can negotiate important information. MBA submitted the disparity among originator
settlement charges and a summary of a two-page GFE as an alternative to the disclosures, it more closely mirrors the
charges to facilitate reconciliation to the proposed GFE that combines the RESPA HUD–1 than the proposed GFE; it does
HUD–1. and TILA disclosures. While lenders not create groupings of disclosures that
Comments by the National Consumer and their associations expressed general must be broken out; and it is one page,
Law Center (NCLC) (filed on behalf of support for the goals of the proposed making it more user friendly.
NCLC and Consumer Action, the rule, many lenders recommended that
Consumer Federation of America, and Other Commenters
HUD work together with the Federal
the National Association of Consumer Reserve Board to produce a combined Many other commenters also
Advocates) stated that the proposed RESPA and TILA disclosure and to expressed concern about the length of
standardization of the GFE, the implement this combined product the form. The National Association of
increased linkage between the GFE and simultaneously, to replace the current Realtors (NAR) stated that the proposed
the settlement statement, and the RESPA and TILA disclosures provided GFE fails to achieve the right balance
proposed requirement that some terms at the time of application. between providing the necessary
on the GFE be binding, are important MBA stated that it generally supports information and presenting such
changes that should increase consumer grouping of the amount or ranges of information simply in a manner to be
understanding and competition in the specific services on the GFE in a manner useful to the consumer. NAR asserted
mortgage marketplace. NCLC that is comprehensible and comparable, that the disclosures, tables, and
recommended that HUD go further by but recommended that the form be instructions in the proposed GFE will
requiring the prominent disclosure of modified so that it is mainly a list of serve as a ‘‘psychological barrier’’ to
the APR on the GFE instead of the charges with minimal supplementary many consumers who will feel
interest rate. According to NCLC, failure material, as on the GFE form submitted overwhelmed with having to read,
to include the APR on the GFE obscures by MBA. MBA recommended that the comprehend, and act on this amount of
the cost of credit and hinders consumer material on page 3 and page 4 of the information. NAR stated that the
shopping. proposed GFE be moved to explanatory decision not to include itemized costs in
NCLC expressed concern that the materials such as the Special the proposed GFE will result in
proposed GFE gives far greater Information Booklet. While MBA stated consumers getting less than the full
prominence to settlement costs than to that a summary of loan terms could be disclosure Congress intended in the
interest. NCLC stated that if the GFE is useful, it recommended that the original statute. NAR asserted that the
successful in getting consumers to shop summary be removed from the GFE and proposed GFE creates the opportunity to
on settlement costs, there is a risk that issued by the Federal Reserve Board in bury additional, undisclosed fees into
consumers will neglect the primary cost consultation with HUD. MBA further ‘‘packages’’ and prevents individual
component of loans, interest. According recommended the deletion of the term provider cost comparison to the
to NCLC, while settlement costs matter, ‘‘adjusted origination charge’’ from the detriment of consumers.
they matter most not as a stand-alone bottom of page 1. NAR also recommended that the
cost, but in relation to the interest rate. A major lender expressed the concern proposed GFE and the HUD–1 mirror
NCLC recommended that the GFE be that the proposed form is so laden with each other in order to assist consumers
revised by reducing the focus on information that lenders cannot convey in understanding whether the terms and
settlement costs through reduction of key cost information in a clear and expenses that were disclosed at loan
the font size and elimination of the bold conspicuous manner. This commenter application are those that are the
type for settlement costs. NCLC also stated that the proposed form would governing terms at closing. NAR noted
recommended that HUD work with the pose a significant compliance burden that, along with CRL, it previously
Federal Reserve Board to produce for lenders and would not provide recommended that HUD provide
disclosures that are not misleading or borrowers with any greater consumers a summary GFE
that obscure the actual cost of credit. In understanding of their loan. accompanied by a full GFE with
addition, NCLC recommended that the Specifically, the lender objected to the detailed explanations of each
first page of the GFE provide only a total disclosures required on page 3 of the subcategory of fees to help consumers
for all settlement costs, without proposed form. understand the services and fees for
breaking out the origination costs. The National Association of Mortgage which they are being charged. NAR
NCLC supported the loan summary on Brokers (NAMB) generally supported reiterated this recommendation for the
page 1 and recommended that the the inclusion of information listed on final rule and, along with the American
summary sheet refer to the APR instead page 4 of the proposed GFE. However, Land Title Association (ALTA),
of to the interest rate. NCLC also NAMB objected to consolidating major submitted a summary GFE and a full
recommended that the first page provide categories on the GFE on the grounds GFE for HUD’s consideration.
only a total of the estimated settlement that such categories tend to lead to The Credit Union National
charges, not separate lines for the consumer confusion since components Association (CUNA) opposed increasing
origination and total settlement costs. are not evident to consumers until the GFE to the proposed four-page form.
presented with the HUD–1, on which CUNA stated that the proposed form
Industry Representatives they are disclosed separately. NAMB would not benefit borrowers who could
Generally, lenders and their also asserted that the proposed GFE is be confused by the additional
associations opposed the proposed GFE in conflict with the current RESPA information, rather than helped in
on the grounds that the form is too requirements on affiliated business understanding their loan options. The
lengthy and, in their opinion, would disclosure, because the proposed GFE National Association of Federal Credit
only confuse borrowers. The American eliminates the name of the provider on Unions (NAFCU) stated that the length
Bankers Association commented that the GFE. NAMB submitted, in place of of the proposed form is too long for the
the proposed GFE is overly prescriptive. the proposed GFE, a model that purpose of the GFE, which is simply to
The Mortgage Bankers Association provides symmetrical disclosure of provide a good faith estimate of
(MBA) stated that the length of the form originator compensation. NAMB stated settlement costs. NAFCU recommended
will cause borrowers to ignore its that its model form not only remedies that pages 3 and 4 of the proposed form
be consolidated into one page by ALTA asserted that HUD’s views that commented that more information about
removing the section on page 3 entitled consumers: (1) Shop among lenders potential payment shock and the
‘‘understanding which charges can based on the lender’s estimates of adjustment of interest rates should be
change at settlement’’ and the section on charges in the 1100 series on the HUD– included on the GFE. Specifically, the
page 4 entitled ‘‘using the shopping 1, and (2) have no need to know the FDIC recommended that the GFE
chart.’’ NAFCU suggested that the amounts of the various charges that explain when an initial interest rate
information contained in these sections comprise the aggregate amount, are in expires and when monthly payments
should be provided in the Special error. ALTA stated that with regard to increase.
Information Booklet. the itemization of individual costs that The Federal Trade Commission (FTC)
The Conference of State Bank comprise the aggregate Block 4 charge, staff comment stated that the proposed
Supervisors (CSBS), the American consumers who want to shop for these GFE form offers several features that
Association of Residential Mortgage services will be seriously disadvantaged will benefit consumers. These features
Regulators (AARMR), and the National because there is no way to determine include a summary overview of loan
Association of Consumer Credit the lender’s estimated price for the title terms and charges on the first page; the
Administrators (NACCA) stated that company, escrow company, attorney, or additional details regarding categories of
they support HUD’s goal to provide surveyor. fees and shopping options on
clear and valuable information to ALTA also stated that the disclosure subsequent pages; and the focus on total
consumers regarding adjustable rate of a single fee for title insurance fails to settlement costs, rather than itemized
mortgages on the GFE. These recognize that, in most areas of the costs. However, FTC staff stated that the
commenters recommended that HUD country, the seller generally pays a form raises concerns that warrant
work with the Federal Reserve Board to substantial portion of the title insurance clarification or modification. For
develop coordinated, consistent, and charges. ALTA noted that the March example, FTC staff stated that
cooperative disclosures to ensure that 2008 proposed rule failed to provide consumers may be confused based on
consumers are not confused. They instruction as to how to disclose title- the differences between the GFE and the
recommended that the GFE contain an related fees when these costs are paid by HUD–1 disclosures and the TILA forms
estimate of taxes and insurance even the seller. ALTA expressed concern that they receive, particularly the difference
when there will be no reserve for taxes if the GFE and HUD–1 do not itemize in monthly amounts. Rather than
and insurance in the monthly payment. the fees for title insurance services, the explain the differences in the Special
According to these commenters, if the possibility exists that the borrower Information Booklet, FTC staff
estimate is not included in the monthly could pay for services for which sellers recommended that HUD provide a clear
payment amount, the borrower will not currently assume payment, and this explanation of the difference between
would result in higher costs to the the forms on the GFE and the closing
clearly understand whether they can
borrower. ALTA requested that HUD script, or use an alternative disclosure
afford the monthly payment. While
continue to require title insurance fees on the GFE and closing script to ensure
these commenters indicated their
disclosed in the 1100 series of the HUD– as much consistency with the TILA
general support for the grouping of fees
1 to be separately itemized on both the disclosures as possible.
and charges on the proposed GFE into The Office of Thrift Supervision
GFE and HUD–1.
major settlement cost categories, they With respect to the category for (OTS) commented that HUD should
expressed concern that some in the owner’s title insurance on page 2 of the consider revising its settlement cost
industry might take advantage of this GFE, ALTA requested that the word booklet to include illustrations
format by putting additional fees and ‘‘optional’’ be dropped from the reflecting the impact that loan features
charges in a totaled category. disclosure on both the proposed GFE and terms can have on the cost of the
ALTA stated that page 1 of the and the proposed HUD–1. ALTA mortgage. In particular, OTS stated that
proposed GFE presents the summary of expressed concern that, by including the such illustrations would be particularly
loan terms and the total costs for word ‘‘optional’’ in both disclosures, useful in reflecting payment shock,
settlement services in an HUD appears to be suggesting that a among other features, that a borrower
understandable format. However, ALTA consumer does not need separate may experience when rates reset.
urged HUD to improve the individual coverage for title insurance, which may
fee disclosures by using a page that is HUD Determination
discourage borrowers from obtaining
identical to page 2 of the current HUD– owner’s coverage. ALTA also noted that In response to comments, HUD has
1. ALTA stated that revising page 2, as owner’s title insurance is required in made a number of changes to the
it recommended, would allow residential real estate transactions in revised GFE, including shortening the
consumers to know all fees included many states and that, by labeling form from four pages to three and
within the total amount listed on the owner’s title insurance as optional on clarifying important information for
GFE summary page and to more directly both the GFE and the HUD–1, HUD’s borrowers throughout the form. While
compare these fees to the final charges requirement would directly conflict HUD recognizes that too much
and closing. with various state requirements. information on the form may
With respect to the categorization of overwhelm borrowers, HUD is also
fees on page 2 of the proposed GFE, Federal Agencies cognizant that borrowers need to be
ALTA objected to the proposed The Federal Deposit Insurance aware of the important aspects of the
requirement that a single fee be Corporation (FDIC) also expressed loan, as well as the settlement costs.
disclosed for title services and lender’s concern about the length of the While HUD considered all of the various
title insurance on Block 4 and for proposed GFE. While considering the alternative forms submitted by
primary title services in the 1100 proposed GFE to be an improvement commenters, HUD determined that its
section of the HUD–1. ALTA stated that over the current model form, the FDIC proposed GFE, with certain
the elimination of required itemization expressed concern about whether the modifications made at this final rule
of these fees is of concern and can only proposed GFE provides information that stage, would best meet the needs of
serve to lessen, rather than enhance, consumers will understand in an easily borrowers to shop and compare loans
competition for these services. understandable format. The FDIC also from different loan originators. As
demonstrated by the testing of the form property taxes or other property-related insurance to protect the borrower’s
conducted by HUD’s forms contractor, charges in addition to the monthly interest in the property.
consumers liked the general format of payment. The section includes a Block 6 of the revised form, ‘‘Required
the form and were not overwhelmed by disclosure as to whether an escrow services that you can shop for,’’ is the
its length. Accordingly, HUD has account is required for the loan same as Block 5 of the proposed form.
maintained several important features of described in the GFE. If no escrow While Block 6 of the proposed form
the proposed GFE in the final form. account is included for the loan, this included both government recording
Other features from the proposed form section informs the borrower that the charges and transfer taxes, in response
have been removed from the form, as additional charges must be paid directly to comments, government recording
revised at this final rule stage, and will when due. If the loan includes an charges are now listed in Block 7 of the
be included in the revised Special escrow account, the section informs the revised form, along with the explanation
Information Booklet. The final GFE borrower that it may or may not cover that ‘‘these charges are state and local
continues to inform borrowers about all additional charges. fees to record your loan and title
critical loan and settlement cost The bottom of page 1 on the revised documents.’’ Block 8 now lists transfer
information and allows borrowers to form retains the ‘‘summary of your taxes with the explanation that ‘‘these
effectively shop among loan originators settlement charges’’ section, as set forth charges are state and local fees on
without burdening them with in the proposed GFE. The summary mortgages and home sales.’’ This change
extraneous information. includes the amount from Block A on was made in response to comments so
The top of page 1 of the revised form page 2, ‘‘your adjusted origination that these two different types of
continues to include blank spaces for charges’’; the amount from Block B on government fees could be treated
the loan originator’s name, address, page 2, ‘‘your charges for all other differently with respect to tolerances, as
phone number, and email address, as settlement services’’ ; and reflects the explained below.
well as the borrower’s name, the ‘‘total estimated settlement charges’’ as Block 7 of the proposed form,
property address, and the date of the the sum of Blocks A and B. ‘‘Reserves or escrow,’’ is now Block 9 of
GFE. In addition, the top of the revised the revised form and is now listed as
Page 2 of the revised GFE, like page
page 1 includes a statement about the ‘‘initial deposit for your escrow
2 of the proposed form, contains a
purpose of the GFE, and information on account.’’ The sentence below the title
listing of estimated settlement charges. now explains that the charge is held in
how to shop for a loan offer. This
The top of the second page continues to an escrow account to pay future
section of the form also references
require that the origination charge be recurring charges on the property and
HUD’s Special Information Booklet on
listed, and the credit or charge for the includes check boxes to indicate
settlement charges, as well as Truth in
specific interest rate is required to be whether the escrow includes all
Lending disclosures and information
subtracted or added to the origination property taxes, all insurance or other
available at http://www.hud.gov/respa.
charge to arrive at the adjusted payments. The ‘‘other’’ category may
Such information was included on page
origination charge. However, this include non-tax and non-insurance
4 of the proposed form. While the
revised page 1 also continues to include portion of the second page includes escrowed items, and/or specify which
information about important dates, such some minor changes from the proposed taxes or insurance payments are
as how long the interest rate is available form. First, Block 2 now references included in the escrow if the escrow
and how long the estimate for all other ‘‘points’’ after the ‘‘charge’’ in the does not include all such payments.
settlement charges is available, the rate heading, rather than at the end of the Block 8 of the proposed form, ‘‘Daily
lock period information that was sentence, to better inform the borrower. interest charges,’’ is now Block 10 of the
included in the loan summary chart on The heading now reads, ‘‘Your credit or revised form. Block 9 of the proposed
the proposed GFE has been moved from charge (points) for the specific interest form, ‘‘Homeowner’s insurance’’ is now
the summary chart to the ‘‘important rate chosen.’’ In addition, to draw the Block 11 of the revised form.
dates’’ block on the revised form. This borrower’s attention to the effect of the The revised GFE requires the charges
change was made to consolidate all the credit in Block 2, the term ‘‘reduces’’ is in Blocks 3 through 11 to be subtotaled
information about dates in one section now bolded in box 2. To draw the at the bottom of page 2. The sum of the
of the form and to minimize potential borrower’s attention to the effect of the adjusted origination charges and the
borrower confusion. charge in Block 2, the term ‘‘increases’’ charges for all other settlement services
The revised page 1 also includes a is now bolded in box 3 of the second are required to be listed on the bottom
summary chart of the loan on which the block. Finally, the second sentence in of page 2. This figure will also be listed
GFE is based, but this section of the box 2 and box 3 in Block 2 refers to on the bottom of page 1, in the block
form is now referred to as ‘‘summary of ‘‘settlement’’ charges rather than ‘‘Total Estimated Settlement Charges.’’
your loan’’ instead of ‘‘summary of your ‘‘upfront’’ charges, in order to be In light of comments received on
loan terms,’’ as proposed. The revised consistent with other language on the various aspects of the proposed form,
summary continues to include key form. page 3 of the revised form has been
terms and information about the loan for Page 2 of the revised GFE, like the redesigned to include the most
which the GFE was provided, but second page of the proposed GFE, also important information from pages 3 and
certain changes were made to headings contains an estimate for all other 4 of the proposed form. At the top of the
on the chart to address specific settlement services. While the categories redesigned page 3, the section
comments. While the proposed GFE from the proposed form have generally ‘‘Understanding which charges can
included information about the monthly been retained on the final form, certain change at settlement’’ includes
escrow payment in the summary chart, changes have been made to the information to assist the borrower in
the revised form includes a separate categories to streamline the form in comparing charges on the GFE with the
section concerning the escrow account. response to comments. Block 10 of the charges listed on the HUD–1 settlement
This section, referred to as ‘‘escrow proposed form ‘‘optional owner’s title statement. Next, the tradeoff table
account information,’’ informs the insurance’’ is now Block 5 of the revised provides information on different loans
borrower that some lenders require an form and informs the borrower that the for which the borrower is qualified that
escrow account to hold funds for paying borrower may purchase owner’s title would increase or decrease settlement
charges, with a corresponding change in the loan originator determined that the recognized the Federal Reserve Board’s
the interest rate of the loan. Completing borrower was not creditworthy. The rulemaking authority under ECOA and
this tradeoff table is now optional. This borrower could not be rejected at the the Fair Credit Reporting Act (FCRA)
table is intended to be read in mortgage application stage unless the and indicated that requirements under
conjunction with the section on originator determined there was a these statutes and their implementing
‘‘adjusted origination charges’’ on page change in the borrower’s eligibility regulations would be triggered by the
2 of the form. The tradeoff table on the based on final underwriting, as newly defined GFE application. They
final form has been modified to require compared to information developed for noted that current definitions in both
‘‘your initial loan amount’’ in the first such application prior to the time the statutes and their implementing
category, as opposed to ‘‘your initial borrower chose the particular originator. regulations cover the GFE application.
loan balance’’ on the proposed form, to Under the proposed rule, the originator According to their comments, the
be consistent with the change in would have been required to document application of ECOA and FCRA to the
terminology on the first page of the the basis for such a determination and GFE application is important because
form. maintain the records for no less than 3 such application ensures binding and
Page 3 of the revised form also years after settlement. accurate disclosures. These commenters
includes the shopping chart included on The March 2008 proposed rule also recommended that HUD coordinate
page 4 of the proposed form, to assist provided that where a borrower was with the Federal Reserve Board to
borrowers in comparing GFEs from rejected for a loan for which a GFE had ensure that the GFE application remains
different loan originators. Finally, the been issued, but the borrower qualified covered by ECOA and FCRA.
lender disclosure that was included on for a different loan program, the Industry Representatives
the proposed form has been retained on originator would have to provide a
the revised form, as discussed below. revised GFE. If a borrower was rejected Industry representatives expressed
for a loan and no other loan product significant concerns about the ‘‘GFE
B. Changes to Facilitate Shopping Application’’ and ‘‘Mortgage
could be offered, the borrower would
1. New Definitions for ‘‘GFE Application’’ approach under the March
have to be notified within one business
Application’’ and ‘‘Mortgage 2008 RESPA proposal. Specifically, they
day and the applicable notice
expressed concerns about the limited
Application’’ requirements satisfied.
information originators would be
Proposed Rule. The March 2008 Under the March 2008 proposed rule,
permitted to collect in order to conduct
proposed rule provided separate for loans covered by RESPA, the TILA
preliminary underwriting before issuing
definitions for a ‘‘GFE application’’ and disclosures would be provided within 3
a GFE. One commenter stated that this
a ‘‘mortgage application’’ in an effort to days of a written GFE application,
limitation precludes an originator from
promote shopping. Under the proposed unless the creditor, i.e. the loan
considering, at the GFE application
rule, a loan originator would have originator, determined that the
stage, important information that a
provided a borrower a GFE once the application could not be approved on
lender currently collects early in the
borrower provided the originator six the terms requested. The proposed rule
transaction in order to develop a GFE.
pieces of information that included: indicated that based on consultations
Some of those additional items include
Borrower’s name, Social Security with the Federal Reserve Board, when a loan product type sought, purpose of
Number, property address, gross GFE application is submitted, an initial loan, and information to compute the
monthly income, borrower’s TILA disclosure would also have to be loan-to-value ratio. The commenters
information on the house price or best provided, so long as the application was claimed that limiting consideration of
estimate of the value of the property, in writing, or, in the case of an oral this type of information would make it
and the amount of the mortgage loan application, committed to written or difficult for originators to provide a
sought. The rule provided that the GFE electronic form. HUD noted that meaningful GFE, because they would be
application would have to be in written whether a GFE application under a unable to provide any reliable estimate
form and, if provided orally, would particular set of facts triggered the Home of cost or determine a borrower’s ability
have to be reduced to a written or Mortgage Disclosure Act (HMDA) or the to repay the loan. They also stated that
electronic record. Under the March 2008 Equal Credit Opportunity Act (ECOA) the inability to consider important
proposed rule, a separate GFE would requirements would be determined underwriting information until the
have to be provided for each loan where under Regulation B and Regulation C, as mortgage application stage would result
a transaction involved more than one interpreted in the Federal Reserve in the issuance of more than one GFE.
mortgage loan. Board’s official staff commentary. The net result, they concluded, would
The proposed rule would have Comments lead to borrower confusion and
required that once a borrower chose to increased costs to the borrower.
proceed with a particular loan Consumer Representatives Industry commenters also expressed
originator, the loan originator could Consumer representatives supported further operational concerns related to
require the borrower to provide early delivery of the GFE, which, under the limitations on underwriting
additional information through a the proposed rule, would be issued information at the GFE stage. They
‘‘mortgage application’’ in order to when a lender receives the proposed stated that the limitation on information
complete final underwriting. This ‘‘GFE Application.’’ However, they that loan originators can take into
additional information could be used to emphasized that enforcement and consideration, in developing a GFE,
verify the GFE, and could include private rights of action are necessary to would force lenders to develop systems
income and employment verification, ensure that a meaningful GFE will be that could underwrite based on very
property valuation, an updated credit provided to consumers early in the limited information. They further stated
analysis, and the borrower’s assets and mortgage application process. that the originator would not have
liabilities. Consumer representatives also raised sufficient information to determine the
The March 2008 proposed rule the issue of whether HUD’s definition of type of property the consumer is
provided that a borrower could be ‘‘GFE Application’’ triggers other considering—such as whether the
rejected at the GFE application stage if regulatory requirements. They property is commercial, industrial,
vacation, or residential—or the type of determines that the application cannot rule. Under this approach, at the time of
loan the consumer is considering, such be approved on the terms requested. application, the loan originator will
as a purchase money loan, refinance, or The commenters further noted that the decide what application information it
home equity loan. They stated it is Regulatory Impact Analysis states ‘‘[t]he needs to collect from a borrower, and
important for the lender to have this proposed rule clarifies that only the which of that collected application
information because the lender may not mortgage application would be subject information it will use, in order to issue
engage in the kind of lending a to Regulations B (ECOA) and C (HMDA), a meaningful GFE. However, before
consumer seeks. which is the current situation today.’’ providing the GFE, the loan originator
In addition, industry commenters These commenters requested will be assumed to have collected at
expressed confusion over whether a clarification of this matter. least the following six items of
credit report was one of the six pieces Industry representatives questioned information: the borrower’s name,
of information they could collect as part HUD’s legal authority to: limit Social Security Number, and gross
of the GFE application, and requested information originators can request to monthly income; the property address;
that HUD provide clarification on this underwrite a loan; require that an estimate of the value of the property;
subject. originators accept an abbreviated and the amount of the mortgage loan
Industry representatives also application from which to complete a sought. The borrower’s Social Security
requested that HUD permit borrowers to GFE; require a new GFE when a Number would be collected for
expedite the application process and counteroffer is made; and require a purposes of obtaining a credit report.
proceed to the mortgage application consumer to be notified within one The final rule now defines
stage, when the borrower so desires due business day of a lender’s decision to ‘‘application’’ to include at least these
to timing or other concerns. reject an application, among other six items of information. Therefore,
Industry representatives stated that concerns. under this single application process, a
the new application definitions in the Additionally, one lender commented loan originator may ask for, or a
March 2008 proposed rule would that under HUD’s March 2008 proposed borrower may choose to submit, more
present uncertainty in complying with rule, lenders would be required to retain information than the loan originator
other mortgage-related statutes and the GFE application for 3 years, which intends to use to process the GFE, for
regulations. They commented that is different from the 25-month retention example the information on a standard
compliance with other statutes and requirement by TILA or ECOA. The 1003 mortgage loan application form,
regulations is triggered by a mortgage lender commented that this difference but beyond the six items of information,
‘‘application.’’ Because HUD’s proposal presents additional expense without a the loan originator will determine what
included both a ‘‘GFE Application’’ and substantive benefit to the consumer. it needs to issue a GFE. HUD strongly
a ‘‘Mortgage Application,’’ they
Other Commenters urges loan originators to develop
commented that it is not clear which
consistent policies or procedures
one is the ‘‘application’’ for purposes of The FTC staff recommended that HUD
concerning what information it will
compliance with other regulations. In reevaluate the proposed ‘‘GFE
particular, lenders expressed concern require to minimize delays in issuing
application,’’ as this terminology is new
with the possibility that the ‘‘GFE GFEs.
and could generate consumer confusion
Application’’ would trigger compliance in the already complex mortgage In order to prevent overburdensome
obligations under FCRA, ECOA, HMDA, process. FTC staff suggested that HUD documentation demands on mortgage
and the TILA requirements. They characterize it as the ‘‘GFE application’’ applicants, and to facilitate shopping by
requested that ambiguities surrounding concept so that consumers do not borrowers, the final rule specifically
compliance with these statutes and confuse it with the mortgage prohibits the loan originator from
other laws be addressed to provide application. They also recommended requiring an applicant, as a condition
clarity and mitigate litigation exposure. that HUD educate consumers about for providing a GFE, to submit
For example, one lender noted that to these two components of the mortgage supplemental documentation to verify
calculate the spread for high-cost loans lending process. Further, FTC indicated the information provided by the
under Regulation Z and many state that the industry would also benefit applicant on the application. Loan
predatory lending laws, the index used from guidance on how the GFE originators, however, can require
is based on the month in which the application relates to other mortgage applicants to provide such verification
‘‘application’’ for credit is received by lending laws that include an information after the GFE has been
the creditor. This lender stated that it ‘‘application’’ concept. provided, in order to complete final
was not clear from the proposed rule CSBS, AARMR, and NACCA also underwriting. In addition, the rule does
whether the GFE application is an expressed concern over the creation of not bar a loan originator from using its
application for purposes of Regulation a ‘‘GFE application’’ and a ‘‘mortgage own sources before issuing a GFE to
Z. application’’ because, they asserted, independently verify the information
Industry commenters expressed these application concepts will cause provided by the applicant.
confusion about preamble statements consumer confusion. They Once the applicant submits to the
regarding whether HMDA or ECOA is recommended that HUD coordinate loan originator all the mortgage
triggered by the GFE Application. They with other federal regulatory agencies to application information deemed
indicated that the preamble stated that ensure consistency and clarity to necessary by the loan originator to
whether HMDA or ECOA is triggered by regulatory requirements from loan process the GFE, the originator will be
the GFE Application should be application to loan closing. required to deliver or mail a GFE to the
determined under Regulations C and B, applicant within 3 business days. HUD
as interpreted by the Board. They noted, HUD Determination is now also limiting the fee that may be
however, that the preamble stated that To address the concerns raised by the charged for providing the GFE,
based on consultations with the Federal commenters about the bifurcated consistent with the Federal Reserve
Reserve Board, TILA disclosures would application approach set forth in the Board’s recently finalized rule limiting
be provided within 3 days of a written proposed rule, HUD has adopted a the fees that consumers can be charged
GFE application unless the creditor single application process for the final for the delivery of TILA disclosures (see
revisions of 12 CFR 226.119(a), 73 FR If a loan originator receives advocates pointed out that some states
44522, July 30, 2008). information indicating that changed prohibit the collection of an application
After the GFE has been received, the circumstances necessitate the issuance fee before credit has been extended and
loan originator may collect additional of a new GFE, such new GFE must be that HUD’s proposal would be
fees needed to proceed to final provided to the borrower within 3 inconsistent with such laws. The
underwriting for borrowers who decide business days of receipt of such consumer advocates asserted that HUD’s
to proceed with a loan from that information. The 3-day requirement is proposal could be read to preempt these
originator. As noted, at that time, in response to comments on the state laws. The consumer advocates
verification information or any other proposed rule that stated that providing recommended that HUD remain silent
information could be required from the a new GFE within one day is not on the collection of such fees in relation
applicant, such as bank statements and workable. to the GFE and should in no way
W–2 forms, to confirm representations The approach set forth in this rule support it.
made by the applicant in the furthers HUD’s goal to promote
application. Industry Representatives
consumer shopping among mortgage
None of the information collected by originators, because it does not overly Industry comments reflected some
the originator prior to issuing the GFE burden a consumer at an early stage. confusion as to whether and to what
may later become the basis for a Rather, a consumer provides extent fees can be charged in connection
‘‘changed circumstance’’ upon which a information that is easily communicated with the GFE. Some industry
loan originator may offer a revised GFE, and pays a nominal fee in order to get commenters understood the proposal to
unless the loan originator can a GFE. mean that lenders can charge a fee once
demonstrate that there was a change in As noted, this public policy is further a borrower submits a ‘‘mortgage
the particular information or that it was supported by the Federal Reserve Board application.’’ Other industry
inaccurate, or that the loan originator through its recently issued final rule commenters sought clarification about
did not rely on that particular limiting fees that can be charged for the what exactly can be charged in
information in issuing the GFE. A loan delivery of the TILA disclosure. Under connection with the GFE. They
originator would have the burden of this rule, borrowers must receive the indicated that meeting the 3-business
demonstrating nonreliance on the TILA disclosure before paying or day requirement for delivery of the GFE
collected information, but may do so by incurring any fee imposed by a creditor to the borrower and completing the
various means, including through, for or other person in connection with the lengthy GFE form would be time
example, a documented record in the consumer’s application for a closed-end consuming and costly.
underwriting file or an established mortgage, except that creditors may
policy of relying on a more limited set Further, in a situation in which a
charge a bona fide and reasonable fee for borrower seeks an accelerated process
of information in providing GFEs. If a
obtaining the consumer’s credit history. for getting a loan, industry
loan originator issues a revised GFE
Whether an application under a representatives stated that the borrower
based on information previously
particular set of facts triggers ECOA or should be able to pay necessary fees for
collected in issuing the original GFE
HMDA requirements must be such items as, for example, an appraisal.
and ‘‘changed circumstances,’’ it must
determined under Regulation B or Industry representatives also opined
document the reasons for issuing the
Regulation C, as interpreted by the that under RESPA, HUD has no
revised GFE, including, for example, its
Federal Reserve Board’s Official Staff authority in their view to require
nonreliance on that information or the
Commentary. lenders to offer GFEs without adequate
inaccuracy of the information, and
retain that documentation for at least 3 2. Up-Front Fees That Impede Shopping compensation.
years. Additional guidance on what Other Commenters
Proposed Rule. The March 2008
constitutes ‘‘changed circumstances’’
proposed rule provided that a loan CSBS, AARMR, and NACCA
will be provided by HUD during the
originator, at its option, could collect a commented that a consumer should not
implementation period.
Furthermore, the loan originator is fee limited to the cost of providing the be charged for the GFE because to do so
presumed to have relied on the GFE, including the cost of an initial locks the consumer into the transaction.
borrower’s name, the borrower’s credit report, as a condition of providing These commenters stated that if HUD
monthly income, the property address, the GFE to a prospective borrower. The insists on permitting a fee to be charged,
an estimate of the value of the property, loan originator was not permitted to the fee charged should be limited to a
the mortgage loan amount sought, and collect, as a condition of providing a credit report.
any information contained in any credit GFE, any fee for an appraisal,
inspection, or other similar service HUD Determination
report obtained by the loan originator
before providing the GFE. The loan needed for final underwriting. HUD has long supported a public
originator cannot base a revision of the Comments policy goal of creating a circumstance
GFE on this information, unless it where consumers can shop for a
changes or is later found to be Consumer Representatives mortgage loan among loan originators
inaccurate. HUD determined that this Consumer representatives expressed without paying significant upfront fees
approach provides the flexibility concerns about the opportunity for that impede shopping. To this end, and
originators need to properly underwrite, consumers to be charged a fee for a GFE consistent with the Federal Reserve
while limiting bait-and-switch methods and a credit report. They are concerned Board’s recently issued revised
whereby the originator uses the GFE to such costs would discourage borrowers regulations limiting the fees that a
draw in a borrower and, after a from shopping for a mortgage. They consumer may be charged for the
significant application fee is paid or stated that lenders would charge a fee delivery of TILA disclosures (73 FR
burdensome documentation demands for the GFE to offset lenders’ costs for 44522, July 30, 2008), HUD, in this final
are made, claims that a material change issuing the GFE, because the cost of rule, is limiting the charge originators
has resulted in a more expensive loan preparation of the GFE cannot otherwise may impose on consumers for delivery
offering. be passed on to consumers. Consumer of the GFE.
The Federal Reserve Board’s rule also encourage borrowers to comparison in consumers’ hands in a consistent,
restricts creditors from imposing a fee shop to find the best deal. user-friendly format should facilitate
on a consumer in connection with the NAMB urged HUD to adopt the FTC consumer shopping, market competition
consumer’s application for a mortgage prototype disclosures in place of the and transparency.’’ They characterized
before the consumer has received the proposed mortgage broker compensation HUD’s summary sheet as striking a
TILA disclosure. The Federal Reserve language. However, NAMB balance between disclosing critical
Board makes an exception that allows recommended that, if the FTC forms are information and preventing information
imposition of a fee that is bona fide and not adopted in their entirety, HUD overload.
reasonable in amount for obtaining the should incorporate the FTC language in CRL presented a legal argument
consumer’s credit history. In an effort to the GFE earlier than on page 3, and in supporting HUD’s authority to require
create consistency among regulatory a more prominent typeface than the disclosure of loan terms. CRL pointed
requirements and serve the best typeface used for the proposed language out that settlement costs are so
interests of consumers, HUD is similarly on comparative shopping. intertwined with loan terms that those
limiting the fee for the GFE to the cost terms must be disclosed for the
HUD Determination
of a credit report. Also, as in the settlement costs to have any meaning.
proposed rule, a loan originator is HUD’s consumer testing of the form Other consumer groups also pointed out
expressly not permitted to charge, as a demonstrated that consumers better that these terms affect the overall price
condition of providing a GFE, any fee understood the function of the GFE and and risk for the consumer. CRL, which
for an appraisal, inspection, or similar its role in the shopping process as a is affiliated with a small nonprofit
settlement service. result of language on the form. lender that will have to comply with the
Accordingly, HUD has determined to new rule, stated that the rule is
3. Introductory Language on the GFE maintain the language on the form that administratively feasible for larger and
Form describes the purpose of the GFE and smaller lenders.
informs the borrower that only they can In addition to supporting loan terms
Proposed Rule. The March 2008
shop for the best loan for them. disclosure, consumer advocacy
proposed rule included a proposed
However, in the interest of streamlining organizations suggested several changes
required GFE form that explained to the
the form, the revised form now to make disclosure even more effective.
borrower: (1) On page 1, the purpose of includes, on page 1, the information They suggested that there should be a
the GFE, i.e., that it is an ‘‘* * * about shopping for a loan that was on more strict legal mechanism for binding
estimate of your settlement costs and page 3 of the proposed GFE. originators to the loan terms after
loan terms if you are approved for this
4. Terms on the GFE (Summary of Loan disclosing them. Some consumer
loan’’; and (2) on page 3, that the
Details) advocates argued for inclusion of the
borrower is the ‘‘* * * only one who
APR on the GFE, perhaps instead of the
can shop for the best loan for you. You Proposed Rule. The proposed GFE note rate, stating that inclusion of the
should shop and compare this GFE with included a summary of the key loan APR would make comparisons easier.
other loan offers. By comparing loan terms. The form required the disclosure Some suggested that the adjustable rate
offers, you can shop for the best loan.’’ of the initial loan amount; the loan term; disclosure should include the date
Comments the initial interest rate on the loan; the when the first adjustment happens, in
initial monthly payment owed for order to help avoid payment shock.
Consumers did not comment on this principal, interest, and any mortgage Commenters pointed out that a monthly
issue. NAMB stated that the insurance; and the rate lock period. The payment disclosure that includes taxes
introductory language of the GFE and form also required the loan originator to and different types of insurance will be
the language encouraging comparative disclose whether the interest rate could more useful in judging affordability and
shopping should be improved. rise; whether the loan balance could for making comparisons to the current
Specifically, NAMB stated that the rise; whether the monthly amount owed mortgage, when applying to refinance.
language encouraging comparative for principal, interest, and any mortgage They also suggested that the maximum
shopping incorrectly characterizes the insurance could rise; whether the loan interest rate disclosure is not likely to
GFE as a ‘‘loan offer.’’ NAMB stated that had a prepayment penalty or a balloon help borrowers and may be misleading.
this is misleading because it leaves payment; and whether the loan The commenters stated that actual
borrowers with the impression that they included a monthly escrow payment for dollar figures are more readily
have been approved for the loan and property taxes and possibly other understandable. The commenters also
that is not the case. NAMB suggested obligations. The proposed rule required stated that the GFE should include a
that the ‘‘loan offer’’ reference be the terms ‘‘prepayment penalty’’ and clear statement that loan terms are
changed to ‘‘other estimates.’’ ‘‘balloon payment’’ to be interpreted negotiable, and all the disclosures
NAMB also recommended that the consistent with TILA (15 U.S.C. 1601 et should be more carefully harmonized
language encouraging comparative seq.). The APR was not included on the with TILA.
shopping be made more conspicuous proposed GFE. NCLC, Consumer Action, the
and informative. NAMB encouraged Comments Consumer Federation of America, and
HUD to adopt language set forth in the the National Association of Consumer
prototype disclosure forms developed Consumer Representatives Advocates stated that they ‘‘applaud’’
by FTC. Those forms include prominent As part of their general support for the inclusion of the maximum payment
legends in large typeface that expressly proposed rule, consumer advocacy amount and the maximum loan balance
advise borrowers that mortgage organizations were positive about the because these help consumers
originators, including both brokers and inclusion of loan terms on the GFE. understand a loan’s risks, especially the
lenders, do not represent borrowers, and NCLC, in a joint letter with Consumer risks of nontraditional loans, and help
that the ‘‘lender or broker providing this Action, Consumer Federation of consumers judge a loan’s affordability.
loan is not necessarily shopping on your America, and National Association of However, these organizations suggested
behalf or providing you with the lowest Consumer Advocates, commented that that HUD provide guidance to
cost loan.’’ The FTC prototype forms ‘‘[p]lacing the most critical information originators on how to calculate
maximum payment and maximum loan HUD has the authority to require Federal Agencies
balance. disclosure of settlement costs only, and FTC staff stated that its experience
One consumer organization pointed that loan terms are not settlement costs. and research suggest that ‘‘consumers in
out that much research, including an They stated that the disclosures both the prime and subprime markets
FTC study, found that borrowers often required by HUD would overlap or would benefit most from the
do not understand exactly what conflict with disclosures under TILA development of a single mortgage
‘‘prepayment penalties’’ are and how and potentially with ECOA and HMDA. disclosure document that consolidates
they work. Therefore, the organization One lender also stated that some of information on the key costs and
recommended that HUD include in the these disclosures would overlap with features of their loans, presents the
prepayment penalty disclosure the state-mandated disclosures. information in a language and format
following brief explanation: ‘‘[p]ayment
Industry representatives commented that is easy to understand, and is
to lender if you refinance, sell home, or
that the Federal Reserve Board and provided early in the transaction to aid
pay your loan off early’’.
Consumer groups were concerned lenders have experience and expertise consumer shopping.’’ However, FTC
that, because the proposed GFE in developing disclosures and staff stated their belief that HUD’s GFE
highlighted settlement costs, it might informational materials on adjustable did not go far enough in requiring these
mislead borrowers into believing that rate mortgages, and that HUD should disclosures, and that even the GFE and
interest costs are less important. They coordinate efforts to provide improved the TILA form together did not disclose
suggested that interest is usually much disclosures and informational materials. the necessary information. FTC staff
more expensive than closing costs, and Industry commenters also stated that also stated that inconsistencies between
should be more effectively emphasized. disclosures related to ARMs give rise to the GFE and TILA forms could lead to
different concerns than settlement costs consumer confusion.
Industry Representatives under RESPA and that HUD should The FDIC commended HUD for
Most lenders and lender organizations follow the Federal Reserve Board’s lead proposing revisions to its RESPA
urged that loan terms be left off the GFE, in this respect. A lender stated that the regulations, and stated that ‘‘[t]he earlier
submitting that loan terms are more rate adjustment disclosure on the availability of and more relevant
properly viewed as TILA disclosures. proposed GFE is biased against ARMs, information on the GFE should promote
These commenters stated that double since it only shows that payments can comparative shopping that will enable
disclosure of loan terms will be increase, not decrease. This same lender consumers to make more informed
confusing to borrowers, especially since suggested that it would be better to have financing decisions.’’ Like the consumer
much of the terminology proposed to be full ARM disclosure, which industry organizations, the FDIC expressed its
used in HUD’s GFE is different from that needs because current ARM disclosures view that the GFE needs to include
used in the TILA (e.g., ‘‘loan amount’’ are inadequate. disclosure of when the first interest rate
vs. ‘‘amount financed’’) and some NAMB supported HUD’s inclusion of adjustment happens, in order to avoid
calculations are different. These loan terms on the GFE, and suggested payment shock.
organizations suggested that loan term that more monthly expenses should be The Federal Reserve Board staff
disclosures should be coordinated with disclosed, such as homeowner’s agreed with the need for disclosure of
TILA, and be less lengthy. A lender association dues, if applicable. the first rate adjustment, and stated that
proposed that originators should be because the GFE’s ARM disclosures are
allowed to substitute early TILA The Mortgage Insurance Companies of less complete than TILA disclosures, the
disclosure for the loan terms sheet. America (MICA) objected to the fact that GFE’s ARM disclosures may not be as
Another lender organization stated that mortgage insurance costs were included beneficial to consumers’ understanding
loan terms should be included only if in the monthly payment for purposes of of how their loans work. The Federal
there is a combined RESPA/TILA form. the question, ‘‘Can your monthly Reserve Board staff’s main concern,
Some credit unions stated that the APR amount owed for principal, interest, and though, was that duplication of
should be included in the GFE loan any mortgage insurance rise? ’’ MICA disclosures and information, and, in
terms. commented that this disclosure may some instances, inconsistency between
Some lenders stated other aspects of mislead borrowers into believing that the loan terms on the GFE and the TILA
the loan terms disclosure would confuse their mortgage insurance payments can form will create confusion for
borrowers. A lender organization rise, when they are in fact set at the time consumers. The Federal Reserve Board
suggested that use of the format ‘‘Your of origination. MICA also suggested that staff suggested that because RESPA and
* * * is’’ to describe the loan details mortgage insurance would be disclosed TILA overlap, the Federal Reserve Board
would create misunderstanding, in the ‘‘Required services that the loan and HUD should work together to
because these were loan terms being originator selects’’ category, and would develop a single RESPA/TILA form. In
applied for, not final loan terms. The also be included in the escrow addition, the Federal Reserve Board staff
same organization also believed that disclosure. stated, similar to a consumer
inclusion of mortgage insurance in the Other Commenters organization comment, that the absence
monthly payment, without disclosing of taxes and insurance in the monthly
whether mortgage insurance is required, CSBS, AARMR, and NACCA payment disclosure will interfere with
would confuse borrowers. In addition, commented that HUD should be aware borrowers’ ability to gauge affordability.
the organization stated that some of the that several states already require loan
originators to disclose various loan HUD Determination
mechanisms behind these loan terms are
too complex for single-line disclosure. terms, and that the GFE should avoid After reviewing the comments, HUD
Many lenders and lender conflicting with these requirements. continues to believe that consumer
organizations submitted that HUD has This group also suggested that, in order understanding of mortgage loans and of
no authority under RESPA to require to avoid consumer confusion, HUD their settlement costs will be greatly
disclosure of loan terms, because loan should coordinate more closely with the enhanced by requiring disclosure of
terms are not part of the settlement Federal Reserve Board’s TILA certain loan terms in a clear, user-
process. These lenders submitted that disclosures. friendly format on the GFE. Therefore,
the final rule includes the proposed costs, and TILA’s is to inform that a good faith estimate of the costs
loan summary chart on the first page of consumers about loan terms, these associated with this specific settlement
the revised GFE, with some revisions to purposes overlap. Settlement costs may service include key information about
address commenters’ suggestions. To include loan origination fees, and the ‘‘specific’’ service. Without this
fully understand the cost of a loan for consumers may finance their settlement information, the origination charges and
which a borrower is paying, the costs.’’ Under section 19(a) of RESPA, other fees associated with the loan will
borrower needs to know the terms of the the Secretary of HUD has the authority be meaningless. Through RESPA,
loan product. Loan terms, such as the to issue such regulations ‘‘as may be Congress entrusts HUD with
interest rate, can have a direct necessary to achieve the purposes of establishing the contents of the GFE,
relationship to the borrower’s settlement this Act.’’ The added information and it is within HUD’s discretion, and
costs, including mortgage broker provided by the new GFE clearly its responsibilities under RESPA, to
compensation and other loan furthers RESPA’s purpose to ‘‘provide ensure that consumers receive enough
origination charges. HUD has more effective advance disclosure to information to make intelligent
emphasized the importance of homebuyers and sellers of settlement shopping decisions about the costs of
disclosing the relationship between the costs.’’ HUD agrees with those their loans. As noted previously in this
interest rate and settlement charges in commenters who asserted that preamble, given the current problems in
statements of policy on mortgage broker disclosure of other settlement costs is the mortgage market, HUD decided to
compensation and past RESPA meaningless (and therefore ineffective), move forward with its improved
rulemaking efforts. Disclosure of this absent the context provided by mortgage disclosures, including this
relationship continues to be a central simultaneous disclosure of some loan new first page of the GFE. The CRL, in
element of this rule. terms. More effective disclosure also its comment on the 2008 proposed rule,
Making it easier to understand the leads to, through borrowers’ improved stated:
relationship between loan terms and ability to shop for mortgages, reduced ‘‘In today’s mortgage market, settlement
loan costs is a key element in enhancing mortgage settlement costs for borrowers, costs are so intertwined with loan terms, and
a borrower’s ability to shop for the best- a key purpose behind RESPA. HUD the illusory trade-off between rate and points
priced loan, including settlement believes its new GFE, and its enhanced is so problematic * * * loan terms simply
charges. A borrower should know that a usefulness to borrowers as a shopping must be included for the disclosure of
loan may have certain features—for document, will provide an effective settlement costs to be even remotely
example, a prepayment penalty or a complement to the TILA disclosure, to effective. HUD’s authority to require them,
therefore, is unambiguous.’’
balloon payment—that may affect the provide borrowers with a more
borrower’s charges for that loan, complete picture of their mortgage In response to comments, HUD has
including by affecting the mortgage loans. revised several aspects of the loan
broker’s indirect compensation or other, Some commenters, primarily summary chart on page 1 of the GFE, to
direct loan origination charges. The new industry, requested that HUD delay its better inform borrowers of the key loan
GFE brings together all of the relevant disclosure reform efforts in this terms. First, the title of this section of
pricing information, including certain rulemaking, pending a joint effort at the GFE has been simplified to
loan terms, on one form, thus allowing disclosure reform with the Federal ‘‘Summary of your loan.’’ To improve
the consumer to understand and Reserve Board. HUD remains ready to clarity, the summary chart now refers to
compare loans much more easily. As coordinate with the Federal Reserve ‘‘initial loan amount’’ instead of ‘‘initial
stated by the National Consumer Law Board to ensure consistency in mortgage loan balance.’’ As in the proposed rule,
Center, in its comment on behalf of disclosure forms. As discussed earlier in the revised form requires disclosure of
itself, Consumer Action, the Consumer this preamble, however, HUD the terms of the loan; initial interest
Federation of America, and the National determined that it must move forward rate; and initial amount owed for
Association of Consumer Advocates: with this rulemaking to provide principal, interest, and any mortgage
‘‘Using a loan summary sheet is a terrific prospective homebuyers and other insurance. However, the information on
advance. As HUD recognizes, consumer mortgage borrowers the benefits of the the rate lock period has been moved out
shopping is facilitated when loan better disclosure provided by the of this section of the GFE and into the
information is condensed and summarized. revised forms and requirements in this ‘‘Important dates’’ section.
Placing the most critical information in rule. These revisions are particularly While some commenters
consumers’ hands in a consistent, user important given the current mortgage recommended that the ‘‘annual
friendly format should facilitate consumer crisis, which is due in part to borrowers’ percentage rate’’ or ‘‘APR’’ be added to
shopping, market competition, and the summary chart, HUD has
misunderstanding or lack of knowledge
transparency.’’ determined not to add ‘‘APR’’ to the
about the fundamental details of their
HUD has determined that disclosure mortgage loans. GFE. HUD recognizes that APR is a
of major loan terms on the GFE is HUD also examined the comments complex term, calculated without the
necessary to provide effective advanced regarding its authority to require inclusion of certain significant costs in
disclosure to homebuyers of settlement disclosure of loan terms on the GFE, and a mortgage loan transaction, and has a
costs, which is a key purpose of RESPA. concludes that it does have such unique purpose as a broad cost-of-credit
HUD disagrees with those industry authority. Section 5(c) of RESPA measure central to the TILA disclosure.
commenters that asserted that the GFE provides for ‘‘a good faith estimate of Consumers will be apprised of the APR
cannot list loan terms associated with the amount or range of charges for on the TILA disclosure they receive at
settlement costs because the TILA specific settlement services the the same time that they receive the GFE.
disclosure is the appropriate form for borrower is likely to incur in connection Accordingly, due to the specific TILA
loan terms. The Federal Reserve Board, with the settlement as prescribed by the purposes of the APR and its inclusion
in its comment on the rule, noted an Secretary.’’ Because, under RESPA’s on the concurrent TILA disclosure, HUD
‘‘overlap’’ between the RESPA and definitions, loan origination, or the does not believe it is necessary to
TILA’s purposes in this regard: making of a mortgage loan, is a include the APR on the GFE.
‘‘Although RESPA’s purpose is to ‘‘settlement service,’’ HUD determined HUD has, however, included on the
inform consumers about settlement that it is within its authority to require GFE form other terms that are included
in the TILA disclosure required by the then make a decision to return to a NAMB stated that it is meaningless,
Federal Reserve Board, but that are particular originator, particularly and potentially misleading, to suggest
important to borrowers’ understanding without an interest rate lock. NCLC that a borrower would receive a specific
the costs of their mortgage loans. For noted that industry practice generally interest rate prior to final application.
example, the GFE requires a general assumes that, in the purchase money NAMB recommended that more specific
disclosure about the existence of context, a minimum of 30 days is language be included on the form
prepayment penalties and balloon needed to shop for and obtain a binding indicating that the rate may change until
payments. Under the final rule, HUD mortgage commitment. locked. They also recommended that the
would continue to interpret these terms CRL also noted that the 10-business- 10-business-day period during which
consistent with TILA, as HUD had day period does not apply to the interest estimated settlement charges would be
indicated it would do in its March 2008 rate, which can come with no guarantee available, be changed to 10 ‘‘calendar’’
proposed rule (73 FR at 14036). at all. NCLC and CRL stated that an days, since this would conform more
Some commenters recommended that interest rate lock must be required in closely to market realities.
the form warn borrowers about the first order for the GFE to be effective. HUD Determination
change in the interest rate, to prevent According to CRL, not including a
payment shock. The revised form requirement for an interest rate lock will HUD has determined to retain the
requires disclosure of the length of time force consumers to shop on settlement time periods set forth in the proposed
before that first change. In addition, the costs alone, which are a relatively small rule. A central purpose of RESPA
revised form clarifies whether, even regulatory reform is to facilitate
component of the total home settlement
when the borrower makes payments on shopping in order to lower settlement
cost. CLR stated that, in addition, not
time, the loan balance can rise and the costs, and there is legitimate concern
requiring a rate lock makes it too easy
monthly amount owed for principal, that requiring GFEs to be open for too
for loan originators to engage in baiting
interest, and any mortgage insurance long a shopping period could
and switching; that is, offering low
can rise. The revised form also requires unintentionally operate to increase
settlement costs, only to recoup those
disclosure of the period of time of the borrower costs. This could occur if loan
costs by increasing the interest rate
first possible increase in the monthly originators are required to commit to
when the consumer returns 3 business
amount owed, the amount to which it prices for too long a period or if the
days later. NCLC stated that, because
can rise at that time, and the maximum length of the period necessitates that
interest is the largest component of the originators make contingency plans for
to which it can ever rise. The final rule price of a mortgage, if interest rates are a large number of loans, when the yield
requires the same information as in the allowed to float, while settlement costs of actual borrowers that can be expected
proposed form about prepayment are fixed, consumers will be encouraged to commit to the originator is uncertain.
penalties and balloon payments. to shop on the smallest portion of Accordingly, the final rule provides that
Finally, the final rule, with some mortgage costs, the settlement costs, and the interest rate stated on the GFE will
revision of the proposed rule language, that lenders will be encouraged to play be available until a date set by the loan
requires information on whether the bait and switch games with the offered originator for the loan. HUD is not
lender requires an escrow account for interest rate. Thus, according to NCLC, requiring the interest rate to be available
the loan, for the payment of property in order for the GFE to be an effective for any specific length of time. The final
taxes and possibly other obligations. shopping tool, all costs must be fixed at rule provides that the loan originator
5. Period During Which the GFE Terms the time the GFE is delivered. indicate on the GFE the period during
Are Available to the Borrower Industry Representatives which the interest rate is available. After
that time period, the interest rate, the
Proposed Rule. Under the proposed MBA stated that the information interest rate related charges, and loan
rule, the interest rate stated on the GFE concerning how long the costs and terms, including some of the loan
would be available until a date set by interest rate are open to borrower originator charges, the per diem interest,
the loan originator for the loan. After acceptance needs greater clarification and the monthly payment estimate for
that date, the interest rate, some of the and could be provided in accompanying the loan could change until the interest
loan originator charges, the per diem materials, and not the GFE. MBA stated rate is locked. The final rule also
interest, and the monthly payment that if such information is included on provides that the estimate for all other
estimate for the loan could change until the GFE, the rule should make clear that settlement charges and loan terms must
the interest rate is locked. The proposed the interest rate on the GFE may be be available for 10 business days from
rule also provided that the estimate for available until a specified hour and when the GFE is provided, but could
all the other charges would be available date, since interest rates frequently remain available longer if the loan
until 10 business days from when the change several times a day. originator chooses to extend the period
GFE is provided, but could remain The Consumer Mortgage Coalition of availability. The 10-business day
available longer, if the loan originator (CMC) stated that RESPA already requirement for settlement costs
extended the period of availability. provides for good faith estimates of essentially provides that the GFE will be
Comments closing costs, and that it is unreasonable available for 2 weeks, thereby providing
to interpret RESPA to limit changes in borrowers with sufficient time to shop
Consumer Representatives closing costs where the estimates were among various providers.
NCRC, CRL, and NCLC all stated that made in good faith. In addition,
a 10-business-day time period is according to CMC, nothing in RESPA 6. Option To Pay Settlement Costs
insufficient for shopping and would appear to justify requiring Proposed Rule. The proposed GFE
recommended a 30-day binding period lenders to keep an interest rate available advised the borrower regarding how the
as more fair to consumers. NCLC stated for a potential borrower who has not interest rate would affect a borrower’s
that the 10-business day period does not actually applied for a loan. Therefore, settlement costs. The proposed GFE
seem to be sufficient time for consumers CMC recommended that the ‘‘important would have required the loan originator
to shop for a different mortgage, obtain dates’’ section on the proposed GFE be to complete a tradeoff table that
alternative GFEs, compare them, and removed. informed the borrower that the borrower
could choose from among the following: table implies that there is a one-to-one HUD Determination
(1) The loan presented in the GFE; (2) relationship between the interest rate HUD has determined to retain the
an otherwise identical loan with a lower and the settlement costs. They stated tradeoff table on the GFE. However,
interest rate and monthly payments that this is not the case, and, in many recognizing that not all loan originators
will raise settlement costs by a specific circumstances, the lender-paid broker offer various loan products, full
amount; or (3) an otherwise identical compensation leads to both higher completion of the table is at the option
loan with a higher interest rate and settlement charges and higher interest of the loan originator. While a loan
monthly payments that will lower rates. In addition, they stated that the originator is required to complete the
settlement costs by a specific amount. If tradeoff table cannot effectively disclose left hand column of the table that
a higher or lower interest rate was not the tradeoffs when lender-paid broker describes the loan offered in the GFE, it
in fact available from the originator, the compensation is based on loan features is not required to complete the table
originator would have been required to other than an increase in the interest with respect to the middle column
provide those options that are available rate; as for example, lenders that reflecting a loan with a lower interest
and indicate ‘‘not available’’ on the commonly pay brokers for loans with rate, or the right hand column, reflecting
form, for those options that were not prepayment penalties. a loan with lower settlement charges.
available. The proposed rule invited Some consumer representatives Filling out these last two columns is
comments on whether the loan expressed support for a requirement that optional for the loan originator, even if
originator should be required to include an originator be required to offer a no- the loan originator has another loan for
a ‘‘no cost loan’’ on the tradeoff table as cost loan on the tradeoff table if the which the borrower may be eligible.
one of the alternative loans if the loan originator has that type of product However, HUD encourages loan
offered to the borrower is not the loan available and the borrower qualifies for originators to complete the tradeoff
for which the GFE is written. such a loan. These commenters also table, in light of HUD’s consumer testing
Comments stated that a meaningful tradeoff of the form that revealed that consumers
between settlement charges and interest found the tradeoff table to be one of the
Consumer Representatives rates would arise in the context of a no- most useful and informative aspects of
Consumer representatives supported cost loan. the GFE. The tradeoff table focuses
the concept of the tradeoff table but consumers’ attention on the information
recommended some changes. They Industry Representatives in the box on the top of page 2 of the
stated that only loans for which the Industry representatives GFE, empowering them to better shop
borrower actually qualifies should be recommended that the tradeoff table on for a mortgage. HUD strongly urges loan
included in the table. They also stated page 3 of the GFE be moved to originators to fill out the tradeoff table
that shopping on monthly payments explanatory materials, including the in its entirety so that borrowers can
through the tradeoff table, proposed in special information booklet. One lender better understand: (1) The disclosure of
HUD’s RESPA rule, only works if the expressed confusion over what HUD the ‘‘charge or credit (points) for the
loan terms are the same. If loan terms intended by ‘‘two other options.’’ The specific interest rate chosen’’ on page 2
vary, shopping on the monthly payment lender stated that it was not clear of the GFE, and (2) what other loans
can be misleading to consumers and whether HUD meant different loan may be available.
have devastating results. These types, rate/point structures, down As many commenters expressed
commenters also expressed concerns payment amounts, or something else. A concern and confusion over the
about the definition of ‘‘otherwise major lender trade organization requirement to provide information
identical,’’ which anticipates that the commented that lenders should not be about alternative loans and about
loans offered on the tradeoff chart required to offer a no-cost loan on the ‘‘otherwise identical’’ loans, HUD is
would vary only by interest rate. As tradeoff table. A major lender stated that clarifying the scope of what qualifies as
outlined by these commenters, the since HUD has not defined what it an ‘‘otherwise identical’’ loan. Should a
problem is that if the lender pays the means by ‘‘no cost,’’ it is difficult to loan originator determine to complete
closing costs, the interest rate will be provide a comment. This lender stated the table, the loan originator has to
higher, and, if the borrower pays the that many lenders now offer no-cost disclose only those loans for which the
closing costs, in many cases, the loan products and to force these lenders borrower would qualify under the
borrower will finance such costs into making such disclosures would lender’s underwriting practices. For
through a higher loan amount. The only result in consumer confusion. purposes of completing the tradeoff
commenters stated that the tradeoff table, an ‘‘otherwise identical’’ loan is a
table would not address this One lender commented that loan where the loan amount, the
circumstance. disclosing two mortgage products on the number and schedule of payments, the
These commenters also recommend tradeoff table, in addition to the product nature of the interest rate, the index and
that the definition of ‘‘otherwise contemplated on the GFE, would be margin for any adjustable rate mortgage,
identical’’ be clarified, to include loans problematic, because this particular the loan terms, and characteristics such
where the number and schedule of lender offers only two mortgage as whether there is a prepayment
payments, the nature of the interest rate, products. penalty or a balloon payment are
whether fixed or adjustable, the index Other Commenters consistent with the loan presented in
and margin for any adjustable rate the GFE. The only loan characteristic
mortgage, and the other loan CSBS, AARMR and NACCA that may vary from the loan presented
characteristics, are held constant, with commented that the tradeoff table does in the GFE is the interest rate.
the exception that the interest rate and not disclose that the choice a borrower No-cost loans are not required to be
loan amount can be lower or higher than makes between a charge and a credit presented as one of the alternative
the loan reflected in the GFE. will have an impact on the overall loans. However, if the baseline GFE is
Consumer representatives also amount of the loan or monthly payment. for a no-cost loan so that the origination
expressed concerns that the The disclosure should reflect such a charge in Box 1 or the credit shown in
introductory language on the tradeoff choice. Box 2 of the GFE offset the total of other
settlement service charges in Boxes 3 identified by the originator, and provision permitting disclosure of a
through 11 (i.e., total estimated optional owner’s title insurance, if the range of charges for settlement services.
settlement costs are zero), the originator borrower uses a provider identified by Trade groups representing other
would complete the tradeoff table by the originator) would have been settlement servicer providers, especially
showing the same loan amount with prohibited from increasing at settlement realtors and title companies, focused on
positive closing costs (effectively the by more than 10 percent of the sum for the alleged potential anticompetitive
positive difference between the charge services presented on the GFE, absent effects of the tolerance provisions.
or credit for the GFE interest rate and unforeseeable circumstances. Thus, a These groups suggested that large
that for the specified lower interest rate) specific charge would have been able to lenders would seek to manage the risks
as the first alternative to the GFE loan, increase by more than 10 percent, so associated with tolerances by
and the same loan with a higher interest long as the sum of all the services contracting with large third party
rate and negative closing costs subject to the 10 percent tolerance did settlement service providers, thereby
(effectively the negative difference not increase by more than 10 percent. placing small settlement service
between the charge or credit for the GFE providers at a competitive disadvantage.
interest rate and that for the specified Comments Lenders and trade groups representing
lower interest rate) as the second lenders and some other settlement
Supporters of Tolerances
alternative. The primary purpose of the service providers also strongly
GFE tradeoff table is to ensure that Many commenters expressed various supported removing government
borrowers understand there is a trade off degrees of support for the concept of recording and transfer charges from the
between interest rates and settlement tolerances. A trade group, representing tolerances. They stated that these
costs and to help them better mortgage brokers as well as some large charges are outside of the control of the
understand the ‘‘Your credit or charge lenders, expressed support for the loan originator and cannot be known
(points) for the specific interest rate’’ concept of tolerances, albeit with certain with any certainty at the time the GFE
disclosure on page 2. It may also help clarifications or modifications. is provided.
However, the strongest support for Several lenders and trade groups
borrowers become aware of alternative
tolerances came from federal banking representing lenders suggested
loans that are potentially available.
regulators and groups representing alternatives to the proposed tolerance
However, it is not meant to be an
consumer interests. These commenters provisions. For example, certain trade
exhaustive range of potential alternative
agreed that unexpected increases in groups representing lenders
loan products to the borrower. Loan
costs between those provided in the recommended that tolerances not apply
originators are encouraged to discuss
GFE and those actually charged at to the initial GFE, which would be used
any alternative loan products with
settlement are a significant problem for as a shopping tool, but tolerances would
borrowers and provide them with their
prospective borrowers, and that the apply only to a ‘‘final’’ GFE that would
own versions of tradeoff tables showing
tolerances proposed by HUD would be be provided after a full mortgage
the effects of the alternative loan terms application had been completed. These
on interest rates, monthly payments, an effective way of preventing such
trade groups also supported more
loan amounts, and settlement costs. surprises. These commenters made
flexibility in the tolerance for the loan
various suggestions for strengthening
7. Establishing Meaningful Standards originator’s own charges, and suggested
the tolerance provisions to provide
for GFEs a 5 percent tolerance rather than a ‘‘zero
additional protections for borrowers.
tolerance.’’ Another alternative
a. Tolerances Suggestions included calculating the
suggested by at least one lender was to
Proposed Rule. Under the March 2008 tolerances item-by-item rather than by
evaluate overall compliance with
proposed rule, loan originators would grouping certain items together and
tolerances rather than compliance on a
have been prohibited from exceeding at strengthening enforcement.
loan-by-loan basis. This suggestion,
settlement the amount listed as ‘‘our Opponents of Tolerances according to the commenter, would
service charge’’ on the GFE, absent alleviate many of the difficulties in
unforeseeable circumstances. The Most lenders, trade groups anticipating unusual aspects of
proposed rule also would have representing lenders, and trade groups individual loans but still hold lenders
prohibited the amount listed as the representing other settlement service accountable for providing GFEs that, as
charge or credit to the borrower for the providers were generally opposed to the a rule, accurately reflect charges at
interest rate chosen, if the interest rate proposed tolerance provisions. These settlement. Another suggestion offered
was locked, absent unforeseeable commenters stated that tolerances and was to make providing a list of third
circumstances, from being exceeded at particularly the zero tolerance for loan party settlement service providers to
settlement. In addition, the proposed originator charges are equivalent to a prospective borrowers optional, with
rule would have prohibited Item A on settlement cost guarantee, and therefore tolerances applying only where the loan
the GFE, ‘‘Your Adjusted Origination conflict with the explicit statutory originator selected the service provider
Charges,’’ from increasing at settlement requirement for an estimate of or where the loan originator provided a
once the interest rate was locked. The settlement charges. Several commenters list of service providers.
proposed rule also would have reviewed the legislative history of
prohibited government and recording section 5 of RESPA, emphasizing that HUD Determination
fees from increasing at settlement, the statute was designed ‘‘to provide the Based on the comments received in
absent unforeseeable circumstances. prospective homebuyer with general response to the proposed rule, HUD has
Under the March 2008 proposed rule, information as to what their costs will revised a number of provisions dealing
the sum of all the other services subject be at the time of settlement.’’ (See H.R. with the tolerances. In particular, HUD
to a tolerance (originator-required Rep. No. 667, 94th Cong., 1st Sess., at has clarified the situations where the
services where the originator selects the 2, 1975 U.S.C.C.A.N. 2448, 2449 (Nov. loan originator would no longer be
third party provider, originator-required 14, 1975) (emphasis added).) These bound by the tolerances. However, HUD
services where the borrower selects commenters also stated that tolerances has determined that only limited
from a list of third party providers may be inconsistent with the statutory changes are necessary in the tolerance
amounts for settlement service categories: government recording the charges estimated on the GFE with
categories in the rule. The final rule charges, and transfer taxes. those actually imposed at settlement.
seeks to balance the borrower’s interest Transfer taxes should generally be The opportunity to cure violations of
in receiving an accurate GFE early in the known at the time the GFE is provided, the tolerances is an important tool for
application process to enable the so those taxes continue to be subject to loan originators to manage compliance
borrower to shop effectively, with the a zero tolerance. If there are changes in with the tolerance requirements. Many
lender’s interest in maintaining the tax rates or in the price of the lenders and groups representing lenders
flexibility to address the many issues property after a GFE is provided, those and other settlement service providers
that can arise in a complex process such changes would either constitute objected to the imposition of tolerances
as loan origination. changed circumstances or new because of the difficulty of providing
Many commenters recommended information that would be the basis for accurate estimates to prospective
changes to the size of the tolerances for providing a revised GFE. It is HUD’s borrowers early in the application
different categories of settlement costs, view that these provisions will provide process. The opportunity to cure will
especially the zero tolerance for loan sufficient flexibility to protect loan permit loan originators to give an
originator charges. With one exception originators from changes outside their estimate of expected settlement charges
described below, the final rule does not control, while still preventing loan in good faith, without subjecting them
change the amounts of the tolerances originators from providing ‘‘low-ball’’ to harsh penalties if the estimate turns
permitted for the different categories of estimates of transfer taxes on the GFE out to be lower than the actual charges
settlement costs. As noted in the that could mislead prospective at settlement.
proposed rule, HUD considered the best borrowers. Government recording HUD has also made clarifying changes
available data on the variation in the charges, in contrast, often may not be to the proposed provision describing the
costs of settlement services, in known with any certainty at the time circumstances in which the GFE can be
particular, for title services, in the GFE is provided, and in many cases revised. As described in more detail
determining that a 10 percent tolerance not until close to, or at, closing. below, changed circumstances that
is reasonable. No commenters submitted Therefore, HUD has determined that result in higher costs can be a basis for
or identified any alternative data these charges should be included with providing a revised GFE. In addition,
sources that would support expanding the third party charges that are subject information that was either not known
the tolerances beyond 10 percent. to an overall 10 percent tolerance. or not relied on at the time the original
With respect to the zero tolerance for Because the government recording GFE was provided may also be the basis
a loan originator’s own charges, HUD charges typically are small in relation to for providing a modified GFE.
recognizes the comments characterizing other settlement costs, this should b. Unforeseeable Circumstances
the tolerance as a potential settlement provide ample flexibility to loan
cost guarantee. However, the final rule originators on these charges without Proposed Rule. The March 2008
provides substantial flexibility to loan unduly impacting the permitted proposed rule provided that loan
originators in providing a revised GFE tolerances for other third party originators would not be held to
when circumstances necessitate settlement charges. tolerances where actions by the
changes. By providing such flexibility, As noted earlier in this preamble, borrower or circumstances concerning
HUD intends to prevent only those HUD has made a number of changes to the borrower’s particular transaction
increases in the loan originator’s charges the tolerances provisions to clarify and result in higher costs that could not
that are made in ‘‘bad faith.’’ Section provide additional flexibility in have reasonably been foreseen at the
19(a) provides explicit authority for the managing the tolerances. As in the time of the GFE application, or where
Secretary to make such interpretations proposed rule, the final rule adds a other legitimate circumstances beyond
as may be necessary to achieve the paragraph to the current regulations that the originator’s control result in such
purposes of RESPA. Providing a clear, provides that a loan originator that higher costs. The proposed rule also
objective standard for what constitutes violates the GFE requirements, which provided that if unforeseeable
‘‘good faith’’ under section 5 of RESPA include the tolerance requirements, circumstances would result in a change
is necessary to provide more effective shall be deemed to have violated section in the borrower’s eligibility for the
advance disclosure to homebuyers and 5 of RESPA. However, the final rule also specific loan terms identified in the
sellers of settlement costs, and as such, provides a loan originator with an GFE, the borrower must be notified of
falls directly within the Secretary’s opportunity to cure any violation of the the rejection for the loan and be
interpretive authority under section tolerance by reimbursing the borrower provided a new GFE if another loan is
19(a). In the context of residential any amount by which the tolerances made available.
mortgage negotiations, HUD finds that were exceeded. This reimbursement
Comments
the term ‘‘good faith’’ requires that, once may be made at settlement or within 30
a loan provider has quoted in writing a calendar days after settlement. HUD will Most of the commenters who
certain price as the cost of its own deem a payment to have been provided commented on unforeseeable
services in a specific transaction and in a timely fashion if it is placed in the circumstances generally supported the
absent the ‘‘changed circumstances’’ mail by the loan originator within 30 proposed rule’s provision on this
provided for elsewhere in the rule, the calendar days after settlement. HUD has matter, but many recommended changes
provider must adhere to the quoted determined, based on the comments or additions to the proposed definition
price. received, that 30 calendar days provides of unforeseeable circumstances. Several
The one exception to the amounts of sufficient time for loan originators to lenders and trade groups representing
the tolerances remaining the same as in identify and cure any tolerance lenders indicated that, while
the proposed rule is the tolerance for the violations through their post-closing ‘‘unforeseeable circumstances’’
government recording and transfer review process. In most cases, HUD encompasses many things that would
charges. HUD has adjusted how these expects that violations will be identified fall under the statutory requirement that
charges are treated under the tolerances. at or before settlement when completing estimates of settlement costs be in ‘‘good
The final rule splits the government the revised HUD–1 form, which faith,’’ the two concepts are not always
recording and transfer charges into two provides a clear format for comparing equivalent. Some commenters suggested
that the definition be expanded or of, or technical changes to, the would have the option of providing a
clarified to include any situation that is definition of unforeseeable modified GFE. Conversely, as an
outside the lender’s control, even if circumstances. Because many of the example, if the borrower’s total assets
such a situation involves a change that changes described in the proposed were relied on in providing the original
occurs often enough to be ‘‘foreseeable’’ definition of ‘‘unforeseeable GFE, and those assets are not materially
in some sense. An example offered of circumstances’’ happen frequently different from what was stated at
such situation is one in which the enough that they could be ‘‘reasonably application, then the borrower’s total
changes in the price of the property or foreseen,’’ the final rule replaces the assets may not be used as a basis for
in the estimated value of the collateral definition of ‘‘unforeseeable providing a revised or modified GFE.
may necessitate new information about circumstances’’ with a new definition While these changes are intended to
the credit quality of the borrower that is for ‘‘changed circumstances.’’ However, provide loan originators with more
developed during the underwriting the types of circumstances included in flexibility in providing revised GFEs,
process, or any other situation for which the new definition are similar to the HUD is also mindful of the potential for
there is a reasonable explanation and types of circumstances that were abuse. Unscrupulous loan originators
that is still consistent with ‘‘good faith.’’ included in the proposed rule. The first might seek to avoid providing a reliable
Several commenters, including FTC clause in the new definition of GFE by claiming not to have relied on
staff and a trade group representing ‘‘changed circumstances’’ in the final information provided by the prospective
mortgage brokers, found the proposed rule still includes acts of God, war, borrower. In order to discourage loan
definition of ‘‘unforeseeable disaster, or other emergencies as was originators from providing ‘‘generic’’
circumstances’’ to be vague. They included in the proposed rule. The final GFEs that are not based on a
suggested adding specific examples of rule clarifies that the other preliminary evaluation of a particular
common situations to clarify the scope circumstances in the second clause are borrower, the final rule limits the ability
of ‘‘unforeseeable circumstances.’’ separate from and in addition to the of loan originators to provide a revised
These commenters also offered circumstances listed in the first clause. GFE based on information that was
suggestions regarding the definition. A The final rule also clarifies that the collected from the borrower prior to
group representing consumer interests other circumstances include situations providing the GFE. However, if a loan
recommended that HUD carefully where information particular to the originator documents that it relies on a
monitor how often unforeseeable borrower or the transaction either limited range of information in
circumstances override the tolerance changes or is later found to be different providing GFEs to borrowers, the loan
requirements, to ensure that the from what was known at the time the originator may provide a revised GFE
exception does not swallow the rule. A GFE was provided. For example, new based on any other information that
joint comment letter from groups information affecting the borrower’s results in increased settlement costs or
representing state regulators suggested credit quality or a change in the loan a change in the borrower’s eligibility,
that a provision be included requiring amount might occur often enough to be even if the information was received by
loan originators to provide written ‘‘reasonably foreseeable’’, but it would the loan originator prior to providing
notice to borrowers describing the still fall within the types of the GFE, subject to the provisions of the
‘‘unforeseeable circumstance’’ that circumstances included in the second rule. Loan originators are presumed to
resulted in the higher costs. clause of the definition of ‘‘changed have relied on the same minimum
circumstances.’’ information that must be collected by
HUD Determination
Under the final rule, changed the loan originator before providing a
Based on the comments received in circumstances that result in an increase GFE; namely, the borrower’s name, the
response to the proposed rule, HUD has in settlement costs, such that the borrower’s monthly income, the
made a number of changes to the tolerances would be exceeded, or that property address, an estimate of the
proposed provisions describing the result in a change in a borrower’s value of the property, the amount of the
circumstances in which the GFE can be eligibility for the loan offered, may be mortgage loan sought, and any credit
revised. HUD has determined that the basis for providing a revised GFE. report that is obtained by the loan
changes are needed to the proposed For example, if the actual loan amount originator before providing the GFE.
grounds for providing a revised GFE. turns out to be higher than the loan These limitations on providing a revised
The final rule clarifies the different amount indicated by the borrower at the GFE apply only if subsequent
types of circumstances (‘‘changed time the GFE was provided, and certain underwriting and verification confirm
circumstances’’) that can be a basis for settlement charges that are based on the that the information remains
providing a revised GFE. The final rule loan amount increase as a result, the substantially the same as the
continues to emphasize that market loan originator may provide a revised information provided by the borrower at
price fluctuations by themselves are not GFE reflecting those higher amounts. the time of the GFE. For example, if the
changed circumstances. For example, if Compliance with the tolerance borrower’s monthly income turns out to
an appraiser that a loan originator provisions would be evaluated by be substantially less than the monthly
intends to use for a particular comparing the revised GFE with the income stated by the borrower in the
transaction raises its prices by $50 after actual amounts charged at settlement. initial application, the final rule would
the loan originator has already provided Similarly, if underwriting and not prevent the loan originator from
a GFE, that increase would not have verification show that a borrower’s either providing a revised GFE or from
constituted an unforeseeable monthly income is different from the denying the loan altogether. If the loan
circumstance under the proposed rule. income relied on in providing the originator decides to provide a revised
This result would continue under the original GFE, and the difference results GFE, HUD encourages the loan
final rule, i.e., such a price increase by in a change in the borrower’s eligibility originator to explain to the borrower the
the appraiser would not be a ‘‘changed for that loan with those particular terms, reasons for providing a revised GFE
circumstance’’ allowing the issuance of the loan originator would no longer be based on the changed circumstances.
a new GFE. bound by the original GFE. If a loan Several other provisions in the final
HUD recognizes that numerous with different terms is available for that rule that permit revisions to the GFE
commenters recommended elaborations borrower, then the loan originator have not changed significantly from
those proposed. The final rule provides to maintain that documentation for 3 Other Commenters
that a revised GFE may be provided if years after settlement.
a borrower requests changes in the loan FTC staff commented that the lender
product, such as changing from a 30- 8. Lender Disclosure disclosure is misleading and will cause
year term to a 15-year term, or from a confusion because it does not make
Proposed Rule. The proposed GFE
fixed-rate mortgage to an adjustable rate clear that the terms of the loan may be
included information for the borrower
mortgage. A revised GFE would be dependent on anticipation of the
to note that lenders can receive
permitted whether such change is first secondary market fees described. FTC
additional fees from other sources by
suggested by the loan originator, or by staff said there should be more explicit
selling the loan at some point after
any other party. The final rule also disclosure in the origination charge
settlement. However, the borrower was
provides that if a prospective borrower section of the GFE, making clear that
also informed that once the loan is
does not express an intent to continue lenders also get higher fees for a higher
obtained at settlement, the loan terms,
with an application within 10 business the borrower’s adjusted origination interest rate.
days of receiving the original GFE, or charges, and total settlement charges HUD Determination
such longer time specified by the loan cannot change. The language on the
originator on the GFE, the loan proposed GFE also indicated that after After consideration of the comments,
originator is no longer bound by the settlement, any fees lenders receive in HUD has determined to retain the
GFE. While HUD does not intend for the the future cannot change the loan lender disclosure on the GFE. HUD is
GFE form to in any way affect state laws received or the charges paid at retaining the lender disclosure on the
regarding contract formation, this settlement by the borrower. GFE because HUD believes that it is
provision is intended to make clear that important for borrowers to be aware that
the estimated charges on a GFE are not Comments lenders may receive additional fees by
open-ended. Lender Representatives selling the loan after settlement.
The final rule also clarifies that,
However, the disclosure has been
where a borrower has not locked a Lenders and lender organizations streamlined. The disclosure on the
particular interest rate, or where an commented that the disclosure revised form informs the borrower that
interest rate lock has expired, all regarding lender compensation on page
interest rate-dependent charges on the some lenders may sell the loan after
4 of the GFE is misleading and settlement and any fees received by the
GFE are subject to change. The charges unnecessary, and should therefore be
that may change include the charge or lender for selling the loan cannot
removed. These commenters suggested change the borrower’s loan or the
credit for the interest rate chosen, the that because borrowers already
adjusted origination charges, and per charges paid by the borrower at
understand how lenders are settlement.
diem interest. The loan originator’s compensated, through origination
origination charge, shown in Block 1 on charges and interest, lenders are already 9. Enforcement and Cure
page 2 of the GFE, is not subject to required to make full compensation
change, even if the interest rate floats. disclosures. Sale of the loan after Proposed Rule. The March 2008
Of course, the various specific places settlement merely allows the lender to proposed rule provided that HUD would
where the interest rate is identified on collect the present value of that interest. deem violations of the requirements for
the GFE would also be subject to change One lender argued that secondary the GFE in 24 CFR 3500.7 to be
if the interest rate is not locked. If the market sale of the loan actually reduces violations of section 5 of RESPA. This
borrower later locks the interest rate, a costs to borrowers rather than increasing would include instances where the
revised GFE should be provided at that them. Lenders also commented that the charges listed on the GFE are exceeded
time to show the revised information. disclosure is biased against lenders at settlement by more than the
Finally, the final rule includes the tolerances permitted under § 3500.7(e).
because it does not point out that they
proposed provision on revision of the In similar fashion, the proposed rule
can lose money selling the loan later. In
GFE for transactions involving new provided that HUD would deem
addition, one lender said that the
home purchases. HUD recognizes that in violations of the requirements for the
cases of new construction, the original current servicing disclosure already
covers this information. Lenders also HUD–1/1A in § 3500.8 to be violations
GFE may be provided long before of section 4 of RESPA.
settlement is anticipated to occur. In suggested that because the text of the
those cases, the loan originator may disclosure does not concern settlement HUD invited comments on whether a
provide a clear and conspicuous costs or issues, the disclosure is outside provision should be added to the
disclosure to the borrower that a revised the purview of RESPA. RESPA regulations that allow a loan
GFE may be provided at any time up Mortgage Broker Representatives originator, for a limited time after
until 60 calendar days prior to closing. closing, to address the failure to comply
If no such disclosure is provided, or if NAMB supported HUD’s inclusion of with tolerances under the proposed GFE
no revised GFE is actually given, then the lender disclosure information, but requirements, and if so, how such a
compliance with the tolerances will be felt that such information should be provision should be structured. HUD
evaluated by comparing the charges on presented with greater emphasis and in sought comments on whether such a
the original GFE with the actual charges more detail. NAMB suggested moving provision would be useful and, if so,
at settlement. During the 60 calendar the information to page two of the GFE what the appropriate time frame would
days prior to closing, a revised GFE may and presenting it as part of the YSP be for finding and refunding excess
be provided only in accordance with the disclosure, in order to make clear to charges. HUD also invited comments on
other paragraphs in this section. consumers the similarity in the two whether the potential for abuse of such
In any case where a revised or charges. According to NAMB, this a provision would be harmful to
modified GFE is provided to a change would help achieve parity of consumers. Comments were also sought
prospective borrower, the loan disclosures between lenders and on whether the ability of prosecutors to
originator is required to document the mortgage brokers, which is essential for exercise enforcement discretion would
reasons for changes that are made and effective consumer disclosure. obviate the need for such a provision.
Comments that a violation of any of the HUD Determination

Many comments were received on the requirements for completing the HUD– HUD has determined to proceed with
advisability of allowing loan originators 1/1A shall be deemed to be a violation adoption of a 12-month implementation
to cure potential violations of the of section 4 of RESPA. However, the period. HUD recognizes that operational
tolerances on the GFE. Lenders and rule provides that an inadvertent or changes will be required in order to
trade groups representing lenders and technical error in completing the HUD– implement the new rule, in addition to
some settlement service providers 1/1A shall not be deemed a violation of training staff on the new requirements.
strongly supported the addition of a section 4 of RESPA, if a revised HUD– However, the need for a standardized
provision allowing loan originators to 1/1A is provided to the borrower and/ GFE with relevant information about the
cure potential violations of the or seller within 30 calendar days of loan and settlement charges is critical in
tolerances. Several lenders reiterated settlement. This opportunity to cure light of the problems in the current
their previous comment that HUD lacks errors on the HUD–1/1A is consistent market, and further delay is not
authority to impose tolerance with HUD’s longstanding policy warranted. HUD believes that a 12-
requirements on the GFE, but that if a permitting settlement agents to provide month implementation period will
tolerance provision were authorized by revised HUD–1/1A settlement provide sufficient time for systems
statute, they would support the statements where errors are discovered changes and training to occur.
inclusion of a cure provision. Among after settlement. Therefore, use of the new GFE and the
the lenders and lender trade groups that new HUD–1/1A will be required as of
10. Implementation Period January 1, 2010. During the transition
supported inclusion of a cure provision,
the comments were almost evenly Proposed Rule. In the March 2008 period, the current RESPA requirements
divided between those suggesting a 60- proposed rule, HUD stated that it with respect to the GFE and the HUD–
calendar-day period to cure potential intended to include a 12-month 1/1A remain in effect and settlement
violations of the tolerances, and those transition period in the final rule. service providers may choose to proceed
suggesting a 90-calendar-day period. During the 12-month transition period, under either the current GFE and HUD–
Another commenter recommended that settlement service providers and other 1/1A requirements or may choose to
HUD consider adding a cure provision persons could comply with either the proceed under the new GFE and HUD–
for the HUD–1 and closing script. current RESPA requirements or with the 1/1A requirements. However, any
Consumer groups were generally revised requirements of the amended settlement service provider who
supportive of stronger enforcement of provisions. HUD invited comments on delivers the new GFE prior to January 1,
RESPA’s disclosure requirements, whether such a transition period is 2010, will be subject to all of the
including enactment of statutory appropriate. requirements related to the new GFE,
changes that would include civil money including compliance with the tolerance
penalties for violations of those Comments provisions and use of the required
requirements. A consumer group that HUD–1/1A.
Consumer representatives generally Other provisions of this final rule,
responded to HUD’s question regarding
favored a 12-month implementation including the average charge and
a cure provision expressed its
period, while lenders and their trade required use provisions and the
opposition to adding such a provision.
Consumer groups, generally, raised the associations sought a longer technical amendments, are
possibility that a cure provision could implementation period on the basis that implemented immediately upon the
be abused by offering only partial 12 months is insufficient time to effective date of the rule.
reimbursement to a borrower. These prepare for compliance with the new As previously stated, HUD will issue
commenters suggested that loan requirements. According to one major guidance on compliance with the rule’s
originators would have an incentive to lender, a 12-month period is far too provisions during the implementation
cure violations even without a specific short, given the extensive nature of the period.
provision exempting them from liability changes. This lender estimated that an
C. Lender Payments to Mortgage
if a potential violation is cured. 18–24 month period will be required for
Brokers—Yield Spread Premiums
implementation of the proposal, as
HUD Determination (YSPs)
published on March 14, 2008.
Based on the comments received in According to other major lenders, the 1. Disclosure of YSP on GFE
response to the proposed rule and proposed rule would require significant The March 2008 proposed rule
further consideration of this issue by systems and operational changes well provided that lender payments to
HUD, HUD has determined that a cure beyond the complex forms changes, and mortgage brokers in table-funded and
provision is important to allow loan would take a minimum of 2 years to intermediary transactions be clearly
originators to more effectively manage implement. A lender association stated disclosed to consumers on the GFE and
any uncertainty in costs associated with that requiring the industry to implement the HUD–1 settlement statements, as set
the required tolerances on the GFE. By changes to RESPA disclosures and then forth below. The rule also proposed to
including a cure provision, HUD to later implement changes to TILA streamline the current regulatory
recognizes that some errors are disclosures would result in significant definition of ‘‘mortgage broker.’’
inevitable when handling large numbers and duplicative costs for systems Under the March 2008 proposed rule,
of complex transactions, and HUD does changes, training, and staffing that the first page of the GFE presented the
not intend for the tolerance would ultimately be borne by net origination charge as ‘‘your adjusted
requirements to create liability for consumers. This association expressed origination charges.’’ The second page
inadvertent errors. support for an implementation period of the proposed GFE informed the
As described in more detail above, beginning 18 months after the effective consumer how the adjusted origination
HUD has built an opportunity to cure date of the rule, or 18 months after the charge was computed. Block 1 disclosed
violations of the tolerances into the implementation period for the Federal as ‘‘Our service charge’’ the originator’s
requirements establishing the Reserve Board’s TILA rule, whichever is total charge to the borrower for the loan.
tolerances. The final rule also provides later. The rule proposed that in the case of
loans originated by mortgage brokers, money, when in fact the disclosure is finance charge under TILA to the extent
the amount in Block 1 would have to doing the opposite. CRL also objected to included in the interest rate and are not
include all charges received by the the disclosure on the grounds that the always included in points and fees
broker and any other originator for, or disclosure does not make clear that this calculations. According to this
as a result of, the mortgage loan is a fee paid to a broker. In addition, commenter, the proposed definition will
origination, including any payments CRL stated that it found the disclosure artificially force more loans into the
from the lender to the broker for the confusing, and noted that HUD has not ‘‘high cost’’ category which will further
origination. In the case of loans tested the effectiveness of the disclosure limit credit because many lenders do
originated by originators other than outside of controlled circumstances. not originate these loans.
mortgage brokers, the amount in Block Both CRL and NCLC recommended an CMC stated that the proposed
1 would have to include all charges to alternative formulation for disclosure of mortgage broker compensation
be paid by the borrower that are to be mortgage broker compensation. disclosure wrongly conflates mortgage
received by the originator for, or as a NCLC also stated that the proposed brokers and mortgage lenders. CMC
result of, the loan origination to the disclosure potentially complicates TILA noted that there are important
borrower, except any amounts review. According to NCLC, without differences between mortgage brokers
denominated by the lender as discount guidance from the Federal Reserve and mortgage lenders in terms of roles
points and which would be disclosed in Board, it is not clear what effect treating in the transaction, compensation, and
Block 2. the lender-paid broker compensation as risk posed to consumers. CMC stated
In loans originated by mortgage a credit will have on the central TILA that the mortgage broker disclosure
brokers, Block 2 of the second page of disclosures, which are the finance proposal fails to adequately address
the proposed GFE would have disclosed charge and the APR. these differences. CMC expressed
whether there is any charge or credit to opposition to consolidating the charges
Industry Representatives
the borrower for the specific interest of the lender and the broker together in
rate chosen for the GFE. The second Lenders generally were opposed to a single ‘‘service charge’’ because,
check box would have indicated the proposed YSP disclosure. Many according to CMC, such consolidation
whether there was a payment for a lenders and their trade associations effectively hides the amount of the
asserted that the proposed approach for broker’s total compensation from the
higher interest rate loan, described as
disclosing YSP conflicts with pending borrower. CMC believes that borrowers
the ‘‘credit of $lllfor this interest
TILA and HOEPA rule changes should have this information and that
rate of lll%. This credit reduces
proposed by the Federal Reserve Board, failure or omission to disclose could
your upfront charges.’’ The third check
and is also inconsistent with Advisory cause harm. CMC stated that disclosing
box would have indicated a ‘‘charge of
Letter 2003–3 of the Office of the YSP as a credit and lumping the YSP
$lll for the interest rate of lll%.
Comptroller of the Currency (OCC). together with (or offsetting it against)
This payment (discount points)
These lenders stated that it would be lender fees or discounts hides the YSP
increases your upfront charges.’’ Any
costly and confusing for the banking in a way that is confusing and
lender payment would have been
industry if HUD and the Federal Reserve potentially harmful to the borrower.
subtracted and any points would have Board issued varying rules, revisions,
been added to arrive at ‘‘your adjusted CMC recommended that broker
and disclosures independently. Other compensation be disclosed as shown in
origination charge’’ that would also lenders stated that, because in their
have been disclosed on the first page of the RESPA/TILA forms and ‘‘mortgage
view HUD assumed that the only way broker fee agreement and disclosure’’
the form. The proposed rule provided for a lender to calculate payment to the
that for mortgage brokers, the amounts submitted with their comments.
broker is by tying the compensation to MBA asserted that the proposed
of any charge or credit in Block 2 would the borrower’s interest rate, neither the disclosure will be unclear to borrowers
have to equal the difference between the proposed GFE nor the proposed HUD– while the costs occasioned by the
price the wholesale lender pays the 1 can accommodate a lender’s adoption of new terminology for
broker for the loan and the initial loan compensation payment to the broker mortgage broker fees will, in its opinion,
amount. based on the loan amount, or based on be enormous. MBA noted that, in its
Comments a flat dollar amount. According to these opinion, the proposed disclosure does
lenders, if a lender were to pay broker not allow for the possibility that, in the
Consumer Representatives compensation that is not tied to the future, some brokers will be paid on a
Some consumer groups opposed the interest rate, there would be no way to basis other than the loan’s interest rate.
proposed YSP disclosure on several disclose the payment without artificially In addition, MBA stated that as lenders
grounds. These groups asserted that to inflating the charges paid by the and brokers perform distinct functions
describe lender-paid broker borrower. in the marketplace and are perceived
compensation as a credit to reduce A major lender noted that if a broker differently by consumers, applying the
settlement costs is misleading. NCLC intends to rely primarily on the lender same rules to them is ill-advised. MBA
stated that there is no requirement that for compensation, the dollar-for-dollar proposed an alternative mortgage broker
the lender payment will actually be offset of the YSP against other service compensation disclosure that discloses
used in this manner. CRL stated that the charges will necessitate that the broker the total compensation for the broker’s
proposed language presumes a trade off increase the disclosed consumer paid services and the amounts paid by the
through a reduction in upfront costs, fees. The lender commented that this lender to the broker on the borrower’s
and research shows that this does not has regulatory impacts under other behalf.
occur, except in limited circumstances. laws. The lender stated that the NAMB reasserted its opposition to
According to CRL, the disclosure’s origination fee is a finance charge under carving out one component of the cost
characterization of the YSP as a ‘‘credit’’ TILA. The lender also stated that the of a mortgage loan for the ‘‘putative
only exacerbates the issue of the origination fee is also normally included purpose of clarification and
nonexistent trade off. CRL expressed in the points and fees definitions under simplification.’’ NAMB asserted that the
concern that the disclosure suggests that several state high-cost laws and HOEPA, proposed YSP disclosure would achieve
the arrangement is saving the consumer whereas YSP payments are only a the opposite result and would detract
from the consumer’s ability to focused only on how, not whether, to and YSPs. According to NAR, calling
understand and comparison shop. disclose YSP. NAMB stated that in the YSP a ‘‘credit’’ to the borrower
NAMB recommended that direct doing so, the proposal ignored FTC’s without explaining or making it clear
competitors should be treated the same earlier finding that disclosing just that the YSP is tied to the interest rate
to facilitate shopping and promote broker compensation created confusion may mislead or confuse a consumer.
consumer understanding. NAMB stated and led consumers to make decisions The Conference of State Bank
that if HUD continues to require contrary to their best interests. Supervisors, the American Association
disclosure of originator compensation, NAMB also asserted that HUD’s of Residential Mortgage Regulators, and
HUD must require all originators to testing was flawed because the testing the National Association of Consumer
disclose the premium value created by was not conducted among actual Credit Administrators commented that
interest on the loan, and that HUD must borrowers dealing with actual loan the proposed disclosure of YSP is not
provide a method for making that originators. According to NAMB, the parallel with the Federal Reserve
calculation. tests fail to assess the consequences of Board’s proposed rule amending
According to NAMB, the proposed disparate disclosures in actual Regulation Z. These commenters urged
disclosure makes distinctions among competitive markets. NAMB noted that, HUD to work closely with the Federal
mortgage originators with no basis for in 2004 and 2007, FTC conducted Reserve Board to develop seamless
doing so, and in disregard of market extensive studies on consumer mortgage regulations before finalizing the
realities. NAMB stated that the proposal disclosures, with a particular focus on proposed rule.
seeks to enhance regulatory distinctions mortgage broker compensation
Federal Agencies
among groups of originators, long after disclosures. NAMB further stated that
such labels have lost their meaning in the 2007 FTC study restated the FTC staff expressed support for the
the marketplace. NAMB also criticized conclusion of the earlier study, noting goal of improving consumer
the proposal because it would, in that disclosure of broker compensation understanding of the costs and terms of
NAMB’s opinion, isolate a single ‘‘created a substantial consumer bias mortgage loans. However, based on the
component of cost—compensation— against broker loans, even when the results of past FTC and HUD mortgage
rather than aggregate cost. According to broker loans cost the same or less than disclosure research, FTC staff urged
NAMB, compensation is relevant only direct lender loans, because the HUD to consider reevaluating its
to the extent that compensation serves disclosures would have been required of proposed broker compensation
as a ‘‘rough proxy for the difference brokers, but not direct lenders.’’ (See disclosures, because they may adversely
between the par, or wholesale, loan rate 2007 FTC Study at 6, n. 14). NAMB also affect consumers and competition. FTC
and the rate quoted to the consumer.’’ objected to the proposed mortgage staff stated that alternative disclosures
In the case of mortgage brokers, that broker compensation disclosure on the that clarify the role of mortgage
difference is called ‘‘yield spread grounds that the proposed rule fails to originators, applied equally to all
premium’’ or YSP; in the case of evaluate how the proposed broker originators, could provide greater
lenders, that difference is called disclosure would relate to any of the benefits to consumers and avoid adverse
‘‘service release premium’’ or SRP. currently mandated disclosures. effects on consumers and competition.
NAMB asserted that in both cases, that According to NAMB, all 50 states FTC staff urged HUD to evaluate and
differential may be readily determined regulate brokers and their compensation test alternative disclosures to determine
prior to closing at the time the interest in various respects. Industry practice the type or types of disclosures that will
rate is locked and should be disclosed. and lender requirements mandate most benefit consumers. FTC staff also
NAMB also asserted that the lender’s further disclosures. NAMB asserted that suggested that HUD consider, and
compensation after the loan is sold is to limit complexity and information possibly test, whether other disclosures
irrelevant, since such compensation overload, HUD should consider how all such as one that clarifies the role of all
does not affect the price paid by the current mortgage broker disclosures mortgage originators would be more
borrower. According to NAMB, what is would relate to its proposal. beneficial for consumers.
relevant is the incremental cost to the NAMB also commented that HUD has The FDIC expressed some concerns
consumer assessed at the time of closing not adequately addressed how its about the proposal’s approach to YSP
that is attributable to the differential proposed mortgage broker compensation disclosure. The FDIC stated that the
between the loan rate and the wholesale disclosure relates to the Federal Reserve proposed GFE does not clarify that YSP
rate. NAMB asserted that that figure can Board’s proposed amendments to is a payment made by a lender to a
be computed and disclosed prior to Regulation Z, or how HUD’s proposal mortgage broker in exchange for
closing and recommended that HUD relates to the risk-based pricing referring a borrower willing to pay an
specify how that computation should be regulations recently proposed by the above par interest rate, nor does the GFE
done, and require disclosure of the Federal Reserve Board and FTC state the amount of the YSP to be paid
resulting figure, or in the alternative, not pursuant to the Fair and Accurate Credit to a broker. Instead, according to the
require such disclosure by any Transactions Act of 2003 (73 FR 28 966 FDIC, the GFE seems to presume that
originators. (May 19, 2008)). NAMB recommended the lender will apply the YSP as a
NAMB asserted that the methodology that HUD seek public comment on the ‘‘credit’’ that will lower settlement costs
of HUD’s testing is flawed in two interaction between HUD’s proposal, the by a corresponding amount. The FDIC
respects. According to NAMB, the proposed amendments to Regulation Z, noted that the proposal does not impose
contractor failed to test consumer and the pending risk-based pricing the condition that YSP must actually
understanding of loan terms and of regulations before proceeding to finalize function as a credit to a borrower as a
comparative shopping when YSP was the March 2008 proposed rule. requirement on lenders or brokers. The
not disclosed. Instead, according to FDIC further stated that while HUD’s
Other Commenters
NAMB, the contractor assumed the effort, through the March 2008 proposed
answer to the fundamental question of The National Association of Realtors rule, to provide borrowers with more
whether YSP disclosure aided (NAR) stated that it is unclear whether information about the trade off between
consumers in comparative shopping. consumers will understand the interest rates and settlement costs is
NAMB also stated that the testing proposed disclosure of discount points positive, this information alone does not
provide borrowers with an that no bias against brokers resulted The revised GFE form in today’s rule
understanding of the economic from such disclosure. As noted below, is the result of an iterative testing
incentives motivating the lenders and while the substance of the broker process, comprised of six rounds of
brokers with whom the borrowers are disclosure remains the same in the final consumer testing of the form during the
dealing. rule as it was in the proposed rule, some period 2003 through 2007. An
The FDIC recommended that HUD minor stylistic changes have been made additional round of testing was
ban YSPs to ensure that broker to draw the borrower’s attention to conducted in the summer of 2008.
compensation will not be based on specific terminology in the disclosure Working with HUD, HUD’s testing
steering the consumer to a loan that is that HUD believes will improve the contractor used the data collected
more expensive than one for which the disclosure. during each round to improve and
borrower otherwise would qualify. The Since 1992, HUD has required the modify the form throughout the testing
FDIC recommended that HUD ban any disclosure of YSPs on the GFE and process. A summary report on each
mortgage broker compensation that is HUD–1 settlement statements as a round of testing is available at: http://
not a flat or point-based fee. ‘‘payment outside closing’’ or ‘‘POC.’’ www.huduser.org/publications/hsgfin/
If YSPs continue to be permitted, the This means of disclosure has proved to GoodFaith.html.
FDIC recommended that their purpose be of little use to consumers. Moreover, HUD disagrees that its contractor’s
and cost be clearly disclosed. The FDIC notwithstanding that lender payments consumer testing of the GFE form was
recommended that the disclosure to brokers are directly based on the rate flawed. Independent reviews by experts
inform the consumer that the broker is of the borrower’s loan, under current in consumer testing and forms
receiving a payment from the lender for HUD guidance such lender payments development found no flaws in the
placing the consumer in a loan with a are not required to be included in the design of the tests. NAMB’s suggestion
higher interest rate. The FDIC stated that calculation of the broker’s total charges of testing forms in actual transactions is
a YSP should not be identified as a for the transaction, nor are they clearly not necessary or workable. Properly
‘‘credit,’’ because such language would listed as an expense to the borrower. designed and implemented testing does
tend to make consumers believe that This omission is exacerbated by the fact produce correct results through an
they are deriving a financial benefit iterative process. The most difficult
that many brokers hold themselves out
from a YSP. The FDIC further aspect of testing actual transactions
as shopping among various funding
recommended removal of the statement would likely be finding loan originators
sources for the best loan for the
‘‘(T)his credit reduces your upfront (both brokers and lenders) willing to
borrower, while failing to explain to the
charge,’’ because this language is not develop and test a form that is designed
borrower that the payment they receive
balanced by a corresponding statement to improve consumer understanding in
from the lender is derived from the
that informs consumers that the YSP actual transactions and thereby reduce
borrower’s interest rate. While some
will result in them paying a the originators’ information advantage
brokers tell customers how they can use
substantially higher interest rate over and market power in those transactions.
lender payments to lower the customer’s
the life of the loan. Perhaps as difficult would be keeping
upfront settlement costs, others do not.
HUD Determination tested consumers from shopping outside
Policy Statement 2001–1 made clear of the experimental group of originators
Having reviewed the comments, and that earlier disclosure and the entry of to keep the test valid, especially since
based on its testing of the forms, HUD YSPs as credits to borrowers would the forms so strongly urge consumers to
has determined to retain the mortgage ‘‘offer greater assurance that lender shop among different originators.
broker disclosure as proposed, with payments to mortgage brokers serve The NAMB’s second criticism is also
clarifying modifications. However, in borrowers’ best interests.’’(See 66 FR not valid as the third round of testing
order to better explain how the 53056.) HUD could not mandate new was exactly on the point of whether to
disclosure works, HUD is removing, disclosure requirements in the Policy disclose the YSP. The purpose of the
from § 3500.2 of the regulations, the Statement. HUD did, however, commit YSP disclosure is to inform consumers
definition of the term ‘‘charge or credit itself in that Policy Statement to making about the full cost of originating loans
for the interest rate chosen’’ and at the full use of its regulatory authority to through a broker and to help them to
same time inserting expanded establish clearer requirements for understand the tradeoff between interest
information in the instructions on how disclosure of mortgage broker fees, and rates/monthly payments and origination
to disclose the credit or charge to to improve the settlement process for costs so that consumers can use the
provide additional guidance. lenders, mortgage brokers, and relationship to their benefit. The third
In reaching the determination to consumers. (See 66 FR 53053). round of testing did not include the YSP
retain the mortgage broker disclosure, It is for this reason that HUD disclosure, and the important finding
HUD is mindful of the concerns proposed its new disclosure was that, without the YSP disclosure,
expressed by the commenters, but requirements. HUD maintains that while consumers did not understand the
believes that the mortgage broker rate-based payments to mortgage brokers existence of the tradeoff between
disclosure, read in conjunction with the must be clearly disclosed to borrowers, interest rates and origination charges as
tradeoff table on the form, will help the at the same time, mortgage brokers also well as when the YSP was disclosed.
borrower understand the relationship must not be disadvantaged in the Helping consumers understand this
between the interest rate and the marketplace, since such disadvantage tradeoff is a fundamental goal of HUD’s
settlement charges. While many will only result in decreased RESPA reform effort and of the design
commenters claimed that the mortgage competition and higher costs to of the GFE form. The third round of
broker disclosure as proposed was consumers. Many mortgage brokers offer testing confirmed that inclusion of the
confusing and would result in bias products that are competitive with and YSP disclosure helped consumers
against mortgage brokers, HUD’s testing frequently lower priced than the understand the tradeoff, and that if they
of the form demonstrated that products of retail lenders, and HUD take a loan with a relatively high
consumers understood the relationship wishes to preserve continued interest rate, they should pay lower
between the interest rate and settlement competition and lower prices for settlement charges. Since the need for
charges as presented on the form and consumers, as well as consumer choice. the YSP disclosure to improve
consumer understanding of the tradeoff proposed form to be more consistent loans from mortgage brokers and loans
was established in round 3, whether a with other terminology on the form. The from lenders even when the YSP is
YSP disclosure should be included was third check box indicates any ‘‘charge of included in the calculation of the
not the subject of later rounds of testing. $lll for this interest rate of lll%. adjusted origination charge.
Rather, later rounds of form This charge (points) increases your total Nevertheless, to assure that borrowers
development and testing were aimed at settlement charges.’’ Any lender choose the best value loan without
making the YSP disclosure free of anti- payment is then subtracted and any being confused by the presence of a
broker bias. This effort was successful. points are added to arrive at ‘‘your YSP, HUD established the first page of
HUD’s testing found that participants adjusted origination charges’’. The final the GFE as a summary page that only
using HUD’s GFE were successful more rule also requires that in the case where includes total estimated settlement
than 90 percent of the time in a lender compensates a broker based on charges. HUD also considered the
identifying the cheapest loan whether a flat dollar amount, or based on the comments that its proposed mortgage
the GFE loan was from a lender, loan amount, the second box in Block 2 broker disclosure requirement might be
mortgage broker, or the two loans cost on page 2 must be checked. inconsistent with the approach taken by
the same. At page 2, while lenders are not the Federal Reserve Board in its
As indicated, HUD has maintained required to check the second or third proposed rule to amend Regulation Z of
the disclosure on the top of page two of boxes of Block 2, in loans where they do TILA, 16 U.S.C. 1601, et seq. (73 FR
the revised GFE, while making some not make such disclosures, they are 1672, January 9, 2008). However, the
stylistic changes to this portion of the required to check Box 1 that indicates Federal Reserve Board recently
form in the interest of borrower that ‘‘The credit or charge for the announced that it has withdrawn its
comprehension. The top of page 2 refers interest rate of lll% is included in proposed mortgage broker fee agreement
to ‘‘Your Adjusted Origination Charges’’ ‘Our origination charge.’ ’’ If lenders requirement set forth in its proposed
instead of ‘‘Your Loan Details’’ on the separately denominate any amounts due rule (73 FR 44522, July 30, 2008).
proposed form because this is the from the borrower as ‘‘points,’’ they In its consultations with the Federal
section of the disclosure that sets forth must check the third box indicating that Reserve Board staff, HUD raised the
the origination charges. The box on the there are charges for the interest rate concerns expressed by some
top of page 2 informs the borrower how and enter the appropriate amount for commenters that treating lender
the adjusted origination charge is points as a positive number. If lenders payments to mortgage brokers as a credit
computed. In response to comments separately denominate any amounts as a toward the origination charges could
recommending that ‘‘service’’ charge be credit to the borrower for the particular increase the points and fees of each
deleted from the form, Block 1 now interest rate covered by the GFE, they brokered mortgage loan, thereby
discloses as ‘‘Our origination charge’’ must check the second box and enter resulting in more loans coming under
the originators’ total charge to the the appropriate amount as a negative HOEPA coverage. Federal Reserve Board
borrower for the loan. number. Lenders must also add any staff advised HUD that notwithstanding
The final rule requires that in the case such positive amounts or deduct any HUD’s changed requirements,
of loans originated by mortgage brokers, negative amounts to arrive at ‘‘Your determinations of whether payments to
the amount in Block 1 must include all Adjusted Origination Charges,’’ listed a mortgage broker must be included in
charges to be paid by the borrower that on Line A of page two of the form. the finance charge and whether a loan
are to be received by the broker and any In reaching its determination, HUD is covered by HOEPA are based on the
other originator for, or as a result of, the considered providing only the adjusted statutory definitions and requirements
mortgage loan origination, including origination charge without the in TILA, as implemented by the Federal
any payments from the lender to the calculation, and disclosing the YSP and Reserve Board’s Regulation Z, which are
broker for the origination. In the case of points elsewhere on the form. HUD unaffected by HUD’s RESPA
loans originated by originators other concluded, however, that a complete rulemaking.
than mortgage brokers, the amount in disclosure of the payments to the
Block 1 must include all charges to be mortgage broker as presented on page 2 2. Definition of ‘‘Mortgage Broker’’
paid by the borrower that are to be of the revised form, especially when The March 2008 proposed rule would
received by the originator for, or as a read in conjunction with the tradeoff have streamlined the current regulatory
result of, the loan origination to the table on page 3, is valuable to borrower definition of ‘‘mortgage broker.’’ Under
borrower, except any amounts understanding of: (1) The broker’s total the proposed definition, ‘‘mortgage
denominated by the lender as discount compensation; (2) how rate-based broker’’ would mean a person (not an
points, which are disclosed in Block 2. payments from lenders can help reduce employee of the lender) or entity that
Block 2 discloses for loans originated borrowers’ upfront origination charges renders origination services in a table-
by mortgage brokers whether there is and settlement costs in brokered loans; funded or intermediary transaction. The
any charge or a credit to the borrower and (3) how payments to reduce the definition would also have applied to a
for the specific interest rate chosen for interest rate and monthly charges loan correspondent approved under 24
its GFE. The heading for Block 2 of the increase upfront charges. CFR 202.8 for FHA programs. The
proposed form included the term As discussed above, testing by HUD’s proposed definition would have
‘‘points’’ at the end of the sentence. On contractor demonstrated that disclosure eliminated the current exclusion of an
the final form, this sentence now states, of the YSP out of context was not useful ‘‘exclusive agent’’ of a lender from the
‘‘Your credit or charge (points) for the to consumers. On the other hand, a form current definition of ‘‘mortgage broker.’’
specific interest rate chosen.’’ The that requires that lenders disclose that Therefore, under the proposed rule, an
second check box indicates whether credits or charges may be included in ‘‘exclusive agent’’ of a lender who was
there is a payment for a higher interest their service charge as well, even when not an employee of the lender, but who
rate loan described as the ‘‘credit of the calculation for brokered loans is on renders origination services in a table
$lll for this interest rate of lll%. the form, was not confusing for funded or intermediary transaction,
This credit reduces your settlement borrowers. HUD’s testing demonstrated would have been subject to the mortgage
charges.’’ The word ‘‘settlement’’ has that borrowers correctly compared broker disclosure requirements set forth
replaced the word ‘‘upfront’’ from the adjusted origination charges between in the proposed rule.
Comments who renders origination services and raise origination fee limits, this should
Consumer groups did not comment on serves as an intermediary between the be done only in conjunction with
this issue. A lender association lender and the borrower, is essentially establishing reasonable limits on YSPs.
commented that the proposed change acting as a mortgage broker, and will be This commenter stated that by
may be inconsistent with Regulation Z subject to the mortgage broker establishing standard limits on
Comments 226.19–b–2(i) and 226.19(b)– disclosure requirements, as set forth in origination fees and YSPs, the FHA loan
3 concerning intermediary agents or the rule. This definition will also apply product can keep the nongovernment
brokers and the timing of disclosures. to a loan correspondent approved under guaranteed products competing by
24 CFR 202.8 for Federal Housing constraining direct fee and YSP costs.
MBA stated that the definition should
Administration (FHA) programs.
not be changed to include exclusive HUD Determination
The revised definition clarifies that a
agents of lenders. MBA commented that mortgage broker also means a person or HUD believes that its RESPA policy
because mortgage lenders, including entity that renders origination services statements on lender payments to
their agents and employees, are and serves as an intermediary between mortgage brokers restrict the total
functionally different from mortgage a borrower and a lender in a transaction origination charges for mortgages,
brokers, they should be treated involving a federally related mortgage including FHA mortgages, to reasonable
differently. MBA stated that it does not loan, including such a person or entity compensation for goods, facilities, or
believe that mortgage lenders or their that closes the loan in its own name in services. (See Statement of Policy 1999–
exclusive agents warrant the same a table-funded transaction. 1, 64 FR 10080, March 1, 1999, and
treatment as mortgage brokers. MBA Statement of Policy 2001–1, 66 FR
asserted that borrowers do not perceive 3. FHA Limitation on Origination Fees
53052, October 18, 2001.) Moreover, the
brokers in the same way as lenders and of Mortgagees
improvements to the disclosure
brokers do not present the same risks as Under its codified regulations, HUD requirements for all loans sought to be
lenders. MBA also stated that that term places specific limits on the amount a achieved as a result of this rulemaking
‘‘intermediary’’ should not be injected mortgagee may collect from a mortgagor should make total loan charges more
into the definition at all, unless this to compensate the mortgagee for transparent and allow market forces to
term is clearly defined to cover expenses incurred in originating and lower these charges for all borrowers,
independent mortgage brokers. closing a FHA-insured mortgage loan including FHA borrowers. Therefore,
According to MBA, because the term is (see 24 CFR 203.27).1 The March 2008 HUD has determined to finalize the
undefined, ‘‘intermediary’’ could be proposed rule would have removed the proposed rule to remove the current
misinterpreted to cover some loan current specific limitations on the specific limitations on the amounts
officers who work for lenders and may amounts mortgagees are presently mortgagees presently are allowed to
be independent contractors. allowed to charge borrowers directly for charge borrowers directly for originating
NAMB expressed opposition to the originating and closing an FHA loan. and closing an FHA loan. The FHA
proposed change because, according to Under HUD’s proposal, the FHA Commissioner retains authority to set
NAMB, it would perpetuate distinctions Commissioner would have retained limits on the amount of any fees that
among mortgage originators that no authority to set limits on the amount of mortgagees charge borrowers directly for
longer have meaning in the marketplace. any fees that mortgagees charge obtaining an FHA loan.
NAMB noted that the roles of mortgage borrowers directly for obtaining an FHA
brokers and other originators have loan. In addition, the proposed rule IV. Modification of the HUD–1/1A
converged with the ubiquity of the would have also permitted other Settlement Statement
‘‘originate to distribute’’ model of government program charges to be A. Overall Comments on Proposed
mortgage finance, and that the disclosed on the blank lines in Section Changes to HUD–1/1A Settlement
regulatory structure under RESPA 800 of the HUD–1/1A. Statement
should reflect that fact. NAMB
Comments Proposed Rule. Under the March 2008
recommended that, at a minimum, the
definition of ‘‘mortgage broker’’ be There was little comment on this proposed rule, the current HUD–1/1A
expanded to include any originator that issue. NCRC disagreed with the Settlement Statements would have been
sells loans where servicing is released proposal to remove the specific modified to allow the borrower to easily
within 6 months of origination, rather limitations on the amount mortgagees compare specific charges at closing with
than securitizing them or holding them are allowed to charge for originating and the estimated charges listed on the GFE.
in portfolio. closing an FHA loan. NCRC stated that The proposed changes would have
CSBS, AARMR, and NACCA a government-guaranteed loan product facilitated comparison of the two
supported the proposed change in the should shield borrowers from excessive documents by inserting, on the relevant
definition of mortgage broker, but charges by establishing reasonable lines of the HUD–1/1A, a reference to
recommended that HUD define limits on fees. According to NCRC, the corresponding block on the GFE,
‘‘intermediary transaction.’’ These while it may be acceptable to carefully thereby replacing the existing line
commenters stated that by failing to descriptions on the current HUD–1/1A.
define ‘‘intermediary transaction,’’ HUD
1 Under 24 CFR 203.27(a)(2)(i), origination fees
The proposed instructions for
are limited to one percent of the mortgage amount. completing the HUD–1/1A would have
has created potential confusion among For new construction involving construction
industry participants and regulators. advances, that charge may be increased to a clarified the extent to which charges for
maximum of 2.5 percent of the original principal individual services must be itemized.
HUD Determination amount of the mortgage to compensate the
mortgagee for necessary inspections and Comments
HUD has determined to revise the administrative costs connected with making
Consumer Representatives
definition of ‘‘mortgage broker.’’ While construction advances. For mortgages on properties

HUD recognizes that mortgage lenders requiring repair or rehabilitation, mortgagor charges A consumer group stated that while
may be assessed at a maximum of 2.5 percent of the
are functionally different from mortgage mortgage attributable to the repair or rehabilitation,
referencing the GFE lines on the
brokers, an exclusive agent of a lender plus one percent on the balance of the mortgage. settlement statement is an important
who is not an employee of a lender, but (See 24 CFR 203.27(a)(2)(ii), and (iii).) step, HUD should mandate a summary
settlement sheet that corresponds Mortgage Broker Representatives underwriting fee,’’ ‘‘table funding fee,’’
exactly to the summary sheet of the Mortgage brokers commented that the and ‘‘MERS fee.’’ This attorney also
GFE. According to this group, doing so HUD–1 and GFE should mirror each pointed to other operational problems
would obviate the need for a crosswalk other and promote clarity, with the HUD–1 and suggested that the
between the GFE and the settlement understanding, and ease of use for agent/underwriter split in the title
statement. The consumer group stated consumers. However, because the insurance premium serves no useful
that the HUD–1 should be easily proposed GFE, at four pages, is less purpose.
comparable to the GFE and should user-friendly in their opinion than the HUD Determination
facilitate, rather than hinder TILA and current version, mirroring the HUD–1
HOEPA compliance. The consumer HUD continues to agree with the
after the proposed document will not many commenters who pointed out the
group expressed concern that HUD’s make it easier for consumers to importance of comparability between
improvement of disclosures in the understand and use. In regard to the GFE and the HUD–1. Accordingly,
settlement context could impede review specific items on the new HUD–1, one to facilitate comparison between the
of lender compliance with the broker commented that specific lines HUD–1 and the GFE, each designated
disclosure requirements under TILA. such as the splitting of title insurance line in Section L on the final HUD–1
This commenter noted that the between lenders and owners would not includes a reference to the relevant line
proposed HUD–1 would require lenders work properly. In addition, the broker from the GFE. Borrowers will be able to
to disclose as a lump sum their commented that the form of disclosure easily compare the designated line on
origination charges and all title services. for closing services would interfere with the HUD–1 with the appropriate
While this group stated that such an ‘‘title only’’ agencies, and that the form category on the GFE. Terminology on
approach is an improvement from the of the HUD–1 would not leave room for the HUD–1 has been modified as
perspective of consumer understanding, an acknowledgment and certification. necessary to conform to the terminology
the group stated that not all origination Title and Closing Industry of the GFE. For example, since Block 2
and title services are clearly all in, or all Representatives on the GFE is designated as ‘‘your credit
out of, the TILA finance charge. Under or charge (points) for the specific
TILA, for example, title insurance is Commenters from the title industry interest rate chosen’’, Line 802 on the
excluded from the finance charge. The said that the HUD–1 was still not easily HUD–1 is also designated ‘‘your credit
commenter stated that other charges comparable to the GFE. They also or charge (points) for the specific
related to title insurance, including the suggested that the title insurance interest rate chosen.’’ Because Block 3 of
settlement fee, courier fee, or document disclosure requirements would conflict the GFE ‘‘Required services that we
preparation fees, may be included in the with the laws of some states. One title select’’ will include multiple services
finance charge, particularly if they are insurance company recommended that such as appraisal, credit report, tax
not bona fide and reasonable. This title and closing charges be kept service and flood certification, each of
commenter noted that similar separate. these services are designated on
inconsistencies are true of other The title industry was opposed to the separate lines of the HUD–1, with a
origination fees. The commenter stated breakout of the title premium between notation that each is from GFE Block 3.
that absent coordination with the the agent and the underwriter. It was The amount listed on the HUD–1 to be
Federal Reserve Board on a more useful suggested that this was a private paid in advance for the mortgage
and expansive definition of the finance business matter and that this breakout insurance premium (included in the 900
charge, and statutory changes to TILA had no effect on the amount of the series on the HUD–1) also contains a
itself, the final settlement statement premium charged. Also, the breakout notation that the advance payment is
should not bundle either all title or all does not appear on the GFE, so it will from GFE Block 3. By noting the
not help the consumer to see it at appropriate block from the GFE on each
origination charges. The commenter also
closing. designated line of the HUD–1,
called for itemization of all title services
One escrow company objected to borrowers will be able to easily compare
on both the GFE and HUD–1, so that
HUD referring to tax and insurance the charges listed on the HUD–1 with
consumers are aware of the variety of
deposits as ‘‘escrows’’ and said that the the charges listed on the GFE.
fees.
proper term was ‘‘impounds.’’ Escrow With respect to the 1100 series for
Lender Representatives companies also objected to HUD’s Title Insurance, the final HUD–1
reference to ‘‘optional’’ owner’s title includes designated lines for title
Lenders commenting on the March insurance and felt such reference might services and lender’s title insurance at
2008 proposed rule generally stated that lead borrowers to forego needed line 1101, with a notation that this
the HUD–1 should be in the same protection. One suggested that the term amount is from GFE Block 4. Unlike the
format as the GFE, to enable ‘‘non-required’’ would be preferable, but proposed HUD–1, the final HUD–1
comparisons of estimated and actual pointed out that in some states owner’s includes a designated line for the
charges. A lender association stated that title insurance actually is required. settlement or closing fee at line 1102,
the proposed changes to the HUD–1 fall One escrow company commented that which is also from GFE Block 4.
short of making the GFE and HUD–1 HUD tested only its own forms, not the However, in order to limit unnecessary
correspond. Many lenders expressed the forms submitted by others, so there was itemization of the component parts of
concern that the way the proposed no evidence that HUD’s forms were the charge for title services,
HUD–1 forms are to be completed better. This commenter went on to say administrative and processing services
would require many changes with that it does not believe that consumers related to title services must be included
significant operational and technology in a real-world situation will use these at line 1101 with the overall charge for
impacts. A major lender stated that forms in the intended manner. title services. Because the final rule
changes to the HUD–1 that consolidate One closing attorney commented that more clearly specifies the extent of
disclosures raise questions about the the limiting of lender charges to line 801 itemization permitted, HUD has
lenders’ ability to complete post-closing will interfere with disclosure of such determined that it is no longer necessary
checks of finance charge calculations. fees as an ‘‘underwriting fee,’’ ‘‘desk to define ‘‘primary title services’’ as a
particular set of title services. In that the script would not be useful to and attorneys better able to address
addition, the final HUD–1 includes a borrowers who are not fluent in English borrowers’ questions.
designated line for owner’s title and to hearing-impaired borrowers. One Many settlement agents also stated
insurance at line 1103, from GFE Block consumer group expressed concern for that they were unable to address
5, but the reference to ‘‘optional’’ circumstances when a borrower does borrower questions since they were not
owner’s title insurance was dropped not have an escrow account. In this privy to discussions and decisions
from the proposed rule in response to event, the group expressed its hope that between the loan originator and
comments. HUD has determined to the closing script would provide an borrower. ALTA suggested that the
retain the designated lines for the estimate of monthly payments for taxes lender should bear the duty of preparing
agent’s portion of the total title and hazard insurance. and delivering the closing script to the
insurance premium (Line 1107) and the borrower.
underwriter’s portion of the total title Industry Representatives
Lenders
insurance premium (Line 1108). Title and Settlement Agents and
Although inclusion of the agent/ Lenders and their trade associations
Notaries
underwriter split on the HUD–1 differs were generally opposed to the closing
from the GFE, it is HUD’s view that this Most comments from title and script requirement. Lenders commented
breakdown will help consumers better settlement agents opposed the concept that a mandatory closing script is
understand their title charges. of the closing script and expressed the unnecessary and will add new,
To further facilitate comparability concern that any requirement to read a substantive burdens to both lenders and
between the GFE and HUD–1, HUD has closing script to the borrower and settlement agents and ultimately
determined to include a third page to explain discrepancies between the GFE, increase closing costs. These
the HUD–1 that includes a chart the HUD–1 and the loan documents commenters further asserted that the
comparing the amounts listed for would constitute the ‘‘unauthorized additional time involved in preparing
particular settlement costs on the GFE practice of law.’’ ALTA commented that the script and reading it at each closing
with the total costs listed for those in many states, settlement agents risk will, over time, result in an increase in
charges on the HUD–1. For further engaging in the unauthorized practice of fees charged by lenders and settlement
discussion of this chart, see the law by reviewing loan documents and agents.
discussion of the Closing Script issue in answering borrower questions about MBA stated that the script would
the next section. final loan terms. ALTA also stated that ‘‘raise legal concerns, be too costly,
even in states where there are no provide little benefit to the consumer at
B. Proposed Addendum to the HUD–1, concerns about the unauthorized closing and raise significant operational
the Closing Script practice of law, the proposed closing concerns.’’ MBA also questioned HUD’s
Proposed Rule. Under the March 2008 script requirements would add a authority to require an ‘‘additional
proposed rule, an addendum would significant additional amount of time to disclosure.’’
have been added to the HUD–1/1A that each closing, leading to a decrease in Bank of America commented that it
would have compared the loan terms the number of closings a settlement agreed with HUD’s goal of reducing
and settlement charges estimated on the agent can perform. According to ALTA, consumer confusion and dissatisfaction
GFE to the final charges on the HUD– this will result in higher closing fees with the closing process, but asserted
1 and would have described in detail charged to the borrower and the seller. that the closing script will not resolve
the loan terms for the specific mortgage ALTA and others also raised concerns those issues. Bank of America stated
loan and related settlement information. about how the closing script that the disclosure of loan terms by use
The settlement agent would have been requirement would be implemented in of a closing script would detract from
required to read the addendum aloud to those jurisdictions that do not conduct the information that is disclosed in the
the borrower at settlement and provide in-person closings. These commenters TILA disclosure and could create more
a copy of the addendum at settlement. also questioned how the closing script confusion than clarity. This commenter
requirement would be implemented if also asserted that the script does not
Comments take into account the realities of
the borrower’s primary language was
Consumer Representatives other than English. different closing practices in different
parts of the country.
NCLC, while supportive of the closing The National Notary Association and Peoples National Bank stated its belief
script, requested that HUD ‘‘clarify that the American Society of Notaries (ASN) that the script would add little to
lenders are responsible for the accurate commented that notaries are not consumers’ knowledge but would add
delivery of the closing script’’ and attorneys or actual settlement agents significantly to the number and cost of
‘‘clarify that settlement agents also are and do not have the authority to explain documents the lender must produce:
responsible to the borrower for the settlement terms to borrowers. The ASN ‘‘The fact that some predatory lenders
accurate delivery of the closing script.’’ also noted that ‘‘[b]y statute, notaries are have intentionally deceived consumers
NCRC supported the Department’s strictly prohibited from explaining will not be cured by additional
inclusion of the closing script. It documents or giving any advice that can disclosures, whether on provided paper
commented that the script would be seen as unlicensed practice of law.’’ or read aloud.’’ This commenter
‘‘instill integrity and prevent lenders Other notaries and signing agents encouraged HUD to address issues
from changing loan terms and costs questioned what they would be required related to deceptive practices through
between the application stage and loan to do if GFE tolerances were exceeded ‘‘more effective investigation and
closing.’’ NCRC stated that the script or the borrowers asked questions they enforcement.’’
would lead borrowers to have a ‘‘clearer were unable to answer. They were
Mortgage Brokers
understanding of loan terms and particularly concerned that the

conditions.’’ requirement of reading, explaining, and NAMB expressed its opposition to the
The California Reinvestment Coalition noting any inconsistencies such as a closing script because it would
also supported the inclusion of the GFE tolerance violation would cause ‘‘increase costs for consumers and lower
closing script, but expressed concern them to be replaced by settlement agents the number of loans that can be closed
in a day.’’ Further, NAMB estimated unintentionally release the settlement should be apprised of their loan terms
that the additional time and resources agent and/or loan originator from at the closing and should also be
that would be consumed by liability. CSBS stated ‘‘[p]erhaps of apprised of any differences between the
implementing the closing script would greatest concern to state supervisors, amounts stated on the GFE and the
average approximately $500 per loan, however, is if a consumer signs an amounts listed on the HUD–1 settlement
with ‘‘no commensurate, or even acknowledgment stating they have been statement. Accordingly, to ensure that
discernible, benefit to consumers in presented with the closing script and borrowers are made aware of the final
light of disclosures already mandated.’’ understand all portions therein, the settlement charges and the terms of their
NAMB further questioned whether the lender will effectively be granted safe loan, and to help make certain that
script would bring mortgage brokers harbor if accused of deceptive tactics.’’ borrowers get the settlement charges
into an advisory role that might then They recommended that the and loan terms to which they agreed,
trigger ‘‘state regulatory and licensing acknowledgment be changed to indicate HUD is requiring an additional page on
requirements’’ and liability. merely that the borrower was the HUD–1/1A settlement statement that
‘‘presented with the closing script,’’ in sets forth a comparison between the
Other Industry Representatives
order to avoid granting the lender safe charges listed on the GFE and the
The Real Estate Service Providers harbor. charges listed on the HUD–1/1A, and
Council (RESPRO) opposed the closing summarizes the final loan terms of the
script concept and raised the concern Federal Agency Commenters
borrower’s loan.
that reading the script aloud in the The FDIC commented that the closing By eliminating the closing script, as
presence of third parties raises privacy script is helpful in making plain the proposed, and including information
issues under the Gramm-Leach-Bliley negative financial consequences for a about the loan on the additional page of
Act, which prohibits the dissemination consumer of entering into an the HUD–1/1A Settlement Statement,
of personal information. ‘‘unconventional loan product such as borrowers will receive the essential
HomeServices of America, Inc. an interest-only loan.’’ However, the information that was included in the
(HomeServices) wrote that ‘‘the FDIC stated that one shortcoming of the proposed closing script while
proposed closing script requirement is script is that there is no information eliminating potential operational
problematic and should not be about what a consumer can do if the challenges posed by the proposed
implemented [because it] will not fulfill loan originator exceeds the permissible closing script.
the purpose for which it is intended tolerance. The instructions for completing the
because it comes too late in the process The Office of Thrift Supervision HUD–1/1A settlement statement
and would be too costly.’’ HomeServices (OTS) stated that while well intended, provide that the loan originator shall
asserted that the closing script would be the proposed closing script requirement transmit sufficient information to the
ineffectual because ‘‘many buyers would be ‘‘time consuming and may closing agent to allow the closing agent
would be contractually obligated to neither be viable nor appropriate in all to prepare the HUD–1/1A, including the
conclude the real estate transaction cases.’’ OTS suggested that if the final new last page. The first half of the new
regardless of any inconsistencies rule contains a closing script page includes a comparison chart that
between the GFE, the HUD–1 Settlement requirement, a written script may sets forth the settlement charges from
Statement and other loan documents suffice. the GFE and the settlement charges from
and shown in the closing script.’’ While expressing its general support
the HUD–1/1A to allow the borrower to
of the script, the FTC staff suggested
Other Commenters easily compare whether the settlement
that HUD consider modifications to the
The National Association of Insurance charges exceed the charges stated on the
current proposal. FTC staff
Commissioners, while expressing GFE. The second half of the new page
recommended placing responsibility for
general support for the closing script, sets forth the loan terms for the loan
creating the script on lenders, rather
expressed its belief that borrowers received at settlement in a format that
than settlement agents and stated that,
would be better protected ‘‘if the same reflects the summary of loan terms on
at a minimum, lenders should have the
information would be provided in the first page of the GFE, but with
responsibility of completing as much of
writing earlier in the real estate additional related information that
the closing script as possible, to
transaction.’’ The Office of the Illinois would be available at closing. By
decrease the risk of inaccuracies. In
Attorney General supported the closing presenting the comparison chart and the
addition, FTC staff recommended that
script and expressed the hope that by loan terms on the new page of the HUD–
HUD consider making the closing script
highlighting changes in terms and fees 1, the borrower will be made aware of
and the comparison chart more
that have occurred since the GFE stage, any changes to the settlement charges or
consistent with the revised GFE and
‘‘(t)he script will discourage loan loan terms and be able to confirm those
HUD–1 formats. FTC staff also
originators from changing key loan changes.
recommended that the final rule address
terms and imposing additional charges the responsibilities of settlement agents V. Permissibility of Average Cost
at closing, practices commonly seen in if there are inconsistencies between the Pricing and Negotiated Discounts—
investigations conducted by our office.’’ loan terms and charges in the GFE and Discussion of Public Comments
This commenter further recommended those in the HUD–1 and other loan
that the HUD–1 Settlement Statement A. Overview and Definition of ‘‘Thing of
documents and also recommended
and closing script addendum ‘‘be Value’’
additional consumer testing of the
required to be given to all borrowers 24 script. Proposed Rule. The March 2008
hours in advance, in addition to the proposed rule would recognize pricing
requirement that the script be read HUD Determination techniques that result in greater
aloud at closing.’’ In response to comments received on competition and lower costs to

CSBS, AARMR and NACCA, while the proposed rule and HUD’s further consumers, specifically average cost
supporting the closing script, expressed review, HUD has eliminated the closing pricing and some discounts among
concern about the acknowledgment script requirement. However, HUD settlement service providers, including
page, believing that the script may continues to believe that borrowers volume based discounts. The rule
proposed to amend 24 CFR 3500.8 and The ABA and the Independent ALTA also noted that although the
would have explained that charges for Community Bankers of America (ICBA) proposed rule would allow settlement
third party services may be calculated expressed concern that volume service providers to offer negotiated
using average cost pricing mechanisms discounts may put smaller market volume discounts, such a provision is in
based on appropriate methods participants such as community banks direct contrast to many state title
established by HUD. These mechanisms at a disadvantage, since most discounts insurance laws that prohibit title
would also have accommodated volume will be negotiated on a volume basis. insurance companies and agencies from
based discounts. The proposed rule According to these commenters, smaller discounting the title premium or
would have allowed loan originators to banks, making fewer loans, will not be offering a rebate on title insurance fees,
disclose on the HUD–1 an average cost able to negotiate as many or as deep especially in states with ‘‘all-inclusive’’
price in accordance with one of several discounts as larger lenders. ABA also rates. Similarly, the National
specific methods. The proposed rule commented that lenders should be Association of Insurance Commissioners
also would have amended 24 CFR allowed to benefit as well from (NAIC) stated that volume based
3500.14(d) and the definition of ‘‘thing negotiated discounts by not being discounts would be a violation of
of value’’ to clarify that it would be required to pass along the entire savings several states anti-rebating laws. NAIC
permissible for settlement service to the borrower, or there is little expressed its concern that the rule could
providers to negotiate discounts in the incentive for them to enter into such be found to preempt state laws to the
prices for settlement services, so long as arrangements. contrary. It recommended that the
the borrower is not charged more than CMC supported the proposal to clarify provision be withdrawn or that HUD
the discounted price. the legality of negotiated discounts and clarify that the volume based discounts
stated that the proposed change to the and average cost pricing provisions are
Comments regulations would be most likely to lead not intended to preempt state law.
to greater competition and lower overall Representative Donald A. Manzullo of
Consumer Representatives
prices in situations where the lender or the U.S. House of Representatives
NCLC and CRL supported volume other party negotiating the discount expressed concern over volume based
based discounts so long as the discounts absorbs the cost of the negotiated discounts, which he described as a
were passed along to the consumer. service and does not pass on the cost to ‘‘thinly veiled attempt to reintroduce
However, CRL expressed concern that the borrower. CMC stated that a the concept of ‘bundling’ services.’’ The
discounts may lead originators to steer clarification that a negotiated discount Congressman reiterated his previously
consumers to certain settlement service would not constitute a thing of value in stated concerns that the long term
providers, thus limiting consumers’ this situation would provide greater impact of volume discounts would
choice of servicers. Therefore CRL flexibility to negotiate lower prices. eliminate competition and destroy small
would support additional safeguards to CMC urged HUD to clarify that the businesses. Rep. Manzullo stated that
ensure that volume based discounts in clarification should not be limited to only large businesses have the resources
fact benefit the consumer. discounts negotiated by settlement necessary to determine the financial
service providers, but should also apply terms, negotiate for settlement services,
Lender Representatives to parties who may not be regarded as or discount their own services.
settlement service providers such as According to Rep. Manzullo, in order to
MBA commended the proposal to builders. In addition, CMC stated that compete, small businesses would be
clarify the legality of volume based HUD should allow the discounted price forced to reduce their prices and profit
discounts, but said that it did not go far charged to the borrower to be calculated margins, driving many of them out of
enough. MBA stated that negotiated on an average cost price basis. business. He stated that such an
discount arrangements for services and anticompetitive environment will allow
materials result in lower costs for Other Commenters
large lenders to raise prices for
consumers and are consistent with ALTA and other title industry settlement services.
RESPA’s purposes of lowering commenters stated that allowing
settlement costs. MBA stated, however, settlement service providers to negotiate Federal Agencies
that by including a requirement that no volume based discounts would be The FDIC stated that it supports the
more than the reduced price can be anticompetitive and disproportionately requirement in the proposed definition
charged to the borrower, there will be harm small businesses. ALTA stated of ‘‘thing of value’’ that no more than
little incentive for lenders to enter into that the ability to negotiate volume the discounted price may be charged to
discount arrangements. MBA stated that discounts on the local services that are a borrower and disclosed on the HUD–
scrutiny to ensure that each and every incidental to the issuance of a title 1 form. In contrast, FTC staff stated that
dollar of discount is passed on to the policy (such as a title search) will while it supports the removal of
consumer presents regulatory risks and disadvantage the small title insurance restrictions against volume based
will make the exception ‘‘uninviting.’’ agency that does not have the resources discounts, it believes that the proposed
MBA asserted that such a restriction is to guaranty a stream of business to a requirement to pass along the entire
unnecessary, since market competition third party or discount its own services discount to the consumer will likely
will result in the consumer receiving the when the services are performed in- limit incentives to negotiate such
benefit of the discounts. MBA also house. In addition, ALTA expressed discounts. According to FTC staff,
questioned the idea that discounts can concern that mortgage lenders and requiring that 100 percent of any
be negotiated only by a settlement brokers will add to the anticompetitive negotiated discount be passed on to
service provider, arguably excluding effects by favoring affiliated title customers reduces incentives of firms to
builders. MBA stated that such an companies or those companies that can spend resources to negotiate such
approach could deprive consumers of provide title related services on a discounts. FTC stated that the proposed
negotiated discounts on house prices nationwide basis. ALTA asserted that regulation also does not clarify how to
offered by lenders that have joint the Regulatory Impact Analysis of the account for the overhead costs
ventures and marketing agreements with proposed rule did not adequately associated with price negotiation
builders. address these issues. activities.
The Office of Advocacy of the Small procure or who help consumers to targeted settlement service provider to
Business Administration stated that obtain third party settlement services, demonstrate compliance with a
pricing mechanisms such as volume would have been allowed to negotiate permissible pricing method through the
based discounts potentially create an the pricing of those services by the third production of relevant records.
uneven playing field for small entities. party provider. The proposed rule
This office reiterated concerns voiced by would have made clear that where Comments
small businesses that volume based average cost pricing is used, the Consumer Representatives
discounts will favor large settlement evaluation of prices of third party
service providers at the expense of small services would focus on all of the loan NCLC and CRL supported the concept
business. According to the Office of originator’s transactions together, rather of average cost pricing but expressed
Advocacy, some small entities may than viewing each transaction concern that the proposed rule used the
leave the market, which would separately. An individual borrower terms ‘‘average pricing’’ and ‘‘average
ultimately result in a decrease in might be charged more or less than the cost pricing’’ interchangeably. These
options and higher prices for actual amount paid for that service in an commenters stated that ‘‘average cost
consumers. individual transaction, provided that pricing’’ must be based on the cost of
borrowers are being charged no more the settlement service and established
HUD Determination rate of return for the settlement service
than the average price actually received
HUD remains committed to a RESPA by third parties during the period in provider. They expressed concern that
regulatory scheme that fosters mortgage which the average price is computed. the proposed rule appeared to allow
settlement pricing mechanisms, that, as The proposed rule specified two ‘‘average pricing’’ whereby an originator
stated in the preamble to the March methods that loan originators could use charges the consumer an average cost
2008 proposed rule ‘‘result in greater to calculate an average price for a while paying the third party settlement
competition and lower costs to particular settlement service. As set provider a different amount for each
consumers’’ (73 FR at 14050). forth in the March 2008 proposed rule, consumer. According to these
Nevertheless, given the comments the loan originator would designate a commenters, there is no reason that the
received on the proposed change to recent 6-month period as the ‘‘averaging originator should not charge the
HUD’s current regulatory definition of period’’ for purposes of calculating the consumer the actual cost of the third
‘‘thing of value’’ and the significant average price. The same average price party service and reflect such cost on
operational and other questions raised would then have to be used in every the HUD–1.
by the proposed change, HUD has transaction in that class of transactions NCLC stated that the current
decided to give further consideration for which a GFE is provided following description of acceptable methods for
beyond this rulemaking to a regulatory the averaging period until a new average cost pricing are inaccurate and
change that explicitly allows negotiated averaging period is established. The should either be eliminated or revised to
discounts, including volume based average price would be calculated either comport with true average cost pricing
discounts, between loan originators and as (1) the actual average price for the formulas. CRL stated that average cost
other settlement service providers and settlement service during the averaging pricing is inappropriate for certain costs
not to implement the proposed change period; or (2) a projected average under that are partially dependent on loan
at this time. HUD wants to ensure that a tiered pricing contract, based on the amount, such as title insurance
any change will adequately protect number of transactions that actually premiums, recording costs, and transfer
consumers, while at the same time closed during the recent averaging taxes, since average cost pricing would
provide adequate market flexibility, and period. If a loan originator used one of disadvantage those consumers
due consideration to small business these methods to calculate the average purchasing or refinancing less
concerns. price for a settlement service, HUD
expensive homes.
It remains HUD’s position, however, would deem the loan originator to have
that discounts negotiated between loan complied with the requirements of the Lender Representatives
originators and other settlement service rule.
providers, or by an individual HUD invited comments on its MBA supported the proposal to allow
settlement service provider on behalf of proposed methods for calculating average cost pricing with some
a borrower, where the discount is average cost prices and on any modifications and clarifications. MBA
ultimately passed on to the borrower in alternative methods that should be suggested, in addition to the approaches
full, is not, depending upon the specific permitted. Specifically, HUD invited provided in the proposal, that the rule
circumstances of a particular comments on how to define ‘‘class of include another approach or approaches
transaction, a violation of Section 8 of transactions’’ and noted as an example that would be less restrictive and
RESPA. If the borrower fully benefits that ‘‘class of transactions’’ could be facilitate entry into average cost pricing
from the discount, these types of defined by loan type or loan-to-value for other firms in order to benefit
mechanisms that lower consumer costs ratio. HUD also invited suggestions on consumers. MBA recommended an
are within RESPA’s principal purposes. alternative average cost pricing methods approach whereby a firm would charge
In addition to further rulemaking, that benefit consumers and are based on the average cost for a class of
HUD will consider other avenues for factors that would lead to charges to the transactions over a prospective
providing guidance on negotiated consumer (and the disclosure of such averaging period, during which all
discounts, including through the charges) that are easily calculated, transactions in the class would be
issuance of statements of policy. verified, and enforced, but difficult to charged a projected average price.
manipulate in an abusive manner. Under this approach, as long as the total
B. Methodology for Average Cost Pricing The March 2008 proposed rule amounts charged on transactions in the
Proposed Rule. The March 2008 provided that with regard to any pricing class do not exceed the amount paid to
proposed rule would have permitted method used by a settlement service the service providers for such
pricing techniques using average cost provider, if a violation of Section 8 of transactions by more than a small
pricing. Under the proposed rule, RESPA is alleged and an investigation amount, the average price would be
settlement service providers who ensues, the burden would be on the permissible.
MBA also recommended that a lender total costs charged on the transactions be limited to small items such as courier
should be given maximum latitude to remain within the applicable tolerance. fees and recording costs. According to
define a ‘‘class of transactions’’ based on In addition, CMC urged HUD to NAR, if average cost pricing is allowed
type of service, type of property, loan clarify that average cost pricing may be for larger items such as appraisals, the
type and/or geographic region. used in situations where there is more consumer will end up paying more for
According to MBA, the lender should than one settlement service provider. an ‘‘average cost’’ if, for example, the
also have latitude to define an ‘‘average CMC stated that the exemption for calculation includes a disproportionate
period’’ and the ‘‘average price’’ as long average cost pricing will be of limited number of expensive appraisals during
as the approach is ‘‘reasonable.’’ MBA value unless such pricing is available a given 6-month period.
also recommended that the when multiple providers are providing
the same service and the fees charged by CSBS, AARMR, and NACCA
documentation requirements be revised
to ensure that they are flexible and do these providers vary. CMC also urged commented that the proposal to allow
not impede use of the provision by HUD to coordinate with the Federal loan originators or settlement service
requiring unnecessary burdensome Reserve Board regarding how average providers to utilize average cost pricing
documentation. cost pricing affects the calculation of the would be difficult for regulators to
finance charge for purposes of TILA. enforce and recommended that the
CMC supported the proposal to allow
average cost pricing, and stated that Finally, CMC recommended that HUD burden of proof of compliance be placed
such a provision could lead to flexible clarify that the average cost pricing on the lender. These commenters stated
negotiations for settlement services, provision is not limited to loan that by allowing loan originators and
thereby increasing price competition originators. providers to utilize this pricing
and lowering costs to borrowers. mechanism, individual transaction costs
Other Commenters
However, CMC stated that unless such could be manipulated and inflated.
RESPRO expressed support for These commenters noted that the
a proposal provides relief from liability average cost pricing and recommended
under Section 8 of RESPA, there will be current regulations can be enforced by
that the rule clarify that average cost regulators, because actual prices can be
little incentive for loan originators or pricing is not limited to loan originators.
other settlement service providers to use determined.
In addition, RESPRO stated that the
average cost pricing. CMC also stated proposed approaches for average cost Federal Agencies
that placing the burden of pricing need clarification. For example,
demonstrating compliance on the RESPRO suggested that HUD clarify The FDIC expressed concern with the
settlement service provider is what constitutes a ‘‘recent’’ 6-month average cost pricing proposal on several
problematic. CMC stated that the two period and also clarify whether a loan grounds. First, the FDIC indicated that
methods set forth in the proposed rule originator can divide up its service it is not aware of an appropriate means
for calculating an average price leave territory into two or more geographical of evaluating whether overall consumer
open questions as to compliance and areas and utilize these areas for costs would decline as a result of
workability. According to CMC, since averaging purposes. average cost pricing. Second, the agency
circumstances often change, the ALTA expressed support for the noted that even if some borrowers’
approach set forth in the proposal for average cost pricing proposal and settlement services costs are reduced
determining the averaging period may requested HUD to clarify that average under average cost pricing, other
not be practical. cost pricing would be available for all borrowers will pay more for a service
CMC recommended that a simpler settlement service providers. ALTA than is warranted for their particular
method would be to let the provider maintained that the proposed provision loan. Third, the FDIC stated that the
who will charge the average cost define on average cost pricing should not have proposal does not include controls to
the class of transactions and a been included in the HUD–1 section of ensure fairness, such as whether the
prospective averaging period during the RESPA regulations, but rather, lender calculated the average costs
which all transactions in the class should have been written so as to permit appropriately.
would be charged a projected average lenders and others to apply average cost
price. CMC also recommended that as FTC staff stated that it supports
pricing without running the risk of
long as the total amounts charged on average cost pricing but recommended
violating Section 8(b) of RESPA.
transactions in the class do not exceed that HUD consider eliminating
Accordingly, ALTA urged HUD to
the amount paid to the service providers clarify that average cost pricing is not a restrictions on how average costs may
for such transactions by more than a violation of Section 8(b). ALTA stated be calculated. FTC staff stated that it
small amount, such as by more than 10 that if the rule would allow title and supports removing barriers to average
percent, the average price should be settlement companies to use the average cost pricing because there is ‘‘no
permissible. CMC recommended an cost price, particularly as such pricing economic justification for requiring that
averaging period of up to 18 months relates to recording fees, express each consumer pay his or her unique
since many contracts are reviewed on an delivery charges, and other third party marginal cost of receiving settlement
annual basis and there are seasonal charges for which title companies must services and because doing so will
variations in volume. With respect to pay, consumers would benefit from the likely result in lower prices for
how the class of transactions should be certainty the average cost provides, and consumers.’’ FTC staff added that
determined, CMC recommended that that the threat of class action litigation calculating and maintaining records of
HUD not specify a set of factors for use for title and settlement companies with such individualized costs and prices
in determining class of transactions, but respect to recording fees would be adds additional accounting and
rather, allow a settlement service removed. recordkeeping costs to the transaction
provider to define the class in any NAR stated that average cost pricing that are not required in other
reasonable manner. CMC also urged should be allowed for both borrowers competitive markets. FTC staff asserted
HUD to clarify that prices may be and sellers, and should be extended to that by removing such costs, the market
uniformly reduced at any point during all settlement service providers. NAR will be more efficient and the result will
the averaging period to ensure that the stated that average cost pricing should be lower prices for consumers.
HUD Determination for that service for a particular class of appropriately and that regulators and
Based on the comments received in transactions do not exceed the total borrowers are able to determine the
response to the proposed rule, HUD has amounts paid to the providers of that basis on which the average charge was
revised the average cost pricing service for that class of transactions. determined. Any settlement service
provisions to provide more flexibility This approach leaves the method of provider that uses an average charge for
and greater clarity. determining the average charge to the a particular service must maintain all
Commenters representing some discretion of the settlement service documents that were used to calculate
consumer interests opposed provider. However, the provider must the average charge for at least three
implementation of the proposed average ensure that the average charge used does years after any settlement in which the
cost pricing provision, recommending not result in borrowers, in the aggregate,
average charge was used.
that HUD limit charges for third party paying more for a particular settlement
services to the actual cost of providing service than the aggregate price paid for VI. Prohibition Against Requiring the
those services, plus an established rate obtaining that service from third parties. Use of Affiliates—Discussion of Public
HUD has determined that this approach Comments
of return. While HUD appreciates these
balances the settlement service
comments, the proposed average cost Proposed Rule. Under the March 2008
provider’s interest in flexibility in
pricing provision was not intended to
calculating an average charge with the proposed rule, the current definition of
limit the amounts charged for settlement
borrower’s interest in preventing ‘‘required use’’ in 24 CFR 3500.2 would
services in this fashion, but instead
excessive settlement charges. This be changed so that consumers would be
simply provided for an alternative
approach is intended to promote greater more likely to shop for the homes and
means of calculating and disclosing
efficiencies that ultimately lead to lower home features, and the loans and
settlement charges on the HUD–1 or
prices for consumers. settlement services, that are best for
HUD–1A settlement statements. In order The final rule provides that a
to avoid similar confusion about the them, free from the influence of
settlement service provider may define deceptive referral arrangements.
intent of this provision in the future, the a class of transactions based on the
final rule uses the term ‘‘average Through this proposed change, HUD
period of time, type of loan, and
charge’’ in place of ‘‘average cost sought to establish that in a real estate
geographic area. For example, a
pricing.’’ The term ‘‘average charge’’ transaction covered by RESPA,
settlement service provider might
appropriately focuses on the amount calculate an average charge for all incentives that consumers may want to
disclosed on the settlement statement, purchase money mortgages in the States accept and disincentives that consumers
rather than the underlying costs of of Georgia and South Carolina in a may want to avoid should be analyzed
providing a particular settlement specified period of time. Alternatively, similarly for compliance with RESPA.
service. a settlement service provider could The proposed change would have
The final rule also clarifies that an establish the class of transactions in made clear that HUD views economic
average charge may be used by any which it would use a single average disincentives that a consumer can avoid
settlement service provider that obtains charge broadly, e.g., all transactions it only by purchasing a settlement service
a service from a third party on behalf of engages in for a period of time, from particular providers, or from
a borrower or seller; the provision is not regardless of loan type or location. The
limited to loan originators. HUD has businesses to which the consumer has
settlement service provider must been referred, to be potentially as
determined that benefits to consumers recalculate the average charge at least
and the benefits of reduced problematic under RESPA as are
every 6 months. In order to prevent
recordkeeping requirements and pricing economic incentives that are contingent
selective use of an average charge, the
flexibility from this provision should on the consumer’s choice of a particular
final rule provides that if an average
not be limited to one group of charge is used in any class of settlement service provider. The
settlement service providers. Any transactions defined by the settlement modifications in the proposed rule,
provider that is able to calculate an service provider, then that provider however, were not intended to prevent
average charge for a service in must use the same average charge for discounts that are beneficial to
accordance with this provision and that every transaction within that class. consumers. The proposed definition
is able to meet the provision’s The final rule also prohibits the use stated that the offering by a settlement
recordkeeping requirements is of average charges for settlement service provider of an optional package
permitted to use an average charge for services where the charge is based on or combination of bona fide settlement
that service. the loan amount or the value of the services to a borrower at a total price
In addition to these clarifying property. Permitting average charges for lower than the sum of the prices of the
changes, HUD has made several other those types of services would require individual settlement services would
significant changes to provide borrowers in transactions with lower not constitute a ‘‘required use.’’
additional flexibility in calculating loan amounts and property values to
average charges. HUD has determined The proposed revision to the
subsidize the costs for borrowers with
that its objective of providing a method higher loan amounts and property ‘‘required use’’ definition would have
that benefits consumers and results in values. HUD has determined that such continued to apply in two sections of
charges that are easily calculated, subsidization is not in the interest of the regulations: The affiliated business
verified, and enforced is best served by consumers. This prohibition applies to exemption in 24 CFR 3500.15, and the
restricting the actual charges imposed charges such as transfer taxes, daily prohibition on the seller requiring the
on borrowers and sellers rather than by interest charges, reserves or escrow, and buyer to purchase title insurance from a
prescribing a particular method for all types of insurance, including particular company in § 3500.16.
calculating those charges. mortgage insurance, title insurance, and However, in light of the other changes
The final rule provides that an hazard insurance. that would have been made by the
average charge may be used for any The final rule maintains the proposed proposed rule, the term ‘‘required use’’
settlement service, provided that the recordkeeping requirements, to ensure would no longer have applied as it does
total amounts received from borrowers that average charges are calculated currently in § 3500.7(e).
Comments should not confuse legitimate incentive it would ‘‘prohibit many consumer
Consumer Representatives arrangements among affiliated entities incentives offered by home builders and
with undue influence or required use of real estate brokers in today’s
NCLC stated that the proposed change a product or service. marketplace that provide consumers
to the ‘‘required use’’ definition does NAMB, the Maryland Association of with lower costs and/or better service; is
not go far enough to protect consumers. Mortgage Brokers (MAMB), and the based on unsubstantiated and anecdotal
NCLC stated that the settlement services Idaho Association of Mortgage Brokers evidence about alleged abuses; attempts
to obtain a home loan are only a small (IAMB) expressed support for the to address violations that already are
part of the costs of the loan. According proposed change in the definition of prohibited under RESPA, and is based
to NCLC, the interest rate, the term of ‘‘required use.’’ NAMB stated that the on an inaccurate reading of anti-trust
the loan, and whether a prepayment proposed revision should resolve the laws.’’ RESPRO asserted that consumer
penalty is permitted, or a balloon problems with tying and required use. incentives are offered to ensure that
payment is required, are all more NAMB recommended that the new sales transactions close as quickly and
important elements of the costs of the definition avoid setting a threshold as efficiently as possible. RESPRO
home loan than are the costs of higher than zero for determining what recommended that the current
settlement services. NCLC stated that constitutes an economic incentive or definition of ‘‘required use’’ be retained.
‘‘(i)t does not make sense for the disincentive. NAMB, MAMB, and IAMB NAR opposed the proposed change
settlement services to be capped in all stated that the threshold for and stated that it would have at least
return for a required use, while the more determining incentives and two unintended consequences.
critical components of the costs of the disincentives should be ‘‘any thing of According to NAR, the rule authorizes
loan are not limited, especially where value.’’ discounts only on the prices of the
the service itself could be discounted Builders and builder-affiliated recommended provider and this would
while the loan terms are increased.’’ mortgage companies opposed the limit the kind of non-price/services
NCLC proposed to define ‘‘required proposed change to the ‘‘required use’’ promotions that joint venture owners
use’’ to include the total cost of the loan definition. CTX Mortgage Company currently and permissibly offer to
in addition to the total of settlement asserted that the proposed change promote affiliates. NAR noted that real
services. CRL commended HUD’s efforts would ‘‘provide a significant road block estate agents and brokers offer a variety
in this area and agreed with NCLC that for future customers to benefit from the of inducements to clients to promote
the definition of ‘‘required use’’ should streamlined mortgage and title services their services, such as by offering a gift
include the total cost of the loan in that Centex offers.’’ The National certificate to a local business or a free
addition to the cost of total settlement Association of Home Builders (NAHB) home inspection. NAR indicated that it
services. asserted that the change would does not believe that HUD intended to
The California Reinvestment Coalition eliminate bona fide incentives, denying eliminate a practice which benefits
supported the proposed change to the consumers significant savings in their consumers. In addition, according to
definition of ‘‘required use’’ and stated home purchases. NAHB characterized NAR, the proposal would allow a
that the proposed change will ‘‘benefit HUD’s examples of ‘‘required use’’ discounted combination of settlement
the borrower by leveling the field.’’ problems as ‘‘ambiguous and services only to a borrower, and NAR
incomplete.’’ NAHB asserted that home believes that sellers should not be
Industry Representatives
builders with affiliated lenders have precluded from receiving discounts as
Generally, lenders expressed business incentives to ensure that home incentives as sellers often pay the
opposition to the proposed change to buyers are pleased with the experience majority of settlement costs in a real
the definition of ‘‘required use’’ on the of obtaining loans from their affiliated estate transaction.
grounds that the proposal is difficult to lenders. NAHB noted that studies of
understand, is overbroad, and would builder-affiliated mortgage companies Other Commenters
eliminate the ability of builders and conducted by an independent research The Laborers’ International Union of
others to offer legitimate consumer firm have found that such firms have North America (LIUNA) supported the
discounts. MBA stated that it would be lower per-loan operating costs as proposed change to the ‘‘required use’’
sufficient for HUD to indicate that under compared to outside lenders. According definition, stating that it ‘‘will promote
its current rules HUD may scrutinize to NAHB, while the savings from these more comparison shopping by
discounts to assure that they are bona economies and the other affiliate borrowers and achieve HUD’s intended
fide, rather than risking depriving benefits are difficult to quantify, they goal of protecting consumers from
borrowers of discounts altogether. are significant and are passed along to unnecessarily high settlement costs.’’
The ABA stated that the proposed consumers in the form of incentives for LIUNA further stated that the ‘‘cost to
change to the ‘‘required’’ use definition use of a builder affiliate. NAHB stated the builders of incentives has already
is ‘‘flawed and unreasonable’’ because that home builders in general do not been built into the sales price, so that it
HUD cited only anecdotal evidence that increase the selling price of homes to is not a true discount, but a penalty for
incentives have been abused by some offset these incentives and asserted that using another company.’’ According to
companies to steer customers to the vast majority of builders who LIUNA, its research indicates that the
affiliated vendors with high prices and provide incentives for buyer use of effect of incentives ‘‘dissuade customers
inferior service, but offered ‘‘no affiliates do so in a responsible manner from comparison shopping for lenders.’’
empirical evidence to support this that brings substantial benefits to Rather, ‘‘customers are steered to loans
assertion.’’ The ABA also stated that the consumers. NAHB and other that are very often more expensive,
proposal runs counter to the plain commenters also suggested alternative despite the incentives.’’ LIUNA asserted
meaning of the words in the statute language to the proposed definition to that builders have improperly used
because defining ‘‘required use’’ to ensure that consumers are presented ‘‘related business relationships at the
mean any incentive offered to use an with the option to select an incentive expense of consumers’’ that ‘‘resulted in
affiliated company contradicts the that is bona fide. higher costs for homebuyers * * * and
unambiguous meaning of the statutory RESPRO objected to the proposed have played a large part in creating the
word ‘‘required.’’ It stated that HUD change to ‘‘required use’’ and stated that current housing crisis.’’ LIUNA
provided statistics indicating that in of RESPA and § 3500.15 of HUD’s permitted pursuant to the Electronic
February 2006, the average rate for a 30- regulations, and similarly frames the Signatures in Global and National
year fixed-rate mortgage was 6.25 definition to apply to ‘‘persons’’ rather Commerce Act (ESIGN) (15 U.S.C.
percent. In contrast, LIUNA noted that than only ‘‘borrowers.’’ 7001–7031) apply to all disclosures
although the main benefit of an ARM is The change to the definition of provided for in HUD’s RESPA
that it has a lower starting interest rate ‘‘required use’’ will not eliminate the regulations.
than the equivalent fixed-rate loan, ability of anyone to offer legitimate
approximately half of the mortgages Comments
consumer discounts. HUD does not
made by certain builders in February interpret RESPA as preventing a Almost all of the comments that
2006 were ARMs that had starting rates settlement service provider or anyone addressed the proposed technical
of 6.25 percent or higher. LIUNA stated else from offering a discount or other changes to the rule expressed support
that builders ‘‘have an incentive to sell thing of value directly to the consumer. for these changes. Several lenders and
their inventory at the highest possible However, RESPA and this final rule trade groups representing lenders and
price, and in-house mortgage units limit tying such a discount to the use of mortgage brokers commented favorably
provide the financing to make it an affiliated settlement service provider. on the changes that conform the transfer
possible. There is evidence that during HUD believes that consumers will of servicing disclosure regulations to the
the housing boom in 2004–2006 utilize affiliated and preferred revised statutory requirements.
builders were only able to sell homes at businesses if the costs of using those However, lenders and their trade groups
such inflated prices because of the businesses are lower than the costs were generally opposed to including the
collaboration with their mortgage associated with similar services from transfer of servicing disclosure on the
subsidiary and an affiliated appraisal other providers. Similarly to the revised GFE.
company. This resulted in large proposed rule, the final rule continues Several groups representing consumer
numbers of homeowners who were to provide that settlement service interests commented on the transfer of
‘‘underwater,’’ owing more than the providers can offer ‘‘ a combination of servicing regulation, and strongly
value of their home, from day one.’’ bona fide settlement services at a total supported expanding the transfer of
CSBS, AARMR, and NACCA price (net of the value of the associated servicing regulations beyond first lien
supported the proposed change to the discount, rebate, or other economic mortgage loans. These groups indicated
‘‘required use’’ definition. However, incentive) lower than the sum of the that the TILA regulations, which HUD
these commenters recommended that market prices of the individual cited as the basis for excluding
the definition of ‘‘required use’’ be settlement services and will not be subordinate lien mortgage loans from
expanded to incorporate situations found to have required the use of the the transfer of servicing disclosure
where the originator fails to give a settlement service providers as long as: requirements, do not provide equivalent
required Affiliated Business (1) The use of any such combination is protections, and that the transfer of
Arrangement disclosure, or provides a optional to the purchaser; and (2) the servicing requirements should therefore
misleading disclosure that facilitates lower price for the combination is not be expanded to cover all federally
steering of the borrower to an affiliate. made up by higher costs elsewhere in related mortgage loans. Consumer
According to these commenters, absent the settlement process.’’ groups also recommended changes to
information necessary to make the best the language used in the proposed
decision, the borrower has effectively VII. Technical Amendments revision to the transfer of servicing
been required to use a particular Proposed Rule disclosure. The consumer group
provider. commenters indicated that the
The FTC staff recommended that HUD The March 2008 proposed rule disclosure’s description of the servicing
reconsider the proposed change to the included several changes to HUD’s function is unrealistically narrow, and
definition of required use. The FTC staff regulations to reflect current statutory that it should be revised to state that:
stated that the expanded definition provisions. First, the proposed rule
could deprive customers of the lower revised the mortgage servicing Servicers are responsible for account
disclosure requirements in 24 CFR maintenance activities such as sending
prices that can result from bundling monthly statements, accepting payments,
related services. 3500.21 to be consistent with section keeping track of account balances, handling
2103 of the Economic Growth and escrow accounts, engaging in loss mitigation
HUD Determination Regulatory Paperwork Reduction Act of and prosecuting foreclosures. They handle
After reviewing comments about 1996 (Title II of the Omnibus interest rate adjustments on adjustable rate
HUD’s proposal to change the definition Consolidated Appropriations Act, 1997) mortgages, collect and report information to
of ‘‘required use’’ and re-examining (Pub. L. 104–208) and sought public national credit bureaus, and remit monies to
aspects of the proposed revised comment on whether the mortgage the owners of the loan.
definition, HUD has determined to servicing disclosure should be included Very few comments were received on
retain the concepts in the definition of as part of the GFE. the proposed revisions to the escrow
‘‘required use’’ set forth in the proposed Second, the proposed rule eliminated accounting regulations, or on the
rule, but with some revisions that better outdated provisions regarding the proposed clarification regarding the
reflect HUD’s intent in applying the phase-in period for aggregate accounting applicability of ESIGN to RESPA. The
definition. The new definition makes it for escrow accounts in 24 CFR 3500.17. comments that were received on these
clear that economic disincentives that The phase-in period ended October 27, changes were primarily from trade
are used to improperly influence a 1997. Eliminating those provisions of groups representing lenders and
consumer’s choices are as problematic the codified RESPA regulations that are mortgage brokers, and the comments
under RESPA as are incentives that are no longer applicable to the home were limited to general expressions of
not true discounts. The revisions made settlement process simplifies and support for the changes proposed.
in the definition subsequent to the clarifies the rules for escrow accounts.
proposed rule clarify how the definition Finally, the March 2008 proposed rule HUD Determination
will apply in the context of the affiliated would add a new § 3500.23 to make Based on the comments received,
business exemption under Section 8(c) clear that the electronic disclosures HUD has determined that the changes to
the transfer of servicing requirements provision were in favor of making the concerns. For example, the Department
should be included in the final rule. proposed change. has determined not to adopt the closing
These changes conform HUD’s script requirement set forth in the
VIII. Regulatory Flexibility Act—
regulations to the revised statutory proposed rule. In addition, the proposed
Comments of the Office of Advocacy of
requirements, and resolve any questions rule language explicitly allowing
the Small Business Administration
about whether lenders must still follow negotiated discounts, including volume
the outdated provisions. No commenters As part of its statutory duty to review based discounts between loan
raised objections to the changes an agency’s compliance with the originators and other settlement service
proposed; the most substantial Regulatory Flexibility Act (RFA), as providers, has not been included in the
comments received were from consumer amended by the Small Business final rule. HUD also revised a number
groups that advocated expanding the Regulatory Enforcement Fairness Act of provisions on tolerances and clarified
coverage of the transfer of servicing (SBREFA), the Office of Advocacy of the the situations where a loan originator
requirements. In light of the numerous U.S. Small Business Administration would no longer be bound by the
comments from lenders and those trade (Advocacy) reviewed the proposed rule tolerances.
groups representing lenders that and submitted its comments to the With respect to the characterization of
opposed inclusion of the transfer of Department. In its letter of June 11, YSP as a credit to the borrower, HUD
servicing disclosure on the GFE, HUD 2008, Advocacy expressed the concern has designed and tested the GFE form to
has determined not to include that that HUD may have underestimated the enable borrowers to accurately
disclosure on the revised GFE at this economic impact of the proposed rule determine the lowest cost loan. Testing
time. However, HUD is not expanding on small entities. Advocacy indicated of the GFE indicated no bias in the
the coverage of the transfer of servicing that it had met with a wide range of selection of loans with lowest
regulations at this time. While HUD may small entity representatives from settlement cost, between ‘‘broker’’ loans
consider doing so at a later time, different sectors of the industry and (YSP reported) and ‘‘lender’’ loans (no
significantly expanding the coverage of several of these representatives YSP reported).
the transfer of servicing regulations indicated that the proposed rule would With respect to statements in the
would be beyond the scope of the have a greater economic impact than the Economic Analysis for the RESPA
technical amendments in the proposed $548 million in annual recurring proposed rule concerning cost impacts
rule and would likely require additional compliance costs for small businesses as of the rule on small businesses, HUD
comment from affected parties. stated by HUD in the Economic recognizes that there will be one-time
The language on the revised model Analysis accompanying the proposal. adjustment costs and recurring costs on
transfer of servicing disclosure form has Accordingly, Advocacy advised HUD to small businesses. Once incurred, the
been modified somewhat from the document the additional costs to small adjustment costs will not be incurred
proposed rule in light of the comments businesses. again. Thus, combining recurring and
received. The transfer of servicing In addition, Advocacy expressed the adjustment costs would be an accurate
disclosure form is not intended to following concerns about the proposed measure for the burden of the rule
provide a comprehensive list of all rule: (1) The proposed rule’s tolerance during the first year only. The recurring
functions that might be performed by levels may be problematic for loan costs per loan are equivalent for small
any servicer, but HUD agrees with those originators because some settlement and large businesses. The aggregate
commenters that suggested that the costs can change on a daily basis, recurring compliance cost depends on
description of the functions performed making the loan originator responsible loan volume and is not underestimated
by servicers was too narrow. for the actions of a third party beyond for small businesses relative to large
Accordingly, HUD has revised that its control; (2) the proposed rule’s businesses. Advocacy and some other
sentence on the form to provide a more requirement that a closing script be read commenters questioned aspects of the
accurate description of the functions to the borrower at the closing will cost estimates of the rule, but did not
performed by loan servicers. present problems for small entities; (3) provide alternative cost estimates
HUD has also determined that the the proposal to allow volume discounts supported by data. HUD carefully
proposed elimination of the phase-in will favor large settlement service considered an alternative analysis
period for aggregate accounting for providers and loan originators at the prepared for NAR that was not based on
escrow accounts should be included in expense of small businesses; and (4) the new data. HUD accepted and
the final rule. This change simply proposed rule’s characterization of YSP implemented suggestions in this
eliminates a regulatory provision that is as a credit to the borrower will put analysis to perform a sensitivity analysis
no longer applicable. The only mortgage brokers at a competitive of the ratio of applications per loan in
significant comments HUD received on disadvantage compared to lenders, and its Final Regulatory Flexibility Analysis.
this provision were in favor of making may create confusion among borrowers. With respect to Advocacy’s
the change proposed. Advocacy supported moving forward recommendation that HUD allow a
Finally, HUD has determined that the without the closing script requirement, longer implementation period to
new provision clarifying the the volume discount language, and the mitigate the cost burden associated with
applicability of ESIGN to RESPA should yield spread premium classification. In the new requirements on small
also be included in the final rule. While addition, Advocacy recommended that businesses, HUD has determined that a
the electronic methods of disclosure HUD clarify the provision on tolerances one-year implementation period is
permitted pursuant to ESIGN could be and encouraged HUD to provide a delay sufficient to make the transition to the
used for disclosures required under in the implementation date in the final new requirements. Many commenters
RESPA, even in the absence of this rule to allow small businesses the agreed. Instituting a longer
regulatory clarification, this provision opportunity to absorb the costs and implementation period for small
will allay any doubts that industry comply with the new requirements. businesses would significantly weaken
participants may have had about the HUD carefully considered the the effective and orderly
permissibility of electronic disclosures comments provided by Advocacy and implementation of the new rule.
under RESPA. The only significant certain modifications have been made in Allowing small firms to operate under
comments HUD received on this the final rule that address Advocacy’s different rules would create confusion
in the closing of loans, especially in discrimination. The RESPA disclosure externalities of a foreclosure to
transactions that involve both large and statute is meant to address this neighboring properties and local
small firms. information asymmetry, but the governments, as well as private costs to
evidence shows that the current RESPA the borrower and lender. The size of this
IX. Findings and Certifications
regulations have not provided social benefit would be in addition to
Paperwork Reduction Act consumers necessary information in a the other benefits enumerated in the
way they can use effectively. Regulatory Impact Analysis.
The information collection
The final rule will create a more level- The costs and benefits are discussed
requirements contained in this rule playing field through a more transparent in more detail in the Regulatory Impact
were submitted to the Office of and standard disclosure of loan details Analysis that accompanies this rule.
Management and Budget (OMB) under and settlement costs; tolerances on Any changes made to the rule
the Paperwork Reduction Act of 1995 settlement charges leading to prices that subsequent to its submission to OMB
(44 U.S.C. 3501–3520), and were consumers can rely on; and adding a are identified in the docket file, which
assigned OMB control number 2502– comparison page to the HUD–1 that is available for public inspection in the
0265. In accordance with the Paperwork allows the consumer to compare the Regulations Division, Office of General
Reduction Act, an agency may not amounts listed for particular settlement Counsel, Department of Housing and
conduct or sponsor, and a person is not costs on the GFE with the total costs Urban Development, 451 7th Street,
required to respond to, a collection of listed for those charges on the HUD–1, SW., Room 10276, Washington, DC
information, unless the collection and to double check the loan details at 20410–0500. The Economic Analysis
displays a currently valid OMB control settlement. These changes will prepared for this rule is also available
number. encourage comparison shopping by for public inspection in the Regulations
Environmental Impact informed consumers, which will place a Division. Due to security measures at
competitive pressure on market prices, the HUD Headquarters building, an
A Finding of No Significant Impact and enable consumers to benefit. advance appointment to review these
with respect to the environment was It is estimated that borrowers will items must be scheduled by calling the
made at the proposed rule stage in save $8.35 billion annually in Regulations Division at 202–402–3055
accordance with HUD regulations at 24 origination and settlement charges. This (this is not a toll-free number).
CFR part 50, which implement section transfer to borrowers from price- Individuals with speech or hearing
102(2)(C) of the National Environmental discriminating producers constitutes impairments may access this number
Policy Act of 1969 (42 U.S.C. 12.5 percent of total charges, and through TTY by calling the Federal
4332(2)(C)). That finding remains represents consumer savings of $668 per Information Relay Service at 800–877–
applicable to this final rule and is loan with a range between $500 and 8339.
available for public inspection between $700 per loan.
the hours of 8:00 a.m. and 5:00 p.m. The total one-time adjustment costs to Federalism Impact
weekdays in the Regulations Division, the lending and settlement industry of This rule does not have federalism
Office of General Counsel, Department the proposed GFE and HUD–1 are implications and does not impose
of Housing and Urban Development, estimated to be $570 million, or $46 per substantial direct compliance costs on
451 7th Street, SW., Room 10276, loan. Total recurring costs are estimated state and local governments or preempt
Washington, DC 20410–0500. Due to to be $918 million annually, or $74 per State law within the meaning of
security measures at the HUD loan. Even if all of the adjustment and Executive Order 13132 (entitled
Headquarters building, an advance recurring costs of the rule were passed ‘‘Federalism’’).
appointment to review the finding must along to consumers, individual
be scheduled by calling the Regulations consumers would still enjoy substantial Regulatory Flexibility Act
Division at 202–402–3055 (this is not a benefits. If all of the adjustment and The Secretary, in accordance with the
toll-free number). Individuals with recurrent costs are passed on to Regulatory Flexibility Act (5 U.S.C.
speech or hearing impairments may borrowers in the first year and no 605(b)), has reviewed and approved this
access this number through TTY by industry efficiency gains are passed to rule and determined that the rule would
calling the Federal Information Relay consumers, the net consumer savings for have a significant economic impact on
Service at 800–877–8339. the average consumer in the first year a substantial number of small entities
would be $548 and $594 per loan every within the meaning of the Regulatory
Executive Order 12866, Regulatory
year afterwards. Flexibility Act. In accordance with
Planning and Review In addition to the private benefits, section 603 of the Regulatory Flexibility
The Office of Management and Budget there are far reaching social benefits. Act, a Final Regulatory Flexibility
(OMB) reviewed this rule under The lower profitability of seeking out Analysis (FRFA) has been prepared. The
Executive Order 12866 (entitled less-informed borrowers for less- FRFA is presented in an Appendix to
‘‘Regulatory Planning and Review’’). competitive loans should lead to a this final rule and is included as
This rule was determined economically reduction in this non-productive Chapter 6 in the Regulatory Impact
significant under the executive order. activity. If the decline in this activity Analysis prepared under Executive
There is strong evidence of represented one percent of current loan Order 12866.
information asymmetry between originator effort, this would result in
mortgage originators and settlement $420 million in social surplus. Another Unfunded Mandates Reform Act
service providers and consumers. This social benefit of the rule is its Title II of the Unfunded Mandates
information asymmetry allows loan contribution to sustainable Reform Act of 1995 (2 U.S.C. 1531–
originators and settlement service homeownership. Consumers who better 1538) (UMRA) requires federal agencies
providers to capture much of the understand the details of their loans, to assess the effects of their regulatory
consumer surplus in this market by and save money on their and settlement actions on state, local, and tribal
charging different prices to similar costs, are more likely to avoid risky governments and on the private sector.
consumers for similar products, a loans, default, and foreclosure. There This rule does not, within the meaning
process economists call price are substantial negative economic of the UMRA, impose any federal
mandates on any state, local, or tribal 3500.22, and 3500.23, and Appendices amount sought, and any information
governments nor on the private sector. E and MS–1 are applicable commencing contained in any credit report obtained
January 16, 2009. by the loan originator prior to providing
Congressional Review of Final Rules (2) Section 203.27, the definitions the GFE, unless the information changes
This rule constitutes a ‘‘major rule’’ as other than Required use in § 3500.2, or is found to be inaccurate after the
defined in the Congressional Review § 3500.7, §§ 3500.8(a) and(c), § 3500.9, GFE has been provided; or
Act (5 U.S.C. Chapter 8). This rule has and Appendices A and C, are applicable (ii) Market price fluctuations by
a 60-day delayed effective date and will commencing January 1, 2010. themselves.
be submitted to the Congress in ■ 5. In § 3500.2, paragraph (b) is * * * * *
accordance with the requirements of the amended by revising the definitions of Good faith estimate or GFE means an
Congressional Review Act. Application, Good faith estimate, estimate of settlement charges a
List of Subjects Mortgage broker, and Required use, and borrower is likely to incur, as a dollar
by adding, in alphabetical order, the amount, and related loan information,
24 CFR Part 203 following new definitions of Balloon based upon common practice and
Hawaiian Natives, Home payment, Changed circumstances, Loan experience in the locality of the
improvement, Indians-lands, Loan originator, Origination service, mortgaged property, as provided on the
programs—housing and community Prepayment penalty, Third party, Title form prescribed in § 3500.7 and
development, Mortgage insurance, service, and Tolerance, to read as prepared in accordance with the
Reporting and recordkeeping follows: Instructions in Appendix C to this part.
requirements, Solar energy * * * * *
§ 3500.2 Definitions.
24 CFR Part 3500 * * * * * Loan originator means a lender or
Consumer protection, Condominiums, (b) * * * mortgage broker.
Housing, Mortgagees, Mortgage Application means the submission of * * * * *
servicing, Reporting and recordkeeping a borrower’s financial information in Mortgage broker means a person (not
requirements. anticipation of a credit decision relating an employee of a lender) or entity that
to a federally related mortgage loan, renders origination services and serves
■ For the reasons set out in the
preamble, parts 203 and 3500 of title 24 which shall include the borrower’s as an intermediary between a borrower
of the Code of Federal Regulations are name, the borrower’s monthly income, and a lender in a transaction involving
amended as follows: the borrower’s social security number to a federally related mortgage loan,
obtain a credit report, the property including such a person or entity that
PART 203—SINGLE FAMILY address, an estimate of the value of the closes the loan in its own name in a
MORTGAGE INSURANCE property, the mortgage loan amount table funded transaction. A loan
sought, and any other information correspondent approved under 24 CFR
■ 1. The authority citation shall deemed necessary by the loan 202.8 for Federal Housing
continue to read as follows: originator. An application may either be Administration programs is a mortgage
Authority: 12 U.S.C. 1709, 1710, 1715b, in writing or electronically submitted, broker for purposes of this part.
1715z–16, and 1715u; 42 U.S.C. 3535(d). including a written record of an oral * * * * *
■ 2. In § 203.27, paragraph (a)(2) is application. Origination service means any service
revised to read as follows: Balloon payment has the same involved in the creation of a mortgage
meaning as ‘‘balloon payment’’ under loan, including but not limited to the
§ 203.27 Charges, fees or discounts. Regulation Z (12 CFR part 226). taking of the loan application, loan
(a) * * * Changed circumstances means: (1)(i) processing, and the underwriting and
(2) A charge to compensate the Acts of God, war, disaster, or other funding of the loan, and the processing
mortgagee for expenses incurred in emergency; and administrative services required to
originating and closing the loan, (ii) Information particular to the perform these functions.
provided that the Commissioner may borrower or transaction that was relied
* * * * *
establish limitations on the amount of on in providing the GFE and that
Prepayment penalty has the same
any such charge. changes or is found to be inaccurate
meaning as ‘‘prepayment penalty’’
after the GFE has been provided. This
PART 3500—REAL ESTATE under Regulation Z (12 CFR part 226).
may include information about the
SETTLEMENT PROCEDURES ACT credit quality of the borrower, the * * * * *
amount of the loan, the estimated value Required use means a situation in
■ 3. The authority citation shall of the property, or any other information which a person’s access to some distinct
continue to read as follows: service, property, discount, rebate, or
that was used in providing the GFE;
Authority: 12 U.S.C. 1709, 1710, 1715b, (iii) New information particular to the other economic incentive, or the
1715z–16, and 1715u; 42 U.S.C. 3535(d). borrower or transaction that was not person’s ability to avoid an economic
relied on in providing the GFE; or disincentive or penalty, is contingent
■ 4. Section 3500.1 is revised to read as
(iv) Other circumstances that are upon the person using or failing to use
follows:
particular to the borrower or a referred provider of settlement
§ 3500.1 Designation and applicability. transaction, including boundary services. In order to qualify for the
(a) Designation. This part may be disputes, the need for flood insurance, affiliated business exemption under
referred to as Regulation X. or environmental problems. § 3500.15, a settlement service provider
(b) Applicability. The following (2) Changed circumstances do not may offer a combination of bona fide
sections, as revised by the final rule include: settlement services at a total price (net
published on November 17, 2008, are (i) The borrower’s name, the of the value of the associated discount,
applicable as follows: borrower’s monthly income, the rebate, or other economic incentive)
(1) The definition of Required use in property address, an estimate of the lower than the sum of the market prices
§ 3500.2, §§ 3500.8(b), 3500.17, 3500.21, value of the property, the mortgage loan of the individual settlement services
and will not be found to have required credit report. The lender may not charge (c) Availability of GFE terms. Except
the use of the settlement service additional fees until after the applicant as provided in this paragraph, the
providers as long as: (1) The use of any has received the GFE. If the GFE is estimate of the charges and terms for all
such combination is optional to the mailed to the applicant, the applicant is settlement services must be available for
purchaser; and (2) the lower price for considered to have received the GFE 3 at least 10 business days from when the
the combination is not made up by calendar days after it is mailed, not GFE is provided, but it may remain
higher costs elsewhere in the settlement including Sundays and the legal public available longer, if the loan originator
process. holidays specified in 5 U.S.C. 6103(a). extends the period of availability. The
* * * * * (5) The lender may at any time collect estimate for the following charges are
Third party means a settlement from the loan applicant any information excepted from this requirement: the
service provider other than a loan that it requires in addition to the interest rate, charges and terms
originator. required application information. dependent upon the interest rate, which
* * * * * However, the lender is not permitted to includes the charge or credit for the
Title service means any service require, as a condition for providing a interest rate chosen, the adjusted
involved in the provision of title GFE, that an applicant submit origination charges, and per diem
insurance (lender’s or owner’s policy), supplemental documentation to verify interest.
including but not limited to: title the information provided on the (d) Content and form of GFE. The GFE
examination and evaluation; application. form is set out in Appendix C to this
preparation and issuance of title (b) Mortgage broker to provide. (1) part. The loan originator must prepare
commitment; clearance of underwriting Except as otherwise provided in the GFE in accordance with the
objections; preparation and issuance of paragraphs (a), (b), or (h) of this section, requirements of this section and the
a title insurance policy or policies; and either the lender or the mortgage broker Instructions in Appendix C to this part.
the processing and administrative must provide a GFE not later than 3 The instructions in Appendix C to this
services required to perform these business days after a mortgage broker part allow for flexibility in the
functions. The term also includes the receives either an application or preparation and distribution of the GFE
service of conducting a settlement. information sufficient to complete an in hard copy and electronic format.
application. The lender is responsible (e) Tolerances for amounts included
* * * * * on GFE. (1) Except as provided in
Tolerance means the maximum for ascertaining whether the GFE has
been provided. If the mortgage broker paragraph (f) of this section, the actual
amount by which the charge for a charges at settlement may not exceed
category or categories of settlement costs has provided a GFE, the lender is not
required to provide an additional GFE. the amounts included on the GFE for:
may exceed the amount of the estimate (i) The origination charge;
for such category or categories on a GFE. (2) The mortgage broker must provide
the GFE by hand delivery, by placing it (ii) While the borrower’s interest rate
■ 6. In § 3500.7, paragraphs (a) through is locked, the credit or charge for the
in the mail, or, if the applicant agrees,
(e) are revised; paragraph (f) is by fax, email, or other electronic means. interest rate chosen;
redesignated as paragraph (h); and new (iii) While the borrower’s interest rate
(3) The mortgage broker is not
paragraphs (f), (g), and (i) are added, as is locked, the adjusted origination
required to provide the applicant with
follows: charge; and
a GFE if, before the end of the 3-
(iv) Transfer taxes.
§ 3500.7 Good faith estimate or GFE. business-day period: (2) Except as provided in paragraph (f)
(a) Lender to provide. (1) Except as (i) The mortgage broker or lender below, the sum of the charges at
otherwise provided in paragraphs (a), denies the application; or settlement for the following services
(b), or (h) of this section, not later than (ii) The applicant withdraws the may not be greater than 10 percent
3 business days after a lender receives application. above the sum of the amounts included
an application, or information sufficient (4) The mortgage broker is not on the GFE:
to complete an application, the lender permitted to charge, as a condition for (i) Lender-required settlement
must provide the applicant with a GFE. providing a GFE, any fee for an services, where the lender selects the
In the case of dealer loans, the lender appraisal, inspection, or other similar third party settlement service provider;
must either provide the GFE or ensure settlement service. The mortgage broker (ii) Lender-required services, title
that the dealer provides the GFE. may, at its option, charge a fee limited services and required title insurance,
(2) The lender must provide the GFE to the cost of a credit report. The and owner’s title insurance, when the
to the loan applicant by hand delivery, mortgage broker may not charge borrower uses a settlement service
by placing it in the mail, or, if the additional fees until after the applicant provider identified by the loan
applicant agrees, by fax, e-mail, or other has received the GFE. If the GFE is originator; and
electronic means. mailed to the applicant, the applicant is (iii) Government recording charges.
(3) The lender is not required to considered to have received the GFE 3 (3) The amounts charged for all other
provide the applicant with a GFE if, calendar days after it is mailed, not settlement services included on the GFE
before the end of the 3-business-day including Sundays and the legal public may change at settlement.
period: holidays specified in 5 U.S.C. 6103(a). (f) Binding GFE. The loan originator is
(i) The lender denies the application; (5) The mortgage broker may at any bound, within the tolerances provided
or time collect from the loan applicant any in paragraph (e) of this section, to the
(ii) The applicant withdraws the information that it requires in addition settlement charges and terms listed on
application. to the required application information. the GFE provided to the borrower,
(4) The lender is not permitted to However, the mortgage broker is not unless a new GFE is provided prior to
charge, as a condition for providing a permitted to require, as a condition for settlement consistent with this
GFE, any fee for an appraisal, providing a GFE, that an applicant paragraph (f). If a loan originator
inspection, or other similar settlement submit supplemental documentation to provides a revised GFE consistent with
service. The lender may, at its option, verify the information provided on the this paragraph, the loan originator must
charge a fee limited to the cost of a application. document the reason that a new GFE
was provided. Loan originators must provide the GFE to the borrower with a information necessary to complete the
retain documentation of any reasons for clear and conspicuous disclosure stating HUD–1 or HUD–1A.
providing a new GFE for no less than 3 that at any time up until 60 calendar (1) In general. The settlement agent
years after settlement. days prior to closing, the loan originator shall state the actual charges paid by the
(1) Changed circumstances affecting may issue a revised GFE. If no such borrower and seller on the HUD–1, or by
settlement costs. If changed separate disclosure is provided, the loan the borrower on the HUD–1A. The
circumstances result in increased costs originator cannot issue a revised GFE, settlement agent must separately itemize
for any settlement services such that the except as otherwise provided in each third party charge paid by the
charges at settlement would exceed the paragraph (f) of this section. borrower and seller. All origination
tolerances for those charges, the loan (g) GFE is not a loan commitment. services performed by or on behalf of
originator may provide a revised GFE to Nothing in this section shall be the loan originator must be included in
the borrower. If a revised GFE is to be interpreted to require a loan originator the loan originator’s own charge.
provided, the loan originator must do so to make a loan to a particular borrower. Administrative and processing services
within 3 business days of receiving The loan originator is not required to related to title services must be included
information sufficient to establish provide a GFE if the loan originator does in the title underwriter’s or title agent’s
changed circumstances. The revised not have available a loan for which the own charge. The amount stated on the
GFE may increase charges for services borrower is eligible. HUD–1 or HUD–1A for any itemized
listed on the GFE only to the extent that service cannot exceed the amount
* * * * *
the changed circumstances actually actually received by the settlement
(i) Violations of section 5 of RESPA
resulted in higher charges. service provider for that itemized
(2) Changed circumstances affecting (12 U.S.C. 2604). A loan originator that
service, unless the charge is an average
loan. If changed circumstances result in violates the requirements of this section
charge in accordance with paragraph
a change in the borrower’s eligibility for shall be deemed to have violated section
(b)(2) of this section.
the specific loan terms identified in the 5 of RESPA. If any charges at settlement (2) Use of average charge. (i) The
GFE, the loan originator may provide a exceed the charges listed on the GFE by average charge for a settlement service
revised GFE to the borrower. If a revised more than the permitted tolerances, the shall be no more than the average
GFE is to be provided, the loan loan originator may cure the tolerance amount paid for a settlement service by
originator must do so within 3 business violation by reimbursing to the borrower one settlement service provider to
days of receiving information sufficient the amount by which the tolerance was another settlement service provider on
to establish changed circumstances. exceeded, at settlement or within 30 behalf of borrowers and sellers for a
(3) Borrower-requested changes. If a calendar days after settlement. A particular class of transactions involving
borrower requests changes to the borrower will be deemed to have federally related mortgage loans. The
mortgage loan identified in the GFE that received timely reimbursement if the total amounts paid by borrowers and
change the settlement charges or the loan originator delivers or places the sellers for a settlement service based on
terms of the loan, the loan originator payment in the mail within 30 calendar the use of an average charge may not
may provide a revised GFE to the days after settlement. exceed the total amounts paid to the
borrower. If a revised GFE is to be ■ 7. Section 3500.8 is revised to read as providers of that service for the
provided, the loan originator must do so follows: particular class of transactions.
within 3 business days of the borrower’s (ii) The settlement service provider
request. § 3500.8 Use of HUD–1 or HUD–1A
settlement statements. shall define the particular class of
(4) Expiration of original GFE. If a transactions for purposes of calculating
borrower does not express an intent to (a) Use by settlement agent. The the average charge as all transactions
continue with an application within 10 settlement agent shall use the HUD–1 involving federally related mortgage
business days after the GFE is provided, settlement statement in every settlement loans for:
or such longer time specified by the involving a federally related mortgage (A) A period of time as determined by
loan originator pursuant to paragraph (c) loan in which there is a borrower and the settlement service provider, but not
above, the loan originator is no longer a seller. For transactions in which there less than 30 calendar days and not more
bound by the GFE. is a borrower and no seller, such as than 6 months;
(5) Interest rate dependent charges refinancing loans or subordinate lien (B) A geographic area as determined
and terms. If the interest rate has not loans, the HUD–1 may be utilized by by the settlement service provider; and
been locked by the borrower, or a locked using the borrower’s side of the HUD– (C) A type of loan as determined by
interest rate has expired, the charge or 1 statement. Alternatively, the form the settlement service provider.
credit for the interest rate chosen, the HUD–1A may be used for these (iii) A settlement service provider
adjusted origination charges, per diem transactions. The HUD–1 or HUD–1A may use an average charge in the same
interest, and loan terms related to the may be modified as permitted under class of transactions for which the
interest rate may change. If the borrower this part. Either the HUD–1 or the HUD– charge was calculated. If the settlement
later locks the interest rate, a new GFE 1A, as appropriate, shall be used for service provider uses the average charge
must be provided showing the revised every RESPA-covered transaction, for any transaction in the class, the
interest rate-dependent charges and unless its use is specifically exempted. settlement service provider must use the
terms. All other charges and terms must The use of the HUD–1 or HUD–1A is same average charge in every
remain the same as on the original GFE, exempted for open-end lines of credit transaction within that class for which
except as otherwise provided in (home-equity plans) covered by the a GFE was provided.
paragraph (f) of this section. Truth in Lending Act and Regulation Z. (iv) The use of an average charge is
(6) New home purchases. In (b) Charges to be stated. The not permitted for any settlement service
transactions involving new home settlement agent shall complete the if the charge for the service is based on
purchases, where settlement is HUD–1 or HUD–1A, in accordance with the loan amount or property value. For
anticipated to occur more than 60 the instructions set forth in Appendix A example, an average charge may not be
calendar days from the time a GFE is to this part. The loan originator must used for transfer taxes, interest charges,
provided, the loan originator may transmit to the settlement agent all reserves or escrow, or any type of
insurance, including mortgage (8) Provisions in mortgage documents. Disclosure Statement. A format for the
insurance, title insurance, or hazard The servicer must examine the mortgage Servicing Disclosure Statement appears
insurance. loan documents to determine the as Appendix MS–1 to this part. The
(v) The settlement service provider applicable cushion for each escrow specific language of the Servicing
must retain all documentation used to account. If the mortgage loan documents Disclosure Statement is not required to
calculate the average charge for a provide for lower cushion limits, then be used. The information set forth in
particular class of transactions for at the terms of the loan documents apply. ‘‘Instructions to Preparer’’ on the
least 3 years after any settlement for Where the terms of any mortgage loan Servicing Disclosure Statement need not
which that average charge was used. document allow greater payments to an be included with the information given
(c) Violations of section 4 of RESPA escrow account than allowed by this to applicants, and material in square
(12 U.S.C. 2604). A violation of any of section, then this section controls the brackets is optional or alternative
the requirements of this section will be applicable limits. Where the mortgage language. The model format may be
deemed to be a violation of section 4 of loan documents do not specifically annotated with additional information
RESPA. An inadvertent or technical establish an escrow account, whether a that clarifies or enhances the model
error in completing the HUD–1 or HUD– servicer may establish an escrow language. The lender, table funding
1A shall not be deemed a violation of account for the loan is a matter for mortgage broker, or dealer should use
section 4 of RESPA if a revised HUD– determination by other Federal or State the language that best describes the
1 or HUD–1A is provided in accordance law. If the mortgage loan document is particular circumstances.
with the requirements of this section silent on the escrow account limits and (2) The Servicing Disclosure
within 30 calendar days after a servicer establishes an escrow account Statement must indicate whether the
settlement. under other Federal or State law, then servicing of the loan may be assigned,
■ 8. In § 3500.9, paragraph (a)(1) is the limitations of this section apply sold, or transferred to any other person
revised as follows: unless applicable Federal or State law at any time while the loan is
provides for a lower amount. If the loan outstanding. If the lender, table funding
§ 3500.9 Reproduction of settlement documents provide for escrow accounts
statements.
mortgage broker, or dealer in a first lien
up to the RESPA limits, then the dealer loan will engage in the servicing
(a) * * * servicer may require the maximum of the mortgage loan for which the
(1) The person reproducing the HUD– amounts consistent with this section, applicant has applied, the disclosure
1 may insert its business name and logo unless an applicable Federal or State may consist of a statement that the
in section A and may rearrange, but not law sets a lesser amount. entity will service such loan and does
delete, the other information that * * * * * not intend to sell, transfer, or assign the
appears in section A. (d) Methods of escrow account servicing of the loan. If the lender, table
* * * * * analysis. (1) The following sets forth the funding mortgage broker, or dealer in a
■ 9. Section 3500.17 is amended: steps servicers must use to determine first lien dealer loan will not engage in
■ a. In paragraph (b) by removing the whether their use of aggregate analysis the servicing of the mortgage loan for
definitions of Acceptable accounting conforms with the limitations in which the applicant has applied, the
method, Conversion date, Phase-in § 3500.17(c)(1). The steps set forth in disclosure may consist of a statement
period, Post-rule account, and Pre-rule this section result in maximum limits. that such entity intends to assign, sell,
account; Servicers may use accounting or transfer servicing of such mortgage
■ b. In paragraph (c) by revising the procedures that result in lower target loan before the first payment is due. In
heading and paragraphs (c)(4), (5), (6), balances. In particular, servicers may all other instances, the disclosure must
and (8); use a cushion less than the permissible state that the servicing of the loan may
■ c. By removing paragraph (d)(2); cushion or no cushion at all. This be assigned, sold or transferred while
■ d. By redesignating paragraphs (d) section does not require the use of a the loan is outstanding.
introductory text and (d)(1) as cushion. (c) Servicing Disclosure Statement;
paragraphs (d)(1) and (d)(2); (2) Aggregate analysis. (i) In Delivery. The lender, table funding
■ e. By adding a new heading to conducting the escrow account analysis mortgage broker, or dealer that
paragraph (d) and by revising newly using aggregate analysis, the target anticipates a first lien dealer loan shall
designated (d)(1) and (d)(2) introductory balances may not exceed the balances deliver the Servicing Disclosure
text; and computed according to the following Statement within 3 business days from
■ f. By removing paragraph (e)(3), to arithmetic operations: receipt of the application by hand
read as follows: * * * * * delivery, by placing it in the mail, or, if
■ 10. Section 3500.21 is amended by the applicant agrees, by fax, e-mail, or
§ 3500.17 Escrow accounts.
revising paragraphs (b) and (c) to read other electronic means. In the event the
* * * * * as follows: borrower is denied credit within the 3
(c) Limits on payments to escrow
business-day period, no servicing
accounts. * * * § 3500.21 Mortgage Servicing Transfers.
disclosure statement is required to be
(4) Aggregate accounting required. All * * * * * delivered. If co-applicants indicate the
servicers must use the aggregate (b) Servicing Disclosure Statement; same address on their application, one
accounting method in conducting Requirements. (1) At the time an copy delivered to that address is
escrow account analyses. application for a mortgage servicing sufficient. If different addresses are
(5) Cushion. The cushion must be no loan is submitted, or within 3 business shown by co-applicants on the
greater than one-sixth (1⁄6) of the days after submission of the application, application, a copy must be delivered to
estimated total annual disbursements the lender, mortgage broker who each of the co-applicants.
from the escrow account. anticipates using table funding, or
(6) Restrictions on pre-accrual. A * * * * *
dealer who anticipates a first lien dealer
servicer must not practice pre-accrual. loan shall provide to each person who ■ 11. A new § 3500.22 is added to read
* * * * * applies for such a loan a Servicing as follows:
§ 3500.22 Severability. separately identified settlement service in columns in section K which relate to the
If any particular provision of this part connection with the transaction, the name of Seller’s transaction may be left blank on the
or the application of any particular the person ultimately receiving the payment copy of the HUD–1 which will be furnished
must be shown together with the total to the Borrower.
provision to any person or circumstance amount paid to such person. Items paid to
is held invalid, the remainder of this and retained by a loan originator are Line Item Instructions
part and the application of such disclosed as required in the instructions for Instructions for completing the individual
provisions to other persons or lines in the 800-series of the HUD–1 (and for items on the HUD–1 follow.
circumstances shall not be affected by per diem interest, in the 900-series of the Section A. This section requires no entry
such holding. HUD–1). of information.
As a general rule, charges that are paid for Section B. Check appropriate loan type and
■ 12. A new § 3500.23 is added to read
by the seller must be shown in the seller’s complete the remaining items as applicable.
as follows: column on page 2 of the HUD–1 (unless paid Section C. This section provides a notice
§ 3500.23 ESIGN applicability. outside closing), and charges that are paid for regarding settlement costs and requires no
by the borrower must be shown in the additional entry of information.
The Electronic Signatures in Global borrower’s column (unless paid outside Sections D and E. Fill in the names and
and National Commerce Act (‘‘ESIGN’’), closing). However, in order to promote current mailing addresses and zip codes of
15 U.S.C. 7001–7031, shall apply to this comparability between the charges on the the Borrower and the Seller. Where there is
part. GFE and the charges on the HUD–1, if a seller more than one Borrower or Seller, the name
■ 13. Appendix A to part 3500 is revised pays for a charge that was included on the and address of each one is required. Use a
in its entirety, including the heading, to GFE, the charge should be listed in the supplementary page if needed to list multiple
borrower’s column on page 2 of the HUD–1. Borrowers or Sellers.
read as follows: That charge should also be offset by listing Section F. Fill in the name, current mailing
Appendix A to Part 3500—Instructions a credit in that amount to the borrower on address and zip code of the Lender.
for Completing HUD–1 and HUD–1a lines 204–209 on page 1 of the HUD–1, and Section G. The street address of the
Settlement Statements; Sample HUD–1 by a charge to the seller in lines 506–509 on property being sold should be listed. If there
page 1 of the HUD–1. If a loan originator is no street address, a brief legal description
and HUD–1a Statements (other than for no-cost loans), real estate or other location of the property should be
The following are instructions for agent, other settlement service provider, or inserted. In all cases give the zip code of the
completing the HUD–1 settlement statement, other person pays for a charge that was property.
required under section 4 of RESPA and 24 included on the GFE, the charge should be Section H. Fill in name, address, zip code
CFR part 3500 (Regulation X) of the listed in the borrower’s column on page 2 of and telephone number of settlement agent,
Department of Housing and Urban the HUD–1, with an offsetting credit reported and address and zip code of ‘‘place of
Development regulations. This form is to be on page 1 of the HUD–1, identifying the party settlement.’’
used as a statement of actual charges and paying the charge. Section I. Fill in date of settlement.
adjustments paid by the borrower and the Charges paid outside of settlement by the Section J. Summary of Borrower’s
seller, to be given to the parties in connection borrower, seller, loan originator, real estate Transaction. Line 101 is for the contract sales
with the settlement. The instructions for agent, or any other person, must be included price of the property being sold, excluding
completion of the HUD–1 are primarily for on the HUD–1 but marked ‘‘P.O.C.’’ for ‘‘Paid the price of any items of tangible personal
the benefit of the settlement agents who Outside of Closing’’ (settlement) and must property if Borrower and Seller have agreed
prepare the statements and need not be not be included in computing totals. to a separate price for such items.
transmitted to the parties as an integral part However, indirect payments from a lender to Line 102 is for the sales price of any items
of the HUD–1. There is no objection to the a mortgage broker may not be disclosed as of tangible personal property excluded from
use of the HUD–1 in transactions in which P.O.C., and must be included as a credit on Line 101. Personal property could include
its use is not legally required. Refer to the Line 802. P.O.C. items must not be placed in such items as carpets, drapes, stoves,
definitions section of HUD’s regulations (24 the Borrower or Seller columns, but rather on refrigerators, etc. What constitutes personal
CFR 3500.2) for specific definitions of many the appropriate line outside the columns. property varies from state to state.
of the terms that are used in these The settlement agent must indicate whether Manufactured homes are not considered
instructions. P.O.C. items are paid for by the Borrower, personal property for this purpose.
Seller, or some other party by marking the Line 103 is used to record the total charges
General Instructions items paid for by whoever made the payment to Borrower detailed in Section L and totaled
Information and amounts may be filled in as ‘‘P.O.C.’’ with the party making the on Line 1400.
by typewriter, hand printing, computer payment identified in parentheses, such as Lines 104 and 105 are for additional
printing, or any other method producing ‘‘P.O.C. (borrower)’’ or ‘‘P.O.C. (seller)’’. amounts owed by the Borrower, such as
clear and legible results. Refer to HUD’s In the case of ‘‘no cost’’ loans where ‘‘no charges that were not listed on the GFE or
regulations (Regulation X) regarding rules cost’’ encompasses third party fees as well as items paid by the Seller prior to settlement
applicable to reproduction of the HUD–1 for the upfront payment to the loan originator, but reimbursed by the Borrower at
the purpose of including customary recitals the third party services covered by the ‘‘no settlement. For example, the balance in the
and information used locally in settlements; cost’’ provisions must be itemized and listed Seller’s reserve account held in connection
for example, a breakdown of payoff figures, in the borrower’s column on the HUD–1/1A with an existing loan, if assigned to the
a breakdown of the Borrower’s total monthly with the charge for the third party service. Borrower in a loan assumption case, will be
mortgage payments, check disbursements, a These itemized charges must be offset with entered here. These lines will also be used
statement indicating receipt of funds, a negative adjusted origination charge on when a tenant in the property being sold has
applicable special stipulations between Line 803 and recorded in the columns. not yet paid the rent, which the Borrower
Borrower and Seller, and the date funds are Blank lines are provided in section L for will collect, for a period of time prior to the
transferred. any additional settlement charges. Blank settlement. The lines will also be used to
The settlement agent shall complete the lines are also provided for additional indicate the treatment for any tenant security
HUD–1 to itemize all charges imposed upon insertions in sections J and K. The names of deposit. The Seller will be credited on Lines
the Borrower and the Seller by the loan the recipients of the settlement charges in 404–405.
originator and all sales commissions, section L and the names of the recipients of Lines 106 through 112 are for items which
whether to be paid at settlement or outside adjustments described in section J or K the Seller had paid in advance, and for which
of settlement, and any other charges which should be included on the blank lines. the Borrower must therefore reimburse the
either the Borrower or the Seller will pay at Lines and columns in section J which Seller. Examples of items for which
settlement. Charges for loan origination and relate to the Borrower’s transaction may be adjustments will be made may include taxes
title services should not be itemized except left blank on the copy of the HUD–1 which and assessments paid in advance for an
as provided in these instructions. For each will be furnished to the Seller. Lines and entire year or other period, when settlement
occurs prior to the expiration of the year or Line 303 must indicate either the cash disclosure of the actual amount of these post-
other period for which they were paid. required from the Borrower at settlement (the settlement items to be paid from settlement
Additional examples include flood and usual case in a purchase transaction), or cash funds is optional. Any amounts entered on
hazard insurance premiums, if the Borrower payable to the Borrower at settlement (if, for Lines 204–209 including Seller financing
is being substituted as an insured under the example, the Borrower’s earnest money arrangements should also be entered on Lines
same policy; mortgage insurance in loan exceeds the Borrower’s cash obligations in 506–509.
assumption cases; planned unit development the transaction or there is a cash-out Instructions for the use of Lines 510
or condominium association assessments refinance). Subtract Line 302 from Line 301 through 519 are the same as those for Lines
paid in advance; fuel or other supplies on and enter the amount of cash due to or from 210 to 219 above.
hand, purchased by the Seller, which the the Borrower at settlement on Line 303. The Line 520 is for the total of Lines 501
Borrower will use when Borrower takes appropriate box should be checked. If the through 519.
possession of the property; and ground rent Borrower’s earnest money is applied toward Lines 601 and 602 are summary lines for
paid in advance. the charge for a settlement service, the the Seller. Enter the total in Line 420 on Line
Line 120 is for the total of Lines 101 amount so applied should not be included on 610. Enter the total in Line 520 on Line 602.
through 112. Line 303 but instead should be shown on the Line 603 must indicate either the cash
Line 201 is for any amount paid against the appropriate line for the settlement service, required to be paid to the Seller at settlement
sales price prior to settlement. marked ‘‘P.O.C. (Borrower)’’, and must not be (the usual case in a purchase transaction), or
Line 202 is for the amount of the new loan included in computing totals. the cash payable by the Seller at settlement.
made by the Lender when a loan to finance Section K. Summary of Seller’s Subtract Line 602 from Line 601 and enter
construction of a new structure constructed Transaction. Instructions for the use of Lines the amount of cash due to or from the Seller
for sale is used as or converted to a loan to 101 and 102 and 104–112 above, apply also at settlement on Line 603. The appropriate
finance purchase. Line 202 should also be to Lines 401–412. Line 420 is for the total of box should be checked.
used for the amount of the first user loan, Lines 401 through 412. Section L. Settlement Charges.
when a loan to purchase a manufactured Line 501 is used if the Seller’s real estate Line 700 is used to enter the sales
home for resale is converted to a loan to broker or other party who is not the commission charged by the sales agent or real
finance purchase by the first user. For other settlement agent has received and holds a estate broker.
loans covered by 24 CFR part 3500 deposit against the sales price (earnest Lines 701–702 are to be used to state the
(Regulation X) which finance construction of money) which exceeds the fee or commission split of the commission where the settlement
a new structure or purchase of a owed to that party. If that party will render agent disburses portions of the commission
manufactured home, list the sales price of the the excess deposit directly to the Seller, to two or more sales agents or real estate
land on Line 104, the construction cost or rather than through the settlement agent, the brokers.
purchase price of manufactured home on amount of excess deposit should be entered Line 703 is used to enter the amount of
Line 105 (Line 101 would be left blank in this on Line 501 and the amount of the total sales commission disbursed at settlement. If
instance) and amount of the loan on Line deposit (including commissions) should be the sales agent or real estate broker is
202. The remainder of the form should be entered on Line 201. retaining a part of the deposit against the
completed taking into account adjustments Line 502 is used to record the total charges sales price (earnest money) to apply towards
and charges related to the temporary to the Seller detailed in section L and totaled the sales agent’s or real estate broker’s
financing and permanent financing and on Line 1400. commission, include in Line 703 only that
which are known at the date of settlement. Line 503 is used if the Borrower is part of the commission being disbursed at
Line 203 is used for cases in which the assuming or taking title subject to existing settlement and insert a note on Line 704
Borrower is assuming or taking title subject liens which are to be deducted from sales indicating the amount the sales agent or real
to an existing loan or lien on the property. price. estate broker is retaining as a ‘‘P.O.C.’’ item.
Lines 204–209 are used for other items Lines 504 and 505 are used for the amounts Line 704 may be used for additional
paid by or on behalf of the Borrower. Lines (including any accrued interest) of any first charges made by the sales agent or real estate
204–209 should be used to indicate any and/or second loans which will be paid as broker, or for a sales commission charged to
financing arrangements or other new loan not part of the settlement. the Borrower, which will be disbursed by the
listed in Line 202. For example, if the Line 506 is used for deposits paid by the settlement agent.
Borrower is using a second mortgage or note Borrower to the Seller or other party who is Line 801 is used to record ‘‘Our origination
to finance part of the purchase price, whether not the settlement agent. Enter the amount of charge,’’ which includes all charges received
from the same lender, another lender or the the deposit in Line 201 on Line 506 unless by the loan originator, except any charge for
Seller, insert the principal amount of the loan Line 501 is used or the party who is not the the specific interest rate chosen (points). This
with a brief explanation on Lines 204–209. settlement agent transfers all or part of the number must not be listed in either the
Lines 204–209 should also be used where the deposit to the settlement agent, in which case buyer’s or seller’s column. The amount
Borrower receives a credit from the Seller for the settlement agent will note in parentheses shown in Line 801 must include any
closing costs, including seller-paid GFE on Line 507 the amount of the deposit that amounts received for origination services,
charges. They may also be used in cases in is being disbursed as proceeds and enter in including administrative and processing
which a Seller (typically a builder) is making the column for Line 506 the amount retained services, performed by or on behalf of the
an ‘‘allowance’’ to the Borrower for items that by the above-described party for settlement loan originator.
the Borrower is to purchase separately. services. If the settlement agent holds the Line 802 is used to record ‘‘Your credit or
Lines 210 through 219 are for items which deposit, insert a note in Line 507 which charge (points) for the specific interest rate
have not yet been paid, and which the indicates that the deposit is being disbursed chosen,’’ which states the charge or credit
Borrower is expected to pay, but which are as proceeds. adjustment as applied to ‘‘Our origination
attributable in part to a period of time prior Lines 506 through 509 may be used to list charge,’’ if applicable. This number must not
to the settlement. In jurisdictions in which additional liens which must be paid off be listed in either column or shown on page
taxes are paid late in the tax year, most cases through the settlement to clear title to the one of the HUD–1.
will show the proration of taxes in these property. Other Seller obligations should be For a mortgage broker originating a loan in
lines. Other examples include utilities used shown on Lines 506–509, including charges its own name, the amount shown on Line 802
but not paid for by the Seller, rent collected that were disclosed on the GFE but that are will be the difference between the initial loan
in advance by the Seller from a tenant for a actually being paid for by the Seller. These amount and the total payment to the
period extending beyond the settlement date, Lines may also be used to indicate funds to mortgage broker from the lender. The total
and interest on loan assumptions. be held by the settlement agent for the payment to the mortgage broker will be the
Line 220 is for the total of Lines 201 payment of either repairs, or water, fuel, or sum of the price paid for the loan by the
through 219. other utility bills that cannot be prorated lender and any other payments to the
Lines 301 and 302 are summary lines for between the parties at settlement because the mortgage broker from the lender, including
the Borrower. Enter total in Line 120 on Line amounts used by the Seller prior to any payments based on the loan amount or
301. Enter total in Line 220 on Line 302. settlement are not yet known. Subsequent loan terms, and any flat rate payments. For
a mortgage broker originating a loan in regular monthly payment. Enter that amount Disbursements to third parties must be
another entity’s name, the amount shown on here and include the per diem charges. If broken out in the appropriate lines or in
Line 802 will be the sum of all payments to such interest is not collected until the first blank lines in the series, and amounts paid
the mortgage broker from the lender, regular monthly payment, no entry should be to these third parties must be shown outside
including any payments based on the loan made on Line 901. of the columns if included in Line 1101.
amount or loan terms, and any flat rate Line 902 is used for mortgage insurance Charges not included in Line 1101 must be
payments. premiums due and payable at settlement, listed in the columns.
In either case, when the amount paid to the including any monthly amounts due at Line 1101 is used to record the total for the
mortgage broker exceeds the initial loan settlement and any upfront mortgage category of ‘‘Title services and lender’s title
amount, there is a credit to the borrower and insurance premium, but not including any insurance.’’ This amount must be listed in
it is entered as a negative amount. When the reserves collected by the Lender and the columns.
initial loan amount exceeds the amount paid recorded in the 1000-series. If a lump sum Line 1102 is used to record the settlement
to the mortgage broker, there is a charge to mortgage insurance premium paid at or closing fee.
the borrower and it is entered as a positive settlement is included on Line 902, a note Line 1103 is used to record the charges for
amount. For a lender, the amount shown on should indicate that the premium is for the the owner’s title insurance and related
Line 802 may include any credit or charge life of the loan. endorsements. This amount must be listed in
(points) to the Borrower. Line 903 is used for homeowner’s the columns.
Line 803 is used to record ‘‘Your adjusted insurance premiums that the Lender requires Line 1104 is used to record the lender’s
origination charges,’’ which states the net to be paid at the time of settlement, except title insurance premium and related
amount of the loan origination charges, the reserves collected by the Lender and endorsements.
sum of the amounts shown in Lines 801 and recorded in the 1000-series. Line 1105 is used to record the amount of
802. This amount must be listed in the Lines 904 and additional sequentially the lender’s title policy limit. This amount is
columns as either a positive number (for numbered lines are used to list additional recorded outside of the columns.
example, where the origination charge shown items required by the Lender (except for Line 1106 is used to record the amount of
in Line 801 exceeds any credit for the interest reserves collected by the Lender and the owner’s title policy limit. This amount is
rate shown in Line 802 or where there is an recorded in the 1000-series), including recorded outside of the columns.
origination charge in Line 801 and a charge premiums for flood or other insurance. These Line 1107 is used to record the amount of
for the interest rate (points) is shown on Line lines are also used to list amounts paid at the total title insurance premium, including
802) or as a negative number (for example, settlement for insurance not required by the endorsements, that is retained by the title
where the credit for the interest rate shown Lender. agent. This amount is recorded outside of the
in Line 802 exceeds the origination charges Lines 1000–1007. This series is used for columns.
shown in Line 801). amounts collected by the Lender from the Line 1108 used to record the amount of the
In the case of ‘‘no cost’’ loans, where ‘‘no Borrower and held in an account for the total title insurance premium, including
cost’’ refers only to the loan originator’s fees, future payment of the obligations listed as endorsements, that is retained by the title
the amounts shown in Lines 801 and 802 they fall due. Include the time period underwriter. This amount is recorded outside
should offset, so that the charge shown on (number of months) and the monthly of the columns.
Line 803 is zero. Where ‘‘no cost’’ includes assessment. In many jurisdictions this is Additional sequentially numbered lines in
third party settlement services, the credit referred to as an ‘‘escrow’’, ‘‘impound’’, or the 1100-series may be used to itemize title
shown in Line 802 will more than offset the ‘‘trust’’ account. In addition to the property charges paid to other third parties, as
amount shown in Line 801. The amount taxes and insurance listed, some Lenders identified by name and type of service
shown in Line 803 will be a negative number may require reserves for flood insurance, provided.
to offset the settlement charges paid condominium owners’ association Lines 1200–1206. This series covers
indirectly through the loan originator. assessments, etc. The amount in line 1001 government recording and transfer charges.
Lines 804–808 may be used to record each must be listed in the columns, and the Charges paid by the borrower must be listed
of the ‘‘Required services that we select.’’ itemizations in lines 1002 through 1007 must in the columns as described for lines 1201
Each settlement service provider must be be listed outside the columns. and 1203, with itemizations shown outside
identified by name and the amount paid After itemizing individual deposits in the the columns. Any amounts that are charged
recorded either inside the columns or as paid 1000 series, the servicer shall make an to the seller and that were not included on
to the provider outside closing (‘‘P.O.C.’’), as adjustment based on aggregate accounting. the Good Faith Estimate must be listed in the
described in the General Instructions. This adjustment equals the difference columns.
Line 804 is used to record the appraisal fee. between the deposit required under aggregate Line 1201 is used to record the total
Line 805 is used to record the fee for all accounting and the sum of the itemized ‘‘Government recording charges,’’ and the
credit reports. deposits. The computation steps for aggregate amount must be listed in the columns.
Line 806 is used to record the fee for any accounting are set out in 24 CFR Line 1202 is used to record, outside of the
tax service. § 3500.17(d). The adjustment will always be columns, the itemized recording charges.
Line 807 is used to record any flood a negative number or zero (-0-), except for Line 1203 is used to record the transfer
certification fee. amounts due to rounding. The settlement taxes, and the amount must be listed in the
Lines 808 and additional sequentially agent shall enter the aggregate adjustment columns.
numbered lines, as needed, are used to amount outside the columns on a final line Line 1204 is used to record, outside of the
record other third party services required by of the 1000 series of the HUD–1 or HUD–1A columns, the amounts for local transfer taxes
the loan originator. These Lines may also be statement. Appendix E to this part sets out and stamps.
used to record other required disclosures an example of aggregate analysis. Line 1205 is used to record, outside of the
from the loan originator. Any such Lines 1100–1108. This series covers title columns, the amounts for State transfer taxes
disclosures must be listed outside the charges and charges by attorneys and closing and stamps.
columns. or settlement agents. The title charges Line 1206 and additional sequentially
Lines 901–904. This series is used to include a variety of services performed by numbered lines may be used to record
record the items which the Lender requires title companies or others, and include fees specific itemized third party charges for
to be paid at the time of settlement, but directly related to the transfer of title (title government recording and transfer services,
which are not necessarily paid to the lender examination, title search, document but the amounts must be listed outside the
(e.g., FHA mortgage insurance premium), preparation), fees for title insurance, and fees columns.
other than reserves collected by the Lender for conducting the closing. The legal charges Line 1301 and additional sequentially
and recorded in the 1000-series. include fees for attorneys representing the numbered lines must be used to record
Line 901 is used if interest is collected at lender, seller, or borrower, and any attorney required services that the borrower can shop
settlement for a part of a month or other preparing title work. The series also includes for, such as fees for survey, pest inspection,
period between settlement and the date from any settlement, notary, and delivery fees or other similar inspections. These lines may
which interest will be collected with the first related to the services covered in this series. also be used to record additional itemized
settlement charges that are not included in a the HUD–1/1A column is greater than the printing, or any other method producing
specific category, such as fees for structural total for the Good Faith Estimate column, clear and legible results. Refer to 24 CFR
and environmental inspections; pre-sale then the amount of the increase must be 3500.9 regarding rules for reproduction of the
inspections of heating, plumbing or electrical entered both as a dollar amount and as a HUD–1A. Additional pages may be attached
equipment; or insurance or warranty percentage increase in the appropriate line. to the HUD–1A for the inclusion of
coverage. The amounts must be listed in ‘‘Charges That Can Change’’. The amounts customary recitals and information used
either the borrower’s or seller’s column. shown in Blocks 9, 10 and 11 on the locally for settlements or if there are
Line 1400 must state the total settlement borrower’s GFE must be entered in the insufficient lines on the HUD–1A. The
charges as calculated by adding the amounts appropriate line in the Good Faith Estimate settlement agent shall complete the HUD–1A
within each column. column. Any third party settlement services in accordance with the instructions for the
for which the borrower selected a provider HUD–1 to the extent possible, including the
Page 3 other than one identified by the loan instructions for disclosing items paid outside
Comparison of Good Faith Estimate (GFE) originator must also be included in this closing and for no cost loans.
and HUD–1/1A Charges section. The amounts shown on the HUD–1/ Blank lines are provided in Section L for
1A for each charge in this section must be any additional settlement charges. Blank
The comparison chart must be prepared entered in the corresponding line in the lines are also provided in Section M for
using the exact information and amounts HUD–1/1A column, along with the recipients of all or portions of the loan
from the GFE and the actual settlement appropriate HUD–1/1A line number. The proceeds. The names of the recipients of the
charges shown on the HUD–1/1A Settlement HUD–1/1A column must include any settlement charges in Section L and the
Statement. The comparison chart is amounts shown on page 2 of the HUD–1 in names of the recipients of the loan proceeds
comprised of three sections: ‘‘Charges That the column as paid for by the borrower, plus in Section M should be set forth on the blank
Cannot Increase’’, ‘‘Charges That Cannot any amounts that are shown as P.O.C. by or lines.
Increase More Than 10%’’, and ‘‘Charges on behalf of the borrower. Additional lines
That Can Change’’. may be added if necessary. Line-Item Instructions
‘‘Charges That Cannot Increase’’. The
amounts shown in Blocks 1 and 2, in Line Loan Terms Page 1
A, and in Block 8 on the borrower’s GFE This section must be completed in The identification information at the top of
must be entered in the appropriate line in the accordance with the information and the HUD–1A should be completed as follows:
Good Faith Estimate column. The amounts instructions provided by the lender. The The borrower’s name and address is
shown on Lines 801, 802, 803 and 1203 of lender must provide this information in a entered in the space provided. If the property
the HUD–1/1A must be entered in the format that permits the settlement agent to securing the loan is different from the
corresponding line in the HUD–1/1A simply enter the necessary information in the borrower’s address, the address or other
column. The HUD–1/1A column must appropriate spaces, without the settlement location information on the property should
include any amounts shown on page 2 of the agent having to refer to the loan documents be entered in the space provided. The loan
HUD–1 in the column as paid for by the themselves. number is the lender’s identification number
borrower, plus any amounts that are shown for the loan. The settlement date is the date
as P.O.C. by or on behalf of the borrower. If Instructions for Completing HUD–1A of settlement in accordance with 24 CFR
there is a credit in Block 2 of the GFE or Line Note: The HUD–1A is an optional form that 3500.2, not the end of any applicable
802 of the HUD–1/1A, the credit should be may be used for refinancing and subordinate- rescission period. The name and address of
entered as a negative number. lien federally related mortgage loans, as well the lender should be entered in the space
‘‘Charges That Cannot Increase More Than as for any other one-party transaction that provided.
10%’’. A description of each charge included does not involve the transfer of title to Section L. Settlement Charges. This section
in Blocks 3 and 7 on the borrower’s GFE residential real property. The HUD–1 form of the HUD–1A is similar to Section L of the
must be entered on separate lines in this may also be used for such transactions, by HUD–1, with minor changes or omissions,
section, with the amount shown on the utilizing the borrower’s side of the HUD–1 including deletion of lines 700 through 704,
borrower’s GFE for each charge entered in the and following the relevant parts of the relating to real estate broker commissions.
corresponding line in the Good Faith instructions as set forth above. The use of The instructions for Section L in the HUD–
Estimate column. For each charge included either the HUD–1 or HUD–1A is not 1, should be followed insofar as possible.
in Blocks 4, 5 and 6 on the borrower’s GFE mandatory for open-end lines of credit Inapplicable charges should be ignored, as
for which the loan originator selected the (home-equity plans), as long as the should any instructions regarding seller
provider or for which the borrower selected provisions of Regulation Z are followed. items.
a provider identified by the loan originator, Line 1400 in the HUD–1A is for the total
a description must be entered on a separate Background settlement charges charged to the borrower.
line in this section, with the amount shown The HUD–1A settlement statement is to be Enter this total on line 1601. This total
on the borrower’s GFE for each charge used as a statement of actual charges and should include Section L amounts from
entered in the corresponding line in the Good adjustments to be given to the borrower at additional pages, if any are attached to this
Faith Estimate column. The loan originator settlement, as defined in this part. The HUD–1A.
must identify any third party settlement instructions for completion of the HUD–1A Section M. Disbursement to Others. This
services for which the borrower selected a are for the benefit of the settlement agent section is used to list payees, other than the
provider other than one identified by the who prepares the statement; the instructions borrower, of all or portions of the loan
loan originator so that the settlement agent are not a part of the statement and need not proceeds (including the lender, if the loan is
can include those charges in the appropriate be transmitted to the borrower. There is no paying off a prior loan made by the same
category. Additional lines may be added if objection to using the HUD–1A in lender), when the payee will be paid directly
necessary. The amounts shown on the HUD– transactions in which it is not required, and out of the settlement proceeds. It is not used
1/1A for each line must be entered in the its use in open-end lines of credit to list payees of settlement charges, nor to list
HUD–1/1A column next to the corresponding transactions (home-equity plans) is funds disbursed directly to the borrower,
charge from the GFE, along with the encouraged. It may not be used as a even if the lender knows the borrower’s
appropriate HUD–1/1A line number. The substitute for a HUD–1 in any transaction intended use of the funds.
HUD–1/1A column must include any that has a seller. For example, in a refinancing transaction,
amounts shown on page 2 of the HUD–1 in Refer to the ‘‘definitions’’ section (§ 3500.2) the loan proceeds are used to pay off an
the column as paid for by the borrower, plus of 24 CFR part 3500 (Regulation X) for existing loan. The name of the lender for the
any amounts that are shown as P.O.C. by or specific definitions of terms used in these loan being paid off and the pay-off balance
on behalf of the borrower. instructions. would be entered in Section M. In a home

The amounts shown in the Good Faith improvement transaction when the proceeds
Estimate and HUD–1/1A columns for this General Instructions are to be paid to the home improvement
section must be separately totaled and Information and amounts may be filled in contractor, the name of the contractor and the
entered in the designated line. If the total for by typewriter, hand printing, computer amount paid to the contractor would be
entered in Section M. In a consolidation loan, all settlement charges that both are included Line 1604 is the amount disbursed to the
or when part of the loan proceeds is used to in the totals for lines 1400 and 1602, and are borrower. This is determined by adding
pay off other creditors, the name of each not financed as part of the principal amount together the amounts for lines 1600 and 1601,
creditor and the amount paid to that creditor of the loan. This is the amount normally and then subtracting any amounts listed on
would be entered in Section M. If the received by the lender from the borrower at lines 1602 and 1603.
proceeds are to be given directly to the settlement, which would occur when some or
borrower and the borrower will use the all of the settlement charges were paid in Page 2
proceeds to pay off existing obligations, this cash by the borrower at settlement, instead of This section of the HUD–1A is similar to
would not be reflected in Section M. being financed as part of the principal page 3 of the HUD–1. The instructions for
Section N. Net Settlement. Line 1600 amount of the loan. Failure to include any
page 3 of the HUD–1, should be followed
normally sets forth the principal amount of such amount in line 1601 will result in an
the loan as it appears on the related note for error in the amount calculated on line 1604. insofar as possible. The HUD–1/1A Column
this loan. In the event this form is used for Items paid outside of closing (P.O.C.) should should include any amounts shown on page
an open-ended home equity line whose not be included in Line 1601. 1 of the HUD–1A in the column as paid for
approved amount is greater than the initial Line 1602 is the total amount from line by the borrower, plus any amounts that are
amount advanced at settlement, the amount 1400. shown as P.O.C. by the borrower.
shown on Line 1600 will be the loan amount Line 1603 is the total amount from line Inapplicable charges should be ignored.
advanced at settlement. Line 1601 is used for 1520. BILLING CODE 4210–67–P
ER17NO08.084</GPH>
ER17NO08.085</GPH>
ER17NO08.086</GPH>
ER17NO08.087</GPH>
BILLING CODE 4210–67–C

ER17NO08.088</GPH>
■ 14. Appendix C to part 3500 is revised ‘‘Summary of your loan.’’—In this section, ‘‘Summary of your settlement charges.’’—
in its entirety, including the heading, to for all loans the loan originator must fill in, On this line, the loan originator must state
read as follows: where indicated: the Adjusted Origination Charges from
(i) The initial loan amount; subtotal A of page 2, the Charges for All
Appendix C to Part 3500—Instructions (ii) The loan term; and Other Settlement Services from subtotal B of
for Completing Good Faith Estimate (iii) The initial interest rate. page 2, and the Total Estimated Settlement
(GFE) Form The loan originator must fill in the initial Charges from the bottom of page 2.
monthly amount owed for principal, interest,
The following are instructions for and any mortgage insurance. The amount Page 2
completing the GFE required under section 5 shown must be the greater of: (1) The ‘‘Understanding your estimated settlement
of RESPA and 24 CFR 3500.7 of the required monthly payment for principal and charges.’’—This section details 11 settlement
Department of Housing and Urban interest for the first regularly scheduled cost categories and amounts associated with
Development regulations. The standardized payment, plus any monthly mortgage the mortgage loan. For purposes of
form set forth in this Appendix is the insurance payment; or (2) the accrued determining whether a tolerance has been
required GFE form and must be provided interest for the first regularly scheduled met, the amount on the GFE should be
exactly as specified. The instructions for payment, plus any monthly mortgage compared with the total of any amounts
completion of the GFE are primarily for the insurance payment. shown on the HUD–1 in the borrower’s
benefit of the loan originator who prepares The loan originator must indicate whether column and any amounts paid outside
the form and need not be transmitted to the the interest rate can rise, and, if it can, must closing by or on behalf of the borrower.
borrower(s) as an integral part of the GFE. insert the maximum rate to which it can rise
The required standardized GFE form must be over the life of the loan. The loan originator Your Adjusted Origination Charges’’
prepared completely and accurately. A must also indicate the period of time after Block 1, ‘‘Our origination charge.’’—The
separate GFE must be provided for each loan which the interest rate can first change. loan originator must state here all charges
where a transaction will involve more than The loan originator must indicate whether that all loan originators involved in this
one mortgage loan. the loan balance can rise even if the borrower transaction will receive, except for any
General Instructions makes payments on time, for example in the charge for the specific interest rate chosen
case of a loan with negative amortization. If (points). A loan originator may not separately
The loan originator preparing the GFE may it can, the loan originator must insert the charge any additional fees for getting this
fill in information and amounts on the form maximum amount to which the loan balance loan, including for application, processing, or
by typewriter, hand printing, computer can rise over the life of the loan. For federal, underwriting. The amount stated in Block 1
printing, or any other method producing state, local, or tribal housing programs that is subject to zero tolerance, i.e., the amount
clear and legible results. Under these provide payment assistance, any repayment may not increase at settlement.
instructions, the ‘‘form’’ refers to the required of such program assistance should be Block 2, ‘‘Your credit or charge (points) for
standardized GFE form. Although the excluded from consideration in completing the specific interest rate chosen.’’—For
standardized GFE is a prescribed form, this item. If the loan balance will increase transactions involving mortgage brokers, the
Blocks 3, 6, and 11 on page 2 may be adapted only because escrow items are being paid mortgage broker must indicate through check
for use in particular loan situations, so that through the loan balance, the loan originator boxes whether there is a credit to the
additional lines may be inserted there, and
is not required to check the box indicating borrower for the interest rate chosen on the
unused lines may be deleted.
that the loan balance can rise. loan, the interest rate, and the amount of the
All fees for categories of charges shall be
The loan originator must indicate whether credit, or whether there is an additional
disclosed in U.S. dollar and cent amounts.
the monthly amount owed for principal, charge (points) to the borrower for the
Specific Instructions interest, and any mortgage insurance can rise interest rate chosen on the loan, the interest
even if the borrower makes payments on rate, and the amount of that charge. Only one
Page 1 time. If the monthly amount owed can rise of the boxes may be checked; a credit and
Top of the Form—The loan originator must even if the borrower makes payments on charge cannot occur together in the same
enter its name, business address, telephone time, the loan originator must indicate the transaction.
number, and email address, if any, on the top period of time after which the monthly For transactions without a mortgage broker,
of the form, along with the applicant’s name, amount owed can first change, the maximum the lender may choose not to separately
the address or location of the property for amount to which the monthly amount owed disclose in this block any credit or charge for
which financing is sought, and the date of the can rise at the time of the first change, and the interest rate chosen on the loan; however,
GFE. the maximum amount to which the monthly if this block does not include any positive or
‘‘Purpose.’’—This section describes the amount owed can rise over the life of the negative figure, the lender must check the
general purpose of the GFE as well as loan. The amount used for the monthly first box to indicate that ‘‘The credit or
additional information available to the amount owed must be the greater of: (1) The charge for the interest rate you have chosen’’
applicant. required monthly payment for principal and is included in ‘‘Our origination charge’’
‘‘Shopping for your loan.’’—This section interest for that month, plus any monthly above (see Block 1 instructions above), must
requires no loan originator action. mortgage insurance payment; or (2) the insert the interest rate, and must also insert
‘‘Important dates.’’—This section briefly accrued interest for that month, plus any ‘‘0’’ in Block 2. Only one of the boxes may
states important deadlines after which the monthly mortgage insurance payment. be checked; a credit and charge cannot occur
loan terms that are the subject of the GFE The loan originator must indicate whether together in the same transaction.
may not be available to the applicant. In Line the loan includes a prepayment penalty, and, For a mortgage broker, the credit or charge
1, the loan originator must state the date and, if so, the maximum amount that it could be. for the specific interest rate chosen is the net
if necessary, time until which the interest The loan originator must indicate whether payment to the mortgage broker from the
rate for the GFE will be available. In Line 2, the loan requires a balloon payment and, if lender (i.e., the sum of all payments to the
the loan originator must state the date until so, the amount of the payment and in how mortgage broker from the lender, including
which the estimate of all other settlement many years it will be due. payments based on the loan amount, a flat
charges for the GFE will be available. This ‘‘Escrow account information.’’—The loan rate, or any other computation, and in a table
date must be at least 10 business days from originator must indicate whether the loan funded transaction, the loan amount less the
the date of the GFE. In Line 3, the loan includes an escrow account for property price paid for the loan by the lender). When
originator must state how many calendar taxes and other financial obligations. The the net payment to the mortgage broker from
days within which the applicant must go to amount shown in the ‘‘Summary of your the lender is positive, there is a credit to the
settlement once the interest rate is locked. In loan’’ section for ‘‘Your initial monthly borrower and it is entered as a negative
Line 4, the loan originator must state how amount owed for principal, interest, and any amount in Block 2 of the GFE. When the net
many calendar days prior to settlement the mortgage insurance’’ must be entered in the payment to the mortgage broker from the
interest rate would have to be locked, if space for the monthly amount owed in this lender is negative, there is a charge to the
applicable. section. borrower and it is entered as a positive
amount in Block 2 of the GFE. If there is no required to add the individual charges charges. The loan originator must indicate
net payment (i.e., the credit or charge for the disclosed in this block and place that total in through check boxes if the reserve or escrow
specific interest rate chosen is zero), the the column of this block. The charge shown account will cover future payments for all
mortgage broker must insert ‘‘0’’ in Block 2 in this block is subject to an overall 10 tax, all hazard insurance, and other
and may check either the box indicating percent tolerance as described above. obligations that the loan originator requires
there is a credit of ‘‘0’’ or the box indicating Block 4, ‘‘Title services and lender’s title to be paid as they fall due. If the reserve or
there is a charge of ‘‘0’’. insurance.’’—In this block, the loan escrow account includes some, but not all,
The amount stated in Block 2 is subject to originator must state the estimated total property taxes or hazard insurance, or if it
zero tolerance while the interest rate is charge for third party settlement service includes mortgage insurance, the loan
locked, i.e., any credit for the interest rate providers for all closing services, regardless originator should check ‘‘other’’ and then list
chosen cannot decrease in absolute value of whether the providers are selected or paid the items included.
terms and any charge for the interest rate for by the borrower, seller, or loan originator. Block 10, ‘‘Daily interest charges.’’—In this
chosen cannot increase. (Note: An increase in The loan originator must also include any block, the loan originator must estimate the
the credit is allowed since this increase is a lender’s title insurance premiums, when total amount that will be due at settlement
reduction in cost to the borrower. A decrease required, regardless of whether the provider for the daily interest on the loan from the
in the credit is not allowed since it is an is selected or paid for by the borrower, seller, date of settlement until the first day of the
increase in cost to the borrower.) or loan originator. All fees for title searches, first period covered by scheduled mortgage
Line A, ‘‘Your Adjusted Origination examinations, and endorsements, for payments. The loan originator must also
Charges.’’—The loan originator must add the example, would be included in this total. The indicate how this total amount is calculated
numbers in Blocks 1 and 2 and enter this charge shown in this block is subject to an by providing the amount of the interest
subtotal at highlighted Line A. The subtotal overall 10 percent tolerance as described charges per day and the number of days used
at Line A will be a negative number if there above. in the calculation, based on a stated projected
is a credit in Block 2 that exceeds the charge Block 5, ‘‘Owner’s title insurance.’’—In this closing date.
in Block 1. The amount stated in Line A is block, for all purchase transactions the loan Block 11, ‘‘Homeowner’s insurance.’’—The
subject to zero tolerance while the interest originator must provide an estimate of the loan originator must estimate in this block
rate is locked. charge for the owner’s title insurance and the total amount of the premiums for any
In the case of ‘‘no cost’’ loans, where ‘‘no related endorsements, regardless of whether hazard insurance policy and other similar
cost’’ refers only to the loan originator’s fees, the providers are selected or paid for by the insurance, such as fire or flood insurance that
Line A must show a zero charge as the borrower, seller, or loan originator. For non- must be purchased at or before settlement to
adjusted origination charge. In the case of purchase transactions, the loan originator meet the loan originator’s requirements. The
‘‘no cost’’ loans where ‘‘no cost’’ may enter ‘‘NA’’ or ‘‘Not Applicable’’ in this loan originator must also separately indicate
encompasses third party fees as well as the Block. The charge shown in this block is the nature of each type of insurance required
upfront payment to the loan originator, all of subject to an overall 10 percent tolerance as along with the charges. To the extent a loan
the third party fees listed in Block 3 through described above. originator requires that such insurance be
Block 11 to be paid for by the loan originator Block 6, ‘‘Required services that you can part of an escrow account, the amount of the
(or borrower, if any) must be itemized and shop for.’’—In this block, the loan originator initial escrow deposit must be included in
listed on the GFE. The credit for the interest must identify each third party settlement Block 9.
rate chosen must be large enough that the service required by the loan originator where Line B, ‘‘Your Charges for All Other
total for Line A will result in a negative the borrower is permitted to shop for and Settlement Services.’’—The loan originator
number to cover the third party fees. select the settlement service provider must add the numbers in Blocks 3 through
(excluding title services), along with the 11 and enter this subtotal in the column at
‘‘Your Charges for All Other Settlement estimated charge to be paid to the provider highlighted Line B.
Services’’ of each service. The loan originator must Line A+B, ‘‘Total Estimated Settlement
There is a 10 percent tolerance applied to identify the specific required services (e.g., Charges.’’—The loan originator must add the
the sum of the prices of each service listed survey, pest inspection) and provide an subtotals in the right-hand column at
in Block 3, Block 4, Block 5, Block 6, and estimate of the charge of each service. The highlighted Lines A and B and enter this total
Block 7, where the loan originator requires loan originator must also add the individual in the column at highlighted Line A+B.
the use of a particular provider or the charges disclosed in this block and place the Page 3
borrower uses a provider selected or total in the column of this block. The charge
identified by the loan originator. Any shown in this block is subject to an overall ‘‘Instructions’’
services in Block 4, Block 5, or Block 6 for 10 percent tolerance as described above. ‘‘Understanding which charges can change
which the borrower selects a provider other Block 7, ‘‘Government recording at settlement.’’—This section informs the
than one identified by the loan originator are charges.’’—In this block, the loan originator applicant about which categories of
not subject to any tolerance and, at must estimate the state and local government settlement charges can increase at closing,
settlement, would not be included in the sum fees for recording the loan and title and by how much, and which categories of
of the charges on which the 10 percent documents that can be expected to be settlement charges cannot increase at closing.
tolerance is based. Where a loan originator charged at settlement. The charge shown in This section requires no loan originator
permits a borrower to shop for third party this block is subject to an overall 10 percent action.
settlement services, the loan originator must tolerance as described above. ‘‘Using the tradeoff table.’’—This section is
provide the borrower with a written list of Block 8, ‘‘Transfer taxes.’’—In this block, designed to make borrowers aware of the
settlement services providers at the time of the loan originator must estimate the sum of relationship between their total estimated
the GFE, on a separate sheet of paper. all state and local government fees on settlement charges on one hand, and the
Block 3, ‘‘Required services that we mortgages and home sales that can be interest rate and resulting monthly payment
select.’’—In this block, the loan originator expected to be charged at settlement, based on the other hand. The loan originator must
must identify each third party settlement upon the proposed loan amount or sales complete the left hand column using the loan
service required and selected by the loan price and on the property address. A zero amount, interest rate, monthly payment
originator (excluding title services), along tolerance applies to the sum of these figure, and the total estimated settlement
with the estimated price to be paid to the estimated fees. charges from page 1 of the GFE. The loan
provider of each service. Examples of such Block 9, ‘‘Initial deposit for your escrow originator, at its option, may provide the
third party settlement services might include account.’’—In this block, the loan originator borrower with the same information for two
provision of credit reports, appraisals, flood must estimate the amount that it will require alternative loans, one with a higher interest
checks, tax services, and any upfront the borrower to place into a reserve or escrow rate, if available, and one with a lower
mortgage insurance premium. The loan account at settlement to be applied to interest rate, if available, from the loan
originator must identify the specific required recurring charges for property taxes, originator. The loan originator should list in
services and provide an estimate of the price homeowner’s and other similar insurance, the tradeoff table only alternative loans for
of each service. Loan originators are also mortgage insurance, and other periodic which it would presently issue a GFE based
on the same information the loan originator balloon payments. If the loan originator fills options are available, an applicant may
considered in issuing this GFE. The in the tradeoff table, the loan originator must request a new GFE, and a new GFE must be
alternative loans must use the same loan show the borrower the loan amount, provided by the loan originator.
amount and be otherwise identical to the alternative interest rate, alternative monthly ‘‘Using the shopping chart.’’—This chart is
loan in the GFE. The alternative loans must payment, the change in the monthly payment a shopping tool to be provided by the loan
have, for example, the identical number of from the loan in this GFE to the alternative originator for the borrower to complete, in
payment periods; the same margin, index, loan, the change in the total settlement order to compare GFEs.
and adjustment schedule if the loans are charges from the loan in this GFE to the ‘‘If your loan is sold in the future.’’—This
adjustable rate mortgages; and the same alternative loan, and the total settlement section requires no loan originator action.
requirements for prepayment penalty and charges for the alternative loan. If these BILLING CODE 4210–67–P
ER17NO08.089</GPH>
ER17NO08.090</GPH>
BILLING CODE 4210–67–C

ER17NO08.091</GPH>
■ 15. Appendix E to part 3500 is under Section 604 of the Regulatory Overlaps are discussed further in this
amended by removing the parenthetical Flexibility Act. The requirements of the chapter.
‘‘(Existing Accounts)’’ from the heading, FRFA are listed below along with references In addition, this Chapter contains (c) a
to where the requirements are covered in the description of any significant alternatives to
‘‘II. Example Illustrating Single-Item
FRFA and where more detailed discussion the final rule which accomplish the stated
Analysis (Existing Accounts)’’. can be found in other chapters of the objectives of applicable statutes and which
■ 16. Appendix MS–1 to part 3500 is Regulatory Impact Analysis (RIA). minimize any significant impact of the final
revised to read as follows: A. A description of the reasons why action rule on small entities. The FRFA also
by the agency is being considered can be describes comments dealing with compliance
Appendix MS–1 to Part 3500 found in Section III of this chapter, in and regulatory burden in the 2008 proposed
[Sample language; use business stationery Section II of Chapter 1 of the RIA, and in rule. Some of the comments were on
or similar heading] greater detail in the first sections of Chapters provisions of the 2008 proposed rule that
[Date] 3 and 4 of the RIA. have been dropped. Other comments were on
B. A succinct statement of the objectives of, impacts that the Department believes will be
SERVICING DISCLOSURE STATEMENT
and legal basis for, the final rule is provided small or non-existent. Some of the
NOTICE TO FIRST LIEN MORTGAGE
in Section III of this chapter. This is also compliance and regulatory burden comments
LOAN APPLICANTS: THE RIGHT TO
discussed in Section II of Chapter 1 of the concerned costs that are only felt during the
COLLECT YOUR MORTGAGE LOAN
RIA and in greater detail in the first sections start-up period and are one-time costs. These
PAYMENTS MAY BE TRANSFERRED
of Chapters 3 and 4 of the RIA. are discussed in Section VII.B, while
You are applying for a mortgage loan C. A description and an estimate of the comments on recurring costs of
covered by the Real Estate Settlement number of small entities to which the rule implementing the new GFE form are
Procedures Act (RESPA) (12 U.S.C. 2601 et will apply or an explanation of why no such addressed in Section VII.C. Section VII.D
seq.). RESPA gives you certain rights under estimate is available. Section V provides data discusses GFE-related changes in the final
Federal law. This statement describes on small businesses that may be affected by rule that reduce regulatory burden. Section
whether the servicing for this loan may be the rule. As explained in Section V, Chapter VII.E discusses compliance issues related to
transferred to a different loan servicer. 5 of the RIA also provides extensive GFE tolerances on settlement party costs,
‘‘Servicing’’ refers to collecting your documentation of the characteristics of the while Section VII.F discusses efficiencies
principal, interest, and escrow payments, if industries directly affected by the rule, associated with the new GFE.
any, as well as sending any monthly or including various estimates of the numbers of Before proceeding further, Section II
annual statements, tracking account balances, small entities, reasons why various data provides a brief summary of the main
and handling other aspects of your loan. You elements are not reliable or unavailable, and findings from the Regulatory Impact Analysis
will be given advance notice before a transfer descriptions of methodologies used to that relate to the final rule.
occurs. estimate (if possible) necessary data elements
that were not readily available. The Summary of the Regulatory Impact Analysis
Servicing Transfer Information
industries discussed in Chapter 5 of the RIA There is strong evidence of information
[We may assign, sell, or transfer the included the following (with section asymmetry between mortgage originators and
servicing of your loan while the loan is reference): mortgage brokers (Section II); settlement service providers and consumers,
outstanding.] lenders including commercial banks, thrifts, allowing loan originators to capture much of
[or] mortgage banks, credit unions (Section III); the consumer surplus in this market through
[We do not service mortgage loans of the settlement and title services including direct price discrimination. The RESPA disclosure
type for which you applied. We intend to title insurance carriers, title agents, escrow statute is meant to address this information
assign, sell, or transfer the servicing of your firms, and lawyers (Section IV); and other asymmetry, but the evidence shows that the
mortgage loan before the first payment is third-party settlement providers including current RESPA regulations are not effective.
due.] appraisers, surveyors, pest inspectors, and The final rule will create a more level-
[or] credit bureaus (Section V); and real estate playing field through a more transparent and
[The loan for which you have applied will agents (Section VI). As explained in Section standard disclosure of loan details and
be serviced at this financial institution and V of this chapter, Appendix A includes settlement costs; tolerances on settlement
we do not intend to sell, transfer, or assign estimates of revenue impacts for the new charges leading to prices that consumers can
the servicing of the loan.] Good Faith Estimate (GFE). rely on; and a comparison page on the HUD–
[INSTRUCTIONS TO PREPARER: Insert D. A description of the projected reporting, 1 that allows the consumer to compare the
the date and select the appropriate language record keeping, and other compliance amounts listed for particular settlement costs
under ‘‘Servicing Transfer Information.’’ The requirements of the rule, including an on the GFE with the total costs listed for
model format may be annotated with further estimate of the classes of small entities that those charges on the HUD–1, and to double
information that clarifies or enhances the will be subject to the requirement and the check the loan details at settlement. These
model language.] types of professional skills necessary for changes will encourage comparison shopping
Dated: November 7, 2008. preparation of the report or record. by informed consumers, which will place a
Compliance requirements and costs are competitive pressure on market prices, and
Brian D. Montgomery,
discussed in Sections VII through IX of this enable consumers to retain more consumer
Assistant Secretary for Housing—Federal chapter. In no case are any professional skills surplus.
Housing Commissioner. required for reporting, record keeping, and
other compliance requirements of this rule Overview of Final Rule
Note: The following appendix will not
appear in the Code of Federal Regulations. that are not otherwise required in the The Department of Housing and Urban
ordinary course of business of firms affected Development has issued a final rule under
by the rule. As noted above, Chapter 5 of the the Real Estate Settlement Procedures Act
Appendix to FR–5180 Final Rule on
RIA includes estimates of the small entities (RESPA) to simplify and improve the process
Regulatory Flexibility Analysis that may be affected by the rule. of obtaining home mortgages and to reduce
The following Regulatory Flexibility E. An identification, to the extent settlement costs for consumers. This
Analysis is Chapter 6 of the final rule’s practicable, of all relevant Federal rules Regulatory Impact Analysis and Regulatory
Economic Analysis, which is available for which may duplicate, overlap or conflict Flexibility Analysis examine the economic
public inspection and available online at with the final rule. The final rule provisions effects of that rule. As this Regulatory Impact
http://www.hud.gov/respa. describing some loan terms in the new GFE Analysis demonstrates, the final rule is
and the HUD–1 are similar to the Truth in expected to improve consumer shopping for
Introduction Lending Act (TILA) regulations; however the mortgages and to reduce the costs of closing
This chapter of the Regulatory Impact differences in approach between the TILA a mortgage transaction for the consumer.
Analysis is the Final Regulatory Flexibility regulations and HUD’s RESPA rule make Consumer savings were estimated under a
Analysis (FRFA) of the final rule as described them more complementary than duplicative. variety of scenarios about originator and
settlement costs. In the base case, the • There is convincing statistical evidence depending on whether the interest rate on the
estimated price reduction to borrowers comes that yield spread premiums are not always loan is below or above ‘‘par.’’ Finally, current
to $8.35 billion or $668 per loan. This used to offset the origination and settlement rules do not assure that the ‘‘good faith
represents the substantial savings that can be costs of the consumer. Studies, including a estimate’’ is a reliable estimate of final
achieved with the final rule. recent HUD-sponsored study of FHA closing settlement costs. As a result, under today’s
The final RESPA rule includes a new, costs by the Urban Institute, find that yield rules, the estimated costs on GFEs may be
simplified Good Faith Estimate (GFE) that spread premiums are often used for the unreliable or incomplete, and final charges at
includes tolerances on final settlement costs originator’s benefit, rather than for the settlement may include significant increases
and a new method for reporting wholesale consumer’s benefit.3 in items that were estimated on the GFE, as
lender payments in broker transactions. The • Borrowers can be confused about the well as additional fees, which can add to the
final rule allows service providers to use trade-off between interest rates and closing consumer’s ultimate closing costs.
prices based on the average charges for the costs. It may be difficult for borrowers (even Thus, today’s GFE is not an effective tool
third-party services they purchase, making sophisticated ones but surely unsophisticated for facilitating borrower shopping or for
their business operations simpler and less ones) to understand the financial trade-offs controlling origination and third-party
costly. Competition among loan originators associated with discount points, yield spread settlement costs. There is enormous potential
will put pressure for these cost savings to be premiums, and upfront settlement costs. for cost reductions in today’s market, which
passed on to borrowers. The new GFE will While many originators explain this to their is too often characterized by relatively high
produce substantial shopping and price- borrowers, giving them an array of choices to and highly variable charges for both
reduction benefits for both origination and meet their needs, some originators may only origination and third-party services.
third-party settlement services. show borrowers a limited number of options. In addition, today’s RESPA rules hold back
Because the final rule calls for significant • There is also evidence that prices paid efficiency and competition by acting as a
changes in the process of originating a for third-party services are highly variable, barrier to innovative cost-reduction
mortgage, this Regulatory Impact Analysis indicating that there is much potential to arrangements. While today’s mortgage market
identifies a wide range of benefits, costs, reduce title, closing, and other settlement is characterized by increased efficiencies and
efficiencies, transfers, and market impacts. costs. For example, a recent analysis of FHA lower prices due to technological advances
The effects on consumers from improved closing costs by the Urban Institute shows and other innovations that is not the case in
borrower shopping will be substantial under wide variation in title and settlement costs. the settlement area where aggressive
this rule. Similarly, the use of tolerances will There is not always an incentive in today’s competition among settlement service
place needed controls on origination and market for originators to control these costs. providers simply does not always take place.
third-party fees. Ensuring that yield spread Too often, high third-party costs are simply Existing RESPA regulations inhibit average
premiums are credited to borrowers in passed through to the consumer. And cost pricing,4 which is an example of a cost
brokered transactions could cause significant consumers may not be the best shoppers for reduction technique. Thus, a framework is
transfers to consumers. The increased third-party service providers due to their lack needed that would encourage competitive
competition associated with RESPA reform of expertise and to the infrequency with negotiations and other arrangements that
will reduce settlement service costs and which they shop for these services. would lead to lower settlement prices. The
result in transfers to consumers from service Consumers often rely on recommendations new GFE will provide such a framework.
providers. Entities that will suffer revenue from the real estate agent (in the case of a
losses under the final rule are usually those Approach of the Final Rule
home purchase) or from the loan originator
who are charging prices higher than (in the case of a refinance as well as a home Main Components of the New GFE and
necessary or are benefiting from the current purchase). HUD–1
system’s market failure. Today’s GFE. Today’s GFE does not help The GFE format simplifies the process of
Note to Reader: A comprehensive the above situations, as it is not an effective originating mortgages by consolidating costs
summary of the problems with the current tool for facilitating borrower shopping nor for into a few major cost categories.5 The GFE
mortgage shopping system and the benefits controlling third-party settlement costs. The ensures that in brokered transactions,
and market impacts of the final rule is current GFE is typically comprised of a long borrowers receive the full benefit of the
provided in Section I of Chapter 3. list of charges, as today’s rules do not higher price paid by wholesale lenders for a
prescribe a standard form or consolidated loan with a high interest rate; that is, so-
Problems With the Mortgage Shopping categories. Such a long list of individual called yield spread premiums. On both the
Process and the Current GFE charges can be overwhelming, often confuses GFE and HUD–1, the portion of any
The current system for originating and consumers, and seems to provide little useful wholesale lender payments that arise because
closing mortgages is highly complex and information for consumer shopping. The a loan has an above-par interest rate is passed
suffers from several problems that have current GFE certainly does not inform through to borrowers as a credit against other
resulted in high prices for borrowers. Studies consumers what the major costs are so that costs. Thus, there is assurance that borrowers
indicate that consumers are often charged they can effectively shop and compare who take on an above-par loan receive funds
high fees and can face wide variations in mortgage offers among different loan to offset their settlement costs. The new GFE
prices, both for origination and third-party originators. The current GFE does not explain also includes a trade-off table that will assist
settlement services. The main points are as how the borrower can use the document to consumers in understanding the relationship
follows: shop and compare loans. Also, the GFE fails between higher interest rates and lower
• There are many barriers to effective to make clear the relationship between the settlement costs.
shopping for mortgages in today’s market. closing costs and the interest rate on a loan, HUD conducted consumer tests to further
The process can be complex and can involve notwithstanding that many mortgage loans improve the GFE form in the 2002 proposed
rather complicated financial trade-offs, originated today adjust up-front closing costs rule. Numerous changes were made to make
which are often not fully and clearly due at settlement, either up or down, the GFE more user-friendly. The GFE form in
explained to borrowers.
• Consumers often pay non-competitive costs associated with originating loans for different 4 The charges reported on the HUD–1 are required
fees for originating mortgages. Most observers applicants. For example, those who required more to be the specific charge paid in connection with
believe that the market breakdown occurs in work by the originator to obtain loan approval the specific loan for which the HUD–1 is filled out.
the relationship between the consumer and might be charged more than those whose Pricing based on average charges is the practice of
the loan originator—the ability of the loan applications required little work in order to obtain charging all borrowers the same average charge for
originator to price discriminate among an approval. The price discrimination we refer to a group of similar loans. Average cost pricing
in this paragraph and elsewhere in this analysis is requires less record keeping and tracking for any
different types of consumers leads to some
not cost-based. It is the result of market individual loan since the numbers reported to the
consumers paying more than other imperfections, such as poor borrower information settlement agent need not be transaction specific.
consumers.2 on alternatives that leads borrowers to accept loans Average cost pricing is not permissible under
at higher cost than the competitive level. RESPA because loan-specific prices are required.
2 One could see price discrimination in a 3 See Section IV.D of Chapter 2 for a discussion 5 See the proposed GFE in Exhibit 3–B of Chapter
competitive market that was the result of different of these studies. 3.
the final rule includes a summary page layout of the revised HUD–1 has new $668 per loan. Sensitivity analysis was
containing the key information for shopping; labeling of some lines so that each entry from conducted with respect to the savings
during the tests, consumers reported that the the GFE can be found on the revised HUD– projection in order to provide a range of
summary page was a useful addition to the 1 with the exact wording as on the GFE. This estimates. Because title fees account for over
GFE. The trade-off table, another component will make it much easier to determine if the 70 percent of third-party fees and because
of the GFE that consumers found useful, is fees actually paid at settlement are consistent there is widespread evidence of lack of
also included in the final GFE. The final GFE with the GFE, whether the borrower does it competition and overcharging in the title and
is a form that consumers find to be clear and alone or with the assistance of the settlement settlement closing industry, one approach
well written and, according the tests agent. The reduced number of HUD–1 entries projected third-party savings only in that
conducted, one that they can use to that should result, as well as use of the same industry. This approach (called the ‘‘title
determine the least expensive loan. In other terminology on both forms should reduce the approach’’) projected savings of $200 per
words, it is a shopping tool that is a vast time spent by the borrower and settlement loan in title and settlement fees. In this case,
improvement over today’s GFE with its long agents comparing and checking the numbers. the estimated price reduction to borrowers
list of fees that can change (i.e., increase) at The significant changes made to the final comes to $8.38 billion ($670 per loan), or
settlement. rule from the March 2008 proposed rule are: 12.6 percent of the $66.7 billion in total
The final GFE includes a set of tolerances • A GFE form that is a shorter form than charges—savings figures that are practically
on originator and third-party costs: had been proposed. identical to the base case mentioned above.8
originators must adhere to their own • Allowing originators the option not to Other projections also showed substantial
origination fees, and give estimates subject to fill out the tradeoff table on the GFE form. savings for consumers. As explained in
a 10 percent upper limit on the sum of • A revised definition of application to Chapter 3, estimated consumer savings under
certain third-party fees. The tolerances on eliminate the separate GFE application a more conservative projection totaled $6.48
originator and third-party costs will process. billion ($518 per loan), or 9.7 percent of total
encourage originators not only to lower their • Adoption of requirements for the GFE settlement charges. Thus, while consumer
own costs but also to seek lower costs for that are similar to recently revised Federal savings are expected to be $8.35 billion (or
third-party services. Reserve Board Truth-in-Lending regulations 12.5 percent of total charges) in the base case
The final rule would allow service which limit fees charged in connection with or $8.38 billion (12.6 percent of total charges)
providers to use pricing based on average early disclosures and defining timely in the title approach, they were $6.48 billion
charges for third-party services they purchase provision of the disclosures. (or 9.7 percent of total charges) in a more
so long as the average is calculated using a • Clarification of terminology that conservative sensitivity analysis. This $6.48–
documented method and the charge on the describes the process applicable to, and the $8.38 billion ($518–$670 per loan) represents
HUD–1 is no greater than the average paid for terms of, an applicant’s particular loan. the substantial savings that can be achieved
that service. This will make internal • Inclusion of a provision to allow lenders with the new GFE.
operations for the loan originator simpler and a short period of time in which to correct Industry Breakdown of Savings. Chapter 3
less costly and competition among lenders certain violations of the new disclosure also disaggregates the sources of consumer
will put pressure for these cost savings to be requirements. savings into the following major categories:
passed on to borrowers as well. The end • A revised HUD–1/1A settlement originators with a breakdown for brokers and
result of all these changes should be lower statement form that includes a summary page lenders, and third-party providers with a
third-party fees for consumers. of information that provides a comparison of breakdown for the title and settlement
To increase the value of the new GFE as the GFE and HUD–1/1A list of charges and industry and other third-party providers.9 In
a shopping document, HUD is proposing a listing of final loan terms as a substitute for the base case, originators (brokers and
revisions to the HUD–1 Settlement Statement the proposed closing script addition. lenders) contribute $5.88 billion, or 70
form that will make the GFE and HUD–1 • Elimination of the requirement for a percent of the $8.35 billion in consumer
easier to compare. The revised HUD–1 uses closing script to be completed and read by savings. This $5.88 billion in savings
the same language to describe categories of the closing agent. represents 14.0 percent of the total revenue
charges as the GFE, and orders the categories • A simplified process for utilizing an of originators, which is projected to be $42.0
of charges in the same way. This makes it average charge mechanism. billion.10 The $5.88 billion is divided
much simpler to compare the two documents • No regulatory change in this rulemaking between brokers, which contribute $3.53
and confirm whether the tolerances required regarding negotiated discounts, including billion, and lenders (banks, thrifts, and
in the new GFE have been met or exceeded. volume based discounts. mortgage banks), which contribute the
In addition, the final rule introduces a Estimates and Sources of Consumer Savings remaining $2.35 billion. The shares for
comparison in the revised HUD–1 that From the Final Rule brokers (60 percent) and lenders (40 percent)
would: (1) Compare the GFE estimates to the represent their respective shares of mortgage
Overall Savings. Chapter 3 discusses the originations. In the base case, third-party
HUD–1 charges and advise borrowers consumer benefits associated with the new
whether tolerances have been met or settlement service providers contribute $2.47
GFE form and provides dollar estimates of billion, or 30 percent of the $8.35 billion in
exceeded; (2) verify that the loan terms consumer savings due to improved shopping
summarized on the GFE match those in the consumer savings. This $2.47 billion in
for both originator and third-party services. savings represents 10.0 percent of the total
loan documents, including the mortgage Consumer savings were estimated under a
note; and (3) provide additional information variety of scenarios about originator and 8 If the savings in title and settlement closing fees
on the terms and conditions of the mortgage. settlement costs.6 In the base case, the
These components of the rule are required due to RESPA reform were only $150, then the
estimated price reduction to borrowers comes estimated price reduction to borrowers comes to
together to fully realize the consumer saving to $8.35 billion annually, or 12.5 percent of $7.76 billion, or 11.6 percent of the $66.7 billion
on mortgage closing cost estimated here. the $66.7 billion in total charges (i.e., in total charges.
Given that there has been no significant origination fees, appraisal, credit report, tax 9 Readers are referred to Chapter 5 for a more
change in the basic HUD–1 structure and service and flood certificate and title detailed examination of the various component
layout, besides the addition of a comparison insurance and settlement agent charges).7 industries (e.g., title services, appraisal, etc.) as well
page, generating this new HUD–1 should not Thus, there is an estimated $8.35 billion in as for the derivations of many of the estimates
pose any problem for firms closing loans—in transfers from firms to borrowers from the presented in this chapter.
fact, the closing process will be much improved disclosures and tolerances of the
10 This assumes a 1.75 percent origination fee for
simpler given that borrowers and closing brokers and lenders, which, when applied to
new GFE. This would represent savings of
agents can precisely link the information on projected originations of $2.4 trillion, yields $42.0
the initial GFE to the information on the final billion in total revenues from origination fees (both
6 Throughout this Economic Analysis, the terms

direct and indirect). See Steps (3)–(5) of Section
HUD–1.The HUD–1 has also been adjusted to ‘‘borrowers’’ and ‘‘consumers’’ are often used VII.E.1 of Chapter 3 for the explanation of
ensure that the new GFE (a shopping interchangeably. origination costs. Sensitivity analyses are
document issued early in the process) and 7 Government fees and taxes and escrow items are conducted for smaller origination fees of 1.5 percent
the HUD–1 (a final settlement document not included in this analysis, as they are not subject and larger fees of 2.0 percent; see Step (21) in
issued at closing) work well together. The to competitive market pressures. Section VII.E.4 of Chapter 3.
revenue of third-party providers, which is (appraisers, surveyors, pest inspectors, etc.), In the title approach, title and settlement
projected to be $24.738 billion.11 The $2.47 which contribute $0.68 billion. Title and agents account for all third-party savings,
billion is divided between title and settlement agents contribute a large share which total $2.5 billion if per loan savings
settlement agents, which contribute $1.79 because they account for 72.5 percent of the are $200 and $1.88 billion if per loan savings
billion, and other third-party providers third-party services included in this analysis. are $150.
TABLE 6–1—INDUSTRY BREAKDOWN OF CONSUMER SAVINGS

Savings Percentage of
Transfers per loan
Source of savings total savings
(billions) (12.5 million (percent)
loans)
Loan Origination .......................................................................................................................... $5.88 $470 70

Lenders ................................................................................................................................. 2.35 470 or 28
Brokers ................................................................................................................................. 3.53 470 42
Third-Party Services .................................................................................................................... 2.47 198 30
Title/Settlement ..................................................................................................................... 1.79 143 22
Other ..................................................................................................................................... 0.68 54 8
Total * ............................................................................................................................. 8.35 668 100

* Savings are 12.5% of $66.7 billion revenue in charges.
Section III.D of this executive summary between the wholesale price of the loan and Mortgage applicants and borrowers realize
presents the revenue impacts on small its par value. Their placement in the $1,169 million savings in time spent
originators and small third-party providers. calculations that lead to net settlement costs shopping for loans and third-party services.
Sources of Savings: Lower Origination and will make them very difficult to miss. That Loan originators save $975 million in time
Third-Party Fees. The Regulatory Impact placement should also enhance borrower spent with shoppers and from average cost
Analysis presents evidence that some comprehension of how yield spread pricing. Third-party settlement service
consumers are paying higher prices for premiums can be used to reduce up-front providers save $191 million in time spent
origination and third-party services. The new settlement costs. Tests of the form indicate with shoppers. Some or all of industry’s total
GFE format in the final rule will improve that consumers can determine the cheaper of $1,166 million in efficiency gains have the
consumer shopping for mortgages, which loan when comparing a broker loan with a potential to be passed through to borrowers
will result in better mortgage products, lower lender loan. through competition. There are additional
interest rates, and lower origination and • The new GFE will better inform social efficiencies such as the reduction of
third-party costs for borrowers. consumers about their financing choices by non-productive behavior and positive
• The final rule simplifies the process of including a tradeoff table on page 3 where externalities of preventing foreclosures (see
originating mortgages by consolidating costs originators can present the different interest Section X.D.).
into a few major cost categories. This is a rate and closing cost options available to The total one-time compliance costs to the
substantial improvement over today’s GFE borrowers. For example, consumers will lending and settlement industry of the GFE
that is not standardized and can contain a better understand the trade-offs between and HUD–1 are estimated to be $571 million,
long list of individual charges that reducing their closing costs and increasing $407 million of which is borne by small
encourages fee proliferation. This makes it the interest rate on the mortgage. business. These costs are summarized below.
easier for the consumer to become • The final rule allows settlement service Total recurring costs are estimated to be $918
overwhelmed and confused. The consistent providers to use prices based on average million annually or $73.40 per loan. The
and simpler presentation of the GFE will charges for the third-party services they share of the recurring costs on small business
improve the ability of the consumer to shop. purchase.
• A GFE with a summary page, which is $471 million. This Chapter 6 examines in
• The above changes and the imposition of greater detail the compliance and other costs
includes the terms of the loan, will make it tolerances on fees will encourage originators
clear to the consumer whether they are associated with the GFE and HUD–1 forms
to seek lower settlement service prices. The and its tolerances.
comparing similar loans. tolerances will lead to well-informed market
• A GFE with a summary page will make The new GFE in the final rule has some
professionals either arranging for the
it simpler for borrowers to shop. The higher features that would increase the cost of
purchase of the settlement services or at least
reward for shopping, along with the providing it and some that would decrease
establishing a benchmark that borrowers can
increased ease with which borrowers can the cost. Practically all of the information
use to start their own search. Under either set
compare loans, should lead to more effective required on the GFE is readily available to
of circumstances, this should lead to lower
shopping, more competition, and lower originators, suggesting no additional costs.
prices for borrowers than if the borrowers
prices for borrowers. The fact that there are fewer numbers and
shopped on their own, since the typical
• The GFE makes cost estimates more borrower’s knowledge of the settlement
less itemization of individual fees suggests
reliable by applying tolerances to the figures reduced costs. On the other hand, there could
service market is limited, at best.
reported. This will reduce the all too frequent be a small amount of additional costs
problem of borrowers being surprised by Savings and Transfers, Efficiencies, and Costs associated with the optional trade-off table
additional costs at settlement. With fees As explained above, it is estimated that but that is not clear. Thus, while it is difficult
firmer under the GFE, shopping is more borrowers would save $8.35 billion in to estimate, it appears that there could be a
likely to result in borrowers saving money origination and settlement charges. This net of zero additional costs. However, if the
when they shop. $8.35 billion represents transfers to GFE added 10 minutes per application to the
• The new GFE will disclose yield spread borrowers from high priced producers, with time it takes to handle the forms today;
premiums and discount points in brokered $5.88 billion coming from originators and annual costs would rise by $255 million at
loans prominently, accurately, and in a way $2.47 billion from third-party settlement 1.7 applications per loan or ($12 per
that should inform borrowers how they may service providers. In addition to the transfers, application or $20 per loan) or $405 million
be used to their advantage. Both values will there are efficiencies associated with the rule at 2.7 applications per loan ($32 per loan).
have to be calculated as the difference as well as costs. We assume the high-cost scenario for
11 See Step (7) of Section VII.E.1 of Chapter 3 for
the derivation of the $24.738 billion.
summary table 6–5. (See Section VII.C.1 of new employees in its use and the costs and may have to fill out the entire form if the
this chapter for further details.) associated with periodic upgrades simply lender does not transmit the information on
The presence of tolerances will lead to replace those costs that would have been an already completed HUD–1 page 3. The
some additional costs to originators of incurred doing the same thing with software settlement agent may also want to check the
making additional arrangements for third for the old rule. They represent no additional information concerning settlement costs,
parties to provide settlement services. If the costs of the new rule. tolerances, and loan terms to make sure they
average loan originator incurs an average of Similarly, there will be a one-time agree with the GFE. In some cases, the
10 minutes per loan of effort making third- adjustment cost for legal advice on how to settlement agent will have to calculate the
party arrangements to meet the tolerances, deal with the changes related to the new tolerances. We assume that it will add five
then the total cost to originators of making GFE. The one-time adjustment cost for legal minutes on average to the time it takes to
third-party arrangements to meet the fees is estimated to be $116 million (see prepare a settlement. The actual distribution
tolerance requirements comes to $150 Section VII.B.2 of this chapter). Once the of the total additional time burden will differ
million ($12 per loan). (See Section VII.E.2 of adjustment has been made, the ongoing legal by transaction depending on how much of
this chapter.) costs are a substitute for the ongoing legal the work is done by the lender. Taking loan
There is the potential of additional costs that would have been incurred under
originators into account, the total time
underwriting costs if the number of the old rule and do not represent any
burden is 15 minutes per loan, for a cost of
applications requiring a credit check rise additional burden.
$18 per loan. The recurring compliance cost
beyond the current ratio of 1.7 applications Finally with respect to the GFE, employees
per loan. Thus, if this ratio remains constant, will have to be trained in the new GFE to the industry would be $225 million
there will be no recurring compliance costs beyond the software and legal training annually, of which small business would
from additional underwriting. If, however, already mentioned. This one time adjustment bear $107 million annually. During a high-
the demand for preliminary GFEs increases cost is estimated to be $194 million (see volume year (15.5 million loans annually),
to 2.7 applications per loan, then the total section VII.B.3). Again, once the transition the annual recurring compliance cost of the
costs for originators will be $138 million or expenses have been incurred, any ongoing HUD–1 would be $279 million annually. (See
$11 per loan (See Section VII.C.). training costs are a substitute for the training Section VIII.C. of Chapter 6.)
In addition to the recurring costs of the costs that would have been incurred anyway There will be one-time adjustment costs of
GFE, there will be one-time adjustment costs and do not represent an additional burden. $188 million in switching to the new HUD–
of $383 million in switching to the new form. There are few recurring costs associated 1 form. Settlement firms will have to upgrade
Loan originators will have to upgrade their with the revised HUD–1. For originators the their software and train staff in its use in
software and train staff in its use in order to burden could be very small: Loan originators order to accommodate the requirements of
accommodate the requirements of the new will not have to collect additional data the new rule. It is estimated that the software
rule. It is estimated that the software cost will beyond what is required for the GFE. In and training cost will be $80 million (see
be $33 million and the training cost will be certain cases, the burden may be noticeable Section VIII.B. of Chapter 6). Once the new
$58 million, for a total of $91 million (see so we assume that the average burden is ten software is functioning, the recurring costs of
Section VII.B.1 of this chapter). We assume minutes per loan for loan originators. training new employees in its use and the
that, of the loan originators’ software and Settlement agents may face a recurring cost, costs associated with periodic upgrades
training costs, $73 million is attributable to although this is not likely either since loan simply replace those costs that would have
the new GFE and $18 million to the new originators are responsible for providing the been incurred doing the same thing with
HUD–1. Once the new software is data. The settlement agent will have to add software for the old rule. They represent no
functioning, the recurring costs of training final charges not known by the originator, additional costs of the new rule.
TABLE 6–2—SUMMARY OF ONE-TIME ADJUSTMENT COSTS

[In millions]
GFE HUD–1 Total

Source of cost
All firms Small firms All firms Small firms All firms Small firms
Software and training ............................... $73 $52 $80 $59 $153 $111
Legal consultation .................................... 116 70 37 18 153 88
Training on rule ........................................ 194 146 71 62 265 208
Total .................................................. 383 268 188 139 571 407
Similarly, there will be a one-time the old rule and do not represent any a substitute for the training costs that would
adjustment cost for legal advice on how to additional burden. have been incurred anyway and do not
deal with the changes related to the new Finally, employees will have to be trained represent an additional burden.
HUD–1. The one-time adjustment cost for in the new HUD–1 beyond the software and The consumer savings, efficiencies and
legal fees is estimated to be $37 million (see legal training already mentioned. This one- costs associated with the GFE are discussed
Section VIII.B. of Chapter 6). Once the time adjustment cost is estimated to be $71 further in Chapter 6 and in Chapter 3. A
adjustment has been made, the ongoing legal million (see Section VIII.B. of Chapter 6). summary of the compliance costs for the base
costs are a substitute for the ongoing legal Again, once the transition expenses have case of 12.5 million loans annually is
costs that would have been incurred under been incurred, any ongoing training costs are presented below in Table 6.1.
TABLE 6–3—COMPLIANCE COSTS OF THE FINAL RULE

[If 12.5 million loans annually]
One-time compliance costs Recurring compliance costs

incurred during the first year (in millions annually)
(in millions)
All firms Small firms Cost per loan
All firms Small firms
GFE ...................................................................................... $383 $268 $693 $364 $55.40
TABLE 6–3—COMPLIANCE COSTS OF THE FINAL RULE—Continued

[If 12.5 million loans annually]
One-time compliance costs Recurring compliance costs

incurred during the first year (in millions annually)
(in millions)
All firms Small firms Cost per loan
All firms Small firms
HUD–1 ................................................................................. 188 139 225 107 18.00
Total .............................................................................. 571 407 918 471 73.40
A natural question to raise is whether the raising prices. It is likely that the adjustment were passed onto consumers then the net
costs of the rule will overwhelm the benefits costs will be spread out over many years, just consumer savings is $548 the first year and
of the rule. The assumption that consumers as the cost of an investment would be. $594 in subsequent years (see table 6–4 for
will benefit by a reduction of settlement costs Suppose, for the sake of illustration, that all a summary). Note that this assumes that all
of at least $668 per loan has not been adjustment costs are all imposed on first-year costs are borne by borrowers and not at all
forcefully challenged. Indeed, results from a borrowers only. In a normal year of 12.5
by the applicants who do not get a loan. It
recent statistical analysis of FHA data imply million loans, this cost would $46 per loan.
that the savings to consumers may be as The recurring compliance costs of the rule is would be reasonable to assume that in the
much as $1,200 per loan. To accomplish this, $73.40 per loan regardless of the year. In high-application scenario, where there is an
however, industry will incur both adjustment such a scenario, the total compliance cost is increase in preliminary underwriting costs,
and recurring costs. Suppose firms impose $120 per loan in the first year as compared that the cost of an initial credit report would
these additional costs on consumers by to $74 for later years. If all compliance costs be passed on to all applicants.
TABLE 6–4—PREDICTED REDUCTIONS IN THE COST OF A LOAN

[If firms impose all first-year adjustment costs on first-year borrowers]
Source of gain or loss First year Afterwards
Average Consumer Savings .................................................................................................................................... $668 $668

One-time Adjustment Costs ............................................................................................................................. ¥46 ¥0
Recurring Compliance Costs ............................................................................................................................ ¥74 ¥74
Net Consumer Savings ............................................................................................................................................ 548 594
Firms’ Efficiencies ............................................................................................................................................. +93 +93

Borrowers’ Efficiencies ..................................................................................................................................... +55 +55
Net Benefits to Consumer ....................................................................................................................................... 696 742
There are other potential benefits to the cost consumer savings gives us an estimate premiums, and that provides identical
consumer besides savings on settlement of the potential consumer benefits per loan: treatment for brokers and lenders. The final
costs. There are aspects of this rule that will $696 in the first year and $742 afterwards. GFE includes language that clarifies how
save time for industry. The value of these Alternatives Considered To Make the GFE yield spread premiums reduce the upfront
efficiencies could be $1,166 million for loan More Workable for Small and Other charge that borrowers pay. Section III.E of
originators and settlement agents, for a per Businesses this Executive Summary discusses this in
loan efficiency of $93. In a competitive more detail.
industry, firms would pass these gains along Chapter 3 discusses the many comments HUD designed the GFE to make it workable
to borrowers in the form of lower costs, a that HUD received on the GFE in the 2002 for small lenders and brokers. Some
consumer benefit. Borrowers themselves will and 2008 proposed rules and the 2005 examples of the changes are the following:
save time through the new GFE. These time RESPA Reform Roundtables. Chapter 4 • In response to concerns expressed by
savings are estimated at $1,169 million but discusses alternatives. The most basic lenders and brokers about their ability to
are derived from a time savings worth $55 alternative was to make no change in the control third-party costs and meet the
per applicant (seventy-five minutes at $44 current GFE. The final rule allows both the specified tolerances in the 2008 proposed
per hour). In the summary of net benefits, we current GFE and the new GFE to be used for rule, HUD raised the tolerance on
only include the per applicant time savings one year after the GFE is introduced, but government recording charges from zero to
for borrowers. We make the cautious requires the new GFE and HUD–1 to be used ten percent.
assumption that successful borrowers have beginning January 1, 2010. This • Consistent with the above, the rule
submitted only one application. A fraction of approximately one-year adjustment period creates a new definition of ‘‘forseeable
the additional 8.25 million applications (in responds to lenders’ comments that there circumstances’’ that clarifies and expands on
excess of 12.5 million loans) consist of: would be significant implementation issues the definition of ‘‘circumstances’’ in the
Applications approved but not accepted; with switching to a new GFE. proposed rule. For example, material
applications denied by the financial The main alternative concerning small information that was either not known at the
institution; and applications withdrawn by businesses considered the brokers’ argument time the original GFE was provided or not
the applicant. Although these individuals that they were disadvantaged by the relied on in providing the original GFE, or
also realize time savings, it would be reporting of yield spread premiums. The new information that has changed in a material
misleading to include them in a ‘‘per loan’’ GFE was designed to ensure that there will way since application, may be the basis for
figure in that the time savings of rejected not be any anti-competitive impacts on the providing a modified GFE. For example, if
applicants would not benefit the borrower. broker industry. A summary page is included the actual loan amount turns out to be higher
Adding the firms’ and borrowers’ value of that presents the key cost figures for borrower than the loan amount indicated by the
time efficiencies to the net of compliance shopping that does not report yield spread borrower at the time the GFE was provided,
and certain settlement charges that are based increased competition associated with competition is maintained between brokers
on the loan amount increase as a result, the discounting—all will lead to reductions in and lenders. The forms adopted in the final
loan originator may provide a revised GFE both originator and third-party fees. As noted rule were tested on hundreds of subjects. The
reflecting those higher amounts. Compliance earlier, there is substantial evidence of non- tests indicate that borrowers who comparison
with the tolerance provisions would be competitive prices charged to some in the shop will have little difficulty identifying the
evaluated by comparing the revised GFE with origination and settlement of mortgages due cheapest loan offered in the market whether
the actual amounts charged at settlement. to information asymmetry between from a broker or a lender.
• HUD has adopted a streamlined single originators and borrowers. Originators (both We do not believe that the customer
application process for the final rule. The small and large) and settlement service outreach function that brokers perform for
new definition will allow loan originators providers (both small and large) that have wholesale lenders is going to change with
more flexibility in determining the been charging high prices will experience RESPA reform. Wholesale lending, which has
information they need to underwrite a GFE. reductions in their revenues as a result of the fueled the rise in mortgage originations over
• The reading at settlement of a closing new GFE. There is no evidence that small the past ten years, will continue to depend
script is no longer required. Much of the businesses have been disproportionately on brokers reaching out to consumer
same information will be transmitted to the charging high prices; for this reason, there is customers and supplying them with loans.
borrower via a new page 3 of the HUD–1. no expectation of any disproportionate Brokers play the key role in the upfront part
Alternatives. This chapter and Chapter 4 impact on small businesses from the new of the mortgage process and this will
and Chapter 6 discuss other major GFE. The revenue reductions will be continue with the final GFE.
alternatives that HUD considered in distributed across firms based on their non- RESPA reform is also not going to change
developing the final rule from the 2008 competitive price behavior. the basic cost and efficiency advantages of
proposed rule. These chapters discuss the Small Brokers.14 The main issue raised by brokers. Brokers have grown in market share
pros and cons of these alternatives and why the brokers concerned the treatment in the and numbers because they can originate
HUD decided not to include them in this 2008 proposed rule of yield spread premiums mortgages at lower costs than others. There
final rule. on the proposed Good Faith Estimate. is no indication that their cost
Market and Competitive Impacts on Small Mortgage Broker representatives asserted that competitiveness is going to change in the
Businesses From the Final Rule the proposed mortgage broker disclosure near future. Thus, brokers, as a group, will
would achieve the opposite result and would remain highly competitive actors in the
Transfers from Small Businesses. It is
estimated that $4.13 billion, or 49.5 percent detract from the consumer’s ability to mortgage market, as they have been in the
of the $8.35 billion in consumer savings understand and comparison shop. They past.
comes from small businesses, with small recommended that lenders should be treated While there is no evidence to suggest any
originators contributing $3.01 billion and similarly to facilitate shopping and promote anti-competitive impact, there will be an
small third-party firms, $1.13 billion.12 consumer understanding. The current final impact on those brokers who are charging
Within the small originator group, most of rule addresses the concern expressed by non-competitive prices. And there is
the transfers to consumers come from small brokers that the reporting of yield spread convincing evidence that some brokers (as
brokers ($2.47 billion, or 82 percent of the premiums in the 2008 proposed rule would well as some lenders) overcharge consumers
$3.01 billion); this is because small firms disadvantage them relative to lenders. (see studies reviewed in Chapter 2). As
account for most of broker revenues but a The Department hired forms development emphasized throughout the Regulatory
small percentage of lender revenues. Within specialists, the Kleimann Communication Impact Analysis, the new GFE will lead to
the small third-party group, most of the Group, to analyze, test, and improve the improved and more effective consumer
transfers come from the title and closing forms. Starting with the GFE form proposed shopping, for many reasons—the new GFE is
industry ($0.68 billion, or 60 percent of the in 2002, they reworked the language and simple and easy to understand, it includes
$1.13 billion), mainly because this industry presentation of the yield spread premium to reliable cost estimates, it effectively discloses
accounts for most third-party fees. In the title emphasize that it offsets other charges to yield spread premiums and discounts in
approach, small title and settlement closing reduce settlement charges, the cash needed to brokered loans without disadvantaging
companies account for $0.95 billion of the close the loan. The subjects tested seemed to brokers, it provides a vehicle to show
$2.5 billion in savings. Section VII.E.2 of like the trade-off table that shows the trade- consumers options, and it explains the trade-
Chapter 3 explains the steps in deriving these off between the interest rate and up-front off between closing costs and interests rates
revenue impacts on small businesses, and charges. It illustrates how yield spread to aid in understanding of yield spread
Section VII.E.4 of Chapter 3 reports several premiums can reduce upfront charges. There premiums. This increased shopping by
sensitivity analyses around the estimates. In is the summary page designed to simplify the consumers will reduce the revenues of those
addition, Chapter 5 provides more detailed digestion of the information on the form by brokers who are charging non-competitive
revenue impacts for the various component including only the total estimated settlement prices. Thus, the main impact on brokers
industries.13 charges from page two. This is the first page (both small and large) of the final rule will
The summary bullets in Section I.C any potential borrower would see. It contains be on those brokers (as well as other
highlight the mechanisms through which only the essentials for comparison-shopping originators) who have been overcharging
these transfers are expected to happen. and is simple: a standard set of yes-no uninformed consumers, through the
Improved understanding of yield spread questions describing the loan and a very combination of high origination fees and
premiums, discount points, and the trade-off simple summary of costs and the bottom line. yield spread premiums.15 As noted above,
between interest rates and settlement costs; Yield spread premiums are never mentioned small brokers are expected to experience
improved consumer shopping among here. Lender and broker loans get identical $2.47 billion in reduced fees.
originators; more aggressive competition by treatment on page 1. A mortgage shopping Small Lenders. Lenders include mortgage
originators for settlement services; and chart is included on page 3 of the GFE, to banks, commercial banks, credit unions, and
help borrowers comparison shop. Arrows thrift institutions.16 There are over 10,000
12 In the more conservative scenario of $6.48 were added to focus the borrower on overall
billion in consumer savings, small businesses charges, rather than one component. All of 15 As explained throughout this chapter, it is
would account for $3.21 billion of the transfers to these features work against the borrower anticipated that market competition, under this
consumers, with small originators accounting for misinterpreting the different presentation of proposed GFE approach, will have a similar impact
$2.36 billion, and small third-party providers, $0.84 loan fees required of brokers vis-à-vis on those lenders (non-brokers) who have been
billion. overcharging consumers through a combination of
13 In Chapter 5, see Section II for brokers, Section
lenders. high origination costs and yield spread premiums.
III for the four lender groups (commercial banks,
HUD has designed the GFE form to focus 16 While it is recognized that the business
thrifts, mortgage banks, and credit unions), Section borrowers on the right numbers so that operations and objectives of these lender groups can
IV for the various title and settlement groups (large differ—not only between the groups (a mortgage
insurers, title and settlement agents, lawyers, and 14 Practically all (98.9%) of the 30,000–44,000 banker versus a portfolio lender) but even within
escrow firms), Section V.A for appraisers, Section brokers qualify as a small business. The Bureau of a single group (a small community bank versus a
V.B for surveyors, Section V.C for pest inspectors, Census reports that small brokers account for 70% large national bank)—they raised so many of the
and Section V.D for credit bureaus. of industry revenue. Continued
lenders that would be affected by the RESPA and large) of the new GFE will be on those the industry provides will require proximity
rule, as well as almost 4,000 credit unions lenders who have been overcharging to land title records (or the establishment of
that originate mortgages. While two-thirds of uninformed consumers. ‘‘title plants,’’ i.e., duplicates of local records,
the lenders qualify as a small business (as do Small Title and Settlement Firms. The title the maintenance of which requires proximity
four-fifths of the credit unions), these small and settlement industry—which consists of to local government records). Even if a
originators account for only 23 percent of large title insurers, title agents, escrow firms, provider is efficient and charges low prices,
industry revenues. Thus, small lenders lawyers, and others involved in the it will not be able to compete against title and
(including credit unions) account for only settlement process—is expected to account closing firms who are located sufficiently
$540 million of the projected $2.35 billion in for $1.79 billion of the $2.47 billion in third- closer to the site in question. Thus, title and
transfers from lenders.17 party transfers under the GFE in the final closing companies are by economic necessity
In general, there was less concern rule. Within the title and settlement group, provided by local firms. Reinforcing the local
expressed by lenders (as compared with small firms are expected to account for 38.1 orientation are the value of local expertise
brokers) about potential anti-competitive percent ($0.68 billion) of the transfers, and the importance of personal networks in
impacts of the GFE on small businesses. although there is some uncertainty with this receiving referrals.
Small lenders—relative to both brokers and estimate.18 Step (8) of Section VII.E of The local orientation of the title industry
large lenders—will remain highly Chapter 3 conducts an analysis that projects could change over time. However, it is
competitive actors in the mortgage market, as all of the consumer savings in third-party unlikely that RESPA reform would be the
they are today. Small mortgage banks, costs coming from the title industry; catalyst. The advances in technology that
community banks and local savings evidence suggests there are more would change business practices are
institutions benefit from their knowledge of opportunities for price reductions in the title independent of what HUD does about
local settlement service providers and of the industry, as compared with other third-party RESPA. The only change that the final rule
local mortgage market. Nothing in the final industries. In this case, consumer savings in will introduce is that title and closing
GFE rule changes that. Generally, lenders and title costs ($150–$200 per loan) ranged from services may occur at lower prices negotiated
their associations opposed the proposed GFE $1.88 billion to $2.50 billion. To a large between providers and lender originators.
on the grounds that in their opinion the form extent, the title and closing industry is There will be no significant change in the
is too lengthy and would only confuse characterized by local firms providing local provision of title and closing work. Nor
borrowers. Lenders had numerous comments services at constant returns to scale. The will there be a reduction of the number of
on most aspects of the 2008 proposed GFE demand for the services of these local firms these services purchased since this reform
form—some of them dealing with major will continue under the final GFE. will not result in a drop in the number of
issues such as the difficulty in predicting Section VIII.C of Chapter 3 summarizes the mortgages that require these services. Large
costs within a three day period and many key competitive issues for this industry with lenders will have to deal with multiple
dealing with practical and more technical respect to the final rule. As noted there, the settlement services providers in order to
issues. HUD responded to many of the issues overall competitiveness of the title and ensure complete geographic coverage, and
and concerns raised by lenders; Sections V, closing industry should be enhanced by the large multi-jurisdictional title firms have no
VI, and VIII of Chapter 3 discuss lenders’ RESPA rule. Chapters 2 and 5 provide apparent cost advantages over smaller title
comments and HUD’s response. evidence that title and closing fees are too firms. In fact, large multi-jurisdictional title
Some lenders were concerned about their high and that there is much potential for firms may have location-related cost
ability to produce firm cost estimates (even price reductions in this industry. Increased disadvantages. There is no reason to believe
of their own fees) within a three-day period, shopping by consumers, as well as increased that small title firms charging competitive
given the complexity of the mortgage process. shopping by loan originators to stay within prices will be adversely impacted by the
their tolerances, will reduce the revenues of changes in this rule. The demand for the
Lenders wanted clarification on their ability
those title and closing companies that have services of these local firms will continue
to make cost adjustments as a result of
been charging non-competitive prices.19 under the final GFE.
information they gain during the full
Excess charges will be reduced and Appraisers. Like surveys and pest
underwriting process. The tolerances in the
competition will ensure that reduced costs inspections, traditional appraisals are
final rule require that lenders play a more
are passed through to consumers. provided on-site at the mortgaged property.
active role in controlling third-party costs
The title industry argued that greater The transportation cost of visiting individual
than they have in the past. However, some
itemization was needed in order for sites, especially the opportunity cost of the
lenders emphasized that they have little consumers to be able to adequately
control over fees of third-party settlement time spent in transit, adds substantially to
comparison shop among estimates. HUD’s the cost of providing the service. The
providers, while others seem to not view is that the consolidated categories on
anticipate problems in this regard. As transportation costs counterbalance, or
the new GFE form provide consumers with overwhelm, any scale economies that may
explained in I.B above, the final rule made the essential information needed for
several adjustments to the tolerance rules, otherwise exist in the production of these
comparison-shopping. Itemization services. The countervailing transportation
which should make them workable for encourages long lists of fees that confuse
lenders. In addition, the final rule allows cost pressures creates an effective constant
borrowers.
average cost pricing, which should help returns to scale production function for this
It is important to keep in mind the local
lenders reduce their costs. Practically all industry and can serve to explain the wide
nature of the title industry when considering
lenders wanted clarification on the definition range of firm size as well as the continued
the impacts of the final RESPA reform (new
of application, and HUD did that. There will success of small businesses in the appraisal
GFE, tolerances, etc.) on the title industry.
be an impact on those lenders (both large and industry. This explains why approximately
The title industry demonstrates a high degree
small) who are charging non-competitive 99.8 percent of traditional appraisal firms
of geographic specialization. Although title
prices. Improved consumer shopping with qualify as small businesses.
insurance companies do not need to be close
the new GFE will reduce the revenues of Even if large appraisal firms are efficient
to the properties insured, until there is
those lenders who are charging non- widespread use of standardized electronic and charges low prices, they will not have
competitive prices. Thus, as with brokers, the land record keeping accessible by the the same advantage as providers who are
main negative impact on lenders (both small Internet,20 the information-gathering service located sufficiently closer to the site in
question. Thus, traditional appraisals are by
economic necessity provided by local firms.
same issues that it is more useful to address them 18 Section IV of Chapter 5 describes the
Reinforcing the local orientation of the
in one place. component industries and estimates the share of
17 Section III of Chapter 5 describes the overall industry revenue going to small businesses. appraisal industry is the value of local
characteristics of these component industries 19 The reasons why the proposed GFE and its expertise. A profound understanding of the
(number of employees, size of firms, etc.), their tolerances will lead to improved and more effective
mortgage origination activity, and the allocation of shopping for third-party services by consumers and business. It is possible that governments
revenue impacts between large and small lenders. loan originators has already been discussed, and responsible for maintaining title records could
That section also explains that the small business need not be repeated here. advance to the level demonstrated in British
share of revenue could vary from 20 percent to 26 20 The proposed rule does nothing to advance or Columbia (Canada), where even title insurance is
percent. retard this fundamental change in the nature of the not part of real estate transactions.
characteristics of the local real estate market homebuyer, who may be intimidated by the providers, leaving them to rely on
is essential for a successful appraisal. In formality of the transaction. Second, to add recommendations from real estate agents and
addition, local appraisal firms maintain local to the confusion and uncertainty, even once lenders. Thus, a framework is needed that
networks of customers and clients, based on the charges have been agreed upon, they are would encourage competitive negotiations
their established track records, which should subject to change until the day of closing. and other arrangements that would lead to
give them a solid business advantage. Such informational asymmetries between the lower third-party settlement prices.
The local orientation of the appraisal buyer and seller impede the ability of the Today’s mortgage market is increasingly
industry could change over time. There has consumer to be an effective shopper and characterized by the introduction of
been a trend towards the increasing use of negotiator. efficiency enhancing improvements such as
automated valuation appraisals, particularly Consumers have strong incentives to automated underwriting systems and,
for appraising properties that are being ensure that they are getting the best deal through competition, these improvements are
refinanced and properties that are being used possible on a mortgage loan and the leading to lower prices for consumers. But
as collateral for home equity loans. The associated third-party settlement costs, but the one area where current RESPA
necessity for appraisers to visit all homes in poorly-informed decisions have drastic regulations act as a major barrier to
need of an appraisal could be rendered less consequences. First, the household itself will competition and lower settlement services is
by the automated value model (AVM), but it lose by paying more for housing and possibly the production and pricing of settlement
is also the case that the databases used to by ruining their credit history in the event of services. Under current law, average cost
create AVMs tend not to have data on default. Second, markets imperfections pricing (another cost reduction technique) is
whether or not there is water in the basement stemming from information asymmetries may inhibited by existing RESPA regulations.
of the subject property. It is unlikely that stand in the way of achieving one of this The goal of HUD’s RESPA reform is to even
RESPA reform would be the catalyst for administration’s domestic priorities: the playing field. The rule will accomplish
increases in AMVs, as the technological expansion of homeownership. There is a this by requiring lenders to provide
advances are already taking place. While wide range of positive economic externalities consumers information that lenders already
RESPA reform could accelerate the use of from homeownership that have been have in a format that is transparent. One of
AVMs, it will not likely have an impact as investigated in the empirical housing the major inefficiencies of imperfect
to whether AVMs are eventually accepted economics literature. These include information is the costs of acquiring
more broadly by the lending industry. The household saving, wealth accumulation, information. RESPA reform will go a long
adoption of AVMs will depend on the property improvements, a more pleasing way toward educating consumers. The first
accuracy of these estimation models, their urban environment, an increase in political page of the new GFE presents a brief
appropriateness for different types of activity, a reduction of crime, better child summary of the terms of the loan that would
properties, and their performance in outcomes, and a positive impact on the labor warn prospective borrowers of potentially
mitigating the risk of default losses. supply of women. The average loan amount expensive aspects of the loan including loan
Statement of Need for and Objectives of the is 3.5 times a household’s income: even amount, maximum interest rate, prepayment
Rule 21 minor inefficiencies in this market will have penalties, and the total estimated settlement
sizeable impacts on the U.S. economy. charges. The second page provides more
Acquiring a mortgage is one of the most detail on the charges for loan origination and
The current GFE format contains a long list
complex transactions a family will ever other settlement services. The third page
of individual charges that can be
undertake. The consumer requires a level of provides a trade-off table so that consumers
overwhelming, often confuses consumers,
financial sensibility to fully understand the will learn the relationship between the
and seems to provide little useful
product. For example, consider the trade-off interest rate and the yield-spread premium.
information for consumer shopping. Current
between the yield spread premium and The third page also includes a table so that
RESPA regulations have led to a proliferation
interest rate payments. Borrowers do not the consumer can take notes on alternative
have access to the rate sheets that describe of charges that makes consumer shopping
and the mortgage settlement process both loan offers and thus comparison shop.
this trade-off. Indeed, many consumers may Tolerances will limit how much settlement
not even understand that there is a trade-off. difficult and confusing, even for the most
informed shoppers. Long lists of charges charges can vary once the GFE has been
To further complicate matters, the mortgage made and the comparison page of the HUD–
industry is continuously evolving: the range certainly do not highlight the bottom-line
costs so consumers can shop and compare 1 will serve to double-check the GFE
and complexity of products expands every regarding settlement charges and provide a
year. Because consumers borrow fairly mortgage offers among different originators.
In addition, under today’s rules, the summary of the key terms of the borrower’s
infrequently, the average borrower will be at loan at settlement. The final rule also allows
an extreme informational disadvantage estimated costs on GFEs may be unreliable or
incomplete, or both, and final charges at settlement service providers to use pricing
compared to the lender. To exacerbate this based on average charges, making their
situation, the typical homebuyer may be settlement may include significant increases
in items that were estimated on the GFE, as business operations simpler and less costly.
rushed and easily steered into a bad loan It is expected that the new GFE will
because they are under pressure to make an well as additional unexpected fees, which
can add substantially to the consumer’s encourage shopping, increase efficiency,
offer on a home. This is especially the case lower housing costs, and promote the
for first-time homebuyers who will not be as ultimate closing costs. The process of
purchase of loans that are more suited to a
likely to challenge lenders, whom they may shopping for a mortgage can also involve
households’ needs.
view as unquestionable experts. complicated financial trade-offs, which are
Closing costs (lender fees and title charges) not always clearly explained to borrowers. Empirical Evidence of Price Discrimination
add to the borrower’s confusion. They are not Today’s GFE is not an effective tool for Studies indicate that consumers are often
as significant as the loan itself and total on facilitating borrower shopping nor for charged relatively high fees and can face
average approximately four percent of the controlling origination and third-party wide variations in settlement prices, both for
loan amount. However, the direct lender fees settlement costs. origination and third-party settlement
and the title charges are perhaps just as The potential for cost reductions in today’s services. Chapter 2 offers convincing
perplexing to the consumer. First, the market is also indicated by studies showing evidence that not only do borrowers find it
multiplicity of fees is confusing (see Exhibits relatively high and highly variable charges difficult to comparison shop in today’s
1–3 of Chapter 3 for a list of the different for third-party services, particularly for title mortgage market, but that they are all too
names of upfront lender fees and settlement and closing services that account for the often charged excessive prices. The
charges). The purpose of every fee and title major portion of third-party fees. There is not enormous potential for cost reductions in
charge is likely to be neither understood nor enough incentive for loan originators to today’s market is indicated by studies
control settlement costs by negotiating lower showing that yield spread premiums do not
questioned by the average first-time

costs from third-party providers; rather, they always offset consumers’ origination costs.
21 For a detailed discussion of problems with the too often simply pass through increases in Studies show that consumers are, in effect,
current system, and thus the need for this proposed third-party costs to consumers. Because of charged relatively high prices in some
rule, see Sections IV and V of Chapter 2 and their lack of expertise, consumers may not be transactions involving yield-spread
Sections I and VII of Chapter 3. the best shoppers for third-party services premiums, and that the mortgage market is
characterized by ‘‘price dispersion.’’ In other aggressively for the mortgage or may not significant variation in closing costs: the
words, some borrowers get market price monitor the lending transaction very closely. standard deviation is $2,381. For its
deals, but other borrowers do not. Studies The Urban Institute (2008) collected data statistical analysis, the Urban Institute
show that less informed and unsuspecting on 7,560 FHA loans. The mean total loan focused on a subsample of 6,366 non-
closing cost for all loans is $4,917 for an
borrowers are particularly vulnerable in this subsidized loans, for which the mean total
average loan amount of $108,237. Total
market. But given the fact that a borrower charges are composed of loan charges $3,081, charges are slightly higher at $5,245. Lender
may be more interested in the main title charges $1,329, and other third party charges for non-subsidized loans are $3,390,
transaction (the home purchase), even more charges $507. It is apparent from the of which $1,450 are direct fees and $1,940 is
sophisticated borrowers may not shop distribution presented below that there is the average YSP.
TABLE 6–5—DISTRIBUTION OF CATEGORIES OF CLOSING COSTS AS A PERCENTAGE OF LOAN AMOUNT

[Calculated by HUD from data provided by Urban Institute]
50th percentile
Series 5th percentile 25th percentile 75th percentile 95th percentile
(median)
Total Closing Cost ............................................................... 2.9 4.1% 5.1 6.4 8.9

Total Loan Charges ............................................................. 1.3 2.4% 3.2 4.2 6.2
Yield-spread premium ................................................... 0.3 1.3% 2.0 2.7 3.8
Direct loan fees ............................................................. 0.0 0.8 1.3 1.8 3.3
Total Title Charges .............................................................. 0.6 0.9 1.2 1.6 2.3
Other Third-Party Charges .................................................. 0.2 0.4% 0.6 0.8 1.4
A great degree of variation appears in the service provisions will be. The Urban mortgage broker reduces upfront fees by only
lender fees. Since total loan charges are Institute report (2008) finds that African 7 cents.22
correlated with loan amount, it would be Americans pay an additional $415 for their This result is derived from a sample of
useful to examine the distribution of closing loans and that Latinos pay an additional $365 nonsubsidized loans above with a rate above
costs as a percentage of loan amounts to (after taking into account borrower 7 percent, which is appropriate for
ascertain whether the variation in fees is still differences such as credit score and loan investigating YSPs. FHA borrowers appear to
present. HUD calculated the distributed of get no benefit from YSPSs on brokered loans
amount). These loans are not subprime loans
these ratios for non-subsidized loans from a with coupon rates above 7 percent. The result
data set of closing cost provided by the Urban but standard FHA loans. Other researchers
is not much better when using the larger data
Institute. There is slightly less variation have found similar results: Jackson and Berry set of all nonsubsidized loans: The Urban
when measured as a percentage but it is still (2002, see the Regulatory Impact Analysis for Institute finds that broker loan-origination
substantial: the ratio of what the 75th reference) find that mortgage brokers charge fees, instead of being lower by a dollar for
percentile pays as a percentage of the loan to African-Americans (by $474) and Hispanics each dollar of YSP, are higher by 16 cents.
what the 25th percentile pays is 1.8 for total (by $580) substantially more for settlement This result is stunningly bad for borrowers.
loan charges, 2.1 for the yield spread services than other borrowers. Discrimination Clearly, the average FHA borrower has no
premium (indirect loan fee), and 2.4 for by race or ethnicity is not economically idea a higher interest rate can be used to
direct loan fees. efficient and would not survive in a perfectly reduce upfront charges. Such a relationship
It is apparent that half of the borrowers pay competitive market. is contrary to what one would expect in a
loan charges equal or greater than 3.2% of market where there were only minor
Second, reconsider the yield-spread
their loan amount; one-quarter pay loan imperfections. Further evidence is from
charges of at least 4.2% of their loan amount; premium. We mentioned that this is one of
the elements of a mortgage that a consumer Jackson and Berry (2002) who studies only
and five percent pay loan charges of at least brokered transactions, a description of which
6.2% of their loan amount. The variation is is not likely to understand. The yield-spread
can be found in Section IV.D.2 of Chapter 2
similar for title charges and other third-party premium is compensation to the broker for
of the Regulatory Impact Analysis. They find
charges. Half of the borrowers pay total selling a loan with a higher interest rate. that the problem of price dispersion occurs
closing costs equal or greater than 5.1% of Thus, as the interest rate rises so should the when yield spread premiums are present,
their loan; one-quarter pay closing costs of at yield-spread premium. This relationship because in these situations there is no single
least 6.4% of their loan amount, and five appears to hold in the data analyzed. The price for broker services: ‘‘Most borrowers
percent pay closing costs of at least 8.9% of broker earns income from two sources: a pay more than 1.5 percent of loan value;
their loan amount. yield-spread premium that is paid by the more than a third pay more than 2.0 percent
HUD believes that these data provides
lender and fees that are paid by the of loan value; roughly ten percent pay more
strong indications of large price dispersion
consumer. However, the burden of the yield- than 3.5 percent of loan value.’’ Jackson and
and thus price discrimination. Price
spread premium is on the consumer, who Berry find this ‘‘price dispersion’’ troubling,
discrimination will always lead to a loss in
pays a higher interest rate for loans with a as it suggests that brokers use yield spread
consumer surplus and unless price
higher yield-spread premium. If consumers premiums as a device ‘‘to extract unnecessary
discrimination is perfect, it will also lead to
a loss in social welfare. It should also be were perfectly informed, there would be a and excessive payments from unsuspecting
noted that if the variation of fees and charges negative one-to-one relationship between up- borrowers’’ (page 9).
paid is greater than the actual costs of front fees and the yield-spread premium. Third, consider the confusion that the
providing the services, then that constitutes variety of loan products and permutations of
They simply represent two different ways of
evidence of a violation of RESPA, which those products can create. If informational
compensating the broker for the effort
explicitly prohibits mark-ups. asymmetries are significant, then lenders will
required to originate a loan.
First, in a competitive market the price of The Urban Institute (2008) finds no strong 22 In a sample, which is appropriate for
the good should depend on its quality and trade-off between the yield-spread premium
not to whom and how it is sold. If there is investigating YSPs, of nonsubsidized loans with a
and upfront cash payments. Ideally, each rate above 7 percent, the Urban Institute finds that
dispersion because the negotiations are face-
dollar of YSP generated by a higher interest broker loan-origination fees, instead of being lower
to-face, this would suggest that the nature of by a dollar for each dollar of YSP, are higher by 16
the market exacerbates the consumer’s rate would result in a one dollar reduction
in upfront fees. The reality is that this is not cents. This result is stunningly bad for borrowers.
informational disadvantage. Indeed, there is FHA borrowers appear to get no benefit from YSPSs
strong evidence that individuals pay different even close to being true. The Urban Institute on brokered loans with coupon rates above 7
prices for reasons other than how costly finds that paying one dollar of YSP to a percent.
be able to earn more when selling more and IV.C serve as roadmaps to other issues a lower one to estimate the benefits (See
complex products. Borrowers who simplify regarding the rule. Section VII.D.4).
their mortgage shopping by rolling all lender/ The NAR questions the potential benefits
Comments Concerning the Initial Regulatory
broker fees into the interest rate (i.e., get of the GFE. For support, Schnare turned to
‘‘zero-cost’’ loans) pay $1,200 less for their Flexibility Analysis a study that used a sample suffering from
loans than brokers who pay lender or broker This section describes how HUD selection bias (See Section V.A.1.g of Chapter
fees as measured by implicit YSPs. Borrowers responded in this Final Regulatory Flexibility 2 for a description) and questioned whether
who pay points realize only $20 of benefits Analysis (FRFA) to comments received on the rule would solve the problem of ‘‘bait and
for every $100 of points paid, for a net loss the Initial Regulatory Flexibility Analysis of switch’’ or any other misleading business
of $80. It appears that the industry is able to the 2008 proposed rule. The primary practice. PD&R has recently received A Study
take advantage of loan complexity, which is comments on the 2008 IRFA included: a of Closing Costs for FHA Mortgages
evidence of price discrimination not related report from the National Association of (summarized above in Section III and at
to the cost of originating the loan. Realtors, prepared by Ann Schnare, who length in Chapter 2). The results strongly
Fourth, consider other settlement charges. claimed that HUD had underestimated the indicate that HUD’s RESPA reform efforts are
Title insurance is an industry with a strong costs of the rule; criticisms from advocates of aimed directly at very serious problems in
potential for natural monopoly. The costs of small business that HUD had not adequately the market for these loan origination and
title insurance are primarily related to analyzed the impacts of its rule on industry other settlement services.
research of property transactions. There is a structure; and an assertion by Representative
Manzullo that HUD used obsolete data in its Impact of the Rule on Industry Structure
large fixed cost of entry which is compiling
a database of transaction and lending records. analysis. Many industry commenters stated that
There should not be a great variation in ‘‘HUD Underestimated the Compliance there were elements of the rule that
settlement charges since the only component Costs’’ (National Association of Realtors) Ann disadvantaged small business. One of the
that does vary substantially is the insurance Schnare prepared alternative estimates 23 for primary concerns of small title firms is the
premium. The Urban Institute (2008) finds an the National Association of Realtors (NAR) of potential adverse effect of volume
average $1,329 title charge in their sample of the compliance costs of HUD’s 2008 discounting. The 2008 final rule set a clearer
proposed reform of the Real Estate Settlement standard for compliance in the context of the
all loans with a standard deviation of $564.
Procedures Act (RESPA) to simplify the new GFE. HUD merely clarified that volume
They also find a significant variation by state
process and reduce the costs of obtaining a discounting is legal as long as the savings are
with New York, Texas, California, and New
mortgage loan. Their report contains passed along to the consumer. ALTA, ICBA,
Jersey all costing at least $1,000 more
worthwhile suggestions, such as performing NAMB, and NAR contend that volume
(holding property values constant) than
a sensitivity analysis with respect to the discounts will favor large settlement service
North Carolina, the lowest-cost state. A
number of applications per loan. However, providers and loan originators/lenders at the
reasonable question is what extra benefits
their cost estimates are inaccurate. In expense of small businesses and place them
people in the high-cost states get relative to
Sections IV, HUD discusses the NAR’s major at a disadvantage. The Office of Advocacy
those in low cost states, or why costs are so
comments that are applicable to the formally endorsed this position in their
high if there are no extra benefits. It is also Regulatory Impact Analysis of the final rule.
useful to analyze total title costs on a state- comment letter (June 11, 2008) and predicted
by-state basis due to the different legal Below iS a Summary of the NAR’s Comments that HUD’s proposed clarification ‘‘may
requirements that exist among the states and and HUD’s Responses cause small businesses to leave the market
the different customs that might have The NAR states that HUD ignored a major and result in higher prices for consumers in
evolved in them as well. HUD examined compliance cost of the rule incurred by loan the long term.’’
within state variation of settlement fees. One originators: the hedging costs of guaranteeing ALTA stated that the ability to negotiate
measure of variability that we calculated for the interest rate for the shopping period of volume discounts on the local services that
each state was the difference between the ten days. Including hedging costs are incidental to the issuance of a title policy
median of the highest quartile of title charges dramatically increases compliance costs by a (such as a title search) will disadvantage the
and the median of the lowest quartile. This factor of four. However, the NAR made an small title insurance agency that does not
is a measure of the difference between the erroneous assumption about the proposed have the resources to guaranty a stream of
typical charge for the highest fourth of the GFE: there is no requirement of an interest- business to a third party or discount its own
borrowers and the lowest fourth of the rate guarantee. Thus, hedging costs will be services when the services are performed in
borrowers within each state. This difference zero (See Section VII.D.1.). house. In addition, ALTA expressed concern
was over $1,000 for nine states. Due to the A second criticism of the analysis of the that mortgage lenders and brokers will add to
extent of price dispersion, we can expect compliance cost of the GFE is that HUD does the anticompetitive effects by favoring
significant savings from the final rule. not consider the possibility that the rule affiliated title companies or those companies
The primary purpose of this discussion could increase the administrative costs to that can provide title related services on a
was to show that there is great variation in loan originators by generating a greater nationwide basis.
closing costs and thus room for price demand for GFEs. Although HUD believes Comment. Both the NAR and ALTA
discrimination. HUD would like to that it is just as likely that applications do asserted that the Regulatory Impact Analysis
emphasize that the goal was not to portray not increase, HUD has included a sensitivity of the proposed rule did not adequately
lenders, and especially mortgage brokers, as analysis of compliance costs by the number address the anti-competitive issues of the
unscrupulous and harmful to economic of applications. (See Section VII.D.2.) proposed rule.
welfare. On the contrary, HUD recognizes The NAR points to another cost not Response. In its Regulatory Impact
that mortgage brokers and other lenders have included in the IRFA: the cost of preliminary Analysis, HUD very meticulously outlined
played a crucial role in recent trends in home underwriting. However, this would only be a the proportional impacts of the rule on small
ownership. It is also clear from the statistical factor if the application to loan ratio were to business. HUD continues to believe that as
evidence presented in this section that there increase. HUD assumed in the IRFA that this long as a small businesses is not charging
are many ethical loan originators. One ratio would be constant. HUD’s response was consumers excessive fees, then small
quarter of the borrowers in this sample paid to include this cost in a high application-to- business will not suffer disproportionately.
no more than 2.4% in loan charges and 4.1% loan scenario. (See Section VII.D.3) To a large extent, the issue of unfavorable
in total closing costs. Consider that if the HUD was criticized for using inconsistent impacts on small business is mute. The
entire market mirrored this more efficient estimates of the value of time in order to raise greatest objection by small business was to
segment, then RESPA reform would not be as the value of the benefits of the rule relative volume discounts. In response to the
urgent. to the costs. In fact, the reverse is true: HUD numerous objections to HUD’s clarification,
used a higher rate to estimate the costs and HUD will not address volume discounts in
Issues Raised in Comments on the 2008 the rule. HUD wants to ensure that any
Initial Regulatory Flexibility Analysis 23 Ann E. Schnare, ‘‘The Estimated Costs of change will adequately protect consumers
Section IV.A presents a review of HUD’s Proposed RESPA Regulations,’’ prepared for while at the same time providing adequate
comments on the 2008 IRFA. Sections IV.B the National Association of Realtors (June 3, 2008). flexibility and due consideration to small
business concerns. It remains HUD’s thrifts, mortgage banks, credit unions estimates of the numbers of small entities.
position, however, that discounts negotiated (Section III); settlement and title services The industries discussed in Chapter 5
between loan originators and other including direct title insurance carriers, title included the following (with industry code
settlement service providers, or by an agents, escrow firms, and lawyers (Section and Chapter V section reference): mortgage
individual settlement service provider on IV); and other third-party settlement brokers (Section II); lenders including
behalf of a borrower, where the discount is providers including appraisers, surveyors, commercial banks, thrifts, mortgage banks,
ultimately passed on to the borrower, is not, pest inspectors, and credit bureaus (Section credit unions (Section III); settlement and
depending upon the specific circumstances V); and real estate agents (Section VI). title services including direct title insurance
of a particular transaction, a violation of The SBA does not expect to have an update carriers, title agents, escrow firms, and
section 8 of RESPA. If the borrower fully (from the 2007 Economic Census) of the 2002 lawyers (Section IV); and other third-party
benefits from the discount, these types of Economic Census data (business income or settlement providers including appraisers,
mechanisms that lower consumer costs are receipts) available until sometime in 2010, surveyors, pest inspectors, and credit bureaus
within RESPA’s principal purposes. well beyond the time horizon for this (Section V); and real estate agents (Section
There may be other facets of the rule, such rulemaking effort. Thus, the FRFA of the VI). The specific industry names and
as tolerances, that are thought to have a final RESPA rule will continue to rely in part industry codes (North American Industry
disproportionate impact on small business, on data from 2002. Classification System, or NAICS code) for the
even on those small firms that are not More importantly, HUD’s estimate of the mortgage originators and third-party firms
charging excessive prices. Instead, HUD annual regulatory burden depends primarily covered in Chapter V are as follows:
believes that the rule will create on our assumptions concerning the Mortgage Origination Firms
opportunities for efficient firms to expand compliance cost per loan. HUD has used
their operations. This opinion is based on our generous estimates of the costs of the rule but 1. Mortgage Loan Brokers (522310).
observations that a distinguishing has received no hard data from industry that 2. Commercial Banks (522110).
would allow us to refine our estimates. The 3. Savings Institutions (522120).
characteristic of the real estate industry is
aggregate impact of the rule depends on 4. Real Estate Credit/Mortgage Bankers
that it is very locally oriented. The value of
mortgage volume. Our approximation of the (522292).
proximity and local expertise make small
average year is 12.5 million transactions. It is 5. Credit Unions (522130).
firms more efficient in providing services to
consumers. RESPA reform will not change probable that the level of originations in Third-Party Service Firms
that essential characteristic of the real estate 2008–2009 will be lower than this amount.
1. Direct Title Insurance Carriers (524127).
industry. (See Section II.C.5. for a However, the final rule requires a twelve-
2. Title Abstract and Settlement Offices
discussion). month implementation period. By the time
(541191).
the rule is in effect, the average mortgage
Timeliness of Data 3. Offices of Lawyers (541110).
volume is expected to return to that of the
4. Other Activities Related to Real Estate
Comment. Some criticized HUD for using average year.
(531390).
‘‘old’’ data in its Regulatory Impact Analysis Alternatives Considered To Minimize Impact 5. Offices of Real Estate Appraisers
of the 2008 proposed rule. For example, on Small Businesses (531320).
Representative Don Manzullo wrote in his 6. Surveying and Mapping (except
comment letter that the market has changed Section VI of this chapter provides
geophysical) Services (541370).
significantly since the data was obtained in discussion of the alternatives considered by
7. Credit Bureaus (561450).
2002 and 2004; that these changes may HUD in developing the final rule with a focus
8. Exterminating and Pest Control Services
impact how the rule is implemented; and on those alternatives considered to minimize
(561710).
that should wait until it has data on current the impact on small business. Section VI
9. Offices of Real Estate Agents and Brokers
market conditions before moving forward includes a summary discussion of the
(531210).
with the rule. following major alternatives: maintaining the
Chapter 5 supports Chapters 3 and 6 by
status quo; not including the yield-spread
Response. HUD’s initial regulatory providing basic mortgage-related data on
premium calculation in the GFE; requiring
flexibility analysis of the proposed RESPA each industry and by explaining the various
the preparation and reading of a closing
rule, which was completed in late 2007, used methodologies for estimating the share of
script; and clarification in the rule of the
the latest, at that time, officially available industry revenue accounted by the different
legality of volume discounting. Section VI
federal government data on small businesses component industries and by small
also includes a discussion of steps HUD took
provided by the Small Business businesses within each component industry.
to make the new GFE easier to implement for
Administration (SBA) as derived from two Chapter 5 presents an overview of the
small businesses.
Census Bureau data sources: the 2002 industries involved in the origination and
Economic Census (business income or Comments and Responses to Other Issues settlement of mortgage loans (see above list).
receipts), and the 2004 County Business Chapters 1–5 of the Regulatory Impact Industry trends are briefly summarized and
Patterns data (number of businesses and firm Analysis include detailed summaries of the special issues related to RESPA are noted.
employment size). These data are augmented, comments submitted by small businesses and There is also a description of the economic
when possible, by highly regarded data from other firms on various aspects of the 2008 statistics for each industry, with an emphasis
industry sources. For example, the SBA/ proposed rule and in response to the 2008 on each industry’s share of small business
Census data on mortgage brokers do not agree IRFA. Detailed discussion of comments activity. Both the estimation of the revenue
with estimates of the size of that industry received can be found in the preamble. share for various industry sub-sectors (e.g.,
made by the National Association of Detailed analysis responding to comments large title insurers’ share of total revenue in
Mortgage Brokers and other observers. HUD received can be found in Sections VI and VIII the title and settlement industry) and the
ultimately based its analysis of the mortgage of Chapter 3. Detailed discussion of estimation of the small business share of
broker industry on these private sector data. comments related to the compliance burden mortgage-related revenue within the
Chapter 5 of the RIA provides extensive of the rule can be found in Sections VII, VIII, industry, often involve several technical
documentation of the characteristics of the and IX of this chapter. Analysis responding analyses that pull together data from a variety
industries directly affected by the rule, to some specific comments on the 2008 IRFA of sources, in addition to Census Bureau
including various estimates of the numbers of can be found in Chapter 3. Changes made to data. This leads to several sensitivity
small entities, reasons why various data the 2008 proposed rule in response to analyses to show the effects of alternative
elements are not reliable or unavailable, and comments received are summarized in estimation methods and assumptions. This
descriptions of methodologies used to Section VI of this chapter. chapter also reports the revenue transfers
estimate (if possible) necessary data elements from the RESPA rule for the specific industry
that were not readily available. The Description and Estimate of the Number of sectors; these transfers are reported in dollar
industries discussed in Chapter 5 of the RIA Small Entities terms and, where possible, as a percentage of
included the following (with Chapter 5 Chapter 5 provides extensive industry revenue. Finally, a number of
section reference): mortgage brokers (Section documentation of the characteristics of the technical issues and special topics, such as
II); lenders including commercial banks, industries affected by the rule, including techniques for estimating the distribution of
retail mortgage originations, are discussed. A also made numerous other changes that were Data Used in Compliance Cost Estimates
technical appendix to Chapter 5 provides designed to make the GFE easier to use, The following tables provide a summary of
relevant definitions and explains the particularly for small businesses. These the industry characteristics data used to
methodology associated with the economic changes are discussed throughout Chapter 3 develop compliance cost estimates for the
data obtained from the Census Bureau. A and summarized in several places in the GFE. Details on the derivation of these data
data appendix in Chapter 5 includes tables Regulatory Impact Analysis. This section will are available in Chapter 5. The compliance
with the economic data (number of firms, list them again, as it is useful to provide a costs of the GFE provisions of the rule apply
employment, revenue, etc.) for each industry record of the changes made to the 2008 mainly to retail loan originators. While
sector. proposed rule that should make the new GFE wholesale lenders, for example, are involved
Thus, the Regulatory Impact Analysis pulls easier to implement for small businesses. in the mortgage origination process, they are
together substantial data from the Bureau of Considered as a group, these changes are not responsible for issuing the GFE—rather
the Census and industry sources to provide important. While many are designed to the originating lender or broker is responsible
estimates of revenue transfers for different address a problem faced by large as well as for the issuing the GFE to the borrower.24
industries and for small businesses within small lenders, for the most part, they address Therefore, data are presented only for those
those industries. Chapter 5 provides a full problems that would place a greater burden brokers and lenders that do retail mortgage
technical review of the data used and the on small than large businesses. Examples of loan originations. Settlement agents do not
various methodologies for estimating the the changes that HUD made are the generate GFEs and therefore they would not
small business share of industry revenues. following: be subject to these GFE-related costs.
Drawing from the analysis in Chapters 3 • Volume-based discounts. Small Settlement agents will, however, be involved
and 5, Appendix A to this chapter provides businesses, especially closing attorneys and generating HUD–1s; since there are some
estimates of the revenue impacts from the escrow companies stated that lenders seeking changes to the HUD–1 form, there are
new GFE. These data are presented in volume discounts would place them at a compliance costs on settlement agents
aggregate form ($ million) and on a per firm competitive disadvantage to larger entities associated with that change. In most cases,
basis, covering all firms (both employer and and force them out of business. HUD HUD expects that loan originators will
non-employer), small firms (small employer responded by not addressing volume complete the comparison page of the HUD–
firms plus non-employer firms), and very discounts in its final rule. 1 form. However, a portion of the compliance
• Tolerances. Some commented that large cost will be the burden on settlement agents
small firms (very small employer firms plus
lenders would have an easier time meeting of completing the comparison page
non-employer firms). Separate data for non-
tolerances than small businesses by accurately in cases where there is additional
employer firms are also provided. In some
contracting with large third-party settlement- information required from the settlement
cases, different projections are provided for
service providers, and thereby placing small agent. Other third-party providers (e.g.,
some of the more important sensitivity
settlement service providers at a competitive appraisers) will face no compliance costs
analyses conducted in Chapters 3 and 5. The
disadvantage. If exceeding the tolerance was from the GFE provisions of the rule.
technical analyses presented in Chapter 5
an infrequent and unpredictable event, larger Chapter 5 provides information on the total
indicate some uncertainty around some of
firms may be able to diversify the risk over number of brokers and lenders that are likely
the numbers (such as the number of small a larger pool of loans. The final rule provides
mortgage banks, the split of revenue among to be affected by the new RESPA rule and its
loan originators with an opportunity to cure revised GFE form. Section II of that chapter
different sectors of the broad title industry, any potential violation of the tolerance by
etc.). Readers are referred to the technical explains that the number of brokers has
reimbursing the borrower any amount by grown substantially in recent years. In 2000,
discussion in Chapter 5 for various which the tolerances were exceeded. The
qualifications with the data and for various there were 30,000 brokers, but with the
opportunity to cure will permit loan increase in refinancing, the number of
sensitivity analyses that illustrate the effects originators to give an estimate of expected
on the estimates of alternative assumptions. brokers rose to 33,000 in 2001 and then
settlement charges in good faith, without jumped to 44,000 in 2002 and then to 53,000
In addition, Chapter 5 explains the subjecting them to harsh penalties if the
definitions of small and very small being in 2004. According to Census Bureau data,
estimate turns out to be lower than the actual practically all brokers (99.1%) qualify as a
used here. charges at settlement. This change reduces small business. Thus, it is estimated that
Alternatives Which Minimize Impact on the potential damages of exceeding the small broker firms have ranged from 32,703
Small Businesses tolerances. to 52,523 over the past few years. As
Under the Initial Regulatory Flexibility Compliance Costs and Regulatory Burden: explained in Section III of Chapter 5, lenders
Analysis, HUD must discuss alternatives that New GFE that will be affected by the RESPA rule
minimize the economic impact on small include: 7,402 commercial banks (4,426 or
This section focuses on the compliance,
entities consistent with the stated objectives 59.8% are small), 1,279 thrift institutions
regulatory, and other costs associated with
of applicable statutes, including a statement (641 or 50.1% are small), 1,287 mortgage
implementing the final rule. It examines
of the factual, policy, and legal reasons for banks (1,077 or 83.7% are small), and 3,969
compliance and regulatory impacts of the
selecting the alternative adopted in the final credit unions (3,097 or 78.0 % are small).25
new GFE on originators. There are two types
rule and why each of the other significant Altogether, there are 13,937 lenders
of compliance and regulatory costs—one-
alternatives to the rule considered by the (including credit unions) affected by the
time start-up costs and recurring costs.
agency was rejected. Many of the alternatives RESPA rule, and 9,241 of these qualify as a
Section VII.B discusses start-up costs, noting
that HUD considered and implemented were small business.
that HUD has lengthened the phase-in period
directed at making the GFE less burdensome Table 6–6 provides the distribution of
for the new GFE in order to reduce any
for small businesses. These changes are retail mortgage originations among the
implementation burden on the industry,
described below. A more detailed discussion various industries and for small firms within
particularly small firms. Section VII.C
of the changes to make the GFE easier to each industry. Totals are estimated based on
discusses recurring costs that are related to
implement for small businesses are provided the number of mortgage originations
implementing the new GFE. The simplicity
in Section VIII of Chapter 3. For a discussion (12,500,000 loans) that would occur in a
of the new GFE, plus the changes that HUD
of all of the major alternatives considered to ‘‘normal’’ year of mortgage originations (that
has made to improve the new GFE, will limit
the final GFE, see Chapter 4. is, not in a high-volume year with a
these annual costs, as discussed in Section
This Regulatory Impact Analysis discusses VII.D. Section VII.E discusses compliance
24 If the wholesale lender generates the GFE, then
several steps that HUD took that will assist issues related to tolerances on settlement
small businesses involved in the mortgage there would be a charge to the originator (either a
party costs. Finally, Section VII.F outlines
direct charge or a reduction in fees, compared with
origination and settlement process. Examples efficiencies associated with the new GFE.
the case where the originator issues the GFE).

include simplifying the new GFE form (fewer Before examining the specific regulatory 25 See Section III.B.5 of Chapter 5 for issues
numbers, etc.), designing the new GFE form and compliance costs, Section VII.A reviews related to the number of small mortgage banks. As
so that there is a level playing field between the basic data used in estimating these costs. also explained in that section, the credit unions are
lenders and brokers, and delaying the phase- For a similar description of the costs on the the ones that report some mortgage origination
out of today’s GFE for twelve months. HUD settlement industry, see Section 0. activity.
refinancing boom). The data below assume 40%.26 (See below for alternative origination
that brokers account for 60% of mortgage volume and broker share estimates.)
originations and lenders, the remaining
TABLE 6–6—VOLUME OF RETAIL MORTGAGE ORIGINATIONS

Percent industry
Percent of Originations by
Industry All originations originations by
originations small firms small firms
Mortgage Brokers ............................................................................ 7,500,000 60.00 5,250,000 70.00

Commercial Banks ........................................................................... 2,053,150 16.43 389,893 18.99
Thrifts ............................................................................................... 974,750 7.80 120,089 12.32
Mortgage Banks ............................................................................... 1,551,500 12.41 644,803 41.56
Credit Unions ................................................................................... 420,600 3.36 122,563 29.14
Total .......................................................................................... 12,500,000 100.00 6,527,349 52.22

As shown in Table 6–6, it is estimated that 52% of mortgages are originated by small brokers and lenders.
Table 6–7 provides the total number of Chapter 5 for a discussion of the 20 loans per which would be consistent with the widely
workers and the number of workers in small worker in the lender industry. Given the held belief that brokers are more productive
firms engaged in retail mortgage origination uncertainty around these estimates (and than lenders; in addition, it may be more
by industry. It is based on the mortgage particularly the lender estimate which is appropriate to overestimate the number of
origination volumes depicted in Table 6–6 obtained by simply assuming that lender lender employees affected by the RESPA rule
and productivity rates of 20 loans per worker workers are as productive as brokers),
per year for mortgage brokers and lenders. alternative estimates and sensitivity analyses than to underestimate them.27 However, this
See Section II.B.2.c of Chapter 5 for the are provided in Chapter 5. As noted in analysis starts by assuming equal
derivation of the 20 loans per worker in the Chapter 5, one alternative would be to choose productivity for lenders and brokers.
broker industry and see Section III.B.5.g of a lower productivity number for lenders,
TABLE 6–7—WORKERS ENGAGED IN RETAIL MORTGAGE LOAN ORIGINATION

Percent of
Workers in
Industry Total workers workers in
small firms small firms
Mortgage Brokers ............................................................................................................ 375,000 288,750 77.00

Commercial Banks ........................................................................................................... 102,658 19,495 18.99
Thrifts ............................................................................................................................... 48,738 6,004 12.32
Mortgage Banks ............................................................................................................... 77,575 32,240 41.56
Credit Unions ................................................................................................................... 21,030 6,128 29.14
Total .......................................................................................................................... 625,000 352,617 56.42
As shown in Table 6–7, it is estimated increase to 438,038 (with 337,293 in small new GFE, commenters did not provide any
there are 625,000 workers engaged in firms) and the number of workers in the useful data on the magnitude of these costs.
mortgage origination, with 352,617 of these combined lender group would increase to There are three major areas of expected one-
operating in small businesses. As noted 271,250 (with 69,296 in small firms).28 time compliance costs of the new GFE. Those
above, the mortgage volume figure Below, sensitivity analyses cover these who generate the new GFE forms, loan
(12,500,000 loans based on $2.4 trillion in higher estimates of the number of workers originators, will need new software in order
originations) reflects industry projections of affected by the RESPA rule. to produce the new forms.29 Their employees
mortgage originations for 2008. Chapters 3, 4, will need to be trained in the use of the new
and 5 conduct sensitivity analyses with a Compliance and Regulatory Burden: One- forms and software. Loan originators may
higher level of originations. For example, one Time Costs seek legal advice to be certain that the
could consider an environment where Several one-time compliance burdens can arrangements they make to ensure that third-
15,500,000 loans were originated (compared be identified that will result from the new party service prices are accurate and within
with the 12,500,000 loans in the base case). rule. All involve the adjustment process from tolerances comply with the regulation. Loan
In this case, the figures in Tables 6–6 and 6– the old rule to the new rule. Although HUD originators may also seek legal advice
7 would change. For example, the number of received comments on the one-time regarding tolerances and average-cost pricing.
workers in the broker industry would compliance cost issues associated with the In this section, it is estimated that these one-
26 See Section III.B.5.d of Chapter 5 for the too low, given that Section II.B.2.c of Chapter 5 (consistent with that number increasing in Olson’s
derivation of the distribution of retail originations derives an estimate of 77% for the share of industry surveys during higher volume years) but kept at 20
among commercial banks, thrifts, and mortgage workers in small broker firms. The 77% figure is for lenders since their volume does not increase
banks; the distribution used here is the ‘‘adjusted used in Table 6–7 (288,750 divided by 375,000) for much during this scenario.
distribution’’ for the number of loans. See Chapter estimating the share of workers in small broker 29 This analysis assumes that the mortgage broker,
5 for reasons why there is some uncertainty with firms. The small business share of the number of
the estimated distribution and for analysis of an workers in each of the four lender industries in not the wholesale lender, produces the GFE in
alternative distribution. Table 6–7 is assumed to be the same as in Table transactions involving mortgage brokers. To the
27 A comment should be made about the small 6–6 for the number of loans. See Section III.B.5 of extent that the wholesale lender is involved in
business share for brokers. Section II.B.1 in Chapter Chapter 5 for the derivation of the small lender producing the GFE the use of the broker data will
5 reports that small brokers account for 70% of shares of lender originations. result in an overestimation of the impact on small
broker industry revenue. Table 6–6 assumes that 28 As explained in Chapter 5, this scenario
businesses (since small businesses make up a much
small brokers account for the same percentage assumes that the increase in mortgage originations larger portion of broker businesses than they do of
(70%) of the number of loans originated by all comes mainly from brokers; the loans-per-worker
brokers; it is possible that this percentage could be assumption is increased to 23 for brokers wholesale lender businesses).
time compliance costs will total $383 However, producers of less sophisticated not be unexpected because the final rule will
million, although it is recognized below that programs will need to write a few additional be made public and will not be costly for
these costs could vary with several factors lines of code to create the output for the first reasons previously discussed.
such as different levels of overall mortgage page of the new GFE. Nonetheless, the final In all three scenarios, the cost of an update
activity. Small brokers and small lenders rule will have no impact on the primary is a good approximation of the software cost
firms will experience $268 million (or 70%) function of origination software and would of the rule. In the first scenario in which
of these one-time compliance costs. require only minor changes. firms purchase an update, it would probably
Changes to the HUD–1 will have be an overestimate of the cost to a purchaser
Software Modification and Training Costs implications for loan origination software. because an update may contain other useful
Loan originators would need alterations to The comparison page, which features a improvements to the software. However, it is
their software to accommodate the summary of the loan terms, requires lenders a reasonable estimate of the cost in that many
requirements of the new rule since they to provide information on the loan and firms would not purchase an update if not for
generate the new GFE. There would be one- settlement costs for page 3 of the HUD–1. the final rule. In the second scenario, in
time costs for production and installation of Indeed, it is possible that most producers of which a firm purchases new software, the
the new GFE (software development, etc.). loan origination software will begin to feature price of an update could serve as an
Software modification, or new software, is an application that generates an almost approximation of the cost of implementing
needed because the GFE has been changed. complete HUD–1 for the settlement agents to the required changes and thus an estimate of
The implementation of software varies with finish. One could add this application to loan the resulting increase in the price of new
business size. Small originators are likely to origination software fairly easily. It will be a software. In the third scenario, where the
use commercial off-the-shelf (COTS) software minor change since lenders enter most of the software companies bear the direct cost of the
products while larger originators may information needed for the comparison page change, the price of an update could serve as
produce their own software if in-house for the GFE. The task facing the programmer an estimate of the cost to software firms of
development is cheaper than buying from will be to set up an interface for entry of producing free updates.32
outside suppliers. HUD reviewed several additional escrow information needed in the In the first two scenarios, where firms bear
software products for loan origination and comparison page, populate page 3 of the the burden of the change in the software; the
closing advertised on the Internet.30 Prices HUD–1 form with settlement cost and loan costs of new or updated software will depend
ranged from a flat $69 31 for one license to term data and print out the HUD–1 form. The upon the number of employees in the firm
undisclosed negotiated prices based on the software would also perform the important using the software. Virtually all software
number of users and feature sets purchased. task of calculating the difference between the companies providing software to lenders for
Software is generally priced according to the figures on the initial GFE and the actual loan origination offer volume discounts.
number of users (e.g., one license per user, settlement costs and then check whether they Such a pricing policy reduces the average
or enterprise licenses based on the expected are within the tolerances. cost for large firms. Second, in larger firms
number of users in the enterprise). One new Depending on the software that a firm has many employees will have specialized duties
requirement, implicit from the tolerances, is purchased there are three possibilities as to that do not include completing the new GFE
that originators will have to keep track of the who pays the direct cost of developing new form and so will not require updated
costs listed on the GFE in order to ensure that software. The first scenario is that a firm software. Thus, it is likely that small firms
the tolerances are not exceeded at settlement. purchases an update of the program. This is will bear a greater per employee software cost
Most of the software products HUD examined a fairly standard option and is generally less from the final rule.
have the capability to access databases of than half the price of new software. Given Based upon the discussion above and an
information, including pricing information, that the changes required by the final rule are examination of software pricing schemes, it
of third-party service providers. Because fairly minor, the price of an update should is reasonable to make three assumptions in
these systems have the capability to access compensate software companies for the cost order to estimate the software costs of the
other databases, they would not need to be involved in altering their programs. final rule: (1) The cost per user is the cost of
redesigned to carry forward prices from the The second possibility is that a firm an update; (2) updates cost less than half of
GFE to the closing documents in order to purchases new software, in which case the the cost of new software; (3) the costs per
determine if final settlement prices remain cost of redesigning the forms to comply with user for a firm decline significantly with the
within tolerances. The GFE portion of the the rule will be built into the purchase price. number of users. An example of the type of
software would need to be modified to Firms that would purchase new software software that a firm might purchase is
display the consolidated expense categories would include new entrants into the Bytepro Standard (by Byte Software, Inc.,
mandated in the rule. Redesigning the form industry, pre-existing firms that would have http://www.bytesoftware.com). This software
appears to constitute a minor alteration of the bought new software for reasons unrelated to has many analytical features such as the
software. the final rule, and firms that use software for ability to calculate maximum loan amounts,
The new GFE also requires additional which updates are not offered. Many users which would be required by the new GFE.
information. The first page summarizes worst routinely upgrade software as new versions The software costs $395 for a two user
case scenarios for the borrower: the are released and build the expected expenses package and $400 for five additional users.
maximum monthly interest rate, the into their business plans. To the extent that The per user cost for the first two is $198.
maximum monthly mortgage payment, and software is routinely upgraded, the extra The cost per user for an additional five is
maximum loan balance. Such information is costs of implementing the GFE changes will $80.
obvious for most types of loans but could be reduced. In these cases, the software cost We can safely assume that the industry
require more effort to calculate for more to the firm of the final rule is not the average of the cost of an update would be no
exotic loans such as a negative amortizing purchase price of the software but rather the more than $150 for the first user, $100 per
loan. Some loan origination software will increase in the purchase price as a result of user for the average small firm, and $50 for
already possess analytical capabilities. the costs of redesigning software to meet the average large firm.33 Second, we assume
RESPA guidelines. that the proportion of workers involved in
30 Examples are: Vantage ILM, http:// A third scenario is that software companies origination that use the software declines
www.vantageilm.com; Utopia Originator from are obliged or volunteer to offer free updates,
Utopia Mortgage Software, http:// in which case the software cost of the final 32 Correctly estimating the cost to software firms
www.callutopia.com/support.html; The Mortgage rule falls directly on software developers. is difficult given the nature of the output.
OfficeTM from Applied Business Software, However, indirectly, the cost of the new Development is a one-time fixed cost, whereas the
http://www.themortgageoffice.com/main.asp; and software will be shared by real estate and cost of delivering software to one user is very low.
MORvision Loan Manager from Dynatek, http:// Given the decreasing average costs, the aggregate
software firms. Software companies that offer
www.dynatek.com/products.asp. economic impact to the software industry would

31 Good Faith Settlement Software by Law Firm free updates will price the risk of changes depend upon the number of firms.
Software; http://www.lawfirmsoftware.com/ into the purchase price of the software. If a 33 Byte Software, Inc. offers an annual support
software/good-faith-estimate.htm. Note that this is large unexpected change occurs, then the service, which would include updates, for up to ten
very basic software compared to other alternatives. software company will bear the burden. users for $300 per year. Every additional user over
More sophisticated software is more expensive. However, the change required by RESPA will ten cost $30.
with the size of the firm. For small firms, we required to familiarize ones self with the new distribution of these costs by industry and
assume that three-quarters of all workers use software is unknown. For this example it is the amount borne by small businesses within
the software and will need an update. For assumed that 2 hours are required. If the each industry. The table uses worker
large firms, we assume that only half of the opportunity cost of time is $72.12 per hour distributions from Table 6–7 and assumes
workers use origination software and need an (based on a $150,000 fully-loaded annual half of the workers in large firms and three-
update. Given these assumptions, the total salary), then the opportunity cost of software quarters of the workers in small firms use the
cost to the industry of an update would be training would be $144 per worker using the software and will require upgrades and
$33 million, of which $26 million is borne new software. Software users often learn training. Given these assumptions the total
by small firms.34 This amounts to an average about new modifications without formal software training cost is $58 million, of
software update cost of $83 per user. training by using them with very little loss which $38 million is borne by small firms.
In addition, each employee using the new of time or productivity. Thus the software The grand total for software upgrade and
software would require some time to adjust training costs estimated below are likely an training cost is $91 million, of which $65
to the changes. The actual amount of time upper bound. Table 6–8 shows the million is borne by small firms.
TABLE 6–8—ONE-TIME SOFTWARE UPGRADE AND TRAINING COSTS OF THE RULE TO LOAN ORIGINATORS
Total software Small business
Industry upgrade and Percentage small
cost
training cost
Mortgage Brokers ............................................................................................................ $61,267,428 $52,891,226 86.3

Commercial Banks ........................................................................................................... 11,647,288 3,570,897 30.7
Thrifts ............................................................................................................................... 5,249,891 1,099,855 21.0
Mortgage Banks ............................................................................................................... 10,308,241 5,905,531 57.3
Credit Unions ................................................................................................................... 2,569,710 1,122,511 43.7
Total .......................................................................................................................... 91,042,558 64,590,020 70.9
Alternative estimates could be made. If 4 (with one-half of employees at large firms feel no further need for additional legal
hours (instead of 2 hours) of software training and three-quarters of workers at small firms advice so that they would have no legal
were required, then total costs would rise by using the software and requiring 2 hours of consultation expenses as a result of the rule.
$57 million to $148 million (with $103 training). As noted earlier, the costs of Larger originators may wish to seek a greater
million being the small business cost). software upgrades required to implement the amount of legal advice, as they perceive
Assuming that only two hours are required, new GFE apply only to retail loan originators. themselves to be at greater risk of class action
but that the proportions of software users These costs do not apply to wholesale RESPA litigation.
were raised to all of the workers in small lenders. The actual amount and cost of legal
firms and three-quarters of the workers in Another way of presenting the software services that will be incurred because of the
large firms, then the total software cost and training costs to loan originators is to
new GFE are unknown. While it is
(including training) of the final rule would be distinguish between the costs of the new GFE
$126 million, of which $86 million would be versus the HUD–1. This break-out is recognized that all firms might not seek legal
borne by small firms. If the proportions are somewhat arbitrary but is useful for the advice, it would seem that many firms
increased (as in the latter scenario) and the discussion of the costs of the different engaged in retail mortgage origination would
hours are increased (as in the former components of the rule. Suppose the HUD– want some minimal legal advice, so that they
scenario), then the total cost would be $206 1 alterations constitute 20 percent of the understand the new rules and regulations. If
(with $137 million being the small business software and training costs to loan all 57,937 firms sought two hours of legal
cost). originators, then of the $91,042,558 total advice at $200 per hour, the fixed legal
The estimates in Table 6–8 above are based costs to loan originators, $72,834,046 stem consultation expense would amount to $23
on a ‘‘normal’’ level of mortgage origination from the GFE and $18,208,512 from the million. In addition, firms will seek further
activity and not that of a high volume year HUD–1. The costs to small business would be legal advice based on their volume of
which might occur as a result of low interest distributed similarly: $52 million from the transactions; in this analysis, the total
rates. High volume years bring with them GFE and $13 million from the HUD–1. One volume-based legal expense amounts to 4
increases in productivity by existing firms could experiment with different ratios of times the fixed expense or $93 million. To
and employees (higher rates of loans per HUD–1 to GFE costs but the total would not show that this is a reasonable estimate,
employee), new employees, and new change. suppose a large originator, operating in all 50
entrants. New employees and new entrants states and the District of Columbia, required
would require additional software licenses Legal Consultation
state-by-state legal reviews averaging 1-
even if there were no new rule changing the Using the new GFE will entail a change in
person-week (40 hours) per state. At $200 per
GFE. For this reason, basing the software business practices, including making
hour, this would amount to $408,000. If all
upgrade compliance burden on a high arrangements with third-party settlement
of the 100 largest originators acquired a
volume year would overstate the burden. service providers to ensure that prices
Using the higher rates of productivity charged will remain within the tolerances of similar amount of legal advice, the cost
associated with refinancing booms to the prices quoted. Loan originators will want would come to $40.8 million, which leaves
compute software upgrade costs would tend to ensure that these arrangements do not approximately $52 million for variable legal
to understate them. Therefore, use of the violate RESPA. It is highly likely that the costs for other originators.35 Under these
normal business volume probably provides trade associations for the mortgage loan estimates, total legal consultation expenses
the most appropriate estimate of this cost. origination industries will produce model associated with the new GFE are expected to
Still, assuming a higher level of origination agreements or other guidance for members to total $116 million and are distributed among
activity (15,500,000 loans) and a 65% market help them comply with the new rule. Loan industries and small businesses, which bear
share for brokers, estimated software costs originators may also want to better 60.3% of the legal cost, as depicted in Table
would be $118 million, and $86 million understand if there any legal implications of 6–9, which uses information on the
would be accounted for by small businesses average-cost pricing. Some originators may distribution of firms and originations.
34 To demonstrate that our estimate is a safe upgrade the software to reflect the changes incurred 35 If the per hour cost of legal consultation were
ceiling, suppose that there are one hundred by the proposed rule. The total cost to the software greater than $200 per hour, then these estimates
software firms and that each one pays six industry would be $90 million. would rise proportionately with the increase in
programmers an average of $150,000 a year to hourly legal costs.
TABLE 6–9—ONE-TIME LEGAL CONSULTATION COSTS OF THE NEW GFE

Total legal Small business Percentage cost
Industry consultation cost cost to small business

Commercial Banks ........................................................................................................... 18,186,829 4,934,375 27.1
Thrifts ............................................................................................................................... 7,740,284 1,182,697 15.3
Mortgage Banks ............................................................................................................... 12,020,625 5,212,708 43.4
Credit Unions ................................................................................................................... 4,706,743 2,147,722 45.6
Total .......................................................................................................................... 115,874,000 69,852,767 60.3
The costs of legal consultation required to requirements of the new rule in a range of The total tuition cost to the industry would
implement the new GFE apply only to retail issues such as the new forms and average- be $53 million and the opportunity cost of
loan originators. Wholesale lenders and cost pricing. While the actual extent of the lost time would be $141 million, amounting
settlement agents and other third-party required training is unknown, a reasonable to a total training cost of $194 million. The
settlement service providers do not provide starting point would be that one quarter of total one-time cost for RESPA training for
GFEs and therefore they would not be subject the workers in large firms and one half of the originator staff in the new rule would come
to these costs. workers in small firms would require training
to $194 million or $310 per worker (averaged
concerning the implications of the final rule.
Employee Training on the New GFE We assume that small firms pay tuition of across all workers). The one-time cost for
Loan originators must fill out the new GFE $250 per worker but that large firms receive small businesses is $146 million. Table 6–10
and be familiar with its requirements so that a discount and pay only $125 per trainee. If depicts the distribution of training costs
they can fill out the form correctly and the training lasts an entire day, then the among the retail mortgage origination
respond to the borrower’s questions about it. opportunity cost of the time, at $72.12 an industries and for small businesses in each
So, there would be a one-time expense of hour (based on a $150,000 fully-loaded industry. It uses data on workers from Table
training loan originators’ employees in the annual salary) would be $577 per trainee. 6–7.36
TABLE 6–10—ONE-TIME WORKER TRAINING COSTS OF THE NEW GFE

Total training Small business Percentage small
Industry cost cost business cost

Commercial banks ........................................................................................................... 22,653,771 8,060,292 35.6
Thrifts ............................................................................................................................... 9,981,440 2,482,613 24.9
Mortgage Banks ............................................................................................................... 21,285,461 13,330,070 62.6
Credit Unions ................................................................................................................... 5,148,741 2,533,751 49.2
Total .......................................................................................................................... 193,591,648 145,793,746 75.3
As explained earlier, the costs of training We assume that no training specific to the changes, and would take a minimum of two
are probably best estimated using the more HUD–1 will be required. Any training in the years to implement.
normal mortgage environment, since many of rule concerning the GFE will cover the HUD– Response. HUD has determined to adopt a
the additional employees during a refinance 1 as well for the loan origination industry. 12-month implementation period. HUD
wave are temporary employees who may Almost all of the information required for the recognizes that operational changes will be
either do only general office work that does HUD–1 is from the GFE. Training concerning
not require any GFE-specific training or who required in order to implement the new rule,
tolerances is a GFE issue, even though the in addition to training staff on the new
may be trained on-the-job by existing calculation is presented on the HUD–1.
permanent employees. Still, the higher requirements. However, the need for a
figures are reported for those who believe Comments Concerning One-Time Adjustment standardized GFE with relevant information
they are the relevant figures. Costs about the loan and settlement charges is
The data and table presented above depict Comments. Lenders and their trade critical in light of the problems in the current
what is likely to be an upper bound for market and further delay is not warranted.
associations opposed a 12-month
training costs. There are other, less costly HUD believes that a 12-month
implementation period on the basis that 12
ways in which the knowledge necessary to
months is insufficient time to prepare for implementation period will provide
comply with the provisions of the final
RESPA rule can be imparted to workers. compliance with the new requirements. sufficient time for systems changes and
Small firms, in particular, are likely to take According to one major lender, a 12-month training to occur. In order to ensure a level
advantage of information on complying with period is far too short given the extensive playing field, during the transition period,
the final rule provided by trade associations nature of the changes. This lender estimated settlement service providers will be required
and their business partners (such as that an 18–24 month period will be required to comply with the current RESPA
wholesale lenders), and these firms may find for implementation of the proposal as requirements. The requirements set forth in
the time and expense of formal training published on March 14, 2008. According to the rule will apply to all settlement service
unnecessary. To the extent that this is the other major lenders, the proposed rule would
providers 12 months after the effective date
case, the estimates reported above will over require significant systems and operational
of the rule.
state the impact on small businesses. changes well beyond the complex forms
36 Sensitivity analysis shows the effects of training, then the total costs would be $314 million to comply with the GFE provisions of the final rule
changing the number of workers participating in the (with the small business share being $219 million); can be imparted to workers, which will reduce the
training. If one half (rather than one-quarter) of the average cost per employee would be $503. number of workers that need formal training.
workers at large firms and three-fourths (rather than However, as noted in the text, there may be other,
one-half) of the workers at small firms attended less costly ways in which the knowledge necessary
Compliance and Regulatory Burden: and that the ratio of applications per loan imposed on small business (see Table 6–11
Recurring Costs of the GFE remain at 1.7, then the annual recurring below and section VII.D.2). Costs of the
This section discusses recurring costs compliance cost of the GFE from completing additional time spent to arrange the pricing
associated with the new GFE. Several topics applications would be $20.40 per loan, $255 that protects the originator from the costs of
are addressed, some of which have already million on all firms, of which $134 is borne the tolerances being exceeded is estimated to
been discussed in previous sections. We by small business. If the loan to application be $12 per loan or $150 million annually, of
expect that the new GFE will probably be ratio increases to 2.7, then the annual which $79 million is paid by small business.
neutral (see the conclusion of Section 0) but recurring compliance cost of completing This additional cost of arranging tolerances
that it may impose a burden of ten minutes applications will be $32.40 per loan, $405 does not vary by the number of applications
per application. Assuming that to be the case million in total, of which $213 million is per loan.
TABLE 6–11—RECURRING COMPLIANCE COSTS OF THE NEW GFE BY THE NUMBER OF APPLICATIONS PER LOAN
Per loan cost Total cost: all firms Total cost: small firms
(millions) (millions)
Source of Additional Cost ................................................. 1.7 2.7 1.7 2.7 1.7 2.7
Processing Applications .................................................... $20.40 $32.40 $255 $405 $134 $213
Arranging Tolerances ....................................................... 12.00 12.00 150 150 79 79
Initial Underwriting ............................................................ 0.00 11.00 0 138 0 72
Total Cost of GFE ..................................................... 32.40 55.40 405 693 213 364
A third source of recurring compliance available to the originator. Pricing involve additional costs. The summary page
costs is that of underwriting additional information is readily available to mortgage simply moves items around or repeats items
applications. If there is no change in the brokers, so there is no additional cost rather than requiring new work.
application per loan ratio as a result of the incurred in determining the yield spread (4) Trade-Off Table. There is a burden to
rule, then the compliance costs of premium or discount points since they have producing and explaining the worksheet in
underwriting additional applications will be to look and see if there is a yield spread Section IV (on page 3 of the GFE) showing
zero. If the application per loan ratio premium under the current regime anyway. the alternative interest rate and upfront fee
increases to 2.7, then the recurring Since it is reasonable to assume that all
combinations (the so-called ‘‘trade-off’’ table
compliance cost from preliminary brokers consult their rate sheets prior to
or worksheet). Many commenters said
underwriting will be $11 per loan, $138 making offers to borrowers, it is reasonable
million across all firms, of which $72 million to assume that they know the difference customizing the trade-off table with the
is from small business (see Section VI.D.3). between the wholesale price and par. It does individual applicant’s actual loan
The total recurring compliance cost on loan not appear that disclosing the yield spread information would be difficult; these
originators of the rule at 1.7 applications per premium or discount points adds any new commenters recommended a generic
loan is estimated to be $32.40 per loan or a burden. example, possibly placing it in the HUD
total of $405 million ($213 million from (2) Itemization of Fees. The reduction in Settlement Booklet, rather than providing it
small business). At 2.7 applications per loan, the itemization of fees will lead to fewer with the GFE. However, it is important to
the annual recurring compliance cost of the unrecognizable terms on the new GFE.37 That remember that the information in the
GFE is $55.40 per loan or a total of $693 should lead to fewer questions about them worksheet is likely to be a reflection of a
million ($364 million from small business). and less time spent answering those worksheet the originator already uses to
questions. Of course, to the extent that the explain the interest rate/upfront fee trade-off.
Cost of Implementing the New GFE Form
originator is precluded from including junk While there may be a burden to explaining
This section examines the various costs fees on the GFE, he or she will not have to how the interest rate-point trade-off works,
associated with filling out and processing the spend any time trying to explain what they
new GFE. In their comments on the 2008 this explanation is something all
are. The confusion avoided may lead the
proposed rule, loan originators commented conscientious originators are already doing in
borrower to better understand what is being
that the proposed GFE was longer than the origination process. In today’s market,
presented so that questions on useful topics
today’s GFE and that it would take more time are more likely to come up and the originator most lenders and brokers likely go over
to fill out. In addition to settlement charges, can spend his time giving useful answers (or alternative interest-rate-point combinations
the proposed GFE contained loan terms, a more time will be spent explaining useful with potential borrowers. For these
trade-off table, a breakout of lender and things). In all, the simpler GFE produces a originators, there is no additional
broker fees, and a breakout of title agent and savings in time for originators and explanation burden arising from the
insurance fees. borrowers.38 production of this worksheet. To the extent
There are several aspects of the new GFE (3) Summary Page. A summary page has that some lenders only explain one option to
that must be considered when estimating the been added to the new GFE in the final rule. a particular borrower (even though they offer
overall additional costs of implementing it. But it should be noted that the summary page others), there would be some additional costs
The following discusses the various factors of the new GFE asks for basic information for those lenders. Today, most originators
that will reduce costs and possibly add costs (e.g., note rate, loan amount) that is readily present to borrowers much more complicated
to the GFE process. As is made clear by the available to the originator and thus do not sets of alternative products than captured by
discussion, there should not be much, if any, the worksheet. It is important to remember
additional cost with implementing the new 37 The fees in the lender-required and selected
that the main purpose of the worksheet is
GFE (as compared with implementing today’s services section will still be itemized (e.g., simply to sensitize the borrower to the fact
GFE). appraisal, credit report, flood certificate, or tax
(1) Disclosure of YSP. Under the existing service) as will those in the lender-required and
that alternative combinations of interest rates
scheme, mortgage brokers are required to borrower selected section (e.g., survey or pest and closing costs are available.
report yield spread premiums as ‘‘paid inspection). There will, however, be no itemization With respect to customizing the worksheet
outside of closing’’ (POC) on today’s GFE and or long lists of various sub-tasks of lender fees or to the applicant’s actual offer, the
title fees, often referred to as junk fees. information on the applicant’s loan is already
HUD–1. Page 2 of the new GFE has a separate
38 Several items were dropped from the new GFE,

block for yield spread premiums (as well as on the new GFE, so that would not appear
as compared with the proposed GFE: The APR, the
for discount points). In order to fill out a GFE to be a significant problem, as that applicant
breakout of the origination fee into its broker and
under the final rule, the mortgage broker lender components, and the breakout of the title information can be linked directly into the
must have a loan in mind for which the services fee were dropped. These were considered worksheet. Then, there is the issue of the two
borrower qualifies from the information unnecessary for comparison shopping. alternative combinations, one with a lower
interest rate and one with a higher interest burden associated with changed Department to believe that the additional
rate. Most originators offer loans with several circumstances comes from having to costs per form, if any, borne by an originator
interest rate and point combinations from document the reasons for the increase in would approach zero.
which the borrower chooses. As noted above, costs and from determining that the amounts Summary. To summarize, the discussion of
they probably have already discussed these of the increases in charges to the borrower the above factors identifies offsetting costs
alternative combinations with the applicant. are no more than the increases in costs and suggests that there will be little if any
The originator would pick two alternatives incurred by the changed circumstances. The additional annual costs associated with the
from among the options available but not Department does not require that a new GFE. Practically all of the information
chosen by the borrower when he picked the justification document be prepared. Since required on the new GFE is readily available
interest rate and point combination for which there are no special reporting requirements to originators, suggesting no additional costs.
his GFE is filled out. The originator would when changed circumstances occur, The fact that there are fewer numbers and
have to punch these other two combinations compliance could be met by simply retaining less itemization of individual fees suggests
into his GFE software (two interest rate and the documentation in a case binder, as any reduced costs. The fact that the GFE figures
point combinations) in order for the software other relevant loan information might be are displayed on the HUD–1 will
to fill out the form. In the event that the retained in a case binder today. For example, substantially simply the closing process. In
originator does not use software to make itemized receipts for the increased charges addition, Section VII.D below lists further
these calculations, they would have to be would simply be put in the loan case binder changes that HUD made to the form that are
done by hand. (as they probably are today). Case binders are likely to reduce costs. On the other hand,
(5) Documentation Costs. Loan originators stored now. The additional cost of there could be some small amount of
are required to document the reasons for identifying and storing the documentation in additional costs associated with the optional
changes in any GFE when a borrower is that binder would be de minimus. This trade-off table and documentation
rejected or when there are changed would represent little burden on the requirements. If there were additional costs
circumstances that result in cost increases. originator, particularly since unforeseen of, for example, 10 minutes per GFE, the
Once a GFE has been given, there are several circumstances will not be the norm. dollar costs would total $255 million per year
potential outcomes. One is that the loan goes There may be some record retention issues (if the number of applications did not
through to closing with tolerances and other with small originators, such as brokers. If increase as a result of the result).39 40 But
requirements met. Another is the borrower small originators retain case binders today, given the above discussion of offsetting
terminates the application. Borrowers could then their situation would be similar to other effects and the improvements made to the
also request changes, such as an increase in originators. If they do not retain the case form, there are likely to be no additional net
the loan amount. There could also be a binder today, then they may choose to do so, costs with implementing the new GFE. Note,
rejection, a counteroffer, or unforeseen or they may rely on their wholesalers for however, that there is the potential for
circumstances. recurring costs from changes to the HUD–1.
record retention. It might well become a
The March 2008 proposed rule provided This issue is summarized in Section VIII.C.
selling point for wholesalers. Relative costs
that a borrower could be rejected at the GFE
of storage, reliability, and accessibility would
application stage if the loan originator Detailed Response to the NAR’s Analysis of
determine who could best perform this
determined that the borrower was not credit the 2008 IRFA
function.
worthy. The borrower could not be rejected The National Association of Realtors
at the mortgage application stage unless the (6) Crosswalk from New GFE to New HUD–
1. The HUD–1 in the final rule has been provided an alternative estimate of
originator determined there was a change in compliance costs prepared by Ann Schnare
the borrower’s eligibility based on final changed so that it matches up with the
categories on the new GFE—making it simple (2008). The main thrust of their report was
underwriting, as compared to information that HUD had grossly underestimated the
developed for such application prior to the for the borrower to compare his or her new
time the borrower chose the particular GFE with the final HUD–1 at closing. In
originator. Under the proposed rule, the addition, a comparison page has been added 39 This calculation assumes a $150,000 fully-
to the HUD–1 to clarify any changes in loaded annual salary; dividing by 2,080 hours
originator would have been required to yields $72 per hour, or $12 for ten minutes.
document the basis for such a determination settlement fees. The simplification of the GFE
does not add any burden for the borrower to Assuming 21,250,000 applications, produces a cost
and maintain the records for no less than figure of $255 million. At 15 minutes, the cost
three years after settlement. the comparison of the figures on the two estimate would rise to about $382.5 million. In the
One lender commented that under HUD’s forms—rather it will be reduced since it will higher volume environment (26,350,000
March 2008 proposed rule, lenders would be now be easier for the borrower to match the applications), the overall cost figure would be
required to retain the GFE application for numbers from the GFE (issued at time of $316.2 million if the per application cost was $12
three years which is different from the 25 shopping) with those on the HUD–1 (issued for ten minutes.
month retention requirement by TILA or at closing). Compared with today, it also 40 We have used a fully-loaded hourly
ECOA. The lender commented that this eliminates the step of adding a pointless list opportunity cost of $72.12 for highly-skilled
of component originator charges to get the professional labor throughout the Economic
difference presents additional expense Analysis. For many functions as well as locations
without a substantive benefit to the relevant figure, the total origination charge.
this amount is probably an overestimate of the
consumer. In addition, the elimination of extra itemized hourly opportunity cost. However, our goal in the
The first two require no special treatment. fees on the GFE may lead to the elimination Economic Analysis is to accurately measure the
Borrower requested changes do not require of them on the HUD–1 since they may have upper bound of the costs of the rule. An alternative
documentation but do require a new GFE, as been on the GFE only to overwhelm the method would be to generate an estimate of the
explained in (5) above. The case of borrower comparison shopper. Even without the new average variable cost from industry-specific data.
rejection (which assumes there is no comparison page, the settlement would have For example, in Tucson, Arizona, the average unit
counteroffer accepted by the borrower) been more transparent for the borrower. labor cost (salary, bonuses, time off, social-security,
However, requiring that an additional page disability, healthcare, 401(k), and other benefits) is
requires documentation today under the $30.73 per hour for loan officers ($23.97 for a Loan
Equal Credit Opportunity Act (ECOA). Under be completed will impose some costs on the Officer/Counselor; $28.48 for a Consumer Loan
ECOA, the originator must document the industry. Compliance costs of the this change Officer I; and $39.75 for a Consumer Loan Officer
reason for a rejection and retain the records are discussed in detail below. II). Additional costs to be considered are rent
for 25 months, which is also the requirement (7) Mortgage Comparison Chart (‘‘Shopping ($2812.50 per month for 1500 square feet) and
in the final rule. Therefore, there is no Chart’’). The shopping chart is on the third computer equipment ($560 per month). Summing
additional documentation required in case of page of the GFE. It is delivered to the this gives us an hourly cost of $31.14. An additional
a rejection. There is no documentation borrower as a blank form. The borrower is ten minutes per application from handling the
free to fill it out and use it to compare forms and ten minutes arranging tolerances leads to
requirement for a counteroffer, but the lender
an additional twenty-seven minutes per closing and

must issue a new GFE to the borrower; the different loan offers. The loan originator is would increase costs by $14 per loan. The estimate
minimal burden associated with issuing an only required to hand it out, but has the of the recurring annual burden of the new GFE
additional GFE. option of answering borrower questions could reasonably be assumed to be $175 million,
Documentation for changed circumstances about it. The short, simple, and self- much less than the $405 million used throughout
adds a new requirement. The additional explanatory nature of the form leads the this analysis.
compliance costs of the 2008 proposed rule. other interest-rate-dependent rates with the burden is $134 million (52.2 percent of $255
The following four sections summarize major caveat that the offer would change if market million).
comments relevant to estimates of the interest rates change. Since there is no reason Suppose that the number of applications
compliance costs of the new GFE. to believe that hedging behavior will be per loans increased by one from 1.7 to 2.7.
affected by the rule, hedging costs should not This was one of the scenarios considered in
Hedging Costs of the New GFE be included as a compliance cost. Once this the NAR’s analysis. The NAR hypothesized
Comment. The NAR’s primary objection to understanding of the proposed rule is that this is likely given that consumers may
HUD’s estimates of the compliance costs of introduced into the NAR’s cost estimate of have a greater demand for a GFE once HUD’s
the proposed GFE was that HUD does not the proposed rule, the NAR’s estimate falls new GFE, which provides useful and
account for the hedging costs that an interest from $181 to $45 (identical to HUD’s estimate transparent information, is introduced.
rate guarantee would require (Schnare 2008). of the cost of the proposed rule) in their low- Calculating the compliance costs due to the
Indeed, the majority of the NAR’s cost cost scenario; from $316 to $101 in their additional burden of completing GFEs is
estimate for the GFE consists of so-called intermediate-cost scenario; and from $413 to straightforward. The additional time spent
‘‘hedging’’ expenses. They claim that the rule $141 in their high-cost scenario. per loan would be 27 minutes (2.7
would require issuers of GFEs to insure application per loan × 10 minutes) and the
against interest rate movements to keep GFE Administrative Costs of More GFE opportunity cost of that time would be
offers open for the required 10 business days. Applications $32.40 per loan (27 minutes × $1.20 per
According to the NAR report, the hedging Comment. A second major criticism by the minute). The total recurring compliance cost
costs could range from $136 to $272 per loan. National Association of Realtors of HUD’s to the origination industry from applications
Making this assumption dramatically regulatory impact analysis of the 2008 would be $405 million (12.5 millions loan
increases the cost estimate for the GFE. The proposed rule is that HUD underestimated per year × $32.40 per loan), of which $213
NAR’s addition of hedging costs quadruples the administrative costs of the proposed rule million is borne by small business (52.2
HUD’s baseline estimate of the compliance by not raising the number of loan percent of $405 million).
cost of the proposed rule from $45 to $181. applications per GFE. HUD’s estimate of the
Response. The NAR made an erroneous ratio of applications to loans after the rule is Multiple Preliminary Underwritings
assumption about the proposed Good Faith implemented is equal to its estimate of the Comment. Every application under the
Estimate (GFE) that lead them to overstate the observed ratio of 1.7 in HMDA data. The new rule requires preliminary underwriting.
compliance costs. A more accurate estimate NAR argues that the number of applications Since borrowers who shop may seek out
of the hedging costs would be zero. Neither would rise because of increased shopping. multiple GFEs, there will be multiple
the proposed rule nor the final rule requires Thus, the administrative costs of applications underwritings. Commenters said this will
lenders to guarantee an interest rate quoted should rise. add to the underwriting burden firms incur
on a GFE for a period of ten days. Interest- Response. It is reasonable to expect that today. The National Association of Realtors
dependent items on the GFE (interest rate, given the improvements to the GFE and the calculated an additional cost of multiple
monthly payment, YSP/discount points, greater rewards from shopping, that the underwriting at $30 per loan for an
adjusted origination fees, and daily interest demand for applications would increase. application per loan ratio of 2.7.
charges) can have a separate availability Note, however, that maintaining a ratio of 1.7 Response. Every application under the
period that can be as short as the time until loans per application is not inconsistent with final rule that generates a GFE will require
a new rate sheet is issued. Only the prices more shopping for loan products. First, preliminary underwriting in order to come
on non-interest-dependent items on the GFE consumers may shop around and ask a up with an early offer for the borrower.
(total origination fees, appraisal fees, title variety of lenders for informal quotes to Originators can charge a fee for issuing a new
fees, etc.) must remain available for 10 days. compare with their GFE. Every inquiry will GFE limited to the cost of a credit report. It
These interest-rate-dependent items only not necessitate a new GFE. Second, the rule is hoped that the charge for this, if any,
become fixed, for purposes of comparison to is likely to lead to lower rejection and would be small enough so that it is not a
the HUD–1 at closing, when the borrower withdrawal rates of applications because significant deterrent to effective shopping.
locks the interest rate. consumers will be more informed going into But whether or not there is a charge, there
Indeed, the NAR study acknowledges that the loan. HUD expects applications from are real resource costs associated with
there is no such requirement. Ann Schnare increased shopping behavior to replace some preliminary underwriting. The additional
writes: ‘‘HUD’s revised GFE has multiple mortgage applications that may have cost generated depends on the number of
dates for the offer: One for the origination fee otherwise resulted in rejections. However, in applicants and the number of GFEs they
and third party settlement costs; one for the response to this comment, HUD provides a receive. Since every completed loan
quoted interest rate; one for the settlement sensitivity analysis of the effects on eventually gets underwritten in full, the
date; and one for the number of days that the administrative costs of increasing additional cost of preliminary underwriting
loan must lock before closing (NAR, fn. 6, p. applications per loan. depends mainly on the number of additional
10).’’ HUD let these dates differ because HUD For reasons explained in the above times that preliminary underwriting occurs
is aware that the hedging costs of an interest paragraph, the number of applications per beyond the one associated with the full
guarantee for a period as long as ten days loan may remain at 1.7 applications per loan. underwriting that would have occurred
would be very costly. If the additional administrative burden of an under the existing scheme.
The loan originator will probably choose a application imposed by the rule is ten It cannot be determined how many
shorter guarantee period for the interest rate minutes per application (as discussed in additional GFEs the average borrower would
because of the hedging costs. Ann Schnare Section VII.C.1), then the additional burden get under the new rule. Borrowers might
admits this to be a possibility: ‘‘the originator of the rule translates to 17 minutes per loan continue the informal shopping method that
could choose a lock-in 41 period that is (1.7 applications per loan × ten minutes). To many use today—gathering information and
considerably shorter than the 10 business derive the opportunity cost of the rule, we making inquiries to lenders and brokers
days required for other components of the multiply 17 minutes by $1.20 per minute about their products and their rates, even
GFE in order to minimize its hedging costs (equivalent to the $72 per hour fully-loaded before deciding to proceed with the request
(NAR, p. 9).’’ Choosing the guarantee period opportunity cost of time, which comes from for a more formal quote using the GFE. In
of the interests rate is a profit maximizing our $150,000 annual figure), to per loan cost other words, they may formally apply only
decision made by the originator. The of additional applications of $20.40 per loan. after deciding who offers the best terms. The
originator will balance the benefits of The aggregate impact on the loan origination simple format and clarity of the new GFE
attracting more customers by extending the industry of the administrative burden of form will enhance this informal information
guarantee period with the hedging costs of completing applications is calculated using gathering process; in fact, the increased
doing so. The current practice of loan the per loan figure: the annual recurring efficiency of informal shopping (calling
originators is to quote an interest rate and compliance cost is $255 million (12.5 million around, checking web sites, etc.) could be an
loans annually × $20.40 per loan). The small important benefit of the new GFE. Since
41 HUD’s understanding is that by ‘‘lock-in’’ business share of the total recurring shoppers as well as originators will be
period, the NAR meant ‘‘guarantee’’ period. compliance cost of this administrative familiar with the GFE, these forms will likely
serve as a guide for practically any million applications42 that are not originated locked, absent unforeseeable circumstances,
conversation between a shopper and an may be disapproved at the preliminary stage from being exceeded at settlement. In
originator, or for any initial request by a rather than going through full underwriting addition, the proposed rule would have
shopper for preliminary information about (as they might today). We expect an increase prohibited Item A on the GFE, ‘‘Your
rates, points, and fees. For these borrowers, in the ratio of accepted applications per loan. Adjusted Origination Charges’’ from
the new GFE simply pins down the numbers. This savings in appraisal, verification, and increasing at settlement once the interest rate
Others, on the other hand, may obtain other incremental underwriting costs that are was locked. The proposed rule also would
multiple GFEs and use them to shop. avoided would tend to offset the increase in have prohibited government and recording
Under the final rule, preliminary cost resulting from the extra preliminary fees from increasing at settlement, absent
underwriting should decrease the number of underwriting noted above. changed circumstances.
applications that go to full underwriting (e.g., Under the March 2008 proposed rule, the
an applicant may be denied during the Estimate of the Opportunity Cost of Time sum of all the other services subject to a
preliminary without having been charged for Comment. The National Association of tolerance (originator-required services where
an appraisal); that is, some of the 8.75 Realtors states (see NAR 2008, fn. 10, p. 11) the originator selects the third party provider,
million that are not originated may be that HUD used one estimate of the value of originator-required services where the
disapproved at the preliminary stage rather an employee’s time ($31.14 per hour) to borrower selects from a list of third party
than going through full underwriting (as they calculate the burden of the proposed rule but providers identified by the originator, and
might today). This savings in appraisal, a higher estimate ($72 per hour) of the optional owner’s title insurance, if the
verification, and other incremental opportunity cost of time to calculate the borrower uses a provider identified by the
underwriting costs that are avoided would benefits of the time savings of the proposed originator) would have been prohibited from
tend to offset the increase in cost resulting rule. increasing at settlement by more than 10
from the extra preliminary underwriting Response. HUD uses the estimate of $72 percent of the sum for services presented on
noted in the above paragraph. However, it is per hour as the opportunity cost of time the GFE, absent changed circumstances.
difficult to estimate these effects. consistently throughout the regulatory Thus, a specific charge would have been able
An implication of a higher ratio of impact analysis to calculate the value of the to increase by more than 10 percent, so long
applications per loan is that the total costs and the benefits of the rule to industry. as the sum of all the services subject to the
underwriting costs would increase. Others, It is true that HUD includes a discussion of 10 percent tolerance did not increase by more
on the other hand, may obtain multiple GFEs alternative estimates of labor costs in a than 10 percent.
and use them to shop. The National footnote of Chapter 6 (see below) 37 on page The rational for the zero tolerance was that
Association of Realtors estimates that the cost 6–6 of the Regulatory Flexibility Analysis. a loan originator should know the price of a
of a preliminary underwriting is $30 ($25 There, HUD explains that our estimate of $72 service if it required the use of its chosen
credit report and $5 labor cost). There are per hour may be far above other estimates of provider. In the case of making referrals, the
currently 1.7 times as many applications as labor costs. HUD provides an example of an loan originator could be expected to have
loans originated. Thus, the additional cost estimate based on industry data from Tucson, some knowledge of the market. In fact, it
per loan for the scenario of 2.7 applications Arizona, where the hourly-wage weighted by should have some knowledge if it is to meet
per loan is $30 ((2.7¥1.7) × $30) and for 3.4 industry is $31.14. However, this figure was even the weakest concept of ‘‘good faith.’’
applications per loan, the additional cost is only presented for illustrative purposes and The 10 percent tolerance seemed like a
$52 ((3.4¥1.7) × $30). HUD uses different was not used in the body of the analysis. reasonable limit for price dispersion for
parameters to estimate the cost of increased Note also that HUD uses a lower value of $44 services obtained in a market that could be
applications. Instead of a preliminary credit per hour as the opportunity cost of time to competitive if the buyers had good
report cost of $25, HUD would use $5. This consumers (see HUD, 3–120). information. It is also simple for borrowers
lower number is not inconsistent with HUD’s The NAR uses the $31.14 hourly wage as quickly to compute 10 percent of the total fee
estimated cost of $25 for a full credit report. a measure of the opportunity cost of an and determine if final charges are within the
A preliminary credit report involves only the employee’s time in their cost estimates of tolerance. In order to protect themselves from
FICO score from one credit bureau and so additional underwriting. However, they do charges in excess of the limits set by the
will be much cheaper. Our assumption of an not apply this figure consistently throughout tolerances, originators would have to gather
inexpensive preliminary credit report is their analysis and do not explain why. price information in the market and possibly
consistent with what representatives of credit Because $31 is only 43% of $72, a uniform set up agreements with some third-party
bureaus, in discussions of the effects of the application of the NAR labor cost estimate providers to perform settlement services at
proposed rule, told HUD is likely to happen. would lower the burden of the rule prearranged prices. Those originators who
Instead of labor costs of $5 (ten minutes at significantly. For example, the recurring would have gathered more information than
$31.14 an hour); HUD uses $6 (five minutes costs of the GFE would fall from $32 per loan they do today or made more pricing
at $72 an hour). HUD’s estimated total cost to $14 in the case of 1.7 applications per arrangements than they do today would have
of a preliminary underwriting would be $11, loan. Although HUD will consider the NAR’s incurred an increase in regulatory burden
reducing the additional costs from $30 to $11 preference for a lower estimate of labor costs, resulting from the new rule.
at 2.7 applications per loan. HUD believes that its fully-loaded and upper- Comment. Loan originators wrote that they
The aggregate impact on the loan bound estimate of $72 is more appropriate for should not be required to pay the bills for
origination industry of multiple preliminary a regulatory impact analysis. third-party fees in excess of the tolerances
underwriting is calculated using the per loan Tolerances on Third-Party Fees since they do not control those fees. They
figure: the annual recurring compliance cost argued that their expertise is as originators,
Under the March 2008 proposed rule, loan
is $138 million (12.5 million loans annually not as appraisers or title companies. They
originators would have been prohibited from
× $11 per loan) at 2.7 loans per application. claimed that they do not know who will
exceeding at settlement the amount listed as
The small business share of the total perform all these services at application, so
‘‘our service charge’’ on the on the GFE,
recurring compliance cost from additional the price is indeterminate. In addition, there
absent changed circumstances (‘‘zero
underwriting is $72 million (52.2 percent of are occasions when services beyond the
tolerance’’). The proposed rule also would
$138 million). If the ratio of applications per normal minimum will be required, but that
have prohibited the amount listed as the
loan does not change (remains at 1.7), then cannot be known at application. For
charge or credit to the borrower for the
there will be no additional compliance cost example, additional appraisal work may be
interest rate chosen, if the interest rate was
from multiple preliminary underwriting. required or some work may have to be done
Finally, it should be emphasized that, to clear up a title problem. So prices and
42 There are currently 1.7 times as many
under the final rule, preliminary even some services that end up as being
applications as loans originated; therefore, if

underwriting should decrease the number of originations are 12.5 million, full underwriting is
required are unknown at application.
applications that go to full underwriting (e.g., started (and probably completed) for about 21.25 Trade groups representing settlement
an applicant may be denied during the million applications, including 8.75 million (21.25 service providers, especially realtors and title
preliminary without having been charged for million minus 12.5 million originations) that are companies, focused on the potential
an appraisal). Some of the assumed 8.75 not originated. anticompetitive effects of the tolerance
provisions. These groups suggested that large alternative data sources that would support information. Some originators might simply
lenders would seek to manage the risks expanding the tolerances beyond 10 percent. check out the market prices for third-party
associated with tolerances by contracting With respect to the zero tolerance for a services from time to time, formulate
with large third party settlement service loan originator’s own charges, HUD estimates such that several of the prices
providers, and thereby placing small recognizes the comments characterizing the charged by the third parties fall within the
settlement service providers at a competitive tolerance as a settlement cost guarantee. tolerance, and trust that nobody to whom
disadvantage. However, the final rule provides substantial they refer the borrower charges a price in
In addition to their general objections to flexibility to loan originators in providing a excess of the tolerance.43 Other originators
the tolerance provisions, lenders and trade revised GFE when circumstances, might want more protection and have
groups representing lenders and other unforeseeable or otherwise, necessitate contracts or business arrangements in place
settlement service providers strongly changes. Section 19(a) provides explicit that have set prices for services that are not
supported removing government recording authority for the Secretary to make such in excess of the tolerances.
and transfer charges from the tolerances. interpretations as may be necessary to Either case requires the originator to do
They stated that these charges are outside of achieve the purposes of RESPA. Providing a more than today, although even today
the control of the loan originator and cannot clear, objective standard for what constitutes originators fill out GFEs with estimates for
be known with any certainty at the time the ‘‘good faith’’ under section 5 of RESPA is third-party settlement services. In the first
GFE is provided. necessary to provide more effective advance case, the liability in the event a tolerance is
If the loan originator solves its problem by disclosure to home buyers and sellers of exceeded would lead to at least a little more
using only those third-parties that agree to settlement costs, and as such, falls directly work gathering information prior to filling
within the Secretary’s interpretive authority
fixed prices, that shifts the burden to the out the GFE. In the second case, more work
under section 19(a).
third-party. Small third-party providers made would be involved in formalizing an
The one exception to the amounts of the
the same argument that small originators agreement to commit the third-party to a
tolerances remaining the same as in the
made. They then will be disadvantaged fixed price. But as noted above, originators
proposed rule is the tolerance for the
relative to large third-party providers by today have to have a working knowledge of
government recording and transfer charges.
having to bear the risk of the unpredictable HUD has adjusted how these charges are third-party settlement service prices to fill
cost that cannot be averaged out over a large treated under the tolerances, based on the out a GFE. Therefore, it is only the increase
number of transactions. numerous comments received on this issue. in burden that would need to be accounted
Response. Based on the comments received The final rule splits the government for here.
in response to the proposed rule, HUD has recording and transfer charges into two It is difficult to estimate these incremental
revised a number of provisions dealing with categories: government recording charges, costs. But to provide an order of magnitude,
the tolerances, and in particular has clarified and transfer taxes. Recording charges will be it is estimated that it takes an average of 10
the situations where the loan originator subject to a 10 percent tolerance instead. additional minutes per loan for the originator
would no longer be bound by the tolerances. The opportunity to cure potential to arrange the pricing that protects the
However, HUD has determined that only violations of the tolerances is an important originator from the costs of the tolerances
limited changes are necessary in the tool for loan originators to manage being exceeded.44 For a brokerage firm
tolerances themselves. Through all of these compliance with the tolerance requirements. originating 250 loans per year, 10 minutes
provisions, the final rule seeks to balance the Many lenders and groups representing per loan would come to 42 hours or about
borrower’s interest in receiving an accurate lenders and other settlement service one week’s worth of one employee’s time per
GFE early in the application process to providers objected to the imposition of year. Thus, this seems to be a reasonable
enable the borrower to shop around, with the tolerances because of the difficulty of starting point for estimation. For the
lender’s interest in maintaining flexibility to providing accurate estimates to prospective estimated 12,500,000 loans, that comes to
address the many issues that can arise in a borrowers early in the application process. 125,000,000 minutes or 2,083,333 hours. At
complex process such as loan origination. The opportunity to cure will permit loan $72 per hour, which translates to $12 per
Many commenters recommended changes originators to give an estimate of expected loan, this comes to a total of $150 million for
to the size of the tolerances for different settlement charges in good faith, without all firms and $78 million for small firms. If
categories of settlement costs, especially the subjecting them to harsh penalties if the it takes 20 extra minutes per loan instead of
zero tolerance for loan originator charges. estimate turns out to be lower than the actual 10, these costs come to $300 million and
With one exception (government recording charges at settlement. $156 million respectively and would be two
and transfer charges), the final rule does not HUD understands that tolerances will weeks of one employee’s time per year for a
change the amounts of the tolerances impose some burden on originators. Since brokerage firm making 250 loans per year.
permitted for the different categories of the protection of tolerances kicks in only if Table 6–12 details the distribution of these
settlement costs. As noted in the rule, HUD the originator requires the use of a particular costs among the retail mortgage originating
considered the best available data on the provider or if the borrower comes to the industries for the per loan burden of ten
variation in the costs of settlement services, originator and asks where the services may minutes. With a larger number of loans
in particular title services, in determining be purchased within the tolerances, the (15,500,000), total costs are $186 million for
that a 10 percent tolerance is reasonable. No originator must have reliable third-party all firms (at 10 minutes per loan) and $97
commenters submitted or identified any settlement service provider pricing million for small firms.
TABLE 6–12—INCREMENTAL COSTS OF THIRD-PARTY PRICING ARRANGEMENTS FOR THE NEW GFE
Total third-party Small business
Industry pricing arrange- cost
ment cost
Mortgage Brokers ........................................................................................................................................ $90,000,000 $63,000,000

Commercial Banks ....................................................................................................................................... 24,637,800 4,678,718
Thrifts ........................................................................................................................................................... 11,697,000 1,441,070
Mortgage Banks ........................................................................................................................................... 18,618,000 7,737,641
Credit Unions ............................................................................................................................................... 5,047,200 1,470,754
Total ...................................................................................................................................................... 150,000,000 78,328,183
43 Other originators may rely on vendor departments within their own company) for pricing 44 These 10 minutes would be beyond what the
management companies (or vendor management information about third-party services. originator spends today to seek out good choices for
his borrowers.
One wholesale lender, ABN–AMRO, offers commitment by lenders to loan terms based settlement charges in good faith, without
a One-fee program to brokers. In it, the on a preliminary underwriting, as well as fear subjecting them to harsh penalties if the
borrower gets a fixed price for many services, that that the preliminary underwriting would estimate turns out to be lower than the actual
including many third-party services. Under be based on information that was too limited charges at settlement.
the new GFE, arrangements like this would (borrower’s name, social security number,
solve the broker’s tolerance compliance gross monthly income, property address; an Costs Associated With Changes to the
requirements with the wholesaler making the estimate of the value of the property; and the HUD–1
arrangements for many of the third-party amount of the mortgage loan sought). In This section discusses costs on closing
services and negotiating the prices for them. response, HUD has adopted a single agents associated with the new HUD–1.
So it may be that (mostly large) wholesalers application process for the final rule. Under Section VIII.A explains the data and VIII.B
offer (mostly small) brokers a lower cost this approach, at the time of application, the the analysis of costs.
alternative to complying with the tolerance loan originator will decide what application
requirements of the new rule. If so, then the information it needs to collect from a Data on Settlement Service Providers
small business burden above would be an borrower, and which of that collected Section VII.A reproduced background data
overestimate. Vendor management application information it will use, in order on the retail mortgage origination industries.
companies are increasingly appearing in the to issue a meaningful GFE. HUD strongly Since the GFE affects settlement service
market, not only providing third-party urges loan originators to develop consistent providers as well as retail mortgage
pricing information, but also offering policies or procedures concerning what originators, this section recapitulates data
monitoring and quality control services for information it will require to minimize from Chapter 5 on the settlement services
originators. delays in issuing GFEs. industries. Readers are referred to Section IV
• Volume-based discounts. Small of Chapter 5 for a more detailed treatment of
Changes in the Final Rule To Reduce the businesses, especially closing attorneys and
Regulatory Burden of the GFE 45 the data.
escrow companies stated that lenders seeking
The final rule contains several changes Table 6–13 provides the total number of
volume discounts would place them at a
from the 2008 proposed rule that are firms, the number of small employer firms,
competitive disadvantage to larger entities
designed to reduce regulatory burden of the the number of nonemployer firms, and the
and force them out of business. HUD
new GFE. Several items that commenters responded by not addressing volume percent of small firms (employer and
were concerned about have been changed discounts in its final rule. nonemployer) in industries that provide
from the 2008 proposed to the final GFE: • Difficulty of meeting tolerances. Many settlement services (see Chapter 5 for details
• Length of form. Many industry groups lenders and groups representing lenders and on the classification of small employer firms
complained that the four-page proposed GFE other settlement service providers objected to in these industries). These constitute all of
was too long. HUD reduced the form in the the imposition of tolerances because of the the firms in these industries in 2004,
final rule to three pages by consolidating the difficulty of providing accurate estimates to according to the Census Bureau. As
third and fourth pages but still retaining the prospective borrowers early in the discussed below, for Offices of Lawyers,
essential trade-off table and shopping chart. application process. The final rule provides Other Activities Related to Real Estate
• Concept of ‘‘GFE application’’. loan originators with an opportunity to cure (Escrow), Surveying & Mapping Services,
Commenters objected to the bifurcated any potential violation of the tolerance by Extermination & Pest Control Services, and
application process (a preliminary ‘‘GFE reimbursing the borrower any amount by Credit Bureaus, the figures in Table 6–13
application’’ followed by the final ‘‘mortgage which the tolerances were exceeded. The almost certainly overstate the number of
application’’), which was designed to opportunity to cure will permit loan firms actually participating in residential real
promote shopping. There was a fear of originators to give an estimate of expected estate settlements.46
TABLE 6–13—FIRMS IN INDUSTRIES PROVIDING SETTLEMENT SERVICES

Small em- Nonemployer Percent small
Industry Total firms ployer firms firms firms
Direct title insurance carriers ......................................................................... 2,094 1,865 135 95.5

Title abstract and settlement offices .............................................................. 14,211 7,889 6,203 99.2
Offices of lawyers .......................................................................................... 401,553 165,127 234,849 99.6
Other activities related to real estate (escrow) .............................................. 463,545 15,119 448,409 99.996
Offices of real estate appraisers ................................................................... 65,491 15,656 49,802 99.9
Surveying & mapping services ...................................................................... 18,224 8,990 9,196 99.8
Extermination & pest control services ........................................................... 18,000 10,018 7,935 99.7
Credit bureaus ............................................................................................... 1,285 710 545 97.7
Total ........................................................................................................ 984,403 225,374 757,074 99.8

Source: Census Bureau.
Table 6–14 provides the total number of employer firms as employees. The number of employer firm. Using the Census Bureau’s
employees in employer firms, and the ‘‘workers’’ in these industries is understated count of employees for computing the
number and percent of employees in small by the number of employees as defined by compliance burden of a rule may tend to
employer firms for each of the settlement the Census Bureau because in a nonemployer
services industries.47 The Census Bureau firm the owner is a production worker as is
does not count owners of employer and non- likely also true for the owner of a small
45 See Chapter 3 for or a treatment of changes note that while the number of firms is drawn from 47 The ‘‘Total Employees’’ data in Table 6–10 are
listed in this section. year 2004 data, the small business percentages are for the year 2004. The ‘‘Employees in Small
46 As shown by the fourth column, practically all
based on 2002 data from the Bureau of Census; Employer Firms’’ data are obtained by multiplying
firms qualify as small businesses. This is partially while they are estimates, they are probably highly the total employee data for 2004 by the percentage
due to the large number of non-employer firms accurate ones. Also see Chapter 5 for the source of of employees in SBA-defined small firms obtained
(which automatically qualify as a small business) from 2002 Bureau of Census data; thus, the small
the small business percentages and for alternative,
included in the Bureau of Census data. See Chapter employee data are estimates but probably highly
year-2002-based small business percentages based
5 for further discussion of this issue and for small accurate ones. See Chapter 5 for discussion of the
business percentages for employer firms only. Also on firms with less than 100 employees. 2002 small business percentages.
understate the burden.48 Thus in computing one worker is added for each small employer number of employees (see Table 6–16 below
the number of workers in these industries, firm and each nonemployer firm to the total for these results).
TABLE 6–14—EMPLOYEES IN INDUSTRIES PROVIDING SETTLEMENT SERVICES

Employees in Percent
Total employees
Industry small employer employed by
in employer firms firms small firms
Direct Title Insurance Carriers ......................................................................................... 75,702 7,144 9.4

Title Abstract and Settlement Offices .............................................................................. 79,819 47,913 60.0
Offices of Lawyers ........................................................................................................... 1,122,723 657,749 58.6
Other Activities Related to Real Estate (Escrow) ........................................................... 67,274 40,074 59.6
Offices of Real Estate Appraisers ................................................................................... 45,021 37,300 82.8
Surveying & Mapping Services ....................................................................................... 61,623 53,610 87.0
Extermination & Pest Control Services ........................................................................... 95,437 55,565 58.2
Credit Bureaus ................................................................................................................. 25,555 5,135 20.1
Total .......................................................................................................................... 1,573,154 904,490 57.5

Source: Census Bureau (note: non-employer firms not included).
Table 6–15 provides information on the Escrow, Offices of Real Estate Appraisers, revenues from settlements for these
volume of settlements for various industries and Credit Bureaus is based on all industries.51 Totals are estimated based on
that participate in the settlement process and settlements, the numbers and percentages for the number of mortgage originations,
the number and percent handled by small the other industries (Surveying & Mapping 12,500,000 that would occur in a ‘‘normal’’
firms within each industry.49 Note that while Services and Extermination & Pest Control year of mortgage originations (i.e., not in a
the distribution among Direct Title Insurance Services) represent the proportion of
Carriers, Title Abstract and Settlement settlements in which they are involved.50 year with a refinancing boom).
Offices, Offices of Lawyers, Lawyers and The allocation is based upon estimated dollar
TABLE 6–15—VOLUME OF SETTLEMENT SERVICE ACTIVITY

Percent indus-
Percent of Settlements by
Industry All settlements try settlements
settlements small firms by small firms
Direct Title Insurance Carriers ......................................................................... 5,375,000 43.00 258,000 4.80

Title Abstract and Settlement Offices .............................................................. 4,749,953 38.00 2,365,476 49.80
Lawyers and Escrow ....................................................................................... 2,375,048 19.00 2,137,543 90.00
Total Settlements ...................................................................................... 12,500,000 100.00 4,761,019 38.09
Offices of Real Estate Appraisers ................................................................... 12,500,000 100.00 10,387,500 83.10

Surveying & Mapping Services ....................................................................... 3,600,000 28.80 2,926,800 81.30
Extermination & Pest Control Services ........................................................... 5,500,000 44.00 2,964,500 53.90
Credit Bureaus ................................................................................................. 12,500,000 100.00 1,312,500 10.50
A larger volume of mortgage activity can also

be examined, for example, to reflect a
48 For example, if worker training were required the smaller firms operating in these industries. Note 51 As explained in Chapter 5, there is also some
by the rule, and burden estimates were based on that in Table 6–13 below, the 90% figure is also uncertainty about the distribution of mortgage-
Census Bureau employee statistics, the compliance used for the share of employees in small firms in related business and revenues among the various
burden for nonemployer firms would be estimated this combined industry. (2) As explained in Section title-related industries. Table 6–12 assumes the
at zero, while clearly at least one ‘‘worker,’’ the IV.B.4 of Chapter 5, there are probably no small following distribution: Direct Title Insurance
owner, would require the training. businesses in the Direct Title Insurance Carriers
Carriers (43.0%), Title Abstract and Settlement
49 The small business percentages in Table 6–12 (DTIC) industry, which includes the large title
insurance firms. The 4.8% figure in Table 6–12 (as Offices (38.0%), and Lawyer and Escrow (19.0%).
are the shares of revenue accounted for by small
business, as reported and explained in Chapter 5— well as the 9.4% figure in Table 6–10) is reported Section IV.B.5 of Chapter 5 considers other
in other words, the small business share of revenues to remain consistent with the Bureau of Census distributions and suggests the following ranges for
is being used here as a proxy for the small business data—including it or excluding it does not affect the the specific industry shares: Direct Title Insurance
share of settlements (or mortgage loans). There are results in any significant way. Carriers (35%–50%), Title Abstract and Settlement
two other points that should be made about these 50 See Step (9) in VII.E.1 of Chapter 3 for the Offices (29%–43%), and Lawyer and Escrow (17%–
data. (1) Figures for Offices of Lawyers and Other calculation of the proportion of settlements for 29%). Given limited available information, it is
Activities Related to Real Estate (Escrow) are Surveying & Mapping Services and Extermination difficult to determine a precise estimate, which is
combined into the new ‘‘Lawyers and Escrow’’ & Pest Control Services. Because of their relatively why Chapter 5 includes several sensitivity analyses.
category. This is because there is insufficient small shares of the overall mortgage business, But obviously, reducing the relative weight of the
information to allocate volumes of settlements different shares for these industries would not
DTIC or increasing the relative weight of the
between these two industries (see Section IV.B.5 of materially affect the overall small business shares
lawyer-escrow industry would increase the small
Chapter 5 for further explanation). As explained in of revenue. While it is recognized that the other
Chapter 5, the small business revenue share for the industries may not be involved in every mortgage business share of settlements. Readers are referred
combined ‘‘Lawyers and Escrow’’ category is raised origination and settlement transactions (e.g., an to Section IV of Chapter 5 for a more complete
to 90% (versus 47.8% for all lawyers and 86.9% for appraisal may not be required for some mortgage analysis of the relative importance of each title-
escrow firms based on 2002 Census Bureau revenue originations), they are certainly involved in most related industry, particularly as it affects the overall
data) under the assumption that lawyer and escrow such transactions and, therefore, it is assumed here small business percentage for title- and settlement-
firms engaged in real estate activity are likely to be that they are involved in all transactions. related work.
‘‘refinance environment’’.52 In this case, the and Settlement Offices (i.e., settlements per information on the degree of settlement
volume of settlement activity would be worker). activity in these broadly defined industries.
distributed as follows: 6,665,000 for Direct The figure for total workers in Title Thus, the number of workers in this category
Title Insurance Carriers, 5,889,941 for Title Abstract and Settlement Offices is the sum of: (93,914) is computed by dividing the number
Abstract and Settlement Offices, 2,945,059 All employees (79,819), small firms (7,889), of settlements handled by the industry from
for Lawyers and Escrow, 4,464,000 for and nonemployer firms (6,203), or 93,911. Table 6–15 divided by one-half the
Surveying & Mapping Services, 6,820,000 for (Small firms and nonemployer firms are settlements per worker in the Title Abstract
Extermination & Pest Control Services, and added to count the owners of those firms as and Settlement Offices industry.
15,500,000 for both Offices of Real Estate production workers as discussed in the For Direct Title Insurance Carriers, many
Appraisers and Credit Bureaus.53 description of Table 6–14 above). The workers are not engaged in actual
corresponding figure for workers in small
The employee figures reported in Table 6– settlements, but rather in the title insurance
firms is the sum of: employees of small firms
14 misstate the number of workers actually function itself. Direct Title Insurance Carriers
(47,913), small firms (7,889), and
participating in residential real estate provide title insurance through agents as well
nonemployer firms (6,203), or 62,005 workers
settlements. This section offers some (representing 66% of all workers in Title as both direct sales of title insurance and
estimates of that figure, although it is Abstract and Settlement Offices). These associated settlement services to consumers
recognized that they are subject to some figures are reported in Table 6–16 below. In through branch offices. They also, of course,
uncertainty given the limited information this industry, there are 50.6 settlements per perform the title insurance function itself.
that is available. Table 6–16 provides one worker (obtained by dividing the 4,749,953 HUD examined the annual reports of the
estimate of the total number of workers and settlements from Table 6–15 by the 93,911 large direct title insurance carrier companies
the number and percent of workers in small workers).54 to attempt to estimate the proportion of
firms engaged in performing settlements by In the combined Lawyers and Escrow employees of these companies engaged in
industry. For Title Abstract and Settlement industry group, worker productivity is providing settlement services. It is estimated
Offices and the combined Lawyers and assumed to be half of that in Title Abstract that approximately 70 percent of workers in
Escrow industry, it is based on the volumes and Settlement Offices on the grounds that this industry, or 54,391 workers, are engaged
of settlement activity depicted in Table 6–15 these workers may not do settlements full in providing settlement services. (See Table
and the productivity level of Title Abstract time and because of the general lack of 6–16.) 55
TABLE 6–16—WORKERS ENGAGED PERFORMING SETTLEMENTS

Percent of
Workers in
Industry Total workers workers in
small firms small firms
Direct Title Insurance Carriers ..................................................................................................... 54,391 6,401 11.77

Title Abstract and Settlement Offices .......................................................................................... 93,911 62,005 66.03
Lawyers and Escrow ................................................................................................................... 93,914 84,523 90.00
Total ...................................................................................................................................... 242,217 152,929 63.14
The estimated numbers of title and worker) during the higher volume (or heavy number of workers in the broker industry, as
settlement workers would be larger under refinance) environment. It is not correct to reported by David Olson and his firm,
market conditions producing a larger volume simply adjust the number of workers up by Wholesale Access. The number of loans per
of mortgage activity. The estimated the percentage increase in mortgage loans broker increased between low and high
distribution of settlements when overall because the number of loans per worker volume years. Similar trend data do not exist
mortgage volume is 115,500,000 was given increases during refinance booms. The earlier showing the number of title and settlement
earlier. To adjust the worker estimates in analysis of brokers and lenders provided workers during recent refinance booms.
Table 6–16 to reflect the higher mortgage estimates of additional workers in a higher Thus, any adjustment would be somewhat
volume requires information about the volume market. That analysis was based speculative. But it is also important to
increase in productivity (i.e., loans per heavily on trend data through 2002 for the emphasize that workers hired during high-
52 In the projection given in the text, home workers is overstated and therefore the number of for employees providing the insurance function for
purchase loans were assumed to stay the same (7.5 settlements per worker is understated. agent-written policies was computed by
million, or 60% of the 12.5 million in mortgages), (Unfortunately, there is no information on the multiplying (2)(b) by total salary expenses; (4) the
while refinances increased from 5 million (or 40% proportion of Title and Abstract workers engaged in total salaries for employees engaged in direct sales
of the 12.5 million mortgages) to 8 million of the single-family mortgage activity, although it is likely of insurance (including other settlement services)
15.5 million total (home purchases remain at 7.5 that most are.) If the number of settlements per and providing the insurance function for direct-
million). worker is too low, the projection will overstate the sales policies was computed by subtracting (3) from
53 The settlement volume for small businesses number of workers needed. total salary expenses; (5) the salaries of employees
during a high volume year can be obtained using 55 In 2004, the DTIC industry employed 77,702
providing the insurance function for direct-sales
the small business percentages from Table 6–12, workers (based on the definition of worker used in policies was computed by multiplying (2)(a) by (4);
giving: 319,920 for Direct Title Insurance Carriers, the text). HUD estimates that approximately 70 (6) the salaries of employees selling title insurance
2,933,191 for Title Abstract and Settlement Offices, percent, or 54,391, are engaged in providing directly (and providing other settlement services)
2,650,553 for Lawyers and Escrow, 3,629,232 for settlement services. HUD computed an estimate of was computed by subtracting (5) from (4); finally (7)
Surveying & Mapping Services, 3,675,980 for the proportion of salaries that large title insurance the percent of salaries paid to employees selling
Extermination & Pest Control Services, 12,880,500 companies paid to workers engaged in settlement title insurance directly (and providing other
for Offices of Real Estate Appraisers, and 1,627,500 services as follows: (1) The amount of revenue
settlement services) was computed by dividing (6)
for Credit Bureaus. required to carry out the insurance function for
by total salary expenses. This analysis was carried
54 There are two caveats with this estimate. First, policies written by agents was computed as the
out using 2005 data from the annual reports of four
the estimate depends on the number of settlements difference between agent-generated revenue and
title insurance companies (First America, Land
in the Title Abstract and Settlement industry, agent commissions (or agent retention expenses); (2)
two percentages were then calculated, (a) the America, Fidelity National, and Stewart). The
which, as discussed in an earlier footnote, could
differ from the number reported in Table 6–12 (see percentage of agent-generated revenue required for percentage computed in (7) ranged from 67.7
Section IV.B.5 of Chapter 5 as well as the earlier the insurance function in agent-written policies as percent to 72.8 percent. Based on these results,
footnote for possible ranges of estimates). Second, (1) divided by total agent-generated revenue, (b) the HUD assumes that 70 percent of DTIC workers are
not all workers in the Title Abstract and Settlement percent of all insurance revenue required for the engaged in providing direct title insurance sales
industry are engaged in single-family real estate insurance function for agent-written policies as (1) and other settlement services.
transactions, which means that the number of divided by total insurance revenue; (3) the salaries
volume years, for example, are more likely to be on how to put the numbers in the right provide most, if not all, of the data for the
be temporary or part-time workers. place. The major changes in the HUD–1 itself comparison page of the HUD–1. Settlement
Temporary workers will likely rely on are to make it more comparable to the GFE. agents will need new software for the simple
permanent workers for training or Accordingly, to facilitate comparison reason that the form will change. There will
information about new rules and regulations. between the HUD–1 and the GFE, each also be a strong demand by settlement agents
Thus, the numbers in Table 6–16 providing designated line in Section L on the final for new software that checks the tolerance
estimates of workers in the title and HUD–1 includes a reference to the relevant calculations given the importance of the
settlement industry serve as a reasonable line from the GFE. Borrowers will be able to comparison page as a means to double check
basis for analyzing the effects of the new easily compare the designated line on the the final figures.
regulation among the various settlement and HUD–1 with the appropriate category on the We will assume that the costs of software
title industries, recognizing that the numbers GFE. Terminology on the HUD–1 has been updates and software training to the
could vary somewhat depending on the modified as necessary to conform to the settlement industry are the same as for the
volume of mortgages considered in the terminology of the GFE. For example, since new GFE. Given the number of workers and
analysis. Block 2 on the GFE is designated as ‘‘your the distribution by firm size, the total cost of
Estimates of the number of single-family- credit or charge for the specific interest rate new software and training is $62 million, of
mortgage-related workers in Surveying & chosen’’, Line 802 on the HUD–1 is also which $46 million is borne by small
Mapping Services, Extermination & Pest designated ‘‘your credit or charge for the business. The cost of the changes to software
Control Services, and Credit Bureaus are not specific interest rate chosen.’’ is $14 million (of which $11 million is borne
included because there are insufficient data The comparison page of the HUD–1, which by small business) and the opportunity cost
upon which to base an estimate. Mortgage- is an additional page, will represent a more of the time spent learning the new software
related work accounts for a relatively small significant change for the industry than the is $48 million (of which $34 million is borne
portion of the overall activity of these slight revisions of the current pages. by small business).
industries, and information is not available to Although some training may be required, it To arrive at a total one-time cost for the
separate single-family-mortgage-related is not likely to be substantial since settlement HUD–1, we add the additional cost of $18
business from other activity. In addition, data agents are already very familiar with what million of new loan origination software as
on workers for these industries are not information to provide at a closing. The a result of the HUD–1 to the $62 million for
needed for the analysis of cost savings below. comparison page displays any differences the settlement industry’s new software,
While this information is also not needed between the settlement charges on the GFE which yields a total one-time software cost of
below for the appraisal industry, it is and the HUD–1 on the top half. On the $80 million to the entire industry. Adding
possible to produce reasonable estimates of bottom half of the comparison page, there is the $13 million of HUD–1 related software
workers for this industry because single- a summary of loan, in a manner similar to the costs from small loan originators to the $46
family-mortgage-related work likely accounts GFE. The burden of the comparison page of million imposed on small settlement firms
for most of the activity in this industry. Using the HUD–1 is most likely to be felt as a one- yields a total of small business one-time
the methodology described above (adding time adjustment cost imposed on software compliance costs of $59 million.
employees of employer firms, non-employer developers. In response to the March 2008
proposed rule, many lenders expressed the Legal Consultation Costs
firms, and owners of small firms to arrive at
the number of workers), the appraisal concern that the way the new HUD–1 forms Legal consultation will be less involved for
industry in the projection year would include are to be completed would require numerous the HUD–1 form than for the new GFE.
110,479 workers, and 102,758 of these work changes with significant operational and However, settlement firms may require
in small firms.56 While some of these technology impacts. These costs can be additional legal consultation to inform on a
appraisers focus on multifamily and categorized similarly as for the new GFE: diverse set of issues, such as average cost-
commercial properties and/or conduct software costs (including training), legal pricing, to be on the safe side. We make the
appraisals for local governments (e.g., consultation costs, and training costs. The same assumptions as for the GFE: All firms
estimating the value of properties for tax total one-time compliance cost to the purchase a minimum of two hours of legal
purposes), most are likely involved in single- industry is $188 million, of which $139 consultation at a cost of $200 an hour and
family mortgage-related activities.57 million is borne by small business. that additional legal services are demanded
Settlement Software Costs on the basis of the volume of business. We
One-Time Costs of the New HUD–1 estimate that the total legal costs to the
Introduction Developers of settlement software and settlement industry will be $37 million of
settlement agents will be subject to software which $18 million is borne by small
The new HUD–1 is simpler than the costs. They will face the following two
existing HUD–1. Nevertheless, there will be business. The cost of legal fees is lower for
changes: A reorganization of the HUD–1 form the HUD–1 form than for the GFE because
change in the form, including the and the requirement of the HUD–1
introduction of the comparison page, and the there are fewer firms involved in settlement
comparison page explaining the crosswalk than in mortgage origination.
settlement industry will need to learn how between the GFE and the final HUD–1. The
the new form works. The primary focus will changes to the HUD–1 form would not Training Costs
require much work from programmers. The Workers who perform settlements will
56 The total number of workers is derived as only programming to be done is changing the need to learn how to fill out the new HUD–
follows: 45,021 employees in employer firms (from manner in which information is displayed on 1 form and in some cases, calculate whether
Table 6–14) plus 49,802 non-employer firms (from the HUD–1 form. First, there will be fewer the change in settlement fees is within the
Table 6–13) plus 15,656 owners of small firms (from fees. Second, references to the corresponding
Table 6–13), which yields 110,479 workers. The
tolerance. The quantities are provided to
figures in the GFE would need to be inserted settlement agents by the GFE, so training will
number of workers in small businesses is derived
as follows: 37,300 employees in small employer
by the software developers. be much less involved. Assuming four hours
firms (from Table 6–14) plus 49,802 non-employer Including the comparison page would of training at an opportunity cost of $72.12
firms (from Table 6–13) plus 15,656 owners of small require more effort because it is completely per hour (based on a $150,000 fully-loaded
firms (from Table 6–13), which yields 102,758 new. The programming itself would not be annual salary); tuition of $250 per worker for
workers in small businesses. challenging since the new page only small firms and a discounted tuition of $125
57 One would think that practically all of the contrasts data from the HUD–1 and the GFE, per worker for large firms; and that half of
owners of the 49,802 non-employed firms appraised shows whether the tolerances are met, and the workers in small firms and one quarter
single-family properties, as well as most of the displays data concerning loan terms. The
37,300 employees in small employer firms. One
of the workers in large firms require training;
more complex calculations concerning the then the total cost of training is $71 million,
could argue that the number of workers for the
loan terms are not required to be done by the
entire industry in 2004 is an upper bound since of which $62 million is borne by small
mortgage activity in that year was higher than in the
settlement agent but by the lender. Loan business.
projection year. Additionally, automated valuation originators must transmit settlement cost and
loan term data to the settlement agents for Recurring Costs of the New HUD–1
models (AVMs) may have reduced the demand for
appraisers; particularly on refinance loans (see page 3 (the comparison page) of the HUD–1 There are few recurring costs associated
Section V.A of Chapter 5 for a discussion of AVMs). form. As discussed previously, lenders will with the revised HUD–1. The revised HUD–
1 will very likely have fewer entries than the cost to the industry would be $225 million of the script may be exaggerated. In the world
existing HUD–1 which will require fewer annually ($18 per loan × 12.5 million loans of the conscientious settlement agent, the
explanations of figures than is true with the annually), of which small business would additional burden of the script at closing
existing forms. This is because of the bear $107 million annually. During a high- would be closer to zero. However, because of
combined subtotals presented in many volume year (15.5 million loans annually), the concern expressed concerning the
sections in the new GFE in lieu of the the annual recurring compliance cost of the implications of the potential cost and legal
frequently numerous broken out individual HUD–1 would be $279 million annually. implications of the script, HUD will not
fees that we see on the GFE. The same is true The benefits of the comparison page of the require a script in its final rule.
when comparing the revised HUD–1 to the HUD–1 are not estimated separately from the To replace the script, HUD has added a
existing HUD–1. Comparing the new GFE to benefits of the new GFE ($6.48–$8.38 billion, page to the HUD–1 form. This will contain
the revised HUD–1 should be simpler than in see Section I.B of Chapter 3). It is assumed much of the same information but will be
the past because it will be much easier to that page 3, which displays tolerances and much easier to fill out and will not have to
find entries on the new HUD–1 that loan terms, reinforces the consumer savings be read by the settlement agent. The top half
correspond to the new GFE because they of the new GFE by compelling settlement will contain a table that compares settlement
have the exact same description. And, of agents and borrower to check the compliance charges with those on the GFE and shows the
course, there are fewer entries to deal with. with the tolerances. The comparison page is amount and percentage by which the charges
It is hard to imagine how simpler forms a vital part of the reform. Requiring it is have changed (in order to check whether the
could be more costly to explain to borrowers. expected to increase the number of change is within the tolerance). The bottom
There may be recurring costs from the consumers who realize the full benefits of the half of the page consists of a summary of the
addition of the comparison page (page 3) of final rule. The benefit of the comparison page loan terms, very similar to the first page of
the HUD–1. This new page will serve two is to double-check the final figures. the GFE.
purposes: (1) as a crosswalk between the The impact of this change is to reduce the
HUD–1 form and page 2 of the GFE and (2) Changes in the Final Rule to Reduce the maximum additional time imposed, which is
presenting a summary of the loan terms Regulatory Barrier of the HUD–1 expected to be imposed by the rule, from 45
similar to page 1 of the GFE. The costs of Recurring Costs of the HUD–1 Addendum minutes to 15 minutes per loan. At an
completing this page are minor. For opportunity cost of time of $72 an hour for
Comment. Many comments were opposed industry, this translates to a decrease in the
originators it could be close to zero. Although to the proposed HUD–1 Addendum or
the lender has to provide the settlement agent regulatory burden of $36 per loan, or $450
‘‘script’’ of the 2008 proposed rule. The million over an expected 12.5 million loans.
with information on the loan terms and some purpose of requiring settlement agents to
of the loan settlement charges, it should not complete and read this form document was Difficulty Comparing the New GFE and
constitute an additional burden. First, if the to have them describe, at settlement, the HUD–1
loan originator used a software program to terms of the loan and to compare the Under the March 2008 proposed rule, the
generate the GFE, he or she would already settlement charges on the GFE to those on the current HUD–1/1A Settlement Statements
have entered those data. A typical software HUD–1. The primary objection to the script would have been modified to allow the
program would print a HUD–1 for an was the time costs. HUD estimated the worst borrower to easily compare specific charges
originator that would contain all of the case scenario of the added time required of at closing with the estimated charges listed
required data concerning loan terms and a non-conscientious agent dealing with a on the GFE. The proposed changes would
settlement costs. The only information that is very complicated loan product to be an have facilitated comparison of the two
not already there is information concerning additional forty-five minutes. We assumed documents by inserting, on the relevant lines
the escrow account. Second, transmitting the that the script would lead to an additional of the HUD–1/1A, a reference to the
information on page 3 to the settlement agent thirty minutes preparing the script, and an corresponding block on the GFE, thereby
will not constitute an additional burden additional fifteen minutes to the actual replacing the existing line descriptions on
either: lenders and brokers already send closing procedure consisting of five minutes the current HUD–1/1A. The proposed
documents to settlement agents, the cost of reading the script, and ten minutes instructions for completing the HUD–1/1A
an additional page will not be noticeable. answering questions. To be cautious, we would have clarified the extent to which
However, there may be a small burden in applied this estimate to establish the outer charges for individual services must be
certain cases, and so we assume that the bound of the opportunity cost of the closing itemized. The script was proposed to
average burden is ten minutes per loan. script to the settlement firm at $54 per facilitate the comparison.
Settlement agents may also face an settlement. The total cost of the script in a Many commented that borrowers would
additional burden, although this is not likely normal year (12.5 million originations) could require more help in comparing the new GFE
either since the lenders are responsible for be $676 million. Settlement industry groups to their HUD–1. Lenders, mortgage brokers
providing the data. The settlement agent may were concerned about the potential and title and closing industry representatives
have to fill out the form if the lender does additional costs of preparing and reading the generally stated that the HUD–1 should be in
not transmit it on a completed HUD–1 page script. the same format as the GFE to enable
3. The settlement agent may also want to A second objection is that the script could comparisons of estimated and actual charges.
check the information concerning settlement place a settlement agent in the position of A lender association stated that the proposed
costs, tolerances, and loan terms to make sure committing the unauthorized practice of law. changes to the HUD–1 fall short of making
they agree with the GFE. In some cases, the This would occur if they were required to the GFE and HUD–1 correspond. Lenders
settlement agent will have to calculate the answer questions concerning issues such as also stated that the proposed HUD–1 is not
tolerances. Preparing page 3 of the HUD–1 the loan terms for which they had no consistent with the disclosures mandated by
may also alert the settlement agent to responsibility. TILA.
inconsistencies that would not have to be Response. At recent roundtables, A consumer group stated that while
resolved before closing. Thus, although the representatives of the settlement industry referencing the GFE lines on the settlement
addition of this page may have a very small have assured HUD that their primary goal is statement is an important step, HUD should
impact, we assume that it will add five transparency and customer service. HUD mandate a summary settlement sheet that
minutes on average to the time it takes to assumed that without the script settlement corresponds exactly to the summary sheet of
prepare a settlement. Taking loan originators agents would neither take any time to explain the GFE. According to this group, this would
into account, the total time burden is fifteen the HUD–1 to borrowers nor take any time to obviate the need for a crosswalk between the
minutes per loan. The compliance cost of the answer questions. Thus, HUD’s cost estimate GFE and the settlement statement. The
change to the HUD–1 for the industry as a consumer group stated that the HUD–1
whole is thus $18 per loan (fifteen minutes should be easily comparable to the GFE and
$72.12 opportunity cost (from a $150,000 fully-

at $72 per hour).58 The recurring compliance loaded salary), one could construct a cost estimate
should facilitate, rather than hinder TILA
from industry-specific data. For example in Tucson, and HOEPA compliance.
58 As for the GFE, an alternative method could be Arizona, the cost of labor (compensation and One broker suggested that HUD had
used to generate an estimate of the opportunity cost benefits) of a Real Estate Clerk is $16.66 per hour created three different documents—the GFE,
of time spent on a script. Instead of assuming a and $74.61 per hour for a Real Estate Attorney. the HUD–1 and the Closing Script—that
present the same information in completely $1,169 million and for industry $1,166 imposed by the rule since the increase in
different formats, and this will add to costs million (the sum of time saved answering time is voluntary. Consumers are free to
and confusion. borrowers’ questions and from the simplicity remain at previous lower levels of shopping
HUD agrees with the many commenters of average-cost pricing). There are also and enjoy a lower increase in saving from the
who pointed out the importance of positive spillovers of increasing consumers’ rule.
comparability between the GFE and the level of awareness. First, consumers will be We do not expect the average consumer to
HUD–1. The main strategy for facilitating less susceptible to predatory lenders and spend more time searching because there are
comparability between the GFE and HUD–1 therefore this type of wasteful activity will be other effects that should dominate the
will be by inclusion of a new third page discouraged, freeing up resources for more incentive described above. First, the higher
comparison chart with the HUD–1. This will productive purposes. Second, by better productivity in search of the new GFE
clearly present whether settlement fees are understanding the loan product, there will be increases a consumer’s savings at all levels of
within the tolerances on the top half of the a decrease in the probability of default search: Consumers will be able to reduce
page and will present a description of the leading to foreclosure, which can cause
their level of effort and retain the same level
loan in a similar fashion to the GFE on the dramatic social costs.
of saving previous to the rule.59 Second, we
bottom half. Shopping Time Saved by Borrowers expect that a large portion of the increase in
The final rule provisions for describing
some loan terms in the page 1 of the GFE and Consumers will save time in shopping for savings will be independent of an
page 3 of the HUD–1 are similar to the Truth both third-party services and mortgage loans individual’s shopping behavior. As the
in Lending Act (TILA) regulations, however as a result of the new GFE. HUD expects that market becomes more competitive, shoppers
the differences in approach between the the time savings for consumers will who are less sophisticated or less diligent
TILA regulations and HUD’s RESPA rule counterbalance some of the costs imposed on may still benefit from the competitive
make them more complementary than industry. The increased burden on pressure of others’ shopping. This additional
duplicative. The TILA and RESPA originators of arranging third-party saving will allow consumers to spend less
approaches to mortgage loan terms disclosure settlement services is likely to be much more time searching. The time that they do spend
are most similar when the loans are very than offset by a reduction in the aggregate searching, however, will be more effective
simple, e.g., fixed interest rate, fixed payment shopping burden for third-party providers and lead to greater savings. The new GFE
loans. The approach differs for more complex incurred by borrowers. Originators will be will allow consumers to spend more time
loan products with variable terms. In general, highly motivated to find low third-party comparing and evaluating offers and less
TILA describes how variable terms can vary prices. Originators could pass the savings on time trying to decipher the loan details.
(e.g., the interest rate or index to which and make it easier to appeal to borrowers, or Given that consumers will reduce the time
variable interest rates are tied, how alternatively, could raise their origination fee spent searching as a result of this rule, then
frequently they can adjust, and what are the by the savings in third-party fees and earn we would be underestimating the benefits to
maximum adjustment amounts, if any), but more profit per loan. Or the final result could consumers by only counting the gain in
forecasts the ‘‘likely’’ outcome based on an fall somewhere in between the two. income from reduced fees and not the gain
indefinite continuation of current market Regardless of which path any originator
in time saved. Considering the number of
conditions (e.g., the note rate will be x in the chooses, the lower third-party prices work to
loans the average originator closes per year,
future based in the index value y as of today). his or her advantage; originators will
the aggregate decrease in search efforts by
The RESPA disclosures in the GFE and probably be aggressive in seeking out lower
borrowers is very likely to exceed the
HUD–1 comparison page focus the borrower prices.
increase in aggregate search effort by the
on the ‘‘worst case scenario’’ for the loan The borrower benefits to the extent that,
upon receipt of the GFE, he or she originators. For example, if each borrower
product to ensure borrowers are fully saves an average of 15 minutes in shopping
cognizant of the potential risks they face in immediately has good pricing information on
third-party services. The borrower could for third-party services, then the total savings
agreeing to the loan terms. The disclosures to borrowers would be $234 million.60 As
on the GFE are meant to be as simple and immediately decide to use the originator’s
third parties, in which case his or her search discussed Sections VII.E.1 and VII.E.2 on
direct as possible to communicate differences tolerances, the new form and the tolerances
among loan products. HUD’s approach to is over. Or, the borrower could search further
with the originator’s prices as a good starting will enable borrowers to save time shopping
these disclosures thus supports consumers’ for loans and for third-party settlement
ability to shop for loans among different point and available as a fall-back, in which
case the borrower’s search efforts are likely service providers. If the new forms save the
originators. For a given set of front-end loan
to be greatly reduced. In both cases the average applicant one hour in evaluating
terms (initial interest rate, initial monthly
borrower searches less, but spending less offers and asking originators follow-up
payment, and up-front fees), originators have
time searching does not imply less benefits questions, borrowers save $935 million.61
an incentive to offer borrowers loans with
from the search. The total value of borrower time saved
worse back-end terms (e.g., higher maximum
interest rate, higher prepayment penalty) to The final GFE also creates time efficiencies
the extent capital markets are willing to pay by making mortgage loan details more 59 These effects are equivalent to the income and
more for loans with such terms. While transparent to consumers. Shopping will be substitution effects of consumer theory to
brokers are required to disclose such encouraged because consumers will have an understand the effect of a price change on the
easier time understanding and comparing consumption of a good. In this case, the increase in
differentials on the GFE and HUD–1, lenders
loans with a standard and comprehensible productivity of shopping should be considered as
are not. HUD’s GFE will help consumers to reduction in the price of savings in terms of leisure.
quickly and easily identify and distinguish GFE. The final rule increases the amount of
The income and substitution effect move in the
loan offers with similar front-end terms, but information processed by consumers;
same direction for the normal good whose price has
worse back-end terms, while shopping for the shopping accomplished; and the benefits changed but the opposite directions for the
best loan. Requiring a comparison page will realized from doing so. substitute.
act to double-check the HUD–1 and thus It is possible that under the final rule that 60 Calculated as follows: 21,250,000 projected
enhance the realization of the benefits of the some consumers will want to spend more mortgage applications (see Chapter 2) times $44 per
simpler GFE. time searching. Although additional time hour times 0.25 hour (or 15 minutes) gives $233.750
spent searching reduces the time spent on million. The $44 per hour figure is based on the
Efficiencies and Reductions in Regulatory other activities such as leisure, the reward of average income ($92,000) of mortgage borrowers, as
and Compliance Burden search is an increase in consumer savings. reported by HMDA; the $92,000 income figure is
Efficiencies come from time saved by both Assuming that the GFE increases the divided by 2,080 hours to arrive at the hourly rate
of $44.23 or $44. If the borrower saved 30 minutes
borrowers and originators as a result of forms productivity of every hour of search, it
in shopping time, then the total savings would be
that are easier to use, competitive impacts in therefore also increases the relative
$468 million.
the market, the decrease in the profitability opportunity cost of leisure. Consumers will 61 Calculated as follows: 12,500,000 loans times
of searching for victims, and the decrease in spend more time shopping to receive 1.7 applications per loan times 1 hour per
discouraged potential homeowners. All these additional income. Under these application times $44 per hour, the average hourly
are ongoing as opposed to one-time costs. circumstances an increase in the time spent income of loan applicants ($92,000 per year/2,080
The value of time saved for borrowers is shopping does not constitute a burden hours per year). See earlier footnote.
shopping for a loan and third-party services Social Efficiencies behavior. Reducing this activity will lead to
comes to $1,169 million.62 In this section, we discuss two social a net gain in social welfare equal to the sum
Time Saved by Originators and Third-Party efficiencies of the rule: The reduction of non- of the marginal costs of extracting the
Service Providers productive behavior and positive markup.
externalities of preventing foreclosures. The total transfer to consumers of $5.88
Originators and third-party settlement billion represents 14 percent of the total
service providers will save time as well. If Reduction in Non-Productive Behavior revenue of originators, which is projected to
half the borrower time saved in (1) above By reducing the profitability of searching be $42.0 billion. As explained above, this
comes from less time spent with originators for less-informed borrowers, the rule will gain in surplus is greater than the loss to
and third-party settlement service providers, lead to a more efficient allocation of producers when firms are engaged in
then originators spend half an hour less per resources. wasteful predatory behavior. If the decline in
loan originated answering borrowers’ follow- The primary benefit to consumers is the this activity represented 1 percent of current
up questions and third-party settlement transfer of surplus from firms that charge originator effort, this would result in $420
service providers spend 7.5 minutes less with significant markups. Much of the excess fees million in social surplus. In the absence of
borrowers for a saving of $765 million 63 and earned by loan originators and settlement this activity, these resources could be
$191 million, respectively, for a total of $956 firms is extracted costlessly. Price- devoted elsewhere making society richer.
million.64 discriminating firms are able to assess the The transfer to consumers is composed of
Time Saved From Average Cost Pricing information asymmetry between themselves both the lost excess profits from markups and
and potential borrowers and estimate the the deadweight loss from the inhibited
As discussed in Chapter 3, the final rule predatory activity to achieve those markups.
consumers’ willingness to pay a markup
allows pricing based on average charges. This Thus, the gain to consumers will outweigh
beyond the costs of originating a loan. Most
reduces costs because firms do not have to the loss in profits of predatory firms.
loan originators base their estimates of a
keep up with an itemized, customized cost consumer’s level of information on signals External Benefits of Preventing Foreclosures
accounting for each borrower. This not only from the consumer. They do not need to
saves costs when generating the GFE, it is Another social benefit of the rule is its
expend additional time or resources to do so.
also saves quality control and other costs contribution to sustainable homeownership.
However, there is a minority of loan
afterwards. Industry sources have told HUD It is more likely that consumers who
originators that devote significant resources
that this could be the source of significant understand the details of their loans will
to advertising to borrowers with a lower
cost savings. avoid default and thus foreclosure. There are
expected level of financial sophistication. If
As explained above, there will be two ways in which this rule will contribute
the rule leads to a reduction in predatory
reductions in compliance costs from average to sustainable homeownership. The first is to
behavior, there will be a gain in social
cost pricing. It is estimated that the benefits encourage shopping by providing a
welfare equal to the costs of actively
of average cost pricing (e.g., reduction in the transparent disclosure of settlement costs and
searching for less informed borrowers.
number of fees whose reported values must other loan details. Such competitive market
The loan originator acts to maximize his or
be those specifically incurred in each behavior should reduce settlement costs and
her expected profit. By raising the requested
transaction) will lead to a reduction in provide a small cushion for borrowers in the
settlement charges above the settlement
originator costs of 0.5 percent, or $210 eventuality of financial distress. The second
costs, a loan originator increases his or her is by educating consumers and helping them
million. No breakdown of fees is needed. No mark-up but increases the probability that the choose the loan that is most appropriate. A
knowledge of an exact fee for each specific consumer will reject the offer. The extent of better understanding of the loan details
service needed for the loan is required for the a consumer’s knowledge of the market will should lead to a better understanding of the
GFE. In addition, no exact figure for the also raise the probability of rejecting a risks inherent in assuming a large financial
amount actually paid needs to be recorded markup. The optimal markup is the one at obligation, and thus a better decision by the
for each loan and transmitted to the which the net revenues from offering loans borrower as to the best loan or even whether
settlement agent for recording on the HUD– at higher prices and a higher rejection rate homeownership is the optimal choice.
1. The originator only needs to know his or equals the net revenues from offering loans Factors that precipitate default are
her approximate average cost when coming at lower competitive prices and a lower downward trends in property values, a loss
up with a package price that is acceptable. rejection rate. It is expected that the rule will of income of the borrower, and an increase
The cost of tracking the details for each item increase the average individual’s in interest rates for borrowers with
for each loan is gone. information; increase the likelihood that they adjustable-rate mortgages (ARMs). None of
would reject excessive fees; and thus reduce these events can be predicted with certainty
62 The benefits are calculated by using the ratio
the prevalence of high markups. This and understanding the loan itself cannot
of 1.7 applications per loan, which is a measure of reduction is what constitutes the transfer to
the current state of affairs. Although we calculate
eliminate the uncertainty. However, a full
borrowers of $668 per loan. appreciation of the potential risks of the loan
administrative costs for firms at different ratios (1.7
and 2.7), it would be misleading to calculate
An aggressive seeker of fees may choose to should lead to a careful decision as to
consumer benefits at higher ratios. Going from an actively search for less informed borrowers whether the loan vehicle is the best one given
average of 1.7 to 2.7 applications per loan does not who are more likely to accept loans with the uncertainty. For example, knowing how
save the average consumer more time. It is clear that excessive fees. The optimal level of search high your interest rate and monthly
the consumer will not be harmed because the effort is the one at which the marginal cost payments can go should make the loan
increase in applications is voluntary but should not of searching is equal to the change in applicant hesitant to accept an ARM unless
be counted as an efficiency. As argued in the text, probability of acceptance from finding less the borrower has the income security to do
we believe that the net change in time spent informed clients times the markup (marginal
searching will be negative. so. Given the same information, different
63 Calculated as follows: 12,500,000 loans times
benefit of search). By increasing the level of borrowers may choose different loans
1.7 applications per loan times 0.5 hours per
information among consumers, the rule will depending on their risk and time preferences.
application times $72 per hour, the average hourly raise the marginal cost of searching for However, it is important that they make an
income of loan originators ($150,000 per year/2,080 vulnerable borrowers and thus will lead to a informed decision.
hours per year). lower optimal level of searching by loan There is strong evidence that borrowers
64 Just as we do for consumers, we estimate the originators. underestimate the costs of adjustable rate
value of time efficiencies using the 1.7 application Whenever producers expend substantial loans. Buck and Pence (2008) assessed
per loan ratio even when comparing it to costs effort to extract consumer surplus, there is a whether borrowers know their mortgage
generated using the higher 2.7 ratio. It would not deadweight loss. The predatory lender terms by comparing the distributions of these
be logical to claim that we are saving a firm any diverts resources from producing output to variables in the household-reported Survey
time by requiring them to process additional

applications. However, it may be sensible to reduce
producing markups (consumer loss). By of Consumer Finances (SCF) to the
the recurring compliance costs from assuming a creating transparency and enhancing a distributions in lender-reported data. The
higher number of applications because the consumer’s understanding, the rule will not authors find that although most borrowers
additional application will not be as much of a only lead to transfers of excess fees to seem to know basic mortgage terms,
burden as it was before. consumers but will inhibit costly predatory borrowers with adjustable-rate mortgages
appear likely to underestimate or to not know revenue, insurance, marketing, and clean-up. Other Efficiencies
how much their interest rates could change. Of these costs, the primary cost to lenders is There are other potential efficiencies that
Borrowers who could experience large the cash loss on property.
payment changes if interest rates rose are The lender and borrower are not the only are anticipated from the new GFE approach
more likely to report not knowing these parties to suffer from a foreclosure. It is often but would be difficult to estimate. For
contract terms. Difficulties with gathering argued that there are negative impacts to the example, studies indicate that one
and processing information appear to be a value of neighboring properties from a impediment to low-income and minority
factor in borrowers’ lack of knowledge. The foreclosure. There are many reasons for these homeownership may be uncertainty and fear
final GFE would present critical loan terms externalities. There is an amenity value to about the home buying and lending process.
such as the maximum monthly payment on having an up kept property next door; The new GFE approach should increase the
the first page in order to better inform foreclosed properties if vacant can attract certainty of the lending process and, over
borrowers. crime; and there may also be a depressing time, should reduce the fears and
The least desirable consequence of an effect on the local economy. A reasonable
uncertainties expressed by low-income and
uninformed decision is foreclosure. The Joint estimate of the negative externality of a
Economic Committee of the U.S. Congress foreclosure on nearby properties is $1,508. In minority families about purchasing a home
estimates the total costs to society at close to addition, the local government loses $19,227 (see Section VII.F of Chapter 3). As discussed
$80,000 per foreclosure. The foreclosed upon through diminished taxes and fees and a in Section IV.D.4 of Chapter 2, improvements
household pays moving costs, legal fees, and shrinking tax base as home prices decrease. in lender information (e.g., interest and
administrative charges of $7,200. A study The total benefits of preventing a foreclosure settlement costs) should also lend to a
from the Federal Reserve Bank of Chicago is $77,935 in averted costs. It is difficult to general increase in consumer satisfaction
reported that lenders alone can lose as much estimate how many foreclosures a uniform with the process of taking out a mortgage (see
as $50,000 per foreclosure. Standard and and transparent GFE with settlement fee CFI Group, 2003).
Poor’s describes these costs as consisting of tolerances would prevent. However,
loss on loan and property value, property preventing 1,300 foreclosures nationwide [FR Doc. E8–27070 Filed 11–14–08; 8:45 am]
maintenance, appraisal, legal fees, lost would yield $100 million of benefits. BILLING CODE 4210–67–P

HUD Final Rule 2009

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HUD Final Rule 2009

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Monday,

November 17, 2008

Comments that a violation of any of the HUD Determination

definition of ‘‘mortgage broker.’’ While construction advances. For mortgages on properties

understanding of loan terms and particularly concerned that the

aloud at closing.’’ In response to comments received on competition and lower costs to

on behalf of the borrower. instructions. would be entered in Section M. In a home

BILLING CODE 4210–67–C

BILLING CODE 4210–67–C

competitive market that was the result of different of these studies. 3.

6 Throughout this Economic Analysis, the terms

TABLE 6–1—INDUSTRY BREAKDOWN OF CONSUMER SAVINGS

Loan Origination .......................................................................................................................... $5.88 $470 70

Total * ............................................................................................................................. 8.35 668 100

11 See Step (7) of Section VII.E.1 of Chapter 3 for

the derivation of the $24.738 billion.

TABLE 6–2—SUMMARY OF ONE-TIME ADJUSTMENT COSTS

GFE HUD–1 Total

Total .................................................. 383 268 188 139 571 407

TABLE 6–3—COMPLIANCE COSTS OF THE FINAL RULE

One-time compliance costs Recurring compliance costs

GFE ...................................................................................... $383 $268 $693 $364 $55.40

TABLE 6–3—COMPLIANCE COSTS OF THE FINAL RULE—Continued

One-time compliance costs Recurring compliance costs

HUD–1 ................................................................................. 188 139 225 107 18.00

Total .............................................................................. 571 407 918 471 73.40

TABLE 6–4—PREDICTED REDUCTIONS IN THE COST OF A LOAN

Source of gain or loss First year Afterwards

Average Consumer Savings .................................................................................................................................... $668 $668

Net Consumer Savings ............................................................................................................................................ 548 594

Firms’ Efficiencies ............................................................................................................................................. +93 +93

Net Benefits to Consumer ....................................................................................................................................... 696 742

questioned by the average first-time

TABLE 6–5—DISTRIBUTION OF CATEGORIES OF CLOSING COSTS AS A PERCENTAGE OF LOAN AMOUNT

Total Closing Cost ............................................................... 2.9 4.1% 5.1 6.4 8.9

the case where the originator issues the GFE).

TABLE 6–6—VOLUME OF RETAIL MORTGAGE ORIGINATIONS

Mortgage Brokers ............................................................................ 7,500,000 60.00 5,250,000 70.00

Total .......................................................................................... 12,500,000 100.00 6,527,349 52.22

TABLE 6–7—WORKERS ENGAGED IN RETAIL MORTGAGE LOAN ORIGINATION

Mortgage Brokers ............................................................................................................ 375,000 288,750 77.00

Total .......................................................................................................................... 625,000 352,617 56.42

www.dynatek.com/products.asp. economic impact to the software industry would

Mortgage Brokers ............................................................................................................ $61,267,428 $52,891,226 86.3

Total .......................................................................................................................... 91,042,558 64,590,020 70.9

TABLE 6–9—ONE-TIME LEGAL CONSULTATION COSTS OF THE NEW GFE

Mortgage Brokers ............................................................................................................ $73,219,520 $56,375,264 77.0

Total .......................................................................................................................... 115,874,000 69,852,767 60.3

TABLE 6–10—ONE-TIME WORKER TRAINING COSTS OF THE NEW GFE

Mortgage Brokers ............................................................................................................ $134,522,236 $119,387,019 88.7

Total .......................................................................................................................... 193,591,648 145,793,746 75.3

38 Several items were dropped from the new GFE,

an additional twenty-seven minutes per closing and

applications as loans originated; therefore, if

Mortgage Brokers ........................................................................................................................................ $90,000,000 $63,000,000

Total ...................................................................................................................................................... 150,000,000 78,328,183

TABLE 6–13—FIRMS IN INDUSTRIES PROVIDING SETTLEMENT SERVICES

Direct title insurance carriers ......................................................................... 2,094 1,865 135 95.5

Total ........................................................................................................ 984,403 225,374 757,074 99.8

TABLE 6–14—EMPLOYEES IN INDUSTRIES PROVIDING SETTLEMENT SERVICES

Direct Title Insurance Carriers ......................................................................................... 75,702 7,144 9.4

Total .......................................................................................................................... 1,573,154 904,490 57.5

TABLE 6–15—VOLUME OF SETTLEMENT SERVICE ACTIVITY