The Department of Housing and Urban Development recently addressed a number of issues that have arisen under changes to the Real Estate Settlement Procedures Act. Among the issues addressed were using a worksheet in lieu of a good faith estimate, rules on refinance transactions and the disclosure of yield spread premiums.
HUD conducted a Webinar on March 18 to address various issues under the new rules. But at the time this article was written, HUD had not updated the FAQs on its Web site since the Jan. 28 version, though its staff has indicated that a new version would be provided soon. This article addresses certain elements of the guidance addressed in recent Webinar.
HUD addressed the concept of providing a worksheet. Reports had surfaced that some loan originators may have been issuing a worksheet in lieu of a GFE of settlement costs, until such time as the consumer indicated intent to proceed with the originator to obtain a loan.
HUD advised that if a consumer requests a GFE, a loan originator should disclose the information that the consumer must provide to obtain a GFE and may not condition issuing a GFE on a consumer showing intent to move forward with a loan. HUD does not object to the use of worksheets for generic rate quotes, but a worksheet may not look like a GFE and must be clear that it is not a GFE.
Moreover, if a consumer has provided the required elements of a loan application under the originator’s policy, a GFE must be provided; a worksheet may not be issued in lieu of a GFE. In particular, because the property is known with a refinance transaction, a worksheet may not be issued in lieu of a GFE as part of a pre-qualification or pre-approval for such a transaction if the consumer has provided the other elements of what constitutes an application under the originator’s policy.
When a worksheet is issued in conjunction with a GFE to provide additional information, the worksheet should contain the fee amounts as in the GFE, and may provide additional items such as seller credits, non-loan fees, and a cash to close calculation. An originator may not, for example, disclose $1,000 for a particular item in the GFE and disclose $500 for the same item in the worksheet. That is, an originator may not pad the fee amount disclosed in the GFE, and disclose the actual anticipated fee amount in the worksheet.
HUD advised that in a refinance transaction, an originator may not treat the property as a missing element of what constitutes an application under the originator’s policy. If the originator has all of the elements that constitute a loan application under its policy other than the property, the originator may not issue a pre-qualification or pre-approval without a GFE. An originator may never advise a consumer not to disclose their property address in order to avoid providing a GFE.
With a purchase transaction, the property is considered to be identified once the consumer executes a purchase contract on a property. Therefore in a purchase transaction, if the originator has received all of the other elements of what constitutes an application under its policy, an originator may issue a pre-qualification or pre-approval without a GFE only if the consumer has not executed a purchase agreement. An originator may not require a consumer to provide documentation to receive a pre-qualification or pre-approval, but a consumer may voluntarily elect to provide documentation in order to receive a more formal pre-qualification or pre-approval. This guidance appears to conflict with FAQ number 33 in the Jan. 28 version of the FAQs. HUD indicated that it plans to “clarify” FAQ number 33.
HUD advised it has heard various views on how to disclose the YSP with regard to Block 1 of the GFE, including that none of, all of and double the YSP is included in Block 1. HUD advised that with a wholesale transaction (1) it is unlikely that none of the YSP is included Block 1, (2) in some cases all of the YSP is included in Block 1 and (3) Block 1 never would include double the YSP.
A key to understanding HUD’s position is that HUD uses the term “yield spread premium” to refer to the total credit that a lender will contribute to a transaction based on the interest rate, and not simply the compensation that a lender will pay to a broker based on the interest rate. With a wholesale loan, all compensation to be received by the broker (and the lender) is included in Block 1, including any compensation paid by the lender to the broker out of the YSP.
HUD also advised that when a loan goes from floating the interest rate to locking the interest rate, Block 1 is not changed solely because of the lock. That is, while the amount of the YSP in Block 2 may increase or decrease based on the lock, the amount in Block 1 would remain the same. Thus the compensation to a mortgage broker in Block 1 would remain the same, unless the broker elects to decrease its compensation.
HUD confirmed that compensation paid to an employee loan officer is not disclosed in Block 1 of the GFE. (The new RESPA rules did not change the prior rule under which compensation paid to an employee is not captured by the disclosures.)
Administrative and processing fees of a loan originator are included in Block 1 of the GFE. HUD advised that administrative and processing fees include basically all loan origination processing fees, including third-party fees for services the lender uses to process or underwrite the loan, except for tax service, credit report, flood certification, life of loan flood determination and appraisal fees. In contrast, third party fees not determined by the originator, for services required and selected by the originator, are included in Block 3. Thus, a fee of a loan originator to process a subordination is included in Block 1, but the fee of a third party to subordinate its lien is included in Block 3.
The housing agency advised that because the HUD-1 and HUD-1A do not act as a ledger for the compensation received by a mortgage broker, the closing instructions of the lender must set forth the payments to be made to the broker.
An itemization of loan-related fees that is included in the HUD-1/1A should be set forth in an addendum, unless the itemization is required by state law or a governmental loan program. When so required, the itemization can be set forth on a blank line outside of the columns in the 800 series. Similarly, if there is a net credit to the borrower on Line 803, which would mean that the lender was paying some or all third party fees, an itemization of the credit may be included in addendum to the HUD-1/1A, unless the itemization is required by state law or a governmental loan program. When so required, the itemization can be set forth on a blank line outside of the columns in the 800 series.
HUD advised that, subject to an exception (1) if state law attributes all of the transfer taxes to the seller, then the GFE does not have to include any amount for transfer taxes, and (2) if state law attributes some of the transfer taxes to the borrower, then the GFE must include only the amount attributed to the buyer. If, however, before issuing the GFE the originator has the purchase contract and the contract assigns more of the transfer taxes to the buyer than assigned under state law, the higher amount must be included in the GFE. If the purchase contract assigns less of the transfer taxes to the buyer than assigned by state law, the GFE must include the higher amount assigned to the buyer by state law. HUD staff also has advised that further guidance regarding transfer taxes is under consideration.