HUD Issues New Rules Requiring Good Faith Estimate of Loan Costs
On November 12, 2008, the U.S. Department of Housing and Urban Development ("HUD") issued a long-anticipated Final Rule amending the regulatory framework of the Real Estate Settlement Procedures Act ("RESPA"). In conjunction with the Final Rule, HUD also issued a standardized Good Faith Estimate form and a revised HUD-1 Settlement Statement form. Compliance with the Final Rule and use of these standardized forms will become mandatory on January 1, 2010.
Industry groups maintain that the Final Rule is deficient in many respects, arguing that because it may overlap with regulations issued by the Fed under the Truth in Lending Act, it creates the possibility of conflicting and ambiguous requirements for lenders and brokers. Consumer advocates also maintain the Final Rule is deficient, arguing that it falls short of stopping certain incentives, such as yield-spread premiums, that contributed heavily to the current problems in the mortgage market, and fails in a broader sense in that it does not help consumers answer the basic question: Can I afford this loan?
Key to these regulations is the requirement that lenders or brokers issue a Good Faith Estimate at the outset of the loan process. Lenders must prepare the estimate with a minimum of information from the borrower, such as the borrower's name, Social Security number, gross monthly income, address and value of the property, and the amount of the proposed mortgage loan. Lenders can request additional information, but cannot expect the borrower to go into the detail otherwise reserved for the formal loan application process.
Once the lender has the necessary information, it must provide the borrower with a Good Faith Estimate (at no charge to the borrower) within three days. The Good Faith Estimate will contain information needed to help consumers shop for the lowest-cost loan, such as the interest rate, timing and cost of the interest rate lock, estimated cost of all settlement charges (including title insurance and recording fees), and the general terms of the loan, such as the amount, term, origination fees, estimated monthly payment, and the fixed or variable nature of the interest rate.
Because the purpose of this estimate is to help consumers make informed decisions, loan originators have an express obligation to provide accurate information up front. As a result, the final cost and terms of the loan and closing process must reflect the original Good Faith Estimate, except under certain specific circumstances.
This Final Rule represents a substantial changes in the regulatory environment surrounding residential mortgage loans and the settlement process. In addition to the significant changes that lenders and brokers will need to make to their loan application process in order to ensure full compliance with the Good Faith Estimate requirements, there will be many practical business arrangements that will have to be made to ensure that disclosed costs (such as a title company's settlement costs) are accurate.
