January 1, 2010 is more than the first day of the second decade of the 21st century, it is also the day new guidelines from the Department of Housing and Urban Development (HUD) go into effect. And with these guidelines it is hoped a new day of increased transparency and improved clarity for borrowers seeking their best options for home financing.
Until now many of the fees charged by lenders, title companies and third party providers could undergo dramatic changes between the time the loan was originated and the time it closed. These changes could amount to hundreds of dollars in additional money being charged to the borrower. Some of these increases were unavoidable. In most cases not only were they avoidable, but one set of fees was quoted to get the business while the actual fees were withheld until closing.
In 2005 HUD held a series of roundtable discussions with industry representatives, trade associations and consumer groups to discuss the impacts of these practices. After two and one half years, HUD its proposed rule changes on March 14, 2008. Since then HUD has received over 12,000 public comments in response to these proposed rules.
The hope of HUD is that these new rules will help consumers shop for the loan that is best for their needs. HUD believes that shopping leads to greater competition and that increased competition leads to lower prices.
Because loan fees have been at the center of this controversy, HUD has attempted to simplify the shopping process for borrowers. By dividing all loan fees into three categories it is hoped that borrowers will be able to make more wise decisions when making their choice for home financing.
Category One: These Fees Cannot Increase at Settlement
The lenders origination charge – this is the up front cost the lender charges to provide their services. In the past, this fee has seen dramatic increases, sometimes based on the difficulty of processing the borrower’s file.
The credit or charge (points) for the specific interest rate after it is locked – many lenders have made it their practice to “float” the interest rate until pricing improves and the yield they make increases. This spread is called the yield spread, or YSP. If pricing is worse, the points charged for the “promised” rate have historically increased. Mortgage Brokers will no longer be able to pass on an increased fee but instead will be held accountable to own up to their own risk when floating an interest rate.
Just what is the YSP? - A bit of background is required for this explanation. Under the new ruling, HUD has determined that YSP is harmful to consumers and must be disclosed to borrowers. Further, HUD has mandated that the YSP be disclosed in the form of a credit to the borrower on the Good Faith Estimate of closing costs. In order to keep their YSP, mortgage brokers must now offset this credit by increasing their origination charge. In contrast, Mortgage Bankers are not required to disclose YSP, because they do not earn a yield spread.
Category Two: Charges that can increase up to 10% at settlement
Required services the lender selects – this can include appraisal, inspections and appraisal reviews.
Title services and lender’s title insurance if the lender selects the title company or borrower uses a company the lender identifies.
Owner’s title insurance if the borrower uses a company the lender identifies.
Required services that the borrower can shop for and if they use a company identified by the lender.
Government recorded charges.
Category Three: Charges that can change at settlement
Required services that the borrower can shop for as long as the company is not identified by the lender.
Title services and lender’s title insurance so long as the borrower does not use the company the lender has identified.
Owner’s title insurance (if the borrower does not use the company identified by the lender.
Initial deposit for the escrow account.
Daily interest charges.
There are other ingredients to these new rules and all are designed to protect the borrower from harmful or predatory lending practices. For the complete HUD booklet on this subject click here.