RESPA Rules Require New Forms

RESPA stands for Real Estate Settlement Procedures Act and was first enacted in 1974 to protect consumers from unnecessary charges associated with securing home mortgage financing. These rules are constantly under scrutiny and now, new Federal mortgage rules have gone into effect beginning January 1, 2010. These new rules were introduced after over two years of research and interviews by the Department of Housing and Urban Development and the Federal Reserve into better ways to protect the interests and rights of borrowers.

The new rules are designed to help consumers shop for and find the best loan for their particular situation. The rules caused a re-creation of the Good Faith Estimate of Closing Costs as well as the final HUD-1 or Settlement Statement. The new forms in their original format are a requirement for every new residential home mortgage originated after January 1st of this year. The forms break down the costs of every home mortgage in the simplest terms and make it all but impossible for lenders to hide fees.

It sounds contradictory, but the new GFE (Good Faith Estimate) has been simplified and yet lengthened from a single legal size sheet to three letter size sheets. (This form may be viewed on-line at: http://www.hud.gov/content/releases/goodfaithestimate.pdf).

Page one of the new GFE gives the borrower an overview of the terms of the mortgage they are considering as well as a proposed interest rate and fee summary. Federal law now mandates that these costs be good for a minimum of 10 days. This is to give the borrower time to shop for better loan terms and or lower costs.

At the bottom of page one each lender must record the borrower’s proposed adjusted origination charges and the total for all other settlement services. Then these two sums are totaled to reveal the borrower’s total settlement charges. Once these charges have been totaled and a rate has been locked, Federal law mandates that they may not increase at closing.

The box at the top of page two shows the borrower how the lender arrived at the adjusted origination charges. The first figure is the lender’s origination charge and must include ALL of the lenders origination charges including: broker fees and charges, application fees, underwriting and processing fees, tax service fees, flood certification fees, etc. In short, all fees charged by the lender for this loan must be lumped into the dollar amount listed on this line.

Just below this figure the lender must declare the borrower’s credit or charge (points) for the specific interest rate chosen. One of three choices must be made. a) “The credit or charge for the interest rate of ____% is included in our origination charge” (see the figure above); b) “You receive a credit of $_______ for the interest rate of _____%. This credit reduces your settlement charges”; c) “You pay a charge of $____ for this interest rate of ____%. This charge (points) increases your total settlement charges”. The sum of these two figures becomes the borrower’s adjusted origination charge and is transferred to the bottom of page one.

The remainder of page two of the GFE is dedicated to other charges associated with the loan such as title fees and other services required by the lender, such as appraisal, inspections, and FHA/VA funding fees. And the new RESPA guidelines extend greater protection to borrowers by limiting many of these services to a 10% increase over the figures quoted in the GFE.

Once the borrower provides enough information for a full application, Federal law mandates that the GFE be provided to the borrower within three business days. The GRE has become a legal and binding document between the lender and the borrower. For this reason lenders will not be allowed to provide a Good Faith Estimate unless a complete application has been taken.

The following information is required for a complete application: Borrower(s) name, Social Security number of Tax ID Number, property address, monthly income, property value or “best estimate”, and loan amount (including interest rate and product type).

The look and feel of the new GFE is quite a bit different from the form that has been in use for so many years. But borrowers will quickly become comfortable with the additional protection it provides them and the ease with which it allows them to compare financing costs between different lenders.