# Real Estate Settlement Procedures Act (RESPA): Proposed Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A08-1015 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** March 14, 2008 - **Citation:** 73 FR 14030 ## Text DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Parts 203 and 3500 [Docket No. FR-5180-P-01] RIN 2502-AI61 Real Estate Settlement Procedures Act (RESPA): Proposed Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs AGENCY: Office of the Assistant Secretary for Housing—Federal Housing Commissioner, HUD. ACTION: Proposed rule. SUMMARY: This proposed rule presents HUD's proposal to simplify and improve the disclosure requirements for mortgage settlement costs under the Real Estate Settlement Procedures Act of 1974 (RESPA), to protect consumers from unnecessarily high settlement costs. This proposed rule takes into consideration: discussions during HUD's RESPA Reform Roundtables held in July and August 2005; public comments in response to HUD's July 29, 2002, proposed rule that addressed RESPA reform; and comments received and views expressed through congressional hearings; meetings with affected parties; and consultation with other federal agencies, including the Small Business Administration Office of Advocacy. HUD's objective in proposing these revisions is to protect consumers from unnecessarily high settlement costs by taking steps to: Improve and standardize the Good Faith Estimate (GFE) form, to make it easier to use for shopping among settlement service providers; ensure that page one of the GFE provides a clear summary of the loan terms and total settlement charges so that borrowers will be able to use the GFE to comparison shop among loan originators for a mortgage loan; provide more accurate estimates of costs of settlement services shown on the GFE; improve disclosure of yield spread premiums to help borrowers understand how they can affect their settlement charges; facilitate comparison of the GFE and the HUD-1/HUD-1A Settlement Statements (HUD-1 settlement statement or HUD-1); ensure that at settlement borrowers are made aware of final loan terms and settlement costs, by reading and providing a copy of a “closing script” to borrowers; clarify HUD-1 instructions; clarify HUD's current regulations concerning discounts; and expressly state when RESPA permits certain pricing mechanisms that benefit consumers, including average cost pricing and discounts, including volume based discounts. DATES: Comment Due Date: May 13, 2008. ADDRESSES: Interested persons are invited to submit comments regarding this proposed rule. There are two methods for comments to be submitted as public comments and to be included in the public comment docket for this rule. Regardless of the method selected, all submissions must refer to the above docket number and title. 1. Submission of Comments by Mail. Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-0001. 2. Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal eRulemaking Portal at www.regulations.gov . HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows commenters maximum time to prepare and submit comments, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the www.regulations.gov Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically. Note: To receive consideration as public comments, comments must be submitted through one of the two methods specified above. Again, all submissions must refer to the docket number and title of the rule. No Facsimile Comments. Facsimile (FAX) comments are not acceptable. Public Inspection of Public Comments. All properly submitted comments and communications submitted to HUD will be available, without charge, for public inspection and copying between 8 a.m. and 5 p.m. weekdays at the above address. Due to security measures at the HUD Headquarters building, an advance appointment to review the public comments must be scheduled by calling the Regulations Division at (202) 708-3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number through TTY by calling the toll-free Federal Information Relay Service at (800) 877-8339. Copies of all comments submitted are available for inspection and downloading at www.regulations.gov . FOR FURTHER INFORMATION CONTACT: Ivy Jackson, Director, or Barton Shapiro, Deputy Director, Office of RESPA and Interstate Land Sales, U.S. Department of Housing and Urban Development, 451 Seventh Street, SW., Room 9158, Washington, DC 20410; telephone number (202) 708-0502 (this is not a toll-free number). For legal questions, contact Paul S. Ceja, Assistant General Counsel for GSE/RESPA, Joan L. Kayagil, Deputy Assistant General Counsel for GSE/RESPA or Rhonda L. Daniels, Attorney-Advisor for GSE/RESPA, Room 9262; telephone number (202) 708-3137. Persons with hearing or speech impairments may access this number via TTY by calling the toll-free Federal Information Relay Service at (800) 877-8339. The address for the above listed persons is: Department of Housing and Urban Development, 451 Seventh Street, SW., Washington, DC 20410. SUPPLEMENTARY INFORMATION: I. Introduction and Principles The process for disclosing settlement costs in the financing or refinancing of a home is regulated under RESPA, 12 U.S.C. 2601-2617. HUD seeks to make improvements to its regulations implementing RESPA (24 CFR part 3500), to make the process clearer and more useful and ultimately less costly for consumers. The mortgage industry has changed considerably since RESPA was enacted in 1974, and the regulations implementing RESPA's original disclosure requirements are no longer adequate. The settlement costs associated with a mortgage loan are significant. In the case of purchase transactions, these costs can become an impediment to homeownership, particularly for low- and moderate-income households. HUD's current RESPA rules do not facilitate shopping or competition to lower these costs. HUD estimates that with the changes proposed to its RESPA regulations in this rulemaking, settlement costs will be lowered by $6.5 to $8.4 billion annually, with an average savings of $518 to $670 per transaction. RESPA's purposes include the provision of effective advance disclosure of settlement costs and elimination of practices that tend to unnecessarily increase the costs of settlement services. Similarly, the Administration is committed to extending homeownership opportunities. HUD's regulatory reform and enforcement efforts for RESPA remain guided by the following principles: 1. Borrowers should receive loan terms and settlement cost information early enough in the process to allow them to shop for the mortgage product and settlement services that best meet their needs; 2. Costs should be disclosed and should be as firm as possible to avoid surprise charges at settlement; 3. Many of the current problems arise from the complexity of the mortgage loan settlement process. The process can be improved with simplification of disclosures and better borrower information; 4. Increased shopping by borrowers will lead to greater pricing competition, so that market forces will lower prices and lessen the need for regulatory enforcement; 5. The key final terms of the loan a borrower receives should be disclosed to the borrower in an understandable way at closing; and 6. HUD will continue to vigorously enforce RESPA to protect borrowers and ensure that honest settlement service providers can compete for business on a level playing field. II. RESPA Overview Congress enacted the Real Estate Settlement Procedures Act of 1974 (Pub. L. 93-533, 88 Stat. 1724, 12 U.S.C. 2601-2617) after finding that “significant reforms in the real estate settlement process are needed to ensure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices * * *.” (12 U.S.C. 2601(a)). RESPA's stated purpose is to “effect certain changes in the settlement process for residential real estate that will result: “(1) In more effective advance disclosure to home buyers and sellers of settlement costs; “(2) In the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services; “(3) In a reduction in the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance; and “(4) In significant reform and modernization of local recordkeeping of land title information.” (12 U.S.C. 2601(b)). RESPA's requirements apply to transactions involving “settlement services” for “federally related mortgage loans.” Under the statute, the term “settlement services” includes any service provided in connection with a real estate settlement. 1 The term “federally related mortgage loan” is broadly defined to encompass virtually all purchase money and refinance mortgages. 2 1 “Settlement services” include “* * * title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing of settlement.” 12 U.S.C. 2602(3). The term is further defined at 24 CFR 3500.2. 2 The term “federally related mortgage loan” generally includes a loan that both: (i) Is “secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families”; and (ii) is “made in whole or in part by any lender the deposits or accounts of which are insured by any agency of the Federal Government, or is made in whole or in part by any lender which is regulated by any agency of the Federal Government”; or “is made * * * or insured, guaranteed, supplemented, or assisted in any way, by [HUD] or any other officer or agency of the Federal Government or * * * in connection with a housing or urban development program administered by [HUD]” or other federal officer or agency; or “is intended to be sold * * * to [Fannie Mae, Ginnie Mae, Freddie Mac], or a financial institution from which it is to be purchased by [Freddie Mac]; or is made in whole or in part by any creditor * * * who makes or invests in residential real estate loans aggregating more than $1,000,000 per year * * *.” 12 U.S.C. 2602(1). Section 4(a) of RESPA (12 U.S.C. 2603(a)) requires the Secretary to develop and prescribe “a standard form for the statement of settlement costs which shall be used * * * as the standard real estate settlement form in all transactions in the United States which involve federally related mortgage loans.” The law further requires that the form “conspicuously and clearly itemize all charges imposed upon the borrower and all charges imposed upon the seller in connection with the settlement * * *” (Id). Section 5 of RESPA (12 U.S.C. 2604) requires the Secretary to prescribe a Special Information Booklet for borrowers. Sections 5(c) and (d) of RESPA require each lender to provide a Good Faith Estimate (GFE), as prescribed by the Secretary, within 3 days of loan application, and that the GFE state “the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the settlement * * *.” In 1990, language was added in Section 6 of RESPA (12 U.S.C. 2605) to require certain disclosures to each borrower, both at the time of loan application and during the life of the loan, about the servicing of the loan. Section 8(a) of RESPA (12 U.S.C. 2607(a)) prohibits persons from giving and from accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that [real estate settlement service business] shall be referred to any person” (12 U.S.C. 2607(a)). Section 8(b) of RESPA prohibits persons from giving and from accepting “any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service * * * other than for services actually performed” (12 U.S.C. 2607(b)). Section 8(c) provides, in part, that “[n]othing in [Section 8] shall be construed as prohibiting * * * (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, * * * or (5) such other payments or classes of payments or other transfers as are specified in regulations prescribed by the Secretary, after consultation with the Attorney General, the Administrator of Veterans' Affairs, the Federal Home Loan Bank Board, 3 the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Secretary of Agriculture” (12 U.S.C. 2607(c)(2)). 3 The Federal Home Loan Bank Board (FHLBB) was abolished effective October 8, 1989, by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (Pub. L. 101-73, 103 Stat. 183). Its successor agency, the Office of Thrift Supervision, Department of the Treasury, assumed the FHLBB's regulatory functions. 12 U.S.C. 1462a(e). Section 9 of RESPA (12 U.S.C. 2608) forbids any seller of property from requiring, directly or indirectly, buyers to purchase title insurance covering the property from any particular title company. Section 10 of RESPA (12 U.S.C. 2609) limits the amounts that lenders or servicers may require borrowers to deposit in escrow accounts, and requires servicers to provide borrowers with both initial and annual escrow account statements. Section 12 of RESPA (12 U.S.C. 2610) prohibits lenders and loan servicers from imposing any fee or charge on any other person for the preparation and submission of the uniform settlement statement required under Section 4 of RESPA or the escrow account statements required under Section 10(c) of RESPA, or for any statements required by the Truth in Lending Act (TILA). Section 18 of RESPA (12 U.S.C. 2616) provides that the Act does not annul, alter, affect, or exempt any person from complying with the laws of any State with respect to settlement practices, “except to the extent that those laws are inconsistent with any provision of [RESPA], and then only to the extent of the inconsistency.” Section 18 further authorizes the Secretary to determine whether such inconsistencies exist, but provides that the Secretary may not determine a State law to be inconsistent with RESPA if the Secretary determines the State law gives greater protection to consumers. Section 19 of RESPA (12 U.S.C. 2617), among other provisions, authorizes the Secretary to seek to achieve the purposes of RESPA by prescribing regulations, making interpretations, and granting reasonable exemptions for classes of transactions. III. Overview of HUD's Efforts Since 2002 On July 29, 2002 (67 FR 49134), HUD issued a proposed RESPA reform rule “Real Estate Settlement Procedures Act (RESPA); Simplifying and Improving the Process of Obtaining Mortgages to Reduce Settlement Costs to Consumers” (2002 Proposed Rule) that would have provided for a revised GFE that would have simplified and standardized estimated settlement cost disclosures to make such estimates more reliable, as well as to prevent unexpected charges at settlement. In addition, the 2002 Proposed Rule would have modified mortgage broker compensation disclosure requirements and would have provided an exemption from Section 8 of RESPA for guaranteed packages of settlement services. The 2002 Proposed Rule followed several years of consultation with industry, consumer, and government groups on changes to RESPA. The 2002 Proposed Rule also followed two reports to Congress that examined ideas to improve the mortgage loan settlement process: The 1998 joint report by HUD and the Board of Governors of the Federal Reserve (Federal Reserve or the Board) on reform of RESPA and the Truth in Lending Act; and the 2000 HUD-Treasury Report on Predatory Lending. Both of these reports are described in more detail in the 2002 Proposed Rule (see 67 FR at 49143-6). In response to the 2002 Proposed Rule, HUD received over 40,000 comments, of which 400 contained in-depth discussions of various issues raised by the proposal. Comments were submitted by real estate, mortgage broker, banking, mortgage lending, financial services, and title industry trade groups; consumer advocacy organizations; mortgage companies; settlement service providers; banks; credit unions and related organizations; State agencies; Members of Congress; lawyers; and other concerned persons. Generally, the extensive comment letters supported the overall goals of the proposal, but disagreed with or expressed reservations concerning specific aspects of the proposal. For example, some lender organizations (including the Mortgage Bankers Association) strongly supported the packaging proposal, while the National Association of Realtors supported the GFE changes. Consumer advocacy organizations (including AARP and the National Consumer Law Center) largely supported the mortgage broker compensation disclosure changes, the other GFE changes; and, subject to some exceptions, the packaging proposal. Several industry organizations supported better disclosure of total mortgage broker compensation. On the other hand, the National Association of Mortgage Brokers opposed HUD's proposed approach to disclosing the yield spread premium as part of the total mortgage broker compensation, and the American Land Title Association opposed HUD's packaging proposal and offered a two-package approach as an alternative. In response to the considerable and varied comments from the public, as well as from other federal agencies and Congress, the Secretary withdrew the proposed rule in early 2004. At that time, the Secretary committed HUD to gather additional information about settlement service costs and the process of obtaining mortgages, as well as to engage in outreach to Congress, members of potentially affected industries, consumers, and other federal agencies, before proceeding with any proposed changes related to HUD's RESPA regulations. In June 2004, in preparation for outreach to the industry and consumer groups, HUD began consulting with its federal agency partners, including the Small Business Administration (SBA) Office of Advocacy, on RESPA reform. These meetings continued through 2005. In Spring 2005, HUD also consulted with Members of Congress and congressional staff on RESPA reform. After these initial consultations, in July and August 2005, HUD held a series of seven consumer and industry roundtables both at HUD Headquarters in Washington, DC, and jointly with the SBA Office of Advocacy in Chicago, Los Angeles, and Fort Worth. As discussed in the public notice announcing the roundtables (70 FR 37646, June 29, 2005), in selecting participants for the roundtables, HUD sought a cross-section of representatives of consumer advocacy organizations, all segments of the settlement services industry, State mortgage industry regulators, and other interested persons who had analyzed the 2002 Proposed Rule or had offered alternative proposals for HUD's consideration. Over 150 companies, organizations, and other persons were invited to attend, and 122 of these attended at least one of the roundtables. At the roundtables, HUD presented an overview of an approach to RESPA reform that included revision of the GFE, clarification of the yield spread premium disclosure, and the option of providing an exemption from the Section 8 provisions prohibiting referral fees, kickbacks, and unearned fees to encourage packaging of settlement services. After HUD's presentation, participants were encouraged to present their views on RESPA reform issues. Participants generally agreed that HUD should pursue revision of the GFE. Many participants stated that the GFE should reflect the HUD-1 settlement statement, so that borrowers could better compare the GFE to the HUD-1. Consumer representatives stated that disclosure of the yield spread premium (YSP) is necessary, while mortgage brokers recommended that the YSP disclosure be dropped from the GFE. Mortgage broker participants noted that lenders are not required to disclose any secondary market fees on otherwise identical loans. Mortgage brokers expressed concern that focusing on a requirement for more effective disclosure of YSPs puts mortgage brokers at a severe disadvantage, as compared to lenders, in originating a loan. Lenders maintained that it would be impractical for a lender to disclose on the GFE how much a lender would earn if or when the loan is sold on the secondary market. These concepts also are discussed in more detail in HUD's Real Estate Settlement Procedures Act Statement of Policy 2001-1 (66 FR 53052, at 53256-7, October 18, 2001). With respect to packaging, small business representatives asserted that a Section 8 exemption for packaging would be harmful to small business providers of settlement services because lenders would dominate packaging and would extract kickbacks from small businesses in exchange for inclusion in a package. Consumer groups opposed packaging with a Section 8 exemption on the grounds that the exemption would provide a safe harbor for loans with high costs and fees and other potentially predatory features. These groups also asserted that there would be no way to determine costs and fees for packaged loans for purposes of determining compliance with the Truth in Lending Act. Lender representatives generally supported packaging under a Section 8 exemption as the most efficient method to ensure cost savings to consumers, but some indicated that packaging could also be delivered with limited Section 8 relief, such as for volume-based discounts and average cost pricing. IV. This Proposed Rule A. Generally Today's proposed rule builds on all of this history and specifically recognizes many of the suggestions made at the roundtables with respect to the GFE and comparability of the HUD-1. The rule proposes a new framework under RESPA that would: (1) Improve and standardize the GFE form to make it easier to use for shopping among settlement service providers; (2) Ensure that page one of the GFE provides a clear summary of loan terms and total settlement charges so that borrowers will be able to use the GFE to comparison shop among loan originators for a mortgage loan; (3) Provide more accurate estimates of costs of settlement services shown on the GFE; (4) Improve the disclosure of yield spread premiums to help borrowers understand how they can affect their settlement charges; (5) Facilitate comparison of the GFE and the HUD-1/HUD-1A Settlement Statements (HUD-1 settlement statement or HUD-1); (6) Ensure that at settlement, borrowers are aware of final loan terms and settlement costs, by reading and providing a copy of a “closing script” to borrowers; (7) Clarify HUD-1 instructions; (8) Clarify HUD's current regulations concerning discounts; and (9) Expressly state when RESPA permits certain pricing mechanisms that benefit consumers, including average cost pricing and discounts, including volume-based discounts. A detailed description of each aspect of the proposed rule that involves these concepts follows in Sections B-E of this preamble. This proposal also includes certain technical amendments to the current RESPA rules, as set forth below. B. Legislative Proposals Related to RESPA Reform In order to further bolster consumer protection, as well as to ensure uniform and consistent enforcement under RESPA, HUD intends to seek legislative changes to RESPA that will complement the regulatory improvements made in this rule. HUD firmly believes that the proposed rule will improve the mortgage loan settlement process through better disclosures to consumers, but greater consumer protection can be achieved by also strengthening certain statutory disclosure requirements and improving the remedies available under RESPA. In today's proposed rule, HUD seeks to ensure that consumers are provided with meaningful and timely information. While HUD can make certain regulatory improvements to the disclosures that will help consumers shop for mortgage loans, HUD needs additional statutory authority to make further warranted improvements in disclosures that will help consumers understand the final terms of the loans and costs to which they commit at closing. Moreover, as currently framed, RESPA establishes limited and inconsistent enforcement authority, and does not provide HUD with any enforcement authority for key disclosure provisions. The 1998 joint report by HUD and the Federal Reserve on reform of RESPA and the Truth in Lending Act recommended that RESPA be amended to provide for more effective enforcement. 4 In its April 2007 report on the title insurance industry, the Government Accountability Office recommended that Congress consider whether modifications to RESPA are needed to better achieve its purposes, including by providing HUD with increased enforcement authority. 5 4 See Section III of this preamble. 5 Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers, Government Accountability Office, April 2007, GAO-07-401. As part of its efforts to improve the protections provided under RESPA, HUD intends to seek statutory modifications that would include the following provisions: (1) Authority for the Secretary to impose civil money penalties for violations of specific RESPA sections, including sections 4 (provision of uniform settlement statement), 5 (GFE and special information (settlement costs) booklet), 6 (servicing), 8 (prohibition against kickbacks, referral fees, and unearned fees), 9 (title insurance), and portions of 10 (escrow accounts), as well as authority for the Secretary and State regulators to seek injunctive and equitable relief for violations of RESPA; (2) requiring delivery of the HUD-1 to the borrower 3 days prior to closing; and (3) a uniform and expanded statute of limitations applicable to governmental and private actions under RESPA. RESPA does not currently provide HUD with enforcement mechanisms for some of the most important consumer disclosures, including the section 4 requirements related to provision of the HUD-1, and section 5 requirements related to provision of the GFE and the special information (settlement costs) booklet. HUD believes that a lack of enforcement authority and of clear remedies for violations of critical sections of RESPA negatively impacts consumers and diminishes the effectiveness of the statute. Accordingly, HUD intends to seek authority to impose civil money penalties to enforce violations of RESPA. In addition to civil money penalty authority, HUD intends to seek authority for additional injunctive and equitable remedies for violations of RESPA. Improving the ability of consumers to shop for the best mortgage loan and control settlement costs—using the new GFE form and comparing it to the HUD-1 at closing—is a key component of today's proposed rule. Additional statutory authority would enable HUD to improve its efforts at providing borrowers with necessary and timely information about their mortgage loans and other settlement services. Section 4 of RESPA currently provides that a borrower may request to inspect the HUD-1 the day before settlement, but many borrowers are unaware of this right, and the time currently provided to inspect the HUD-1 allows little margin for identifying and challenging problematic charges before settlement. HUD also intends to seek reform of the statute of limitations provisions of RESPA. Currently, there are different limitation periods depending on which section of the statute is alleged to have been violated, and who is pursuing a remedy of the violation. HUD believes that enforcement efforts would be enhanced, and the requirements of the statute simplified, by standardizing the statute of limitations. C. Federal Reserve Board Proposed Rule Amending Regulation Z On January 9, 2008, the Federal Reserve Board (Board) issued a proposed rule that would amend its Regulation Z which implements the Truth in Lending Act, 16 U.S.C. 1601, et seq. (73 FR 1672, January 9, 2008). The proposed rule is intended to accomplish three goals: (1) To protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices while preserving responsible lending and sustainable homeownership; (2) to ensure that mortgage loan advertisements provide accurate and balanced information and do not include misleading or deceptive representations; and (3) to require earlier mortgage disclosures for non-purchase money mortgage transactions which would include mortgage refinancings, closed-end home equity loans, and reverse mortgages (73 FR 1672). In its proposal, the Board would establish new protections for higher-priced mortgages, a newly defined category of loans, and for all mortgage loans. The proposed rule contains four key protections for higher-priced mortgage loans to prohibit creditors from: (1) Engaging in a pattern or practice of extending credit based on the collateral without regard to the consumer's ability to repay; (2) making a loan without verifying the income and assets relied upon to make the loan; (3) imposing prepayment penalties in certain circumstances; and (4) making loans without establishing escrows for taxes and insurance (73 FR 1673). The Board also proposes, for all mortgage transactions, to prohibit creditors from paying mortgage brokers more than the consumer agreed the broker would receive. Specifically, the proposed rule would prohibit a creditor from making a payment, “directly or indirectly, to a mortgage broker unless the broker enters into an agreement with a consumer” (73 FR 1725). Further, a creditor payment to a mortgage broker could not exceed the total amount of compensation stated in the written agreement, reduced by any amounts paid directly by the consumer or by any other source (Id). In proposing the mortgage broker agreement, the Board recognizes HUD's current policy statements and regulatory requirements regarding disclosure of mortgage broker compensation and noted that HUD had announced its intention to propose improved disclosures under RESPA (73 FR 1700). The Board stated that it intends that its proposal “* * * would complement any proposal by HUD and operate in combination with that proposal to meet the agencies' shared objectives of fair and transparent markets for mortgage loans and for mortgage brokerage services.” HUD believes its proposals regarding the GFE and mortgage broker compensation are consistent with those of the Board. As HUD moves forward to finalize this rule, it will continue to work with the Board to make the respective rules consistent, comprehensive, and complementary. D. Planned Implementation of Final Rule Given the significant changes that would be made in its RESPA regulations by this proposed rule, the Department intends to include a transition period in the final rule. During the 12-month transition period, settlement service providers and other persons may comply with either the current requirements or the revised requirements of the amended provisions. HUD is seeking comments on whether such a transition period is appropriate. E. The GFE and GFE Requirements Problems Identified with the Existing GFE. Under RESPA, loan originators must provide a GFE of the borrower's settlement costs (along with HUD's Special Information Booklet in home purchase transactions) at or within 3 days of a mortgage loan application. RESPA authorizes HUD to prescribe regulations concerning the GFE, and HUD's regulations at 24 CFR 3500.7, along with the suggested format set forth in Appendix C to the regulations, constitute the current GFE guidance. At the closing, a borrower must receive the Uniform Settlement Statement (HUD-1 or HUD-1A), which itemizes final settlement charges to borrowers. The regulations at 24 CFR 3500.8-3500.10 and the instructions in Appendix A to the regulations specify HUD's requirements for the HUD-1/1A. HUD believes that the GFE could better facilitate borrowers shopping for the best loan. Further, the GFE could better achieve the statute's purposes of preventing unnecessarily high settlement costs by requiring a more accurate and consistent presentation of costs. The regulations do not require that the GFE be given to the borrower until after he or she submits a full application to an originator. This can result in a borrower paying significant fees before receiving a GFE, inhibiting the possibility of shopping beyond the provider with whom the applicant first applies. HUD's RESPA regulations require that the GFE include a list of charges but they do not prescribe a standard form. Consequently, it is virtually impossible to shop and compare the charges of various originators and settlement service providers using the GFE, because different originators may list different types or categories of charges, or may identify specific charges by different names, or both. The current regulations also do not require that the GFE contain information on the terms of loans, such as the loan's interest rate, for purposes of comparison. Further, while the HUD Special Information Booklet supplements the GFE, the GFE does not provide certain important explanatory information to the borrower including, for example, how the borrower can use the document to shop and compare loans. The GFE also does not make clear the relationship between the closing costs and the interest rate on a loan. HUD's current regulations require loan originators to list on the GFE the “amount of or range of” each charge that the borrower is likely to incur in connection with the settlement. 6 The suggested GFE format, found in Appendix C to the regulations, lists 20 common settlement services. The suggested format also provides a space for listing any other applicable services and charges. These requirements have led, in many instances, to a proliferation of charges for separate “services” without any actual increase in the work performed by individual settlement service providers. 6 24 CFR 3500.7(a). The RESPA regulations do not require that the GFE clearly identify the total charges of major providers of settlement services, including lenders and brokers (loan originators), title agents and insurers (title charges), and other third party settlement service providers. Without the simplification provided by presenting totals for major items, it is difficult for borrowers to know how much they are paying for major items, including origination and title related charges, or how they can compare loans and select among service providers to get the best value. The estimated costs on GFEs are frequently unreliable or incomplete, or both, and final charges at settlement often include significant increases in items that were estimated on the GFE, as well as additional surprise “junk fees,” which can add substantially to the consumer's ultimate closing costs. New GFE Requirements. In light of these considerations, HUD believes that in order for the GFE to better serve its intended purpose, which is to apprise borrowers of the charges they are likely to incur at settlement, a number of specific changes to the GFE requirements are required to make it firmer and more useable. Accordingly, today's proposed rule would establish a new required GFE form to be provided to borrowers by loan originators in all RESPA covered transactions. 7 HUD believes that the content of the material in the proposed form gives the consumer the information needed to shop for loan products and to assist them during the settlement process. The Department seeks public comment on the proposed GFE, as well as the proposed HUD-1/1A Settlement Statement forms. The following sections address the proposed changes, and, where appropriate, include a summary of comments received on the issue in response to the 2002 Proposed Rule, as well as comments voiced during the 2005 RESPA Reform Roundtables. 7 HUD's RESPA rules currently provide that in the case of a federally related mortgage loan involving an open-end line of credit (home equity plan) covered under the Truth in Lending Act and Regulation Z, a lender or broker that provides the borrower with the disclosures required by 12 CFR 226.5b of Regulation Z at the time the borrower applies for such loan shall be deemed to comply with GFE requirements set forth at 24 CFR 3500.7. Nothing in this proposed rule is intended to change this provision. 1. Changes to Facilitate Shopping The Proposed Rule. Today's rule proposes to establish a new definition for a “GFE application” and a separate new definition for “mortgage application.” The GFE application would be comprised of those items of information that the borrower would submit to receive a GFE. Such an application would include only such information as the originator considered necessary to arrive at a preliminary credit decision and provide the borrower a GFE. Specifically, a GFE application would include six items of information (name, Social Security number, property address, gross monthly income, borrower's information on the house price or best estimate of the value of the property, and the amount of the mortgage loan sought) in order to enable a loan originator to make a preliminary credit decision concerning the borrower. The proposed rule will also require that the GFE application be in writing or in computer-generated form. Oral applications can be accepted at the option of the lender. In such cases, the lender must reduce the oral application to a written or electronic record. The proposed rule also provides that when a borrower chooses to proceed with a particular loan originator, the loan originator may require that the borrower provide a “mortgage application” to begin final underwriting. The mortgage application will ordinarily expand on the information provided in the GFE application, including bank and security accounts and employment information as well as asset and liability information and all the other information that the originator requires to underwrite the loan. To facilitate shopping and lower the cost burden of shopping on consumers and industry alike, the proposed rule would not require that all underwriting information be supplied at the GFE application stage. Nevertheless, borrowers must be protected against “bait and switch.” Accordingly, the proposed rule provides that during final underwriting, the originator may verify the information in and developed from the GFE application, including employment and income information, ascertain the value of the property to secure the loan, update the credit analysis, and analyze any relevant information collected in the entire application process, including, but not limited to, information on the borrower's assets and liabilities. However, borrowers may not be rejected unless the originator determines that there is a change in the borrower's eligibility based on final underwriting, as compared to information provided in the GFE application and credit information developed for such application prior to the time the borrower chooses the particular originator. 8 The originator must document the basis for any such determination and keep these records for no less than 3 years after settlement, in accordance with proposed subsection 24 CFR 3500.7(f)(1)(iii). 8 Unforeseeable circumstances resulting in a change in the borrower's eligibility may also be a basis for rejecting the borrower. Unforeseeable circumstances are also discussed in Section 8(b) below. Where a borrower is rejected for a loan for which a GFE has been issued, and another loan product is available to the borrower, the loan originator must provide the borrower with a revised GFE. Where a borrower is rejected, the borrower must be notified within one business day and the applicable notice requirements satisfied. Loan originators will provide GFEs based on the GFE applications that are memorialized in writing or electronic form. A separate GFE must be provided for each loan where a transaction will involve more than one mortgage loan. For loans covered by RESPA, Truth in Lending Act (TILA) disclosures would also be provided within 3 days of a written GFE application, unless the creditor, i.e., loan originator, determines that the application cannot be approved on the terms requested. (See comments 19(a)(1)-3 and 4 of the Federal Reserve Board's Official Staff Commentary on the Truth in Lending Act (TILA).) Based on consultations with representatives of the Federal Reserve, when a GFE application is submitted, an initial TILA disclosure should also be provided so long as the application is in writing, or, in the case of an oral application, committed to written or electronic form. By obtaining multiple GFEs, borrowers will be in a position to decide which loan provider and which mortgage product they wish to select. When the borrower makes those decisions, the borrower will notify the originator, who may then require a more comprehensive “mortgage application,” and possibly a fee or fees, to initiate the loan origination. As indicated, this application would consist of the more detailed information required by the originator, submitted in order to obtain a final underwriting decision, leading to origination of a mortgage loan. 9 9 HUD anticipates that in most cases a mortgage application will be the Uniform Residential Loan Application, Freddie Mac Form 65, or Fannie Mae Form 1003. Discussion. Under RESPA, a GFE must be provided to a borrower at or within 3 days of application. HUD's current regulations define an application as the “submission of a borrower's financial information in anticipation of a credit decision, whether written or computer generated, relating to a federally related mortgage loan” identifying a specific property. 10 The 2002 Proposed Rule sought to make GFEs more readily available to consumers and, therefore, more useful as a shopping tool by clarifying the minimum information needed to obtain a GFE and by broadening the rules to allow oral applications, consistent with earlier informal interpretations by HUD, so long as such requests contained sufficient information for the originator to provide a GFE. Accordingly, the 2002 Proposed Rule also revised the definition of “application” in the regulations to make it clear that an application would be deemed to exist, and that the GFE should be provided once the consumer provided sufficient information to enable a loan originator to make an initial determination regarding the borrower's creditworthiness (typically, a Social Security number, a property address, basic income information, the borrower's information on the house price or best estimate of the value of the property, and the mortgage loan amount needed), whether orally, in writing or computer-generated. The GFE would be given to the borrower, conditioned on final loan approval following full underwriting and appraisal of the property securing the mortgage. 10 24 CFR 3500.2. HUD acknowledged in the 2002 Proposed Rule that the proposed changes in the definition of “application” and the requirement that a GFE be provided to prospective borrowers early in the shopping process might have implications for the content and delivery of required disclosures under TILA requirements. As a result, HUD invited comments on how the proposed GFE changes might impact other disclosure requirements, and also invited comments on how the proposed GFE changes could be harmonized with the other disclosure requirements. As indicated above, under today's proposal, the definition of “GFE application” provides the trigger for initial RESPA disclosures. After a consumer decides to proceed with a particular loan originator's GFE, the loan originator will generally require a separate “mortgage application” as defined under this proposed rule, before making a credit decision. Consumer representatives recommended that HUD consult with the Federal Reserve Board to coordinate the timing of RESPA and TILA disclosures. Industry commenters on the 2002 Proposed Rule were generally concerned that HUD's proposal to require disclosures earlier in consumers' process of shopping for a mortgage would trigger requirements under the Home Mortgage Disclosure Act (HMDA) and the Equal Credit Opportunity Act (ECOA). By refining the definition of “application” under RESPA, and dividing the application process as described, HUD believes that today's proposal will facilitate the availability of shopping information and avoid unnecessary regulatory burden on the industry and an unwarranted increase in notices of loan denials to borrowers. Whether a GFE application under a particular set of facts triggers HMDA or ECOA requirements must be determined under Regulation B and Regulation C, as interpreted in the Federal Reserve Board's official staff commentary. It should be noted that by proposing such a change to the current definition of “application,” HUD does not intend to prevent a loan originator from prequalifying a borrower for a mortgage loan. 2. Addressing Up-Front Fees That Impede Shopping The Proposed Rule. The proposal would allow a loan originator, at its option, to collect a fee limited to the cost of providing the GFE, including the cost of an initial credit report, as a condition for providing a GFE to the prospective borrower. Discussion. HUD would prefer that originators not impose any charges for a GFE, since providing a GFE before the payment of any fee will further facilitate shopping. HUD believes it would be reasonable for loan originators to treat shoppers for mortgages in much the same way other retailers treat shoppers, where the price of the product includes marketing expenses and purchasers pay the cost incurred to serve shoppers who do not purchase the goods or services. Such an approach would better serve the purposes of the statute. However, HUD recognizes that there may be incidental or nominal costs to provide GFEs to prospective borrowers. Therefore, in order to facilitate shopping using GFEs, the proposed rule would allow a loan originator, at its option, to collect a fee limited to the cost of providing the GFE, including the cost of an initial credit report, as a condition for providing a GFE to a prospective borrower. HUD is interested in receiving comments on this approach. 3. Introductory Language The Proposed Rule. The proposed GFE explains to the borrower: (1) The purpose of the GFE, i.e., that it is an “* * * estimate of your settlement costs and loan terms if you are approved for this loan” and (2) informs the borrower that he or she is the “* * * only one who can shop for the best loan for you. You should compare this GFE with other loan offers. By comparing loan offers, you can shop for the best loan.” Discussion. The GFE proposed today informs the borrower that he or she is the only one who can shop for the best loan. HUD believes that this formulation should be useful to consumers dealing with all types of loan originators. The 2002 Proposed Rule had included language in this section of the previously proposed GFE that was intended to describe the role of the loan originator and to encourage borrowers to shop for themselves. Comments both from consumer groups and industry generally favored removing language on the GFE that discussed the role of the loan originator, on the grounds that the language was misleading, confusing, and might conflict with state law. AARP, however, supported retaining the portion of the proposed language that encourages the borrower to shop among loan originators. In light of the comments received on the 2002 proposal, today's proposed GFE does not include any language on the role of the loan originator. Instead, the language on the proposed GFE informs the consumer that he or she is the only one who can shop for the best loan. 4. Terms on the GFE (Summary of Loan Details) The Proposed Rule. The proposed GFE includes a summary of the key terms of the loan. The form discloses the initial loan amount; the loan term; the initial interest rate on the loan; the initial monthly payment owed for principal, interest, and any mortgage insurance; and the rate lock period. The form also discloses whether the interest rate can rise, whether the loan balance can rise; whether the monthly amount owed for principal, interest and any mortgage insurance can rise; whether the loan has a prepayment penalty or a balloon payment and whether the loan includes a monthly escrow payment for property taxes and possibly other obligations. HUD is requiring the terms “prepayment penalty” and “balloon payment” to be interpreted consistent with TILA (15 U.S.C. 1601 et seq. ). The Annual Percentage Rate (APR) is not included on the proposed GFE. Discussion. One of HUD's objectives in proposing revisions to the current RESPA regulations is to ensure that consumers are able to use page one of the GFE to comparison shop among loan originators for a mortgage loan. Accordingly, page one of the proposed GFE contains a summary of the loan terms and details, as well as a summary of the total estimated settlement charges for the loan. The new summary format of page one of the proposed GFE with its list of important loan terms will increase consumer awareness and allow borrowers the opportunity to shop among loan originators and easily compare various loan offers. The proposed GFE is designed to provide clear information on both fixed and adjustable rate mortgages. The disclosure of terms on the latter is complicated due to their variable structure and to future changes in interest rates. Adjustable rate mortgages have recently experienced high default rates. HUD seeks comment on possible additional ways to increase consumer understanding of adjustable rate mortgages. The 2002 proposed GFE advised the borrower of the terms of the mortgage and included the interest rate and the APR. It also advised the borrower whether or not the loan had a prepayment penalty or balloon payment, and whether the loan had an adjustable rate and, if so, its terms. Comments on the 2002 GFE primarily concerned whether it should include information also appearing on the TILA disclosure. Consumers generally supported the inclusion of TILA disclosure information on the GFE. Lenders generally recommended that information appearing on TILA disclosures should be removed from the GFE because borrowers will continue to receive separate TILA disclosure forms, and inclusion on the GFE is unnecessary and would potentially lead to borrower confusion. Some participants at the RESPA Reform Roundtables suggested that more information on new loan products such as interest-only loans should be included on the GFE. While mindful of the need to present consumers with key loan information on the GFE, HUD has determined not to include the APR on today's proposed GFE. The APR is central to the TILA disclosure that will be provided in purchase transactions at the same time as the GFE and ordinarily at the same time in other transactions. However, the terms “prepayment penalty” and “balloon payment” have been retained on the form to facilitate consumer shopping, even though these terms are also included on the TILA disclosure. With respect to today's proposed GFE, HUD notes that there are differences between how the GFE discloses the monthly payment and how the TILA form will disclose the monthly payment. Specifically, the proposed GFE requires disclosure of principal, interest, and any mortgage insurance, while the TILA disclosure may include amounts for taxes. HUD will revise its Special Information Booklet to explain this difference, to avoid consumer confusion. The interest rate listed on the GFE will reflect the loan offered at the time the GFE is given. Until locked in, the interest rate will float. For loans originated by mortgage brokers, the amount of any “charge or credit to the borrower for the specific interest rate chosen” will float with the wholesale market. 11 This is because mortgage brokers must report the precise difference between the price of the loan and its par value in the “charge or credit for the specific interest rate chosen.” As a result, borrowers who use brokers as defined in this proposed rule and choose to float will float according to wholesale lenders' changes. 11 The “charge or credit for the interest rate chosen” concerns the discount points and the yield spread premium that are further discussed in Section C of this preamble. Current federal regulations allow originators to provide GFE and TILA information together. 12 However, the proposed GFE is designed as a distinct, required form to promote shopping by consumers. HUD believes it is best complemented by providing a separate TILA disclosure along with the GFE. 12 24 CFR 3500.7(d). 5. Period During Which the GFE Terms Are Available to the Borrower The Proposed Rule. The interest rate stated on the GFE would be available until a date set by the loan originator for the loan. After that date, the interest rate, some of the loan originator charges, the per diem interest, and the monthly payment estimate for the loan could change until the interest rate is locked. The estimate of the charges for all other settlement services would be available until 10 business days from when the GFE is provided, but it may remain available longer, if the loan originator extends the period of availability. Discussion. In order to promote competition while avoiding committing originators to open-ended offers, the 2002 Proposed Rule would have required that the GFE be held open for a minimum of 30 days. Commenters on the 2002 Proposed Rule were specifically asked whether 30 days was an appropriate period, and considerable comment was elicited on this subject. A major consumer group supported the 30-day period, while the majority of lenders commenting on the 2002 proposal recommended a 10-day shopping period or less. Today's proposed rule reflects HUD's determination that the appropriate period for which GFE terms are generally to be available is 10 business days, excluding the interest rate of the loan set forth in the GFE, some of the loan origination charges related to the interest rate, the per diem interest, and the monthly payment estimate. The interest rate stated on the GFE would be available until a date set by the loan originator for the loan. After that date, the interest rate, some of the loan originator charges, the per diem interest, and the monthly payment estimate for the loan could change until the interest rate is locked. A central purpose of RESPA regulatory reform is to facilitate shopping in order to lower settlement costs, and there is legitimate concern that requiring GFEs to be open for too long a shopping period could unintentionally operate to increase borrower costs. By requiring that the GFE terms be generally available for 10 business days, GFEs will be effectively open for 2 weeks, thereby providing borrowers with sufficient time to shop among various offers and providers. Borrowers may request, and originators at their option may lengthen the shopping period for a loan or loans beyond 10 business days. In such cases, the originator should note and initial the increased duration the GFE is open on the borrower's GFE. 6. Consolidating Major Categories on the GFE The Proposed Rule. The proposed GFE would group and consolidate all fees and charges into major settlement cost categories, with a single total amount estimated for each category. Discussion. Under current RESPA rules, the GFE simply lists estimated charges or ranges of charges for settlement services. There is no requirement for grouping or subtotaling charges to the same recipients. The costs listed on the GFE include loan originator charges such as loan origination and underwriting charges; charges by third parties for lender-required services, such as appraisal, title, and title insurance fees; state and local charges imposed at settlement such as recording fees or city/county stamps; and amounts the borrower is required to put into an escrow account, or reserves, for items such as property taxes or hazard insurance. At settlement, borrowers receive a second RESPA disclosure—the Uniform Settlement Statement (the HUD-1/1A) that enumerates the final costs associated with both the loan and, if applicable, the purchase transaction. The proposed GFE would group and consolidate all fees and charges into major settlement cost categories, with a single total amount estimated for each category. This approach would reduce any incentive for loan originators and others to establish a myriad of “junk fees” and provide them in a long list in order to increase their profits. In the 2002 Proposed Rule, HUD had proposed a GFE that grouped and consolidated charges into major cost categories, with a single total amount for each category. In commenting on the 2002 proposal, consumer groups were split on the best approach to addressing fee proliferation on the GFE. AARP strongly supported consolidation of major cost categories, and recommended that HUD's proposed categories be further consolidated into three categories for enhanced consumer comprehension. The National Consumer Law Center (NCLC) filed comments on its own behalf, and on behalf of the Consumer Federation of America, National Association of Consumer Advocates, Consumers Union, and U.S. Public Interest Research Group. These commenters noted that while subtotaling is helpful to consumers, itemization on the HUD-1 is necessary to ensure that compliance with TILA and the Home Ownership and Equity Protection Act (HOEPA) can be determined. The National Community Reinvestment Coalition and the National Center on Poverty Law indicated their belief that the tolerance 13 levels will address the issue of proliferation of fees, and commented that the GFE must be as similar as possible to the HUD-1 for comparison purposes. Lenders who commented on this proposed change to the GFE in 2002 expressed concern that lumping costs together in large categories will confuse consumers when they compare data on the GFE with data on the HUD-1/1A. 13 “Tolerance” refers to the maximum amount by which the charge for a category of settlement costs may exceed the amount of the estimate for such category on a GFE, and is expressed as a percentage of an estimate. See Section (h) below. Having considered the results of consumer testing of the forms as detailed below in Section F and comments received on the 2002 Proposed Rule, HUD has determined to propose a standardized GFE, containing major cost categories, to facilitate better borrower understanding of settlement services and their costs, and empower borrowers to shop, compare, and negotiate major cost items where possible. HUD is not proposing to further consolidate the categories, because it believes that each of the proposed categories provides useful information to borrowers. Although today's proposed GFE does not itemize the services required in each category, it does explain to the borrower the exact nature of each category of services. For example, origination services are characterized as the services and charges to obtain and process the loan for the borrower. HUD also regards the information on required services that can and cannot be shopped for as useful information that borrowers should have in choosing an originator and later to facilitate shopping for services to lower costs. HUD's current RESPA regulations require that the GFE include a list of any lender-required providers, including the name, address and telephone number of the provider and the nature of the lender's relationship with the provider. Under today's proposed rule, if the lender requires the use of a particular provider other than its own employees, and requires the borrower to pay any portion of such service, the lender must identify on the GFE the service, and the estimated cost or range of charges for the service. HUD has determined to eliminate the requirement to identify the name of the required service provider, because it believes that consumers will use the GFE to shop among loan originators based on cost rather than on the identity of individual settlement service providers. Where a lender permits a borrower to shop for a required settlement service, under today's proposed rule the lender must provide the borrower with a written list of identified providers at the time the GFE is provided. Such a list may be included on the GFE form or on a separate sheet of paper. The GFE set forth in the 2002 Proposed Rule would also have referenced the corresponding series on the HUD-1, to facilitate comparison between the GFE and HUD-1. While these references have been removed in the GFE proposed today in the interest of simplifying the form, HUD is also proposing changes to the HUD-1/1A to facilitate comparison of the GFE to the HUD-1/1A. Section II.D. of this preamble discusses today's proposed changes to the HUD-1/1A. Pursuant to 24 CFR 3500.15, originators seeking to satisfy the requirements for the affiliated business exemption must provide the requisite affiliated business arrangement disclosure at the time of any referral to an affiliated settlement service provider. The GFE proposed by today's Proposed Rule does not attempt to include this information. However, under HUD's existing RESPA regulations, the affiliated business disclosure must be given on a separate form consistent with Appendix D of HUD's existing regulations. Where such a referral occurs at the time a GFE is given, the affiliated business disclosure must be given along with the GFE. 7. Option to Pay Settlement Costs The Proposed Rule. The GFE Form shall advise the borrower how the interest rate of the loan affects the borrower's settlement costs, and shall include actual available options in this regard on the form. Discussion. In addressing the problem of lender payments to mortgage brokers in the 1999 and 2001 Policy Statements, 14 HUD made it clear that consumers should be advised as early as possible when shopping for a loan of how their interest rate affects their settlement costs and that their options in this regard should be presented on the GFE form. In order to decide which rate/cost combination is best, HUD regards it as essential that borrowers be presented actual offers of the loan originator on the chart on page 3 of today's proposed GFE. The GFE would inform borrowers that: (1) They can choose the loan presented in the GFE; (2) they can choose an otherwise identical loan with a lower interest rate and monthly payments that will raise settlement costs by a specific amount; or (3) they can choose an otherwise identical loan with a higher interest rate and monthly payments that will lower settlement costs by a specific amount. If a higher or lower interest rate is not in fact available from the originator, the originator must provide those options that are available and indicate “not available” on the form for those options that are not available. While some commenters on the 2002 Proposed Rule recommended that HUD require loan originators to feature specific types of loans on the loan option chart on the GFE, HUD does not believe that it should impose requirements on loan originators on what types of loans are offered to borrowers. Therefore, HUD does not propose such requirements in today's proposed rule. HUD's consumer testing has demonstrated that consumers responded very positively to the trade-off chart on the GFE that presents information on different interest rates and up-front fees. In fact, this was the feature that consumers liked best about the form. 14 64 FR 10080 (March 1, 1999), 66 FR 53052 (October 18, 2001). The provision of this information on page 3 of the form will help borrowers understand their options for paying settlement costs. If the borrower chooses one of the two alternative options presented on the form, the borrower must receive a new GFE. 8. Establishing Meaningful Standards for GFEs a. Tolerances. The Proposed Rule. The proposal would prohibit loan originators from exceeding at settlement the amount listed as “our service charge” on the GFE, absent unforeseeable circumstances. The charge or the credit to the borrower for the interest rate chosen, if the interest rate is locked, absent unforeseeable circumstances, also cannot be exceeded at settlement. The proposal would also prohibit Item A on the GFE, “Your Adjusted Origination Charges” from increasing at settlement once the interest rate is locked. In addition, the proposal would prohibit government recording and transfer charges from increasing at settlement, absent unforeseeable circumstances. The proposal would prohibit the sum of all the other services subject to a tolerance (originator required services where the originator selects the third party provider, originator required services where the borrower selects from a list of third party providers identified by the originator, and optional owner's title insurance, if the borrower uses a provider identified by the originator) from increasing at settlement by more than 10 percent absent unforeseeable circumstances. Thus, a specific charge may increase by more than 10 percent at settlement, so long as the sum of all the services subject to the 10 percent tolerance does not increase by more than 10 percent. Discussion . Current RESPA regulations at 24 CFR 3500.7(a) require a lender to provide a “good faith estimate” of the “amount of or range of charges for the specific settlement services the borrower is likely to incur in connection with the settlement.” While the rules require that the estimate be made “in good faith” and “bear a reasonable relationship” to the charges the borrower is likely to incur at settlement, HUD is proposing to clarify what a “Good Faith Estimate” demands, both with regard to the loan originator's own charges, as well as to lender-selected, third party charges and other settlement costs. Estimates appearing on the GFEs can be significantly lower than the amount ultimately charged at settlement and do not provide meaningful guidance on the costs borrowers will incur at settlement. While unforeseeable circumstances can drive up costs in particular circumstances, in most cases loan originators have the ability to estimate final settlement costs with great accuracy. The loan originator's own charges, which are entirely within the originator's control, can be stated with certainty, absent unforeseeable circumstances. Government recording and transfer charges are well known to loan originators or can be calculated based on the purchase price or value of the property. Moreover, many third party costs such as credit report fees, pest inspection fees, tax services, and flood reviews are readily ascertainable. Other third party costs such as title services and title insurance and up-front mortgage insurance premiums, typically only vary depending on the value of the property or the loan amount. HUD also is aware that recent advances in technology and telecommunications in loan processing make routine provision of accurate estimates of third party costs easier and cheaper. Some borrowers have indicated that the GFE has often failed to represent an accurate estimate of final settlement costs, for a number of reasons. In too many cases, fees that were not included on the GFE materialize at settlement. These unexpected fees often result in extra compensation for the originator and/or the third party settlement service providers and in higher charges to the borrower. The absence of more precise regulatory standards for providing a good faith estimate of final settlement costs has not helped ensure greater accuracy and reliability. In light of these considerations, HUD believes that in order for the GFE to serve its intended purpose, which is to apprise prospective borrowers of the charges they are likely to incur at settlement, new standards must be established under existing law to better define good faith” and the standards applicable to the GFE. 15 Accordingly, the proposed rule states that loan originators may not increase their own charges (the service charge) from that stated on the GFE, absent “unforeseeable circumstances.” Government recording and transfer charges would also not be able to increase at settlement, absent “unforeseeable circumstances.” While the interest rate is locked, the charge or the credit to the borrower for the interest rate chosen also cannot be exceeded at settlement, absent “unforeseeable circumstances.” While fees for the service charge have a “zero tolerance” under the proposed rule, absent unforeseeable circumstances, the sum of all the other services subject to a tolerance—required services the loan originator selects, title and closing services, lender's title insurance and optional owner's title insurance if chosen or identified by the originator, and required services that borrowers can shop for when the borrower elects to use the provider identified by the originator—would be subject to a single overall 10 percent tolerance. Thus, a specific charge may increase by more than 10 percent, so long as the total does not increase by more than 10 percent. 15 Differing editions of Black's Law Dictionary have defined “good faith” as a “state of mind consisting in * * * honesty in belief or purpose * * * and faithfulness to one's duty or obligation,” and “freedom from knowledge of circumstances which ought to put the holder upon inquiry,” as well as “absence of all information, notice, or benefit or belief of facts which render a transaction unconscientious.” Inherent in these definitions is the concept that where a party makes an estimate in good faith, the party will take into account all available relevant information, and will exercise reasonable care in evaluating such information before providing such an estimate. The subject of tolerances received considerable attention from commenters in the 2002 proposed RESPA rulemaking, as well as during the RESPA Reform Roundtables. Generally, lending industry groups commenting on the 2002 Proposed Rule opposed tolerances on the grounds that settlement costs are extremely variable and subject to change after appraisal and underwriting. Many other comments from lenders on the 2002 Proposed Rule noted that costs often change after property appraisal and as a result of borrower product changes or changes in the loan amount or closing date. Consumer groups, on the other hand, supported tolerances as a means to prevent “bait and switch” tactics by loan originators. Regulators, including the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, were generally supportive of tolerances. During the RESPA reform roundtables, many participants who expressed comments on the need for tolerances agreed that it is possible to get solid estimates of costs at the GFE stage, while others expressed concern that a 10 percent tolerance level is too strict. In its written comments in response to the 2002 Proposed Rule, the American Land Title Association (ALTA) questioned HUD's authority to adopt tolerances in light of the legislative history of the good faith estimate requirement in Section 5(c) of RESPA. ALTA noted that as part of the original RESPA statute, Congress enacted a separate section that required lenders, at the time of loan commitment, but not later than 12 days prior to settlement, to provide the prospective buyer and seller with an “itemized disclosure in writing of each charge arising in connection with the settlement.” Section 6 of the original statute imposed a duty on the lender to obtain from persons who were to provide services in connection with the settlement “the amount of each charge they intend to make.” If the exact charge was not available, a good faith estimate could be provided. Section 6(b) provided for lender liability to the buyer or seller for failure to provide the requisite disclosures in the amount of actual damages or $500, whichever was greater, and, if the action was successful, attorney's fees and court costs. ALTA noted that due to concerns raised by lenders about Section 6, that provision of RESPA was repealed within one year of enactment. Congress substituted for Section 6 the language of Section 5(c) requiring lenders to provide a good faith estimate of settlement costs, along with a Special Information Booklet, within 3 days of loan application. ALTA also noted that Congress did not impose any sanctions for violations of the Section 5(c) obligation. In light of this legislative history, ALTA contends that HUD does not have statutory authority to adopt tolerances as proposed. While mindful of the legislative history of RESPA with respect to the enactment and later repeal of the section requiring lenders to provide disclosures of the amount of each charge arising in connection with the settlement, HUD believes that the tolerance approach it is proposing today is distinguishable from the requirement to provide an itemized disclosure of each charge. Unlike the requirement in the original Section 6 of RESPA that required lenders to provide exact figures for individual settlement charges, today's proposed approach permits considerable flexibility. The proposal would permit all charges to decrease between the time the GFE is provided and the date of settlement; all charges may increase in the event of unforeseeable circumstances; and some third party charges such as homeowners' insurance are not subject to any tolerance. Moreover, individual charges for certain third party services that originators require and either select or identify may increase by more than 10 percent at settlement, as long as the sum of such charges increases by no more than 10 percent at settlement. In considering the appropriate tolerance for third party settlement services on the GFE, HUD considered the available data on the variation in the cost of title services within individual market areas. Title services is the largest component of third party settlement service costs, accounting for slightly over two-thirds of the total among the sample of Federal Housing Administration (FHA) insured-loans discussed in the Economic Analysis. A study by Consumers Union on the dispersion of title costs within each of five large California metropolitan areas provides the best available data. Consumers Union found that, for four of the five metropolitan areas—Los Angeles, San Francisco, San Diego, and Sacramento—the highest reported prices for title services were between 9.95 percent and 13.84 percent above the average price in the local market. The exception is Fresno, where the highest price is 27.90 percent above the average. These data indicate that a title insurance company should be able to remain within about 10 percent of its originally quoted price, in the event that a particular loan turns out to involve more extensive title work than originally anticipated. HUD therefore has concluded that a 10 percent tolerance is reasonable. To provide a further margin for unexpected cost increases, HUD extended the 10 percent tolerance per service in the 2002 Proposed Rule to a 10 percent tolerance for the combined total cost of all third party settlement services selected by the lender. Other services are a much smaller share of the total cost of third party settlement services, and therefore increases in their cost are likely to have a much smaller impact on the combined total cost of all third party settlement services covered by the 10 percent tolerance. The proposal also clarifies that if the borrower requests a change in the type of loan, loan amount, or loan product, or otherwise makes a change to the mortgage transaction, the originator is not bound by the original GFE. However, because the borrower is in effect initiating a new application, today's proposed rule would require that the originator must either adhere to the original GFE or must redisclose to the borrower by providing a new GFE, and the originator would then be subject to the tolerances applicable to that GFE, provided the originator chooses to accommodate the change and the borrower qualifies for the change. In addition, to meet the tolerances, today's proposed rule provides that originators must include all charges correctly within their prescribed category on the GFE (and the HUD-1/1A). This means that third party fees estimated on the GFE must be reported as the estimated prices to be paid to third parties only, and fees reported on the HUD-1/1A must not exceed those actually paid to third parties, except where the prices are based on an average calculated in accordance with proposed § 3500.8(b)(2). (See Section G discussion on average cost pricing in this preamble.) While loan originators are expected to issue a GFE of settlement costs where a borrower submits a GFE application, in the case of new construction, settlement costs can change between the time a purchase contract is signed and settlement. Such estimates are subject to the provisions regarding unforeseeable circumstances and the provision for borrower requested changes, including the documentation requirements discussed below. The proposed rule provides that the loan originator may provide the GFE to the borrower with a clear and conspicuous disclosure stating that at any time up until 60 days prior to closing, the loan originator may issue a revised GFE. If no such disclosure is provided with the initial GFE, the loan originator would not be able to issue a revised GFE except as otherwise provided in the rule. b. Unforeseeable Circumstances The Proposed Rule . The proposal provides that loan originators should not be held to tolerances where actions by the borrower or circumstances concerning the borrower's particular transaction result in higher costs that could not have reasonably been foreseen at the time of the GFE application, or where other legitimate circumstances beyond the originator's control result in such higher costs. The proposal also provides that if unforeseeable circumstances result in a change in the borrower's eligibility for the specific loan terms identified in the GFE, the borrower must be notified of the rejection for the loan and be provided a new GFE if another loan is made available. Discussion . While tolerances are necessary to provide “bright line” standards for consumers and industry alike, HUD recognizes that there may be circumstances under which loan originators should not be held to tolerances. The proposed rule details the circumstances under which tolerances may not apply, but indicates further that if it is possible for the loan originator to perform at all in such circumstances, the loan originator's charges may increase only to the extent caused by the particular circumstances. Today's proposed rule defines “unforeseeable circumstances” as either: (1) Acts of God, war, disaster, or other type of emergency that makes it impossible or impracticable for the originator to perform; or (2) circumstances that could not be reasonably foreseen at the time of the GFE application, that are particular to the transaction and that result in increased costs, such as a change in the property purchase price, boundary disputes, or environmental problems that were not described to the loan originator in the GFE application; the need for a second appraisal; and flood insurance. As with any business transaction, the borrower has the ability to call off the transaction in such circumstances. The proposed rule specifically excludes market fluctuations from being regarded as unforeseeable circumstances. Where an originator cannot perform or meet the tolerances because of unforeseeable circumstances, the originator must document the costs occasioned by the unforeseeable circumstances, and, as indicated, charge the borrower only the increased costs caused by such circumstances. Additionally, as indicated, when an increase in costs is necessary because of unforeseeable circumstances beyond the originator's control, the borrower should be notified within 3 days of such charges—as though a new application was filed—before any additional costs are incurred, and a new GFE reflecting the charges must be provided to the borrower. Finally, when unforeseeable circumstances result in a change in a borrower's eligibility for the loan identified in the GFE, the borrower should be notified within one business day of the decision to reject the loan, and, if another loan is made available to the borrower, a new GFE must be provided to the borrower. In all cases, the loan originator must retain appropriate documentation explaining any unforeseeable circumstances for a transaction for no less than 3 years after settlement. 9. Important Information for Borrowers Page 4 of the GFE provides important information for the borrower, including information on how to apply for the loan set forth in the GFE. Page 4 also informs borrowers that they may wish to consult government publications about loans and settlement charges that have been published by HUD and the Federal Reserve Board. In addition, Page 4 provides important information to borrowers about their financial responsibilities as homeowners. This section of the GFE notifies the borrower that in addition to the monthly loan payment for principal, interest, and mortgage insurance, the borrower will be required to pay other annual charges to keep the property. The section provides the borrower with an estimate for annual property taxes, along with homeowner's flood, and other required property protection insurance, but estimates for other annual charges such as homeowner's association fees or condominium fees are not required to be provided on the form. The section informs the borrower that the borrower may have to identify such other charges and ask for additional estimates from other sources. The section also states that such charges will not change based on the loan originator chosen by the borrower and advises the borrower not to consider the loan originator's estimates of such charges, when shopping for the best loan. Page 4 also notes that lenders can receive additional fees from other sources by selling the loan at some future date after settlement. However, the borrower is informed that once the loan is obtained at settlement, the loan terms, the borrower's adjusted origination charges, and total settlement charges cannot change. Page 4 also includes a mortgage shopping chart that allows borrowers to compare GFEs from different loan originators. 10. Enforcement The Proposed Rule . Today's proposed rule provides that charging a fee in excess of the tolerance, or any other failure to follow the GFE requirements, constitutes a violation of Section 5 of RESPA. As discussed below, HUD is also considering a provision that would allow loan originators a limited period of time to remedy any potential violations of the tolerances established under the rule, and thereby ease their possible exposure to liability for such violations. Discussion . In enacting RESPA, Congress sought to protect consumers from unnecessarily high settlement charges. Accordingly, HUD believes that charging of a fee in excess of the tolerance, or other failure to follow the GFE requirements, constitutes a violation of Section 5 of RESPA. HUD is soliciting comments on whether to add a provision to HUD's regulations that would allow loan originators, for a limited time after closing, to address the failure to comply with tolerances under HUD's GFE requirements, and if so, how such a provision should be structured. HUD is considering providing in the final rule that if, within a specified period (such as 14 business days) after the closing, a loan originator identifies a charge that exceeded the tolerance and repays the excess amount of the charge to the consumer within the specified period, the loan originator would be in compliance with Section 5. HUD is interested in commenters' views on whether such a procedure would be useful, and if so, what would be the appropriate time frame for finding and refunding excess charges. HUD is also soliciting comments on whether such a provision could be abused and therefore harmful to consumers, and whether the ability of prosecutors to exercise enforcement discretion obviates the need for such a provision. F. Lender Payments to Mortgage Brokers—Yield Spread Premium (YSP) Background . Lenders routinely provide the funds for mortgages that mortgage brokers originate for borrowers. Mortgage brokers also may be compensated for their services in originating the mortgage by the borrower and/or the lender. When the interest rate on the loan exceeds the par interest rate of the lender, the lender pays the broker at closing an amount in excess of the principal amount of the loan, and this excess is commonly referred to in the mortgage industry as a “yield spread premium” (YSP). For the past decade, such payments have been the subject of numerous lawsuits and consumer complaints, typically because consumers claim they were unaware that their broker was receiving such compensation, in addition to the direct compensation they paid the broker. Moreover, these consumers assert that such payments resulted from their being placed in mortgages with higher than necessary interest rates without their knowledge. Some consumer advocates have argued that all such payments should be treated as referral fees or kickbacks and thus should be illegal per se under RESPA. HUD has taken the position, however, that YSPs can be useful and should remain available as an option for mortgage borrowers to help pay their closing costs, particularly those borrowers with limited available cash who choose to pay some or all closing costs through a higher interest rate. HUD made its position on the issue clear in HUD's Policy Statement 2001-1 (2001 Policy Statement). 16 In the 2001 Policy Statement, HUD restated its view 17 that as long as the broker's compensation is for services, and total compensation is reasonable, interest rate-based lender payments to the mortgage broker are legal under RESPA. HUD did not mandate new disclosure requirements in the 2001 Policy Statement, but did commit itself to making full use of its regulatory authority to establish clearer requirements for disclosure of mortgage broker fees, and to improve the settlement process for lenders, mortgage brokers, and consumers. 18 In the 2001 Policy Statement, HUD stressed that disclosure of broker compensation was “extremely important and that many of the concerns expressed by borrowers over YSPs can be addressed by disclosing YSPs, borrower compensation to the broker, and the terms of the mortgage loan, so that the borrower may evaluate and choose among alternative loan options.” 19 In brief, it has been HUD's consistent position that the existence of a YSP in any loan should be at the borrower's choice, based upon a complete understanding of the trade-off between up-front settlement costs and the interest rate. 16 Real Estate Settlement Procedures Act Statement of Policy 2001-1, Clarification of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, and Guidance Concerning Unearned Fees under Section 8(b), published October 18, 2001, at 66 FR 53052. 17 66 FR 53052. 18 66 FR 53052. 19 66 FR 53056. HUD's current RESPA regulations require that a rate-based payment from a lender to a broker be reported on the GFE, and later on the HUD-1. Such payments are frequently characterized on the GFE and HUD-1 as a “YSP” or “yield spread premium,” and then are designated as a “paid outside closing” or “POC.” 20 The YSP is not often understood by the borrower. In addition, it is not listed as an expense to the borrower. At the same time, many brokers hold themselves out as shopping among various funding sources for the best loan for the borrower, and do not explain to the borrower that the payment they receive from the lender is derived from the borrower's interest rate. Some may even assert that the YSP is not a payment the borrower needs to be concerned with. The 2001 Policy Statement emphasized that earlier disclosure and the entry of yield spread premiums, as credits to borrowers would “offer greater assurance that lender payments to mortgage brokers serve borrowers' best interests.” 21 20 “YSP POC” sometimes appears on the second page of the HUD-1/1-A to represent “Yield Spread Premium Paid Outside of Closing,” which is rarely understood by borrowers as a payment they make out of their above-par interest rate. 21 66 FR 53056. 2002 Proposed Rule . The 2002 Proposed Rule provided that on the GFE, all brokers first disclose their total compensation charges and disclose any YSP as a lender payment to the borrower and discount points as additional borrower payments. The amounts of any lender payment or discount points would be combined with the total origination charges, to arrive at a net origination charge. It was this final figure that was to be emphasized and highlighted for borrower comparison among lenders and brokers. The purpose of these changes in the GFE disclosure requirements, as proposed by the 2002 Proposed Rule, was to: (a) Make the borrower aware of the fact that the lender payments were a part of total origination costs, since they were directly related to the borrower's choice of a higher interest rate and monthly payment; (b) ensure that these payments worked to reduce out of pocket costs of the borrower; and (c) encourage the borrower to compare net origination costs of all loans whether from a lender or a broker, in order to select the loan product that best meets the borrower's needs. The rationale for the disclosure changes was to promote transparency, reduce borrower confusion, facilitate shopping, and, at the same time, avoid giving any competitive advantage to brokers or lenders in the marketplace. Nearly all commenters on the 2002 Proposed Rule that discussed YSPs other than individual mortgage brokers or their national and state associations expressed support for greater broker fee disclosure. Consumer representatives, in particular, were strong supporters of disclosure along the lines that HUD proposed, and offered suggestions for making the requirements more enforceable. Consumer groups recounted the class action litigation that resulted from the payment of yield spread premiums and HUD's past statements committing the Department to ensuring better disclosure of yield spread premiums. The National Consumer Law Center (NCLC) said that to date, yield spread premiums are generally paid by the lender solely as compensation for a higher interest rate loan. In most cases, according to NCLC, the borrower is not only paying an up-front fee, but is also paying a higher interest rate as a result of being steered into above-par loans. Consumer groups asserted that the YSP should be defined for the consumer in simple, easy-to-understand language on the GFE. Lenders and their trade groups, on the other hand, tended to favor HUD's requiring a separate Mortgage Broker Fee Agreement, as proposed by the lending industry in the last few years, which would be entered into by brokers and their customers, in addition to the GFE. Mortgage brokers and their trade groups expressed vigorous opposition to disclosing the YSP as a credit to the borrower. They maintained that such a characterization is misleading, unfair, and anti-small business. The brokers stated that HUD's proposal: (1) Created confusion for the borrower; (2) would unnecessarily increase HOEPA transactions; (3) would stifle FHA and low/moderate-income lending; (4) would unfairly target brokers; (5) would create an uneven playing field with retail lenders; and (6) could adversely affect tax treatment of borrowers. FHA Issue . Currently, FHA regulations limit origination fees for loans insured under the FHA program generally to one percent of the mortgage amount (see 24 CFR 203.27(a)(2)(i)). FHA does not have authority under the National Housing Act (12 U.S.C. 1709(b)(2)) to limit payments between loan originators, and yield spread premiums are not included in calculating the FHA limits on origination fees. Some industry commenters argued that the YSP disclosure, as proposed in 2002, would have adversely affected the origination of FHA loans. Specifically, the National Association of Mortgage Brokers (NAMB) commented that if the 2002 Proposed Rule were finalized, many mortgage brokers would cease to originate FHA loans because of the origination fee limitation. The MBA and some of its member firms argued for removal or adjustment of the FHA origination fee cap. RESPA Roundtables . At the 2005 RESPA Reform Roundtables, consumer representatives generally continued to support disclosure of yield spread premium on the GFE. Mortgage broker representatives maintained their opposition to any yield spread premium disclosure on the GFE on the grounds that disclosure would put mortgage brokers at a competitive disadvantage as compared to lenders. Mortgage brokers also stated that if brokers are required to disclose yield spread premiums, lenders should also be required to disclose par, plus pricing, and gain on sales in the secondary market. Many lender representatives at the roundtables noted that it would be difficult for a lender to disclose any profit on a loan sold in the secondary market on the GFE, since the amount could not be ascertained with any certainty in advance, but in general, they did not express support for or opposition to a requirement for broker disclosure of the yield spread premium. Some participants at the roundtables, including consumer as well as industry representatives, recommended the use of a separate mortgage broker fee agreement in lieu of the yield spread premium disclosure requirement. The Proposed Rule . Lender payments to mortgage brokers in table funded and intermediary transactions should be clearly disclosed to consumers on the GFE, and on the HUD-1 settlement statements as set forth below. The proposed rule would also streamline the current regulatory definition of “mortgage broker.” Discussion . For the past decade, HUD has required the disclosure of YSPs on the GFE and HUD-1 documents as a “payment outside closing” or “POC.” This means of disclosure proved to be of little use to consumers. Moreover, notwithstanding that lender payments to brokers are directly based on the rate of the borrower's loan, under current HUD guidance, such lender payments are not required to be included in the calculation of the broker's total charges for the transaction, nor are they clearly listed as an expense to the borrower. The confusion that can result when borrowers do not understand that mortgage brokers' total compensation includes lender payments derived from the interest rate is exacerbated by the fact that many brokers hold themselves out as shopping among various funding sources for the best loan for the borrower, while failing to explain to the borrower that the payment they receive from the lender is derived from the borrower's interest rate. On the other hand, some brokers tell their customers how they can use lender payments to lower the customer's up-front settlement costs. The 2001 Policy Statement made clear that earlier disclosure and the entry of yield spread premiums as credits to borrowers would “offer greater assurance that lender payments to mortgage brokers serve borrowers' best interests.” 22 HUD could not mandate new disclosure requirements in the 2001 Policy Statement. HUD did, however, commit itself in the 2001 Policy Statement to making full use of its regulatory authority to establish clearer requirements for disclosure of mortgage broker fees, and to improve the settlement process for lenders, mortgage brokers, and consumers. 23 22 66 FR 53056. 23 66 FR 53053. It is for this reason that HUD proposed its new disclosure requirements in the July 2002 Proposed Rule. Having carefully considered the NAMB's and other comments in response to the 2002 proposal, as well as the comments presented at the RESPA Roundtables, and the results of consumer testing by the Federal Trade Commission (FTC) and HUD, as discussed below, HUD maintains that while YSPs to mortgage brokers must be clearly disclosed to borrowers, at the same time, mortgage brokers also must not be disadvantaged in the marketplace, since such disadvantage will only result in decreased competition and higher costs to consumers. Many mortgage brokers offer products that are competitive with and frequently lower priced than the products of retail lenders, as evidenced by brokers' large and growing share of the loan origination market, and HUD wishes to preserve continued competition and lower cost choices for consumers. Today's proposed rule also streamlines the current regulatory definition of “mortgage broker.” Under the proposed definition, “mortgage broker” means a person (not an employee of the lender) or entity that renders origination services in a table funded or intermediary transaction. The definition would also apply to a loan correspondent approved under 24 CFR 202.8 for FHA programs. The proposed definition would eliminate the current exclusion of an “exclusive agent” of a lender from the definition of “mortgage broker.” The current definition essentially excludes some persons who perform the same services as mortgage brokers as defined in 24 CFR 3500.2. In order to improve disclosure of settlement charges and increase transparency, HUD believes that all persons who perform mortgage broker services should be subject to the disclosure requirements. Therefore, an “exclusive agent” of a lender who is not an employee of the lender, but who renders origination services in a table funded or intermediary transaction, would be subject to the mortgage broker disclosure requirements set forth in this proposed rule. HUD Research on Mortgage Broker Disclosures 1. HUD's Testing of the GFE. In October 2002, HUD contracted with a communication and consumer testing expert, Kleimann Communication Group, to revise and test the GFE and mortgage package forms, 24 in order to assure that the forms were user-friendly and enabled consumers to identify the least expensive loan. With respect to the GFE, the testing had the additional purpose of showing and explaining yield spread premiums and discount points to borrowers. New homebuyers and experienced homebuyers were part of the groups tested. The groups included members from diverse racial and ethnic groups, the elderly, and low-education and low-income groups. The testing of the GFE form was conducted in two phases. 24 As noted in Section III above (Overview of HUD's Efforts Since 2002), the 2002 Proposed Rule included a “guaranteed mortgage package agreement” or “GMPA,” and HUD's contractor initially tested both the GFE and GMPA forms. In subsequent rounds of testing, the name of the GMPA form was changed to “mortgage package offer” or “MPO” and is referred to in this document as “MPO.” 2. Phase 1 HUD Testing. In Phase 1, the contractor conducted three rounds of one-on-one testing interviews to collect data about form comprehension and potential sources of confusion. The goal of the testing was to fine-tune and develop the GFE form and ensure that consumers can use the GFE in the way intended. Testing in this phase solicited consumer feedback through individual interviews with consumers as they actually used the GFEs in the simulated task of buying a home and needed to select between several loan offers. The data provide guidance about problems consumers have and the reasons for those problems. This phase consisted of three rounds of testing. Each of the first two rounds of testing involved interviews with a total of 45 consumers in three cities. The contractor made several format and language changes to the form, as it was published in the July 2002, proposed rule, to improve readability and clarity. Among other changes, a summary page was developed and tested, with the specific charges for individual categories of settlement services appearing on a second page of the form. Kleimann then developed a comprehensive testing protocol that addressed the key objectives of the GFE form for consumers. The interviews with each participant lasted for 90 minutes with a 10-minute break. The interviews had two parts, one unstructured and one structured. In the unstructured portion of the interview, participants were asked to think aloud as they looked at each form for the first time. This unstructured and unprompted portion of the interview allowed Kleimann to capture users' initial reactions, including to areas that they responded well, to areas they did not understand, and to areas they questioned. The unstructured portion also ensured that the testers did not influence the comments of the participants by leading them to discuss information they would not have noticed on their own. In the structured portion of the interview, Kleimann gave each consumer completed GFEs (as well as MPOs) and asked targeted questions to determine how well participants understood certain areas of the forms, whether the consumers could determine the least expensive loan, and how the forms might be improved. The study design focused on how the forms performed as stand-alone documents. The interviewer neither helped the participant understand any of the information on the forms nor answered any questions the participant asked to clarify information. In these tests, 90 percent of participants chose the least expensive loan, when confronted with a choice between a GFE representing a loan from a lender (with no YSP shown) and a GFE representing a loan from a broker (with the YSP disclosed). The percentage increased slightly to 93 percent when an MPO was included as a third option. Participants also understood the forms well. They could identify the basic loan costs and loan features. Over 90 percent could identify the total estimated settlement charges. The tested forms retained the trade-off table shown on the forms in the 2002 Proposed Rule, showing borrowers that if they wanted to receive a lower interest rate, they would have to pay more at settlement, and vice versa; 90 percent understood the trade-off table. About two-thirds of the participants could distinguish between items they, as consumers, could shop for and items for which they would use the broker's or lender's providers; almost two-thirds could explain the adjusted origination charge; and 70 percent of participants were able to identify the tolerances correctly in round 2 testing. During the testing, Kleimann asked participants a number of questions about how they felt about the forms—how comfortable or uncomfortable they felt with the forms, what they liked and disliked, and how they perceived the information and the level of writing. Participants reacted very positively to the GFE layout and language, and to the clear delineation of charges. They found the summary page on page 1, the breakdown of charges on page 2, and the trade-off table on page 3 to be particularly useful. In round 2 of testing, 86 percent said the GFE had the right information for them, almost 90 percent said the GFE was written at the right level for them, and about two-thirds of participants said they were comfortable with the forms. This testing was designed to see how the GFE form would perform as a stand-alone document. The interviewer neither coached nor led the participant by asking questions before the participant could work alone with the document. While this technique identifies how well participants use the GFE form as a stand-alone in a testing situation, consumers using these forms in the context of actual situations may perform even better. First, this testing involved no interaction at all between the potential borrower and a loan originator. In an actual situation, a loan originator would be able to answer borrower questions about the information on the forms and improve the borrower's understanding of it. Of course, some originators might try to confuse the borrower in order to collect higher fees, but a competitor might be more than willing to clear up that confusion, since doing so might get him the borrower's business. In addition to the help coming from the originator, borrowers could always ask someone else for help: A spouse, friend, their real estate agent, etc. Moreover, local consumer groups that focus on lending issues will also assist borrowers in understanding the new, streamlined GFE form. Since none of these sources were available during the testing, the Kleimann results should be viewed as underestimates of how much the new forms will help consumers once the forms are placed in an actual context of obtaining financing to purchase a home or refinance an existing loan. The third round of testing consisted of 60 participants, with 15 each in four cities, following the same procedures as in the first two rounds of testing. 25 The GFE form was changed in order to consider whether an alternative presentation of the discount points and yield spread premium, suggested by the National Association of Mortgage Brokers, would increase consumer understanding. The yield spread premium (YSP) and discount point disclosure was removed from the top of page 2, where it had been integrated into the calculation of total up-front charges to the borrower, and moved to page 3. As a consequence, page 2 included only the adjusted origination charge at the top. Thus, otherwise identical loans from a broker and a lender would have identical figures on page 2 as well as on page 1 of the summary. Page 3 contained the YSP and discount points. The form did not include a full calculation of total broker compensation, and thus differed from both the proposed rule and the first two rounds of testing. 25 The cities were Wilmington (Delaware), Tulsa, Minneapolis, and Los Angeles. The results showed that participants could continue to identify the cheapest loan: 93 percent of the participants correctly selected the broker loan as the cheaper loan as opposed to 90 percent in round 2. Also, in round 3 of testing, 89 percent of participants would have chosen the cheaper broker loan as opposed to 86 percent in round 2. None of the differences between these percentages in round 2 and round 3 is statistically significant. Also, as in the first two rounds, participants generally liked the form and would use it to comparison shop. They could identify the basic terms of the mortgage and the estimate of total settlement costs, and 86 percent understood the trade-off table. The material seemed to be presented at the right level and to be clearly laid out. Participants again identified the summary page, the breakdown of charges, and the trade-off table as useful. However, participants had trouble understanding the concepts of YSP and discount points. 26 Only 3 percent and 30 percent, respectively, of the participants could paraphrase what YSPs and discount points represented, leaving over two-thirds of the participants unable to paraphrase. Participants did not understand how these two concepts (now located on page 3) related to other settlement charges (on page 2). Essentially, placing these terms outside the calculation of origination charges (that is, on page 3 instead of page 2 as in the first two testing rounds) seems to decrease participants' understanding of how the YSP and discount points fit into total loan costs. Since there was no significant improvement in participants' ability to determine the cheapest loan, and most participants did not understand the concept of YSP, HUD decided to keep the YSP on page 2 in the calculation in the 2005 Proposed Rule, as was the case in the 2002 Proposed Rule. 26 These results are consistent with the work of Jackson and Berry (2001) and Woodward (2003a). 3. FTC Testing. During the same period that HUD was developing the revised GFE, FTC tested the effect of YSP disclosure to see if the disclosure had an adverse effect on the consumer's ability to comparison shop. Using a variation on the GFE form tested by Kleimann in round 2 testing, FTC extracted and tested a portion of the form. The first page of the extract consisted of an abbreviated version of the Summary Table from page 1 of the GFE. The second page of the extract contained the “Your Charges for Loan Origination” box and an abbreviated version of the “Your Charges for All Other Settlement Services” box from page 2 of the GFE. As a control, FTC took these same two extracts and eliminated the YSP and service charge, producing a second set of extracts. Thus, FTC isolated elements of the proposed GFE and created two variations of their extracts: with the YSP and without the YSP. FTC also tested the YSP disclosure from the GFE in HUD's 2002 Proposed Rule, and an alternative disclosure using language developed by FTC to describe the YSP and other loan terms. FTC testers gave each participant a pair of loan extracts to evaluate: one had no YSP and thus represented a lender loan, and the other contained a YSP and thus represented a broker loan. The broker loan was $300 less than the lender loan. FTC asked participants which loan was cheaper and also which loan the participant would choose. Each participant also received a second set of extracts in which each loan offer was the same cost. The participants were asked the same two questions: which loan was cheaper and which loan would the participant choose. FTC tested five groups with 103 or 104 participants per group. The results using the GFE variation of HUD's second round of testing are most relevant to the 2005 Proposed Rule. When the YSP was disclosed and the broker loan offer was cheaper, 72 percent of participants could correctly identify the broker loan as the cheaper loan; 17 percent incorrectly identified the lender loan as cheaper. Asked to identify which loan offer they would choose, 70 percent of participants would have chosen the cheaper broker loan; and 16 percent would have chosen the lender loan. In contrast, when the form extract did not disclose the YSP, 90 percent correctly identified the broker loan as cheaper, and 85 percent would have chosen it. Disclosing the YSP caused an 18 percent drop in participants correctly identifying the cheaper loan and a 14 percent drop in the number who would choose it in the market. When costs of the broker and lender loans were the same on GFE forms that contained the YSP, participant performance decreased. Fifty-three percent reported that the loan costs were a tie; 30 percent believed the lender was cheaper; 11 percent believed the broker was cheaper. When asked to identify which loan offer they would choose, 25 percent of the participants chose either the lender or the broker loan offers; 46 percent selected the lender loan offer; and 17 percent selected the broker offer. In contrast, when the form omitted the YSP, 96 percent correctly identified the tie, and 78 percent chose one or the other as their preference. FTC concluded that the YSP disclosure on the GFE form extract it tested had two drawbacks. First, its YSP disclosure impaired the ability of borrowers to comparison shop leading many to choose the more costly alternative. Second, the YSP disclosure introduced bias in the selection process that favored lenders over brokers. The Department's goal is to promote consumer shopping for mortgages and to prevent bias against any loan originator. 4. Phase 2 HUD Testing. FTC conducted its tests in February and March of 2003, and briefed HUD on the results during the summer of 2003. HUD decided to undertake additional testing and to incorporate the FTC test results in the further testing. For round 4 of testing, HUD asked Kleimann Communication Group to parallel aspects of the FTC study, including the questions asked, the difference between the amounts of each offer, and the length of the test situation. 27 HUD continued to test a full-length GFE rather than the portion tested by FTC, because HUD thought that the context of the entire form might provide a more accurate measure of participants' understanding of the GFE. 27 Kleimann's report, entitled Consumer Testing Results for HUD's Good Faith Estimate (GFE) Form: Rounds 4 & 5 (dated March 19, 2004), provides information on the specific characteristics of the consumers tested, revisions that Kleimann made to the form and the reasons for those revisions, the specific cities where the tests were conducted, the testing protocols, testing conditions, and the main results from each round of testing. For round 4 of testing, 600 participants were selected; all received full GFEs. The control group received GFEs that omitted the YSP disclosure, while the experimental group received GFEs with the YSP disclosed. Each participant was given two pairs of loans: one in which the broker loan was $300 less than the lender and one in which the broker and lender loan offers were the same cost. Each participant was asked three questions for each set of GFEs: (1) Which offer was cheaper or if they cost the same, (2) which offer would they choose, and (3) why they made that choice. The results of this testing showed both consistency with and divergence from the FTC results. When the YSP was disclosed, 83 percent of the participants correctly identified the broker loan as cheaper, and 8 percent incorrectly identified the lender as cheaper. These results were an improvement over the FTC results of 72 percent and 17 percent. In this GFE scenario, 72 percent of the participants said they would choose the broker offer and 11 percent said they would choose the lender. Similarly, in the FTC study, 70 percent of the participants chose the broker offer and 16 percent chose the lender offer. When the YSP disclosure was removed, 92 percent correctly identified the broker loan as cheaper, and 1 percent incorrectly identified the lender as cheaper. These results are quite similar to FTC's results of 90 percent and 4 percent. When asked to choose a loan, 88 percent of participants chose the broker offer, while 1 percent chose the lender loan. These results compare to 85 percent and 3 percent respectively in the FTC testing. When given same cost loan offers with a YSP, 81 percent correctly identified both loans as costing the same; 15 percent incorrectly identified the lender as cheaper; and 3 percent incorrectly identified the broker as cheaper. In contrast, in the FTC study, only 53 percent correctly identified the offers as costing the same; 30 percent incorrectly identified the lender as cheaper; and 11 percent incorrectly identified the broker as cheaper. In this GFE scenario, 50 percent of participants would have chosen either offer; 39 percent chose the lender offer; and only 5 percent chose the broker's. In contrast in the FTC study, only 25 percent chose either offer; 46 percent chose the lender offer; and 17 percent chose the broker's offer. Of particular concern was the difference between participants who could identify the cheapest loan offer, but did not choose it. Analysis of the participant responses to the open-ended question of “why did you choose that offer” led to further modifications of the GFE to address this concern and to a fifth round of testing. In many comments, participants stated that they chose a particular offer because they did not want the “higher interest rate” indicated on page 2 of the GFE. They concluded from the language on the YSP disclosure that the interest rate was higher than the rate cited on page 1 under “Loan Details.” Also, many of those who had no preference for the cheaper broker loan indicated that $300 was not a sufficient difference to be a deciding factor. As a result of the testing and analysis, revisions were made to the GFE. First, the language in box 2 on page 2 of the GFE referring to the “higher interest rate” and “lower interest rate” was modified to reduce the possibility of borrowers” misinterpreting that the interest rate had changed from what was reported on the first page. Second, a third option was added to the YSP/discount points section on page 2 so a lender could indicate that its credits or charges were already included in “Our Service Charge.” This addition was designed to ensure that participants would understand that a lender's origination charge might include a YSP or discount points, even though the YSP or points would not necessarily be known at the time of settlement, because the loan would not have been sold into the secondary market. The third option thus creates a closer parallel between broker and lender loans. Third, arrows were added on pages 1 and 2 to focus the borrower's attention on the subtotals and the total estimated charges, rather than on individual components. In addition, the typeface point size in the Total Estimated Settlement Charges on the bottom of page 1 was increased to further draw attention to the bottom-line. For purposes of testing, three other changes were made to the GFEs. First, the difference in the total cost was changed to $500, to increase the likelihood that the difference would be a deciding factor. Second, another pair of loan options was added in which the lender offer was $500 less than the broker offer. This addition was intended to identify any bias for or against the broker and lender options. Finally, a set of four loans was added, to investigate whether the comparison across more than two offers increased or decreased participant performance. No version was tested without the YSP and discount points language. For round 5 of testing, 600 participants were divided into two groups, both of which received the revised GFE. 28 The first group received the revised GFE with changed language and with the addition of a third option so that lenders could indicate that YSP and discount points had been included in “Our Service Charge.” The second group received the identical revised GFE, but the third option box was removed. All participants received three pairs of loans, one with the broker offer being lower by $500, one with the lender offer being lower by $500, and one in which both offers were the same. In addition, each participant received a set of four offers to compare. 28 Participants were chosen for demographic diversity in the same five cities: Atlanta, Boston, Denver, Seattle, and Tulsa. No participant from round 4 was permitted to participate in round 5. The three option GFE and the two option GFE performed quite similarly with the three option form consistently getting slightly better results. The proposed rule therefore discusses only the three option form, [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A08-1015. Public record. Not legal advice.