RESPA: Changes at the Closing Table

The federal government late last year finalized sweeping reforms to settlement rules for residential transactions.

April 1, 2009

The goal: Help consumers more easily understand settlement costs and prevent big price discrepancies between the preliminary Good Faith Estimate and the HUD-1 settlement statement that’s presented at closing. Here’s a look at the main changes:

Lender cost estimates. When filling out the GFE, lenders are permitted to use an average for estimating third-party costs such as appraisals, inspections, and environmental tests. This could make filling out the form easier and faster for lenders and reduce the likelihood of the transaction running into trouble at the closing when actual costs are presented on the HUD-1 form. Effective date: Jan. 16, 2009

No incentives tied to affiliated services. Service providers can refer consumers to affiliated companies, but the new rule reduces the ability of builders to offer incentives to buyers if the incentives are contingent upon buyers using the builders’ affiliated services. The original implementation date for the restriction was Jan. 16, but the U.S. Department of Housing and Urban Development has pushed that date back 90 days in response to lawsuits against the federal government filed by builders and the National Association of Home Builders, claiming the change is arbitrary and capricious. Effective date: April 16, 2009

Simplified forms. The new GFE and HUD-1 forms are intended to be easier for consumers to understand and aim to increase transparency by requiring lenders to calculate yield-spread premiums as part of their origination fee. The yield-spread premium is a way of compensating mortgage brokers based on the interest-rate spread for which borrowers qualify and what they ultimately lock into. The National Association of Mortgage Brokers has filed a lawsuit against HUD, saying the new rule discriminates against small mortgage brokers. Effective date: Jan. 1, 2010*

Fewer cost fluctuations. The new forms will no longer allow lenders to change certain costs between the GFE and the HUD-1 forms. Costs that cannot be altered include the origination fee and transfer taxes. Some third-party costs, such as title searches and inspections, can change, but they’re limited to a maximum change of 10 percent. Effective date: Jan. 1, 2010*

30-day cure period. At the closing table, if costs have changed more than the 10 percent limit, the deal can close, but the cost discrepancies must be worked out within 30 days. Effective date: Jan. 1, 2010*

* Lenders that choose to use the new GFE and HUD-1 forms before the effective date must immediately abide by the new rules on cost discrepancies and calculating the yield-spread premium.