January 2009

Patricia Antonelli, Esq.
Lalitha Rao, Esq.

In November 2008, the U.S. Department of Housing and Urban Development (HUD) issued final rules to amend Regulation X (24 CFR Part 3500), which implements the Real Estate Settlement Procedures Act (RESPA). The goal of the new rule is to protect consumers from unnecessarily high settlement costs. The new rule should improve a consumer’s ability to shop for the lowest cost mortgage. The final rule will be implemented in two stages as follows. Note that the Obama Administration issued a January 20, 2009 memo to federal government agencies and departments notifying them that the Administration intends to review and approve any new or pending federal regulations. We will monitor the effect of this directive and provide future e-mail alerts on the topic.

The following changes became effective January 16, 2009:

• “Average Charges” permitted
• Revised definition of “Required Use” *delayed 90 days, see below
• Revision to Servicing Notice
• Changes to Escrow Account Provisions
• Allowance for ESIGN

The following changes become effective January 1, 2010:

Revised Good Faith Estimate (GFE)
New tolerances for GFE
Required Disclosure of key loan terms, closing costs and Yield Spread Premiums
Revised HUD-1 Settlement Statement
Revised definitions for applications, Good Faith Estimate and Mortgage Broker

This article will discuss the changes and provisions that became effective on January 16, 2009. The remaining provisions in the final rule will be presented in future articles.
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“Average Charges” Permitted
A settlement service provider that obtains a service from a third party on behalf of a borrower or seller will now be allowed to disclose an “average charge” on HUD-1 Settlement Statements. An average charge can be used so long as it does not result in borrowers, in the aggregate, paying more for a particular settlement service than the aggregate price for obtaining that service from third parties.

The settlement provider has the flexibility to determine the class of transactions to be covered under the average charge. A settlement service provider calculates the average charge for a class of transactions based on the period of time (between 30 days and 6 months), the type of loan and the geographic area. Average charge calculations are not permitted for services where the cost is based on the price of the loan or property value. A provider must retain all documentation use to calculate the average charge for 3 years after a settlement for which the average charge was used.

Revised Definition of “Required Use”
The definition of “required use” has been amended to clarify what actions may be considered violations of Section 8 of RESPA, Prohibitions Against Kick-Backs and Unearned Fees (12 U.S.C. 2607) and its implementing rule, Regulation X (24 CFR 3500.14). Section 8 provides, in part, that fees accepted for referrals are prohibited in certain situations. One of these prohibited situations relates to the “required use”.

A “required use” occurs when a consumer paying for a settlement service is required to use a particular provider of that settlement service. The revised definition of “required use” makes clear that the use of both economic incentives and disincentives to improperly influence a consumer’s choice of settlement service providers are equally problematic under RESPA.

This provision is not prohibiting legitimate discounts on services to consumers. Multiple services may be offered to consumers at a discount. The definition provides that settlement service providers can offer legitimate discounts to consumers by offering a combination of settlement services at a total price lower than the sum of the individual settlement services. This combination of services will not be considered a required use if (1) the use of any such combination is optional to the purchaser and (2) the lower price for the combination is not made up by higher costs elsewhere in the settlement process.

* HUD announced on January 6, 2009 that there will be a 90-day delay of the “required use” provision. This delay comes in response to a lawsuit and preliminary injunction filed in late December 2008 by the National Association of Home Builders (NAHMB), seeking to overturn the “required use” section. HUD agreed to the 90-day delay so that it can collect the necessary information to prepare a proper defense of its position.

The NAHB and homebuilders who routinely affiliate with mortgage lenders to offer incentives find this section problematic, because they are not considered settlement service providers. Thus, any discounts or incentives provided by homebuilders to purchasers when using a mortgage lender affiliated with the homebuilder are eliminated.

Servicing Disclosure Statements
Regulation X now reflects what the RESPA statute already provides. Amendments to 24 CFR 3500.21 entitled “Mortgage Servicing Transfers” provide that a Servicing Disclosure Notice must be provided to an applicant when the application is submitted or within three (3) business days after submission. The final rule provides suggested language for the Notice that may be used in the notification.

Escrow Account Provisions
The final rules clarify some accounting provisions for escrow cushions. Stated escrow cushions in loan document apply only if they are less than cushions mandated by state or federal law. Otherwise, cushions mandated by state or federal law apply. Additionally the phase-in period of aggregate accounting for escrow accounts has been eliminated.

Allowance for ESIGN
ESIGN is applicable to RESPA for electronic delivery of disclosures.
Note on January 1, 2010 rules - The National Association of Mortgage Brokers (NAMB) filed a lawsuit seeking to overturn provisions which are to become effective on January 1, 2010. The NAMB is seeking to block rules requiring the disclosure of key loan terms and yield-spread premiums. At this point, HUD has not announced any changes in response to this lawsuit. Additional information will be provided as it develops.