December 15, 2009

RESPA expert, Phillip L. Schulman, Esq., partner in the law firm of K&L Gates in Washington, DC, answers eight common questions about the new rule taking effect on January 1, 2010. To submit a question for a future "Ask the Expert" feature, email respa@realtors.org.

1. If we are doing a "pre-qualification," should we wait to provide a GFE until a property is identified?
   
2. How does the RESPA rule distinguishes between “lender,” mortgage broker,” and “loan originator”?
   
3. If a mortgage broker is involved, who is responsible for a tolerance violation - the lender or the mortgage broker?
   
4. Must a loan originator recommend settlement providers to a borrower even if it does not want to do so?
   
5. What if the contract calls for a home warranty paid for by seller? Whose side does it go on?
   
6. If a buyer pays a portion of the real estate commission, how do you disclose this on the GFE?
   
7. How can a lender’s underwriting standard that prohibits cash back to the buyer at closing be reconciled with a tolerance that is exceeded at closing?
   
8. How does a change in the closing date affect the completion of the HUD-1?
   

Eight General Questions on New RESPA Rule (PDF: 303K )

NOTE: Answers in this space should not be construed as legal advice. NAR members seeking answers to specific RESPA questions should seek legal advice from an attorney familiar with RESPA.

---

1. Question: If we are doing a "pre-qualification" and therefore there is no property address, should we wait to provide a GFE until a property is identified? Typically, we provided a preliminary GFE.

Answer: The final RESPA rule requires a loan originator to provide a GFE within 3 business days of receiving an "application," which is defined as "the submission of a borrower's financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the borrower's name, the borrower's monthly income, the borrower's social security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator."

HUD FAQs state: "May a loan originator issue a GFE if the loan originator has not received one of the six pieces of information included in the definition of an application (borrower's name, borrower's monthly income, borrower's social security number, property address, estimate of the value of the property and mortgage loan amount sought)?

An application includes information the loan originator requires the borrower to submit in anticipation of a credit decision. If a loan originator issues a GFE, the loan originator is presumed to have received all six pieces of information." (emphasis added). Also note that if a loan originator issues a GFE without a property address and the property address is later identified, this subsequent identification of the property address does not constitute a changed circumstance and will not allow the loan originator to reissue the GFE. Thus, to the extent a lender is pre-qualifying a borrower and does not receive all six pieces of information included in the definition of "application," the lender arguably should avoid issuing the borrower a GFE in connection with the pre-qualification. Otherwise, the issuance of the GFE presumes that the lender has received an "application," which binds the lender to the GFE unless there are changed circumstances. This would not prohibit a lender from giving the consumer a pre-qualification letter on its letterhead, as long as the pre-qualification letter is not titled as a Good Faith Estimate and does not take the shape of the GFE form.

2. Question: How does the RESPA rule distinguishes between “lender,” mortgage broker,” and “loan originator”?

Answer: When the RESPA rule refers to "loan originator," this is defined to include either a lender or a mortgage broker. If certain obligations under the final RESPA rule apply only to the lender or only to the mortgage broker, HUD uses the terms "lender" or "mortgage broker."

3. Question:If a mortgage broker is involved, who is responsible for a tolerance violation - the lender or the mortgage broker?

Answer: The mortgage lender is ultimately responsible under the final RESPA rule for any excesses in the tolerance restrictions. However, the lender may try to seek reimbursement from the mortgage broker if the lender is required to reimburse any excess over the tolerance restrictions. If a lender decides to do this, the final RESPA rule does not govern this activity.

4. Question: Must a loan originator recommend settlement providers to a borrower even if it does not want to do so?

Answer: Essentially, HUD expects the lender to identify at least one settlement service provider on the list of services the borrower is permitted to shop for. Arguably, each provider listed will be the provider the lender relies on to obtain prices to populate the GFE. According to HUD's FAQs, when a loan originator permits a borrower to shop for third-party settlement services, the loan originator must provide the borrower with a written list of settlement service providers at the time of the GFE on a separate sheet of paper. Thus, this list could include title and settlement providers, survey companies, home inspectors, homeowners insurance companies - any provider of settlement services for which the consumer may shop and select the provider. (See also, HUD FAQs, “GFE – Written list of providers” #s 1-8, pp. 11, 12).

5. Question: What if the contract calls for a home warranty paid for by seller? Whose side does it go on?

Answer: If the home warranty is typically a borrower fee that is paid for by the seller, on behalf of the borrower, this fee would be disclosed in Block 6 of the GFE. On the HUD-1, the fee would be included in the lump sum disclosed on Line 1301 in the borrower's column, with the home warranty fee disclosed outside of the columns. A charge would then be disclosed in the 500 series for the seller, with a corresponding credit disclosed in the 200 series for the borrower. If, however, the home warranty fee is strictly a seller-paid fee, the charge would not be disclosed on the GFE. On the HUD-1, the home warranty charge would appear in a separate line item in the 1300 series inside the seller's column.

6. Question: If a buyer pays a portion of the real estate commission, how do you disclose this on the GFE?

Answer: HUD has not envisioned this scenario, and, in fact, would likely treat the real estate commission as a seller fee. As a seller fee, the commission would not be required to be included on the GFE. If the buyer later agrees to pay a portion of the real estate commission, this amount would be reflected in the borrower's column of the HUD-1. As the fee would not be disclosed on the GFE, tolerances are not an issue.

7. Question: How can a lender’s underwriting standard that prohibits cash back to the buyer at closing be reconciled with a tolerance that is exceeded at closing?

Answer: This is not an issue addressed by the final RESPA rule. To the extent a lender or investor's underwriting guidelines do not allow cash back to the buyer at closing, note that RESPA allows a lender up to 30 days after closing to cure any tolerance violations. As long as the same underwriting guidelines do not prohibit cash back to the buyer after closing, making the reimbursement to the buyer within 30 days after closing may be a way around this limitation. Otherwise, lenders may have to revise their underwriting guidelines to account for the lender's cure of tolerance violations at closing.

8. Question: How does a change in the closing date affect the completion of the HUD-1?

Answer: If there is a change in the closing date, typically this only affects the amount of pre-paid items that are disclosed on both the GFE and the HUD-1, like escrow and daily interest charges. These items, however, are subject to the no tolerance restriction, which means they may change by any amount at closing. Thus, to the extent the closing is rescheduled, these pre-paid items may change on the HUD-1 without restriction.