How to Avoid Loan Closing Delays Because Of Inaccurate GFE Charges Under the New RESPA

If you are worried that getting your borrower’s Good Faith Estimate may be a near impossibility when first starting the loan process and when you don’t know all the third-party service provider’s fees, HUD allows loan originators another method that may relieve some of the guessing. Loan originators may use average charges for those third party service charges that are not based on your borrower’s property value or loan amount. HUD cites the following list of nonexclusive service charges as permissible: appraisals, credit reports, flood certificates, tax service, and recording documents. However, HUD specifically states the average charge method cannot be used for transfer taxes, interest charges, escrow reserves and insurances (including your Texas title company’s title insurance).

However, if you are going to use the average charge method, HUD requires the loan originator to document how you arrived at such average charge. A loan originator must keep documentation showing how it calculated an average charge for at least three years after any settlement for which that average charge was used.

In order to calculate an average charge, the loan originator must "define a specific class of transactions for a specific time period (not less than 30 calendar days, nor more than 6 months), for a specific geographical area, and for a specific loan type. The average charge is based on a calculation of the average amount paid for the settlement service for the particular class of transaction. HUD does not prescribe a particular method for calculating the average charge, but it must be determined in such a way that the total amounts paid by borrowers and sellers through use of an average charge will not exceed the total amounts paid to the applicable settlement service providers in the particular class of transactions." See New RESPA Rule FAQs at http://bit.ly/msSSY, p. 28-29.

What if the loan originator overcharges the borrower or seller too much when using the average charge method? Does the loan originator have to refund the borrower or seller the excess amount? The answer is no, but…the loan originator cannot retain the excess. Instead, the excess should be applied to the next average charge period, so that the next class of borrowers or sellers receive a discount on their charges that use the average charge method.

So the loan originator can use the average charge method to alleviate the guesswork in knowing the third-party service provider’s charges, so the loan originator may avoid hang-ups that would delay a closing. However, if the loan originator uses the average charge method, it best be ready to substantiate the average costs determined to their regulators.

RESPA Changes: Are You Ready For Some RESPA?

At this point, I am sure you have at least heard new rules regarding Good Faith Estimates and HUD Settlement Statements are on the way. If you are like most people, you are probably waiting for your company superiors to funnel the information to you or your team, which you will probably receive right before the Christmas holiday—which means you will retain maybe 1% of what your training covers.

In a perfect world, everyone at your company would jump on board, read the rules and inculcate them into their brain. I mean, what’s the worst that could happen if you don’t learn the new rules??? Well, how about a “tolerance violation”? Let’s face it: Anything with the word “violation” can’t be good for you. However, as usual in life there are consequences for not following the rules; and just as usual, many companies do not take the time to train up their employees to avoid such costly mistakes. Honestly, it is worth the time to read and understand what challenges you, your team or your company might be facing if you do not follow the new RESPA guidelines.

For example, did you know a loan originator will no longer be able to charge any fees prior to issuing a Good Faith Estimate except a credit report? Only after the applicant receives the Good Faith Estimate and acknowledges an intention of proceeding with the loan indicated in that particular Good Faith Estimate can you, as lender or mortgage broker, collect fees beyond the cost of a credit report for origination-related services.

How about the fact that the lender is responsible for ascertaining if the Good Faith Estimate has been provided by its mortgage broker? If the Good Faith Estimate is not provided in 3 business days, then the lender is in violation of Section 5 of RESPA, not just the mortgage broker.

Being that I am a settlement agent and familiar with the following scenario, this is one of my favorites. If a loan originator pressures a settlement agent into lowering their fees to reduce the charges, or otherwise “cover the difference,” as a condition of receiving future referrals of business, it may be considered a potential violation of RESPA Section 8(a). A complaint can be filed at RESPA and ILS if this is violated.

I realize not everyone wants to read a litany of rules, but you should check out the Q & A page, which gives a good overview of the new rules effective January 1, 2010 at http://bit.ly/19W3d3.

May 2010 be your best yet!