In my “What Is RESPA” blog post I mentioned that the US Department of Housing and Urban Development (HUD) was implementing significant revisions to the Good Faith Estimate (GFE) and the HUD Settlement Statement (HUD-1) in order to provide borrowers with greater transparency when comparing settlement charges at closing and to make it easier for borrowers to compare offers between lenders. The changes are in now in effect for first mortgage applications that are received on or after January 1st, 2010.
To get a better understanding of the recent changes to the GFE and HUD-1 forms, I attend a training session and will outline what I learned below.
Major Changes to the GFE and HUD-1:
- All lenders are required to clearly disclose loan terms and closing costs in the same matter with a nationally standardized GFE.
- A reconciliation of the GFE to the HUD-1 is now required.
- Lenders will be required to provide the borrower with a Settlement Service Provider List that includes Settlement Service Provider names. This pertains to any settlement service where the service is required but the borrower can select a provider- for example: title, pest, and septic inspections. In addition:
- The list must include providers available in the local market
- If the borrower selects a service provider from the list, the lender will be subject to certain fee tolerances for the charges associated with that provider
- If the borrower selects a service provider not on the list, the settlement service is not subject to the tolerance
- Tolerance on settlement charges are now defined in 3 categories:
1) Charges that cannot increase at Settlement:
- Origination charges
- Discount or premium points for a specific interest rate selected
- Adjusted origination charges (after the interest rate is locked)
- Transfer Taxes (Not applicable in Arizona)
2) Charges that cannot increase in the aggregate by more than 10% at Settlement:
- Required settlement services that the lender selects, such as Appraisal Services
- Title services and Lender’s Title Insurance (if selected by lender or if a borrower uses a company identified on the Settlement Services Provider List)
- Owner’s Title Insurance (if the borrower uses a company identified on the Settlement Services Provider List)
- Required Settlement Services (such as pest inspections) that the borrower selects from the Settlement Services Provider List
- Government Recording Charges
3) Charges that can increase at Settlement:
- Required settlement services that the borrower can select if the borrower selects a service provider not listed on the Settlement Services Provider List
- Title services and Lender’s Title Insurance if the borrower selects a service provider not listed on the Settlement Services Provider List
- Owner’s Title Insurance if the borrower selects a service provider not listed on the Settlement Services Provider List
- Initial deposit for Borrower Escrow Account
- Daily Interest Charges
- Homeowner’s Insurance
Note: For 1 and 2 above, these fees will not be subject to the tolerances should a change in circumstances occur that directly impacts the fee and a revised GFE is provided within the three (3) business day tine period after receipt of the information regarding the changed circumstance.
Good Faith Estimate (GFE) Outlined:
GFE Page 1:
- The section at the top of the form outlines the name of the originator, the originators address, phone number, and e-mail in the first column. The 2nd column outlines the borrower’s name, property address and the date of the GFE.
- Purpose of the GFE.
- Shopping Your Loan. The new GFE encourages borrowers to “shop” their loan to compare rates and terms. There is a chart provided on the bottom of page 3 of the GFE for this purpose.
- Important Dates and what they mean for the borrower.
- Summary of your Loan outlining the loan amount, loan term in years, initial monthly amount owed for principal, interest and mortgage insurance, the amount your loan balance can rise, if your loan has a pre-payment penalty, and if your loan has a balloon payment.
- Escrow Account Information. The new GFE has a section outlining whether the lender has an escrow account for property taxes and other property related charges (homeowners insurance)
- Summary of Settlement Charges. A: Adjusted origination charges (see page 2 for the outline) + B: All Other Settlement Services (see page 2 for the outline) which = the Total Estimated Settlement Charges.
GFE Page 2:
- Adjusted Originated Charges: 1) Lenders Origination Charge, 2) Credit or Charge (points) for the specific interest rate chosen with 3 options = A) Your Adjusted Origination Charges
- Charges for All other Settlement Services: 3) Required Services that are selected by the Lender, 4) Title services and Lender’s Title Insurance (includes courier fees, lender policy, filing, etc and is now a lump sum), 5) Owner’s Title Insurance (shown as a buyer cost even though AZ Purchase Contract states it is a seller cost), 5) Required services by the lender. The buyer has the option of using the lenders provider or they can pick their own (usually termite inspection, mold inspection), 7) Government Recording Fees, 8) Transfer Fees (not applicable in the State of AZ), 9) Initial deposit for escrow account outlining if property tax, insurance or anything else is impounded, 10) Daily Interest charges outlining x amount per day, for x days and states the settlement date, 11) Homeowners Insurance policy = B: Charges for All Other Settlement Charges
GFE Page 3:
- Understanding What Charges Can Change at Settlement. (see outline above)
- Using the Trade Off Table. Lowering the settlement charges will result in you having a higher interest rate. Lowering the interest rate will result in you having a higher settlement charge. If you choose either of these options it will change the origination charges and you will need to get a new GFE.
- Using the Shopping Chart. It is up to you as the borrower to decide whether to chop your rate. This chart is provided for you to make the comparison if you choose to do so.
- If your Loan is Sold in the Future. Outlines that if your loan is sold, it will not change your loan or the charges you paid at settlement.
Potential problems/pitfalls with the new regulations and forms:
The premium for the owner’s title policy is listed on the GFE as a charge to the buyer but this is typically paid by the seller. Therefore, the Total Estimated Settlement Charge listed on the GFE that the buyer receives from the lender is incorrect in most cases. This charge is rectified by showing as a charge to the buyer in the borrower’s column then offset with a credit from the seller to the buyer in the Seller’s column on page 1 of the HUD-1 statement.
If there is a difference between the costs quoted on the GFE and the final numbers on the HUD-1, the lender has the opportunity to reimburse the borrower any amounts by which tolerances were exceeded, either at the closing or within 30 days of settlement or the lender can elect to revise their Good Faith Estimate when the tolerance has been exceeded which may cause a delay in the closing and possession if it is not done with enough lead time.
Ways to avoid potential pitfalls prior to closing:
- Select a lender that has a good, close working relationship with their title agency.
- Be sure your lender and your realtor estate agent are communicating to insure your GFE figures are within mandatory tolerances.
- Have a conversation with your lender about ten days before the closing to confirm that every thing is in order.
- Contact your lender at lease three business days before your closing date to verify that the figures are within the new tolerances and that you will not be prevented from closing on your new property on the intended closing date.
Click here to view the new GFE form: http://www.hud.gov/offices/hsg/ramh/res/gfestimate.pdf
Click here to view the new HUD-1 form: http://www.hud.gov/content/releases/hud-1.pdf
