Major Change in Residential Real Estate: A Summary of RESPA Changes Effective January 1, 2010

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In response to recent events in the real estate industry, the housing arm of the federal government, Housing and Urban Development (“HUD”), has enacted new reforms of the Real Estate Settlement Procedures Act (“RESPA”) that will help families shop for the lowest-cost mortgage available and avoid costly and potentially harmful loan offers from predatory lenders. The new RESPA rules now will require that all lenders and all mortgage brokers provide you as a potential client a standard Good Faith Estimate (“GFE”). This newly formatted GFE will clearly disclose all of the key loan terms and closing costs.

The most significant change is the addition of a third page to the HUD-1 Settlement Statement that allows you as a consumer to easily compare your final loan terms and closing costs with other lenders. This greatly will control predatory lenders from over-charging. The new GFE will include an instructional page to help borrowers understand their loan offer. Additionally, the new GFE enables consumers to compare their original estimated closing costs given at the initial meeting with a lender to the final actual costs on their HUD-1 Settlement Statement at closing. To facilitate this comparison between the final HUD-1 and the original GFE, each designated line on the final HUD-1 now will include a reference to the relevant line from the original GFE. This change means you now will be able to easily compare the estimate you received up front against the actual costs at the settlement table.

Summary of the new RESPA Rule

  • HUD will require mortgage lenders and brokers to provide borrowers with an easy-to-read standard Good Faith Estimate (GFE) that will clearly answer the key questions they have when applying for a mortgage including:
    • What's the term of the loan?
    • Is the interest rate fixed or can it change?
    • Is there a pre-payment penalty should the borrower choose to refinance at a later date?
    • Is there a balloon payment?
    • What are total closing costs?
  • HUD's new GFE has been reduced from 4 to 3 pages, including an instructional page to help borrowers better understand their loan offer. In addition, the GFE will consolidate closing costs into major categories to prevent junk fees and display total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. HUD will specify the closing costs that can and cannot change at settlement. If a fee changes, HUD will limit the amount it can change.
  • To help borrowers compare their GFE with their HUD-1 Settlement Statement, each designated line on the final HUD-1 will now include a reference to the relevant line from the GFE. Borrowers will now be able to easily compare their estimated and actual costs.
  • HUD will require lender payments to mortgage brokers (often called Yield Spread Premiums) to be disclosed in a more meaningful way. These payments are directly dependent on the interest rates that consumers agree to.
  • Loan originators will be required to provide borrowers their GFE 3 days after the loan originator's receipt of all necessary information. To facilitate shopping, loan originators cannot not require verification of GFE information (tax returns, etc.) until after the applicant makes the decision to proceed.
  • HUD will allow lenders and settlement service providers to correct potential violations of RESPA's new disclosure and tolerance requirements. Lenders and settlement service providers will now have 30 days from the date of closing to correct errors or violations and repay consumers any overcharges.
  • HUD estimates that, by improving upfront disclosures on the GFE, and limiting the amount that estimated charges can change, consumers may save nearly $700 in total closing costs.
  • The new, standardized GFE and revised HUD-1 will be required on January 1, 2010.

Reager & Adler provides full-service real estate closing services to Central Pennsylvania individuals and businesses, therefore, we will continue to monitor changes to RESPA as the new regulations go into effect early in 2010.

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