Presentation on theme: "State Examiner Training Implemented through HUD’s Regulation X"— Presentation transcript:
1 State Examiner Training Implemented through HUD’s Regulation X BASIC RESPAImplemented throughHUD’sRegulation XFederal Reserve Bank Atlanta & Richmond
2 Objectives We will review the following: Background of RESPA Kickback Rules of Section 8Pre-closing DisclosuresClosing DisclosuresPost-closing Disclosure
3 BackgroundReal Estate Settlement Procedures Act (RESPA) passed by Congress in 1974HUD designated to write the regulation to implement the lawHUD Regulation X implements RESPA
4 Background Purchase Money mortgage loans only Three purposes: Require advance disclosure of settlement chargesProhibit certain referral fees and “kickbacks”(Section 8 Violations)Limit escrow amounts required for taxes and insurance
5 Background In 1990, Congress added two more requirements: Provide disclosures when mortgage servicing rights are transferredProvide annual escrow account statements by servicers to borrowers
6 BackgroundIn 1992, RESPA’s coverage expanded to include all 1st mortgages on 1-4 family homesnot just purchase money mortgagesIn 1994, Coverage was further expanded to include loans secured by junior liens
8 Section 8 Violations Section 8A Section 8B No referral feesSection 8BNo splitting of charges except for actual services performedViolations are considered a felonysubject to $10,000 fine1 year prison termtreble damagesattorney’s fees
9 Section 8 Violations Mortgage Yield Spread Premiums March 1, 1999 HUD Issues Policy Statement on the legality of payments by lenders to mortgage brokers under the RESPAHolds Mortgage Industry to a 2 part test:Goods or facilities must be furnished or services must actually be performedCompensation for goods or services must commensurate with their value.
10 HUD’s Policy Statements 2 part test threshold - the broker must:Take the applicationPerform 5 of 14 additional services.October 18, 2001HUD was challenged in court and reissued another statement asserting the same criteriaThe Policy Statement does not legally resolve the issue regarding “Yield Spread Premiums”.
11 Section 8 ViolationsExamples of Section 8 violations
16 Special Information Booklet PurposeDesigned to help applicants understand the home buying, financing & settlement processesTimingRequired to be provided on:Purchase money applicationsUnless declined within 3 business days
17 Special Information Booklet Internal ReviewDetermine that booklet is provided:Within three business daysAfter receipt of a written applicationDetermine that current version is being used (Sept. ’97)
19 GFE Definition Application A submission of a borrower’s financial information in anticipation of a credit decision whether written or computer generated relating to a federally-related mortgage loanIf no property is specified, then it is not considered an applicationIt's a prequalification.
20 GFE Definition Business Day Business day means a day on which the offices of the business entity are open to the public for carrying on substantially all of the entity's business functions.
21 Good Faith Estimate (“GFE”) PurposeProvides applicants with information regarding which settlement services will be required and how much the charge for each of those services is likely to be.TimingThe GFE should be provided within three business days after receipt of a written applicationNot required if the application is declined within 3 days from application.
22 Good Faith Estimate (“GFE”) Internal ReviewReview form for the required terms as outlined in Appendix C of HUD Regulation XThe estimates must bear a “reasonable relationship” to the charge a borrower is likely to pay at settlementLenders may substitute GFE for Itemization of Amount Financed required by Regulation Z for mortgage loans subject to RESPA.
23 Good Faith Estimate (“GFE”) HUD ProposalHUD makes proposal to attach liability to disclosure similar to Reg Z.Either create tolerance for accuracy compared to HUD 1 actual costs or Lender guarantee closing costs on front endAlphonso Jackson replaces Mel Martinez as HUD Secretary of Housing & proposal is tabled.
25 Mortgage Servicing Transfer Disclosure Purpose:Informs the applicant of the likelihood that servicing (collection of payments) will be sold or transferred to another institutionThere are 5 parts to this disclosure:Transfer Practices and RequirementsComplaint ResolutionDamages and CostsServicing Transfer Estimates by Original LenderCustomer Acknowledgement
26 Mortgage Servicing Transfer Disclosure Original RequirementsDisclosure must be provided for 1st lien loansHistorical data had to be updated by March 31 of each calendar year.
27 Mortgage Servicing Transfer Disclosure Timing Requirement:If the application is taken face-to-face, provide the disclosure at the time of application.If the application is taken in a manner other than face-to-face, provide the disclosure within 3 business daysMandatory Customer AcknowledgementDisclosure must be retained for 5 years
28 Mortgage Servicing Transfer Disclosure Congress Changes the LawSeptember 30, 1996Congress amended RESPA to eliminate hist. data & acknowledgementHUD Proposes AmendmentsHUD proposes to amend Regulation X to implement 1996 requirements but never finalizes proposed regulationJuly 29, 2003HUD proposes revisions to Regulation X and provides interim rule:“….However, in the meantime, the Section 6 language in the statute may be provided in conjunction with the GFE………”
29 Mortgage Servicing Transfer Disclosure Section 6“Each person who makes a federally related mortgage loan shall disclose to each person who applies for the loan, at the time of application for the loan, whether the servicing of the loan may be assigned, sold, or transferred to any other person at any time while the loan is outstanding.”
30 Mortgage Servicing Transfer Disclosure Current requirements(b)(1)Servicing disclosure statement must be given within 3 business days(b)(3)(I)Servicing disclosure statement must disclose whether servicing may be assigned, sold, or transferred
32 Affiliated Business Disclosure PurposeThe disclosure informs borrowers of any affiliated relationship that exists between the lender and service providerDisclosure InformationProvided on a separate paperThe name & address of service providerDescribes the service they are providingLists the cost ( $) for that service
33 Affiliated Relationship Affiliated Relationship Exists:When a company refers a settlement service to a provider with whom the company has an affiliate relationship and that company benefits financially from the referral of business.If so, the lender is limited to requiring an:AppraiserAttorneyCredit Bureau.
34 Affiliated Relationship Affiliated Relationship Exists When:One business entity has effective control over another by virtue of a partnership or other agreement orA parent to subsidiary relationship or where the two entities are under common control of a third entityOr in which the referring company owns 1% or more of the company providing the settlement service.
35 Affiliated Business Disclosure Timing of DisclosureFace-to-face applicationno later than the time of each referralif the lender requires use of a particular providerat the time of loan application, except thatwhere a lender makes the referral to a borrower, the referral may be satisfied at the time that the good faith estimate is providedTelephone application????affiliation may be given orallyfollowed by the written disclosure within 3 days.
36 Affiliated Business Disclosure Record RetentionCustomer acknowledgement of the disclosure is required and must be retained for 5 years
40 HUD-1 or HUD-1ADetermine if the financial institution uses the current HUD-1 or HUD-1A, as appropriateHUD –1 may always be usedReview HUD-1 to see that charges are properly disclosed for both borrower and seller
41 HUD-1 or HUD-1A Required Disclosures Timing for Disclosure Charges paid outside of closing must be labeled “POC” but not included in the totals.The name of any 3rd party was the recipient of a fee must be disclosed.Timing for DisclosureMust be provided at or prior to settlement.
42 HUD-1 or HUD-1A Timing for Disclosure HUD-1 or HUD-1A must be available for inspection by the borrower at least one business day before settlement.
43 Charging for Disclosures Lenders are prohibited from charging fees for the preparation of: HUD1/1A, TIL statement or escrow account disclosures.
47 Escrow Accounts Definition “a separate bank account segregated from the bank’s own funds in which the bank is required by state law to deposit all monies collected for clients”AKA Trust, Reserve or Impound Account
48 Escrow AccountsWhat kinds of payments would a servicer make from an Escrow account?Hazard InsuranceFlood InsuranceGuarantee Insurance (PMI or Government)Various Types of Taxes
49 Escrow AccountsWhy would a bank condition a loan or require a borrower to pay amounts into an escrow account?To protect its interest in the collateral i.e. avoid tax liens or ensure that hazard policy premiums are paid
50 Escrow AccountsIf the bank engages in this activity, there are requirements, restrictions, and limitations outlined in Section of Regulation X and Section 10(C)(1) of RESPACivil Liability as well
51 Escrow Accounts Prior to establishing an escrow account: An escrow account analysis must be performed to determine amounts the borrower will deposit into the account
52 Escrow AccountsTo establish an account, the following limitations must be followed: (c)(1)(I)collect an amount that is sufficient to bring taxes and insurance premiums currentselect a cushion that does not exceed 1/6th of each annual outlaymust use the “aggregate accounting method” to determine amounts that are collected at closingAll accounts established after October 27, 1997(b)
53 Escrow Accounts During the life of an account: 3500.17(k)(1) Servicers are limited to collect monthly payments that do not exceed 1/12th of each annual outlay amountMust refund surpluses > $50 within 30 days of the escrow analysis statement
54 Escrow Accounts During the life of an account: 3500.17(k)(1) Servicer must pay outlays in a timely manner in order to avoid any penaltyPayments may not be more than 30 days overdue
55 Escrow Accounts During the life of an account: 3500.17(k)(1) Discounts and additional fees – HUD encourages the servicer to follow customer preference, but does not require payments to be made so as to earn discounts.
56 Escrow Accounts Initial Escrow Account Statement amount of the monthly payment (PITI)amount of the monthly payment that will be deposited into the escrow account(g)(1)(I)amounts of outlay(s) that will be paid from the escrow account (estimated taxes & insurance, etc.)cushion, if any, selected by the servicertrial running balance
57 Escrow Accounts Timing Record Retention The bank must furnish the borrower with an initial disclosure within 45 days upon establishing an escrow account (g)(1)Record RetentionRecordkeeping requirement for 5 years after the account is last serviced(l)(2)
58 Escrow ExerciseReview In-Class ExerciseRESPA’s Appendix E Example
59 Escrow ExerciseUse HUD’s Aggregate Accounting Method & 3 Step Process to compute a Trial Balance with CushionThis analysis is used to help in the preparation of the Initial Escrow Account Statement
60 Escrow Exercise Exercise Loan Scenario: Settlement Date: May 15 First Payment Date: July 1Projected Outlays:School Taxes (Paid Sept. 20) $360County Taxes (Paid July 25 $500& Dec.10 $700) $1,200Total Annual Outlays $1,560Monthly Deposits to Account = $1,560 / 12 =$130 per monthServicer Selects a 2 Month Cushion
69 Annual Escrow Statement ContentsDisclosure is similar to Initial Statement(I)(1)(I) thru (viii)However, it shows actual amounts paid from the account and addresses overages and shortagesTimingMust be provided within 30 days at the end of the annual escrow accounting computation year(I)
70 Notice of Sale or Transfer of Servicing Hello Goodbye
71 Notice of Sale or Transfer of Servicing “Transferee” (the new servicer) must providenotice not more than 15 days after theeffective date of the transfer of servicing;“Transferor” (the old servicer) must provide anotice not less than 15 days before theeffective date of the transfer.
72 Notice of Sale or Transfer of Servicing Option for transferor and transferee to combinenotices into one notice which must be provided not less than15 days before the effective date of the transfer.Special circumstances allow for the notices to be given within 30 days after the effective date of the transfer of servicing