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1 BASIC RESPA Implemented through HUD’s Regulation X.

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Presentation on theme: "1 BASIC RESPA Implemented through HUD’s Regulation X."— Presentation transcript:

1 1 BASIC RESPA Implemented through HUD’s Regulation X

2 2 Objectives We will review the following: –Background of RESPA –Kickback Rules of Section 8 –Pre-closing Disclosures –Closing Disclosures –Post-closing Disclosure

3 3 Background  Real Estate Settlement Procedures Act (RESPA) passed by Congress in 1974  HUD designated to write the regulation to implement the law  HUD Regulation X implements RESPA

4 4 Background  Purchase Money mortgage loans only  Three purposes:  Require advance disclosure of settlement charges  Prohibit certain referral fees and “kickbacks”  (Section 8 Violations)  Limit escrow amounts required for taxes and insurance

5 5 Background  In 1990, Congress added two more requirements:  Provide disclosures when mortgage servicing rights are transferred  Provide annual escrow account statements by servicers to borrowers

6 6 Background  In 1992, RESPA’s coverage expanded to include all 1 st mortgages on 1-4 family homes  not just purchase money mortgages  In 1994, Coverage was further expanded to include loans secured by junior liens

7 7 Section 8 Violations kickbacks

8 8 Section 8 Violations Section 8A –N–No referral fees Section 8B –N–No splitting of charges except for actual services performed Violations are considered a felony –s–subject to $10,000 fine –1–1 year prison term –t–treble damages –a–attorney’s fees

9 9 Mortgage Yield Spread Premiums –March 1, 1999 HUD Issues Policy Statement on the legality of payments by lenders to mortgage brokers under the RESPA –Holds Mortgage Industry to a 2 part test: Goods or facilities must be furnished or services must actually be performed Compensation for goods or services must commensurate with their value.

10 10 HUD’s Policy Statements 2 part test threshold - the broker must: –Take the application –Perform 5 of 14 additional services. October 18, 2001 –HUD was challenged in court and reissued another statement asserting the same criteria The Policy Statement does not legally resolve the issue regarding “Yield Spread Premiums”.

11 11 Section 8 Violations Examples of Section 8 violations

12 12 RESPA Disclosures

13 13 RESPA Disclosures Pre Closing Disclosures – Special Information Booklet – Good Faith Estimate – Mortgage Servicing Transfer Disclosure – Affiliated Business Arrangement Discl.

14 14 Disclosures In the news: –HUD’s Proposal - Meaningful “GFE” –Mortgage Servicing Disclosure Violations

15 15 Special Information Booklet Isn’t that special

16 16 Special Information Booklet Purpose –Designed to help applicants understand the home buying, financing & settlement processes Timing –Required to be provided on: Purchase money applications Unless declined within 3 business days

17 17 Special Information Booklet Internal Review – Determine that booklet is provided: Within three business days After receipt of a written application – Determine that current version is being used (Sept. ’97)

18 18 Good Faith Estimate

19 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 loan –If no property is specified, then it is not considered an application It's a prequalification.

20 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 21 Good Faith Estimate (“GFE”)  Purpose  Provides applicants with information regarding which settlement services will be required and how much the charge for each of those services is likely to be.  Timing  The GFE should be provided within three business days after receipt of a written application  Not required if the application is declined within 3 days from application.

22 22 Good Faith Estimate (“GFE”)  Internal Review  Review form for the required terms as outlined in Appendix C of HUD Regulation X  The estimates must bear a “reasonable relationship” to the charge a borrower is likely to pay at settlement  Lenders may substitute GFE for Itemization of Amount Financed required by Regulation Z for mortgage loans subject to RESPA.

23 23 Good Faith Estimate (“GFE”) HUD Proposal –HUD 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 end –Alphonso Jackson replaces Mel Martinez as HUD Secretary of Housing & proposal is tabled.

24 24 Mortgage Servicing Transfer Disclosure

25 25 Mortgage Servicing Transfer Disclosure  Purpose:  Informs the applicant of the likelihood that servicing (collection of payments) will be sold or transferred to another institution  There are 5 parts to this disclosure:  Transfer Practices and Requirements  Complaint Resolution  Damages and Costs  Servicing Transfer Estimates by Original Lender  Customer Acknowledgement

26 26 Mortgage Servicing Transfer Disclosure Original Requirements Disclosure must be provided for 1 st lien loans Historical data had to be updated by March 31 of each calendar year.

27 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 days –Mandatory Customer Acknowledgement –Disclosure must be retained for 5 years

28 28 Mortgage Servicing Transfer Disclosure Congress Changes the Law September 30, 1996 Congress amended RESPA to eliminate hist. data & acknowledgement HUD Proposes Amendments HUD proposes to amend Regulation X to implement 1996 requirements but never finalizes proposed regulation July 29, 2003 HUD 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 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 30 Mortgage Servicing Transfer Disclosure Current requirements 3500.21(b)(1) Servicing disclosure statement must be given within 3 business days 3500.21(b)(3)(I) Servicing disclosure statement must disclose whether servicing may be assigned, sold, or transferred

31 31 Affiliated Business Arrangement

32 32 Affiliated Business Disclosure Purpose –The disclosure informs borrowers of any affiliated relationship that exists between the lender and service provider Disclosure Information –Provided on a separate paper The name & address of service provider Describes the service they are providing Lists the cost ( $) for that service

33 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: Appraiser Attorney Credit Bureau.

34 34 Affiliated Relationship Affiliated Relationship Exists When: –One business entity has effective control over another by virtue of a partnership or other agreement or –A parent to subsidiary relationship or where the two entities are under common control of a third entity –Or in which the referring company owns 1% or more of the company providing the settlement service.

35 35 Affiliated Business Disclosure Timing of Disclosure –Face-to-face application no later than the time of each referral if the lender requires use of a particular provider –at the time of loan application, except that –where a lender makes the referral to a borrower, the referral may be satisfied at the time that the good faith estimate is provided –Telephone application???? affiliation may be given orally followed by the written disclosure within 3 days.

36 36 Affiliated Business Disclosure Record Retention –Customer acknowledgement of the disclosure is required and must be retained for 5 years

37 37 Closing - RESPA

38 38 Required Disclosures Disclosures at Closing – HUD 1/ 1A Settlement Statement – Initial Escrow Account Disclosure

39 39 HUD-1 Hud-1A Uniform Settlement Statement

40 40 HUD-1 or HUD-1A Determine if the financial institution uses the current HUD-1 or HUD-1A, as appropriate –HUD –1 may always be used Review HUD-1 to see that charges are properly disclosed for both borrower and seller

41 41 HUD-1 or HUD-1A  Required Disclosures  Charges paid outside of closing must be labeled “POC” but not included in the totals.  The name of any 3 rd party was the recipient of a fee must be disclosed.  Timing for Disclosure  Must be provided at or prior to settlement.

42 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 43  Lenders are prohibited from charging fees for the preparation of: HUD1/1A, TIL statement or escrow account disclosures. Charging for Disclosures

44 44 Escrow Accounts

45 45 Escrow Accounts Does you bank escrows for taxes and insurance premiums? –Refer to p.2 of the HUD 1 Statement - 1000 series

46 46 Escrow Accounts What is an Escrow Account?

47 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 48 Escrow Accounts What kinds of payments would a servicer make from an Escrow account? –Hazard Insurance –Flood Insurance –Guarantee Insurance (PMI or Government) –Various Types of Taxes

49 49 Escrow Accounts Why 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 50 Escrow Accounts If the bank engages in this activity, there are requirements, restrictions, and limitations outlined in Section 3500.17 of Regulation X and Section 10(C)(1) of RESPA Civil Liability as well

51 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 52 Escrow Accounts To establish an account, the following limitations must be followed: 3500.17(c)(1)(I) collect an amount that is sufficient to bring taxes and insurance premiums current select a cushion that does not exceed 1/6 th of each annual outlay must use the “aggregate accounting method” to determine amounts that are collected at closing –All accounts established after October 27, 1997 –3500.17(b)

53 53 Escrow Accounts During the life of an account: 3500.17(k)(1) –Servicers are limited to collect monthly payments that do not exceed 1/12 th of each annual outlay amount –Must refund surpluses > $50 within 30 days of the escrow analysis statement

54 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 penalty –Payments may not be more than 30 days overdue

55 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 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 3500.17(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 servicer –trial running balance 3500.17(g)(1)(I)

57 57 Escrow Accounts Timing –The bank must furnish the borrower with an initial disclosure within 45 days upon establishing an escrow account - 3500.17(g)(1) Record Retention –Recordkeeping requirement for 5 years after the account is last serviced 3500.17(l)(2) –

58 58 Escrow Exercise Review In-Class Exercise RESPA’s Appendix E Example

59 59 Escrow Exercise Use HUD’s Aggregate Accounting Method & 3 Step Process to compute a Trial Balance with Cushion This analysis is used to help in the preparation of the Initial Escrow Account Statement

60 60 Escrow Exercise Exercise Loan Scenario: –Settlement Date:May 15 –First Payment Date:July 1 –Projected Outlays: School Taxes (Paid Sept. 20) $360 County Taxes (Paid July 25 $500 &Dec.10 $700) $1,200 Total Annual Outlays $1,560 Monthly Deposits to Account = $1,560 / 12 = $130 per month Servicer Selects a 2 Month Cushion

61 61 Escrow Exercise Step 1 - Initial Trial Balance MonthPaymentDisbursement Balance June00 0 July130500 -370 August1300 -240 September130360 -470 October1300 -340 November 1300 -210 December130700 -780 * January1300 -650 February1300 -520 March1300 -390 April1300 -260 May1300 -130 June1300 0 * = High Deficit

62 62 Escrow Exercise Step 2 - Adjusted Trial Balance Month Payment Disbursement Balance June00 780 July130500 410 August1300 540 September130360 310 October1300 440 November 1300 570 December130700 0 January1300 130 February1300 260 March1300 390 April1300 520 May1300 650 June1300 780

63 63 Escrow Exercise Step 3 - Trial Balance with Cushion Month Payment Disbursement Balance June00 1040 July130500 670 August1300 800 September130360 570 October1300 700 November 1300 830 December130700 260 January1300 390 February1300 520 March1300 650 April1300 780 May1300 910 June1300 1040 High Deficit (780) + 2 Month Cushion (260) = 1040 (Opening Statement Balance)

64 64 Escrow Exercise Single Item Accounting Method School Taxes County Property Taxes Paid on: Sept. 20 Paid on July 25 and on Dec. 10 $360 $1,200 Dep. Outlay Bal. Dep. Outlays Bal. Jun 0 0 0 0 Jul 30 30 100 500 Aug 30 60 100 Sept 30 360 * 100 Oct 30 100 Nov 30 100 0 Dec 30 100 700 * Jan 30 100 Feb 30 100 Mar 30 100 Apr 30 100 May 30 100 Jun 30 0 100 0 High Deficits: $270 + $600 2 Mos.Cushion: $60 + $200 $330 + $800 = $1,130 Trial Balance with Cushion using the Single Item Accounting Method

65 65 Escrow Exercise Trial Balance with Cushion: Single Item Accounting Method: $1,130 * *Used on the HUD 1 Settlement Aggregate Accounting Method: $1,040 ** **Amount collected at closing & Used as “Starting Balance” on Initial Escrow Account Statement $90 = Aggregate Accounting Adjustment used on the HUD 1 Settlement Statement

66 66 Post Closing - RESPA

67 67 RESPA / Regulation X Disclosures: Post Closing Annual Escrow Account Statement Notice of sale or transfer of servicing - “Hello - Goodbye”, if applicable.

68 68 Annual Escrow Account Statement

69 69 Annual Escrow Statement  Contents  Disclosure is similar to Initial Statement  3500.17(I)(1)(I) thru (viii)  However, it shows actual amounts paid from the account and addresses overages and shortages  Timing  Must be provided within 30 days at the end of the annual escrow accounting computation year  3500.17(I)

70 70 Notice of Sale or Transfer of Servicing Hello Goodbye

71 71 Notice of Sale or Transfer of Servicing  “Transferee” (the new servicer) must provide notice not more than 15 days after the effective date of the transfer of servicing;  “ Transferor” (the old servicer) must provide a notice not less than 15 days before the effective date of the transfer.

72 72 Notice of Sale or Transfer of Servicing  Option for transferor and transferee to combine notices 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

73 73 Questions

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