HUD Proposes Extensive RESPA Reform in Response to Market

The U.S. Department of Housing and Development (HUD) issued a proposal on March 14, 2008 to change the Real Estate Settlement Procedures Act (RESPA), which includes regulations for a new Good Faith Estimate (GFE). The proposed GFE is designed to clarify the terms of the loan for the borrower and to enable them to compare several different loans from different lenders. The first page of the four-page GFE includes a summary of the loan terms and a breakdown of the fees. Subsequent pages contain detail on the extent that the charges listed can change on the final loan, a chart comparing the disclosed loan to alternative loans with the same loan amount and similar terms, and a list of the estimated annual amounts for property taxes and insurance. The proposal states that the GFE will also disclose the Yield Spread Premium (YSP) to the borrower, but the YSP will be included under the heading "Our Service Charges" and will be shown as a credit for the interest rate chosen. The GFE has to remain available for the borrower to use as the basis for their loan application for ten days after it is issued. The proposal includes minor changes to the HUD-1 to match the proposed GFE.

If the borrower applies after receiving the GFE and is rejected, the borrower must be notified after 1-business day. As well, if there is another loan product available, the borrower must be issued a new GFE based on this alternative loan product.

This proposal includes a script to be read at the closing table that further informs borrowers about the terms of the loan. There is no regulation determining how to employ this script in closings where the parties are not physically present.

HUD is also seeking to implement regulations that will allow it to enforce these changes, adding penalties involving disclosures, title insurance, kickbacks, referral fees, unearned fees, and use of escrow accounts.

Currently this proposal has a comment period of 30 days