RESPA Reform and Effective Policy Management

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1 RESPA Reform and Effective Policy Management Topic: This issue of Policy Matters details the best practices for covering normal and customary closing costs in light of the new Real Estate Settlement Procedures Act (RESPA) reform. The guidelines set forth by the RESPA reform on Jan. 1, 2010, marked the beginning of a new process for lenders when disclosing mortgage terms. The reform has changed how certain fees are disclosed; these fees now disclosed in a bundled format as opposed to the previous common practice, which was to itemize specific settlement fees. In addition, all lenders are mandated to use new standardized forms, including a new Good Faith Estimate (GFE) and HUD-1 Settlement Statement, which are dramatically different in both layout and content from previous versions. These changes represent a dramatic shift from what had been considered common practice for years. As a result, borrowers, lenders and settlement agents must now work to acclimate to this new means of providing a more accurate estimate of fees and final settlement statements. The intent of the RESPA reform is to simplify the process of comparing mortgage financing terms for consumers; with the goal of ensuring consumers have a greater understanding of the terms and thus enabling them to make more educated, cost-effective decisions. The reform is also designed to prevent lenders from significantly modifying loan charges and closing fees to the consumer (absent extraordinary changes in circumstances). When 2010 began, inconsistency existed throughout the industry as lenders and title companies worked to build or update their software systems in order to incorporate the new disclosure regulations. However, as we reach the middle of the year, a greater number of lenders, title companies and settlement agents have gained experience with the new process; and consequently, the process has become more standardized. There is now an opportunity to implement relocation policy changes that incorporate the new fee terms set forth by the RESPA reform. The right policy changes can help lenders more effectively manage and counsel each transferee and can help companies ensure they are providing consistent, fair and accurate new home purchase benefits. This issue of Policy Matters highlights the key changes that the RESPA reform has established specifically, how normal and customary closing costs are disclosed and will help companies identify areas in which policy verbiage can be updated to best align with the changes. 1

2 Lender s and the Loan Origination Charge One of the key changes from the RESPA reform in disclosing settlement costs is the new practice of bundling fees together and disclosing them as one fee amount, versus the itemization of several different fees. In the past, a borrower shopping for a loan would typically obtain various loan offers that would include a range of loan-fee terms. This made it difficult for consumers to accurately compare one loan program to another and evaluate which lender had the most competitive offer. With the RESPA reform, many of the fees that had been previously itemized on a GFE are now required to be bundled together and disclosed as a single fee. The intent of this change is to enable each consumer to more easily understand and compare one loan offering to another. One of the specific fees impacted by this change is the lender fees, which now falls into the new bundled fee format. Prior to Jan. 1, 2010, a lender could charge any number of different fees. Although the fees were similar from one lender to the next, the terms used for each fee varied. Underwriting s, Processing s, Application s and Origination s are some of the more common lender fee terms used. Previously, these fees were broken out on individual line items with the corresponding charge listed for each one. Under the new regulation, lenders may still charge these fees; however, any and all lender fees must be bundled into one line item fee under the term Loan Origination Charge. There has been some confusion related to the term Loan Origination Charge, which is different from a Loan Origination. A Loan Origination is typically charged as a percentage (or point) of the loan amount. A Loan Origination is also a tax-deductible cost and should not be a tax-protected reimbursed expense. For companies that do reimburse a Loan Origination, the cost is still identified on the HUD-1 Settlement Statement. However, the single Loan Origination Charge listed under the borrower s costs column includes the Loan Origination plus any other lender fees (such as the Underwriting and Application ). SIRVA Recommendation To ensure that policy language on the reimbursement of lender fees is consistent with settlement fee disclosures, SIRVA recommends eliminating individual lender fees in the policy and replacing them with a single fee category containing a monetary fee cap. The fee cap can be adjusted depending on whether the company reimburses a Loan Origination. This new fee would simply be called a Loan Origination Charge. An example of a policy statement for a company that reimburses an origination fee is noted below: Loan Origination Charge not to exceed 1 percent of the primary loan amount plus $525. This statement covers both the cost of the Loan Origination and provides a cap on any other lender fees included in the Loan Origination Charge. A Loan Origination will still be identified on a HUD Settlement Statement which will allow a company and the employee to determine if any portion of the Loan Origination Charge is tax deductable. 2

3 Bundled Lender s The common lender fees below used to be itemized and now fall into a bundled fee category. Application Loan Origination Loan Origination Charge Underwriting Funding Processing Services and Lender s Just like lender fees, title services fees are also bundled and disclosed as one line-item fee. Examination, Binder, /Abstract Search, Settlement, Document Preparation and EPA Endorsement are some of the more common itemized fees charged by title companies and now bundled and disclosed as one single fee. Lender s title insurance is still identified on the HUD-1 Settlement Statement. However, the single Services (line item 1101 on the HUD-1 Settlement Statement) includes the cost of the Lender s title insurance. SIRVA Recommendation SIRVA believes the best practice in policy management is to eliminate the various itemized fees described above. It would be more efficient to list Services and Lender s as a reimbursed expense; this approach ensures the transferee is covered for any normal and customary cost related to title fees. There are a few fees related to title services that do not fall into the bundled title services category and should continue to remain itemized for reimbursement based on policy. One of these fees is the Owner s. Owner s is not required to obtain financing, but RESPA mandates that it must be offered and disclosed as a separate line-item charge. Depending on the state of purchase, Owner s could be either a buyer-paid cost or a seller-paid cost. In addition, Lender s Attorney s are to be bundled into the Services category in attorney states. However, the Borrower s Attorney s in certain states are to be disclosed separately on the HUD-1 Settlement Statement. Why? This is a required service, but it is one for 3

4 which a borrower may shop. As a part of the RESPA reform, any required services that a buyer may shop for must be disclosed separately. Bundled s The title fees below used to be itemized and now fall into a bundled fee category. Examination Lender's Binder Document preparation Services & Lender's Search Wire Abstract Search Settlement Third-Party Settlement s The RESPA reform does not change the manner in which third-party settlement fees or passthrough costs are disclosed. Any pass-through costs paid to a third-party provider continue to be itemized on a HUD-1 Settlement Statement. Examples of these fees include Appraisal, Credit Report, Tax Service, Survey, Recording and Transfer Taxes/Stamps. Normal and customary fees such as these should still remain a part of the home-purchase benefits based on the policy. Conclusion As the mortgage industry has adjusted to the RESPA reform, lenders and companies now have the opportunity to revise their policies in order to ensure their home purchase program is best in line with the new regulations. The right policy changes will help assure that transferees receive accurate counseling, and are provided with consistent and fair new home purchase benefits. As always, SIRVA is committed to providing you with the most up-to-date information in order to assist you in managing an effective relocation. 4

5 If you have further questions on this topic or another part of your relocation policy, please feel free to contact Rick Hoover, director, client services, SIRVA Mortgage at ext or Meighan Dutt, director, client services, SIRVA Mortgage at ext The foregoing is intended as general information only. SIRVA suggests that decisions as to your specific situation should be made only after full evaluation of your circumstances with your company leadership, tax and legal advisors, and HR personnel SIRVA, Inc. / / blog.sirva.com SIRVA and the SIRVA LOGO DESIGN are registered service marks of a subsidiary of SIRVA, Inc. 5