ADVISORY MEMORANDUM TO: FROM: ALL MASSHOUSING LENDERS KATHY BURNS, DIRECTOR OF HOMEOWNERSHIP DATE: NOVEMBER 15, 2010 RE: COMPLIANCE DOCUMENTATION REQUIREMENTS The purpose of this Advisory is to provide guidance and clarify key requirements with certain compliance documentation and issues encountered during the transition phase of MassHousing s move to pre-purchase file audits. During the first phase of transition, certain compliance documentation has been identified to be either missing from the shipped file and/or not properly completed in accordance with regulatory compliance requirements, specifically with the Real Estate Settlement Procedures Act ( RESPA ) and the Truth-in-Lending Act ( TILA ). Although this is not a widespread problem, it has caused processing delays for those loans in question while Lenders work with Titan Lenders Corp. ("Titan") and MassHousing staff to resolve issues and correct documents and data fields in order to ensure compliance. As mortgage industry professionals are aware, significant changes to federal rules under RESPA took effect January 1, 2010. Among other things, the Good Faith Estimate ( GFE ) and HUD-1 Settlement Statement forms have been redesigned, and these two forms are at the heart of every transaction. It is essential that Lenders and their closing attorneys ensure regulatory compliance requirements are being adhered to including, but not limited to, TILA and RESPA. Note: The Lender is urged to consult with legal counsel regarding proper compliance with all pertinent local, state, and federal laws and regulations. RESPA and TILA Documentation Particular care should be paid to submission of these documents. 1. The initial Good Faith Estimate (GFE) and Settlement Services Provider list; 1
2. All subsequent GFEs in chronological order, including dates of issuance, full documentation of change in circumstances, and the date of such change; 3. The final GFE shall be stamped or marked FINAL on the disclosure; 4. The initial Truth-in-Lending Disclosure (TIL) including date of issuance. Lenders would benefit from clearly delineating that all required disclosures were issued within three (3) business days from the date of application; 5. Interim or re-disclosed TILs; 6. The final TIL signed and dated by all borrowers; and 7. An itemization of loan costs paid by third parties, if any are excluded from finance charge calculations. Below are a few select TILA and RESPA requirements and provisions to assist Lenders in properly executing compliance documentation. Key regulatory citations and links are provided for convenience; however, please refer to the entire regulation for all regulatory requirements and provisions. Regulation Z: Truth-in-Lending Attorney/Closing Fee - Finance Charge Treatment Generally a "lump sum" charge by an attorney or settlement agent "may" be excluded as a finance charge all pursuant to commentary to Regulation Z contained in 226.4 Paragraph 4 (c) (7) which reads as follows. Regulation Z: Staff Commentary - Paragraph 4(c) (7) 1. Real estate or residential mortgage transaction charges. The list of charges in 226.4(c) (7) applies both to residential mortgage transactions and to other transactions secured by real estate. The fees are excluded from the finance charge even if the services for which the fees are imposed are performed by the creditor's employees rather than by a third party. In addition, the cost of verifying or confirming information connected to the item is also excluded. For example, credit-report fees cover not only the cost of the report but also the cost of verifying information in the report. In all cases, charges excluded under 226.4(c) (7) must be bona fide and reasonable. 2. Lump-sum charges. If a lump sum charged for several services includes a charge that is not excludable, a portion of the total should be allocated to that service and included in the finance charge. However, a lump sum charged for conducting or attending a closing (for example, by a lawyer or a title company) is excluded from the finance charge if the charge is primarily for services related to items listed in 226.4(c) (7) (for example, reviewing or completing documents), even if other incidental services such as explaining various documents or disbursing funds for the parties are performed. The entire charge is excluded even if a fee for the incidental services would be a finance charge if it were imposed separately. Seller s Points & Other Seller-Paid Amounts - 226.4 Paragraph 4(c) (5) 1. Seller's points. The seller's points mentioned in 226.4(c)(5) include any charges imposed by the creditor upon the non-creditor seller of property for providing credit to 2
the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller's points are frequently involved in real estate transactions guaranteed or insured by governmental agencies. A commitment fee paid by a noncreditor seller (such as a real estate developer) to the creditor should be treated as seller's points. Buyer's points (that is, points charged to the buyer by the creditor), however, are finance charges. 2. Other Seller-paid amounts. Mortgage insurance premiums and other finance charges are sometimes paid at or before consummation or settlement on the borrower's behalf by a non-creditor seller. The creditor should treat the payment made by the seller as seller's points and exclude it from the finance charge if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available. Application Fees Paragraph 226.4(c): Charges excluded from the finance charge. Application fees. An application fee that is excluded from the finance charge is a charge to recover the costs associated with processing applications for credit. The fee may cover the costs of services such as credit reports, credit investigations, and appraisals. The creditor is free to impose the fee in only certain of its loan programs, such as mortgage loans. However, if the fee is to be excluded from the finance charge under 226.4(c) (1), it must be charged to all applicants, not just to applicants who are approved or who actually receive credit. Real Estate Settlement Procedures Act - RESPA 3500.2 Definitions Application means the submission of a borrower's financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the borrower's name, the borrower's monthly income, the borrower's social security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator. An application may either be in writing or electronically submitted, including a written record of an oral application. GFE Requirements RESPA requires that the GFE be provided to the applicant(s) within three (3) business days of receipt of an application for any real estate secured dwelling. Under the revised RESPA requirements, if the following information is collected, it is considered an application; and therefore, the GFE must be provided: Name; Social Security Number; 3
Property Address; Monthly Income; Home Value or Best Estimate of Value; Requested Loan Amount; and Any other information the lender deems necessary 3500.7 Good Faith Estimate. 3500.7(a) (5) The lender may at any time collect from the loan applicant any information that it requires in addition to the required application information. However, the lender is not permitted to require, as a condition for providing a GFE, that an applicant submit supplemental documentation to verify the information provided on the application. Lender to provide. (1) Except as otherwise provided in paragraphs (a), (b), or (h) of 3500.7, not later than 3 business days after a lender receives an application, or information sufficient to complete an application, the lender must provide the applicant with a GFE. Changed Circumstance The initial GFE is binding unless there is a changed circumstance. A changed circumstance is defined as: Acts of God, war, disaster or other emergency; Changed or inaccurate information provided by borrower after the issuance of the GFE such as credit quality, loan amount, or property value; New information not previously relied on; or Other circumstances (i.e. boundary disputes, required flood insurance, environmental problems) A changed circumstance does not include market fluctuations. None of the information collected by the loan originator prior to issuing the GFE may later become the basis for a changed circumstance upon which a loan originator may offer a revised GFE, unless the loan originator can demonstrate that there was a change in the particular information or that it was inaccurate, or that the loan originator did not rely on that particular information in issuing the GFE. In addition, the loan originator is presumed to have relied on the borrower s name, the borrower s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator before providing the GFE. The loan originator cannot base a revision of the GFE on this information, unless it changed or is later found to be inaccurate. Intent to Proceed After the applicant(s) have received the initial GFE, the issuer of the GFE is responsible for obtaining and documenting the applicant(s) expressed intent to proceed with the transaction. If a GFE is re-issued due to changed circumstances, the applicant(s) must 4
express intent to proceed as well. The express interest to proceed must be documented in writing. Origination Charges: YSP and Discount Points As part of the revised RESPA requirements, Yield Spread Premium (YSP) and Discount Points (to buy down the interest rate) are not permitted on the same loans. Loans submitted with a GFE that reflects both YSP and Discount Points are not eligible for purchase. One of the stated purposes for the revisions to RESPA is to improve disclosure of Yield Spread Premiums (YSPs) to help borrowers understand how YSPs can affect borrowers settlement charges. YSP s are now reflected as credits to the borrower on the GFE and are no longer presumed to be paid to the broker. HUD now requires the broker to include the YSP as a charge to the borrower in the APR but doesn t count the later credit of the same amount in the APR. The purpose of Block 2, Box 2 is to show the amounts that are not being paid directly by the borrower. By agreeing to pay a higher interest rate, the borrower pays less charges upfront because the broker will receive a payment (YSP) from the lender based on interest rate. This amount is always shown as a credit (a negative amount) because it is decreasing the amount listed in Block 1. Another way of stating this is that this amount reduces the amount the borrower is expected to bring to the closing table. Settlement Service Provider ( SSP ) List RESPA requires that if the applicant(s) is allowed to shop for services required by the Lender, then a Settlement Service Provider List (SSP) must be provided with the GFE. The SSP must provide a minimum of one (1) service provider for each shoppable service. If a service is not required by the Lender (i.e. Pest Inspection, Home Warranty), then the fee must not be listed on the GFE. If no service providers are listed, then it is assumed the applicant(s) could not shop, and fees will be bound by specific fee tolerances. HUD-1 Settlement Statement Lines 1100-1108. This series covers title charges and charges by attorneys and closing or settlement agents. The title charges include a variety of services performed by title companies or others and include fees directly related to the transfer of title (title examination, title search, and document preparation), fees for title insurance, and fees for conducting the closing. The legal charges include fees for attorneys representing the lender, seller, or borrower, and any attorney preparing title work. The series also includes any settlement, notary, and delivery fees related to the services covered in this series. Disbursements to third parties must be broken out in the appropriate lines or in blank lines in the series, and amounts paid to these third parties must be shown outside of the 5
columns if included in Line 1101. Charges not included in Line 1101 must be listed in the columns. Line 1101 is used to record the total for the category of ``Title services and lender's title insurance.'' This amount must be listed in the columns. Line 1102 is used to record the settlement or closing fee. Line 1103 is used to record the charges for the owner's title insurance and related endorsements. This amount must be listed in the columns. Line 1104 is used to record the lender's title insurance premium and related endorsements. Line 1105 is used to record the amount of the lender's title policy limit. This amount is recorded outside of the columns. Line 1106 is used to record the amount of the owner's title policy limit. This amount is recorded outside of the columns. Line 1107 is used to record the amount of the total title insurance premium, including endorsements, that is retained by the title agent. This amount is recorded outside of the columns. Line 1108 used to record the amount of the total title insurance premium, including endorsements, that is retained by the title underwriter. This amount is recorded outside of the columns Additional sequentially numbered lines in the 1100-series may be used to itemize title charges paid to other third parties, as identified by name and type of service provided. Instructions for completing the GFE and HUD-1 Settlement Statements are located on the HUD website: http://www.hud.gov/offices/hsg/ramh/res/respa_hm.cfm http://edocket.access.gpo.gov/cfr_2009/aprqtr/24cfr3500appc.htm http://edocket.access.gpo.gov/cfr_2009/aprqtr/24cfr3500appa.htm Please refer to RESPA FAQ s http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs422010.pdf Thank you for working with us during this transition. MassHousing looks forward to working with our participating Lenders to achieve high standards of loan quality. All questions on this Advisory should be directed to Constandino Papagiannis, Risk and Compliance Manager by phone at 617-854-1380 or by email at cpapagiannis@masshousing.com. 6