[Federal Register Volume 73, Number 222 (Monday, November 17, 2008)]
[Rules and Regulations]
[Pages 68204-68288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-27070]



[[Page 68203]]

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Part IV





Department of Housing and Urban Development





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24 CFR Parts 203 and 3500



 Real Estate Settlement Procedures Act (RESPA): Rule To Simplify and 
Improve the Process of Obtaining Mortgages and Reduce Consumer 
Settlement Costs; Final Rule

  Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / 
Rules and Regulations  

[[Page 68204]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 203 and 3500

[Docket No. FR-5180-F-03]
RIN 2502-AI61


Real Estate Settlement Procedures Act (RESPA): Rule To Simplify 
and Improve the Process of Obtaining Mortgages and Reduce Consumer 
Settlement Costs

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: This final rule amends HUD's regulations to further RESPA's 
purposes by requiring more timely and effective disclosures related to 
mortgage settlement costs for federally related mortgage loans to 
consumers. The changes made by this final rule are designed to protect 
consumers from unnecessarily high settlement costs by taking steps to: 
improve and standardize the Good Faith Estimate (GFE) form to make it 
easier to use for shopping among settlement service providers; ensure 
that page 1 of the GFE provides a clear summary of the loan terms and 
total settlement charges so that borrowers will be able to use the GFE 
to identify a particular loan product and comparison shop among loan 
originators; provide more accurate estimates of costs of settlement 
services shown on the GFE; improve disclosure of yield spread premiums 
(YSPs) to help borrowers understand how YSPs can affect borrowers' 
settlement charges; facilitate comparison of the GFE and the HUD-1/HUD-
1A Settlement Statements; ensure that at settlement borrowers are aware 
of final costs as they relate to their particular mortgage loan and 
settlement transaction; clarify HUD-1 instructions; expressly state 
that RESPA permits the listing of an average charge on the HUD-1; and 
strengthen the prohibition against requiring the use of affiliated 
businesses.
    This final rule follows a March 14, 2008, proposed rule and makes 
changes in response to public comment and further consideration of 
certain issues by HUD. In addition, this rule provides for an 
appropriate transition period. Compliance with the new requirements 
pertaining to the GFE and settlement statements is not required until 
January 1, 2010. However, certain provisions are to be implemented upon 
the effective date of the final rule.

DATES: Effective Date: This rule is effective on January 16, 2009.

FOR FURTHER INFORMATION CONTACT: Ivy Jackson, Director, or Barton 
Shapiro, Deputy Director, Office of RESPA and Interstate Land Sales, 
Office of Housing, Department of Housing and Urban Development, 451 7th 
Street, SW., Room 9158, Washington, DC 20410-8000; telephone number 
202-708-0502. For legal questions, contact Paul S. Ceja, Assistant 
General Counsel; Joan Kayagil, Deputy Assistant General Counsel; or 
Rhonda L. Daniels, Attorney-Advisor, for GSE/RESPA, Department of 
Housing and Urban Development, 451 7th Street, SW., Room 9262, 
Washington, DC 20410-0500; telephone number 202-708-3137. These 
telephone numbers are not toll-free. Persons with hearing or speech 
impairments may access these numbers through TTY by calling the toll-
free Federal Information Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

Background

    On March 14, 2008 (73 FR 14030), HUD published a proposed rule 
(March 2008 proposed rule) that submitted for public comment changes to 
HUD's regulations designed to improve certain disclosures required to 
be provided under RESPA (12 U.S.C. 2601-2617). The RESPA disclosure 
requirements apply in almost all transactions involving mortgages that 
secure loans on one-to four-family residential properties. HUD's 
regulations implementing the RESPA requirements are codified in 24 CFR 
part 3500. The revisions to the regulations adopted by HUD in this 
final rule are intended to make the process of obtaining mortgage 
financing clearer and, ultimately, less costly for consumers.
    The preamble of the March 2008 proposed rule presents an overview 
of the statutory requirements under RESPA, as well as a detailed 
account of HUD's efforts to initiate regulatory changes commencing in 
2002. HUD refers the reader to the March 2008 proposed rule for a 
detailed description of the background of this rulemaking. The 
principles that guided HUD in the development of this rule are also 
included in the March 2008 proposed rule.
    The preamble to this final rule highlights some of the more 
significant changes made at this final rule stage in response to public 
comment and upon further consideration of certain issues by HUD, 
summarizes the public comments received on the March 2008 proposed 
rule, and provides HUD's response to those comments. The following 
table of contents is provided to assist the reader in identifying where 
certain topics are discussed in this preamble. This final rule is also 
accompanied by a final regulatory impact analysis and regulatory 
flexibility analysis, which are addressed in sections VIII and IX of 
this preamble.

Table of Contents

I. Significant Changes from March 2008 Proposed Rule
II. Overview of Commenters
III. GFE and GFE Requirements--Discussion of Public Comments
    A. Overall Comments on the Proposed Required GFE Form
    B. Changes to Facilitate Shopping
    1. New Definitions for ``GFE Application'' and ``Mortgage 
Application.''
    2. Up-Front Fees That Impede Shopping
    3. Introductory Language on the GFE Form
    4. Terms on the GFE (Summary of Loan Details)
    5. Period During Which the GFE Terms Are Available to the 
Borrower
    6. Option to Pay Settlement Costs
    7. Establishing Meaningful Standards for GFEs
    a. Tolerances
    b. Unforeseeable Circumstances
    8. Lender Disclosure
    9. Enforcement and Cure
    10. Implementation Period
    C. Lender Payments to Mortgage Brokers--Yield Spread Premiums 
(YSPs)
    1. Disclosure of YSP on GFE
    2. Definition of ``Mortgage Broker.''
    3. FHA Limitation on Origination Fees of Mortgagees
IV. Modification of HUD-1/1A Settlement Statement
    A. Overall Comments on Proposed Changes to HUD-1/1A Settlement 
Statement
    B. Proposed Addendum to the HUD-1, the Closing Script
V. Permissibility of Average Cost Pricing and Negotiated Discounts--
Discussion of Public Comments
    A. Overview and Definition of ``Thing of Value''
    B. Methodology for Average Cost Pricing
VI. Prohibition Against Requiring the Use of Affiliates--Discussion 
of Public Comments
VII. Technical Amendments
VIII. Regulatory Flexibility Act--Comments of the Office of Advocacy 
of the Small Business Administration
IX. Findings and Certifications

I. Significant Changes From March 2008 Proposed Rule

    RESPA is a consumer protection statute, and, as further described 
in this preamble, consumer groups were, in general, very supportive of 
the basic goals and key components of the March 2008 proposed rule. For 
example, the National Consumer Law Center, in a joint comment with 
Consumer Action, the Consumer Federation of America, and the National 
Association of Consumer Advocates, stated, ``HUD has done an excellent 
job in moving the ball toward greater protection for consumers in the 
settlement process.'' In addition,

[[Page 68205]]

the Center for Responsible Lending, in its comment concluded: ``[W]e 
applaud HUD for addressing the challenge of reforming RESPA. We believe 
HUD's proposed GFE provides important improvements over existing 
requirements.''
    HUD received adverse comments about many aspects of the proposed 
rule, primarily from mortgage industry representatives, including 
requests that HUD withdraw its proposal entirely or that HUD postpone 
its current efforts in order to work with the Federal Reserve Board to 
arrive at a joint regulatory approach. HUD takes these comments very 
seriously and appreciates the concerns raised by these commenters. 
HUD's view continues to be, however, that improvements in disclosures 
to consumers about critical information relating to the costs of 
obtaining a home mortgage, often the most significant financial 
transaction a consumer will enter into, are needed, and that such 
disclosures are a central purpose of RESPA. Most commenters--including 
consumers, industry representatives, and federal and state regulatory 
agencies--supported the concept of better disclosures in general, and 
commended both HUD's efforts and particular provisions in the proposed 
rule.
    Moreover, given the current mortgage crisis, the foreclosure 
situation many homeowners are now facing because they entered into 
mortgage transactions that they did not fully understand, and the 
prospect that future homeowners may find themselves in this same 
situation, HUD believes that it is very important that the improvements 
in mortgage disclosures made by this final rule move forward 
immediately. Nevertheless, as noted in the preamble to the March 2008 
proposed rule, HUD will continue to work with the Federal Reserve Board 
to achieve coordination and consistency between the Board's current 
regulatory efforts and HUD's requirements.
    HUD has made many changes to the March 2008 proposed rule in 
response to public comment and further consideration of certain issues 
by HUD. Some of the provisions in the March 2008 proposed rule have 
been revised in this final rule and others have been withdrawn for 
further consideration. HUD believes that the result is a final rule 
that will give borrowers additional and more reliable information about 
their mortgage loans earlier in the application process, and will 
better assure that the mortgage loans to which they commit at 
settlement will be the loans of their choice. At the same time, in 
recognition of the concerns raised by industry commenters about the 
need for sufficient time for the industry to make systems and 
operational changes necessary to meet the requirements of the new rule, 
the final rule provides that the new GFE and HUD-1 will not be required 
until January 1, 2010. However, certain other provisions of the rule 
will take effect 60 days from the publication date of the final rule. 
The following are some of the most significant changes made at this 
final rule stage, and are discussed in more detail in the discussion of 
public comment.
     A GFE form that is shorter than had been proposed.
     Allowing originators the option not to fill out the 
tradeoff table on the GFE form.
     A revised definition of ``application'' to eliminate the 
separate GFE application process.
     Adoption of requirements for the GFE that are similar to 
recently revised Federal Reserve Board Truth-in-Lending regulations 
which limit fees charged in connection with early disclosures and 
defining timely provision of the disclosures.
     Clarification of terminology that describes the process 
applicable to, and the terms of, an applicant's particular loan.
     Inclusion of a provision to allow lenders a short period 
of time in which to correct certain violations of the new disclosure 
requirements.
     A revised HUD-1/1A settlement statement form that includes 
a summary page of information that provides a comparison of the GFE and 
HUD-1/1A list of charges and a listing of final loan terms as a 
substitute for the proposed closing script addition.
     Elimination of the requirement for a closing script to be 
completed and read by the closing agent.
     A simplified process for utilizing an average charge 
mechanism.
     No regulatory change in this rulemaking regarding 
negotiated discounts, including volume based discounts.

II. Overview of Commenters

    The public comment period on the March 2008 proposed rule was 
originally scheduled to close on May 13, 2008. In response to numerous 
requests, including congressional requests, to extend the comment 
period, and HUD's desire to develop a better rule, HUD announced an 
extension of the comment period. This announcement was made on both 
HUD's Web site and by publication of a notice in the Federal Register 
on May 12, 2008 (73 FR 26953). At the close of the extended public 
comment period on June 12, 2008, HUD had received approximately 12,000 
comments. Approximately two-thirds of the comments received were 
duplicative or repeat comments; i.e., individuals or organizations who 
submitted identical or virtually identical comments. For example, 
members of certain trade organizations, or employees of certain 
companies, frequently submitted identical comments.
    HUD received comments from homeowners, prospective homeowners, 
organizations representative of consumers, and numerous industry 
organizations involved in the settlement process, including lending 
institutions, mortgage brokers, real estate agents, lawyers, title 
agents, escrow agents, closing agents and notaries, community 
development corporations, and major organizations representative of key 
industry areas such as bankers, mortgage bankers, mortgage brokers, 
realtors, and title and escrow agents, as well as from state and 
federal regulators.
    HUD appreciates all those who took the time to review the March 
2008 proposed rule and submit comments.
    In addition to submission of comments, HUD representatives accepted 
invitations to participate in public forums and panel discussions about 
RESPA and HUD's March 2008 proposed rule. HUD also met, at HUD 
Headquarters or at the offices of the Office of Management and Budget 
(OMB), with interested parties, requesting meetings as provided by 
Executive Order 12866 (Regulatory Planning and Review), who highlighted 
for HUD and OMB areas of concern and support for various aspects of the 
rule.
    All of this input contributed to HUD's decisions that resulted in 
this final rule.
    HUD also received approximately 100 public comments that were 
submitted after the deadline. To the extent feasible, HUD reviewed late 
comments to determine if issues were raised that were not addressed in 
comments submitted by the deadline.

III. GFE and GFE Requirements--Discussion of Public Comments

A. Overall Comments on the Proposed Required GFE Form

    Proposed Rule. HUD proposed a four-page GFE form. The first page of 
the GFE included a summary chart with key terms and information about 
the loan for which the GFE was provided, including initial loan 
balance; loan term; initial interest rate; initial amount owed for 
principal, interest, and any mortgage insurance; rate lock period; 
whether the interest rate can rise; whether the loan balance can rise; 
whether the monthly

[[Page 68206]]

amount owed for principal, interest, and any mortgage insurance can 
rise; whether the loan has a prepayment penalty; whether the loan has a 
balloon payment; and whether the loan includes a monthly escrow payment 
for property taxes and possibly other obligations. The first page of 
the form also included information regarding the length of time the 
interest rate for the GFE was valid; the length of time the other 
settlement charges were valid; information about when settlement must 
occur if the borrower proceeds with the loan; and information 
concerning how many days the interest rate must be locked before 
settlement. At the bottom of the first page, the GFE included a summary 
of the settlement charges. The adjusted origination charges listed on 
the second page, along with the charges for all other settlement 
charges listed on the second page, would have been totaled and listed 
on this page.
    The second page of the GFE included a listing of estimated 
settlement charges. The loan originator's service charge would have 
been required to be listed at the top of page two, and the credit or 
charge (points) for the specific interest rate chosen would have been 
required to be subtracted or added to the service charge to arrive at 
the adjusted origination charge, which would have been shown on the top 
of page two. Page two of the GFE also would have required an estimate 
for all other settlement services. The GFE included categories for 
other settlement services including: Required services that the loan 
originator selected; title services and lender's title insurance; 
required services that the borrower would have been able to shop for; 
government recording and transfer charges; reserves or escrow; daily 
interest charges; homeowner's insurance; and optional owner's title 
insurance. The GFE would have required these charges to be subtotaled 
at the bottom of page two. The sum of the adjusted origination charges 
and the charges for all other settlement services would have been 
required to be listed on the bottom of page 2.
    The third page of the GFE would have required information 
concerning shopping for a loan offer. In addition, page three would 
have included information about which settlement charges could change 
at settlement, and by how much such charges could change. Page 3 also 
would have required the loan originator to include information about 
loans for which a borrower would have qualified that would increase or 
decrease settlement charges, with a corresponding change in the 
interest rate of the loan. (See section III.B.6 of this preamble 
below.)
    The fourth page of the GFE included a discussion of financial 
responsibilities of a homeowner. The loan originator would have been 
required to state the annual property taxes and annual homeowner's 
flood, and other required property protection insurance, but would not 
have been required to state estimates for other charges such as annual 
homeowner's association or condominium fees. The GFE included a section 
that advised borrowers that the type of loan chosen could affect 
current and future monthly payments. The proposed GFE also indicated 
that the borrower could ask the loan originator for more information 
about loan types and could look at several government publications, 
including HUD's Special Information Booklet on settlement charges, 
Truth in Lending Act (TILA) disclosures, and consumer information 
publications of the Federal Reserve Board. The March 2008 proposed rule 
invited comments on possible additional ways to increase consumer 
understanding of adjustable rate mortgages.
    Page 4 also would have included information about possible lender 
compensation after settlement. In addition, page 4 would have included 
a shopping chart to assist the borrower in comparing GFEs from 
different loan originators and information about how to apply for the 
loan for which the GFE had been provided.
Comments
Consumer Representatives
    Consumer representatives generally supported the proposed 
standardized GFE, while offering specific recommendations for 
improvement. The National Community Reinvestment Coalition recommended 
inclusion of the annual percentage rate (APR) on the GFE. The Center 
for Responsible Lending (CRL) stated that it believed that the proposed 
GFE has the potential to significantly improve current disclosure 
requirements because it offers a standardized shopping tool with better 
linkages to the HUD-1, requires that terms be binding, and takes 
important steps toward trying to alert consumers to the risky features 
of their loans. However, according to CRL, most consumers will not have 
the capacity to absorb everything in a four-page GFE and therefore it 
proposed an alternative two-page GFE.
    CRL noted that a new GFE should ensure that consumers have the best 
chance possible to understand the riskiest features of their loans. CRL 
commended HUD for adding several features that highlight risk to the 
first page of the GFE: The prepayment penalty, the balloon payment, the 
maximum possible loan balance, the maximum monthly payment, and whether 
certain fees are escrowed. CRL stated that knowing the maximum monthly 
payment of principal, interest, and mortgage insurance is critical to 
the consumer's ability to determine whether or not the loan is 
sustainable. It recommended that other features be added to page 1, 
including increased emphasis on total monthly payment. It also 
recommended that the monthly payment amount include an estimate of 
property taxes, property insurance, and the other charges listed on 
page 4 of the proposed GFE as one total line item, on page 1.
    CRL also recommended that page 1 of the GFE include the annual 
percentage rate (APR) instead of the note rate because the APR is the 
standardized measurement of loan cost in the industry, and because the 
APR captures the total cost of the loan. CRL further recommended that 
given that credit cost comprises the largest component of total loan 
cost, the form's emphasis on settlement costs should be reduced.
    In addition, CRL recommended that the first page of the GFE also 
include information on the first possible date on which the interest 
rate can rise; an explanation of what prepayment penalties are and how 
they are triggered; simplified broker compensation; and notification 
that mortgage terms are negotiable. While CRL supported aggregating 
fees on page 2 of the GFE to promote mortgage loan shopping, it 
recommended that the tradeoff table on page 3 be revamped in order to 
force the rate/point tradeoff that it is intended to disclose.
    The GFE proposed by CRL includes the APR, for reasons stated above. 
In addition, the GFE proposed by CRL includes the first date the 
interest rate can rise. CRL also included on page 1, ``estimated 
required additional housing expenses'' as well as ``total estimated 
maximum monthly housing costs.'' CRL stated that while it understands 
that consumers should not compare loans based on total estimated 
maximum monthly housing costs, CRL believes that it is critical that 
consumers, particularly those in the subprime market, begin evaluating 
their ability to afford the loan at the outset of the loan process. 
CRL's proposed GFE also includes a broader prepayment penalty 
disclosure than the prepayment penalty disclosure on the proposed GFE. 
In addition, CRL's proposed GFE includes a broker compensation 
disclosure, a

[[Page 68207]]

notice that the consumer can negotiate settlement charges and a summary 
of charges to facilitate reconciliation to the HUD-1.
    Comments by the National Consumer Law Center (NCLC) (filed on 
behalf of NCLC and Consumer Action, the Consumer Federation of America, 
and the National Association of Consumer Advocates) stated that the 
proposed standardization of the GFE, the increased linkage between the 
GFE and the settlement statement, and the proposed requirement that 
some terms on the GFE be binding, are important changes that should 
increase consumer understanding and competition in the mortgage 
marketplace. NCLC recommended that HUD go further by requiring the 
prominent disclosure of the APR on the GFE instead of the interest 
rate. According to NCLC, failure to include the APR on the GFE obscures 
the cost of credit and hinders consumer shopping.
    NCLC expressed concern that the proposed GFE gives far greater 
prominence to settlement costs than to interest. NCLC stated that if 
the GFE is successful in getting consumers to shop on settlement costs, 
there is a risk that consumers will neglect the primary cost component 
of loans, interest. According to NCLC, while settlement costs matter, 
they matter most not as a stand-alone cost, but in relation to the 
interest rate. NCLC recommended that the GFE be revised by reducing the 
focus on settlement costs through reduction of the font size and 
elimination of the bold type for settlement costs. NCLC also 
recommended that HUD work with the Federal Reserve Board to produce 
disclosures that are not misleading or that obscure the actual cost of 
credit. In addition, NCLC recommended that the first page of the GFE 
provide only a total for all settlement costs, without breaking out the 
origination costs.
    NCLC supported the loan summary on page 1 and recommended that the 
summary sheet refer to the APR instead of to the interest rate. NCLC 
also recommended that the first page provide only a total of the 
estimated settlement charges, not separate lines for the origination 
and total settlement costs.
Industry Representatives
    Generally, lenders and their associations opposed the proposed GFE 
on the grounds that the form is too lengthy and, in their opinion, 
would only confuse borrowers. The American Bankers Association 
commented that the proposed GFE is overly prescriptive. The Mortgage 
Bankers Association (MBA) stated that the length of the form will cause 
borrowers to ignore its important information. MBA submitted a two-page 
GFE as an alternative to the proposed GFE that combines the RESPA and 
TILA disclosures. While lenders and their associations expressed 
general support for the goals of the proposed rule, many lenders 
recommended that HUD work together with the Federal Reserve Board to 
produce a combined RESPA and TILA disclosure and to implement this 
combined product simultaneously, to replace the current RESPA and TILA 
disclosures provided at the time of application.
    MBA stated that it generally supports grouping of the amount or 
ranges of specific services on the GFE in a manner that is 
comprehensible and comparable, but recommended that the form be 
modified so that it is mainly a list of charges with minimal 
supplementary material, as on the GFE form submitted by MBA. MBA 
recommended that the material on page 3 and page 4 of the proposed GFE 
be moved to explanatory materials such as the Special Information 
Booklet. While MBA stated that a summary of loan terms could be useful, 
it recommended that the summary be removed from the GFE and issued by 
the Federal Reserve Board in consultation with HUD. MBA further 
recommended the deletion of the term ``adjusted origination charge'' 
from the bottom of page 1.
    A major lender expressed the concern that the proposed form is so 
laden with information that lenders cannot convey key cost information 
in a clear and conspicuous manner. This commenter stated that the 
proposed form would pose a significant compliance burden for lenders 
and would not provide borrowers with any greater understanding of their 
loan. Specifically, the lender objected to the disclosures required on 
page 3 of the proposed form.
    The National Association of Mortgage Brokers (NAMB) generally 
supported the inclusion of information listed on page 4 of the proposed 
GFE. However, NAMB objected to consolidating major categories on the 
GFE on the grounds that such categories tend to lead to consumer 
confusion since components are not evident to consumers until presented 
with the HUD-1, on which they are disclosed separately. NAMB also 
asserted that the proposed GFE is in conflict with the current RESPA 
requirements on affiliated business disclosure, because the proposed 
GFE eliminates the name of the provider on the GFE. NAMB submitted, in 
place of the proposed GFE, a model that provides symmetrical disclosure 
of originator compensation. NAMB stated that its model form not only 
remedies the disparity among originator disclosures, it more closely 
mirrors the HUD-1 than the proposed GFE; it does not create groupings 
of disclosures that must be broken out; and it is one page, making it 
more user friendly.
Other Commenters
    Many other commenters also expressed concern about the length of 
the form. The National Association of Realtors (NAR) stated that the 
proposed GFE fails to achieve the right balance between providing the 
necessary information and presenting such information simply in a 
manner to be useful to the consumer. NAR asserted that the disclosures, 
tables, and instructions in the proposed GFE will serve as a 
``psychological barrier'' to many consumers who will feel overwhelmed 
with having to read, comprehend, and act on this amount of information. 
NAR stated that the decision not to include itemized costs in the 
proposed GFE will result in consumers getting less than the full 
disclosure Congress intended in the original statute. NAR asserted that 
the proposed GFE creates the opportunity to bury additional, 
undisclosed fees into ``packages'' and prevents individual provider 
cost comparison to the detriment of consumers.
    NAR also recommended that the proposed GFE and the HUD-1 mirror 
each other in order to assist consumers in understanding whether the 
terms and expenses that were disclosed at loan application are those 
that are the governing terms at closing. NAR noted that, along with 
CRL, it previously recommended that HUD provide consumers a summary GFE 
accompanied by a full GFE with detailed explanations of each 
subcategory of fees to help consumers understand the services and fees 
for which they are being charged. NAR reiterated this recommendation 
for the final rule and, along with the American Land Title Association 
(ALTA), submitted a summary GFE and a full GFE for HUD's consideration.
    The Credit Union National Association (CUNA) opposed increasing the 
GFE to the proposed four-page form. CUNA stated that the proposed form 
would not benefit borrowers who could be confused by the additional 
information, rather than helped in understanding their loan options. 
The National Association of Federal Credit Unions (NAFCU) stated that 
the length of the proposed form is too long for the purpose of the GFE, 
which is simply to provide a good faith estimate of settlement costs. 
NAFCU recommended that pages 3 and 4 of the proposed form

[[Page 68208]]

be consolidated into one page by removing the section on page 3 
entitled ``understanding which charges can change at settlement'' and 
the section on page 4 entitled ``using the shopping chart.'' NAFCU 
suggested that the information contained in these sections should be 
provided in the Special Information Booklet.
    The Conference of State Bank Supervisors (CSBS), the American 
Association of Residential Mortgage Regulators (AARMR), and the 
National Association of Consumer Credit Administrators (NACCA) stated 
that they support HUD's goal to provide clear and valuable information 
to consumers regarding adjustable rate mortgages on the GFE. These 
commenters recommended that HUD work with the Federal Reserve Board to 
develop coordinated, consistent, and cooperative disclosures to ensure 
that consumers are not confused. They recommended that the GFE contain 
an estimate of taxes and insurance even when there will be no reserve 
for taxes and insurance in the monthly payment. According to these 
commenters, if the estimate is not included in the monthly payment 
amount, the borrower will not clearly understand whether they can 
afford the monthly payment. While these commenters indicated their 
general support for the grouping of fees and charges on the proposed 
GFE into major settlement cost categories, they expressed concern that 
some in the industry might take advantage of this format by putting 
additional fees and charges in a totaled category.
    ALTA stated that page 1 of the proposed GFE presents the summary of 
loan terms and the total costs for settlement services in an 
understandable format. However, ALTA urged HUD to improve the 
individual fee disclosures by using a page that is identical to page 2 
of the current HUD-1. ALTA stated that revising page 2, as it 
recommended, would allow consumers to know all fees included within the 
total amount listed on the GFE summary page and to more directly 
compare these fees to the final charges and closing.
    With respect to the categorization of fees on page 2 of the 
proposed GFE, ALTA objected to the proposed requirement that a single 
fee be disclosed for title services and lender's title insurance on 
Block 4 and for primary title services in the 1100 section of the HUD-
1. ALTA stated that the elimination of required itemization of these 
fees is of concern and can only serve to lessen, rather than enhance, 
competition for these services.
    ALTA asserted that HUD's views that consumers: (1) Shop among 
lenders based on the lender's estimates of charges in the 1100 series 
on the HUD-1, and (2) have no need to know the amounts of the various 
charges that comprise the aggregate amount, are in error. ALTA stated 
that with regard to the itemization of individual costs that comprise 
the aggregate Block 4 charge, consumers who want to shop for these 
services will be seriously disadvantaged because there is no way to 
determine the lender's estimated price for the title company, escrow 
company, attorney, or surveyor.
    ALTA also stated that the disclosure of a single fee for title 
insurance fails to recognize that, in most areas of the country, the 
seller generally pays a substantial portion of the title insurance 
charges. ALTA noted that the March 2008 proposed rule failed to provide 
instruction as to how to disclose title-related fees when these costs 
are paid by the seller. ALTA expressed concern that if the GFE and HUD-
1 do not itemize the fees for title insurance services, the possibility 
exists that the borrower could pay for services for which sellers 
currently assume payment, and this would result in higher costs to the 
borrower. ALTA requested that HUD continue to require title insurance 
fees disclosed in the 1100 series of the HUD-1 to be separately 
itemized on both the GFE and HUD-1.
    With respect to the category for owner's title insurance on page 2 
of the GFE, ALTA requested that the word ``optional'' be dropped from 
the disclosure on both the proposed GFE and the proposed HUD-1. ALTA 
expressed concern that, by including the word ``optional'' in both 
disclosures, HUD appears to be suggesting that a consumer does not need 
separate coverage for title insurance, which may discourage borrowers 
from obtaining owner's coverage. ALTA also noted that owner's title 
insurance is required in residential real estate transactions in many 
states and that, by labeling owner's title insurance as optional on 
both the GFE and the HUD-1, HUD's requirement would directly conflict 
with various state requirements.
Federal Agencies
    The Federal Deposit Insurance Corporation (FDIC) also expressed 
concern about the length of the proposed GFE. While considering the 
proposed GFE to be an improvement over the current model form, the FDIC 
expressed concern about whether the proposed GFE provides information 
that consumers will understand in an easily understandable format. The 
FDIC also commented that more information about potential payment shock 
and the adjustment of interest rates should be included on the GFE. 
Specifically, the FDIC recommended that the GFE explain when an initial 
interest rate expires and when monthly payments increase.
    The Federal Trade Commission (FTC) staff comment stated that the 
proposed GFE form offers several features that will benefit consumers. 
These features include a summary overview of loan terms and charges on 
the first page; the additional details regarding categories of fees and 
shopping options on subsequent pages; and the focus on total settlement 
costs, rather than itemized costs. However, FTC staff stated that the 
form raises concerns that warrant clarification or modification. For 
example, FTC staff stated that consumers may be confused based on the 
differences between the GFE and the HUD-1 disclosures and the TILA 
forms they receive, particularly the difference in monthly amounts. 
Rather than explain the differences in the Special Information Booklet, 
FTC staff recommended that HUD provide a clear explanation of the 
difference between the forms on the GFE and the closing script, or use 
an alternative disclosure on the GFE and closing script to ensure as 
much consistency with the TILA disclosures as possible.
    The Office of Thrift Supervision (OTS) commented that HUD should 
consider revising its settlement cost booklet to include illustrations 
reflecting the impact that loan features and terms can have on the cost 
of the mortgage. In particular, OTS stated that such illustrations 
would be particularly useful in reflecting payment shock, among other 
features, that a borrower may experience when rates reset.
HUD Determination
    In response to comments, HUD has made a number of changes to the 
revised GFE, including shortening the form from four pages to three and 
clarifying important information for borrowers throughout the form. 
While HUD recognizes that too much information on the form may 
overwhelm borrowers, HUD is also cognizant that borrowers need to be 
aware of the important aspects of the loan, as well as the settlement 
costs. While HUD considered all of the various alternative forms 
submitted by commenters, HUD determined that its proposed GFE, with 
certain modifications made at this final rule stage, would best meet 
the needs of borrowers to shop and compare loans from different loan 
originators. As

[[Page 68209]]

demonstrated by the testing of the form conducted by HUD's forms 
contractor, consumers liked the general format of the form and were not 
overwhelmed by its length. Accordingly, HUD has maintained several 
important features of the proposed GFE in the final form. Other 
features from the proposed form have been removed from the form, as 
revised at this final rule stage, and will be included in the revised 
Special Information Booklet. The final GFE continues to inform 
borrowers about critical loan and settlement cost information and 
allows borrowers to effectively shop among loan originators without 
burdening them with extraneous information.
    The top of page 1 of the revised form continues to include blank 
spaces for the loan originator's name, address, phone number, and email 
address, as well as the borrower's name, the property address, and the 
date of the GFE. In addition, the top of the revised page 1 includes a 
statement about the purpose of the GFE, and information on how to shop 
for a loan offer. This section of the form also references HUD's 
Special Information Booklet on settlement charges, as well as Truth in 
Lending disclosures and information available at http://www.hud.gov/respa. Such information was included on page 4 of the proposed form. 
While the revised page 1 also continues to include information about 
important dates, such as how long the interest rate is available and 
how long the estimate for all other settlement charges is available, 
the rate lock period information that was included in the loan summary 
chart on the proposed GFE has been moved from the summary chart to the 
``important dates'' block on the revised form. This change was made to 
consolidate all the information about dates in one section of the form 
and to minimize potential borrower confusion.
    The revised page 1 also includes a summary chart of the loan on 
which the GFE is based, but this section of the form is now referred to 
as ``summary of your loan'' instead of ``summary of your loan terms,'' 
as proposed. The revised summary continues to include key terms and 
information about the loan for which the GFE was provided, but certain 
changes were made to headings on the chart to address specific 
comments. While the proposed GFE included information about the monthly 
escrow payment in the summary chart, the revised form includes a 
separate section concerning the escrow account. This section, referred 
to as ``escrow account information,'' informs the borrower that some 
lenders require an escrow account to hold funds for paying property 
taxes or other property-related charges in addition to the monthly 
payment. The section includes a disclosure as to whether an escrow 
account is required for the loan described in the GFE. If no escrow 
account is included for the loan, this section informs the borrower 
that the additional charges must be paid directly when due. If the loan 
includes an escrow account, the section informs the borrower that it 
may or may not cover all additional charges.
    The bottom of page 1 on the revised form retains the ``summary of 
your settlement charges'' section, as set forth in the proposed GFE. 
The summary includes the amount from Block A on page 2, ``your adjusted 
origination charges''; the amount from Block B on page 2, ``your 
charges for all other settlement services'' ; and reflects the ``total 
estimated settlement charges'' as the sum of Blocks A and B.
    Page 2 of the revised GFE, like page 2 of the proposed form, 
contains a listing of estimated settlement charges. The top of the 
second page continues to require that the origination charge be listed, 
and the credit or charge for the specific interest rate is required to 
be subtracted or added to the origination charge to arrive at the 
adjusted origination charge. However, this portion of the second page 
includes some minor changes from the proposed form. First, Block 2 now 
references ``points'' after the ``charge'' in the heading, rather than 
at the end of the sentence, to better inform the borrower. The heading 
now reads, ``Your credit or charge (points) for the specific interest 
rate chosen.'' In addition, to draw the borrower's attention to the 
effect of the credit in Block 2, the term ``reduces'' is now bolded in 
box 2. To draw the borrower's attention to the effect of the charge in 
Block 2, the term ``increases'' is now bolded in box 3 of the second 
block. Finally, the second sentence in box 2 and box 3 in Block 2 
refers to ``settlement'' charges rather than ``upfront'' charges, in 
order to be consistent with other language on the form.
    Page 2 of the revised GFE, like the second page of the proposed 
GFE, also contains an estimate for all other settlement services. While 
the categories from the proposed form have generally been retained on 
the final form, certain changes have been made to the categories to 
streamline the form in response to comments. Block 10 of the proposed 
form ``optional owner's title insurance'' is now Block 5 of the revised 
form and informs the borrower that the borrower may purchase owner's 
title insurance to protect the borrower's interest in the property.
    Block 6 of the revised form, ``Required services that you can shop 
for,'' is the same as Block 5 of the proposed form. While Block 6 of 
the proposed form included both government recording charges and 
transfer taxes, in response to comments, government recording charges 
are now listed in Block 7 of the revised form, along with the 
explanation that ``these charges are state and local fees to record 
your loan and title documents.'' Block 8 now lists transfer taxes with 
the explanation that ``these charges are state and local fees on 
mortgages and home sales.'' This change was made in response to 
comments so that these two different types of government fees could be 
treated differently with respect to tolerances, as explained below.
    Block 7 of the proposed form, ``Reserves or escrow,'' is now Block 
9 of the revised form and is now listed as ``initial deposit for your 
escrow account.'' The sentence below the title now explains that the 
charge is held in an escrow account to pay future recurring charges on 
the property and includes check boxes to indicate whether the escrow 
includes all property taxes, all insurance or other payments. The 
``other'' category may include non-tax and non-insurance escrowed 
items, and/or specify which taxes or insurance payments are included in 
the escrow if the escrow does not include all such payments.
    Block 8 of the proposed form, ``Daily interest charges,'' is now 
Block 10 of the revised form. Block 9 of the proposed form, 
``Homeowner's insurance'' is now Block 11 of the revised form.
    The revised GFE requires the charges in Blocks 3 through 11 to be 
subtotaled at the bottom of page 2. The sum of the adjusted origination 
charges and the charges for all other settlement services are required 
to be listed on the bottom of page 2. This figure will also be listed 
on the bottom of page 1, in the block ``Total Estimated Settlement 
Charges.''
    In light of comments received on various aspects of the proposed 
form, page 3 of the revised form has been redesigned to include the 
most important information from pages 3 and 4 of the proposed form. At 
the top of the redesigned page 3, the section ``Understanding which 
charges can change at settlement'' includes information to assist the 
borrower in comparing charges on the GFE with the charges listed on the 
HUD-1 settlement statement. Next, the tradeoff table provides 
information on different loans for which the borrower is qualified that 
would increase or decrease settlement

[[Page 68210]]

charges, with a corresponding change in the interest rate of the loan. 
Completing this tradeoff table is now optional. This table is intended 
to be read in conjunction with the section on ``adjusted origination 
charges'' on page 2 of the form. The tradeoff table on the final form 
has been modified to require ``your initial loan amount'' in the first 
category, as opposed to ``your initial loan balance'' on the proposed 
form, to be consistent with the change in terminology on the first page 
of the form.
    Page 3 of the revised form also includes the shopping chart 
included on page 4 of the proposed form, to assist borrowers in 
comparing GFEs from different loan originators. Finally, the lender 
disclosure that was included on the proposed form has been retained on 
the revised form, as discussed below.

B. Changes to Facilitate Shopping

 1. New Definitions for ``GFE Application'' and ``Mortgage 
Application''
    Proposed Rule. The March 2008 proposed rule provided separate 
definitions for a ``GFE application'' and a ``mortgage application'' in 
an effort to promote shopping. Under the proposed rule, a loan 
originator would have provided a borrower a GFE once the borrower 
provided the originator six pieces of information that included: 
Borrower's name, Social Security Number, property address, gross 
monthly income, borrower's information on the house price or best 
estimate of the value of the property, and the amount of the mortgage 
loan sought. The rule provided that the GFE application would have to 
be in written form and, if provided orally, would have to be reduced to 
a written or electronic record. Under the March 2008 proposed rule, a 
separate GFE would have to be provided for each loan where a 
transaction involved more than one mortgage loan.
    The proposed rule would have required that once a borrower chose to 
proceed with a particular loan originator, the loan originator could 
require the borrower to provide additional information through a 
``mortgage application'' in order to complete final underwriting. This 
additional information could be used to verify the GFE, and could 
include income and employment verification, property valuation, an 
updated credit analysis, and the borrower's assets and liabilities.
    The March 2008 proposed rule provided that a borrower could be 
rejected at the GFE application stage if the loan originator determined 
that the borrower was not creditworthy. The borrower could not be 
rejected at the mortgage application stage unless the originator 
determined there was a change in the borrower's eligibility based on 
final underwriting, as compared to information developed for such 
application prior to the time the borrower chose the particular 
originator. Under the proposed rule, the originator would have been 
required to document the basis for such a determination and maintain 
the records for no less than 3 years after settlement.
    The March 2008 proposed rule also provided that where a borrower 
was rejected for a loan for which a GFE had been issued, but the 
borrower qualified for a different loan program, the originator would 
have to provide a revised GFE. If a borrower was rejected for a loan 
and no other loan product could be offered, the borrower would have to 
be notified within one business day and the applicable notice 
requirements satisfied.
    Under the March 2008 proposed rule, for loans covered by RESPA, the 
TILA disclosures would be provided within 3 days of a written GFE 
application, unless the creditor, i.e. the loan originator, determined 
that the application could not be approved on the terms requested. The 
proposed rule indicated that based on consultations with the Federal 
Reserve Board, when a GFE application is submitted, an initial TILA 
disclosure would also have to be provided, so long as the application 
was in writing, or, in the case of an oral application, committed to 
written or electronic form. HUD noted that whether a GFE application 
under a particular set of facts triggered the Home Mortgage Disclosure 
Act (HMDA) or the Equal Credit Opportunity Act (ECOA) requirements 
would be determined under Regulation B and Regulation C, as interpreted 
in the Federal Reserve Board's official staff commentary.
Comments
Consumer Representatives
    Consumer representatives supported early delivery of the GFE, 
which, under the proposed rule, would be issued when a lender receives 
the proposed ``GFE Application.'' However, they emphasized that 
enforcement and private rights of action are necessary to ensure that a 
meaningful GFE will be provided to consumers early in the mortgage 
application process.
    Consumer representatives also raised the issue of whether HUD's 
definition of ``GFE Application'' triggers other regulatory 
requirements. They recognized the Federal Reserve Board's rulemaking 
authority under ECOA and the Fair Credit Reporting Act (FCRA) and 
indicated that requirements under these statutes and their implementing 
regulations would be triggered by the newly defined GFE application. 
They noted that current definitions in both statutes and their 
implementing regulations cover the GFE application.
    According to their comments, the application of ECOA and FCRA to 
the GFE application is important because such application ensures 
binding and accurate disclosures. These commenters recommended that HUD 
coordinate with the Federal Reserve Board to ensure that the GFE 
application remains covered by ECOA and FCRA.
Industry Representatives
    Industry representatives expressed significant concerns about the 
``GFE Application'' and ``Mortgage Application'' approach under the 
March 2008 RESPA proposal. Specifically, they expressed concerns about 
the limited information originators would be permitted to collect in 
order to conduct preliminary underwriting before issuing a GFE. One 
commenter stated that this limitation precludes an originator from 
considering, at the GFE application stage, important information that a 
lender currently collects early in the transaction in order to develop 
a GFE. Some of those additional items include loan product type sought, 
purpose of loan, and information to compute the loan-to-value ratio. 
The commenters claimed that limiting consideration of this type of 
information would make it difficult for originators to provide a 
meaningful GFE, because they would be unable to provide any reliable 
estimate of cost or determine a borrower's ability to repay the loan. 
They also stated that the inability to consider important underwriting 
information until the mortgage application stage would result in the 
issuance of more than one GFE. The net result, they concluded, would 
lead to borrower confusion and increased costs to the borrower.
    Industry commenters also expressed further operational concerns 
related to the limitations on underwriting information at the GFE 
stage. They stated that the limitation on information that loan 
originators can take into consideration, in developing a GFE, would 
force lenders to develop systems that could underwrite based on very 
limited information. They further stated that the originator would not 
have sufficient information to determine the type of property the 
consumer is considering--such as whether the property is commercial, 
industrial,

[[Page 68211]]

vacation, or residential--or the type of loan the consumer is 
considering, such as a purchase money loan, refinance, or home equity 
loan. They stated it is important for the lender to have this 
information because the lender may not engage in the kind of lending a 
consumer seeks.
    In addition, industry commenters expressed confusion over whether a 
credit report was one of the six pieces of information they could 
collect as part of the GFE application, and requested that HUD provide 
clarification on this subject.
    Industry representatives also requested that HUD permit borrowers 
to expedite the application process and proceed to the mortgage 
application stage, when the borrower so desires due to timing or other 
concerns.
    Industry representatives stated that the new application 
definitions in the March 2008 proposed rule would present uncertainty 
in complying with other mortgage-related statutes and regulations. They 
commented that compliance with other statutes and regulations is 
triggered by a mortgage ``application.'' Because HUD's proposal 
included both a ``GFE Application'' and a ``Mortgage Application,'' 
they commented that it is not clear which one is the ``application'' 
for purposes of compliance with other regulations. In particular, 
lenders expressed concern with the possibility that the ``GFE 
Application'' would trigger compliance obligations under FCRA, ECOA, 
HMDA, and the TILA requirements. They requested that ambiguities 
surrounding compliance with these statutes and other laws be addressed 
to provide clarity and mitigate litigation exposure. For example, one 
lender noted that to calculate the spread for high-cost loans under 
Regulation Z and many state predatory lending laws, the index used is 
based on the month in which the ``application'' for credit is received 
by the creditor. This lender stated that it was not clear from the 
proposed rule whether the GFE application is an application for 
purposes of Regulation Z.
    Industry commenters expressed confusion about preamble statements 
regarding whether HMDA or ECOA is triggered by the GFE Application. 
They indicated that the preamble stated that whether HMDA or ECOA is 
triggered by the GFE Application should be determined under Regulations 
C and B, as interpreted by the Board. They noted, however, that the 
preamble stated that based on consultations with the Federal Reserve 
Board, TILA disclosures would be provided within 3 days of a written 
GFE application unless the creditor determines that the application 
cannot be approved on the terms requested. The commenters further noted 
that the Regulatory Impact Analysis states ``[t]he proposed rule 
clarifies that only the mortgage application would be subject to 
Regulations B (ECOA) and C (HMDA), which is the current situation 
today.'' These commenters requested clarification of this matter.
    Industry representatives questioned HUD's legal authority to: limit 
information originators can request to underwrite a loan; require that 
originators accept an abbreviated application from which to complete a 
GFE; require a new GFE when a counteroffer is made; and require a 
consumer to be notified within one business day of a lender's decision 
to reject an application, among other concerns.
    Additionally, one lender commented that under HUD's March 2008 
proposed rule, lenders would be required to retain the GFE application 
for 3 years, which is different from the 25-month retention requirement 
by TILA or ECOA. The lender commented that this difference presents 
additional expense without a substantive benefit to the consumer.
Other Commenters
    The FTC staff recommended that HUD reevaluate the proposed ``GFE 
application,'' as this terminology is new and could generate consumer 
confusion in the already complex mortgage process. FTC staff suggested 
that HUD characterize it as the ``GFE application'' concept so that 
consumers do not confuse it with the mortgage application. They also 
recommended that HUD educate consumers about these two components of 
the mortgage lending process. Further, FTC indicated that the industry 
would also benefit from guidance on how the GFE application relates to 
other mortgage lending laws that include an ``application'' concept.
    CSBS, AARMR, and NACCA also expressed concern over the creation of 
a ``GFE application'' and a ``mortgage application'' because, they 
asserted, these application concepts will cause consumer confusion. 
They recommended that HUD coordinate with other federal regulatory 
agencies to ensure consistency and clarity to regulatory requirements 
from loan application to loan closing.
HUD Determination
    To address the concerns raised by the commenters about the 
bifurcated application approach set forth in the proposed rule, HUD has 
adopted a single application process for the final rule. Under this 
approach, at the time of application, the loan originator will decide 
what application information it needs to collect from a borrower, and 
which of that collected application information it will use, in order 
to issue a meaningful GFE. However, before providing the GFE, the loan 
originator will be assumed to have collected at least the following six 
items of information: the borrower's name, Social Security Number, and 
gross monthly income; the property address; an estimate of the value of 
the property; and the amount of the mortgage loan sought. The 
borrower's Social Security Number would be collected for purposes of 
obtaining a credit report. The final rule now defines ``application'' 
to include at least these six items of information. Therefore, under 
this single application process, a loan originator may ask for, or a 
borrower may choose to submit, more information than the loan 
originator intends to use to process the GFE, for example the 
information on a standard 1003 mortgage loan application form, but 
beyond the six items of information, the loan originator will determine 
what it needs to issue a GFE. HUD strongly urges loan originators to 
develop consistent policies or procedures concerning what information 
it will require to minimize delays in issuing GFEs.
    In order to prevent overburdensome documentation demands on 
mortgage applicants, and to facilitate shopping by borrowers, the final 
rule specifically prohibits the loan originator from requiring an 
applicant, as a condition for providing a GFE, to submit supplemental 
documentation to verify the information provided by the applicant on 
the application. Loan originators, however, can require applicants to 
provide such verification information after the GFE has been provided, 
in order to complete final underwriting. In addition, the rule does not 
bar a loan originator from using its own sources before issuing a GFE 
to independently verify the information provided by the applicant.
    Once the applicant submits to the loan originator all the mortgage 
application information deemed necessary by the loan originator to 
process the GFE, the originator will be required to deliver or mail a 
GFE to the applicant within 3 business days. HUD is now also limiting 
the fee that may be charged for providing the GFE, consistent with the 
Federal Reserve Board's recently finalized rule limiting the fees that 
consumers can be charged for the delivery of TILA disclosures (see

[[Page 68212]]

revisions of 12 CFR 226.119(a), 73 FR 44522, July 30, 2008).
    After the GFE has been received, the loan originator may collect 
additional fees needed to proceed to final underwriting for borrowers 
who decide to proceed with a loan from that originator. As noted, at 
that time, verification information or any other information could be 
required from the applicant, such as bank statements and W-2 forms, to 
confirm representations made by the applicant in the application.
    None of the information collected by the 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. A loan originator would have the burden of demonstrating 
nonreliance on the collected information, but may do so by various 
means, including through, for example, a documented record in the 
underwriting file or an established policy of relying on a more limited 
set of information in providing GFEs. If a loan originator issues a 
revised GFE based on information previously collected in issuing the 
original GFE and ``changed circumstances,'' it must document the 
reasons for issuing the revised GFE, including, for example, its 
nonreliance on that information or the inaccuracy of the information, 
and retain that documentation for at least 3 years. Additional guidance 
on what constitutes ``changed circumstances'' will be provided by HUD 
during the implementation period.
    Furthermore, 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 
changes or is later found to be inaccurate. HUD determined that this 
approach provides the flexibility originators need to properly 
underwrite, while limiting bait-and-switch methods whereby the 
originator uses the GFE to draw in a borrower and, after a significant 
application fee is paid or burdensome documentation demands are made, 
claims that a material change has resulted in a more expensive loan 
offering.
    If a loan originator receives information indicating that changed 
circumstances necessitate the issuance of a new GFE, such new GFE must 
be provided to the borrower within 3 business days of receipt of such 
information. The 3-day requirement is in response to comments on the 
proposed rule that stated that providing a new GFE within one day is 
not workable.
    The approach set forth in this rule furthers HUD's goal to promote 
consumer shopping among mortgage originators, because it does not 
overly burden a consumer at an early stage. Rather, a consumer provides 
information that is easily communicated and pays a nominal fee in order 
to get a GFE.
    As noted, this public policy is further supported by the Federal 
Reserve Board through its recently issued final rule limiting fees that 
can be charged for the delivery of the TILA disclosure. Under this 
rule, borrowers must receive the TILA disclosure before paying or 
incurring any fee imposed by a creditor or other person in connection 
with the consumer's application for a closed-end mortgage, except that 
creditors may charge a bona fide and reasonable fee for obtaining the 
consumer's credit history. Whether an application under a particular 
set of facts triggers ECOA or HMDA requirements must be determined 
under Regulation B or Regulation C, as interpreted by the Federal 
Reserve Board's Official Staff Commentary.
2. Up-Front Fees That Impede Shopping
    Proposed Rule. The March 2008 proposed rule provided that a loan 
originator, at its option, could collect a fee limited to the cost of 
providing the GFE, including the cost of an initial credit report, as a 
condition of providing the GFE to a prospective borrower. The loan 
originator was not permitted to collect, as a condition of providing a 
GFE, any fee for an appraisal, inspection, or other similar service 
needed for final underwriting.
Comments
Consumer Representatives
    Consumer representatives expressed concerns about the opportunity 
for consumers to be charged a fee for a GFE and a credit report. They 
are concerned such costs would discourage borrowers from shopping for a 
mortgage. They stated that lenders would charge a fee for the GFE to 
offset lenders' costs for issuing the GFE, because the cost of 
preparation of the GFE cannot otherwise be passed on to consumers. 
Consumer advocates pointed out that some states prohibit the collection 
of an application fee before credit has been extended and that HUD's 
proposal would be inconsistent with such laws. The consumer advocates 
asserted that HUD's proposal could be read to preempt these state laws. 
The consumer advocates recommended that HUD remain silent on the 
collection of such fees in relation to the GFE and should in no way 
support it.
Industry Representatives
    Industry comments reflected some confusion as to whether and to 
what extent fees can be charged in connection with the GFE. Some 
industry commenters understood the proposal to mean that lenders can 
charge a fee once a borrower submits a ``mortgage application.'' Other 
industry commenters sought clarification about what exactly can be 
charged in connection with the GFE. They indicated that meeting the 3-
business day requirement for delivery of the GFE to the borrower and 
completing the lengthy GFE form would be time consuming and costly.
    Further, in a situation in which a borrower seeks an accelerated 
process for getting a loan, industry representatives stated that the 
borrower should be able to pay necessary fees for such items as, for 
example, an appraisal. Industry representatives also opined that under 
RESPA, HUD has no authority in their view to require lenders to offer 
GFEs without adequate compensation.
Other Commenters
    CSBS, AARMR, and NACCA commented that a consumer should not be 
charged for the GFE because to do so locks the consumer into the 
transaction. These commenters stated that if HUD insists on permitting 
a fee to be charged, the fee charged should be limited to a credit 
report.
HUD Determination
    HUD has long supported a public policy goal of creating a 
circumstance where consumers can shop for a mortgage loan among loan 
originators without paying significant upfront fees that impede 
shopping. To this end, and consistent with the Federal Reserve Board's 
recently issued revised regulations limiting the fees that a consumer 
may be charged for the delivery of TILA disclosures (73 FR 44522, July 
30, 2008), HUD, in this final rule, is limiting the charge originators 
may impose on consumers for delivery of the GFE.

[[Page 68213]]

    The Federal Reserve Board's rule restricts creditors from imposing 
a fee on a consumer in connection with the consumer's application for a 
mortgage before the consumer has received the TILA disclosure. The 
Federal Reserve Board makes an exception that allows imposition of a 
fee that is bona fide and reasonable in amount for obtaining the 
consumer's credit history. In an effort to create consistency among 
regulatory requirements and serve the best interests of consumers, HUD 
is similarly limiting the fee for the GFE to the cost of a credit 
report. Also, as in the proposed rule, a loan originator is expressly 
not permitted to charge, as a condition of providing a GFE, any fee for 
an appraisal, inspection, or similar settlement service.
3. Introductory Language on the GFE Form
    Proposed Rule. The March 2008 proposed rule included a proposed 
required GFE form that explained to the borrower: (1) On page 1, the 
purpose of the GFE, i.e., that it is an ``* * * estimate of your 
settlement costs and loan terms if you are approved for this loan''; 
and (2) on page 3, that the borrower is the ``* * * only one who can 
shop for the best loan for you. You should shop and compare this GFE 
with other loan offers. By comparing loan offers, you can shop for the 
best loan.''
Comments
    Consumers did not comment on this issue. NAMB stated that the 
introductory language of the GFE and the language encouraging 
comparative shopping should be improved. Specifically, NAMB stated that 
the language encouraging comparative shopping incorrectly characterizes 
the GFE as a ``loan offer.'' NAMB stated that this is misleading 
because it leaves borrowers with the impression that they have been 
approved for the loan and that is not the case. NAMB suggested that the 
``loan offer'' reference be changed to ``other estimates.''
    NAMB also recommended that the language encouraging comparative 
shopping be made more conspicuous and informative. NAMB encouraged HUD 
to adopt language set forth in the prototype disclosure forms developed 
by FTC. Those forms include prominent legends in large typeface that 
expressly advise borrowers that mortgage originators, including both 
brokers and lenders, do not represent borrowers, and that the ``lender 
or broker providing this loan is not necessarily shopping on your 
behalf or providing you with the lowest cost loan.'' The FTC prototype 
forms also encourage borrowers to comparison shop to find the best 
deal.
    NAMB urged HUD to adopt the FTC prototype disclosures in place of 
the proposed mortgage broker compensation language. However, NAMB 
recommended that, if the FTC forms are not adopted in their entirety, 
HUD should incorporate the FTC language in the GFE earlier than on page 
3, and in a more prominent typeface than the typeface used for the 
proposed language on comparative shopping.
HUD Determination
    HUD's consumer testing of the form demonstrated that consumers 
better understood the function of the GFE and its role in the shopping 
process as a result of language on the form. Accordingly, HUD has 
determined to maintain the language on the form that describes the 
purpose of the GFE and informs the borrower that only they can shop for 
the best loan for them. However, in the interest of streamlining the 
form, the revised form now includes, on page 1, the information about 
shopping for a loan that was on page 3 of the proposed GFE.
 4. Terms on the GFE (Summary of Loan Details)
    Proposed Rule. The proposed GFE included a summary of the key loan 
terms. The form required the disclosure of the initial loan amount; the 
loan term; the initial interest rate on the loan; the initial monthly 
payment owed for principal, interest, and any mortgage insurance; and 
the rate lock period. The form also required the loan originator to 
disclose whether the interest rate could rise; whether the loan balance 
could rise; whether the monthly amount owed for principal, interest, 
and any mortgage insurance could rise; whether the loan had a 
prepayment penalty or a balloon payment; and whether the loan included 
a monthly escrow payment for property taxes and possibly other 
obligations. The proposed rule required the terms ``prepayment 
penalty'' and ``balloon payment'' to be interpreted consistent with 
TILA (15 U.S.C. 1601 et seq.). The APR was not included on the proposed 
GFE.
Comments
Consumer Representatives
    As part of their general support for the proposed rule, consumer 
advocacy organizations were positive about the inclusion of loan terms 
on the GFE. NCLC, in a joint letter with Consumer Action, Consumer 
Federation of America, and National Association of Consumer Advocates, 
commented that ``[p]lacing the most critical information in consumers' 
hands in a consistent, user-friendly format should facilitate consumer 
shopping, market competition and transparency.'' They characterized 
HUD's summary sheet as striking a balance between disclosing critical 
information and preventing information overload.
    CRL presented a legal argument supporting HUD's authority to 
require disclosure of loan terms. CRL pointed out that settlement costs 
are so intertwined with loan terms that those terms must be disclosed 
for the settlement costs to have any meaning. Other consumer groups 
also pointed out that these terms affect the overall price and risk for 
the consumer. CRL, which is affiliated with a small nonprofit lender 
that will have to comply with the new rule, stated that the rule is 
administratively feasible for larger and smaller lenders.
    In addition to supporting loan terms disclosure, consumer advocacy 
organizations suggested several changes to make disclosure even more 
effective. They suggested that there should be a more strict legal 
mechanism for binding originators to the loan terms after disclosing 
them. Some consumer advocates argued for inclusion of the APR on the 
GFE, perhaps instead of the note rate, stating that inclusion of the 
APR would make comparisons easier. Some suggested that the adjustable 
rate disclosure should include the date when the first adjustment 
happens, in order to help avoid payment shock. Commenters pointed out 
that a monthly payment disclosure that includes taxes and different 
types of insurance will be more useful in judging affordability and for 
making comparisons to the current mortgage, when applying to refinance. 
They also suggested that the maximum interest rate disclosure is not 
likely to help borrowers and may be misleading. The commenters stated 
that actual dollar figures are more readily understandable. The 
commenters also stated that the GFE should include a clear statement 
that loan terms are negotiable, and all the disclosures should be more 
carefully harmonized with TILA.
    NCLC, Consumer Action, the Consumer Federation of America, and the 
National Association of Consumer Advocates stated that they ``applaud'' 
inclusion of the maximum payment amount and the maximum loan balance 
because these help consumers understand a loan's risks, especially the 
risks of nontraditional loans, and help consumers judge a loan's 
affordability. However, these organizations suggested that HUD provide 
guidance to originators on how to calculate

[[Page 68214]]

maximum payment and maximum loan balance.
    One consumer organization pointed out that much research, including 
an FTC study, found that borrowers often do not understand exactly what 
``prepayment penalties'' are and how they work. Therefore, the 
organization recommended that HUD include in the prepayment penalty 
disclosure the following brief explanation: ``[p]ayment to lender if 
you refinance, sell home, or pay your loan off early''.
    Consumer groups were concerned that, because the proposed GFE 
highlighted settlement costs, it might mislead borrowers into believing 
that interest costs are less important. They suggested that interest is 
usually much more expensive than closing costs, and should be more 
effectively emphasized.
Industry Representatives
    Most lenders and lender organizations urged that loan terms be left 
off the GFE, submitting that loan terms are more properly viewed as 
TILA disclosures. These commenters stated that double disclosure of 
loan terms will be confusing to borrowers, especially since much of the 
terminology proposed to be used in HUD's GFE is different from that 
used in the TILA (e.g., ``loan amount'' vs. ``amount financed'') and 
some calculations are different. These organizations suggested that 
loan term disclosures should be coordinated with TILA, and be less 
lengthy. A lender proposed that originators should be allowed to 
substitute early TILA disclosure for the loan terms sheet. Another 
lender organization stated that loan terms should be included only if 
there is a combined RESPA/TILA form. Some credit unions stated that the 
APR should be included in the GFE loan terms.
    Some lenders stated other aspects of the loan terms disclosure 
would confuse borrowers. A lender organization suggested that use of 
the format ``Your * * * is'' to describe the loan details would create 
misunderstanding, because these were loan terms being applied for, not 
final loan terms. The same organization also believed that inclusion of 
mortgage insurance in the monthly payment, without disclosing whether 
mortgage insurance is required, would confuse borrowers. In addition, 
the organization stated that some of the mechanisms behind these loan 
terms are too complex for single-line disclosure.
    Many lenders and lender organizations submitted that HUD has no 
authority under RESPA to require disclosure of loan terms, because loan 
terms are not part of the settlement process. These lenders submitted 
that HUD has the authority to require disclosure of settlement costs 
only, and that loan terms are not settlement costs. They stated that 
the disclosures required by HUD would overlap or conflict with 
disclosures under TILA and potentially with ECOA and HMDA. One lender 
also stated that some of these disclosures would overlap with state-
mandated disclosures.
    Industry representatives commented that the Federal Reserve Board 
and lenders have experience and expertise in developing disclosures and 
informational materials on adjustable rate mortgages, and that HUD 
should coordinate efforts to provide improved disclosures and 
informational materials. Industry commenters also stated that 
disclosures related to ARMs give rise to different concerns than 
settlement costs under RESPA and that HUD should follow the Federal 
Reserve Board's lead in this respect. A lender stated that the rate 
adjustment disclosure on the proposed GFE is biased against ARMs, since 
it only shows that payments can increase, not decrease. This same 
lender suggested that it would be better to have full ARM disclosure, 
which industry needs because current ARM disclosures are inadequate.
    NAMB supported HUD's inclusion of loan terms on the GFE, and 
suggested that more monthly expenses should be disclosed, such as 
homeowner's association dues, if applicable.
    The Mortgage Insurance Companies of America (MICA) objected to the 
fact that mortgage insurance costs were included in the monthly payment 
for purposes of the question, ``Can your monthly amount owed for 
principal, interest, and any mortgage insurance rise? '' MICA commented 
that this disclosure may mislead borrowers into believing that their 
mortgage insurance payments can rise, when they are in fact set at the 
time of origination. MICA also suggested that mortgage insurance would 
be disclosed in the ``Required services that the loan originator 
selects'' category, and would also be included in the escrow 
disclosure.
Other Commenters
    CSBS, AARMR, and NACCA commented that HUD should be aware that 
several states already require loan originators to disclose various 
loan terms, and that the GFE should avoid conflicting with these 
requirements. This group also suggested that, in order to avoid 
consumer confusion, HUD should coordinate more closely with the Federal 
Reserve Board's TILA disclosures.
Federal Agencies
    FTC staff stated that its experience and research suggest that 
``consumers in both the prime and subprime markets would benefit most 
from the development of a single mortgage disclosure document that 
consolidates information on the key costs and features of their loans, 
presents the information in a language and format that is easy to 
understand, and is provided early in the transaction to aid consumer 
shopping.'' However, FTC staff stated their belief that HUD's GFE did 
not go far enough in requiring these disclosures, and that even the GFE 
and the TILA form together did not disclose the necessary information. 
FTC staff also stated that inconsistencies between the GFE and TILA 
forms could lead to consumer confusion.
    The FDIC commended HUD for proposing revisions to its RESPA 
regulations, and stated that ``[t]he earlier availability of and more 
relevant information on the GFE should promote comparative shopping 
that will enable consumers to make more informed financing decisions.'' 
Like the consumer organizations, the FDIC expressed its view that the 
GFE needs to include disclosure of when the first interest rate 
adjustment happens, in order to avoid payment shock.
    The Federal Reserve Board staff agreed with the need for disclosure 
of the first rate adjustment, and stated that because the GFE's ARM 
disclosures are less complete than TILA disclosures, the GFE's ARM 
disclosures may not be as beneficial to consumers' understanding of how 
their loans work. The Federal Reserve Board staff's main concern, 
though, was that duplication of disclosures and information, and, in 
some instances, inconsistency between the loan terms on the GFE and the 
TILA form will create confusion for consumers. The Federal Reserve 
Board staff suggested that because RESPA and TILA overlap, the Federal 
Reserve Board and HUD should work together to develop a single RESPA/
TILA form. In addition, the Federal Reserve Board staff stated, similar 
to a consumer organization comment, that the absence of taxes and 
insurance in the monthly payment disclosure will interfere with 
borrowers' ability to gauge affordability.
HUD Determination
    After reviewing the comments, HUD continues to believe that 
consumer understanding of mortgage loans and of their settlement costs 
will be greatly enhanced by requiring disclosure of certain loan terms 
in a clear, user-friendly format on the GFE. Therefore,

[[Page 68215]]

the final rule includes the proposed loan summary chart on the first 
page of the revised GFE, with some revisions to address commenters' 
suggestions. To fully understand the cost of a loan for which a 
borrower is paying, the borrower needs to know the terms of the loan 
product. Loan terms, such as the interest rate, can have a direct 
relationship to the borrower's settlement costs, including mortgage 
broker compensation and other loan origination charges. HUD has 
emphasized the importance of disclosing the relationship between the 
interest rate and settlement charges in statements of policy on 
mortgage broker compensation and past RESPA rulemaking efforts. 
Disclosure of this relationship continues to be a central element of 
this rule.
    Making it easier to understand the relationship between loan terms 
and loan costs is a key element in enhancing a borrower's ability to 
shop for the best-priced loan, including settlement charges. A borrower 
should know that a loan may have certain features--for example, a 
prepayment penalty or a balloon payment--that may affect the borrower's 
charges for that loan, including by affecting the mortgage broker's 
indirect compensation or other, direct loan origination charges. The 
new GFE brings together all of the relevant pricing information, 
including certain loan terms, on one form, thus allowing the consumer 
to understand and compare loans much more easily. As stated by the 
National Consumer Law Center, in its comment on behalf of itself, 
Consumer Action, the Consumer Federation of America, and the National 
Association of Consumer Advocates:

    ``Using a loan summary sheet is a terrific advance. As HUD 
recognizes, consumer shopping is facilitated when loan information 
is condensed and summarized. Placing the most critical information 
in consumers' hands in a consistent, user friendly format should 
facilitate consumer shopping, market competition, and 
transparency.''

    HUD has determined that disclosure of major loan terms on the GFE 
is necessary to provide effective advanced disclosure to homebuyers of 
settlement costs, which is a key purpose of RESPA. HUD disagrees with 
those industry commenters that asserted that the GFE cannot list loan 
terms associated with settlement costs because the TILA disclosure is 
the appropriate form for loan terms. The Federal Reserve Board, in its 
comment on the rule, noted an ``overlap'' between the RESPA and TILA's 
purposes in this regard: ``Although RESPA's purpose is to inform 
consumers about settlement costs, and TILA's is to inform consumers 
about loan terms, these purposes overlap. Settlement costs may include 
loan origination fees, and consumers may finance their settlement 
costs.'' Under section 19(a) of RESPA, the Secretary of HUD has the 
authority to issue such regulations ``as may be necessary to achieve 
the purposes of this Act.'' The added information provided by the new 
GFE clearly furthers RESPA's purpose to ``provide more effective 
advance disclosure to homebuyers and sellers of settlement costs.'' HUD 
agrees with those commenters who asserted that disclosure of other 
settlement costs is meaningless (and therefore ineffective), absent the 
context provided by simultaneous disclosure of some loan terms. More 
effective disclosure also leads to, through borrowers' improved ability 
to shop for mortgages, reduced mortgage settlement costs for borrowers, 
a key purpose behind RESPA. HUD believes its new GFE, and its enhanced 
usefulness to borrowers as a shopping document, will provide an 
effective complement to the TILA disclosure, to provide borrowers with 
a more complete picture of their mortgage loans.
    Some commenters, primarily industry, requested that HUD delay its 
disclosure reform efforts in this rulemaking, pending a joint effort at 
disclosure reform with the Federal Reserve Board. HUD remains ready to 
coordinate with the Federal Reserve Board to ensure consistency in 
mortgage disclosure forms. As discussed earlier in this preamble, 
however, HUD determined that it must move forward with this rulemaking 
to provide prospective homebuyers and other mortgage borrowers the 
benefits of the better disclosure provided by the revised forms and 
requirements in this rule. These revisions are particularly important 
given the current mortgage crisis, which is due in part to borrowers' 
misunderstanding or lack of knowledge about the fundamental details of 
their mortgage loans.
    HUD also examined the comments regarding its authority to require 
disclosure of loan terms on the GFE, and concludes that it does have 
such authority. Section 5(c) of RESPA provides for ``a good faith 
estimate of the amount or range of charges for specific settlement 
services the borrower is likely to incur in connection with the 
settlement as prescribed by the Secretary.'' Because, under RESPA's 
definitions, loan origination, or the making of a mortgage loan, is a 
``settlement service,'' HUD determined that it is within its authority 
to require that a good faith estimate of the costs associated with this 
specific settlement service include key information about the 
``specific'' service. Without this information, the origination charges 
and other fees associated with the loan will be meaningless. Through 
RESPA, Congress entrusts HUD with establishing the contents of the GFE, 
and it is within HUD's discretion, and its responsibilities under 
RESPA, to ensure that consumers receive enough information to make 
intelligent shopping decisions about the costs of their loans. As noted 
previously in this preamble, given the current problems in the mortgage 
market, HUD decided to move forward with its improved mortgage 
disclosures, including this new first page of the GFE. The CRL, in its 
comment on the 2008 proposed rule, stated:

    ``In today's mortgage market, settlement costs are so 
intertwined with loan terms, and the illusory trade-off between rate 
and points is so problematic * * * loan terms simply must be 
included for the disclosure of settlement costs to be even remotely 
effective. HUD's authority to require them, therefore, is 
unambiguous.''

    In response to comments, HUD has revised several aspects of the 
loan summary chart on page 1 of the GFE, to better inform borrowers of 
the key loan terms. First, the title of this section of the GFE has 
been simplified to ``Summary of your loan.'' To improve clarity, the 
summary chart now refers to ``initial loan amount'' instead of 
``initial loan balance.'' As in the proposed rule, the revised form 
requires disclosure of the terms of the loan; initial interest rate; 
and initial amount owed for principal, interest, and any mortgage 
insurance. However, the information on the rate lock period has been 
moved out of this section of the GFE and into the ``Important dates'' 
section.
    While some commenters recommended that the ``annual percentage 
rate'' or ``APR'' be added to the summary chart, HUD has determined not 
to add ``APR'' to the GFE. HUD recognizes that APR is a complex term, 
calculated without the inclusion of certain significant costs in a 
mortgage loan transaction, and has a unique purpose as a broad cost-of-
credit measure central to the TILA disclosure. Consumers will be 
apprised of the APR on the TILA disclosure they receive at the same 
time that they receive the GFE. Accordingly, due to the specific TILA 
purposes of the APR and its inclusion on the concurrent TILA 
disclosure, HUD does not believe it is necessary to include the APR on 
the GFE.
    HUD has, however, included on the GFE form other terms that are 
included

[[Page 68216]]

in the TILA disclosure required by the Federal Reserve Board, but that 
are important to borrowers' understanding the costs of their mortgage 
loans. For example, the GFE requires a general disclosure about the 
existence of prepayment penalties and balloon payments. Under the final 
rule, HUD would continue to interpret these terms consistent with TILA, 
as HUD had indicated it would do in its March 2008 proposed rule (73 FR 
at 14036).
    Some commenters recommended that the form warn borrowers about the 
first change in the interest rate, to prevent payment shock. The 
revised form requires disclosure of the length of time before that 
first change. In addition, the revised form clarifies whether, even 
when the borrower makes payments on time, the loan balance can rise and 
the monthly amount owed for principal, interest, and any mortgage 
insurance can rise. The revised form also requires disclosure of the 
period of time of the first possible increase in the monthly amount 
owed, the amount to which it can rise at that time, and the maximum to 
which it can ever rise. The final rule requires the same information as 
in the proposed form about prepayment penalties and balloon payments. 
Finally, the final rule, with some revision of the proposed rule 
language, requires information on whether the lender requires an escrow 
account for the loan, for the payment of property taxes and possibly 
other obligations.
 5. Period During Which the GFE Terms Are Available to the Borrower
    Proposed Rule. Under the proposed rule, the interest rate stated on 
the GFE would be available until a date set by the loan originator for 
the loan. After that date, the interest rate, some of the loan 
originator charges, the per diem interest, and the monthly payment 
estimate for the loan could change until the interest rate is locked. 
The proposed rule also provided that the estimate for all the other 
charges would be available until 10 business days from when the GFE is 
provided, but could remain available longer, if the loan originator 
extended the period of availability.
Comments
Consumer Representatives
    NCRC, CRL, and NCLC all stated that a 10-business-day time period 
is insufficient for shopping and recommended a 30-day binding period as 
more fair to consumers. NCLC stated that the 10-business day period 
does not seem to be sufficient time for consumers to shop for a 
different mortgage, obtain alternative GFEs, compare them, and then 
make a decision to return to a particular originator, particularly 
without an interest rate lock. NCLC noted that industry practice 
generally assumes that, in the purchase money context, a minimum of 30 
days is needed to shop for and obtain a binding mortgage commitment.
    CRL also noted that the 10-business-day period does not apply to 
the interest rate, which can come with no guarantee at all. NCLC and 
CRL stated that an interest rate lock must be required in order for the 
GFE to be effective. According to CRL, not including a requirement for 
an interest rate lock will force consumers to shop on settlement costs 
alone, which are a relatively small component of the total home 
settlement cost. CLR stated that, in addition, not requiring a rate 
lock makes it too easy for loan originators to engage in baiting and 
switching; that is, offering low settlement costs, only to recoup those 
costs by increasing the interest rate when the consumer returns 3 
business days later. NCLC stated that, because interest is the largest 
component of the price of a mortgage, if interest rates are allowed to 
float, while settlement costs are fixed, consumers will be encouraged 
to shop on the smallest portion of mortgage costs, the settlement 
costs, and that lenders will be encouraged to play bait and switch 
games with the offered interest rate. Thus, according to NCLC, in order 
for the GFE to be an effective shopping tool, all costs must be fixed 
at the time the GFE is delivered.
Industry Representatives
    MBA stated that the information concerning how long the costs and 
interest rate are open to borrower acceptance needs greater 
clarification and could be provided in accompanying materials, and not 
the GFE. MBA stated that if such information is included on the GFE, 
the rule should make clear that the interest rate on the GFE may be 
available until a specified hour and date, since interest rates 
frequently change several times a day.
    The Consumer Mortgage Coalition (CMC) stated that RESPA already 
provides for good faith estimates of closing costs, and that it is 
unreasonable to interpret RESPA to limit changes in closing costs where 
the estimates were made in good faith. In addition, according to CMC, 
nothing in RESPA would appear to justify requiring lenders to keep an 
interest rate available for a potential borrower who has not actually 
applied for a loan. Therefore, CMC recommended that the ``important 
dates'' section on the proposed GFE be removed.
    NAMB stated that it is meaningless, and potentially misleading, to 
suggest that a borrower would receive a specific interest rate prior to 
final application. NAMB recommended that more specific language be 
included on the form indicating that the rate may change until locked. 
They also recommended that the 10-business-day period during which 
estimated settlement charges would be available, be changed to 10 
``calendar'' days, since this would conform more closely to market 
realities.
HUD Determination
    HUD has determined to retain the time periods set forth in the 
proposed rule. A central purpose of RESPA regulatory reform is to 
facilitate shopping in order to lower settlement costs, and there is 
legitimate concern that requiring GFEs to be open for too long a 
shopping period could unintentionally operate to increase borrower 
costs. This could occur if loan originators are required to commit to 
prices for too long a period or if the length of the period 
necessitates that originators make contingency plans for a large number 
of loans, when the yield of actual borrowers that can be expected to 
commit to the originator is uncertain. Accordingly, the final rule 
provides that the interest rate stated on the GFE will be available 
until a date set by the loan originator for the loan. HUD is not 
requiring the interest rate to be available for any specific length of 
time. The final rule provides that the loan originator indicate on the 
GFE the period during which the interest rate is available. After that 
time period, the interest rate, the interest rate related charges, and 
loan terms, including some of the loan originator charges, the per diem 
interest, and the monthly payment estimate for the loan could change 
until the interest rate is locked. The final rule also provides that 
the estimate for all other settlement charges and loan terms must be 
available for 10 business days from when the GFE is provided, but could 
remain available longer if the loan originator chooses to extend the 
period of availability. The 10-business day requirement for settlement 
costs essentially provides that the GFE will be available for 2 weeks, 
thereby providing borrowers with sufficient time to shop among various 
providers.
6. Option To Pay Settlement Costs
    Proposed Rule. The proposed GFE advised the borrower regarding how 
the interest rate would affect a borrower's settlement costs. The 
proposed GFE would have required the loan originator to complete a 
tradeoff table that informed the borrower that the borrower

[[Page 68217]]

could choose from among the following: (1) The loan presented in the 
GFE; (2) an otherwise identical loan with a lower interest rate and 
monthly payments that will raise settlement costs by a specific amount; 
or (3) an otherwise identical loan with a higher interest rate and 
monthly payments that will lower settlement costs by a specific amount. 
If a higher or lower interest rate was not in fact available from the 
originator, the originator would have been required to provide those 
options that are available and indicate ``not available'' on the form, 
for those options that were not available. The proposed rule invited 
comments on whether the loan originator should be required to include a 
``no cost loan'' on the tradeoff table as one of the alternative loans 
if the loan offered to the borrower is not the loan for which the GFE 
is written.
Comments
Consumer Representatives
    Consumer representatives supported the concept of the tradeoff 
table but recommended some changes. They stated that only loans for 
which the borrower actually qualifies should be included in the table. 
They also stated that shopping on monthly payments through the tradeoff 
table, proposed in HUD's RESPA rule, only works if the loan terms are 
the same. If loan terms vary, shopping on the monthly payment can be 
misleading to consumers and have devastating results. These commenters 
also expressed concerns about the definition of ``otherwise 
identical,'' which anticipates that the loans offered on the tradeoff 
chart would vary only by interest rate. As outlined by these 
commenters, the problem is that if the lender pays the closing costs, 
the interest rate will be higher, and, if the borrower pays the closing 
costs, in many cases, the borrower will finance such costs through a 
higher loan amount. The commenters stated that the tradeoff table would 
not address this circumstance.
    These commenters also recommend that the definition of ``otherwise 
identical'' be clarified, to include loans where the number and 
schedule of payments, the nature of the interest rate, whether fixed or 
adjustable, the index and margin for any adjustable rate mortgage, and 
the other loan characteristics, are held constant, with the exception 
that the interest rate and loan amount can be lower or higher than the 
loan reflected in the GFE.
    Consumer representatives also expressed concerns that the 
introductory language on the tradeoff table implies that there is a 
one-to-one relationship between the interest rate and the settlement 
costs. They stated this is not the case, and, in many circumstances, 
the lender-paid broker compensation leads to both higher settlement 
charges and higher interest rates. In addition, they stated that the 
tradeoff table cannot effectively disclose the tradeoffs when lender-
paid broker compensation is based on loan features other than an 
increase in the interest rate; as for example, lenders that commonly 
pay brokers for loans with prepayment penalties.
    Some consumer representatives expressed support for a requirement 
that an originator be required to offer a no-cost loan on the tradeoff 
table if the originator has that type of product available and the 
borrower qualifies for such a loan. These commenters also stated that a 
meaningful tradeoff between settlement charges and interest rates would 
arise in the context of a no-cost loan.
Industry Representatives
    Industry representatives recommended that the tradeoff table on 
page 3 of the GFE be moved to explanatory materials, including the 
special information booklet. One lender expressed confusion over what 
HUD intended by ``two other options.'' The lender stated that it was 
not clear whether HUD meant different loan types, rate/point 
structures, down payment amounts, or something else. A major lender 
trade organization commented that lenders should not be required to 
offer a no-cost loan on the tradeoff table. A major lender stated that 
since HUD has not defined what it means by ``no cost,'' it is difficult 
to provide a comment. This lender stated that many lenders now offer 
no-cost loan products and to force these lenders into making such 
disclosures would only result in consumer confusion.
    One lender commented that disclosing two mortgage products on the 
tradeoff table, in addition to the product contemplated on the GFE, 
would be problematic, because this particular lender offers only two 
mortgage products.
Other Commenters
    CSBS, AARMR and NACCA commented that the tradeoff table does not 
disclose that the choice a borrower makes between a charge and a credit 
will have an impact on the overall amount of the loan or monthly 
payment. The disclosure should reflect such a choice.
HUD Determination
    HUD has determined to retain the tradeoff table on the GFE. 
However, recognizing that not all loan originators offer various loan 
products, full completion of the table is at the option of the loan 
originator. While a loan originator is required to complete the left 
hand column of the table that describes the loan offered in the GFE, it 
is not required to complete the table with respect to the middle column 
reflecting a loan with a lower interest rate, or the right hand column, 
reflecting a loan with lower settlement charges. Filling out these last 
two columns is optional for the loan originator, even if the loan 
originator has another loan for which the borrower may be eligible. 
However, HUD encourages loan originators to complete the tradeoff 
table, in light of HUD's consumer testing of the form that revealed 
that consumers found the tradeoff table to be one of the most useful 
and informative aspects of the GFE. The tradeoff table focuses 
consumers' attention on the information in the box on the top of page 2 
of the GFE, empowering them to better shop for a mortgage. HUD strongly 
urges loan originators to fill out the tradeoff table in its entirety 
so that borrowers can better understand: (1) The disclosure of the 
``charge or credit (points) for the specific interest rate chosen'' on 
page 2 of the GFE, and (2) what other loans may be available.
    As many commenters expressed concern and confusion over the 
requirement to provide information about alternative loans and about 
``otherwise identical'' loans, HUD is clarifying the scope of what 
qualifies as an ``otherwise identical'' loan. Should a loan originator 
determine to complete the table, the loan originator has to disclose 
only those loans for which the borrower would qualify under the 
lender's underwriting practices. For purposes of completing the 
tradeoff table, an ``otherwise identical'' loan is a loan where the 
loan amount, the number and schedule of payments, the nature of the 
interest rate, the index and margin for any adjustable rate mortgage, 
the loan terms, and characteristics such as whether there is a 
prepayment penalty or a balloon payment are consistent with the loan 
presented in the GFE. The only loan characteristic that may vary from 
the loan presented in the GFE is the interest rate.
    No-cost loans are not required to be presented as one of the 
alternative loans. However, if the baseline GFE is for a no-cost loan 
so that the origination charge in Box 1 or the credit shown in Box 2 of 
the GFE offset the total of other

[[Page 68218]]

settlement service charges in Boxes 3 through 11 (i.e., total estimated 
settlement costs are zero), the originator would complete the tradeoff 
table by showing the same loan amount with positive closing costs 
(effectively the positive difference between the charge or credit for 
the GFE interest rate and that for the specified lower interest rate) 
as the first alternative to the GFE loan, and the same loan with a 
higher interest rate and negative closing costs (effectively the 
negative difference between the charge or credit for the GFE interest 
rate and that for the specified lower interest rate) as the second 
alternative. The primary purpose of the GFE tradeoff table is to ensure 
that borrowers understand there is a trade off between interest rates 
and settlement costs and to help them better understand the ``Your 
credit or charge (points) for the specific interest rate'' disclosure 
on page 2. It may also help borrowers become aware of alternative loans 
that are potentially available. However, it is not meant to be an 
exhaustive range of potential alternative loan products to the 
borrower. Loan originators are encouraged to discuss any alternative 
loan products with borrowers and provide them with their own versions 
of tradeoff tables showing the effects of the alternative loan terms on 
interest rates, monthly payments, loan amounts, and settlement costs.
7. Establishing Meaningful Standards for GFEs
a. Tolerances
    Proposed Rule. Under the March 2008 proposed rule, loan originators 
would have been prohibited from exceeding at settlement the amount 
listed as ``our service charge'' on the GFE, absent unforeseeable 
circumstances. The proposed rule also would have prohibited the amount 
listed as the charge or credit to the borrower for the interest rate 
chosen, if the interest rate was locked, absent unforeseeable 
circumstances, from being exceeded at settlement. In addition, the 
proposed rule would have prohibited Item A on the GFE, ``Your Adjusted 
Origination Charges,'' from increasing at settlement once the interest 
rate was locked. The proposed rule also would have prohibited 
government and recording fees from increasing at settlement, absent 
unforeseeable circumstances.
    Under the March 2008 proposed rule, the sum of all the other 
services subject to a tolerance (originator-required services where the 
originator selects the third party provider, originator-required 
services where the borrower selects from a list of third party 
providers identified by the originator, and optional owner's title 
insurance, if the borrower uses a provider identified by the 
originator) would have been prohibited from increasing at settlement by 
more than 10 percent of the sum for services presented on the GFE, 
absent unforeseeable circumstances. Thus, a specific charge would have 
been able to increase by more than 10 percent, so long as the sum of 
all the services subject to the 10 percent tolerance did not increase 
by more than 10 percent.
Comments
Supporters of Tolerances
    Many commenters expressed various degrees of support for the 
concept of tolerances. A trade group, representing mortgage brokers as 
well as some large lenders, expressed support for the concept of 
tolerances, albeit with certain clarifications or modifications. 
However, the strongest support for tolerances came from federal banking 
regulators and groups representing consumer interests. These commenters 
agreed that unexpected increases in costs between those provided in the 
GFE and those actually charged at settlement are a significant problem 
for prospective borrowers, and that the tolerances proposed by HUD 
would be an effective way of preventing such surprises. These 
commenters made various suggestions for strengthening the tolerance 
provisions to provide additional protections for borrowers. Suggestions 
included calculating the tolerances item-by-item rather than by 
grouping certain items together and strengthening enforcement.
Opponents of Tolerances
    Most lenders, trade groups representing lenders, and trade groups 
representing other settlement service providers were generally opposed 
to the proposed tolerance provisions. These commenters stated that 
tolerances and particularly the zero tolerance for loan originator 
charges are equivalent to a settlement cost guarantee, and therefore 
conflict with the explicit statutory requirement for an estimate of 
settlement charges. Several commenters reviewed the legislative history 
of section 5 of RESPA, emphasizing that the statute was designed ``to 
provide the prospective homebuyer with general information as to what 
their costs will be at the time of settlement.'' (See H.R. Rep. No. 
667, 94th Cong., 1st Sess., at 2, 1975 U.S.C.C.A.N. 2448, 2449 (Nov. 
14, 1975) (emphasis added).) These commenters also stated that 
tolerances may be inconsistent with the statutory provision permitting 
disclosure of a range of charges for settlement services.
    Trade groups representing other settlement servicer providers, 
especially realtors and title companies, focused on the alleged 
potential anticompetitive effects of the tolerance provisions. These 
groups suggested that large lenders would seek to manage the risks 
associated with tolerances by contracting with large third party 
settlement service providers, thereby placing small settlement service 
providers at a competitive disadvantage.
    Lenders and trade groups representing lenders and some other 
settlement service providers also strongly supported removing 
government recording and transfer charges from the tolerances. They 
stated that these charges are outside of the control of the loan 
originator and cannot be known with any certainty at the time the GFE 
is provided.
    Several lenders and trade groups representing lenders suggested 
alternatives to the proposed tolerance provisions. For example, certain 
trade groups representing lenders recommended that tolerances not apply 
to the initial GFE, which would be used as a shopping tool, but 
tolerances would apply only to a ``final'' GFE that would be provided 
after a full mortgage application had been completed. These trade 
groups also supported more flexibility in the tolerance for the loan 
originator's own charges, and suggested a 5 percent tolerance rather 
than a ``zero tolerance.'' Another alternative suggested by at least 
one lender was to evaluate overall compliance with tolerances rather 
than compliance on a loan-by-loan basis. This suggestion, according to 
the commenter, would alleviate many of the difficulties in anticipating 
unusual aspects of individual loans but still hold lenders accountable 
for providing GFEs that, as a rule, accurately reflect charges at 
settlement. Another suggestion offered was to make providing a list of 
third party settlement service providers to prospective borrowers 
optional, with tolerances applying only where the loan originator 
selected the service provider or where the loan originator provided a 
list of service providers.
HUD Determination
    Based on the comments received in response to the proposed rule, 
HUD has revised a number of provisions dealing with the tolerances. In 
particular, HUD has clarified the situations where the loan originator 
would no longer be bound by the tolerances. However, HUD has determined 
that only limited changes are necessary in the tolerance

[[Page 68219]]

amounts for settlement service categories in the rule. The final rule 
seeks to balance the borrower's interest in receiving an accurate GFE 
early in the application process to enable the borrower to shop 
effectively, with the lender's interest in maintaining flexibility to 
address the many issues that can arise in a complex process such as 
loan origination.
    Many commenters recommended changes to the size of the tolerances 
for different categories of settlement costs, especially the zero 
tolerance for loan originator charges. With one exception described 
below, the final rule does not change the amounts of the tolerances 
permitted for the different categories of settlement costs. As noted in 
the proposed rule, HUD considered the best available data on the 
variation in the costs of settlement services, in particular, for title 
services, in determining that a 10 percent tolerance is reasonable. No 
commenters submitted or identified any alternative data sources that 
would support expanding the tolerances beyond 10 percent.
    With respect to the zero tolerance for a loan originator's own 
charges, HUD recognizes the comments characterizing the tolerance as a 
potential settlement cost guarantee. However, the final rule provides 
substantial flexibility to loan originators in providing a revised GFE 
when circumstances necessitate changes. By providing such flexibility, 
HUD intends to prevent only those increases in the loan originator's 
charges that are made in ``bad faith.'' Section 19(a) provides explicit 
authority for the Secretary to make such interpretations as may be 
necessary to achieve the purposes of RESPA. Providing a clear, 
objective standard for what constitutes ``good faith'' under section 5 
of RESPA is necessary to provide more effective advance disclosure to 
homebuyers and sellers of settlement costs, and as such, falls directly 
within the Secretary's interpretive authority under section 19(a). In 
the context of residential mortgage negotiations, HUD finds that the 
term ``good faith'' requires that, once a loan provider has quoted in 
writing a certain price as the cost of its own services in a specific 
transaction and absent the ``changed circumstances'' provided for 
elsewhere in the rule, the provider must adhere to the quoted price.
    The one exception to the amounts of the tolerances remaining the 
same as in the proposed rule is the tolerance for the government 
recording and transfer charges. HUD has adjusted how these charges are 
treated under the tolerances. The final rule splits the government 
recording and transfer charges into two categories: government 
recording charges, and transfer taxes.
    Transfer taxes should generally be known at the time the GFE is 
provided, so those taxes continue to be subject to a zero tolerance. If 
there are changes in the tax rates or in the price of the property 
after a GFE is provided, those changes would either constitute changed 
circumstances or new information that would be the basis for providing 
a revised GFE. It is HUD's view that these provisions will provide 
sufficient flexibility to protect loan originators from changes outside 
their control, while still preventing loan originators from providing 
``low-ball'' estimates of transfer taxes on the GFE that could mislead 
prospective borrowers. Government recording charges, in contrast, often 
may not be known with any certainty at the time the GFE is provided, 
and in many cases not until close to, or at, closing. Therefore, HUD 
has determined that these charges should be included with the third 
party charges that are subject to an overall 10 percent tolerance. 
Because the government recording charges typically are small in 
relation to other settlement costs, this should provide ample 
flexibility to loan originators on these charges without unduly 
impacting the permitted tolerances for other third party settlement 
charges.
    As noted earlier in this preamble, HUD has made a number of changes 
to the tolerances provisions to clarify and provide additional 
flexibility in managing the tolerances. As in the proposed rule, the 
final rule adds a paragraph to the current regulations that provides 
that a loan originator that violates the GFE requirements, which 
include the tolerance requirements, shall be deemed to have violated 
section 5 of RESPA. However, the final rule also provides a loan 
originator with an opportunity to cure any violation of the tolerance 
by reimbursing the borrower any amount by which the tolerances were 
exceeded. This reimbursement may be made at settlement or within 30 
calendar days after settlement. HUD will deem a payment to have been 
provided in a timely fashion if it is placed in the mail by the loan 
originator within 30 calendar days after settlement. HUD has 
determined, based on the comments received, that 30 calendar days 
provides sufficient time for loan originators to identify and cure any 
tolerance violations through their post-closing review process. In most 
cases, HUD expects that violations will be identified at or before 
settlement when completing the revised HUD-1 form, which provides a 
clear format for comparing the charges estimated on the GFE with those 
actually imposed at settlement.
    The opportunity to cure violations of the tolerances is an 
important tool for loan originators to manage compliance with the 
tolerance requirements. Many lenders and groups representing lenders 
and other settlement service providers objected to the imposition of 
tolerances because of the difficulty of providing accurate estimates to 
prospective borrowers early in the application process. The opportunity 
to cure will permit loan originators to give an estimate of expected 
settlement charges in good faith, without subjecting them to harsh 
penalties if the estimate turns out to be lower than the actual charges 
at settlement.
    HUD has also made clarifying changes to the proposed provision 
describing the circumstances in which the GFE can be revised. As 
described in more detail below, changed circumstances that result in 
higher costs can be a basis for providing a revised GFE. In addition, 
information that was either not known or not relied on at the time the 
original GFE was provided may also be the basis for providing a 
modified GFE.
b. Unforeseeable Circumstances
    Proposed Rule. The March 2008 proposed rule provided that loan 
originators would not be held to tolerances where actions by the 
borrower or circumstances concerning the borrower's particular 
transaction result in higher costs that could not have reasonably been 
foreseen at the time of the GFE application, or where other legitimate 
circumstances beyond the originator's control result in such higher 
costs. The proposed rule also provided that if unforeseeable 
circumstances would result in a change in the borrower's eligibility 
for the specific loan terms identified in the GFE, the borrower must be 
notified of the rejection for the loan and be provided a new GFE if 
another loan is made available.
Comments
    Most of the commenters who commented on unforeseeable circumstances 
generally supported the proposed rule's provision on this matter, but 
many recommended changes or additions to the proposed definition of 
unforeseeable circumstances. Several lenders and trade groups 
representing lenders indicated that, while ``unforeseeable 
circumstances'' encompasses many things that would fall under the 
statutory requirement that estimates of settlement costs be in ``good 
faith,'' the two concepts are not always equivalent. Some commenters 
suggested

[[Page 68220]]

that the definition be expanded or clarified to include any situation 
that is outside the lender's control, even if such a situation involves 
a change that occurs often enough to be ``foreseeable'' in some sense. 
An example offered of such situation is one in which the changes in the 
price of the property or in the estimated value of the collateral may 
necessitate new information about the credit quality of the borrower 
that is developed during the underwriting process, or any other 
situation for which there is a reasonable explanation and that is still 
consistent with ``good faith.''
    Several commenters, including FTC staff and a trade group 
representing mortgage brokers, found the proposed definition of 
``unforeseeable circumstances'' to be vague. They suggested adding 
specific examples of common situations to clarify the scope of 
``unforeseeable circumstances.''
    These commenters also offered suggestions regarding the definition. 
A group representing consumer interests recommended that HUD carefully 
monitor how often unforeseeable circumstances override the tolerance 
requirements, to ensure that the exception does not swallow the rule. A 
joint comment letter from groups representing state regulators 
suggested that a provision be included requiring loan originators to 
provide written notice to borrowers describing the ``unforeseeable 
circumstance'' that resulted in the higher costs.
HUD Determination
    Based on the comments received in response to the proposed rule, 
HUD has made a number of changes to the proposed provisions describing 
the circumstances in which the GFE can be revised. HUD has determined 
that changes are needed to the proposed grounds for providing a revised 
GFE.
    The final rule clarifies the different types of circumstances 
(``changed circumstances'') that can be a basis for providing a revised 
GFE. The final rule continues to emphasize that market price 
fluctuations by themselves are not changed circumstances. For example, 
if an appraiser that a loan originator intends to use for a particular 
transaction raises its prices by $50 after the loan originator has 
already provided a GFE, that increase would not have constituted an 
unforeseeable circumstance under the proposed rule. This result would 
continue under the final rule, i.e., such a price increase by the 
appraiser would not be a ``changed circumstance'' allowing the issuance 
of a new GFE.
    HUD recognizes that numerous commenters recommended elaborations 
of, or technical changes to, the definition of unforeseeable 
circumstances. Because many of the changes described in the proposed 
definition of ``unforeseeable circumstances'' happen frequently enough 
that they could be ``reasonably foreseen,'' the final rule replaces the 
definition of ``unforeseeable circumstances'' with a new definition for 
``changed circumstances.'' However, the types of circumstances included 
in the new definition are similar to the types of circumstances that 
were included in the proposed rule. The first clause in the new 
definition of ``changed circumstances'' in the final rule still 
includes acts of God, war, disaster, or other emergencies as was 
included in the proposed rule. The final rule clarifies that the other 
circumstances in the second clause are separate from and in addition to 
the circumstances listed in the first clause. The final rule also 
clarifies that the other circumstances include situations where 
information particular to the borrower or the transaction either 
changes or is later found to be different from what was known at the 
time the GFE was provided. For example, new information affecting the 
borrower's credit quality or a change in the loan amount might occur 
often enough to be ``reasonably foreseeable'', but it would still fall 
within the types of circumstances included in the second clause of the 
definition of ``changed circumstances.''
    Under the final rule, changed circumstances that result in an 
increase in settlement costs, such that the tolerances would be 
exceeded, or that result in a change in a borrower's eligibility for 
the loan offered, may be the basis for providing a revised GFE. For 
example, if the actual loan amount turns out to be higher than the loan 
amount indicated by the borrower at the time the GFE was provided, and 
certain settlement charges that are based on the loan amount increase 
as a result, the loan originator may provide a revised GFE reflecting 
those higher amounts. Compliance with the tolerance provisions would be 
evaluated by comparing the revised GFE with the actual amounts charged 
at settlement.
    Similarly, if underwriting and verification show that a borrower's 
monthly income is different from the income relied on in providing the 
original GFE, and the difference results in a change in the borrower's 
eligibility for that loan with those particular terms, the loan 
originator would no longer be bound by the original GFE. If a loan with 
different terms is available for that borrower, then the loan 
originator would have the option of providing a modified GFE. 
Conversely, as an example, if the borrower's total assets were relied 
on in providing the original GFE, and those assets are not materially 
different from what was stated at application, then the borrower's 
total assets may not be used as a basis for providing a revised or 
modified GFE.
    While these changes are intended to provide loan originators with 
more flexibility in providing revised GFEs, HUD is also mindful of the 
potential for abuse. Unscrupulous loan originators might seek to avoid 
providing a reliable GFE by claiming not to have relied on information 
provided by the prospective borrower. In order to discourage loan 
originators from providing ``generic'' GFEs that are not based on a 
preliminary evaluation of a particular borrower, the final rule limits 
the ability of loan originators to provide a revised GFE based on 
information that was collected from the borrower prior to providing the 
GFE. However, if a loan originator documents that it relies on a 
limited range of information in providing GFEs to borrowers, the loan 
originator may provide a revised GFE based on any other information 
that results in increased settlement costs or a change in the 
borrower's eligibility, even if the information was received by the 
loan originator prior to providing the GFE, subject to the provisions 
of the rule. Loan originators are presumed to have relied on the same 
minimum information that must be collected by the loan originator 
before providing a GFE; namely, the borrower's name, the borrower's 
monthly income, the property address, an estimate of the value of the 
property, the amount of the mortgage loan sought, and any credit report 
that is obtained by the loan originator before providing the GFE. These 
limitations on providing a revised GFE apply only if subsequent 
underwriting and verification confirm that the information remains 
substantially the same as the information provided by the borrower at 
the time of the GFE. For example, if the borrower's monthly income 
turns out to be substantially less than the monthly income stated by 
the borrower in the initial application, the final rule would not 
prevent the loan originator from either providing a revised GFE or from 
denying the loan altogether. If the loan originator decides to provide 
a revised GFE, HUD encourages the loan originator to explain to the 
borrower the reasons for providing a revised GFE based on the changed 
circumstances.
    Several other provisions in the final rule that permit revisions to 
the GFE have not changed significantly from

[[Page 68221]]

those proposed. The final rule provides that a revised GFE may be 
provided if a borrower requests changes in the loan product, such as 
changing from a 30-year term to a 15-year term, or from a fixed-rate 
mortgage to an adjustable rate mortgage. A revised GFE would be 
permitted whether such change is first suggested by the loan 
originator, or by any other party. The final rule also provides that if 
a prospective borrower does not express an intent to continue with an 
application within 10 business days of receiving the original GFE, or 
such longer time specified by the loan originator on the GFE, the loan 
originator is no longer bound by the GFE. While HUD does not intend for 
the GFE form to in any way affect state laws regarding contract 
formation, this provision is intended to make clear that the estimated 
charges on a GFE are not open-ended.
    The final rule also clarifies that, where a borrower has not locked 
a particular interest rate, or where an interest rate lock has expired, 
all interest rate-dependent charges on the GFE are subject to change. 
The charges that may change include the charge or credit for the 
interest rate chosen, the adjusted origination charges, and per diem 
interest. The loan originator's origination charge, shown in Block 1 on 
page 2 of the GFE, is not subject to change, even if the interest rate 
floats. Of course, the various specific places where the interest rate 
is identified on the GFE would also be subject to change if the 
interest rate is not locked. If the borrower later locks the interest 
rate, a revised GFE should be provided at that time to show the revised 
information.
    Finally, the final rule includes the proposed provision on revision 
of the GFE for transactions involving new home purchases. HUD 
recognizes that in cases of new construction, the original GFE may be 
provided long before settlement is anticipated to occur. In those 
cases, the loan originator may provide a clear and conspicuous 
disclosure to the borrower that a revised GFE may be provided at any 
time up until 60 calendar days prior to closing. If no such disclosure 
is provided, or if no revised GFE is actually given, then compliance 
with the tolerances will be evaluated by comparing the charges on the 
original GFE with the actual charges at settlement. During the 60 
calendar days prior to closing, a revised GFE may be provided only in 
accordance with the other paragraphs in this section.
    In any case where a revised or modified GFE is provided to a 
prospective borrower, the loan originator is required to document the 
reasons for changes that are made and to maintain that documentation 
for 3 years after settlement.
 8. Lender Disclosure
    Proposed Rule. The proposed GFE included information for the 
borrower to note that lenders can receive additional fees from other 
sources by selling the loan at some point after settlement. However, 
the borrower was also informed that once the loan is obtained at 
settlement, the loan terms, the borrower's adjusted origination 
charges, and total settlement charges cannot change. The language on 
the proposed GFE also indicated that after settlement, any fees lenders 
receive in the future cannot change the loan received or the charges 
paid at settlement by the borrower.
Comments
Lender Representatives
    Lenders and lender organizations commented that the disclosure 
regarding lender compensation on page 4 of the GFE is misleading and 
unnecessary, and should therefore be removed. These commenters 
suggested that because borrowers already understand how lenders are 
compensated, through origination charges and interest, lenders are 
already required to make full compensation disclosures. Sale of the 
loan after settlement merely allows the lender to collect the present 
value of that interest. One lender argued that secondary market sale of 
the loan actually reduces costs to borrowers rather than increasing 
them. Lenders also commented that the disclosure is biased against 
lenders because it does not point out that they can lose money selling 
the loan later. In addition, one lender said that the current servicing 
disclosure already covers this information. Lenders also suggested that 
because the text of the disclosure does not concern settlement costs or 
issues, the disclosure is outside the purview of RESPA.
Mortgage Broker Representatives
    NAMB supported HUD's inclusion of the lender disclosure 
information, but felt that such information should be presented with 
greater emphasis and in more detail. NAMB suggested moving the 
information to page two of the GFE and presenting it as part of the YSP 
disclosure, in order to make clear to consumers the similarity in the 
two charges. According to NAMB, this change would help achieve parity 
of disclosures between lenders and mortgage brokers, which is essential 
for effective consumer disclosure.
Other Commenters
    FTC staff commented that the lender disclosure is misleading and 
will cause confusion because it does not make clear that the terms of 
the loan may be dependent on anticipation of the secondary market fees 
described. FTC staff said there should be more explicit disclosure in 
the origination charge section of the GFE, making clear that lenders 
also get higher fees for a higher interest rate.
HUD Determination
    After consideration of the comments, HUD has determined to retain 
the lender disclosure on the GFE. HUD is retaining the lender 
disclosure on the GFE because HUD believes that it is important for 
borrowers to be aware that lenders may receive additional fees by 
selling the loan after settlement. However, the disclosure has been 
streamlined. The disclosure on the revised form informs the borrower 
that some lenders may sell the loan after settlement and any fees 
received by the lender for selling the loan cannot change the 
borrower's loan or the charges paid by the borrower at settlement.
9. Enforcement and Cure
    Proposed Rule. The March 2008 proposed rule provided that HUD would 
deem violations of the requirements for the GFE in 24 CFR 3500.7 to be 
violations of section 5 of RESPA. This would include instances where 
the charges listed on the GFE are exceeded at settlement by more than 
the tolerances permitted under Sec.  3500.7(e). In similar fashion, the 
proposed rule provided that HUD would deem violations of the 
requirements for the HUD-1/1A in Sec.  3500.8 to be violations of 
section 4 of RESPA.
    HUD invited comments on whether a provision should be added to the 
RESPA regulations that allow a loan originator, for a limited time 
after closing, to address the failure to comply with tolerances under 
the proposed GFE requirements, and if so, how such a provision should 
be structured. HUD sought comments on whether such a provision would be 
useful and, if so, what the appropriate time frame would be for finding 
and refunding excess charges. HUD also invited comments on whether the 
potential for abuse of such a provision would be harmful to consumers. 
Comments were also sought on whether the ability of prosecutors to 
exercise enforcement discretion would obviate the need for such a 
provision.

[[Page 68222]]

Comments
    Many comments were received on the advisability of allowing loan 
originators to cure potential violations of the tolerances on the GFE. 
Lenders and trade groups representing lenders and some settlement 
service providers strongly supported the addition of a provision 
allowing loan originators to cure potential violations of the 
tolerances. Several lenders reiterated their previous comment that HUD 
lacks authority to impose tolerance requirements on the GFE, but that 
if a tolerance provision were authorized by statute, they would support 
the inclusion of a cure provision. Among the lenders and lender trade 
groups that supported inclusion of a cure provision, the comments were 
almost evenly divided between those suggesting a 60-calendar-day period 
to cure potential violations of the tolerances, and those suggesting a 
90-calendar-day period. Another commenter recommended that HUD consider 
adding a cure provision for the HUD-1 and closing script.
    Consumer groups were generally supportive of stronger enforcement 
of RESPA's disclosure requirements, including enactment of statutory 
changes that would include civil money penalties for violations of 
those requirements. A consumer group that responded to HUD's question 
regarding a cure provision expressed its opposition to adding such a 
provision. Consumer groups, generally, raised the possibility that a 
cure provision could be abused by offering only partial reimbursement 
to a borrower. These commenters suggested that loan originators would 
have an incentive to cure violations even without a specific provision 
exempting them from liability if a potential violation is cured.
HUD Determination
    Based on the comments received in response to the proposed rule and 
further consideration of this issue by HUD, HUD has determined that a 
cure provision is important to allow loan originators to more 
effectively manage any uncertainty in costs associated with the 
required tolerances on the GFE. By including a cure provision, HUD 
recognizes that some errors are inevitable when handling large numbers 
of complex transactions, and HUD does not intend for the tolerance 
requirements to create liability for inadvertent errors.
    As described in more detail above, HUD has built an opportunity to 
cure violations of the tolerances into the requirements establishing 
the tolerances. The final rule also provides that a violation of any of 
the requirements for completing the HUD-1/1A shall be deemed to be a 
violation of section 4 of RESPA. However, the rule provides that an 
inadvertent or technical error in completing the HUD-1/1A shall not be 
deemed a violation of section 4 of RESPA, if a revised HUD-1/1A is 
provided to the borrower and/or seller within 30 calendar days of 
settlement. This opportunity to cure errors on the HUD-1/1A is 
consistent with HUD's longstanding policy permitting settlement agents 
to provide revised HUD-1/1A settlement statements where errors are 
discovered after settlement.
10. Implementation Period
    Proposed Rule. In the March 2008 proposed rule, HUD stated that it 
intended to include a 12-month transition period in the final rule. 
During the 12-month transition period, settlement service providers and 
other persons could comply with either the current RESPA requirements 
or with the revised requirements of the amended provisions. HUD invited 
comments on whether such a transition period is appropriate.
Comments
    Consumer representatives generally favored a 12-month 
implementation period, while lenders and their trade associations 
sought a longer implementation period on the basis that 12 months is 
insufficient time to prepare for compliance with the new requirements. 
According to one major lender, a 12-month period is far too short, 
given the extensive nature of the changes. This lender estimated that 
an 18-24 month period will be required for implementation of the 
proposal, as published on March 14, 2008. According to other major 
lenders, the proposed rule would require significant systems and 
operational changes well beyond the complex forms changes, and would 
take a minimum of 2 years to implement. A lender association stated 
that requiring the industry to implement changes to RESPA disclosures 
and then to later implement changes to TILA disclosures would result in 
significant and duplicative costs for systems changes, training, and 
staffing that would ultimately be borne by consumers. This association 
expressed support for an implementation period beginning 18 months 
after the effective date of the rule, or 18 months after the 
implementation period for the Federal Reserve Board's TILA rule, 
whichever is later.
HUD Determination
    HUD has determined to proceed with adoption of a 12-month 
implementation period. HUD recognizes that operational changes will be 
required in order to implement the new rule, in addition to training 
staff on the new requirements. However, the need for a standardized GFE 
with relevant information about the loan and settlement charges is 
critical in light of the problems in the current market, and further 
delay is not warranted. HUD believes that a 12-month implementation 
period will provide sufficient time for systems changes and training to 
occur. Therefore, use of the new GFE and the new HUD-1/1A will be 
required as of January 1, 2010. During the transition period, the 
current RESPA requirements with respect to the GFE and the HUD-1/1A 
remain in effect and settlement service providers may choose to proceed 
under either the current GFE and HUD-1/1A requirements or may choose to 
proceed under the new GFE and HUD-1/1A requirements. However, any 
settlement service provider who delivers the new GFE prior to January 
1, 2010, will be subject to all of the requirements related to the new 
GFE, including compliance with the tolerance provisions and use of the 
required HUD-1/1A.
    Other provisions of this final rule, including the average charge 
and required use provisions and the technical amendments, are 
implemented immediately upon the effective date of the rule.
    As previously stated, HUD will issue guidance on compliance with 
the rule's provisions during the implementation period.

C. Lender Payments to Mortgage Brokers--Yield Spread Premiums (YSPs)

1. Disclosure of YSP on GFE
    The March 2008 proposed rule provided that lender payments to 
mortgage brokers in table-funded and intermediary transactions be 
clearly disclosed to consumers on the GFE and the HUD-1 settlement 
statements, as set forth below. The rule also proposed to streamline 
the current regulatory definition of ``mortgage broker.''
    Under the March 2008 proposed rule, the first page of the GFE 
presented the net origination charge as ``your adjusted origination 
charges.'' The second page of the proposed GFE informed the consumer 
how the adjusted origination charge was computed. Block 1 disclosed as 
``Our service charge'' the originator's total charge to the borrower 
for the loan. The rule proposed that in the case of

[[Page 68223]]

loans originated by mortgage brokers, the amount in Block 1 would have 
to include all charges received by the broker and any other originator 
for, or as a result of, the mortgage loan origination, including any 
payments from the lender to the broker for the origination. In the case 
of loans originated by originators other than mortgage brokers, the 
amount in Block 1 would have to include all charges to be paid by the 
borrower that are to be received by the originator for, or as a result 
of, the loan origination to the borrower, except any amounts 
denominated by the lender as discount points and which would be 
disclosed in Block 2.
    In loans originated by mortgage brokers, Block 2 of the second page 
of the proposed GFE would have disclosed whether there is any charge or 
credit to the borrower for the specific interest rate chosen for the 
GFE. The second check box would have indicated whether there was a 
payment for a higher interest rate loan, described as the ``credit of 
$------for this interest rate of ------%. This credit reduces your 
upfront charges.'' The third check box would have indicated a ``charge 
of $------ for the interest rate of ------%. This payment (discount 
points) increases your upfront charges.'' Any lender payment would have 
been subtracted and any points would have been added to arrive at 
``your adjusted origination charge'' that would also have been 
disclosed on the first page of the form. The proposed rule provided 
that for mortgage brokers, the amounts of any charge or credit in Block 
2 would have to equal the difference between the price the wholesale 
lender pays the broker for the loan and the initial loan amount.
Comments
Consumer Representatives
    Some consumer groups opposed the proposed YSP disclosure on several 
grounds. These groups asserted that to describe lender-paid broker 
compensation as a credit to reduce settlement costs is misleading. NCLC 
stated that there is no requirement that the lender payment will 
actually be used in this manner. CRL stated that the proposed language 
presumes a trade off through a reduction in upfront costs, and research 
shows that this does not occur, except in limited circumstances. 
According to CRL, the disclosure's characterization of the YSP as a 
``credit'' only exacerbates the issue of the nonexistent trade off. CRL 
expressed concern that the disclosure suggests that the arrangement is 
saving the consumer money, when in fact the disclosure is doing the 
opposite. CRL also objected to the disclosure on the grounds that the 
disclosure does not make clear that this is a fee paid to a broker. In 
addition, CRL stated that it found the disclosure confusing, and noted 
that HUD has not tested the effectiveness of the disclosure outside of 
controlled circumstances. Both CRL and NCLC recommended an alternative 
formulation for disclosure of mortgage broker compensation.
    NCLC also stated that the proposed disclosure potentially 
complicates TILA review. According to NCLC, without guidance from the 
Federal Reserve Board, it is not clear what effect treating the lender-
paid broker compensation as a credit will have on the central TILA 
disclosures, which are the finance charge and the APR.
Industry Representatives
    Lenders generally were opposed to the proposed YSP disclosure. Many 
lenders and their trade associations asserted that the proposed 
approach for disclosing YSP conflicts with pending TILA and HOEPA rule 
changes proposed by the Federal Reserve Board, and is also inconsistent 
with Advisory Letter 2003-3 of the Office of the Comptroller of the 
Currency (OCC). These lenders stated that it would be costly and 
confusing for the banking industry if HUD and the Federal Reserve Board 
issued varying rules, revisions, and disclosures independently. Other 
lenders stated that, because in their view HUD assumed that the only 
way for a lender to calculate payment to the broker is by tying the 
compensation to the borrower's interest rate, neither the proposed GFE 
nor the proposed HUD-1 can accommodate a lender's compensation payment 
to the broker based on the loan amount, or based on a flat dollar 
amount. According to these lenders, if a lender were to pay broker 
compensation that is not tied to the interest rate, there would be no 
way to disclose the payment without artificially inflating the charges 
paid by the borrower.
    A major lender noted that if a broker intends to rely primarily on 
the lender for compensation, the dollar-for-dollar offset of the YSP 
against other service charges will necessitate that the broker increase 
the disclosed consumer paid fees. The lender commented that this has 
regulatory impacts under other laws. The lender stated that the 
origination fee is a finance charge under TILA. The lender also stated 
that the origination fee is also normally included in the points and 
fees definitions under several state high-cost laws and HOEPA, whereas 
YSP payments are only a finance charge under TILA to the extent 
included in the interest rate and are not always included in points and 
fees calculations. According to this commenter, the proposed definition 
will artificially force more loans into the ``high cost'' category 
which will further limit credit because many lenders do not originate 
these loans.
    CMC stated that the proposed mortgage broker compensation 
disclosure wrongly conflates mortgage brokers and mortgage lenders. CMC 
noted that there are important differences between mortgage brokers and 
mortgage lenders in terms of roles in the transaction, compensation, 
and risk posed to consumers. CMC stated that the mortgage broker 
disclosure proposal fails to adequately address these differences. CMC 
expressed opposition to consolidating the charges of the lender and the 
broker together in a single ``service charge'' because, according to 
CMC, such consolidation effectively hides the amount of the broker's 
total compensation from the borrower. CMC believes that borrowers 
should have this information and that failure or omission to disclose 
could cause harm. CMC stated that disclosing YSP as a credit and 
lumping the YSP together with (or offsetting it against) lender fees or 
discounts hides the YSP in a way that is confusing and potentially 
harmful to the borrower. CMC recommended that broker compensation be 
disclosed as shown in the RESPA/TILA forms and ``mortgage broker fee 
agreement and disclosure'' submitted with their comments.
    MBA asserted that the proposed disclosure will be unclear to 
borrowers while the costs occasioned by the adoption of new terminology 
for mortgage broker fees will, in its opinion, be enormous. MBA noted 
that, in its opinion, the proposed disclosure does not allow for the 
possibility that, in the future, some brokers will be paid on a basis 
other than the loan's interest rate. In addition, MBA stated that as 
lenders and brokers perform distinct functions in the marketplace and 
are perceived differently by consumers, applying the same rules to them 
is ill-advised. MBA proposed an alternative mortgage broker 
compensation disclosure that discloses the total compensation for the 
broker's services and the amounts paid by the lender to the broker on 
the borrower's behalf.
    NAMB reasserted its opposition to carving out one component of the 
cost of a mortgage loan for the ``putative purpose of clarification and 
simplification.'' NAMB asserted that the proposed YSP disclosure would 
achieve the opposite result and would detract

[[Page 68224]]

from the consumer's ability to understand and comparison shop. NAMB 
recommended that direct competitors should be treated the same to 
facilitate shopping and promote consumer understanding. NAMB stated 
that if HUD continues to require disclosure of originator compensation, 
HUD must require all originators to disclose the premium value created 
by interest on the loan, and that HUD must provide a method for making 
that calculation.
    According to NAMB, the proposed disclosure makes distinctions among 
mortgage originators with no basis for doing so, and in disregard of 
market realities. NAMB stated that the proposal seeks to enhance 
regulatory distinctions among groups of originators, long after such 
labels have lost their meaning in the marketplace. NAMB also criticized 
the proposal because it would, in NAMB's opinion, isolate a single 
component of cost--compensation--rather than aggregate cost. According 
to NAMB, compensation is relevant only to the extent that compensation 
serves as a ``rough proxy for the difference between the par, or 
wholesale, loan rate and the rate quoted to the consumer.'' In the case 
of mortgage brokers, that difference is called ``yield spread premium'' 
or YSP; in the case of lenders, that difference is called ``service 
release premium'' or SRP. NAMB asserted that in both cases, that 
differential may be readily determined prior to closing at the time the 
interest rate is locked and should be disclosed. NAMB also asserted 
that the lender's compensation after the loan is sold is irrelevant, 
since such compensation does not affect the price paid by the borrower. 
According to NAMB, what is relevant is the incremental cost to the 
consumer assessed at the time of closing that is attributable to the 
differential between the loan rate and the wholesale rate. NAMB 
asserted that that figure can be computed and disclosed prior to 
closing and recommended that HUD specify how that computation should be 
done, and require disclosure of the resulting figure, or in the 
alternative, not require such disclosure by any originators.
    NAMB asserted that the methodology of HUD's testing is flawed in 
two respects. According to NAMB, the contractor failed to test consumer 
understanding of loan terms and of comparative shopping when YSP was 
not disclosed. Instead, according to NAMB, the contractor assumed the 
answer to the fundamental question of whether YSP disclosure aided 
consumers in comparative shopping. NAMB also stated that the testing 
focused only on how, not whether, to disclose YSP. NAMB stated that in 
doing so, the proposal ignored FTC's earlier finding that disclosing 
just broker compensation created confusion and led consumers to make 
decisions contrary to their best interests.
    NAMB also asserted that HUD's testing was flawed because the 
testing was not conducted among actual borrowers dealing with actual 
loan originators. According to NAMB, the tests fail to assess the 
consequences of disparate disclosures in actual competitive markets. 
NAMB noted that, in 2004 and 2007, FTC conducted extensive studies on 
consumer mortgage disclosures, with a particular focus on mortgage 
broker compensation disclosures. NAMB further stated that the 2007 FTC 
study restated the conclusion of the earlier study, noting that 
disclosure of broker compensation ``created a substantial consumer bias 
against broker loans, even when the broker loans cost the same or less 
than direct lender loans, because the disclosures would have been 
required of brokers, but not direct lenders.'' (See 2007 FTC Study at 
6, n. 14). NAMB also objected to the proposed mortgage broker 
compensation disclosure on the grounds that the proposed rule fails to 
evaluate how the proposed broker disclosure would relate to any of the 
currently mandated disclosures. According to NAMB, all 50 states 
regulate brokers and their compensation in various respects. Industry 
practice and lender requirements mandate further disclosures. NAMB 
asserted that to limit complexity and information overload, HUD should 
consider how all current mortgage broker disclosures would relate to 
its proposal.
    NAMB also commented that HUD has not adequately addressed how its 
proposed mortgage broker compensation disclosure relates to the Federal 
Reserve Board's proposed amendments to Regulation Z, or how HUD's 
proposal relates to the risk-based pricing regulations recently 
proposed by the Federal Reserve Board and FTC pursuant to the Fair and 
Accurate Credit Transactions Act of 2003 (73 FR 28 966 (May 19, 2008)). 
NAMB recommended that HUD seek public comment on the interaction 
between HUD's proposal, the proposed amendments to Regulation Z, and 
the pending risk-based pricing regulations before proceeding to 
finalize the March 2008 proposed rule.
Other Commenters
    The National Association of Realtors (NAR) stated that it is 
unclear whether consumers will understand the proposed disclosure of 
discount points and YSPs. According to NAR, calling the YSP a 
``credit'' to the borrower without explaining or making it clear that 
the YSP is tied to the interest rate may mislead or confuse a consumer.
    The Conference of State Bank Supervisors, the American Association 
of Residential Mortgage Regulators, and the National Association of 
Consumer Credit Administrators commented that the proposed disclosure 
of YSP is not parallel with the Federal Reserve Board's proposed rule 
amending Regulation Z. These commenters urged HUD to work closely with 
the Federal Reserve Board to develop seamless regulations before 
finalizing the proposed rule.
Federal Agencies
    FTC staff expressed support for the goal of improving consumer 
understanding of the costs and terms of mortgage loans. However, based 
on the results of past FTC and HUD mortgage disclosure research, FTC 
staff urged HUD to consider reevaluating its proposed broker 
compensation disclosures, because they may adversely affect consumers 
and competition. FTC staff stated that alternative disclosures that 
clarify the role of mortgage originators, applied equally to all 
originators, could provide greater benefits to consumers and avoid 
adverse effects on consumers and competition. FTC staff urged HUD to 
evaluate and test alternative disclosures to determine the type or 
types of disclosures that will most benefit consumers. FTC staff also 
suggested that HUD consider, and possibly test, whether other 
disclosures such as one that clarifies the role of all mortgage 
originators would be more beneficial for consumers.
    The FDIC expressed some concerns about the proposal's approach to 
YSP disclosure. The FDIC stated that the proposed GFE does not clarify 
that YSP is a payment made by a lender to a mortgage broker in exchange 
for referring a borrower willing to pay an above par interest rate, nor 
does the GFE state the amount of the YSP to be paid to a broker. 
Instead, according to the FDIC, the GFE seems to presume that the 
lender will apply the YSP as a ``credit'' that will lower settlement 
costs by a corresponding amount. The FDIC noted that the proposal does 
not impose the condition that YSP must actually function as a credit to 
a borrower as a requirement on lenders or brokers. The FDIC further 
stated that while HUD's effort, through the March 2008 proposed rule, 
to provide borrowers with more information about the trade off between 
interest rates and settlement costs is positive, this information alone 
does not

[[Page 68225]]

provide borrowers with an understanding of the economic incentives 
motivating the lenders and brokers with whom the borrowers are dealing.
    The FDIC recommended that HUD ban YSPs to ensure that broker 
compensation will not be based on steering the consumer to a loan that 
is more expensive than one for which the borrower otherwise would 
qualify. The FDIC recommended that HUD ban any mortgage broker 
compensation that is not a flat or point-based fee.
    If YSPs continue to be permitted, the FDIC recommended that their 
purpose and cost be clearly disclosed. The FDIC recommended that the 
disclosure inform the consumer that the broker is receiving a payment 
from the lender for placing the consumer in a loan with a higher 
interest rate. The FDIC stated that a YSP should not be identified as a 
``credit,'' because such language would tend to make consumers believe 
that they are deriving a financial benefit from a YSP. The FDIC further 
recommended removal of the statement ``(T)his credit reduces your 
upfront charge,'' because this language is not balanced by a 
corresponding statement that informs consumers that the YSP will result 
in them paying a substantially higher interest rate over the life of 
the loan.
HUD Determination
    Having reviewed the comments, and based on its testing of the 
forms, HUD has determined to retain the mortgage broker disclosure as 
proposed, with clarifying modifications. However, in order to better 
explain how the disclosure works, HUD is removing, from Sec.  3500.2 of 
the regulations, the definition of the term ``charge or credit for the 
interest rate chosen'' and at the same time inserting expanded 
information in the instructions on how to disclose the credit or charge 
to provide additional guidance.
    In reaching the determination to retain the mortgage broker 
disclosure, HUD is mindful of the concerns expressed by the commenters, 
but believes that the mortgage broker disclosure, read in conjunction 
with the tradeoff table on the form, will help the borrower understand 
the relationship between the interest rate and the settlement charges. 
While many commenters claimed that the mortgage broker disclosure as 
proposed was confusing and would result in bias against mortgage 
brokers, HUD's testing of the form demonstrated that consumers 
understood the relationship between the interest rate and settlement 
charges as presented on the form and that no bias against brokers 
resulted from such disclosure. As noted below, while the substance of 
the broker disclosure remains the same in the final rule as it was in 
the proposed rule, some minor stylistic changes have been made to draw 
the borrower's attention to specific terminology in the disclosure that 
HUD believes will improve the disclosure.
    Since 1992, HUD has required the disclosure of YSPs on the GFE and 
HUD-1 settlement statements as a ``payment outside closing'' or 
``POC.'' This means of disclosure has proved to be of little use to 
consumers. Moreover, notwithstanding that lender payments to brokers 
are directly based on the rate of the borrower's loan, under current 
HUD guidance such lender payments are not required to be included in 
the calculation of the broker's total charges for the transaction, nor 
are they clearly listed as an expense to the borrower. This omission is 
exacerbated by the fact that many brokers hold themselves out as 
shopping among various funding sources for the best loan for the 
borrower, while failing to explain to the borrower that the payment 
they receive from the lender is derived from the borrower's interest 
rate. While some brokers tell customers how they can use lender 
payments to lower the customer's upfront settlement costs, others do 
not.
    Policy Statement 2001-1 made clear that earlier disclosure and the 
entry of YSPs as credits to borrowers would ``offer greater assurance 
that lender payments to mortgage brokers serve borrowers' best 
interests.''(See 66 FR 53056.) HUD could not mandate new disclosure 
requirements in the Policy Statement. HUD did, however, commit itself 
in that Policy Statement to making full use of its regulatory authority 
to establish clearer requirements for disclosure of mortgage broker 
fees, and to improve the settlement process for lenders, mortgage 
brokers, and consumers. (See 66 FR 53053).
    It is for this reason that HUD proposed its new disclosure 
requirements. HUD maintains that while rate-based payments to mortgage 
brokers must be clearly disclosed to borrowers, at the same time, 
mortgage brokers also must not be disadvantaged in the marketplace, 
since such disadvantage will only result in decreased competition and 
higher costs to consumers. Many mortgage brokers offer products that 
are competitive with and frequently lower priced than the products of 
retail lenders, and HUD wishes to preserve continued competition and 
lower prices for consumers, as well as consumer choice.
    The revised GFE form in today's rule is the result of an iterative 
testing process, comprised of six rounds of consumer testing of the 
form during the period 2003 through 2007. An additional round of 
testing was conducted in the summer of 2008. Working with HUD, HUD's 
testing contractor used the data collected during each round to improve 
and modify the form throughout the testing process. A summary report on 
each round of testing is available at: http://www.huduser.org/publications/hsgfin/GoodFaith.html.
    HUD disagrees that its contractor's consumer testing of the GFE 
form was flawed. Independent reviews by experts in consumer testing and 
forms development found no flaws in the design of the tests. NAMB's 
suggestion of testing forms in actual transactions is not necessary or 
workable. Properly designed and implemented testing does produce 
correct results through an iterative process. The most difficult aspect 
of testing actual transactions would likely be finding loan originators 
(both brokers and lenders) willing to develop and test a form that is 
designed to improve consumer understanding in actual transactions and 
thereby reduce the originators' information advantage and market power 
in those transactions. Perhaps as difficult would be keeping tested 
consumers from shopping outside of the experimental group of 
originators to keep the test valid, especially since the forms so 
strongly urge consumers to shop among different originators.
    The NAMB's second criticism is also not valid as the third round of 
testing was exactly on the point of whether to disclose the YSP. The 
purpose of the YSP disclosure is to inform consumers about the full 
cost of originating loans through a broker and to help them to 
understand the tradeoff between interest rates/monthly payments and 
origination costs so that consumers can use the relationship to their 
benefit. The third round of testing did not include the YSP disclosure, 
and the important finding was that, without the YSP disclosure, 
consumers did not understand the existence of the tradeoff between 
interest rates and origination charges as well as when the YSP was 
disclosed. Helping consumers understand this tradeoff is a fundamental 
goal of HUD's RESPA reform effort and of the design of the GFE form. 
The third round of testing confirmed that inclusion of the YSP 
disclosure helped consumers understand the tradeoff, and that if they 
take a loan with a relatively high interest rate, they should pay lower 
settlement charges. Since the need for the YSP disclosure to improve

[[Page 68226]]

consumer understanding of the tradeoff was established in round 3, 
whether a YSP disclosure should be included was not the subject of 
later rounds of testing. Rather, later rounds of form development and 
testing were aimed at making the YSP disclosure free of anti-broker 
bias. This effort was successful. HUD's testing found that participants 
using HUD's GFE were successful more than 90 percent of the time in 
identifying the cheapest loan whether the GFE loan was from a lender, 
mortgage broker, or the two loans cost the same.
    As indicated, HUD has maintained the disclosure on the top of page 
two of the revised GFE, while making some stylistic changes to this 
portion of the form in the interest of borrower comprehension. The top 
of page 2 refers to ``Your Adjusted Origination Charges'' instead of 
``Your Loan Details'' on the proposed form because this is the section 
of the disclosure that sets forth the origination charges. The box on 
the top of page 2 informs the borrower how the adjusted origination 
charge is computed. In response to comments recommending that 
``service'' charge be deleted from the form, Block 1 now discloses as 
``Our origination charge'' the originators' total charge to the 
borrower for the loan.
    The final rule requires that in the case of loans originated by 
mortgage brokers, the amount in Block 1 must include all charges to be 
paid by the borrower that are to be received by the broker and any 
other originator for, or as a result of, the mortgage loan origination, 
including any payments from the lender to the broker for the 
origination. In the case of loans originated by originators other than 
mortgage brokers, the amount in Block 1 must include all charges to be 
paid by the borrower that are to be received by the originator for, or 
as a result of, the loan origination to the borrower, except any 
amounts denominated by the lender as discount points, which are 
disclosed in Block 2.
    Block 2 discloses for loans originated by mortgage brokers whether 
there is any charge or a credit to the borrower for the specific 
interest rate chosen for its GFE. The heading for Block 2 of the 
proposed form included the term ``points'' at the end of the sentence. 
On the final form, this sentence now states, ``Your credit or charge 
(points) for the specific interest rate chosen.'' The second check box 
indicates whether there is a payment for a higher interest rate loan 
described as the ``credit of $------ for this interest rate of ------%. 
This credit reduces your settlement charges.'' The word ``settlement'' 
has replaced the word ``upfront'' from the proposed form to be more 
consistent with other terminology on the form. The third check box 
indicates any ``charge of $------ for this interest rate of ------%. 
This charge (points) increases your total settlement charges.'' Any 
lender payment is then subtracted and any points are added to arrive at 
``your adjusted origination charges''. The final rule also requires 
that in the case where a lender compensates a broker based on a flat 
dollar amount, or based on the loan amount, the second box in Block 2 
on page 2 must be checked.
    At page 2, while lenders are not required to check the second or 
third boxes of Block 2, in loans where they do not make such 
disclosures, they are required to check Box 1 that indicates that ``The 
credit or charge for the interest rate of ------% is included in `Our 
origination charge.' '' If lenders separately denominate any amounts 
due from the borrower as ``points,'' they must check the third box 
indicating that there are charges for the interest rate and enter the 
appropriate amount for points as a positive number. If lenders 
separately denominate any amounts as a credit to the borrower for the 
particular interest rate covered by the GFE, they must check the second 
box and enter the appropriate amount as a negative number. Lenders must 
also add any such positive amounts or deduct any negative amounts to 
arrive at ``Your Adjusted Origination Charges,'' listed on Line A of 
page two of the form.
    In reaching its determination, HUD considered providing only the 
adjusted origination charge without the calculation, and disclosing the 
YSP and points elsewhere on the form. HUD concluded, however, that a 
complete disclosure of the payments to the mortgage broker as presented 
on page 2 of the revised form, especially when read in conjunction with 
the tradeoff table on page 3, is valuable to borrower understanding of: 
(1) The broker's total compensation; (2) how rate-based payments from 
lenders can help reduce borrowers' upfront origination charges and 
settlement costs in brokered loans; and (3) how payments to reduce the 
interest rate and monthly charges increase upfront charges.
    As discussed above, testing by HUD's contractor demonstrated that 
disclosure of the YSP out of context was not useful to consumers. On 
the other hand, a form that requires that lenders disclose that credits 
or charges may be included in their service charge as well, even when 
the calculation for brokered loans is on the form, was not confusing 
for borrowers. HUD's testing demonstrated that borrowers correctly 
compared adjusted origination charges between loans from mortgage 
brokers and loans from lenders even when the YSP is included in the 
calculation of the adjusted origination charge. Nevertheless, to assure 
that borrowers choose the best value loan without being confused by the 
presence of a YSP, HUD established the first page of the GFE as a 
summary page that only includes total estimated settlement charges. HUD 
also considered the comments that its proposed mortgage broker 
disclosure requirement might be inconsistent with the approach taken by 
the Federal Reserve Board in its proposed rule to amend Regulation Z of 
TILA, 16 U.S.C. 1601, et seq. (73 FR 1672, January 9, 2008). However, 
the Federal Reserve Board recently announced that it has withdrawn its 
proposed mortgage broker fee agreement requirement set forth in its 
proposed rule (73 FR 44522, July 30, 2008).
    In its consultations with the Federal Reserve Board staff, HUD 
raised the concerns expressed by some commenters that treating lender 
payments to mortgage brokers as a credit toward the origination charges 
could increase the points and fees of each brokered mortgage loan, 
thereby resulting in more loans coming under HOEPA coverage. Federal 
Reserve Board staff advised HUD that notwithstanding HUD's changed 
requirements, determinations of whether payments to a mortgage broker 
must be included in the finance charge and whether a loan is covered by 
HOEPA are based on the statutory definitions and requirements in TILA, 
as implemented by the Federal Reserve Board's Regulation Z, which are 
unaffected by HUD's RESPA rulemaking.
2. Definition of ``Mortgage Broker''
    The March 2008 proposed rule would have streamlined the current 
regulatory definition of ``mortgage broker.'' Under the proposed 
definition, ``mortgage broker'' would mean a person (not an employee of 
the lender) or entity that renders origination services in a table-
funded or intermediary transaction. The definition would also have 
applied to a loan correspondent approved under 24 CFR 202.8 for FHA 
programs. The proposed definition would have eliminated the current 
exclusion of an ``exclusive agent'' of a lender from the current 
definition of ``mortgage broker.'' Therefore, under the proposed rule, 
an ``exclusive agent'' of a lender who was not an employee of the 
lender, but who renders origination services in a table funded or 
intermediary transaction, would have been subject to the mortgage 
broker disclosure requirements set forth in the proposed rule.

[[Page 68227]]

Comments
    Consumer groups did not comment on this issue. A lender association 
commented that the proposed change may be inconsistent with Regulation 
Z Comments 226.19-b-2(i) and 226.19(b)-3 concerning intermediary agents 
or brokers and the timing of disclosures. MBA stated that the 
definition should not be changed to include exclusive agents of 
lenders. MBA commented that because mortgage lenders, including their 
agents and employees, are functionally different from mortgage brokers, 
they should be treated differently. MBA stated that it does not believe 
that mortgage lenders or their exclusive agents warrant the same 
treatment as mortgage brokers. MBA asserted that borrowers do not 
perceive brokers in the same way as lenders and brokers do not present 
the same risks as lenders. MBA also stated that that term 
``intermediary'' should not be injected into the definition at all, 
unless this term is clearly defined to cover independent mortgage 
brokers. According to MBA, because the term is undefined, 
``intermediary'' could be misinterpreted to cover some loan officers 
who work for lenders and may be independent contractors.
    NAMB expressed opposition to the proposed change because, according 
to NAMB, it would perpetuate distinctions among mortgage originators 
that no longer have meaning in the marketplace. NAMB noted that the 
roles of mortgage brokers and other originators have converged with the 
ubiquity of the ``originate to distribute'' model of mortgage finance, 
and that the regulatory structure under RESPA should reflect that fact. 
NAMB recommended that, at a minimum, the definition of ``mortgage 
broker'' be expanded to include any originator that sells loans where 
servicing is released within 6 months of origination, rather than 
securitizing them or holding them in portfolio.
    CSBS, AARMR, and NACCA supported the proposed change in the 
definition of mortgage broker, but recommended that HUD define 
``intermediary transaction.'' These commenters stated that by failing 
to define ``intermediary transaction,'' HUD has created potential 
confusion among industry participants and regulators.
HUD Determination
    HUD has determined to revise the definition of ``mortgage broker.'' 
While HUD recognizes that mortgage lenders are functionally different 
from mortgage brokers, an exclusive agent of a lender who is not an 
employee of a lender, but who renders origination services and serves 
as an intermediary between the lender and the borrower, is essentially 
acting as a mortgage broker, and will be subject to the mortgage broker 
disclosure requirements, as set forth in the rule. This definition will 
also apply to a loan correspondent approved under 24 CFR 202.8 for 
Federal Housing Administration (FHA) programs.
    The revised definition clarifies that a mortgage broker also means 
a person or entity that renders origination services and serves as an 
intermediary between a borrower and a lender in a transaction involving 
a federally related mortgage loan, including such a person or entity 
that closes the loan in its own name in a table-funded transaction.
 3. FHA Limitation on Origination Fees of Mortgagees
    Under its codified regulations, HUD places specific limits on the 
amount a mortgagee may collect from a mortgagor to compensate the 
mortgagee for expenses incurred in originating and closing a FHA-
insured mortgage loan (see 24 CFR 203.27).\1\ The March 2008 proposed 
rule would have removed the current specific limitations on the amounts 
mortgagees are presently allowed to charge borrowers directly for 
originating and closing an FHA loan. Under HUD's proposal, the FHA 
Commissioner would have retained authority to set limits on the amount 
of any fees that mortgagees charge borrowers directly for obtaining an 
FHA loan. In addition, the proposed rule would have also permitted 
other government program charges to be disclosed on the blank lines in 
Section 800 of the HUD-1/1A.
---------------------------------------------------------------------------

    \1\ Under 24 CFR 203.27(a)(2)(i), origination fees are limited 
to one percent of the mortgage amount. For new construction 
involving construction advances, that charge may be increased to a 
maximum of 2.5 percent of the original principal amount of the 
mortgage to compensate the mortgagee for necessary inspections and 
administrative costs connected with making construction advances. 
For mortgages on properties requiring repair or rehabilitation, 
mortgagor charges may be assessed at a maximum of 2.5 percent of the 
mortgage attributable to the repair or rehabilitation, plus one 
percent on the balance of the mortgage. (See 24 CFR 
203.27(a)(2)(ii), and (iii).)
---------------------------------------------------------------------------

Comments
    There was little comment on this issue. NCRC disagreed with the 
proposal to remove the specific limitations on the amount mortgagees 
are allowed to charge for originating and closing an FHA loan. NCRC 
stated that a government-guaranteed loan product should shield 
borrowers from excessive charges by establishing reasonable limits on 
fees. According to NCRC, while it may be acceptable to carefully raise 
origination fee limits, this should be done only in conjunction with 
establishing reasonable limits on YSPs. This commenter stated that by 
establishing standard limits on origination fees and YSPs, the FHA loan 
product can keep the nongovernment guaranteed products competing by 
constraining direct fee and YSP costs.
HUD Determination
    HUD believes that its RESPA policy statements on lender payments to 
mortgage brokers restrict the total origination charges for mortgages, 
including FHA mortgages, to reasonable compensation for goods, 
facilities, or services. (See Statement of Policy 1999-1, 64 FR 10080, 
March 1, 1999, and Statement of Policy 2001-1, 66 FR 53052, October 18, 
2001.) Moreover, the improvements to the disclosure requirements for 
all loans sought to be achieved as a result of this rulemaking should 
make total loan charges more transparent and allow market forces to 
lower these charges for all borrowers, including FHA borrowers. 
Therefore, HUD has determined to finalize the proposed rule to remove 
the current specific limitations on the amounts mortgagees presently 
are allowed to charge borrowers directly for originating and closing an 
FHA loan. The FHA Commissioner retains authority to set limits on the 
amount of any fees that mortgagees charge borrowers directly for 
obtaining an FHA loan.

IV. Modification of the HUD-1/1A Settlement Statement

A. Overall Comments on Proposed Changes to HUD-1/1A Settlement 
Statement

    Proposed Rule. Under the March 2008 proposed rule, the current HUD-
1/1A Settlement Statements would have been modified to allow the 
borrower to easily compare specific charges at closing with the 
estimated charges listed on the GFE. The proposed changes would have 
facilitated comparison of the two documents by inserting, on the 
relevant lines of the HUD-1/1A, a reference to the corresponding block 
on the GFE, thereby replacing the existing line descriptions on the 
current HUD-1/1A. The proposed instructions for completing the HUD-1/1A 
would have clarified the extent to which charges for individual 
services must be itemized.
Comments
Consumer Representatives
    A consumer group stated that while referencing the GFE lines on the 
settlement statement is an important step, HUD should mandate a summary

[[Page 68228]]

settlement sheet that corresponds exactly to the summary sheet of the 
GFE. According to this group, doing so would obviate the need for a 
crosswalk between the GFE and the settlement statement. The consumer 
group stated that the HUD-1 should be easily comparable to the GFE and 
should facilitate, rather than hinder TILA and HOEPA compliance. The 
consumer group expressed concern that HUD's improvement of disclosures 
in the settlement context could impede review of lender compliance with 
the disclosure requirements under TILA. This commenter noted that the 
proposed HUD-1 would require lenders to disclose as a lump sum their 
origination charges and all title services. While this group stated 
that such an approach is an improvement from the perspective of 
consumer understanding, the group stated that not all origination and 
title services are clearly all in, or all out of, the TILA finance 
charge. Under TILA, for example, title insurance is excluded from the 
finance charge. The commenter stated that other charges related to 
title insurance, including the settlement fee, courier fee, or document 
preparation fees, may be included in the finance charge, particularly 
if they are not bona fide and reasonable. This commenter noted that 
similar inconsistencies are true of other origination fees. The 
commenter stated that absent coordination with the Federal Reserve 
Board on a more useful and expansive definition of the finance charge, 
and statutory changes to TILA itself, the final settlement statement 
should not bundle either all title or all origination charges. The 
commenter also called for itemization of all title services on both the 
GFE and HUD-1, so that consumers are aware of the variety of fees.
Lender Representatives
    Lenders commenting on the March 2008 proposed rule generally stated 
that the HUD-1 should be in the same format as the GFE, to enable 
comparisons of estimated and actual charges. A lender association 
stated that the proposed changes to the HUD-1 fall short of making the 
GFE and HUD-1 correspond. Many lenders expressed the concern that the 
way the proposed HUD-1 forms are to be completed would require many 
changes with significant operational and technology impacts. A major 
lender stated that changes to the HUD-1 that consolidate disclosures 
raise questions about the lenders' ability to complete post-closing 
checks of finance charge calculations.
Mortgage Broker Representatives
    Mortgage brokers commented that the HUD-1 and GFE should mirror 
each other and promote clarity, understanding, and ease of use for 
consumers. However, because the proposed GFE, at four pages, is less 
user-friendly in their opinion than the current version, mirroring the 
HUD-1 after the proposed document will not make it easier for consumers 
to understand and use. In regard to specific items on the new HUD-1, 
one broker commented that specific lines such as the splitting of title 
insurance between lenders and owners would not work properly. In 
addition, the broker commented that the form of disclosure for closing 
services would interfere with ``title only'' agencies, and that the 
form of the HUD-1 would not leave room for an acknowledgment and 
certification.
Title and Closing Industry Representatives
    Commenters from the title industry said that the HUD-1 was still 
not easily comparable to the GFE. They also suggested that the title 
insurance disclosure requirements would conflict with the laws of some 
states. One title insurance company recommended that title and closing 
charges be kept separate.
    The title industry was opposed to the breakout of the title premium 
between the agent and the underwriter. It was suggested that this was a 
private business matter and that this breakout had no effect on the 
amount of the premium charged. Also, the breakout does not appear on 
the GFE, so it will not help the consumer to see it at closing.
    One escrow company objected to HUD referring to tax and insurance 
deposits as ``escrows'' and said that the proper term was ``impounds.'' 
Escrow companies also objected to HUD's reference to ``optional'' 
owner's title insurance and felt such reference might lead borrowers to 
forego needed protection. One suggested that the term ``non-required'' 
would be preferable, but pointed out that in some states owner's title 
insurance actually is required.
    One escrow company commented that HUD tested only its own forms, 
not the forms submitted by others, so there was no evidence that HUD's 
forms were better. This commenter went on to say that it does not 
believe that consumers in a real-world situation will use these forms 
in the intended manner.
    One closing attorney commented that the limiting of lender charges 
to line 801 will interfere with disclosure of such fees as an 
``underwriting fee,'' ``desk underwriting fee,'' ``table funding fee,'' 
and ``MERS fee.'' This attorney also pointed to other operational 
problems with the HUD-1 and suggested that the agent/underwriter split 
in the title insurance premium serves no useful purpose.
HUD Determination
    HUD continues to agree with the many commenters who pointed out the 
importance of comparability between the GFE and the HUD-1. Accordingly, 
to facilitate comparison between the HUD-1 and the GFE, each designated 
line in Section L on the final HUD-1 includes a reference to the 
relevant line from the GFE. Borrowers will be able to easily compare 
the designated line on the HUD-1 with the appropriate category on the 
GFE. Terminology on the HUD-1 has been modified as necessary to conform 
to the terminology of the GFE. For example, since Block 2 on the GFE is 
designated as ``your credit or charge (points) for the specific 
interest rate chosen'', Line 802 on the HUD-1 is also designated ``your 
credit or charge (points) for the specific interest rate chosen.'' 
Because Block 3 of the GFE ``Required services that we select'' will 
include multiple services such as appraisal, credit report, tax service 
and flood certification, each of these services are designated on 
separate lines of the HUD-1, with a notation that each is from GFE 
Block 3. The amount listed on the HUD-1 to be paid in advance for the 
mortgage insurance premium (included in the 900 series on the HUD-1) 
also contains a notation that the advance payment is from GFE Block 3. 
By noting the appropriate block from the GFE on each designated line of 
the HUD-1, borrowers will be able to easily compare the charges listed 
on the HUD-1 with the charges listed on the GFE.
    With respect to the 1100 series for Title Insurance, the final HUD-
1 includes designated lines for title services and lender's title 
insurance at line 1101, with a notation that this amount is from GFE 
Block 4. Unlike the proposed HUD-1, the final HUD-1 includes a 
designated line for the settlement or closing fee at line 1102, which 
is also from GFE Block 4. However, in order to limit unnecessary 
itemization of the component parts of the charge for title services, 
administrative and processing services related to title services must 
be included at line 1101 with the overall charge for title services. 
Because the final rule more clearly specifies the extent of itemization 
permitted, HUD has determined that it is no longer necessary to define 
``primary title services'' as a

[[Page 68229]]

particular set of title services. In addition, the final HUD-1 includes 
a designated line for owner's title insurance at line 1103, from GFE 
Block 5, but the reference to ``optional'' owner's title insurance was 
dropped from the proposed rule in response to comments. HUD has 
determined to retain the designated lines for the agent's portion of 
the total title insurance premium (Line 1107) and the underwriter's 
portion of the total title insurance premium (Line 1108). Although 
inclusion of the agent/underwriter split on the HUD-1 differs from the 
GFE, it is HUD's view that this breakdown will help consumers better 
understand their title charges.
    To further facilitate comparability between the GFE and HUD-1, HUD 
has determined to include a third page to the HUD-1 that includes a 
chart comparing the amounts listed for particular settlement costs on 
the GFE with the total costs listed for those charges on the HUD-1. For 
further discussion of this chart, see the discussion of the Closing 
Script issue in the next section.

B. Proposed Addendum to the HUD-1, the Closing Script

    Proposed Rule. Under the March 2008 proposed rule, an addendum 
would have been added to the HUD-1/1A that would have compared the loan 
terms and settlement charges estimated on the GFE to the final charges 
on the HUD-1 and would have described in detail the loan terms for the 
specific mortgage loan and related settlement information. The 
settlement agent would have been required to read the addendum aloud to 
the borrower at settlement and provide a copy of the addendum at 
settlement.
Comments
Consumer Representatives
    NCLC, while supportive of the closing script, requested that HUD 
``clarify that lenders are responsible for the accurate delivery of the 
closing script'' and ``clarify that settlement agents also are 
responsible to the borrower for the accurate delivery of the closing 
script.'' NCRC supported the Department's inclusion of the closing 
script. It commented that the script would ``instill integrity and 
prevent lenders from changing loan terms and costs between the 
application stage and loan closing.'' NCRC stated that the script would 
lead borrowers to have a ``clearer understanding of loan terms and 
conditions.''
    The California Reinvestment Coalition also supported the inclusion 
of the closing script, but expressed concern that the script would not 
be useful to borrowers who are not fluent in English and to hearing-
impaired borrowers. One consumer group expressed concern for 
circumstances when a borrower does not have an escrow account. In this 
event, the group expressed its hope that the closing script would 
provide an estimate of monthly payments for taxes and hazard insurance.
Industry Representatives
Title and Settlement Agents and Notaries
    Most comments from title and settlement agents opposed the concept 
of the closing script and expressed the concern that any requirement to 
read a closing script to the borrower and explain discrepancies between 
the GFE, the HUD-1 and the loan documents would constitute the 
``unauthorized practice of law.'' ALTA commented that in many states, 
settlement agents risk engaging in the unauthorized practice of law by 
reviewing loan documents and answering borrower questions about final 
loan terms. ALTA also stated that even in states where there are no 
concerns about the unauthorized practice of law, the proposed closing 
script requirements would add a significant additional amount of time 
to each closing, leading to a decrease in the number of closings a 
settlement agent can perform. According to ALTA, this will result in 
higher closing fees charged to the borrower and the seller. ALTA and 
others also raised concerns about how the closing script requirement 
would be implemented in those jurisdictions that do not conduct in-
person closings. These commenters also questioned how the closing 
script requirement would be implemented if the borrower's primary 
language was other than English.
    The National Notary Association and the American Society of 
Notaries (ASN) commented that notaries are not attorneys or actual 
settlement agents and do not have the authority to explain settlement 
terms to borrowers. The ASN also noted that ``[b]y statute, notaries 
are strictly prohibited from explaining documents or giving any advice 
that can be seen as unlicensed practice of law.'' Other notaries and 
signing agents questioned what they would be required to do if GFE 
tolerances were exceeded or the borrowers asked questions they were 
unable to answer. They were particularly concerned that the requirement 
of reading, explaining, and noting any inconsistencies such as a GFE 
tolerance violation would cause them to be replaced by settlement 
agents and attorneys better able to address borrowers' questions.
    Many settlement agents also stated that they were unable to address 
borrower questions since they were not privy to discussions and 
decisions between the loan originator and borrower. ALTA suggested that 
the lender should bear the duty of preparing and delivering the closing 
script to the borrower.
Lenders
    Lenders and their trade associations were generally opposed to the 
closing script requirement. Lenders commented that a mandatory closing 
script is unnecessary and will add new, substantive burdens to both 
lenders and settlement agents and ultimately increase closing costs. 
These commenters further asserted that the additional time involved in 
preparing the script and reading it at each closing will, over time, 
result in an increase in fees charged by lenders and settlement agents.
    MBA stated that the script would ``raise legal concerns, be too 
costly, provide little benefit to the consumer at closing and raise 
significant operational concerns.'' MBA also questioned HUD's authority 
to require an ``additional disclosure.''
    Bank of America commented that it agreed with HUD's goal of 
reducing consumer confusion and dissatisfaction with the closing 
process, but asserted that the closing script will not resolve those 
issues. Bank of America stated that the disclosure of loan terms by use 
of a closing script would detract from the information that is 
disclosed in the TILA disclosure and could create more confusion than 
clarity. This commenter also asserted that the script does not take 
into account the realities of different closing practices in different 
parts of the country.
    Peoples National Bank stated its belief that the script would add 
little to consumers' knowledge but would add significantly to the 
number and cost of documents the lender must produce: ``The fact that 
some predatory lenders have intentionally deceived consumers will not 
be cured by additional disclosures, whether on provided paper or read 
aloud.'' This commenter encouraged HUD to address issues related to 
deceptive practices through ``more effective investigation and 
enforcement.''
Mortgage Brokers
    NAMB expressed its opposition to the closing script because it 
would ``increase costs for consumers and lower the number of loans that 
can be closed

[[Page 68230]]

in a day.'' Further, NAMB estimated that the additional time and 
resources that would be consumed by implementing the closing script 
would average approximately $500 per loan, with ``no commensurate, or 
even discernible, benefit to consumers in light of disclosures already 
mandated.'' NAMB further questioned whether the script would bring 
mortgage brokers into an advisory role that might then trigger ``state 
regulatory and licensing requirements'' and liability.
Other Industry Representatives
    The Real Estate Service Providers Council (RESPRO) opposed the 
closing script concept and raised the concern that reading the script 
aloud in the presence of third parties raises privacy issues under the 
Gramm-Leach-Bliley Act, which prohibits the dissemination of personal 
information.
    HomeServices of America, Inc. (HomeServices) wrote that ``the 
proposed closing script requirement is problematic and should not be 
implemented [because it] will not fulfill the purpose for which it is 
intended because it comes too late in the process and would be too 
costly.'' HomeServices asserted that the closing script would be 
ineffectual because ``many buyers would be contractually obligated to 
conclude the real estate transaction regardless of any inconsistencies 
between the GFE, the HUD-1 Settlement Statement and other loan 
documents and shown in the closing script.''
Other Commenters
    The National Association of Insurance Commissioners, while 
expressing general support for the closing script, expressed its belief 
that borrowers would be better protected ``if the same information 
would be provided in writing earlier in the real estate transaction.'' 
The Office of the Illinois Attorney General supported the closing 
script and expressed the hope that by highlighting changes in terms and 
fees that have occurred since the GFE stage, ``(t)he script will 
discourage loan originators from changing key loan terms and imposing 
additional charges at closing, practices commonly seen in 
investigations conducted by our office.'' This commenter further 
recommended that the HUD-1 Settlement Statement and closing script 
addendum ``be required to be given to all borrowers 24 hours in 
advance, in addition to the requirement that the script be read aloud 
at closing.''
    CSBS, AARMR and NACCA, while supporting the closing script, 
expressed concern about the acknowledgment page, believing that the 
script may unintentionally release the settlement agent and/or loan 
originator from liability. CSBS stated ``[p]erhaps of greatest concern 
to state supervisors, however, is if a consumer signs an acknowledgment 
stating they have been presented with the closing script and understand 
all portions therein, the lender will effectively be granted safe 
harbor if accused of deceptive tactics.'' They recommended that the 
acknowledgment be changed to indicate merely that the borrower was 
``presented with the closing script,'' in order to avoid granting the 
lender safe harbor.
Federal Agency Commenters
    The FDIC commented that the closing script is helpful in making 
plain the negative financial consequences for a consumer of entering 
into an ``unconventional loan product such as an interest-only loan.'' 
However, the FDIC stated that one shortcoming of the script is that 
there is no information about what a consumer can do if the loan 
originator exceeds the permissible tolerance.
    The Office of Thrift Supervision (OTS) stated that while well 
intended, the proposed closing script requirement would be ``time 
consuming and may neither be viable nor appropriate in all cases.'' OTS 
suggested that if the final rule contains a closing script requirement, 
a written script may suffice.
    While expressing its general support of the script, the FTC staff 
suggested that HUD consider modifications to the current proposal. FTC 
staff recommended placing responsibility for creating the script on 
lenders, rather than settlement agents and stated that, at a minimum, 
lenders should have the responsibility of completing as much of the 
closing script as possible, to decrease the risk of inaccuracies. In 
addition, FTC staff recommended that HUD consider making the closing 
script and the comparison chart more consistent with the revised GFE 
and HUD-1 formats. FTC staff also recommended that the final rule 
address the responsibilities of settlement agents if there are 
inconsistencies between the loan terms and charges in the GFE and those 
in the HUD-1 and other loan documents and also recommended additional 
consumer testing of the script.
HUD Determination
    In response to comments received on the proposed rule and HUD's 
further review, HUD has eliminated the closing script requirement. 
However, HUD continues to believe that borrowers should be apprised of 
their loan terms at the closing and should also be apprised of any 
differences between the amounts stated on the GFE and the amounts 
listed on the HUD-1 settlement statement. Accordingly, to ensure that 
borrowers are made aware of the final settlement charges and the terms 
of their loan, and to help make certain that borrowers get the 
settlement charges and loan terms to which they agreed, HUD is 
requiring an additional page on the HUD-1/1A settlement statement that 
sets forth a comparison between the charges listed on the GFE and the 
charges listed on the HUD-1/1A, and summarizes the final loan terms of 
the borrower's loan.
    By eliminating the closing script, as proposed, and including 
information about the loan on the additional page of the HUD-1/1A 
Settlement Statement, borrowers will receive the essential information 
that was included in the proposed closing script while eliminating 
potential operational challenges posed by the proposed closing script.
    The instructions for completing the HUD-1/1A settlement statement 
provide that the loan originator shall transmit sufficient information 
to the closing agent to allow the closing agent to prepare the HUD-1/
1A, including the new last page. The first half of the new page 
includes a comparison chart that sets forth the settlement charges from 
the GFE and the settlement charges from the HUD-1/1A to allow the 
borrower to easily compare whether the settlement charges exceed the 
charges stated on the GFE. The second half of the new page sets forth 
the loan terms for the loan received at settlement in a format that 
reflects the summary of loan terms on the first page of the GFE, but 
with additional related information that would be available at closing. 
By presenting the comparison chart and the loan terms on the new page 
of the HUD-1, the borrower will be made aware of any changes to the 
settlement charges or loan terms and be able to confirm those changes.

V. Permissibility of Average Cost Pricing and Negotiated Discounts--
Discussion of Public Comments

A. Overview and Definition of ``Thing of Value''

    Proposed Rule. The March 2008 proposed rule would recognize pricing 
techniques that result in greater competition and lower costs to 
consumers, specifically average cost pricing and some discounts among 
settlement service providers, including volume based discounts. The 
rule

[[Page 68231]]

proposed to amend 24 CFR 3500.8 and would have explained that charges 
for third party services may be calculated using average cost pricing 
mechanisms based on appropriate methods established by HUD. These 
mechanisms would also have accommodated volume based discounts. The 
proposed rule would have allowed loan originators to disclose on the 
HUD-1 an average cost price in accordance with one of several specific 
methods. The proposed rule also would have amended 24 CFR 3500.14(d) 
and the definition of ``thing of value'' to clarify that it would be 
permissible for settlement service providers to negotiate discounts in 
the prices for settlement services, so long as the borrower is not 
charged more than the discounted price.
Comments
Consumer Representatives
    NCLC and CRL supported volume based discounts so long as the 
discounts were passed along to the consumer. However, CRL expressed 
concern that discounts may lead originators to steer consumers to 
certain settlement service providers, thus limiting consumers' choice 
of servicers. Therefore CRL would support additional safeguards to 
ensure that volume based discounts in fact benefit the consumer.
Lender Representatives
    MBA commended the proposal to clarify the legality of volume based 
discounts, but said that it did not go far enough. MBA stated that 
negotiated discount arrangements for services and materials result in 
lower costs for consumers and are consistent with RESPA's purposes of 
lowering settlement costs. MBA stated, however, that by including a 
requirement that no more than the reduced price can be charged to the 
borrower, there will be little incentive for lenders to enter into 
discount arrangements. MBA stated that scrutiny to ensure that each and 
every dollar of discount is passed on to the consumer presents 
regulatory risks and will make the exception ``uninviting.'' MBA 
asserted that such a restriction is unnecessary, since market 
competition will result in the consumer receiving the benefit of the 
discounts. MBA also questioned the idea that discounts can be 
negotiated only by a settlement service provider, arguably excluding 
builders. MBA stated that such an approach could deprive consumers of 
negotiated discounts on house prices offered by lenders that have joint 
ventures and marketing agreements with builders.
    The ABA and the Independent Community Bankers of America (ICBA) 
expressed concern that volume discounts may put smaller market 
participants such as community banks at a disadvantage, since most 
discounts will be negotiated on a volume basis. According to these 
commenters, smaller banks, making fewer loans, will not be able to 
negotiate as many or as deep discounts as larger lenders. ABA also 
commented that lenders should be allowed to benefit as well from 
negotiated discounts by not being required to pass along the entire 
savings to the borrower, or there is little incentive for them to enter 
into such arrangements.
    CMC supported the proposal to clarify the legality of negotiated 
discounts and stated that the proposed change to the regulations would 
be most likely to lead to greater competition and lower overall prices 
in situations where the lender or other party negotiating the discount 
absorbs the cost of the negotiated service and does not pass on the 
cost to the borrower. CMC stated that a clarification that a negotiated 
discount would not constitute a thing of value in this situation would 
provide greater flexibility to negotiate lower prices. CMC urged HUD to 
clarify that the clarification should not be limited to discounts 
negotiated by settlement service providers, but should also apply to 
parties who may not be regarded as settlement service providers such as 
builders. In addition, CMC stated that HUD should allow the discounted 
price charged to the borrower to be calculated on an average cost price 
basis.
Other Commenters
    ALTA and other title industry commenters stated that allowing 
settlement service providers to negotiate volume based discounts would 
be anticompetitive and disproportionately harm small businesses. ALTA 
stated that the ability to negotiate volume discounts on the local 
services that are incidental to the issuance of a title policy (such as 
a title search) will disadvantage the small title insurance agency that 
does not have the resources to guaranty a stream of business to a third 
party or discount its own services when the services are performed in-
house. In addition, ALTA expressed concern that mortgage lenders and 
brokers will add to the anticompetitive effects by favoring affiliated 
title companies or those companies that can provide title related 
services on a nationwide basis. ALTA asserted that the Regulatory 
Impact Analysis of the proposed rule did not adequately address these 
issues.
    ALTA also noted that although the proposed rule would allow 
settlement service providers to offer negotiated volume discounts, such 
a provision is in direct contrast to many state title insurance laws 
that prohibit title insurance companies and agencies from discounting 
the title premium or offering a rebate on title insurance fees, 
especially in states with ``all-inclusive'' rates. Similarly, the 
National Association of Insurance Commissioners (NAIC) stated that 
volume based discounts would be a violation of several states anti-
rebating laws. NAIC expressed its concern that the rule could be found 
to preempt state laws to the contrary. It recommended that the 
provision be withdrawn or that HUD clarify that the volume based 
discounts and average cost pricing provisions are not intended to 
preempt state law.
    Representative Donald A. Manzullo of the U.S. House of 
Representatives expressed concern over volume based discounts, which he 
described as a ``thinly veiled attempt to reintroduce the concept of 
`bundling' services.'' The Congressman reiterated his previously stated 
concerns that the long term impact of volume discounts would eliminate 
competition and destroy small businesses. Rep. Manzullo stated that 
only large businesses have the resources necessary to determine the 
financial terms, negotiate for settlement services, or discount their 
own services. According to Rep. Manzullo, in order to compete, small 
businesses would be forced to reduce their prices and profit margins, 
driving many of them out of business. He stated that such an 
anticompetitive environment will allow large lenders to raise prices 
for settlement services.
Federal Agencies
    The FDIC stated that it supports the requirement in the proposed 
definition of ``thing of value'' that no more than the discounted price 
may be charged to a borrower and disclosed on the HUD-1 form. In 
contrast, FTC staff stated that while it supports the removal of 
restrictions against volume based discounts, it believes that the 
proposed requirement to pass along the entire discount to the consumer 
will likely limit incentives to negotiate such discounts. According to 
FTC staff, requiring that 100 percent of any negotiated discount be 
passed on to customers reduces incentives of firms to spend resources 
to negotiate such discounts. FTC stated that the proposed regulation 
also does not clarify how to account for the overhead costs associated 
with price negotiation activities.

[[Page 68232]]

    The Office of Advocacy of the Small Business Administration stated 
that pricing mechanisms such as volume based discounts potentially 
create an uneven playing field for small entities. This office 
reiterated concerns voiced by small businesses that volume based 
discounts will favor large settlement service providers at the expense 
of small business. According to the Office of Advocacy, some small 
entities may leave the market, which would ultimately result in a 
decrease in options and higher prices for consumers.
HUD Determination
    HUD remains committed to a RESPA regulatory scheme that fosters 
mortgage settlement pricing mechanisms, that, as stated in the preamble 
to the March 2008 proposed rule ``result in greater competition and 
lower costs to consumers'' (73 FR at 14050). Nevertheless, given the 
comments received on the proposed change to HUD's current regulatory 
definition of ``thing of value'' and the significant operational and 
other questions raised by the proposed change, HUD has decided to give 
further consideration beyond this rulemaking to a regulatory change 
that explicitly allows negotiated discounts, including volume based 
discounts, between loan originators and other settlement service 
providers and not to implement the proposed change at this time. HUD 
wants to ensure that any change will adequately protect consumers, 
while at the same time provide adequate market flexibility, and due 
consideration to small business concerns.
    It remains HUD's position, however, that discounts negotiated 
between loan originators and other settlement service providers, or by 
an individual settlement service provider on behalf of a borrower, 
where the discount is ultimately passed on to the borrower in full, is 
not, depending upon the specific circumstances of a particular 
transaction, a violation of Section 8 of RESPA. If the borrower fully 
benefits from the discount, these types of mechanisms that lower 
consumer costs are within RESPA's principal purposes.
    In addition to further rulemaking, HUD will consider other avenues 
for providing guidance on negotiated discounts, including through the 
issuance of statements of policy.

B. Methodology for Average Cost Pricing

    Proposed Rule. The March 2008 proposed rule would have permitted 
pricing techniques using average cost pricing. Under the proposed rule, 
settlement service providers who procure or who help consumers to 
obtain third party settlement services, would have been allowed to 
negotiate the pricing of those services by the third party provider. 
The proposed rule would have made clear that where average cost pricing 
is used, the evaluation of prices of third party services would focus 
on all of the loan originator's transactions together, rather than 
viewing each transaction separately. An individual borrower might be 
charged more or less than the actual amount paid for that service in an 
individual transaction, provided that borrowers are being charged no 
more than the average price actually received by third parties during 
the period in which the average price is computed.
    The proposed rule specified two methods that loan originators could 
use to calculate an average price for a particular settlement service. 
As set forth in the March 2008 proposed rule, the loan originator would 
designate a recent 6-month period as the ``averaging period'' for 
purposes of calculating the average price. The same average price would 
then have to be used in every transaction in that class of transactions 
for which a GFE is provided following the averaging period until a new 
averaging period is established. The average price would be calculated 
either as (1) the actual average price for the settlement service 
during the averaging period; or (2) a projected average under a tiered 
pricing contract, based on the number of transactions that actually 
closed during the recent averaging period. If a loan originator used 
one of these methods to calculate the average price for a settlement 
service, HUD would deem the loan originator to have complied with the 
requirements of the rule.
    HUD invited comments on its proposed methods for calculating 
average cost prices and on any alternative methods that should be 
permitted. Specifically, HUD invited comments on how to define ``class 
of transactions'' and noted as an example that ``class of 
transactions'' could be defined by loan type or loan-to-value ratio. 
HUD also invited suggestions on alternative average cost pricing 
methods that benefit consumers and are based on factors that would lead 
to charges to the consumer (and the disclosure of such charges) that 
are easily calculated, verified, and enforced, but difficult to 
manipulate in an abusive manner.
    The March 2008 proposed rule provided that with regard to any 
pricing method used by a settlement service provider, if a violation of 
Section 8 of RESPA is alleged and an investigation ensues, the burden 
would be on the targeted settlement service provider to demonstrate 
compliance with a permissible pricing method through the production of 
relevant records.
Comments
Consumer Representatives
    NCLC and CRL supported the concept of average cost pricing but 
expressed concern that the proposed rule used the terms ``average 
pricing'' and ``average cost pricing'' interchangeably. These 
commenters stated that ``average cost pricing'' must be based on the 
cost of the settlement service and established rate of return for the 
settlement service provider. They expressed concern that the proposed 
rule appeared to allow ``average pricing'' whereby an originator 
charges the consumer an average cost while paying the third party 
settlement provider a different amount for each consumer. According to 
these commenters, there is no reason that the originator should not 
charge the consumer the actual cost of the third party service and 
reflect such cost on the HUD-1.
    NCLC stated that the current description of acceptable methods for 
average cost pricing are inaccurate and should either be eliminated or 
revised to comport with true average cost pricing formulas. CRL stated 
that average cost pricing is inappropriate for certain costs that are 
partially dependent on loan amount, such as title insurance premiums, 
recording costs, and transfer taxes, since average cost pricing would 
disadvantage those consumers purchasing or refinancing less expensive 
homes.
Lender Representatives
    MBA supported the proposal to allow average cost pricing with some 
modifications and clarifications. MBA suggested, in addition to the 
approaches provided in the proposal, that the rule include another 
approach or approaches that would be less restrictive and facilitate 
entry into average cost pricing for other firms in order to benefit 
consumers. MBA recommended an approach whereby a firm would charge the 
average cost for a class of transactions over a prospective averaging 
period, during which all transactions in the class would be charged a 
projected average price. Under this approach, as long as the total 
amounts charged on transactions in the class do not exceed the amount 
paid to the service providers for such transactions by more than a 
small amount, the average price would be permissible.

[[Page 68233]]

    MBA also recommended that a lender should be given maximum latitude 
to define a ``class of transactions'' based on type of service, type of 
property, loan type and/or geographic region. According to MBA, the 
lender should also have latitude to define an ``average period'' and 
the ``average price'' as long as the approach is ``reasonable.'' MBA 
also recommended that the documentation requirements be revised to 
ensure that they are flexible and do not impede use of the provision by 
requiring unnecessary burdensome documentation.
    CMC supported the proposal to allow average cost pricing, and 
stated that such a provision could lead to flexible negotiations for 
settlement services, thereby increasing price competition and lowering 
costs to borrowers. However, CMC stated that unless such a proposal 
provides relief from liability under Section 8 of RESPA, there will be 
little incentive for loan originators or other settlement service 
providers to use average cost pricing. CMC also stated that placing the 
burden of demonstrating compliance on the settlement service provider 
is problematic. CMC stated that the two methods set forth in the 
proposed rule for calculating an average price leave open questions as 
to compliance and workability. According to CMC, since circumstances 
often change, the approach set forth in the proposal for determining 
the averaging period may not be practical.
    CMC recommended that a simpler method would be to let the provider 
who will charge the average cost define the class of transactions and a 
prospective averaging period during which all transactions in the class 
would be charged a projected average price. CMC also recommended that 
as long as the total amounts charged on transactions in the class do 
not exceed the amount paid to the service providers for such 
transactions by more than a small amount, such as by more than 10 
percent, the average price should be permissible. CMC recommended an 
averaging period of up to 18 months since many contracts are reviewed 
on an annual basis and there are seasonal variations in volume. With 
respect to how the class of transactions should be determined, CMC 
recommended that HUD not specify a set of factors for use in 
determining class of transactions, but rather, allow a settlement 
service provider to define the class in any reasonable manner. CMC also 
urged HUD to clarify that prices may be uniformly reduced at any point 
during the averaging period to ensure that the total costs charged on 
the transactions remain within the applicable tolerance.
    In addition, CMC urged HUD to clarify that average cost pricing may 
be used in situations where there is more than one settlement service 
provider. CMC stated that the exemption for average cost pricing will 
be of limited value unless such pricing is available when multiple 
providers are providing the same service and the fees charged by these 
providers vary. CMC also urged HUD to coordinate with the Federal 
Reserve Board regarding how average cost pricing affects the 
calculation of the finance charge for purposes of TILA. Finally, CMC 
recommended that HUD clarify that the average cost pricing provision is 
not limited to loan originators.
Other Commenters
    RESPRO expressed support for average cost pricing and recommended 
that the rule clarify that average cost pricing is not limited to loan 
originators. In addition, RESPRO stated that the proposed approaches 
for average cost pricing need clarification. For example, RESPRO 
suggested that HUD clarify what constitutes a ``recent'' 6-month period 
and also clarify whether a loan originator can divide up its service 
territory into two or more geographical areas and utilize these areas 
for averaging purposes.
    ALTA expressed support for the average cost pricing proposal and 
requested HUD to clarify that average cost pricing would be available 
for all settlement service providers. ALTA maintained that the proposed 
provision on average cost pricing should not have been included in the 
HUD-1 section of the RESPA regulations, but rather, should have been 
written so as to permit lenders and others to apply average cost 
pricing without running the risk of violating Section 8(b) of RESPA. 
Accordingly, ALTA urged HUD to clarify that average cost pricing is not 
a violation of Section 8(b). ALTA stated that if the rule would allow 
title and settlement companies to use the average cost price, 
particularly as such pricing relates to recording fees, express 
delivery charges, and other third party charges for which title 
companies must pay, consumers would benefit from the certainty the 
average cost provides, and that the threat of class action litigation 
for title and settlement companies with respect to recording fees would 
be removed.
    NAR stated that average cost pricing should be allowed for both 
borrowers and sellers, and should be extended to all settlement service 
providers. NAR stated that average cost pricing should be limited to 
small items such as courier fees and recording costs. According to NAR, 
if average cost pricing is allowed for larger items such as appraisals, 
the consumer will end up paying more for an ``average cost'' if, for 
example, the calculation includes a disproportionate number of 
expensive appraisals during a given 6-month period.
    CSBS, AARMR, and NACCA commented that the proposal to allow loan 
originators or settlement service providers to utilize average cost 
pricing would be difficult for regulators to enforce and recommended 
that the burden of proof of compliance be placed on the lender. These 
commenters stated that by allowing loan originators and providers to 
utilize this pricing mechanism, individual transaction costs could be 
manipulated and inflated. These commenters noted that the current 
regulations can be enforced by regulators, because actual prices can be 
determined.
Federal Agencies
    The FDIC expressed concern with the average cost pricing proposal 
on several grounds. First, the FDIC indicated that it is not aware of 
an appropriate means of evaluating whether overall consumer costs would 
decline as a result of average cost pricing. Second, the agency noted 
that even if some borrowers' settlement services costs are reduced 
under average cost pricing, other borrowers will pay more for a service 
than is warranted for their particular loan. Third, the FDIC stated 
that the proposal does not include controls to ensure fairness, such as 
whether the lender calculated the average costs appropriately.
    FTC staff stated that it supports average cost pricing but 
recommended that HUD consider eliminating restrictions on how average 
costs may be calculated. FTC staff stated that it supports removing 
barriers to average cost pricing because there is ``no economic 
justification for requiring that each consumer pay his or her unique 
marginal cost of receiving settlement services and because doing so 
will likely result in lower prices for consumers.'' FTC staff added 
that calculating and maintaining records of such individualized costs 
and prices adds additional accounting and recordkeeping costs to the 
transaction that are not required in other competitive markets. FTC 
staff asserted that by removing such costs, the market will be more 
efficient and the result will be lower prices for consumers.

[[Page 68234]]

HUD Determination
    Based on the comments received in response to the proposed rule, 
HUD has revised the average cost pricing provisions to provide more 
flexibility and greater clarity.
    Commenters representing some consumer interests opposed 
implementation of the proposed average cost pricing provision, 
recommending that HUD limit charges for third party services to the 
actual cost of providing those services, plus an established rate of 
return. While HUD appreciates these comments, the proposed average cost 
pricing provision was not intended to limit the amounts charged for 
settlement services in this fashion, but instead simply provided for an 
alternative means of calculating and disclosing settlement charges on 
the HUD-1 or HUD-1A settlement statements. In order to avoid similar 
confusion about the intent of this provision in the future, the final 
rule uses the term ``average charge'' in place of ``average cost 
pricing.'' The term ``average charge'' appropriately focuses on the 
amount disclosed on the settlement statement, rather than the 
underlying costs of providing a particular settlement service.
    The final rule also clarifies that an average charge may be used by 
any settlement service provider that obtains a service from a third 
party on behalf of a borrower or seller; the provision is not limited 
to loan originators. HUD has determined that benefits to consumers and 
the benefits of reduced recordkeeping requirements and pricing 
flexibility from this provision should not be limited to one group of 
settlement service providers. Any provider that is able to calculate an 
average charge for a service in accordance with this provision and that 
is able to meet the provision's recordkeeping requirements is permitted 
to use an average charge for that service.
    In addition to these clarifying changes, HUD has made several other 
significant changes to provide additional flexibility in calculating 
average charges. HUD has determined that its objective of providing a 
method that benefits consumers and results in charges that are easily 
calculated, verified, and enforced is best served by restricting the 
actual charges imposed on borrowers and sellers rather than by 
prescribing a particular method for calculating those charges.
    The final rule provides that an average charge may be used for any 
settlement service, provided that the total amounts received from 
borrowers for that service for a particular class of transactions do 
not exceed the total amounts paid to the providers of that service for 
that class of transactions. This approach leaves the method of 
determining the average charge to the discretion of the settlement 
service provider. However, the provider must ensure that the average 
charge used does not result in borrowers, in the aggregate, paying more 
for a particular settlement service than the aggregate price paid for 
obtaining that service from third parties. HUD has determined that this 
approach balances the settlement service provider's interest in 
flexibility in calculating an average charge with the borrower's 
interest in preventing excessive settlement charges. This approach is 
intended to promote greater efficiencies that ultimately lead to lower 
prices for consumers.
    The final rule provides that a settlement service provider may 
define a class of transactions based on the period of time, type of 
loan, and geographic area. For example, a settlement service provider 
might calculate an average charge for all purchase money mortgages in 
the States of Georgia and South Carolina in a specified period of time. 
Alternatively, a settlement service provider could establish the class 
of transactions in which it would use a single average charge broadly, 
e.g., all transactions it engages in for a period of time, regardless 
of loan type or location. The settlement service provider must 
recalculate the average charge at least every 6 months. In order to 
prevent selective use of an average charge, the final rule provides 
that if an average charge is used in any class of transactions defined 
by the settlement service provider, then that provider must use the 
same average charge for every transaction within that class.
    The final rule also prohibits the use of average charges for 
settlement services where the charge is based on the loan amount or the 
value of the property. Permitting average charges for those types of 
services would require borrowers in transactions with lower loan 
amounts and property values to subsidize the costs for borrowers with 
higher loan amounts and property values. HUD has determined that such 
subsidization is not in the interest of consumers. This prohibition 
applies to charges such as transfer taxes, daily interest charges, 
reserves or escrow, and all types of insurance, including mortgage 
insurance, title insurance, and hazard insurance.
    The final rule maintains the proposed recordkeeping requirements, 
to ensure that average charges are calculated appropriately and that 
regulators and borrowers are able to determine the basis on which the 
average charge was determined. Any settlement service provider that 
uses an average charge for a particular service must maintain all 
documents that were used to calculate the average charge for at least 
three years after any settlement in which the average charge was used.

VI. Prohibition Against Requiring the Use of Affiliates--Discussion of 
Public Comments

    Proposed Rule. Under the March 2008 proposed rule, the current 
definition of ``required use'' in 24 CFR 3500.2 would be changed so 
that consumers would be more likely to shop for the homes and home 
features, and the loans and settlement services, that are best for 
them, free from the influence of deceptive referral arrangements. 
Through this proposed change, HUD sought to establish that in a real 
estate transaction covered by RESPA, incentives that consumers may want 
to accept and disincentives that consumers may want to avoid should be 
analyzed similarly for compliance with RESPA.
    The proposed change would have made clear that HUD views economic 
disincentives that a consumer can avoid only by purchasing a settlement 
service from particular providers, or from businesses to which the 
consumer has been referred, to be potentially as problematic under 
RESPA as are economic incentives that are contingent on the consumer's 
choice of a particular settlement service provider. The modifications 
in the proposed rule, however, were not intended to prevent discounts 
that are beneficial to consumers. The proposed definition stated that 
the offering by a settlement service provider of an optional package or 
combination of bona fide settlement services to a borrower at a total 
price lower than the sum of the prices of the individual settlement 
services would not constitute a ``required use.''
    The proposed revision to the ``required use'' definition would have 
continued to apply in two sections of the regulations: The affiliated 
business exemption in 24 CFR 3500.15, and the prohibition on the seller 
requiring the buyer to purchase title insurance from a particular 
company in Sec.  3500.16. However, in light of the other changes that 
would have been made by the proposed rule, the term ``required use'' 
would no longer have applied as it does currently in Sec.  3500.7(e).

[[Page 68235]]

Comments
Consumer Representatives
    NCLC stated that the proposed change to the ``required use'' 
definition does not go far enough to protect consumers. NCLC stated 
that the settlement services to obtain a home loan are only a small 
part of the costs of the loan. According to NCLC, the interest rate, 
the term of the loan, and whether a prepayment penalty is permitted, or 
a balloon payment is required, are all more important elements of the 
costs of the home loan than are the costs of settlement services. NCLC 
stated that ``(i)t does not make sense for the settlement services to 
be capped in return for a required use, while the more critical 
components of the costs of the loan are not limited, especially where 
the service itself could be discounted while the loan terms are 
increased.'' NCLC proposed to define ``required use'' to include the 
total cost of the loan in addition to the total of settlement services. 
CRL commended HUD's efforts in this area and agreed with NCLC that the 
definition of ``required use'' should include the total cost of the 
loan in addition to the cost of total settlement services.
    The California Reinvestment Coalition supported the proposed change 
to the definition of ``required use'' and stated that the proposed 
change will ``benefit the borrower by leveling the field.''
Industry Representatives
    Generally, lenders expressed opposition to the proposed change to 
the definition of ``required use'' on the grounds that the proposal is 
difficult to understand, is overbroad, and would eliminate the ability 
of builders and others to offer legitimate consumer discounts. MBA 
stated that it would be sufficient for HUD to indicate that under its 
current rules HUD may scrutinize discounts to assure that they are bona 
fide, rather than risking depriving borrowers of discounts altogether.
    The ABA stated that the proposed change to the ``required'' use 
definition is ``flawed and unreasonable'' because HUD cited only 
anecdotal evidence that incentives have been abused by some companies 
to steer customers to affiliated vendors with high prices and inferior 
service, but offered ``no empirical evidence to support this 
assertion.'' The ABA also stated that the proposal runs counter to the 
plain meaning of the words in the statute because defining ``required 
use'' to mean any incentive offered to use an affiliated company 
contradicts the unambiguous meaning of the statutory word ``required.'' 
It stated that HUD should not confuse legitimate incentive arrangements 
among affiliated entities with undue influence or required use of a 
product or service.
    NAMB, the Maryland Association of Mortgage Brokers (MAMB), and the 
Idaho Association of Mortgage Brokers (IAMB) expressed support for the 
proposed change in the definition of ``required use.'' NAMB stated that 
the proposed revision should resolve the problems with tying and 
required use. NAMB recommended that the new definition avoid setting a 
threshold higher than zero for determining what constitutes an economic 
incentive or disincentive. NAMB, MAMB, and IAMB all stated that the 
threshold for determining incentives and disincentives should be ``any 
thing of value.''
    Builders and builder-affiliated mortgage companies opposed the 
proposed change to the ``required use'' definition. CTX Mortgage 
Company asserted that the proposed change would ``provide a significant 
road block for future customers to benefit from the streamlined 
mortgage and title services that Centex offers.'' The National 
Association of Home Builders (NAHB) asserted that the change would 
eliminate bona fide incentives, denying consumers significant savings 
in their home purchases. NAHB characterized HUD's examples of 
``required use'' problems as ``ambiguous and incomplete.'' NAHB 
asserted that home builders with affiliated lenders have business 
incentives to ensure that home buyers are pleased with the experience 
of obtaining loans from their affiliated lenders. NAHB noted that 
studies of builder-affiliated mortgage companies conducted by an 
independent research firm have found that such firms have lower per-
loan operating costs as compared to outside lenders. According to NAHB, 
while the savings from these economies and the other affiliate benefits 
are difficult to quantify, they are significant and are passed along to 
consumers in the form of incentives for use of a builder affiliate. 
NAHB stated that home builders in general do not increase the selling 
price of homes to offset these incentives and asserted that the vast 
majority of builders who provide incentives for buyer use of affiliates 
do so in a responsible manner that brings substantial benefits to 
consumers. NAHB and other commenters also suggested alternative 
language to the proposed definition to ensure that consumers are 
presented with the option to select an incentive that is bona fide.
    RESPRO objected to the proposed change to ``required use'' and 
stated that it would ``prohibit many consumer incentives offered by 
home builders and real estate brokers in today's marketplace that 
provide consumers with lower costs and/or better service; is based on 
unsubstantiated and anecdotal evidence about alleged abuses; attempts 
to address violations that already are prohibited under RESPA, and is 
based on an inaccurate reading of anti-trust laws.'' RESPRO asserted 
that consumer incentives are offered to ensure that sales transactions 
close as quickly and as efficiently as possible. RESPRO recommended 
that the current definition of ``required use'' be retained.
    NAR opposed the proposed change and stated that it would have at 
least two unintended consequences. According to NAR, the rule 
authorizes discounts only on the prices of the recommended provider and 
this would limit the kind of non-price/services promotions that joint 
venture owners currently and permissibly offer to promote affiliates. 
NAR noted that real estate agents and brokers offer a variety of 
inducements to clients to promote their services, such as by offering a 
gift certificate to a local business or a free home inspection. NAR 
indicated that it does not believe that HUD intended to eliminate a 
practice which benefits consumers. In addition, according to NAR, the 
proposal would allow a discounted combination of settlement services 
only to a borrower, and NAR believes that sellers should not be 
precluded from receiving discounts as incentives as sellers often pay 
the majority of settlement costs in a real estate transaction.
Other Commenters
    The Laborers' International Union of North America (LIUNA) 
supported the proposed change to the ``required use'' definition, 
stating that it ``will promote more comparison shopping by borrowers 
and achieve HUD's intended goal of protecting consumers from 
unnecessarily high settlement costs.''
    LIUNA further stated that the ``cost to the builders of incentives 
has already been built into the sales price, so that it is not a true 
discount, but a penalty for using another company.'' According to 
LIUNA, its research indicates that the effect of incentives ``dissuade 
customers from comparison shopping for lenders.'' Rather, ``customers 
are steered to loans that are very often more expensive, despite the 
incentives.'' LIUNA asserted that builders have improperly used 
``related business relationships at the expense of consumers'' that 
``resulted in higher costs for homebuyers * * * and have played a large 
part in creating the current housing crisis.'' LIUNA

[[Page 68236]]

provided statistics indicating that in February 2006, the average rate 
for a 30-year fixed-rate mortgage was 6.25 percent. In contrast, LIUNA 
noted that although the main benefit of an ARM is that it has a lower 
starting interest rate than the equivalent fixed-rate loan, 
approximately half of the mortgages made by certain builders in 
February 2006 were ARMs that had starting rates of 6.25 percent or 
higher. LIUNA stated that builders ``have an incentive to sell their 
inventory at the highest possible price, and in-house mortgage units 
provide the financing to make it possible. There is evidence that 
during the housing boom in 2004-2006 builders were only able to sell 
homes at such inflated prices because of the collaboration with their 
mortgage subsidiary and an affiliated appraisal company. This resulted 
in large numbers of homeowners who were ``underwater,'' owing more than 
the value of their home, from day one.''
    CSBS, AARMR, and NACCA supported the proposed change to the 
``required use'' definition. However, these commenters recommended that 
the definition of ``required use'' be expanded to incorporate 
situations where the originator fails to give a required Affiliated 
Business Arrangement disclosure, or provides a misleading disclosure 
that facilitates steering of the borrower to an affiliate. According to 
these commenters, absent information necessary to make the best 
decision, the borrower has effectively been required to use a 
particular provider.
    The FTC staff recommended that HUD reconsider the proposed change 
to the definition of required use. The FTC staff stated that the 
expanded definition could deprive customers of the lower prices that 
can result from bundling related services.
HUD Determination
    After reviewing comments about HUD's proposal to change the 
definition of ``required use'' and re-examining aspects of the proposed 
revised definition, HUD has determined to retain the concepts in the 
definition of ``required use'' set forth in the proposed rule, but with 
some revisions that better reflect HUD's intent in applying the 
definition. The new definition makes it clear that economic 
disincentives that are used to improperly influence a consumer's 
choices are as problematic under RESPA as are incentives that are not 
true discounts. The revisions made in the definition subsequent to the 
proposed rule clarify how the definition will apply in the context of 
the affiliated business exemption under Section 8(c) of RESPA and Sec.  
3500.15 of HUD's regulations, and similarly frames the definition to 
apply to ``persons'' rather than only ``borrowers.''
    The change to the definition of ``required use'' will not eliminate 
the ability of anyone to offer legitimate consumer discounts. HUD does 
not interpret RESPA as preventing a settlement service provider or 
anyone else from offering a discount or other thing of value directly 
to the consumer. However, RESPA and this final rule limit tying such a 
discount to the use of an affiliated settlement service provider. HUD 
believes that consumers will utilize affiliated and preferred 
businesses if the costs of using those businesses are lower than the 
costs associated with similar services from other providers. Similarly 
to the proposed rule, the final rule continues to provide that 
settlement service providers can offer `` a combination of bona fide 
settlement services at a total price (net of the value of the 
associated discount, rebate, or other economic incentive) lower than 
the sum of the market prices of the individual settlement services and 
will not be found to have required the use of the settlement service 
providers as long as: (1) The use of any such combination is optional 
to the purchaser; and (2) the lower price for the combination is not 
made up by higher costs elsewhere in the settlement process.''

VII. Technical Amendments

Proposed Rule

    The March 2008 proposed rule included several changes to HUD's 
regulations to reflect current statutory provisions. First, the 
proposed rule revised the mortgage servicing disclosure requirements in 
24 CFR 3500.21 to be consistent with section 2103 of the Economic 
Growth and Regulatory Paperwork Reduction Act of 1996 (Title II of the 
Omnibus Consolidated Appropriations Act, 1997) (Pub. L. 104-208) and 
sought public comment on whether the mortgage servicing disclosure 
should be included as part of the GFE.
    Second, the proposed rule eliminated outdated provisions regarding 
the phase-in period for aggregate accounting for escrow accounts in 24 
CFR 3500.17. The phase-in period ended October 27, 1997. Eliminating 
those provisions of the codified RESPA regulations that are no longer 
applicable to the home settlement process simplifies and clarifies the 
rules for escrow accounts.
    Finally, the March 2008 proposed rule would add a new Sec.  3500.23 
to make clear that the electronic disclosures permitted pursuant to the 
Electronic Signatures in Global and National Commerce Act (ESIGN) (15 
U.S.C. 7001-7031) apply to all disclosures provided for in HUD's RESPA 
regulations.
Comments
    Almost all of the comments that addressed the proposed technical 
changes to the rule expressed support for these changes. Several 
lenders and trade groups representing lenders and mortgage brokers 
commented favorably on the changes that conform the transfer of 
servicing disclosure regulations to the revised statutory requirements. 
However, lenders and their trade groups were generally opposed to 
including the transfer of servicing disclosure on the revised GFE.
    Several groups representing consumer interests commented on the 
transfer of servicing regulation, and strongly supported expanding the 
transfer of servicing regulations beyond first lien mortgage loans. 
These groups indicated that the TILA regulations, which HUD cited as 
the basis for excluding subordinate lien mortgage loans from the 
transfer of servicing disclosure requirements, do not provide 
equivalent protections, and that the transfer of servicing requirements 
should therefore be expanded to cover all federally related mortgage 
loans. Consumer groups also recommended changes to the language used in 
the proposed revision to the transfer of servicing disclosure. The 
consumer group commenters indicated that the disclosure's description 
of the servicing function is unrealistically narrow, and that it should 
be revised to state that:

    Servicers are responsible for account maintenance activities 
such as sending monthly statements, accepting payments, keeping 
track of account balances, handling escrow accounts, engaging in 
loss mitigation and prosecuting foreclosures. They handle interest 
rate adjustments on adjustable rate mortgages, collect and report 
information to national credit bureaus, and remit monies to the 
owners of the loan.

    Very few comments were received on the proposed revisions to the 
escrow accounting regulations, or on the proposed clarification 
regarding the applicability of ESIGN to RESPA. The comments that were 
received on these changes were primarily from trade groups representing 
lenders and mortgage brokers, and the comments were limited to general 
expressions of support for the changes proposed.
HUD Determination
    Based on the comments received, HUD has determined that the changes 
to

[[Page 68237]]

the transfer of servicing requirements should be included in the final 
rule. These changes conform HUD's regulations to the revised statutory 
requirements, and resolve any questions about whether lenders must 
still follow the outdated provisions. No commenters raised objections 
to the changes proposed; the most substantial comments received were 
from consumer groups that advocated expanding the coverage of the 
transfer of servicing requirements. In light of the numerous comments 
from lenders and those trade groups representing lenders that opposed 
inclusion of the transfer of servicing disclosure on the GFE, HUD has 
determined not to include that disclosure on the revised GFE at this 
time. However, HUD is not expanding the coverage of the transfer of 
servicing regulations at this time. While HUD may consider doing so at 
a later time, significantly expanding the coverage of the transfer of 
servicing regulations would be beyond the scope of the technical 
amendments in the proposed rule and would likely require additional 
comment from affected parties.
    The language on the revised model transfer of servicing disclosure 
form has been modified somewhat from the proposed rule in light of the 
comments received. The transfer of servicing disclosure form is not 
intended to provide a comprehensive list of all functions that might be 
performed by any servicer, but HUD agrees with those commenters that 
suggested that the description of the functions performed by servicers 
was too narrow. Accordingly, HUD has revised that sentence on the form 
to provide a more accurate description of the functions performed by 
loan servicers.
    HUD has also determined that the proposed elimination of the phase-
in period for aggregate accounting for escrow accounts should be 
included in the final rule. This change simply eliminates a regulatory 
provision that is no longer applicable. The only significant comments 
HUD received on this provision were in favor of making the change 
proposed.
    Finally, HUD has determined that the new provision clarifying the 
applicability of ESIGN to RESPA should also be included in the final 
rule. While the electronic methods of disclosure permitted pursuant to 
ESIGN could be used for disclosures required under RESPA, even in the 
absence of this regulatory clarification, this provision will allay any 
doubts that industry participants may have had about the permissibility 
of electronic disclosures under RESPA. The only significant comments 
HUD received on this provision were in favor of making the proposed 
change.

VIII. Regulatory Flexibility Act--Comments of the Office of Advocacy of 
the Small Business Administration

    As part of its statutory duty to review an agency's compliance with 
the Regulatory Flexibility Act (RFA), as amended by the Small Business 
Regulatory Enforcement Fairness Act (SBREFA), the Office of Advocacy of 
the U.S. Small Business Administration (Advocacy) reviewed the proposed 
rule and submitted its comments to the Department. In its letter of 
June 11, 2008, Advocacy expressed the concern that HUD may have 
underestimated the economic impact of the proposed rule on small 
entities. Advocacy indicated that it had met with a wide range of small 
entity representatives from different sectors of the industry and 
several of these representatives indicated that the proposed rule would 
have a greater economic impact than the $548 million in annual 
recurring compliance costs for small businesses as stated by HUD in the 
Economic Analysis accompanying the proposal. Accordingly, Advocacy 
advised HUD to document the additional costs to small businesses.
    In addition, Advocacy expressed the following concerns about the 
proposed rule: (1) The proposed rule's tolerance levels may be 
problematic for loan originators because some settlement costs can 
change on a daily basis, making the loan originator responsible for the 
actions of a third party beyond its control; (2) the proposed rule's 
requirement that a closing script be read to the borrower at the 
closing will present problems for small entities; (3) the proposal to 
allow volume discounts will favor large settlement service providers 
and loan originators at the expense of small businesses; and (4) the 
proposed rule's characterization of YSP as a credit to the borrower 
will put mortgage brokers at a competitive disadvantage compared to 
lenders, and may create confusion among borrowers. Advocacy supported 
moving forward without the closing script requirement, the volume 
discount language, and the yield spread premium classification. In 
addition, Advocacy recommended that HUD clarify the provision on 
tolerances and encouraged HUD to provide a delay in the implementation 
date in the final rule to allow small businesses the opportunity to 
absorb the costs and comply with the new requirements.
    HUD carefully considered the comments provided by Advocacy and 
certain modifications have been made in the final rule that address 
Advocacy's concerns. For example, the Department has determined not to 
adopt the closing script requirement set forth in the proposed rule. In 
addition, the proposed rule language explicitly allowing negotiated 
discounts, including volume based discounts between loan originators 
and other settlement service providers, has not been included in the 
final rule. HUD also revised a number of provisions on tolerances and 
clarified the situations where a loan originator would no longer be 
bound by the tolerances.
    With respect to the characterization of YSP as a credit to the 
borrower, HUD has designed and tested the GFE form to enable borrowers 
to accurately determine the lowest cost loan. Testing of the GFE 
indicated no bias in the selection of loans with lowest settlement 
cost, between ``broker'' loans (YSP reported) and ``lender'' loans (no 
YSP reported).
    With respect to statements in the Economic Analysis for the RESPA 
proposed rule concerning cost impacts of the rule on small businesses, 
HUD recognizes that there will be one-time adjustment costs and 
recurring costs on small businesses. Once incurred, the adjustment 
costs will not be incurred again. Thus, combining recurring and 
adjustment costs would be an accurate measure for the burden of the 
rule during the first year only. The recurring costs per loan are 
equivalent for small and large businesses. The aggregate recurring 
compliance cost depends on loan volume and is not underestimated for 
small businesses relative to large businesses. Advocacy and some other 
commenters questioned aspects of the cost estimates of the rule, but 
did not provide alternative cost estimates supported by data. HUD 
carefully considered an alternative analysis prepared for NAR that was 
not based on new data. HUD accepted and implemented suggestions in this 
analysis to perform a sensitivity analysis of the ratio of applications 
per loan in its Final Regulatory Flexibility Analysis.
    With respect to Advocacy's recommendation that HUD allow a longer 
implementation period to mitigate the cost burden associated with the 
new requirements on small businesses, HUD has determined that a one-
year implementation period is sufficient to make the transition to the 
new requirements. Many commenters agreed. Instituting a longer 
implementation period for small businesses would significantly weaken 
the effective and orderly implementation of the new rule. Allowing 
small firms to operate under different rules would create confusion

[[Page 68238]]

in the closing of loans, especially in transactions that involve both 
large and small firms.

IX. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in this rule were 
submitted to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), and were 
assigned OMB control number 2502-0265. In accordance with the Paperwork 
Reduction Act, an agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information, unless the 
collection displays a currently valid OMB control number.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made at the proposed rule stage in accordance with HUD regulations 
at 24 CFR part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). That finding 
remains applicable to this final rule and is available for public 
inspection between the hours of 8:00 a.m. and 5:00 p.m. weekdays in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 
20410-0500. Due to security measures at the HUD Headquarters building, 
an advance appointment to review the finding must be scheduled by 
calling the Regulations Division at 202-402-3055 (this is not a toll-
free number). Individuals with speech or hearing impairments may access 
this number through TTY by calling the Federal Information Relay 
Service at 800-877-8339.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled ``Regulatory Planning and Review''). 
This rule was determined economically significant under the executive 
order.
    There is strong evidence of information asymmetry between mortgage 
originators and settlement service providers and consumers. This 
information asymmetry allows loan originators and settlement service 
providers to capture much of the consumer surplus in this market by 
charging different prices to similar consumers for similar products, a 
process economists call price discrimination. The RESPA disclosure 
statute is meant to address this information asymmetry, but the 
evidence shows that the current RESPA regulations have not provided 
consumers necessary information in a way they can use effectively.
    The final rule will create a more level-playing field through a 
more transparent and standard disclosure of loan details and settlement 
costs; tolerances on settlement charges leading to prices that 
consumers can rely on; and adding a comparison page to the HUD-1 that 
allows the consumer to compare the amounts listed for particular 
settlement costs on the GFE with the total costs listed for those 
charges on the HUD-1, and to double check the loan details at 
settlement. These changes will encourage comparison shopping by 
informed consumers, which will place a competitive pressure on market 
prices, and enable consumers to benefit.
    It is estimated that borrowers will save $8.35 billion annually in 
origination and settlement charges. This transfer to borrowers from 
price-discriminating producers constitutes 12.5 percent of total 
charges, and represents consumer savings of $668 per loan with a range 
between $500 and $700 per loan.
    The total one-time adjustment costs to the lending and settlement 
industry of the proposed GFE and HUD-1 are estimated to be $570 
million, or $46 per loan. Total recurring costs are estimated to be 
$918 million annually, or $74 per loan. Even if all of the adjustment 
and recurring costs of the rule were passed along to consumers, 
individual consumers would still enjoy substantial benefits. If all of 
the adjustment and recurrent costs are passed on to borrowers in the 
first year and no industry efficiency gains are passed to consumers, 
the net consumer savings for the average consumer in the first year 
would be $548 and $594 per loan every year afterwards.
    In addition to the private benefits, there are far reaching social 
benefits. The lower profitability of seeking out less-informed 
borrowers for less-competitive loans should lead to a reduction in this 
non-productive activity. If the decline in this activity represented 
one percent of current loan originator effort, this would result in 
$420 million in social surplus. Another social benefit of the rule is 
its contribution to sustainable homeownership. Consumers who better 
understand the details of their loans, and save money on their and 
settlement costs, are more likely to avoid risky loans, default, and 
foreclosure. There are substantial negative economic externalities of a 
foreclosure to neighboring properties and local governments, as well as 
private costs to the borrower and lender. The size of this social 
benefit would be in addition to the other benefits enumerated in the 
Regulatory Impact Analysis.
    The costs and benefits are discussed in more detail in the 
Regulatory Impact Analysis that accompanies this rule.
    Any changes made to the rule subsequent to its submission to OMB 
are identified in the docket file, which is available for public 
inspection in the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
10276, Washington, DC 20410-0500. The Economic Analysis prepared for 
this rule is also available for public inspection in the Regulations 
Division. Due to security measures at the HUD Headquarters building, an 
advance appointment to review these items must be scheduled by calling 
the Regulations Division at 202-402-3055 (this is not a toll-free 
number). Individuals with speech or hearing impairments may access this 
number through TTY by calling the Federal Information Relay Service at 
800-877-8339.

Federalism Impact

    This rule does not have federalism implications and does not impose 
substantial direct compliance costs on state and local governments or 
preempt State law within the meaning of Executive Order 13132 (entitled 
``Federalism'').

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this rule and determined that 
the rule would have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act. In accordance with section 603 of the Regulatory 
Flexibility Act, a Final Regulatory Flexibility Analysis (FRFA) has 
been prepared. The FRFA is presented in an Appendix to this final rule 
and is included as Chapter 6 in the Regulatory Impact Analysis prepared 
under Executive Order 12866.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) requires federal agencies to assess the effects of 
their regulatory actions on state, local, and tribal governments and on 
the private sector. This rule does not, within the meaning of the UMRA, 
impose any federal

[[Page 68239]]

mandates on any state, local, or tribal governments nor on the private 
sector.

Congressional Review of Final Rules

    This rule constitutes a ``major rule'' as defined in the 
Congressional Review Act (5 U.S.C. Chapter 8). This rule has a 60-day 
delayed effective date and will be submitted to the Congress in 
accordance with the requirements of the Congressional Review Act.

List of Subjects

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians-lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy

24 CFR Part 3500

    Consumer protection, Condominiums, Housing, Mortgagees, Mortgage 
servicing, Reporting and recordkeeping requirements.


0
For the reasons set out in the preamble, parts 203 and 3500 of title 24 
of the Code of Federal Regulations are amended as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation shall continue to read as follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42 
U.S.C. 3535(d).


0
2. In Sec.  203.27, paragraph (a)(2) is revised to read as follows:


Sec.  203.27  Charges, fees or discounts.

    (a) * * *
    (2) A charge to compensate the mortgagee for expenses incurred in 
originating and closing the loan, provided that the Commissioner may 
establish limitations on the amount of any such charge.

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

0
3. The authority citation shall continue to read as follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42 
U.S.C. 3535(d).


0
4. Section 3500.1 is revised to read as follows:


Sec.  3500.1  Designation and applicability.

    (a) Designation. This part may be referred to as Regulation X.
    (b) Applicability. The following sections, as revised by the final 
rule published on November 17, 2008, are applicable as follows:
    (1) The definition of Required use in Sec.  3500.2, Sec. Sec.  
3500.8(b), 3500.17, 3500.21, 3500.22, and 3500.23, and Appendices E and 
MS-1 are applicable commencing January 16, 2009.
    (2) Section 203.27, the definitions other than Required use in 
Sec.  3500.2, Sec.  3500.7, Sec. Sec.  3500.8(a) and(c), Sec.  3500.9, 
and Appendices A and C, are applicable commencing January 1, 2010.

0
5. In Sec.  3500.2, paragraph (b) is amended by revising the 
definitions of Application, Good faith estimate, Mortgage broker, and 
Required use, and by adding, in alphabetical order, the following new 
definitions of Balloon payment, Changed circumstances, Loan originator, 
Origination service, Prepayment penalty, Third party, Title service, 
and Tolerance, to read as follows:


Sec.  3500.2  Definitions.

* * * * *
    (b) * * *
    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.
    Balloon payment has the same meaning as ``balloon payment'' under 
Regulation Z (12 CFR part 226).
    Changed circumstances means: (1)(i) Acts of God, war, disaster, or 
other emergency;
    (ii) Information particular to the borrower or transaction that was 
relied on in providing the GFE and that changes or is found to be 
inaccurate after the GFE has been provided. This may include 
information about the credit quality of the borrower, the amount of the 
loan, the estimated value of the property, or any other information 
that was used in providing the GFE;
    (iii) New information particular to the borrower or transaction 
that was not relied on in providing the GFE; or
    (iv) Other circumstances that are particular to the borrower or 
transaction, including boundary disputes, the need for flood insurance, 
or environmental problems.
    (2) Changed circumstances do not include:
    (i) 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 prior to providing the 
GFE, unless the information changes or is found to be inaccurate after 
the GFE has been provided; or
    (ii) Market price fluctuations by themselves.
* * * * *
    Good faith estimate or GFE means an estimate of settlement charges 
a borrower is likely to incur, as a dollar amount, and related loan 
information, based upon common practice and experience in the locality 
of the mortgaged property, as provided on the form prescribed in Sec.  
3500.7 and prepared in accordance with the Instructions in Appendix C 
to this part.
* * * * *
    Loan originator means a lender or mortgage broker.
* * * * *
    Mortgage broker means a person (not an employee of a lender) or 
entity that renders origination services and serves as an intermediary 
between a borrower and a lender in a transaction involving a federally 
related mortgage loan, including such a person or entity that closes 
the loan in its own name in a table funded transaction. A loan 
correspondent approved under 24 CFR 202.8 for Federal Housing 
Administration programs is a mortgage broker for purposes of this part.
* * * * *
    Origination service means any service involved in the creation of a 
mortgage loan, including but not limited to the taking of the loan 
application, loan processing, and the underwriting and funding of the 
loan, and the processing and administrative services required to 
perform these functions.
* * * * *
    Prepayment penalty has the same meaning as ``prepayment penalty'' 
under Regulation Z (12 CFR part 226).
* * * * *
    Required use means a situation in which a person's access to some 
distinct service, property, discount, rebate, or other economic 
incentive, or the person's ability to avoid an economic disincentive or 
penalty, is contingent upon the person using or failing to use a 
referred provider of settlement services. In order to qualify for the 
affiliated business exemption under Sec.  3500.15, a settlement service 
provider may offer a combination of bona fide settlement services at a 
total price (net of the value of the associated discount, rebate, or 
other economic incentive) lower than the sum of the market prices of 
the individual settlement services

[[Page 68240]]

and will not be found to have required the use of the settlement 
service providers as long as: (1) The use of any such combination is 
optional to the purchaser; and (2) the lower price for the combination 
is not made up by higher costs elsewhere in the settlement process.
* * * * *
    Third party means a settlement service provider other than a loan 
originator.
* * * * *
    Title service means any service involved in the provision of title 
insurance (lender's or owner's policy), including but not limited to: 
title examination and evaluation; preparation and issuance of title 
commitment; clearance of underwriting objections; preparation and 
issuance of a title insurance policy or policies; and the processing 
and administrative services required to perform these functions. The 
term also includes the service of conducting a settlement.
* * * * *
    Tolerance means the maximum amount by which the charge for a 
category or categories of settlement costs may exceed the amount of the 
estimate for such category or categories on a GFE.

0
6. In Sec.  3500.7, paragraphs (a) through (e) are revised; paragraph 
(f) is redesignated as paragraph (h); and new paragraphs (f), (g), and 
(i) are added, as follows:


Sec.  3500.7  Good faith estimate or GFE.

    (a) Lender to provide. (1) Except as otherwise provided in 
paragraphs (a), (b), or (h) of this section, 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. In the case of dealer loans, the lender must either provide the 
GFE or ensure that the dealer provides the GFE.
    (2) The lender must provide the GFE to the loan applicant by hand 
delivery, by placing it in the mail, or, if the applicant agrees, by 
fax, e-mail, or other electronic means.
    (3) The lender is not required to provide the applicant with a GFE 
if, before the end of the 3-business-day period:
    (i) The lender denies the application; or
    (ii) The applicant withdraws the application.
    (4) The lender is not permitted to charge, as a condition for 
providing a GFE, any fee for an appraisal, inspection, or other similar 
settlement service. The lender may, at its option, charge a fee limited 
to the cost of a credit report. The lender may not charge additional 
fees until after the applicant has received the GFE. If the GFE is 
mailed to the applicant, the applicant is considered to have received 
the GFE 3 calendar days after it is mailed, not including Sundays and 
the legal public holidays specified in 5 U.S.C. 6103(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.
    (b) Mortgage broker to provide. (1) Except as otherwise provided in 
paragraphs (a), (b), or (h) of this section, either the lender or the 
mortgage broker must provide a GFE not later than 3 business days after 
a mortgage broker receives either an application or information 
sufficient to complete an application. The lender is responsible for 
ascertaining whether the GFE has been provided. If the mortgage broker 
has provided a GFE, the lender is not required to provide an additional 
GFE.
    (2) The mortgage broker must provide the GFE by hand delivery, by 
placing it in the mail, or, if the applicant agrees, by fax, email, or 
other electronic means.
    (3) The mortgage broker is not required to provide the applicant 
with a GFE if, before the end of the 3-business-day period:
    (i) The mortgage broker or lender denies the application; or
    (ii) The applicant withdraws the application.
    (4) The mortgage broker is not permitted to charge, as a condition 
for providing a GFE, any fee for an appraisal, inspection, or other 
similar settlement service. The mortgage broker may, at its option, 
charge a fee limited to the cost of a credit report. The mortgage 
broker may not charge additional fees until after the applicant has 
received the GFE. If the GFE is mailed to the applicant, the applicant 
is considered to have received the GFE 3 calendar days after it is 
mailed, not including Sundays and the legal public holidays specified 
in 5 U.S.C. 6103(a).
    (5) The mortgage broker may at any time collect from the loan 
applicant any information that it requires in addition to the required 
application information. However, the mortgage broker 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.
    (c) Availability of GFE terms. Except as provided in this 
paragraph, the estimate of the charges and terms for all settlement 
services must be available for at least 10 business days from when the 
GFE is provided, but it may remain available longer, if the loan 
originator extends the period of availability. The estimate for the 
following charges are excepted from this requirement: the interest 
rate, charges and terms dependent upon the interest rate, which 
includes the charge or credit for the interest rate chosen, the 
adjusted origination charges, and per diem interest.
    (d) Content and form of GFE. The GFE form is set out in Appendix C 
to this part. The loan originator must prepare the GFE in accordance 
with the requirements of this section and the Instructions in Appendix 
C to this part. The instructions in Appendix C to this part allow for 
flexibility in the preparation and distribution of the GFE in hard copy 
and electronic format.
    (e) Tolerances for amounts included on GFE. (1) Except as provided 
in paragraph (f) of this section, the actual charges at settlement may 
not exceed the amounts included on the GFE for:
    (i) The origination charge;
    (ii) While the borrower's interest rate is locked, the credit or 
charge for the interest rate chosen;
    (iii) While the borrower's interest rate is locked, the adjusted 
origination charge; and
    (iv) Transfer taxes.
    (2) Except as provided in paragraph (f) below, the sum of the 
charges at settlement for the following services may not be greater 
than 10 percent above the sum of the amounts included on the GFE:
    (i) Lender-required settlement services, where the lender selects 
the third party settlement service provider;
    (ii) Lender-required services, title services and required title 
insurance, and owner's title insurance, when the borrower uses a 
settlement service provider identified by the loan originator; and
    (iii) Government recording charges.
    (3) The amounts charged for all other settlement services included 
on the GFE may change at settlement.
    (f) Binding GFE. The loan originator is bound, within the 
tolerances provided in paragraph (e) of this section, to the settlement 
charges and terms listed on the GFE provided to the borrower, unless a 
new GFE is provided prior to settlement consistent with this paragraph 
(f). If a loan originator provides a revised GFE consistent with this 
paragraph, the loan originator must document the reason that a new GFE

[[Page 68241]]

was provided. Loan originators must retain documentation of any reasons 
for providing a new GFE for no less than 3 years after settlement.
    (1) Changed circumstances affecting settlement costs. If changed 
circumstances result in increased costs for any settlement services 
such that the charges at settlement would exceed the tolerances for 
those charges, the loan originator may provide a revised GFE to the 
borrower. If a revised GFE is to be provided, the loan originator must 
do so within 3 business days of receiving information sufficient to 
establish changed circumstances. The revised GFE may increase charges 
for services listed on the GFE only to the extent that the changed 
circumstances actually resulted in higher charges.
    (2) Changed circumstances affecting loan. If changed circumstances 
result in a change in the borrower's eligibility for the specific loan 
terms identified in the GFE, the loan originator may provide a revised 
GFE to the borrower. If a revised GFE is to be provided, the loan 
originator must do so within 3 business days of receiving information 
sufficient to establish changed circumstances.
    (3) Borrower-requested changes. If a borrower requests changes to 
the mortgage loan identified in the GFE that change the settlement 
charges or the terms of the loan, the loan originator may provide a 
revised GFE to the borrower. If a revised GFE is to be provided, the 
loan originator must do so within 3 business days of the borrower's 
request.
    (4) Expiration of original GFE. If a borrower does not express an 
intent to continue with an application within 10 business days after 
the GFE is provided, or such longer time specified by the loan 
originator pursuant to paragraph (c) above, the loan originator is no 
longer bound by the GFE.
    (5) Interest rate dependent charges and terms. If the interest rate 
has not been locked by the borrower, or a locked interest rate has 
expired, the charge or credit for the interest rate chosen, the 
adjusted origination charges, per diem interest, and loan terms related 
to the interest rate may change. If the borrower later locks the 
interest rate, a new GFE must be provided showing the revised interest 
rate-dependent charges and terms. All other charges and terms must 
remain the same as on the original GFE, except as otherwise provided in 
paragraph (f) of this section.
    (6) New home purchases. In transactions involving new home 
purchases, where settlement is anticipated to occur more than 60 
calendar days from the time a GFE is provided, the loan originator may 
provide the GFE to the borrower with a clear and conspicuous disclosure 
stating that at any time up until 60 calendar days prior to closing, 
the loan originator may issue a revised GFE. If no such separate 
disclosure is provided, the loan originator cannot issue a revised GFE, 
except as otherwise provided in paragraph (f) of this section.
    (g) GFE is not a loan commitment. Nothing in this section shall be 
interpreted to require a loan originator to make a loan to a particular 
borrower. The loan originator is not required to provide a GFE if the 
loan originator does not have available a loan for which the borrower 
is eligible.
* * * * *
    (i) Violations of section 5 of RESPA (12 U.S.C. 2604). A loan 
originator that violates the requirements of this section shall be 
deemed to have violated section 5 of RESPA. If any charges at 
settlement exceed the charges listed on the GFE by more than the 
permitted tolerances, the loan originator may cure the tolerance 
violation by reimbursing to the borrower the amount by which the 
tolerance was exceeded, at settlement or within 30 calendar days after 
settlement. A borrower will be deemed to have received timely 
reimbursement if the loan originator delivers or places the payment in 
the mail within 30 calendar days after settlement.

0
7. Section 3500.8 is revised to read as follows:


Sec.  3500.8  Use of HUD-1 or HUD-1A settlement statements.

    (a) Use by settlement agent. The settlement agent shall use the 
HUD-1 settlement statement in every settlement involving a federally 
related mortgage loan in which there is a borrower and a seller. For 
transactions in which there is a borrower and no seller, such as 
refinancing loans or subordinate lien loans, the HUD-1 may be utilized 
by using the borrower's side of the HUD-1 statement. Alternatively, the 
form HUD-1A may be used for these transactions. The HUD-1 or HUD-1A may 
be modified as permitted under this part. Either the HUD-1 or the HUD-
1A, as appropriate, shall be used for every RESPA-covered transaction, 
unless its use is specifically exempted. The use of the HUD-1 or HUD-1A 
is exempted for open-end lines of credit (home-equity plans) covered by 
the Truth in Lending Act and Regulation Z.
    (b) Charges to be stated. The settlement agent shall complete the 
HUD-1 or HUD-1A, in accordance with the instructions set forth in 
Appendix A to this part. The loan originator must transmit to the 
settlement agent all information necessary to complete the HUD-1 or 
HUD-1A.
    (1) In general. The settlement agent shall state the actual charges 
paid by the borrower and seller on the HUD-1, or by the borrower on the 
HUD-1A. The settlement agent must separately itemize each third party 
charge paid by the borrower and seller. All origination services 
performed by or on behalf of the loan originator must be included in 
the loan originator's own charge. Administrative and processing 
services related to title services must be included in the title 
underwriter's or title agent's own charge. The amount stated on the 
HUD-1 or HUD-1A for any itemized service cannot exceed the amount 
actually received by the settlement service provider for that itemized 
service, unless the charge is an average charge in accordance with 
paragraph (b)(2) of this section.
    (2) Use of average charge. (i) The average charge for a settlement 
service shall be no more than the average amount paid for a settlement 
service by one settlement service provider to another settlement 
service provider on behalf of borrowers and sellers for a particular 
class of transactions involving federally related mortgage loans. The 
total amounts paid by borrowers and sellers for a settlement service 
based on the use of an average charge may not exceed the total amounts 
paid to the providers of that service for the particular class of 
transactions.
    (ii) The settlement service provider shall define the particular 
class of transactions for purposes of calculating the average charge as 
all transactions involving federally related mortgage loans for:
    (A) A period of time as determined by the settlement service 
provider, but not less than 30 calendar days and not more than 6 
months;
    (B) A geographic area as determined by the settlement service 
provider; and
    (C) A type of loan as determined by the settlement service 
provider.
    (iii) A settlement service provider may use an average charge in 
the same class of transactions for which the charge was calculated. If 
the settlement service provider uses the average charge for any 
transaction in the class, the settlement service provider must use the 
same average charge in every transaction within that class for which a 
GFE was provided.
    (iv) The use of an average charge is not permitted for any 
settlement service if the charge for the service is based on the loan 
amount or property value. For example, an average charge may not be 
used for transfer taxes, interest charges, reserves or escrow, or any 
type of

[[Page 68242]]

insurance, including mortgage insurance, title insurance, or hazard 
insurance.
    (v) The settlement service provider must retain all documentation 
used to calculate the average charge for a particular class of 
transactions for at least 3 years after any settlement for which that 
average charge was used.
    (c) Violations of section 4 of RESPA (12 U.S.C. 2604). A violation 
of any of the requirements of this section will be deemed to be a 
violation of section 4 of RESPA. An inadvertent or technical error in 
completing the HUD-1 or HUD-1A shall not be deemed a violation of 
section 4 of RESPA if a revised HUD-1 or HUD-1A is provided in 
accordance with the requirements of this section within 30 calendar 
days after settlement.

0
8. In Sec.  3500.9, paragraph (a)(1) is revised as follows:


Sec.  3500.9  Reproduction of settlement statements.

    (a) * * *
    (1) The person reproducing the HUD-1 may insert its business name 
and logo in section A and may rearrange, but not delete, the other 
information that appears in section A.
* * * * *

0
9. Section 3500.17 is amended:
0
a. In paragraph (b) by removing the definitions of Acceptable 
accounting method, Conversion date, Phase-in period, Post-rule account, 
and Pre-rule account;
0
b. In paragraph (c) by revising the heading and paragraphs (c)(4), (5), 
(6), and (8);
0
c. By removing paragraph (d)(2);
0
d. By redesignating paragraphs (d) introductory text and (d)(1) as 
paragraphs (d)(1) and (d)(2);
0
e. By adding a new heading to paragraph (d) and by revising newly 
designated (d)(1) and (d)(2) introductory text; and
0
f. By removing paragraph (e)(3), to read as follows:


Sec.  3500.17  Escrow accounts.

* * * * *
    (c) Limits on payments to escrow accounts. * * *
    (4) Aggregate accounting required. All servicers must use the 
aggregate accounting method in conducting escrow account analyses.
    (5) Cushion. The cushion must be no greater than one-sixth (\1/6\) 
of the estimated total annual disbursements from the escrow account.
    (6) Restrictions on pre-accrual. A servicer must not practice pre-
accrual.
* * * * *
    (8) Provisions in mortgage documents. The servicer must examine the 
mortgage loan documents to determine the applicable cushion for each 
escrow account. If the mortgage loan documents provide for lower 
cushion limits, then the terms of the loan documents apply. Where the 
terms of any mortgage loan document allow greater payments to an escrow 
account than allowed by this section, then this section controls the 
applicable limits. Where the mortgage loan documents do not 
specifically establish an escrow account, whether a servicer may 
establish an escrow account for the loan is a matter for determination 
by other Federal or State law. If the mortgage loan document is silent 
on the escrow account limits and a servicer establishes an escrow 
account under other Federal or State law, then the limitations of this 
section apply unless applicable Federal or State law provides for a 
lower amount. If the loan documents provide for escrow accounts up to 
the RESPA limits, then the servicer may require the maximum amounts 
consistent with this section, unless an applicable Federal or State law 
sets a lesser amount.
* * * * *
    (d) Methods of escrow account analysis. (1) The following sets 
forth the steps servicers must use to determine whether their use of 
aggregate analysis conforms with the limitations in Sec.  
3500.17(c)(1). The steps set forth in this section result in maximum 
limits. Servicers may use accounting procedures that result in lower 
target balances. In particular, servicers may use a cushion less than 
the permissible cushion or no cushion at all. This section does not 
require the use of a cushion.
    (2) Aggregate analysis. (i) In conducting the escrow account 
analysis using aggregate analysis, the target balances may not exceed 
the balances computed according to the following arithmetic operations:
* * * * *

0
10. Section 3500.21 is amended by revising paragraphs (b) and (c) to 
read as follows:


Sec.  3500.21  Mortgage Servicing Transfers.

* * * * *
    (b) Servicing Disclosure Statement; Requirements. (1) At the time 
an application for a mortgage servicing loan is submitted, or within 3 
business days after submission of the application, the lender, mortgage 
broker who anticipates using table funding, or dealer who anticipates a 
first lien dealer loan shall provide to each person who applies for 
such a loan a Servicing Disclosure Statement. A format for the 
Servicing Disclosure Statement appears as Appendix MS-1 to this part. 
The specific language of the Servicing Disclosure Statement is not 
required to be used. The information set forth in ``Instructions to 
Preparer'' on the Servicing Disclosure Statement need not be included 
with the information given to applicants, and material in square 
brackets is optional or alternative language. The model format may be 
annotated with additional information that clarifies or enhances the 
model language. The lender, table funding mortgage broker, or dealer 
should use the language that best describes the particular 
circumstances.
    (2) The Servicing Disclosure Statement must indicate whether the 
servicing of the loan may be assigned, sold, or transferred to any 
other person at any time while the loan is outstanding. If the lender, 
table funding mortgage broker, or dealer in a first lien dealer loan 
will engage in the servicing of the mortgage loan for which the 
applicant has applied, the disclosure may consist of a statement that 
the entity will service such loan and does not intend to sell, 
transfer, or assign the servicing of the loan. If the lender, table 
funding mortgage broker, or dealer in a first lien dealer loan will not 
engage in the servicing of the mortgage loan for which the applicant 
has applied, the disclosure may consist of a statement that such entity 
intends to assign, sell, or transfer servicing of such mortgage loan 
before the first payment is due. In all other instances, the disclosure 
must state that the servicing of the loan may be assigned, sold or 
transferred while the loan is outstanding.
    (c) Servicing Disclosure Statement; Delivery. The lender, table 
funding mortgage broker, or dealer that anticipates a first lien dealer 
loan shall deliver the Servicing Disclosure Statement within 3 business 
days from receipt of the application by hand delivery, by placing it in 
the mail, or, if the applicant agrees, by fax, e-mail, or other 
electronic means. In the event the borrower is denied credit within the 
3 business-day period, no servicing disclosure statement is required to 
be delivered. If co-applicants indicate the same address on their 
application, one copy delivered to that address is sufficient. If 
different addresses are shown by co-applicants on the application, a 
copy must be delivered to each of the co-applicants.
* * * * *

0
11. A new Sec.  3500.22 is added to read as follows:

[[Page 68243]]

Sec.  3500.22  Severability.

    If any particular provision of this part or the application of any 
particular provision to any person or circumstance is held invalid, the 
remainder of this part and the application of such provisions to other 
persons or circumstances shall not be affected by such holding.

0
12. A new Sec.  3500.23 is added to read as follows:


Sec.  3500.23  ESIGN applicability.

    The Electronic Signatures in Global and National Commerce Act 
(``ESIGN''), 15 U.S.C. 7001-7031, shall apply to this part.

0
13. Appendix A to part 3500 is revised in its entirety, including the 
heading, to read as follows:

Appendix A to Part 3500--Instructions for Completing HUD-1 and HUD-1a 
Settlement Statements; Sample HUD-1 and HUD-1a Statements

    The following are instructions for completing the HUD-1 
settlement statement, required under section 4 of RESPA and 24 CFR 
part 3500 (Regulation X) of the Department of Housing and Urban 
Development regulations. This form is to be used as a statement of 
actual charges and adjustments paid by the borrower and the seller, 
to be given to the parties in connection with the settlement. The 
instructions for completion of the HUD-1 are primarily for the 
benefit of the settlement agents who prepare the statements and need 
not be transmitted to the parties as an integral part of the HUD-1. 
There is no objection to the use of the HUD-1 in transactions in 
which its use is not legally required. Refer to the definitions 
section of HUD's regulations (24 CFR 3500.2) for specific 
definitions of many of the terms that are used in these 
instructions.

General Instructions

    Information and amounts may be filled in by typewriter, hand 
printing, computer printing, or any other method producing clear and 
legible results. Refer to HUD's regulations (Regulation X) regarding 
rules applicable to reproduction of the HUD-1 for the purpose of 
including customary recitals and information used locally in 
settlements; for example, a breakdown of payoff figures, a breakdown 
of the Borrower's total monthly mortgage payments, check 
disbursements, a statement indicating receipt of funds, applicable 
special stipulations between Borrower and Seller, and the date funds 
are transferred.
    The settlement agent shall complete the HUD-1 to itemize all 
charges imposed upon the Borrower and the Seller by the loan 
originator and all sales commissions, whether to be paid at 
settlement or outside of settlement, and any other charges which 
either the Borrower or the Seller will pay at settlement. Charges 
for loan origination and title services should not be itemized 
except as provided in these instructions. For each separately 
identified settlement service in connection with the transaction, 
the name of the person ultimately receiving the payment must be 
shown together with the total amount paid to such person. Items paid 
to and retained by a loan originator are disclosed as required in 
the instructions for lines in the 800-series of the HUD-1 (and for 
per diem interest, in the 900-series of the HUD-1).
    As a general rule, charges that are paid for by the seller must 
be shown in the seller's column on page 2 of the HUD-1 (unless paid 
outside closing), and charges that are paid for by the borrower must 
be shown in the borrower's column (unless paid outside closing). 
However, in order to promote comparability between the charges on 
the GFE and the charges on the HUD-1, if a seller pays for a charge 
that was included on the GFE, the charge should be listed in the 
borrower's column on page 2 of the HUD-1. That charge should also be 
offset by listing a credit in that amount to the borrower on lines 
204-209 on page 1 of the HUD-1, and by a charge to the seller in 
lines 506-509 on page 1 of the HUD-1. If a loan originator (other 
than for no-cost loans), real estate agent, other settlement service 
provider, or other person pays for a charge that was included on the 
GFE, the charge should be listed in the borrower's column on page 2 
of the HUD-1, with an offsetting credit reported on page 1 of the 
HUD-1, identifying the party paying the charge.
    Charges paid outside of settlement by the borrower, seller, loan 
originator, real estate agent, or any other person, must be included 
on the HUD-1 but marked ``P.O.C.'' for ``Paid Outside of Closing'' 
(settlement) and must not be included in computing totals. However, 
indirect payments from a lender to a mortgage broker may not be 
disclosed as P.O.C., and must be included as a credit on Line 802. 
P.O.C. items must not be placed in the Borrower or Seller columns, 
but rather on the appropriate line outside the columns. The 
settlement agent must indicate whether P.O.C. items are paid for by 
the Borrower, Seller, or some other party by marking the items paid 
for by whoever made the payment as ``P.O.C.'' with the party making 
the payment identified in parentheses, such as ``P.O.C. (borrower)'' 
or ``P.O.C. (seller)''.
    In the case of ``no cost'' loans where ``no cost'' encompasses 
third party fees as well as the upfront payment to the loan 
originator, the third party services covered by the ``no cost'' 
provisions must be itemized and listed in the borrower's column on 
the HUD-1/1A with the charge for the third party service. These 
itemized charges must be offset with a negative adjusted origination 
charge on Line 803 and recorded in the columns.
    Blank lines are provided in section L for any additional 
settlement charges. Blank lines are also provided for additional 
insertions in sections J and K. The names of the recipients of the 
settlement charges in section L and the names of the recipients of 
adjustments described in section J or K should be included on the 
blank lines.
    Lines and columns in section J which relate to the Borrower's 
transaction may be left blank on the copy of the HUD-1 which will be 
furnished to the Seller. Lines and columns in section K which relate 
to the Seller's transaction may be left blank on the copy of the 
HUD-1 which will be furnished to the Borrower.

Line Item Instructions

    Instructions for completing the individual items on the HUD-1 
follow.
    Section A. This section requires no entry of information.
    Section B. Check appropriate loan type and complete the 
remaining items as applicable.
    Section C. This section provides a notice regarding settlement 
costs and requires no additional entry of information.
    Sections D and E. Fill in the names and current mailing 
addresses and zip codes of the Borrower and the Seller. Where there 
is more than one Borrower or Seller, the name and address of each 
one is required. Use a supplementary page if needed to list multiple 
Borrowers or Sellers.
    Section F. Fill in the name, current mailing address and zip 
code of the Lender.
    Section G. The street address of the property being sold should 
be listed. If there is no street address, a brief legal description 
or other location of the property should be inserted. In all cases 
give the zip code of the property.
    Section H. Fill in name, address, zip code and telephone number 
of settlement agent, and address and zip code of ``place of 
settlement.''
    Section I. Fill in date of settlement.
    Section J. Summary of Borrower's Transaction. Line 101 is for 
the contract sales price of the property being sold, excluding the 
price of any items of tangible personal property if Borrower and 
Seller have agreed to a separate price for such items.
    Line 102 is for the sales price of any items of tangible 
personal property excluded from Line 101. Personal property could 
include such items as carpets, drapes, stoves, refrigerators, etc. 
What constitutes personal property varies from state to state. 
Manufactured homes are not considered personal property for this 
purpose.
    Line 103 is used to record the total charges to Borrower 
detailed in Section L and totaled on Line 1400.
    Lines 104 and 105 are for additional amounts owed by the 
Borrower, such as charges that were not listed on the GFE or items 
paid by the Seller prior to settlement but reimbursed by the 
Borrower at settlement. For example, the balance in the Seller's 
reserve account held in connection with an existing loan, if 
assigned to the Borrower in a loan assumption case, will be entered 
here. These lines will also be used when a tenant in the property 
being sold has not yet paid the rent, which the Borrower will 
collect, for a period of time prior to the settlement. The lines 
will also be used to indicate the treatment for any tenant security 
deposit. The Seller will be credited on Lines 404-405.
    Lines 106 through 112 are for items which the Seller had paid in 
advance, and for which the Borrower must therefore reimburse the 
Seller. Examples of items for which adjustments will be made may 
include taxes and assessments paid in advance for an entire year or 
other period, when settlement

[[Page 68244]]

occurs prior to the expiration of the year or other period for which 
they were paid. Additional examples include flood and hazard 
insurance premiums, if the Borrower is being substituted as an 
insured under the same policy; mortgage insurance in loan assumption 
cases; planned unit development or condominium association 
assessments paid in advance; fuel or other supplies on hand, 
purchased by the Seller, which the Borrower will use when Borrower 
takes possession of the property; and ground rent paid in advance.
    Line 120 is for the total of Lines 101 through 112.
    Line 201 is for any amount paid against the sales price prior to 
settlement.
    Line 202 is for the amount of the new loan made by the Lender 
when a loan to finance construction of a new structure constructed 
for sale is used as or converted to a loan to finance purchase. Line 
202 should also be used for the amount of the first user loan, when 
a loan to purchase a manufactured home for resale is converted to a 
loan to finance purchase by the first user. For other loans covered 
by 24 CFR part 3500 (Regulation X) which finance construction of a 
new structure or purchase of a manufactured home, list the sales 
price of the land on Line 104, the construction cost or purchase 
price of manufactured home on Line 105 (Line 101 would be left blank 
in this instance) and amount of the loan on Line 202. The remainder 
of the form should be completed taking into account adjustments and 
charges related to the temporary financing and permanent financing 
and which are known at the date of settlement.
    Line 203 is used for cases in which the Borrower is assuming or 
taking title subject to an existing loan or lien on the property.
    Lines 204-209 are used for other items paid by or on behalf of 
the Borrower. Lines 204-209 should be used to indicate any financing 
arrangements or other new loan not listed in Line 202. For example, 
if the Borrower is using a second mortgage or note to finance part 
of the purchase price, whether from the same lender, another lender 
or the Seller, insert the principal amount of the loan with a brief 
explanation on Lines 204-209. Lines 204-209 should also be used 
where the Borrower receives a credit from the Seller for closing 
costs, including seller-paid GFE charges. They may also be used in 
cases in which a Seller (typically a builder) is making an 
``allowance'' to the Borrower for items that the Borrower is to 
purchase separately.
    Lines 210 through 219 are for items which have not yet been 
paid, and which the Borrower is expected to pay, but which are 
attributable in part to a period of time prior to the settlement. In 
jurisdictions in which taxes are paid late in the tax year, most 
cases will show the proration of taxes in these lines. Other 
examples include utilities used but not paid for by the Seller, rent 
collected in advance by the Seller from a tenant for a period 
extending beyond the settlement date, and interest on loan 
assumptions.
    Line 220 is for the total of Lines 201 through 219.
    Lines 301 and 302 are summary lines for the Borrower. Enter 
total in Line 120 on Line 301. Enter total in Line 220 on Line 302.
    Line 303 must indicate either the cash required from the 
Borrower at settlement (the usual case in a purchase transaction), 
or cash payable to the Borrower at settlement (if, for example, the 
Borrower's earnest money exceeds the Borrower's cash obligations in 
the transaction or there is a cash-out refinance). Subtract Line 302 
from Line 301 and enter the amount of cash due to or from the 
Borrower at settlement on Line 303. The appropriate box should be 
checked. If the Borrower's earnest money is applied toward the 
charge for a settlement service, the amount so applied should not be 
included on Line 303 but instead should be shown on the appropriate 
line for the settlement service, marked ``P.O.C. (Borrower)'', and 
must not be included in computing totals.
    Section K. Summary of Seller's Transaction. Instructions for the 
use of Lines 101 and 102 and 104-112 above, apply also to Lines 401-
412. Line 420 is for the total of Lines 401 through 412.
    Line 501 is used if the Seller's real estate broker or other 
party who is not the settlement agent has received and holds a 
deposit against the sales price (earnest money) which exceeds the 
fee or commission owed to that party. If that party will render the 
excess deposit directly to the Seller, rather than through the 
settlement agent, the amount of excess deposit should be entered on 
Line 501 and the amount of the total deposit (including commissions) 
should be entered on Line 201.
    Line 502 is used to record the total charges to the Seller 
detailed in section L and totaled on Line 1400.
    Line 503 is used if the Borrower is assuming or taking title 
subject to existing liens which are to be deducted from sales price.
    Lines 504 and 505 are used for the amounts (including any 
accrued interest) of any first and/or second loans which will be 
paid as part of the settlement.
    Line 506 is used for deposits paid by the Borrower to the Seller 
or other party who is not the settlement agent. Enter the amount of 
the deposit in Line 201 on Line 506 unless Line 501 is used or the 
party who is not the settlement agent transfers all or part of the 
deposit to the settlement agent, in which case the settlement agent 
will note in parentheses on Line 507 the amount of the deposit that 
is being disbursed as proceeds and enter in the column for Line 506 
the amount retained by the above-described party for settlement 
services. If the settlement agent holds the deposit, insert a note 
in Line 507 which indicates that the deposit is being disbursed as 
proceeds.
    Lines 506 through 509 may be used to list additional liens which 
must be paid off through the settlement to clear title to the 
property. Other Seller obligations should be shown on Lines 506-509, 
including charges that were disclosed on the GFE but that are 
actually being paid for by the Seller. These Lines may also be used 
to indicate funds to be held by the settlement agent for the payment 
of either repairs, or water, fuel, or other utility bills that 
cannot be prorated between the parties at settlement because the 
amounts used by the Seller prior to settlement are not yet known. 
Subsequent disclosure of the actual amount of these post-settlement 
items to be paid from settlement funds is optional. Any amounts 
entered on Lines 204-209 including Seller financing arrangements 
should also be entered on Lines 506-509.
    Instructions for the use of Lines 510 through 519 are the same 
as those for Lines 210 to 219 above.
    Line 520 is for the total of Lines 501 through 519.
    Lines 601 and 602 are summary lines for the Seller. Enter the 
total in Line 420 on Line 610. Enter the total in Line 520 on Line 
602.
    Line 603 must indicate either the cash required to be paid to 
the Seller at settlement (the usual case in a purchase transaction), 
or the cash payable by the Seller at settlement. Subtract Line 602 
from Line 601 and enter the amount of cash due to or from the Seller 
at settlement on Line 603. The appropriate box should be checked.
    Section L. Settlement Charges.
    Line 700 is used to enter the sales commission charged by the 
sales agent or real estate broker.
    Lines 701-702 are to be used to state the split of the 
commission where the settlement agent disburses portions of the 
commission to two or more sales agents or real estate brokers.
    Line 703 is used to enter the amount of sales commission 
disbursed at settlement. If the sales agent or real estate broker is 
retaining a part of the deposit against the sales price (earnest 
money) to apply towards the sales agent's or real estate broker's 
commission, include in Line 703 only that part of the commission 
being disbursed at settlement and insert a note on Line 704 
indicating the amount the sales agent or real estate broker is 
retaining as a ``P.O.C.'' item.
    Line 704 may be used for additional charges made by the sales 
agent or real estate broker, or for a sales commission charged to 
the Borrower, which will be disbursed by the settlement agent.
    Line 801 is used to record ``Our origination charge,'' which 
includes all charges received by the loan originator, except any 
charge for the specific interest rate chosen (points). This number 
must not be listed in either the buyer's or seller's column. The 
amount shown in Line 801 must include any amounts received for 
origination services, including administrative and processing 
services, performed by or on behalf of the loan originator.
    Line 802 is used to record ``Your credit or charge (points) for 
the specific interest rate chosen,'' which states the charge or 
credit adjustment as applied to ``Our origination charge,'' if 
applicable. This number must not be listed in either column or shown 
on page one of the HUD-1.
    For a mortgage broker originating a loan in its own name, the 
amount shown on Line 802 will be the difference between the initial 
loan amount and the total payment to the mortgage broker from the 
lender. The total payment to the mortgage broker will be the sum of 
the price paid for the loan by the lender and any other payments to 
the mortgage broker from the lender, including any payments based on 
the loan amount or loan terms, and any flat rate payments. For

[[Page 68245]]

a mortgage broker originating a loan in another entity's name, the 
amount shown on Line 802 will be the sum of all payments to the 
mortgage broker from the lender, including any payments based on the 
loan amount or loan terms, and any flat rate payments.
    In either case, when the amount paid to the mortgage broker 
exceeds the initial loan amount, there is a credit to the borrower 
and it is entered as a negative amount. When the initial loan amount 
exceeds the amount paid to the mortgage broker, there is a charge to 
the borrower and it is entered as a positive amount. For a lender, 
the amount shown on Line 802 may include any credit or charge 
(points) to the Borrower.
    Line 803 is used to record ``Your adjusted origination 
charges,'' which states the net amount of the loan origination 
charges, the sum of the amounts shown in Lines 801 and 802. This 
amount must be listed in the columns as either a positive number 
(for example, where the origination charge shown in Line 801 exceeds 
any credit for the interest rate shown in Line 802 or where there is 
an origination charge in Line 801 and a charge for the interest rate 
(points) is shown on Line 802) or as a negative number (for example, 
where the credit for the interest rate shown in Line 802 exceeds the 
origination charges shown in Line 801).
    In the case of ``no cost'' loans, where ``no cost'' refers only 
to the loan originator's fees, the amounts shown in Lines 801 and 
802 should offset, so that the charge shown on Line 803 is zero. 
Where ``no cost'' includes third party settlement services, the 
credit shown in Line 802 will more than offset the amount shown in 
Line 801. The amount shown in Line 803 will be a negative number to 
offset the settlement charges paid indirectly through the loan 
originator.
    Lines 804-808 may be used to record each of the ``Required 
services that we select.'' Each settlement service provider must be 
identified by name and the amount paid recorded either inside the 
columns or as paid to the provider outside closing (``P.O.C.''), as 
described in the General Instructions.
    Line 804 is used to record the appraisal fee.
    Line 805 is used to record the fee for all credit reports.
    Line 806 is used to record the fee for any tax service.
    Line 807 is used to record any flood certification fee.
    Lines 808 and additional sequentially numbered lines, as needed, 
are used to record other third party services required by the loan 
originator. These Lines may also be used to record other required 
disclosures from the loan originator. Any such disclosures must be 
listed outside the columns.
    Lines 901-904. This series is used to record the items which the 
Lender requires to be paid at the time of settlement, but which are 
not necessarily paid to the lender (e.g., FHA mortgage insurance 
premium), other than reserves collected by the Lender and recorded 
in the 1000-series.
    Line 901 is used if interest is collected at settlement for a 
part of a month or other period between settlement and the date from 
which interest will be collected with the first regular monthly 
payment. Enter that amount here and include the per diem charges. If 
such interest is not collected until the first regular monthly 
payment, no entry should be made on Line 901.
    Line 902 is used for mortgage insurance premiums due and payable 
at settlement, including any monthly amounts due at settlement and 
any upfront mortgage insurance premium, but not including any 
reserves collected by the Lender and recorded in the 1000-series. If 
a lump sum mortgage insurance premium paid at settlement is included 
on Line 902, a note should indicate that the premium is for the life 
of the loan.
    Line 903 is used for homeowner's insurance premiums that the 
Lender requires to be paid at the time of settlement, except 
reserves collected by the Lender and recorded in the 1000-series.
    Lines 904 and additional sequentially numbered lines are used to 
list additional items required by the Lender (except for reserves 
collected by the Lender and recorded in the 1000-series), including 
premiums for flood or other insurance. These lines are also used to 
list amounts paid at settlement for insurance not required by the 
Lender.
    Lines 1000-1007. This series is used for amounts collected by 
the Lender from the Borrower and held in an account for the future 
payment of the obligations listed as they fall due. Include the time 
period (number of months) and the monthly assessment. In many 
jurisdictions this is referred to as an ``escrow'', ``impound'', or 
``trust'' account. In addition to the property taxes and insurance 
listed, some Lenders may require reserves for flood insurance, 
condominium owners' association assessments, etc. The amount in line 
1001 must be listed in the columns, and the itemizations in lines 
1002 through 1007 must be listed outside the columns.
    After itemizing individual deposits in the 1000 series, the 
servicer shall make an adjustment based on aggregate accounting. 
This adjustment equals the difference between the deposit required 
under aggregate accounting and the sum of the itemized deposits. The 
computation steps for aggregate accounting are set out in 24 CFR 
Sec.  3500.17(d). The adjustment will always be a negative number or 
zero (-0-), except for amounts due to rounding. The settlement agent 
shall enter the aggregate adjustment amount outside the columns on a 
final line of the 1000 series of the HUD-1 or HUD-1A statement. 
Appendix E to this part sets out an example of aggregate analysis.
    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, 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 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.
    Lines 1200-1206. This series covers government recording and 
transfer charges. Charges paid by the borrower must be listed in the 
columns as described for lines 1201 and 1203, with itemizations 
shown outside the columns. Any amounts that are charged to the 
seller and that were not included on the Good Faith Estimate must be 
listed in the columns.
    Line 1201 is used to record the total ``Government recording 
charges,'' and the amount must be listed in the columns.
    Line 1202 is used to record, outside of the columns, the 
itemized recording charges.
    Line 1203 is used to record the transfer taxes, and the amount 
must be listed in the columns.
    Line 1204 is used to record, outside of the columns, the amounts 
for local transfer taxes and stamps.
    Line 1205 is used to record, outside of the columns, the amounts 
for State transfer taxes and stamps.
    Line 1206 and additional sequentially numbered lines may be used 
to record specific itemized third party charges for government 
recording and transfer services, but the amounts must be listed 
outside the columns.
    Line 1301 and additional sequentially numbered lines must be 
used to record required services that the borrower can shop for, 
such as fees for survey, pest inspection, or other similar 
inspections. These lines may also be used to record additional 
itemized

[[Page 68246]]

settlement charges that are not included in a specific category, 
such as fees for structural and environmental inspections; pre-sale 
inspections of heating, plumbing or electrical equipment; or 
insurance or warranty coverage. The amounts must be listed in either 
the borrower's or seller's column.
    Line 1400 must state the total settlement charges as calculated 
by adding the amounts within each column.

Page 3

Comparison of Good Faith Estimate (GFE) and HUD-1/1A Charges

    The comparison chart must be prepared using the exact 
information and amounts from the GFE and the actual settlement 
charges shown on the HUD-1/1A Settlement Statement. The comparison 
chart is comprised of three sections: ``Charges That Cannot 
Increase'', ``Charges That Cannot Increase More Than 10%'', and 
``Charges That Can Change''.
    ``Charges That Cannot Increase''. The amounts shown in Blocks 1 
and 2, in Line A, and in Block 8 on the borrower's GFE must be 
entered in the appropriate line in the Good Faith Estimate column. 
The amounts shown on Lines 801, 802, 803 and 1203 of the HUD-1/1A 
must be entered in the corresponding line in the HUD-1/1A column. 
The HUD-1/1A column must include any amounts shown on page 2 of the 
HUD-1 in the column as paid for by the borrower, plus any amounts 
that are shown as P.O.C. by or on behalf of the borrower. If there 
is a credit in Block 2 of the GFE or Line 802 of the HUD-1/1A, the 
credit should be entered as a negative number.
    ``Charges That Cannot Increase More Than 10%''. A description of 
each charge included in Blocks 3 and 7 on the borrower's GFE must be 
entered on separate lines in this section, with the amount shown on 
the borrower's GFE for each charge entered in the corresponding line 
in the Good Faith Estimate column. For each charge included in 
Blocks 4, 5 and 6 on the borrower's GFE for which the loan 
originator selected the provider or for which the borrower selected 
a provider identified by the loan originator, a description must be 
entered on a separate line in this section, with the amount shown on 
the borrower's GFE for each charge entered in the corresponding line 
in the Good Faith Estimate column. The loan originator must identify 
any third party settlement services for which the borrower selected 
a provider other than one identified by the loan originator so that 
the settlement agent can include those charges in the appropriate 
category. Additional lines may be added if necessary. The amounts 
shown on the HUD-1/1A for each line must be entered in the HUD-1/1A 
column next to the corresponding charge from the GFE, along with the 
appropriate HUD-1/1A line number. The HUD-1/1A column must include 
any amounts shown on page 2 of the HUD-1 in the column as paid for 
by the borrower, plus any amounts that are shown as P.O.C. by or on 
behalf of the borrower.
    The amounts shown in the Good Faith Estimate and HUD-1/1A 
columns for this section must be separately totaled and entered in 
the designated line. If the total for the HUD-1/1A column is greater 
than the total for the Good Faith Estimate column, then the amount 
of the increase must be entered both as a dollar amount and as a 
percentage increase in the appropriate line.
    ``Charges That Can Change''. The amounts shown in Blocks 9, 10 
and 11 on the borrower's GFE must be entered in the appropriate line 
in the Good Faith Estimate column. Any third party settlement 
services for which the borrower selected a provider other than one 
identified by the loan originator must also be included in this 
section. The amounts shown on the HUD-1/1A for each charge in this 
section must be entered in the corresponding line in the HUD-1/1A 
column, along with the appropriate HUD-1/1A line number. The HUD-1/
1A column must include any amounts shown on page 2 of the HUD-1 in 
the column as paid for by the borrower, plus any amounts that are 
shown as P.O.C. by or on behalf of the borrower. Additional lines 
may be added if necessary.

Loan Terms

    This section must be completed in accordance with the 
information and instructions provided by the lender. The lender must 
provide this information in a format that permits the settlement 
agent to simply enter the necessary information in the appropriate 
spaces, without the settlement agent having to refer to the loan 
documents themselves.

Instructions for Completing HUD-1A

    Note: The HUD-1A is an optional form that may be used for 
refinancing and subordinate-lien federally related mortgage loans, 
as well as for any other one-party transaction that does not involve 
the transfer of title to residential real property. The HUD-1 form 
may also be used for such transactions, by utilizing the borrower's 
side of the HUD-1 and following the relevant parts of the 
instructions as set forth above. The use of either the HUD-1 or HUD-
1A is not mandatory for open-end lines of credit (home-equity 
plans), as long as the provisions of Regulation Z are followed.

Background

    The HUD-1A settlement statement is to be used as a statement of 
actual charges and adjustments to be given to the borrower at 
settlement, as defined in this part. The instructions for completion 
of the HUD-1A are for the benefit of the settlement agent who 
prepares the statement; the instructions are not a part of the 
statement and need not be transmitted to the borrower. There is no 
objection to using the HUD-1A in transactions in which it is not 
required, and its use in open-end lines of credit transactions 
(home-equity plans) is encouraged. It may not be used as a 
substitute for a HUD-1 in any transaction that has a seller.
    Refer to the ``definitions'' section (Sec.  3500.2) of 24 CFR 
part 3500 (Regulation X) for specific definitions of terms used in 
these instructions.

General Instructions

    Information and amounts may be filled in by typewriter, hand 
printing, computer printing, or any other method producing clear and 
legible results. Refer to 24 CFR 3500.9 regarding rules for 
reproduction of the HUD-1A. Additional pages may be attached to the 
HUD-1A for the inclusion of customary recitals and information used 
locally for settlements or if there are insufficient lines on the 
HUD-1A. The settlement agent shall complete the HUD-1A in accordance 
with the instructions for the HUD-1 to the extent possible, 
including the instructions for disclosing items paid outside closing 
and for no cost loans.
    Blank lines are provided in Section L for any additional 
settlement charges. Blank lines are also provided in Section M for 
recipients of all or portions of the loan proceeds. The names of the 
recipients of the settlement charges in Section L and the names of 
the recipients of the loan proceeds in Section M should be set forth 
on the blank lines.

Line-Item Instructions

Page 1

    The identification information at the top of the HUD-1A should 
be completed as follows:
    The borrower's name and address is entered in the space 
provided. If the property securing the loan is different from the 
borrower's address, the address or other location information on the 
property should be entered in the space provided. The loan number is 
the lender's identification number for the loan. The settlement date 
is the date of settlement in accordance with 24 CFR 3500.2, not the 
end of any applicable rescission period. The name and address of the 
lender should be entered in the space provided.
    Section L. Settlement Charges. This section of the HUD-1A is 
similar to Section L of the HUD-1, with minor changes or omissions, 
including deletion of lines 700 through 704, relating to real estate 
broker commissions. The instructions for Section L in the HUD-1, 
should be followed insofar as possible. Inapplicable charges should 
be ignored, as should any instructions regarding seller items.
    Line 1400 in the HUD-1A is for the total settlement charges 
charged to the borrower. Enter this total on line 1601. This total 
should include Section L amounts from additional pages, if any are 
attached to this HUD-1A.
    Section M. Disbursement to Others. This section is used to list 
payees, other than the borrower, of all or portions of the loan 
proceeds (including the lender, if the loan is paying off a prior 
loan made by the same lender), when the payee will be paid directly 
out of the settlement proceeds. It is not used to list payees of 
settlement charges, nor to list funds disbursed directly to the 
borrower, even if the lender knows the borrower's intended use of 
the funds.
    For example, in a refinancing transaction, the loan proceeds are 
used to pay off an existing loan. The name of the lender for the 
loan being paid off and the pay-off balance would be entered in 
Section M. In a home improvement transaction when the proceeds are 
to be paid to the home improvement contractor, the name of the 
contractor and the amount paid to the contractor would be

[[Page 68247]]

entered in Section M. In a consolidation loan, or when part of the 
loan proceeds is used to pay off other creditors, the name of each 
creditor and the amount paid to that creditor would be entered in 
Section M. If the proceeds are to be given directly to the borrower 
and the borrower will use the proceeds to pay off existing 
obligations, this would not be reflected in Section M.
    Section N. Net Settlement. Line 1600 normally sets forth the 
principal amount of the loan as it appears on the related note for 
this loan. In the event this form is used for an open-ended home 
equity line whose approved amount is greater than the initial amount 
advanced at settlement, the amount shown on Line 1600 will be the 
loan amount advanced at settlement. Line 1601 is used for all 
settlement charges that both are included in the totals for lines 
1400 and 1602, and are not financed as part of the principal amount 
of the loan. This is the amount normally received by the lender from 
the borrower at settlement, which would occur when some or all of 
the settlement charges were paid in cash by the borrower at 
settlement, instead of being financed as part of the principal 
amount of the loan. Failure to include any such amount in line 1601 
will result in an error in the amount calculated on line 1604. Items 
paid outside of closing (P.O.C.) should not be included in Line 
1601.
    Line 1602 is the total amount from line 1400.
    Line 1603 is the total amount from line 1520.
    Line 1604 is the amount disbursed to the borrower. This is 
determined by adding together the amounts for lines 1600 and 1601, 
and then subtracting any amounts listed on lines 1602 and 1603.

Page 2

    This section of the HUD-1A is similar to page 3 of the HUD-1. 
The instructions for page 3 of the HUD-1, should be followed insofar 
as possible. The HUD-1/1A Column should include any amounts shown on 
page 1 of the HUD-1A in the column as paid for by the borrower, plus 
any amounts that are shown as P.O.C. by the borrower. Inapplicable 
charges should be ignored.
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0
14. Appendix C to part 3500 is revised in its entirety, including the 
heading, to read as follows:

Appendix C to Part 3500--Instructions for Completing Good Faith 
Estimate (GFE) Form

    The following are instructions for completing the GFE required 
under section 5 of RESPA and 24 CFR 3500.7 of the Department of 
Housing and Urban Development regulations. The standardized form set 
forth in this Appendix is the required GFE form and must be provided 
exactly as specified. The instructions for completion of the GFE are 
primarily for the benefit of the loan originator who prepares the 
form and need not be transmitted to the borrower(s) as an integral 
part of the GFE. The required standardized GFE form must be prepared 
completely and accurately. A separate GFE must be provided for each 
loan where a transaction will involve more than one mortgage loan.

General Instructions

    The loan originator preparing the GFE may fill in information 
and amounts on the form by typewriter, hand printing, computer 
printing, or any other method producing clear and legible results. 
Under these instructions, the ``form'' refers to the required 
standardized GFE form. Although the standardized GFE is a prescribed 
form, Blocks 3, 6, and 11 on page 2 may be adapted for use in 
particular loan situations, so that additional lines may be inserted 
there, and unused lines may be deleted.
    All fees for categories of charges shall be disclosed in U.S. 
dollar and cent amounts.

Specific Instructions

Page 1

    Top of the Form--The loan originator must enter its name, 
business address, telephone number, and email address, if any, on 
the top of the form, along with the applicant's name, the address or 
location of the property for which financing is sought, and the date 
of the GFE.
    ``Purpose.''--This section describes the general purpose of the 
GFE as well as additional information available to the applicant.
    ``Shopping for your loan.''--This section requires no loan 
originator action.
    ``Important dates.''--This section briefly states important 
deadlines after which the loan terms that are the subject of the GFE 
may not be available to the applicant. In Line 1, the loan 
originator must state the date and, if necessary, time until which 
the interest rate for the GFE will be available. In Line 2, the loan 
originator must state the date until which the estimate of all other 
settlement charges for the GFE will be available. This date must be 
at least 10 business days from the date of the GFE. In Line 3, the 
loan originator must state how many calendar days within which the 
applicant must go to settlement once the interest rate is locked. In 
Line 4, the loan originator must state how many calendar days prior 
to settlement the interest rate would have to be locked, if 
applicable.
    ``Summary of your loan.''--In this section, for all loans the 
loan originator must fill in, where indicated:
    (i) The initial loan amount;
    (ii) The loan term; and
    (iii) The initial interest rate.
    The loan originator must fill in the initial monthly amount owed 
for principal, interest, and any mortgage insurance. The amount 
shown must be the greater of: (1) The required monthly payment for 
principal and interest for the first regularly scheduled payment, 
plus any monthly mortgage insurance payment; or (2) the accrued 
interest for the first regularly scheduled payment, plus any monthly 
mortgage insurance payment.
    The loan originator must indicate whether the interest rate can 
rise, and, if it can, must insert the maximum rate to which it can 
rise over the life of the loan. The loan originator must also 
indicate the period of time after which the interest rate can first 
change.
    The loan originator must indicate whether the loan balance can 
rise even if the borrower makes payments on time, for example in the 
case of a loan with negative amortization. If it can, the loan 
originator must insert the maximum amount to which the loan balance 
can rise over the life of the loan. For federal, state, local, or 
tribal housing programs that provide payment assistance, any 
repayment of such program assistance should be excluded from 
consideration in completing this item. If the loan balance will 
increase only because escrow items are being paid through the loan 
balance, the loan originator is not required to check the box 
indicating that the loan balance can rise.
    The loan originator must indicate whether the monthly amount 
owed for principal, interest, and any mortgage insurance can rise 
even if the borrower makes payments on time. If the monthly amount 
owed can rise even if the borrower makes payments on time, the loan 
originator must indicate the period of time after which the monthly 
amount owed can first change, the maximum amount to which the 
monthly amount owed can rise at the time of the first change, and 
the maximum amount to which the monthly amount owed can rise over 
the life of the loan. The amount used for the monthly amount owed 
must be the greater of: (1) The required monthly payment for 
principal and interest for that month, plus any monthly mortgage 
insurance payment; or (2) the accrued interest for that month, plus 
any monthly mortgage insurance payment.
    The loan originator must indicate whether the loan includes a 
prepayment penalty, and, if so, the maximum amount that it could be.
    The loan originator must indicate whether the loan requires a 
balloon payment and, if so, the amount of the payment and in how 
many years it will be due.
    ``Escrow account information.''--The loan originator must 
indicate whether the loan includes an escrow account for property 
taxes and other financial obligations. The amount shown in the 
``Summary of your loan'' section for ``Your initial monthly amount 
owed for principal, interest, and any mortgage insurance'' must be 
entered in the space for the monthly amount owed in this section.
    ``Summary of your settlement charges.''--On this line, the loan 
originator must state the Adjusted Origination Charges from subtotal 
A of page 2, the Charges for All Other Settlement Services from 
subtotal B of page 2, and the Total Estimated Settlement Charges 
from the bottom of page 2.

Page 2

    ``Understanding your estimated settlement charges.''--This 
section details 11 settlement cost categories and amounts associated 
with the mortgage loan. For purposes of determining whether a 
tolerance has been met, the amount on the GFE should be compared 
with the total of any amounts shown on the HUD-1 in the borrower's 
column and any amounts paid outside closing by or on behalf of the 
borrower.

Your Adjusted Origination Charges''

    Block 1, ``Our origination charge.''--The loan originator must 
state here all charges that all loan originators involved in this 
transaction will receive, except for any charge for the specific 
interest rate chosen (points). A loan originator may not separately 
charge any additional fees for getting this loan, including for 
application, processing, or underwriting. The amount stated in Block 
1 is subject to zero tolerance, i.e., the amount may not increase at 
settlement.
    Block 2, ``Your credit or charge (points) for the specific 
interest rate chosen.''--For transactions involving mortgage 
brokers, the mortgage broker must indicate through check boxes 
whether there is a credit to the borrower for the interest rate 
chosen on the loan, the interest rate, and the amount of the credit, 
or whether there is an additional charge (points) to the borrower 
for the interest rate chosen on the loan, the interest rate, and the 
amount of that charge. Only one of the boxes may be checked; a 
credit and charge cannot occur together in the same transaction.
    For transactions without a mortgage broker, the lender may 
choose not to separately disclose in this block any credit or charge 
for the interest rate chosen on the loan; however, if this block 
does not include any positive or negative figure, the lender must 
check the first box to indicate that ``The credit or charge for the 
interest rate you have chosen'' is included in ``Our origination 
charge'' above (see Block 1 instructions above), must insert the 
interest rate, and must also insert ``0'' in Block 2. Only one of 
the boxes may be checked; a credit and charge cannot occur together 
in the same transaction.
    For a mortgage broker, the credit or charge for the specific 
interest rate chosen is the net payment to the mortgage broker from 
the lender (i.e., the sum of all payments to the mortgage broker 
from the lender, including payments based on the loan amount, a flat 
rate, or any other computation, and in a table funded transaction, 
the loan amount less the price paid for the loan by the lender). 
When the net payment to the mortgage broker from the lender is 
positive, there is a credit to the borrower and it is entered as a 
negative amount in Block 2 of the GFE. When the net payment to the 
mortgage broker from the lender is negative, there is a charge to 
the borrower and it is entered as a positive

[[Page 68254]]

amount in Block 2 of the GFE. If there is no net payment (i.e., the 
credit or charge for the specific interest rate chosen is zero), the 
mortgage broker must insert ``0'' in Block 2 and may check either 
the box indicating there is a credit of ``0'' or the box indicating 
there is a charge of ``0''.
    The amount stated in Block 2 is subject to zero tolerance while 
the interest rate is locked, i.e., any credit for the interest rate 
chosen cannot decrease in absolute value terms and any charge for 
the interest rate chosen cannot increase. (Note: An increase in the 
credit is allowed since this increase is a reduction in cost to the 
borrower. A decrease in the credit is not allowed since it is an 
increase in cost to the borrower.)
    Line A, ``Your Adjusted Origination Charges.''--The loan 
originator must add the numbers in Blocks 1 and 2 and enter this 
subtotal at highlighted Line A. The subtotal at Line A will be a 
negative number if there is a credit in Block 2 that exceeds the 
charge in Block 1. The amount stated in Line A is subject to zero 
tolerance while the interest rate is locked.
    In the case of ``no cost'' loans, where ``no cost'' refers only 
to the loan originator's fees, Line A must show a zero charge as the 
adjusted origination charge. In the case of ``no cost'' loans where 
``no cost'' encompasses third party fees as well as the upfront 
payment to the loan originator, all of the third party fees listed 
in Block 3 through Block 11 to be paid for by the loan originator 
(or borrower, if any) must be itemized and listed on the GFE. The 
credit for the interest rate chosen must be large enough that the 
total for Line A will result in a negative number to cover the third 
party fees.

``Your Charges for All Other Settlement Services''

    There is a 10 percent tolerance applied to the sum of the prices 
of each service listed in Block 3, Block 4, Block 5, Block 6, and 
Block 7, where the loan originator requires the use of a particular 
provider or the borrower uses a provider selected or identified by 
the loan originator. Any services in Block 4, Block 5, or Block 6 
for which the borrower selects a provider other than one identified 
by the loan originator are not subject to any tolerance and, at 
settlement, would not be included in the sum of the charges on which 
the 10 percent tolerance is based. Where a loan originator permits a 
borrower to shop for third party settlement services, the loan 
originator must provide the borrower with a written list of 
settlement services providers at the time of the GFE, on a separate 
sheet of paper.
    Block 3, ``Required services that we select.''--In this block, 
the loan originator must identify each third party settlement 
service required and selected by the loan originator (excluding 
title services), along with the estimated price to be paid to the 
provider of each service. Examples of such third party settlement 
services might include provision of credit reports, appraisals, 
flood checks, tax services, and any upfront mortgage insurance 
premium. The loan originator must identify the specific required 
services and provide an estimate of the price of each service. Loan 
originators are also required to add the individual charges 
disclosed in this block and place that total in the column of this 
block. The charge shown in this block is subject to an overall 10 
percent tolerance as described above.
    Block 4, ``Title services and lender's title insurance.''--In 
this block, the loan originator must state the estimated total 
charge for third party settlement service providers for all closing 
services, regardless of whether the providers are selected or paid 
for by the borrower, seller, or loan originator. The loan originator 
must also include any lender's title insurance premiums, when 
required, regardless of whether the provider is selected or paid for 
by the borrower, seller, or loan originator. All fees for title 
searches, examinations, and endorsements, for example, would be 
included in this total. The charge shown in this block is subject to 
an overall 10 percent tolerance as described above.
    Block 5, ``Owner's title insurance.''--In this block, for all 
purchase transactions the loan originator must provide an estimate 
of the charge for the owner's title insurance and related 
endorsements, regardless of whether the providers are selected or 
paid for by the borrower, seller, or loan originator. For non-
purchase transactions, the loan originator may enter ``NA'' or ``Not 
Applicable'' in this Block. The charge shown in this block is 
subject to an overall 10 percent tolerance as described above.
    Block 6, ``Required services that you can shop for.''--In this 
block, the loan originator must identify each third party settlement 
service required by the loan originator where the borrower is 
permitted to shop for and select the settlement service provider 
(excluding title services), along with the estimated charge to be 
paid to the provider of each service. The loan originator must 
identify the specific required services (e.g., survey, pest 
inspection) and provide an estimate of the charge of each service. 
The loan originator must also add the individual charges disclosed 
in this block and place the total in the column of this block. The 
charge shown in this block is subject to an overall 10 percent 
tolerance as described above.
    Block 7, ``Government recording charges.''--In this block, the 
loan originator must estimate the state and local government fees 
for recording the loan and title documents that can be expected to 
be charged at settlement. The charge shown in this block is subject 
to an overall 10 percent tolerance as described above.
    Block 8, ``Transfer taxes.''--In this block, the loan originator 
must estimate the sum of all state and local government fees on 
mortgages and home sales that can be expected to be charged at 
settlement, based upon the proposed loan amount or sales price and 
on the property address. A zero tolerance applies to the sum of 
these estimated fees.
    Block 9, ``Initial deposit for your escrow account.''--In this 
block, the loan originator must estimate the amount that it will 
require the borrower to place into a reserve or escrow account at 
settlement to be applied to recurring charges for property taxes, 
homeowner's and other similar insurance, mortgage insurance, and 
other periodic charges. The loan originator must indicate through 
check boxes if the reserve or escrow account will cover future 
payments for all tax, all hazard insurance, and other obligations 
that the loan originator requires to be paid as they fall due. If 
the reserve or escrow account includes some, but not all, property 
taxes or hazard insurance, or if it includes mortgage insurance, the 
loan originator should check ``other'' and then list the items 
included.
    Block 10, ``Daily interest charges.''--In this block, the loan 
originator must estimate the total amount that will be due at 
settlement for the daily interest on the loan from the date of 
settlement until the first day of the first period covered by 
scheduled mortgage payments. The loan originator must also indicate 
how this total amount is calculated by providing the amount of the 
interest charges per day and the number of days used in the 
calculation, based on a stated projected closing date.
    Block 11, ``Homeowner's insurance.''--The loan originator must 
estimate in this block the total amount of the premiums for any 
hazard insurance policy and other similar insurance, such as fire or 
flood insurance that must be purchased at or before settlement to 
meet the loan originator's requirements. The loan originator must 
also separately indicate the nature of each type of insurance 
required along with the charges. To the extent a loan originator 
requires that such insurance be part of an escrow account, the 
amount of the initial escrow deposit must be included in Block 9.
    Line B, ``Your Charges for All Other Settlement Services.''--The 
loan originator must add the numbers in Blocks 3 through 11 and 
enter this subtotal in the column at highlighted Line B.
    Line A+B, ``Total Estimated Settlement Charges.''--The loan 
originator must add the subtotals in the right-hand column at 
highlighted Lines A and B and enter this total in the column at 
highlighted Line A+B.

Page 3

``Instructions''

    ``Understanding which charges can change at settlement.''--This 
section informs the applicant about which categories of settlement 
charges can increase at closing, and by how much, and which 
categories of settlement charges cannot increase at closing. This 
section requires no loan originator action.
    ``Using the tradeoff table.''--This section is designed to make 
borrowers aware of the relationship between their total estimated 
settlement charges on one hand, and the interest rate and resulting 
monthly payment on the other hand. The loan originator must complete 
the left hand column using the loan amount, interest rate, monthly 
payment figure, and the total estimated settlement charges from page 
1 of the GFE. The loan originator, at its option, may provide the 
borrower with the same information for two alternative loans, one 
with a higher interest rate, if available, and one with a lower 
interest rate, if available, from the loan originator. The loan 
originator should list in the tradeoff table only alternative loans 
for which it would presently issue a GFE based

[[Page 68255]]

on the same information the loan originator considered in issuing 
this GFE. The alternative loans must use the same loan amount and be 
otherwise identical to the loan in the GFE. The alternative loans 
must have, for example, the identical number of payment periods; the 
same margin, index, and adjustment schedule if the loans are 
adjustable rate mortgages; and the same requirements for prepayment 
penalty and balloon payments. If the loan originator fills in the 
tradeoff table, the loan originator must show the borrower the loan 
amount, alternative interest rate, alternative monthly payment, the 
change in the monthly payment from the loan in this GFE to the 
alternative loan, the change in the total settlement charges from 
the loan in this GFE to the alternative loan, and the total 
settlement charges for the alternative loan. If these options are 
available, an applicant may request a new GFE, and a new GFE must be 
provided by the loan originator.
    ``Using the shopping chart.''--This chart is a shopping tool to 
be provided by the loan originator for the borrower to complete, in 
order to compare GFEs.
    ``If your loan is sold in the future.''--This section requires 
no loan originator action.
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0
15. Appendix E to part 3500 is amended by removing the parenthetical 
``(Existing Accounts)'' from the heading, ``II. Example Illustrating 
Single-Item Analysis (Existing Accounts)''.

0
16. Appendix MS-1 to part 3500 is revised to read as follows:

Appendix MS-1 to Part 3500

    [Sample language; use business stationery or similar heading]
    [Date]

SERVICING DISCLOSURE STATEMENT NOTICE TO FIRST LIEN MORTGAGE LOAN 
APPLICANTS: THE RIGHT TO COLLECT YOUR MORTGAGE LOAN PAYMENTS MAY BE 
TRANSFERRED

    You are applying for a mortgage loan covered by the Real Estate 
Settlement Procedures Act (RESPA) (12 U.S.C. 2601 et seq.). RESPA 
gives you certain rights under Federal law. This statement describes 
whether the servicing for this loan may be transferred to a 
different loan servicer. ``Servicing'' refers to collecting your 
principal, interest, and escrow payments, if any, as well as sending 
any monthly or annual statements, tracking account balances, and 
handling other aspects of your loan. You will be given advance 
notice before a transfer occurs.

Servicing Transfer Information

    [We may assign, sell, or transfer the servicing of your loan 
while the loan is outstanding.]
    [or]
    [We do not service mortgage loans of the type for which you 
applied. We intend to assign, sell, or transfer the servicing of 
your mortgage loan before the first payment is due.]
    [or]
    [The loan for which you have applied will be serviced at this 
financial institution and we do not intend to sell, transfer, or 
assign the servicing of the loan.]
    [INSTRUCTIONS TO PREPARER: Insert the date and select the 
appropriate language under ``Servicing Transfer Information.'' The 
model format may be annotated with further information that 
clarifies or enhances the model language.]

    Dated: November 7, 2008.
Brian D. Montgomery,
Assistant Secretary for Housing--Federal Housing Commissioner.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix to FR-5180 Final Rule on Regulatory Flexibility Analysis

    The following Regulatory Flexibility Analysis is Chapter 6 of 
the final rule's Economic Analysis, which is available for public 
inspection and available online at http://www.hud.gov/respa.

Introduction

    This chapter of the Regulatory Impact Analysis is the Final 
Regulatory Flexibility Analysis (FRFA) of the final rule as 
described under Section 604 of the Regulatory Flexibility Act. The 
requirements of the FRFA are listed below along with references to 
where the requirements are covered in the FRFA and where more 
detailed discussion can be found in other chapters of the Regulatory 
Impact Analysis (RIA).
    A. A description of the reasons why action by the agency is 
being considered can be found in Section III of this chapter, in 
Section II of Chapter 1 of the RIA, and in greater detail in the 
first sections of Chapters 3 and 4 of the RIA.
    B. A succinct statement of the objectives of, and legal basis 
for, the final rule is provided in Section III of this chapter. This 
is also discussed in Section II of Chapter 1 of the RIA and in 
greater detail in the first sections of Chapters 3 and 4 of the RIA.
    C. A description and an estimate of the number of small entities 
to which the rule will apply or an explanation of why no such 
estimate is available. Section V provides data on small businesses 
that may be affected by the rule. As explained in Section V, Chapter 
5 of the RIA also provides extensive documentation of the 
characteristics of the industries directly affected by the rule, 
including various estimates of the numbers of small entities, 
reasons why various data elements are not reliable or unavailable, 
and descriptions of methodologies used to estimate (if possible) 
necessary data elements that were not readily available. The 
industries discussed in Chapter 5 of the RIA included the following 
(with section reference): mortgage brokers (Section II); lenders 
including commercial banks, thrifts, mortgage banks, credit unions 
(Section III); settlement and title services including direct title 
insurance carriers, title agents, escrow firms, and lawyers (Section 
IV); and other third-party settlement providers including 
appraisers, surveyors, pest inspectors, and credit bureaus (Section 
V); and real estate agents (Section VI). As explained in Section V 
of this chapter, Appendix A includes estimates of revenue impacts 
for the new Good Faith Estimate (GFE).
    D. A description of the projected reporting, record keeping, and 
other compliance requirements of the rule, including an estimate of 
the classes of small entities that will be subject to the 
requirement and the types of professional skills necessary for 
preparation of the report or record. Compliance requirements and 
costs are discussed in Sections VII through IX of this chapter. In 
no case are any professional skills required for reporting, record 
keeping, and other compliance requirements of this rule that are not 
otherwise required in the ordinary course of business of firms 
affected by the rule. As noted above, Chapter 5 of the RIA includes 
estimates of the small entities that may be affected by the rule.
    E. An identification, to the extent practicable, of all relevant 
Federal rules which may duplicate, overlap or conflict with the 
final rule. The final rule provisions describing some loan terms in 
the new GFE and the HUD-1 are similar to the Truth in Lending Act 
(TILA) regulations; however the differences in approach between the 
TILA regulations and HUD's RESPA rule make them more complementary 
than duplicative. Overlaps are discussed further in this chapter.
    In addition, this Chapter contains (c) a description of any 
significant alternatives to the final rule which accomplish the 
stated objectives of applicable statutes and which minimize any 
significant impact of the final rule on small entities. The FRFA 
also describes comments dealing with compliance and regulatory 
burden in the 2008 proposed rule. Some of the comments were on 
provisions of the 2008 proposed rule that have been dropped. Other 
comments were on impacts that the Department believes will be small 
or non-existent. Some of the compliance and regulatory burden 
comments concerned costs that are only felt during the start-up 
period and are one-time costs. These are discussed in Section VII.B, 
while comments on recurring costs of implementing the new GFE form 
are addressed in Section VII.C. Section VII.D discusses GFE-related 
changes in the final rule that reduce regulatory burden. Section 
VII.E discusses compliance issues related to GFE tolerances on 
settlement party costs, while Section VII.F discusses efficiencies 
associated with the new GFE.
    Before proceeding further, Section II provides a brief summary 
of the main findings from the Regulatory Impact Analysis that relate 
to the final rule.

Summary of the Regulatory Impact Analysis

    There is strong evidence of information asymmetry between 
mortgage originators and settlement service providers and consumers, 
allowing loan originators to capture much of the consumer surplus in 
this market through price discrimination. The RESPA disclosure 
statute is meant to address this information asymmetry, but the 
evidence shows that the current RESPA regulations are not effective. 
The final rule will create a more level-playing field through a more 
transparent and standard disclosure of loan details and settlement 
costs; tolerances on settlement charges leading to prices that 
consumers can rely on; and a comparison page on the HUD-1 that 
allows the consumer to compare the amounts listed for particular 
settlement costs on the GFE with the total costs listed for those 
charges on the HUD-1, and to double check the loan details at 
settlement. These changes will encourage comparison shopping by 
informed consumers, which will place a competitive pressure on 
market prices, and enable consumers to retain more consumer surplus.

Overview of Final Rule

    The Department of Housing and Urban Development has issued a 
final rule under the Real Estate Settlement Procedures Act (RESPA) 
to simplify and improve the process of obtaining home mortgages and 
to reduce settlement costs for consumers. This Regulatory Impact 
Analysis and Regulatory Flexibility Analysis examine the economic 
effects of that rule. As this Regulatory Impact Analysis 
demonstrates, the final rule is expected to improve consumer 
shopping for mortgages and to reduce the costs of closing a mortgage 
transaction for the consumer. Consumer savings were estimated under 
a variety of scenarios about originator and

[[Page 68260]]

settlement costs. In the base case, the estimated price reduction to 
borrowers comes to $8.35 billion or $668 per loan. This represents 
the substantial savings that can be achieved with the final rule.
    The final RESPA rule includes a new, simplified Good Faith 
Estimate (GFE) that includes tolerances on final settlement costs 
and a new method for reporting wholesale lender payments in broker 
transactions. The final rule allows service providers to use prices 
based on the average charges for the third-party services they 
purchase, making their business operations simpler and less costly. 
Competition among loan originators will put pressure for these cost 
savings to be passed on to borrowers. The new GFE will produce 
substantial shopping and price-reduction benefits for both 
origination and third-party settlement services.
    Because the final rule calls for significant changes in the 
process of originating a mortgage, this Regulatory Impact Analysis 
identifies a wide range of benefits, costs, efficiencies, transfers, 
and market impacts. The effects on consumers from improved borrower 
shopping will be substantial under this rule. Similarly, the use of 
tolerances will place needed controls on origination and third-party 
fees. Ensuring that yield spread premiums are credited to borrowers 
in brokered transactions could cause significant transfers to 
consumers. The increased competition associated with RESPA reform 
will reduce settlement service costs and result in transfers to 
consumers from service providers. Entities that will suffer revenue 
losses under the final rule are usually those who are charging 
prices higher than necessary or are benefiting from the current 
system's market failure.

    Note to Reader: A comprehensive summary of the problems with the 
current mortgage shopping system and the benefits and market impacts 
of the final rule is provided in Section I of Chapter 3.

Problems With the Mortgage Shopping Process and the Current GFE

    The current system for originating and closing mortgages is 
highly complex and suffers from several problems that have resulted 
in high prices for borrowers. Studies indicate that consumers are 
often charged high fees and can face wide variations in prices, both 
for origination and third-party settlement services. The main points 
are as follows:
     There are many barriers to effective shopping for 
mortgages in today's market. The process can be complex and can 
involve rather complicated financial trade-offs, which are often not 
fully and clearly explained to borrowers.
     Consumers often pay non-competitive fees for 
originating mortgages. Most observers believe that the market 
breakdown occurs in the relationship between the consumer and the 
loan originator--the ability of the loan originator to price 
discriminate among different types of consumers leads to some 
consumers paying more than other consumers.\2\
---------------------------------------------------------------------------

    \2\ One could see price discrimination in a competitive market 
that was the result of different costs associated with originating 
loans for different applicants. For example, those who required more 
work by the originator to obtain loan approval might be charged more 
than those whose applications required little work in order to 
obtain an approval. The price discrimination we refer to in this 
paragraph and elsewhere in this analysis is not cost-based. It is 
the result of market imperfections, such as poor borrower 
information on alternatives that leads borrowers to accept loans at 
higher cost than the competitive level.
---------------------------------------------------------------------------

     There is convincing statistical evidence that yield 
spread premiums are not always used to offset the origination and 
settlement costs of the consumer. Studies, including a recent HUD-
sponsored study of FHA closing costs by the Urban Institute, find 
that yield spread premiums are often used for the originator's 
benefit, rather than for the consumer's benefit.\3\
---------------------------------------------------------------------------

    \3\ See Section IV.D of Chapter 2 for a discussion of these 
studies.
---------------------------------------------------------------------------

     Borrowers can be confused about the trade-off between 
interest rates and closing costs. It may be difficult for borrowers 
(even sophisticated ones but surely unsophisticated ones) to 
understand the financial trade-offs associated with discount points, 
yield spread premiums, and upfront settlement costs. While many 
originators explain this to their borrowers, giving them an array of 
choices to meet their needs, some originators may only show 
borrowers a limited number of options.
     There is also evidence that prices paid for third-party 
services are highly variable, indicating that there is much 
potential to reduce title, closing, and other settlement costs. For 
example, a recent analysis of FHA closing costs by the Urban 
Institute shows wide variation in title and settlement costs. There 
is not always an incentive in today's market for originators to 
control these costs. Too often, high third-party costs are simply 
passed through to the consumer. And consumers may not be the best 
shoppers for third-party service providers due to their lack of 
expertise and to the infrequency with which they shop for these 
services. Consumers often rely on recommendations from the real 
estate agent (in the case of a home purchase) or from the loan 
originator (in the case of a refinance as well as a home purchase).
    Today's GFE. Today's GFE does not help the above situations, as 
it is not an effective tool for facilitating borrower shopping nor 
for controlling third-party settlement costs. The current GFE is 
typically comprised of a long list of charges, as today's rules do 
not prescribe a standard form or consolidated categories. Such a 
long list of individual charges can be overwhelming, often confuses 
consumers, and seems to provide little useful information for 
consumer shopping. The current GFE certainly does not inform 
consumers what the major costs are so that they can effectively shop 
and compare mortgage offers among different loan originators. The 
current GFE does not explain how the borrower can use the document 
to shop and compare loans. Also, the GFE fails to make clear the 
relationship between the closing costs and the interest rate on a 
loan, notwithstanding that many mortgage loans originated today 
adjust up-front closing costs due at settlement, either up or down, 
depending on whether the interest rate on the loan is below or above 
``par.'' Finally, current rules do not assure that the ``good faith 
estimate'' is a reliable estimate of final settlement costs. As a 
result, under today's rules, the estimated costs on GFEs may be 
unreliable or incomplete, and final charges at settlement may 
include significant increases in items that were estimated on the 
GFE, as well as additional fees, which can add to the consumer's 
ultimate closing costs.
    Thus, today's GFE is not an effective tool for facilitating 
borrower shopping or for controlling origination and third-party 
settlement costs. There is enormous potential for cost reductions in 
today's market, which is too often characterized by relatively high 
and highly variable charges for both origination and third-party 
services.
    In addition, today's RESPA rules hold back efficiency and 
competition by acting as a barrier to innovative cost-reduction 
arrangements. While today's mortgage market is characterized by 
increased efficiencies and lower prices due to technological 
advances and other innovations that is not the case in the 
settlement area where aggressive competition among settlement 
service providers simply does not always take place. Existing RESPA 
regulations inhibit average cost pricing,\4\ which is an example of 
a cost reduction technique. Thus, a framework is needed that would 
encourage competitive negotiations and other arrangements that would 
lead to lower settlement prices. The new GFE will provide such a 
framework.
---------------------------------------------------------------------------

    \4\ The charges reported on the HUD-1 are required to be the 
specific charge paid in connection with the specific loan for which 
the HUD-1 is filled out. Pricing based on average charges is the 
practice of charging all borrowers the same average charge for a 
group of similar loans. Average cost pricing requires less record 
keeping and tracking for any individual loan since the numbers 
reported to the settlement agent need not be transaction specific. 
Average cost pricing is not permissible under RESPA because loan-
specific prices are required.
---------------------------------------------------------------------------

Approach of the Final Rule

Main Components of the New GFE and HUD-1

    The GFE format simplifies the process of originating mortgages 
by consolidating costs into a few major cost categories.\5\ The GFE 
ensures that in brokered transactions, borrowers receive the full 
benefit of the higher price paid by wholesale lenders for a loan 
with a high interest rate; that is, so-called yield spread premiums. 
On both the GFE and HUD-1, the portion of any wholesale lender 
payments that arise because a loan has an above-par interest rate is 
passed through to borrowers as a credit against other costs. Thus, 
there is assurance that borrowers who take on an above-par loan 
receive funds to offset their settlement costs. The new GFE also 
includes a trade-off table that will assist consumers in 
understanding the relationship between higher interest rates and 
lower settlement costs.
---------------------------------------------------------------------------

    \5\ See the proposed GFE in Exhibit 3-B of Chapter 3.
---------------------------------------------------------------------------

    HUD conducted consumer tests to further improve the GFE form in 
the 2002 proposed rule. Numerous changes were made to make the GFE 
more user-friendly. The GFE form in

[[Page 68261]]

the final rule includes a summary page containing the key 
information for shopping; during the tests, consumers reported that 
the summary page was a useful addition to the GFE. The trade-off 
table, another component of the GFE that consumers found useful, is 
also included in the final GFE. The final GFE is a form that 
consumers find to be clear and well written and, according the tests 
conducted, one that they can use to determine the least expensive 
loan. In other words, it is a shopping tool that is a vast 
improvement over today's GFE with its long list of fees that can 
change (i.e., increase) at settlement.
    The final GFE includes a set of tolerances on originator and 
third-party costs: originators must adhere to their own origination 
fees, and give estimates subject to a 10 percent upper limit on the 
sum of certain third-party fees. The tolerances on originator and 
third-party costs will encourage originators not only to lower their 
own costs but also to seek lower costs for third-party services.
    The final rule would allow service providers to use pricing 
based on average charges for third-party services they purchase so 
long as the average is calculated using a documented method and the 
charge on the HUD-1 is no greater than the average paid for that 
service. This will make internal operations for the loan originator 
simpler and less costly and competition among lenders will put 
pressure for these cost savings to be passed on to borrowers as 
well. The end result of all these changes should be lower third-
party fees for consumers.
    To increase the value of the new GFE as a shopping document, HUD 
is proposing revisions to the HUD-1 Settlement Statement form that 
will make the GFE and HUD-1 easier to compare. The revised HUD-1 
uses the same language to describe categories of charges as the GFE, 
and orders the categories of charges in the same way. This makes it 
much simpler to compare the two documents and confirm whether the 
tolerances required in the new GFE have been met or exceeded. In 
addition, the final rule introduces a comparison in the revised HUD-
1 that would: (1) Compare the GFE estimates to the HUD-1 charges and 
advise borrowers whether tolerances have been met or exceeded; (2) 
verify that the loan terms summarized on the GFE match those in the 
loan documents, including the mortgage note; and (3) provide 
additional information on the terms and conditions of the mortgage. 
These components of the rule are required together to fully realize 
the consumer saving on mortgage closing cost estimated here.
    Given that there has been no significant change in the basic 
HUD-1 structure and layout, besides the addition of a comparison 
page, generating this new HUD-1 should not pose any problem for 
firms closing loans--in fact, the closing process will be much 
simpler given that borrowers and closing agents can precisely link 
the information on the initial GFE to the information on the final 
HUD-1.The HUD-1 has also been adjusted to ensure that the new GFE (a 
shopping document issued early in the process) and the HUD-1 (a 
final settlement document issued at closing) work well together. The 
layout of the revised HUD-1 has new labeling of some lines so that 
each entry from the GFE can be found on the revised HUD-1 with the 
exact wording as on the GFE. This will make it much easier to 
determine if the fees actually paid at settlement are consistent 
with the GFE, whether the borrower does it alone or with the 
assistance of the settlement agent. The reduced number of HUD-1 
entries that should result, as well as use of the same terminology 
on both forms should reduce the time spent by the borrower and 
settlement agents comparing and checking the numbers.
    The significant changes made to the final rule from the March 
2008 proposed rule are:
     A GFE form that is a shorter form than had been 
proposed.
     Allowing originators the option not to fill out the 
tradeoff table on the GFE form.
     A revised definition of application to eliminate the 
separate GFE application process.
     Adoption of requirements for the GFE that are similar 
to recently revised Federal Reserve Board Truth-in-Lending 
regulations which limit fees charged in connection with early 
disclosures and defining timely provision of the disclosures.
     Clarification of terminology that describes the process 
applicable to, and the terms of, an applicant's particular loan.
     Inclusion of a provision to allow lenders a short 
period of time in which to correct certain violations of the new 
disclosure requirements.
     A revised HUD-1/1A settlement statement form that 
includes a summary page of information that provides a comparison of 
the GFE and HUD-1/1A list of charges and a listing of final loan 
terms as a substitute for the proposed closing script addition.
     Elimination of the requirement for a closing script to 
be completed and read by the closing agent.
     A simplified process for utilizing an average charge 
mechanism.
     No regulatory change in this rulemaking regarding 
negotiated discounts, including volume based discounts.

 Estimates and Sources of Consumer Savings From the Final Rule

    Overall Savings. Chapter 3 discusses the consumer benefits 
associated with the new GFE form and provides dollar estimates of 
consumer savings due to improved shopping for both originator and 
third-party services. Consumer savings were estimated under a 
variety of scenarios about originator and settlement costs.\6\ In 
the base case, the estimated price reduction to borrowers comes to 
$8.35 billion annually, or 12.5 percent of the $66.7 billion in 
total charges (i.e., origination fees, appraisal, credit report, tax 
service and flood certificate and title insurance and settlement 
agent charges).\7\ Thus, there is an estimated $8.35 billion in 
transfers from firms to borrowers from the improved disclosures and 
tolerances of the new GFE. This would represent savings of $668 per 
loan. Sensitivity analysis was conducted with respect to the savings 
projection in order to provide a range of estimates. Because title 
fees account for over 70 percent of third-party fees and because 
there is widespread evidence of lack of competition and overcharging 
in the title and settlement closing industry, one approach projected 
third-party savings only in that industry. This approach (called the 
``title approach'') projected savings of $200 per loan in title and 
settlement fees. In this case, the estimated price reduction to 
borrowers comes to $8.38 billion ($670 per loan), or 12.6 percent of 
the $66.7 billion in total charges--savings figures that are 
practically identical to the base case mentioned above.\8\ Other 
projections also showed substantial savings for consumers. As 
explained in Chapter 3, estimated consumer savings under a more 
conservative projection totaled $6.48 billion ($518 per loan), or 
9.7 percent of total settlement charges. Thus, while consumer 
savings are expected to be $8.35 billion (or 12.5 percent of total 
charges) in the base case or $8.38 billion (12.6 percent of total 
charges) in the title approach, they were $6.48 billion (or 9.7 
percent of total charges) in a more conservative sensitivity 
analysis. This $6.48-$8.38 billion ($518-$670 per loan) represents 
the substantial savings that can be achieved with the new GFE.
---------------------------------------------------------------------------

    \6\ Throughout this Economic Analysis, the terms ``borrowers'' 
and ``consumers'' are often used interchangeably.
    \7\ Government fees and taxes and escrow items are not included 
in this analysis, as they are not subject to competitive market 
pressures.
    \8\ If the savings in title and settlement closing fees due to 
RESPA reform were only $150, then the estimated price reduction to 
borrowers comes to $7.76 billion, or 11.6 percent of the $66.7 
billion in total charges.
---------------------------------------------------------------------------

    Industry Breakdown of Savings. Chapter 3 also disaggregates the 
sources of consumer savings into the following major categories: 
originators with a breakdown for brokers and lenders, and third-
party providers with a breakdown for the title and settlement 
industry and other third-party providers.\9\ In the base case, 
originators (brokers and lenders) contribute $5.88 billion, or 70 
percent of the $8.35 billion in consumer savings. This $5.88 billion 
in savings represents 14.0 percent of the total revenue of 
originators, which is projected to be $42.0 billion.\10\ The $5.88 
billion is divided between brokers, which contribute $3.53 billion, 
and lenders (banks, thrifts, and mortgage banks), which contribute 
the remaining $2.35 billion. The shares for brokers (60 percent) and 
lenders (40 percent) represent their respective shares of mortgage 
originations. In the base case, third-party settlement service 
providers contribute $2.47 billion, or 30 percent of the $8.35 
billion in consumer savings. This $2.47 billion in savings 
represents 10.0 percent of the total

[[Page 68262]]

revenue of third-party providers, which is projected to be $24.738 
billion.\11\ The $2.47 billion is divided between title and 
settlement agents, which contribute $1.79 billion, and other third-
party providers (appraisers, surveyors, pest inspectors, etc.), 
which contribute $0.68 billion. Title and settlement agents 
contribute a large share because they account for 72.5 percent of 
the third-party services included in this analysis. In the title 
approach, title and settlement agents account for all third-party 
savings, which total $2.5 billion if per loan savings are $200 and 
$1.88 billion if per loan savings are $150.
---------------------------------------------------------------------------

    \9\ Readers are referred to Chapter 5 for a more detailed 
examination of the various component industries (e.g., title 
services, appraisal, etc.) as well as for the derivations of many of 
the estimates presented in this chapter.
    \10\ This assumes a 1.75 percent origination fee for brokers and 
lenders, which, when applied to projected originations of $2.4 
trillion, yields $42.0 billion in total revenues from origination 
fees (both direct and indirect). See Steps (3)-(5) of Section 
VII.E.1 of Chapter 3 for the explanation of origination costs. 
Sensitivity analyses are conducted for smaller origination fees of 
1.5 percent and larger fees of 2.0 percent; see Step (21) in Section 
VII.E.4 of Chapter 3.
    \11\ See Step (7) of Section VII.E.1 of Chapter 3 for the 
derivation of the $24.738 billion.

                                Table 6-1--Industry Breakdown of Consumer Savings
----------------------------------------------------------------------------------------------------------------
                                                                                   Savings  per    Percentage of
                        Source of savings                            Transfers      loan  (12.5    total savings
                                                                    (billions)    million loans)     (percent)
----------------------------------------------------------------------------------------------------------------
Loan Origination................................................           $5.88            $470              70
    Lenders.....................................................            2.35          470 or              28
    Brokers.....................................................            3.53             470              42
Third-Party Services............................................            2.47             198              30
    Title/Settlement............................................            1.79             143              22
    Other.......................................................            0.68              54               8
                                                                 -----------------------------------------------
        Total *.................................................            8.35             668            100
----------------------------------------------------------------------------------------------------------------
* Savings are 12.5% of $66.7 billion revenue in charges.

    Section III.D of this executive summary presents the revenue 
impacts on small originators and small third-party providers.
    Sources of Savings: Lower Origination and Third-Party Fees. The 
Regulatory Impact Analysis presents evidence that some consumers are 
paying higher prices for origination and third-party services. The 
new GFE format in the final rule will improve consumer shopping for 
mortgages, which will result in better mortgage products, lower 
interest rates, and lower origination and third-party costs for 
borrowers.
     The final rule simplifies the process of originating 
mortgages by consolidating costs into a few major cost categories. 
This is a substantial improvement over today's GFE that is not 
standardized and can contain a long list of individual charges that 
encourages fee proliferation. This makes it easier for the consumer 
to become overwhelmed and confused. The consistent and simpler 
presentation of the GFE will improve the ability of the consumer to 
shop.
     A GFE with a summary page, which includes the terms of 
the loan, will make it clear to the consumer whether they are 
comparing similar loans.
     A GFE with a summary page will make it simpler for 
borrowers to shop. The higher reward for shopping, along with the 
increased ease with which borrowers can compare loans, should lead 
to more effective shopping, more competition, and lower prices for 
borrowers.
     The GFE makes cost estimates more reliable by applying 
tolerances to the figures reported. This will reduce the all too 
frequent problem of borrowers being surprised by additional costs at 
settlement. With fees firmer under the GFE, shopping is more likely 
to result in borrowers saving money when they shop.
     The new GFE will disclose yield spread premiums and 
discount points in brokered loans prominently, accurately, and in a 
way that should inform borrowers how they may be used to their 
advantage. Both values will have to be calculated as the difference 
between the wholesale price of the loan and its par value. Their 
placement in the calculations that lead to net settlement costs will 
make them very difficult to miss. That placement should also enhance 
borrower comprehension of how yield spread premiums can be used to 
reduce up-front settlement costs. Tests of the form indicate that 
consumers can determine the cheaper loan when comparing a broker 
loan with a lender loan.
     The new GFE will better inform consumers about their 
financing choices by including a tradeoff table on page 3 where 
originators can present the different interest rate and closing cost 
options available to borrowers. For example, consumers will better 
understand the trade-offs between reducing their closing costs and 
increasing the interest rate on the mortgage.
     The final rule allows settlement service providers to 
use prices based on average charges for the third-party services 
they purchase.
     The above changes and the imposition of tolerances on 
fees will encourage originators to seek lower settlement service 
prices. The tolerances will lead to well-informed market 
professionals either arranging for the purchase of the settlement 
services or at least establishing a benchmark that borrowers can use 
to start their own search. Under either set of circumstances, this 
should lead to lower prices for borrowers than if the borrowers 
shopped on their own, since the typical borrower's knowledge of the 
settlement service market is limited, at best.

Savings and Transfers, Efficiencies, and Costs

    As explained above, it is estimated that borrowers would save 
$8.35 billion in origination and settlement charges. This $8.35 
billion represents transfers to borrowers from high priced 
producers, with $5.88 billion coming from originators and $2.47 
billion from third-party settlement service providers. In addition 
to the transfers, there are efficiencies associated with the rule as 
well as costs.
    Mortgage applicants and borrowers realize $1,169 million savings 
in time spent shopping for loans and third-party services. Loan 
originators save $975 million in time spent with shoppers and from 
average cost pricing. Third-party settlement service providers save 
$191 million in time spent with shoppers. Some or all of industry's 
total of $1,166 million in efficiency gains have the potential to be 
passed through to borrowers through competition. There are 
additional social efficiencies such as the reduction of non-
productive behavior and positive externalities of preventing 
foreclosures (see Section X.D.).
    The total one-time compliance costs to the lending and 
settlement industry of the GFE and HUD-1 are estimated to be $571 
million, $407 million of which is borne by small business. These 
costs are summarized below. Total recurring costs are estimated to 
be $918 million annually or $73.40 per loan. The share of the 
recurring costs on small business is $471 million. This Chapter 6 
examines in greater detail the compliance and other costs associated 
with the GFE and HUD-1 forms and its tolerances.
    The new GFE in the final rule has some features that would 
increase the cost of providing it and some that would decrease the 
cost. Practically all of the information required on the GFE is 
readily available to originators, suggesting no additional costs. 
The fact that there are fewer numbers and less itemization of 
individual fees suggests reduced costs. On the other hand, there 
could be a small amount of additional costs associated with the 
optional trade-off table but that is not clear. Thus, while it is 
difficult to estimate, it appears that there could be a net of zero 
additional costs. However, if the GFE added 10 minutes per 
application to the time it takes to handle the forms today; annual 
costs would rise by $255 million at 1.7 applications per loan or 
($12 per application or $20 per loan) or $405 million at 2.7 
applications per loan ($32 per loan). We assume the high-cost 
scenario for

[[Page 68263]]

summary table 6-5. (See Section VII.C.1 of this chapter for further 
details.)
    The presence of tolerances will lead to some additional costs to 
originators of making additional arrangements for third parties to 
provide settlement services. If the average loan originator incurs 
an average of 10 minutes per loan of effort making third-party 
arrangements to meet the tolerances, then the total cost to 
originators of making third-party arrangements to meet the tolerance 
requirements comes to $150 million ($12 per loan). (See Section 
VII.E.2 of this chapter.)
    There is the potential of additional underwriting costs if the 
number of applications requiring a credit check rise beyond the 
current ratio of 1.7 applications per loan. Thus, if this ratio 
remains constant, there will be no recurring compliance costs from 
additional underwriting. If, however, the demand for preliminary 
GFEs increases to 2.7 applications per loan, then the total costs 
for originators will be $138 million or $11 per loan (See Section 
VII.C.).
    In addition to the recurring costs of the GFE, there will be 
one-time adjustment costs of $383 million in switching to the new 
form. Loan originators will have to upgrade their software and train 
staff in its use in order to accommodate the requirements of the new 
rule. It is estimated that the software cost will be $33 million and 
the training cost will be $58 million, for a total of $91 million 
(see Section VII.B.1 of this chapter). We assume that, of the loan 
originators' software and training costs, $73 million is 
attributable to the new GFE and $18 million to the new HUD-1. Once 
the new software is functioning, the recurring costs of training new 
employees in its use and the costs associated with periodic upgrades 
simply replace those costs that would have been incurred doing the 
same thing with software for the old rule. They represent no 
additional costs of the new rule.
    Similarly, there will be a one-time adjustment cost for legal 
advice on how to deal with the changes related to the new GFE. The 
one-time adjustment cost for legal fees is estimated to be $116 
million (see Section VII.B.2 of this chapter). Once the adjustment 
has been made, the ongoing legal costs are a substitute for the 
ongoing legal costs that would have been incurred under the old rule 
and do not represent any additional burden.
    Finally with respect to the GFE, employees will have to be 
trained in the new GFE beyond the software and legal training 
already mentioned. This one time adjustment cost is estimated to be 
$194 million (see section VII.B.3). Again, once the transition 
expenses have been incurred, any ongoing training costs are a 
substitute for the training costs that would have been incurred 
anyway and do not represent an additional burden.
    There are few recurring costs associated with the revised HUD-1. 
For originators the burden could be very small: Loan originators 
will not have to collect additional data beyond what is required for 
the GFE. In certain cases, the burden may be noticeable so we assume 
that the average burden is ten minutes per loan for loan 
originators. Settlement agents may face a recurring cost, although 
this is not likely either since loan originators are responsible for 
providing the data. The settlement agent will have to add final 
charges not known by the originator, and may have to fill out the 
entire form if the lender does not transmit the information on an 
already completed HUD-1 page 3. The settlement agent may also want 
to check the information concerning settlement costs, tolerances, 
and loan terms to make sure they agree with the GFE. In some cases, 
the settlement agent will have to calculate the tolerances. We 
assume that it will add five minutes on average to the time it takes 
to prepare a settlement. The actual distribution of the total 
additional time burden will differ by transaction depending on how 
much of the work is done by the lender. Taking loan originators into 
account, the total time burden is 15 minutes per loan, for a cost of 
$18 per loan. The recurring compliance cost to the industry would be 
$225 million annually, of which small business would bear $107 
million annually. During a high-volume year (15.5 million loans 
annually), the annual recurring compliance cost of the HUD-1 would 
be $279 million annually. (See Section VIII.C. of Chapter 6.)
    There will be one-time adjustment costs of $188 million in 
switching to the new HUD-1 form. Settlement firms will have to 
upgrade their software and train staff in its use in order to 
accommodate the requirements of the new rule. It is estimated that 
the software and training cost will be $80 million (see Section 
VIII.B. of Chapter 6). Once the new software is functioning, the 
recurring costs of training new employees in its use and the costs 
associated with periodic upgrades simply replace those costs that 
would have been incurred doing the same thing with software for the 
old rule. They represent no additional costs of the new rule.

                                                     Table 6-2--Summary of One-Time Adjustment Costs
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        GFE                            HUD-1                           Total
                     Source of cost                      -----------------------------------------------------------------------------------------------
                                                             All firms      Small firms      All firms      Small firms      All firms      Small firms
--------------------------------------------------------------------------------------------------------------------------------------------------------
Software and training...................................             $73             $52             $80             $59            $153            $111
Legal consultation......................................             116              70              37              18             153              88
Training on rule........................................             194             146              71              62             265             208
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................             383             268             188             139             571             407
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Similarly, there will be a one-time adjustment cost for legal 
advice on how to deal with the changes related to the new HUD-1. The 
one-time adjustment cost for legal fees is estimated to be $37 
million (see Section VIII.B. of Chapter 6). Once the adjustment has 
been made, the ongoing legal costs are a substitute for the ongoing 
legal costs that would have been incurred under the old rule and do 
not represent any additional burden.
    Finally, employees will have to be trained in the new HUD-1 
beyond the software and legal training already mentioned. This one-
time adjustment cost is estimated to be $71 million (see Section 
VIII.B. of Chapter 6). Again, once the transition expenses have been 
incurred, any ongoing training costs are a substitute for the 
training costs that would have been incurred anyway and do not 
represent an additional burden.
    The consumer savings, efficiencies and costs associated with the 
GFE are discussed further in Chapter 6 and in Chapter 3. A summary 
of the compliance costs for the base case of 12.5 million loans 
annually is presented below in Table 6.1.

                                  Table 6-3--Compliance Costs of the Final Rule
                                        [If 12.5 million loans annually]
----------------------------------------------------------------------------------------------------------------
                                     One-time compliance costs        Recurring compliance costs (in millions
                                  incurred during the first year                     annually)
                                           (in millions)         -----------------------------------------------
                                 --------------------------------
                                     All firms      Small firms      All firms      Small firms    Cost per loan
----------------------------------------------------------------------------------------------------------------
GFE.............................            $383            $268            $693            $364          $55.40

[[Page 68264]]

 
HUD-1...........................             188             139             225             107           18.00
                                 -------------------------------------------------------------------------------
    Total.......................             571             407             918             471           73.40
----------------------------------------------------------------------------------------------------------------

    A natural question to raise is whether the costs of the rule 
will overwhelm the benefits of the rule. The assumption that 
consumers will benefit by a reduction of settlement costs of at 
least $668 per loan has not been forcefully challenged. Indeed, 
results from a recent statistical analysis of FHA data imply that 
the savings to consumers may be as much as $1,200 per loan. To 
accomplish this, however, industry will incur both adjustment and 
recurring costs. Suppose firms impose these additional costs on 
consumers by raising prices. It is likely that the adjustment costs 
will be spread out over many years, just as the cost of an 
investment would be. Suppose, for the sake of illustration, that all 
adjustment costs are all imposed on first-year borrowers only. In a 
normal year of 12.5 million loans, this cost would $46 per loan. The 
recurring compliance costs of the rule is $73.40 per loan regardless 
of the year. In such a scenario, the total compliance cost is $120 
per loan in the first year as compared to $74 for later years. If 
all compliance costs were passed onto consumers then the net 
consumer savings is $548 the first year and $594 in subsequent years 
(see table 6-4 for a summary). Note that this assumes that all costs 
are borne by borrowers and not at all by the applicants who do not 
get a loan. It would be reasonable to assume that in the high-
application scenario, where there is an increase in preliminary 
underwriting costs, that the cost of an initial credit report would 
be passed on to all applicants.

          Table 6-4--Predicted Reductions in the Cost of a Loan
     [If firms impose all first-year adjustment costs on first-year
                               borrowers]
------------------------------------------------------------------------
         Source of gain or loss             First year      Afterwards
------------------------------------------------------------------------
Average Consumer Savings................            $668            $668
    One-time Adjustment Costs...........             -46              -0
    Recurring Compliance Costs..........             -74             -74
                                         -------------------------------
Net Consumer Savings....................             548             594
                                         ===============================
    Firms' Efficiencies.................             +93             +93
    Borrowers' Efficiencies.............             +55             +55
                                         -------------------------------
Net Benefits to Consumer................             696             742
------------------------------------------------------------------------

    There are other potential benefits to the consumer besides 
savings on settlement costs. There are aspects of this rule that 
will save time for industry. The value of these efficiencies could 
be $1,166 million for loan originators and settlement agents, for a 
per loan efficiency of $93. In a competitive industry, firms would 
pass these gains along to borrowers in the form of lower costs, a 
consumer benefit. Borrowers themselves will save time through the 
new GFE. These time savings are estimated at $1,169 million but are 
derived from a time savings worth $55 per applicant (seventy-five 
minutes at $44 per hour). In the summary of net benefits, we only 
include the per applicant time savings for borrowers. We make the 
cautious assumption that successful borrowers have submitted only 
one application. A fraction of the additional 8.25 million 
applications (in excess of 12.5 million loans) consist of: 
Applications approved but not accepted; applications denied by the 
financial institution; and applications withdrawn by the applicant. 
Although these individuals also realize time savings, it would be 
misleading to include them in a ``per loan'' figure in that the time 
savings of rejected applicants would not benefit the borrower. 
Adding the firms' and borrowers' value of time efficiencies to the 
net of compliance cost consumer savings gives us an estimate of the 
potential consumer benefits per loan: $696 in the first year and 
$742 afterwards.

Alternatives Considered To Make the GFE More Workable for Small and 
Other Businesses

    Chapter 3 discusses the many comments that HUD received on the 
GFE in the 2002 and 2008 proposed rules and the 2005 RESPA Reform 
Roundtables. Chapter 4 discusses alternatives. The most basic 
alternative was to make no change in the current GFE. The final rule 
allows both the current GFE and the new GFE to be used for one year 
after the GFE is introduced, but requires the new GFE and HUD-1 to 
be used beginning January 1, 2010. This approximately one-year 
adjustment period responds to lenders' comments that there would be 
significant implementation issues with switching to a new GFE.
    The main alternative concerning small businesses considered the 
brokers' argument that they were disadvantaged by the reporting of 
yield spread premiums. The new GFE was designed to ensure that there 
will not be any anti-competitive impacts on the broker industry. A 
summary page is included that presents the key cost figures for 
borrower shopping that does not report yield spread premiums, and 
that provides identical treatment for brokers and lenders. The final 
GFE includes language that clarifies how yield spread premiums 
reduce the upfront charge that borrowers pay. Section III.E of this 
Executive Summary discusses this in more detail.
    HUD designed the GFE to make it workable for small lenders and 
brokers. Some examples of the changes are the following:
     In response to concerns expressed by lenders and 
brokers about their ability to control third-party costs and meet 
the specified tolerances in the 2008 proposed rule, HUD raised the 
tolerance on government recording charges from zero to ten percent.
     Consistent with the above, the rule creates a new 
definition of ``forseeable circumstances'' that clarifies and 
expands on the definition of ``circumstances'' in the proposed rule. 
For example, material information that was either not known at the 
time the original GFE was provided or not relied on in providing the 
original GFE, or information that has changed in a material way 
since application, may be the basis for providing a modified GFE. 
For example, if the actual loan amount turns out to be higher than 
the loan amount indicated by the borrower at the time the GFE was 
provided,

[[Page 68265]]

and certain settlement charges that are based on the loan amount 
increase as a result, the loan originator may provide a revised GFE 
reflecting those higher amounts. Compliance with the tolerance 
provisions would be evaluated by comparing the revised GFE with the 
actual amounts charged at settlement.
     HUD has adopted a streamlined single application 
process for the final rule. The new definition will allow loan 
originators more flexibility in determining the information they 
need to underwrite a GFE.
     The reading at settlement of a closing script is no 
longer required. Much of the same information will be transmitted to 
the borrower via a new page 3 of the HUD-1.
    Alternatives. This chapter and Chapter 4 and Chapter 6 discuss 
other major alternatives that HUD considered in developing the final 
rule from the 2008 proposed rule. These chapters discuss the pros 
and cons of these alternatives and why HUD decided not to include 
them in this final rule.

Market and Competitive Impacts on Small Businesses From the Final Rule

    Transfers from Small Businesses. It is estimated that $4.13 
billion, or 49.5 percent of the $8.35 billion in consumer savings 
comes from small businesses, with small originators contributing 
$3.01 billion and small third-party firms, $1.13 billion.\12\ Within 
the small originator group, most of the transfers to consumers come 
from small brokers ($2.47 billion, or 82 percent of the $3.01 
billion); this is because small firms account for most of broker 
revenues but a small percentage of lender revenues. Within the small 
third-party group, most of the transfers come from the title and 
closing industry ($0.68 billion, or 60 percent of the $1.13 
billion), mainly because this industry accounts for most third-party 
fees. In the title approach, small title and settlement closing 
companies account for $0.95 billion of the $2.5 billion in savings. 
Section VII.E.2 of Chapter 3 explains the steps in deriving these 
revenue impacts on small businesses, and Section VII.E.4 of Chapter 
3 reports several sensitivity analyses around the estimates. In 
addition, Chapter 5 provides more detailed revenue impacts for the 
various component industries.\13\
---------------------------------------------------------------------------

    \12\ In the more conservative scenario of $6.48 billion in 
consumer savings, small businesses would account for $3.21 billion 
of the transfers to consumers, with small originators accounting for 
$2.36 billion, and small third-party providers, $0.84 billion.
    \13\ In Chapter 5, see Section II for brokers, Section III for 
the four lender groups (commercial banks, thrifts, mortgage banks, 
and credit unions), Section IV for the various title and settlement 
groups (large insurers, title and settlement agents, lawyers, and 
escrow firms), Section V.A for appraisers, Section V.B for 
surveyors, Section V.C for pest inspectors, and Section V.D for 
credit bureaus.
---------------------------------------------------------------------------

    The summary bullets in Section I.C highlight the mechanisms 
through which these transfers are expected to happen. Improved 
understanding of yield spread premiums, discount points, and the 
trade-off between interest rates and settlement costs; improved 
consumer shopping among originators; more aggressive competition by 
originators for settlement services; and increased competition 
associated with discounting--all will lead to reductions in both 
originator and third-party fees. As noted earlier, there is 
substantial evidence of non-competitive prices charged to some in 
the origination and settlement of mortgages due to information 
asymmetry between originators and borrowers. Originators (both small 
and large) and settlement service providers (both small and large) 
that have been charging high prices will experience reductions in 
their revenues as a result of the new GFE. There is no evidence that 
small businesses have been disproportionately charging high prices; 
for this reason, there is no expectation of any disproportionate 
impact on small businesses from the new GFE. The revenue reductions 
will be distributed across firms based on their non-competitive 
price behavior.
    Small Brokers.\14\ The main issue raised by the brokers 
concerned the treatment in the 2008 proposed rule of yield spread 
premiums on the proposed Good Faith Estimate. Mortgage Broker 
representatives asserted that the proposed mortgage broker 
disclosure would achieve the opposite result and would detract from 
the consumer's ability to understand and comparison shop. They 
recommended that lenders should be treated similarly to facilitate 
shopping and promote consumer understanding. The current final rule 
addresses the concern expressed by brokers that the reporting of 
yield spread premiums in the 2008 proposed rule would disadvantage 
them relative to lenders.
---------------------------------------------------------------------------

    \14\ Practically all (98.9%) of the 30,000-44,000 brokers 
qualify as a small business. The Bureau of Census reports that small 
brokers account for 70% of industry revenue.
---------------------------------------------------------------------------

    The Department hired forms development specialists, the Kleimann 
Communication Group, to analyze, test, and improve the forms. 
Starting with the GFE form proposed in 2002, they reworked the 
language and presentation of the yield spread premium to emphasize 
that it offsets other charges to reduce settlement charges, the cash 
needed to close the loan. The subjects tested seemed to like the 
trade-off table that shows the trade-off between the interest rate 
and up-front charges. It illustrates how yield spread premiums can 
reduce upfront charges. There is the summary page designed to 
simplify the digestion of the information on the form by including 
only the total estimated settlement charges from page two. This is 
the first page any potential borrower would see. It contains only 
the essentials for comparison-shopping and is simple: a standard set 
of yes-no questions describing the loan and a very simple summary of 
costs and the bottom line. Yield spread premiums are never mentioned 
here. Lender and broker loans get identical treatment on page 1. A 
mortgage shopping chart is included on page 3 of the GFE, to help 
borrowers comparison shop. Arrows were added to focus the borrower 
on overall charges, rather than one component. All of these features 
work against the borrower misinterpreting the different presentation 
of loan fees required of brokers vis-[agrave]-vis lenders.
    HUD has designed the GFE form to focus borrowers on the right 
numbers so that competition is maintained between brokers and 
lenders. The forms adopted in the final rule were tested on hundreds 
of subjects. The tests indicate that borrowers who comparison shop 
will have little difficulty identifying the cheapest loan offered in 
the market whether from a broker or a lender.
    We do not believe that the customer outreach function that 
brokers perform for wholesale lenders is going to change with RESPA 
reform. Wholesale lending, which has fueled the rise in mortgage 
originations over the past ten years, will continue to depend on 
brokers reaching out to consumer customers and supplying them with 
loans. Brokers play the key role in the upfront part of the mortgage 
process and this will continue with the final GFE.
    RESPA reform is also not going to change the basic cost and 
efficiency advantages of brokers. Brokers have grown in market share 
and numbers because they can originate mortgages at lower costs than 
others. There is no indication that their cost competitiveness is 
going to change in the near future. Thus, brokers, as a group, will 
remain highly competitive actors in the mortgage market, as they 
have been in the past.
    While there is no evidence to suggest any anti-competitive 
impact, there will be an impact on those brokers who are charging 
non-competitive prices. And there is convincing evidence that some 
brokers (as well as some lenders) overcharge consumers (see studies 
reviewed in Chapter 2). As emphasized throughout the Regulatory 
Impact Analysis, the new GFE will lead to improved and more 
effective consumer shopping, for many reasons--the new GFE is simple 
and easy to understand, it includes reliable cost estimates, it 
effectively discloses yield spread premiums and discounts in 
brokered loans without disadvantaging brokers, it provides a vehicle 
to show consumers options, and it explains the trade-off between 
closing costs and interests rates to aid in understanding of yield 
spread premiums. This increased shopping by consumers will reduce 
the revenues of those brokers who are charging non-competitive 
prices. Thus, the main impact on brokers (both small and large) of 
the final rule will be on those brokers (as well as other 
originators) who have been overcharging uninformed consumers, 
through the combination of high origination fees and yield spread 
premiums.\15\ As noted above, small brokers are expected to 
experience $2.47 billion in reduced fees.
---------------------------------------------------------------------------

    \15\ As explained throughout this chapter, it is anticipated 
that market competition, under this proposed GFE approach, will have 
a similar impact on those lenders (non-brokers) who have been 
overcharging consumers through a combination of high origination 
costs and yield spread premiums.
---------------------------------------------------------------------------

    Small Lenders. Lenders include mortgage banks, commercial banks, 
credit unions, and thrift institutions.\16\ There are over 10,000

[[Page 68266]]

lenders that would be affected by the RESPA rule, as well as almost 
4,000 credit unions that originate mortgages. While two-thirds of 
the lenders qualify as a small business (as do four-fifths of the 
credit unions), these small originators account for only 23 percent 
of industry revenues. Thus, small lenders (including credit unions) 
account for only $540 million of the projected $2.35 billion in 
transfers from lenders.\17\
---------------------------------------------------------------------------

    \16\ While it is recognized that the business operations and 
objectives of these lender groups can differ--not only between the 
groups (a mortgage banker versus a portfolio lender) but even within 
a single group (a small community bank versus a large national 
bank)--they raised so many of the same issues that it is more useful 
to address them in one place.
    \17\ Section III of Chapter 5 describes the characteristics of 
these component industries (number of employees, size of firms, 
etc.), their mortgage origination activity, and the allocation of 
revenue impacts between large and small lenders. That section also 
explains that the small business share of revenue could vary from 20 
percent to 26 percent.
---------------------------------------------------------------------------

    In general, there was less concern expressed by lenders (as 
compared with brokers) about potential anti-competitive impacts of 
the GFE on small businesses. Small lenders--relative to both brokers 
and large lenders--will remain highly competitive actors in the 
mortgage market, as they are today. Small mortgage banks, community 
banks and local savings institutions benefit from their knowledge of 
local settlement service providers and of the local mortgage market. 
Nothing in the final GFE rule changes that. Generally, lenders and 
their associations opposed the proposed GFE on the grounds that in 
their opinion the form is too lengthy and would only confuse 
borrowers. Lenders had numerous comments on most aspects of the 2008 
proposed GFE form--some of them dealing with major issues such as 
the difficulty in predicting costs within a three day period and 
many dealing with practical and more technical issues. HUD responded 
to many of the issues and concerns raised by lenders; Sections V, 
VI, and VIII of Chapter 3 discuss lenders' comments and HUD's 
response.
    Some lenders were concerned about their ability to produce firm 
cost estimates (even of their own fees) within a three-day period, 
given the complexity of the mortgage process. Lenders wanted 
clarification on their ability to make cost adjustments as a result 
of information they gain during the full underwriting process. The 
tolerances in the final rule require that lenders play a more active 
role in controlling third-party costs than they have in the past. 
However, some lenders emphasized that they have little control over 
fees of third-party settlement providers, while others seem to not 
anticipate problems in this regard. As explained in I.B above, the 
final rule made several adjustments to the tolerance rules, which 
should make them workable for lenders. In addition, the final rule 
allows average cost pricing, which should help lenders reduce their 
costs. Practically all lenders wanted clarification on the 
definition of application, and HUD did that. There will be an impact 
on those lenders (both large and small) who are charging non-
competitive prices. Improved consumer shopping with the new GFE will 
reduce the revenues of those lenders who are charging non-
competitive prices. Thus, as with brokers, the main negative impact 
on lenders (both small and large) of the new GFE will be on those 
lenders who have been overcharging uninformed consumers.
    Small Title and Settlement Firms. The title and settlement 
industry--which consists of large title insurers, title agents, 
escrow firms, lawyers, and others involved in the settlement 
process--is expected to account for $1.79 billion of the $2.47 
billion in third-party transfers under the GFE in the final rule. 
Within the title and settlement group, small firms are expected to 
account for 38.1 percent ($0.68 billion) of the transfers, although 
there is some uncertainty with this estimate.\18\ Step (8) of 
Section VII.E of Chapter 3 conducts an analysis that projects all of 
the consumer savings in third-party costs coming from the title 
industry; evidence suggests there are more opportunities for price 
reductions in the title industry, as compared with other third-party 
industries. In this case, consumer savings in title costs ($150-$200 
per loan) ranged from $1.88 billion to $2.50 billion. To a large 
extent, the title and closing industry is characterized by local 
firms providing services at constant returns to scale. The demand 
for the services of these local firms will continue under the final 
GFE.
---------------------------------------------------------------------------

    \18\ Section IV of Chapter 5 describes the component industries 
and estimates the share of overall industry revenue going to small 
businesses.
---------------------------------------------------------------------------

    Section VIII.C of Chapter 3 summarizes the key competitive 
issues for this industry with respect to the final rule. As noted 
there, the overall competitiveness of the title and closing industry 
should be enhanced by the RESPA rule. Chapters 2 and 5 provide 
evidence that title and closing fees are too high and that there is 
much potential for price reductions in this industry. Increased 
shopping by consumers, as well as increased shopping by loan 
originators to stay within their tolerances, will reduce the 
revenues of those title and closing companies that have been 
charging non-competitive prices.\19\ Excess charges will be reduced 
and competition will ensure that reduced costs are passed through to 
consumers.
---------------------------------------------------------------------------

    \19\ The reasons why the proposed GFE and its tolerances will 
lead to improved and more effective shopping for third-party 
services by consumers and loan originators has already been 
discussed, and need not be repeated here.
---------------------------------------------------------------------------

    The title industry argued that greater itemization was needed in 
order for consumers to be able to adequately comparison shop among 
estimates. HUD's view is that the consolidated categories on the new 
GFE form provide consumers with the essential information needed for 
comparison-shopping. Itemization encourages long lists of fees that 
confuse borrowers.
    It is important to keep in mind the local nature of the title 
industry when considering the impacts of the final RESPA reform (new 
GFE, tolerances, etc.) on the title industry. The title industry 
demonstrates a high degree of geographic specialization. Although 
title insurance companies do not need to be close to the properties 
insured, until there is widespread use of standardized electronic 
land record keeping accessible by the Internet,\20\ the information-
gathering service the industry provides will require proximity to 
land title records (or the establishment of ``title plants,'' i.e., 
duplicates of local records, the maintenance of which requires 
proximity to local government records). Even if a provider is 
efficient and charges low prices, it will not be able to compete 
against title and closing firms who are located sufficiently closer 
to the site in question. Thus, title and closing companies are by 
economic necessity provided by local firms. Reinforcing the local 
orientation are the value of local expertise and the importance of 
personal networks in receiving referrals.
---------------------------------------------------------------------------

    \20\ The proposed rule does nothing to advance or retard this 
fundamental change in the nature of the business. It is possible 
that governments responsible for maintaining title records could 
advance to the level demonstrated in British Columbia (Canada), 
where even title insurance is not part of real estate transactions.
---------------------------------------------------------------------------

    The local orientation of the title industry could change over 
time. However, it is unlikely that RESPA reform would be the 
catalyst. The advances in technology that would change business 
practices are independent of what HUD does about RESPA. The only 
change that the final rule will introduce is that title and closing 
services may occur at lower prices negotiated between providers and 
lender originators. There will be no significant change in the local 
provision of title and closing work. Nor will there be a reduction 
of the number of these services purchased since this reform will not 
result in a drop in the number of mortgages that require these 
services. Large lenders will have to deal with multiple settlement 
services providers in order to ensure complete geographic coverage, 
and large multi-jurisdictional title firms have no apparent cost 
advantages over smaller title firms. In fact, large multi-
jurisdictional title firms may have location-related cost 
disadvantages. There is no reason to believe that small title firms 
charging competitive prices will be adversely impacted by the 
changes in this rule. The demand for the services of these local 
firms will continue under the final GFE.
    Appraisers. Like surveys and pest inspections, traditional 
appraisals are provided on-site at the mortgaged property. The 
transportation cost of visiting individual sites, especially the 
opportunity cost of the time spent in transit, adds substantially to 
the cost of providing the service. The transportation costs 
counterbalance, or overwhelm, any scale economies that may otherwise 
exist in the production of these services. The countervailing 
transportation cost pressures creates an effective constant returns 
to scale production function for this industry and can serve to 
explain the wide range of firm size as well as the continued success 
of small businesses in the appraisal industry. This explains why 
approximately 99.8 percent of traditional appraisal firms qualify as 
small businesses.
    Even if large appraisal firms are efficient and charges low 
prices, they will not have the same advantage as providers who are 
located sufficiently closer to the site in question. Thus, 
traditional appraisals are by economic necessity provided by local 
firms. Reinforcing the local orientation of the appraisal industry 
is the value of local expertise. A profound understanding of the

[[Page 68267]]

characteristics of the local real estate market is essential for a 
successful appraisal. In addition, local appraisal firms maintain 
local networks of customers and clients, based on their established 
track records, which should give them a solid business advantage.
    The local orientation of the appraisal industry could change 
over time. There has been a trend towards the increasing use of 
automated valuation appraisals, particularly for appraising 
properties that are being refinanced and properties that are being 
used as collateral for home equity loans. The necessity for 
appraisers to visit all homes in need of an appraisal could be 
rendered less by the automated value model (AVM), but it is also the 
case that the databases used to create AVMs tend not to have data on 
whether or not there is water in the basement of the subject 
property. It is unlikely that RESPA reform would be the catalyst for 
increases in AMVs, as the technological advances are already taking 
place. While RESPA reform could accelerate the use of AVMs, it will 
not likely have an impact as to whether AVMs are eventually accepted 
more broadly by the lending industry. The adoption of AVMs will 
depend on the accuracy of these estimation models, their 
appropriateness for different types of properties, and their 
performance in mitigating the risk of default losses.

Statement of Need for and Objectives of the Rule \21\
---------------------------------------------------------------------------

    \21\ For a detailed discussion of problems with the current 
system, and thus the need for this proposed rule, see Sections IV 
and V of Chapter 2 and Sections I and VII of Chapter 3.
---------------------------------------------------------------------------

    Acquiring a mortgage is one of the most complex transactions a 
family will ever undertake. The consumer requires a level of 
financial sensibility to fully understand the product. For example, 
consider the trade-off between the yield spread premium and interest 
rate payments. Borrowers do not have access to the rate sheets that 
describe this trade-off. Indeed, many consumers may not even 
understand that there is a trade-off. To further complicate matters, 
the mortgage industry is continuously evolving: the range and 
complexity of products expands every year. Because consumers borrow 
fairly infrequently, the average borrower will be at an extreme 
informational disadvantage compared to the lender. To exacerbate 
this situation, the typical homebuyer may be rushed and easily 
steered into a bad loan because they are under pressure to make an 
offer on a home. This is especially the case for first-time 
homebuyers who will not be as likely to challenge lenders, whom they 
may view as unquestionable experts.
    Closing costs (lender fees and title charges) add to the 
borrower's confusion. They are not as significant as the loan itself 
and total on average approximately four percent of the loan amount. 
However, the direct lender fees and the title charges are perhaps 
just as perplexing to the consumer. First, the multiplicity of fees 
is confusing (see Exhibits 1-3 of Chapter 3 for a list of the 
different names of upfront lender fees and settlement charges). The 
purpose of every fee and title charge is likely to be neither 
understood nor questioned by the average first-time homebuyer, who 
may be intimidated by the formality of the transaction. Second, to 
add to the confusion and uncertainty, even once the charges have 
been agreed upon, they are subject to change until the day of 
closing. Such informational asymmetries between the buyer and seller 
impede the ability of the consumer to be an effective shopper and 
negotiator.
    Consumers have strong incentives to ensure that they are getting 
the best deal possible on a mortgage loan and the associated third-
party settlement costs, but poorly-informed decisions have drastic 
consequences. First, the household itself will lose by paying more 
for housing and possibly by ruining their credit history in the 
event of default. Second, markets imperfections stemming from 
information asymmetries may stand in the way of achieving one of 
this administration's domestic priorities: expansion of 
homeownership. There is a wide range of positive economic 
externalities from homeownership that have been investigated in the 
empirical housing economics literature. These include household 
saving, wealth accumulation, property improvements, a more pleasing 
urban environment, an increase in political activity, a reduction of 
crime, better child outcomes, and a positive impact on the labor 
supply of women. The average loan amount is 3.5 times a household's 
income: even minor inefficiencies in this market will have sizeable 
impacts on the U.S. economy.
    The current GFE format contains a long list of individual 
charges that can be overwhelming, often confuses consumers, and 
seems to provide little useful information for consumer shopping. 
Current RESPA regulations have led to a proliferation of charges 
that makes consumer shopping and the mortgage settlement process 
both difficult and confusing, even for the most informed shoppers. 
Long lists of charges certainly do not highlight the bottom-line 
costs so consumers can shop and compare mortgage offers among 
different originators. In addition, under today's rules, the 
estimated costs on GFEs may be unreliable or incomplete, or both, 
and final charges at settlement may include significant increases in 
items that were estimated on the GFE, as well as additional 
unexpected fees, which can add substantially to the consumer's 
ultimate closing costs. The process of shopping for a mortgage can 
also involve complicated financial trade-offs, which are not always 
clearly explained to borrowers. Today's GFE is not an effective tool 
for facilitating borrower shopping nor for controlling origination 
and third-party settlement costs.
    The potential for cost reductions in today's market is also 
indicated by studies showing relatively high and highly variable 
charges for third-party services, particularly for title and closing 
services that account for the major portion of third-party fees. 
There is not enough incentive for loan originators to control 
settlement costs by negotiating lower costs from third-party 
providers; rather, they too often simply pass through increases in 
third-party costs to consumers. Because of their lack of expertise, 
consumers may not be the best shoppers for third-party services 
providers, leaving them to rely on recommendations from real estate 
agents and lenders. Thus, a framework is needed that would encourage 
competitive negotiations and other arrangements that would lead to 
lower third-party settlement prices.
    Today's mortgage market is increasingly characterized by the 
introduction of efficiency enhancing improvements such as automated 
underwriting systems and, through competition, these improvements 
are leading to lower prices for consumers. But the one area where 
current RESPA regulations act as a major barrier to competition and 
lower settlement services is the production and pricing of 
settlement services. Under current law, average cost pricing 
(another cost reduction technique) is inhibited by existing RESPA 
regulations.
    The goal of HUD's RESPA reform is to even the playing field. The 
rule will accomplish this by requiring lenders to provide consumers 
information that lenders already have in a format that is 
transparent. One of the major inefficiencies of imperfect 
information is the costs of acquiring information. RESPA reform will 
go a long way toward educating consumers. The first page of the new 
GFE presents a brief summary of the terms of the loan that would 
warn prospective borrowers of potentially expensive aspects of the 
loan including loan amount, maximum interest rate, prepayment 
penalties, and the total estimated settlement charges. The second 
page provides more detail on the charges for loan origination and 
other settlement services. The third page provides a trade-off table 
so that consumers will learn the relationship between the interest 
rate and the yield-spread premium. The third page also includes a 
table so that the consumer can take notes on alternative loan offers 
and thus comparison shop. Tolerances will limit how much settlement 
charges can vary once the GFE has been made and the comparison page 
of the HUD-1 will serve to double-check the GFE regarding settlement 
charges and provide a summary of the key terms of the borrower's 
loan at settlement. The final rule also allows settlement service 
providers to use pricing based on average charges, making their 
business operations simpler and less costly. It is expected that the 
new GFE will encourage shopping, increase efficiency, lower housing 
costs, and promote the purchase of loans that are more suited to a 
households' needs.

Empirical Evidence of Price Discrimination

    Studies indicate that consumers are often charged relatively 
high fees and can face wide variations in settlement prices, both 
for origination and third-party settlement services. Chapter 2 
offers convincing evidence that not only do borrowers find it 
difficult to comparison shop in today's mortgage market, but that 
they are all too often charged excessive prices. The enormous 
potential for cost reductions in today's market is indicated by 
studies showing that yield spread premiums do not always offset 
consumers' origination costs. Studies show that consumers are, in 
effect, charged relatively high prices in some transactions 
involving yield-spread premiums, and that the mortgage market is

[[Page 68268]]

characterized by ``price dispersion.'' In other words, some 
borrowers get market price deals, but other borrowers do not. 
Studies show that less informed and unsuspecting borrowers are 
particularly vulnerable in this market. But given the fact that a 
borrower may be more interested in the main transaction (the home 
purchase), even more sophisticated borrowers may not shop 
aggressively for the mortgage or may not monitor the lending 
transaction very closely.
    The Urban Institute (2008) collected data on 7,560 FHA loans. 
The mean total loan closing cost for all loans is $4,917 for an 
average loan amount of $108,237. Total charges are composed of loan 
charges $3,081, title charges $1,329, and other third party charges 
$507. It is apparent from the distribution presented below that 
there is significant variation in closing costs: the standard 
deviation is $2,381. For its statistical analysis, the Urban 
Institute focused on a subsample of 6,366 non-subsidized loans, for 
which the mean total charges are slightly higher at $5,245. Lender 
charges for non-subsidized loans are $3,390, of which $1,450 are 
direct fees and $1,940 is the average YSP.

              Table 6-5--Distribution of Categories of Closing Costs as a Percentage of Loan Amount
                            [Calculated by HUD from data provided by Urban Institute]
----------------------------------------------------------------------------------------------------------------
                                                                       50th
             Series               5th percentile       25th         percentile         75th            95th
                                                    percentile       (median)       percentile      percentile
----------------------------------------------------------------------------------------------------------------
Total Closing Cost..............             2.9            4.1%             5.1             6.4             8.9
Total Loan Charges..............             1.3            2.4%             3.2             4.2             6.2
    Yield-spread premium........             0.3            1.3%             2.0             2.7             3.8
    Direct loan fees............             0.0             0.8             1.3             1.8             3.3
Total Title Charges.............             0.6             0.9             1.2             1.6             2.3
Other Third-Party Charges.......             0.2            0.4%             0.6             0.8             1.4
----------------------------------------------------------------------------------------------------------------

    A great degree of variation appears in the lender fees. Since 
total loan charges are correlated with loan amount, it would be 
useful to examine the distribution of closing costs as a percentage 
of loan amounts to ascertain whether the variation in fees is still 
present. HUD calculated the distributed of these ratios for non-
subsidized loans from a data set of closing cost provided by the 
Urban Institute. There is slightly less variation when measured as a 
percentage but it is still substantial: the ratio of what the 75th 
percentile pays as a percentage of the loan to what the 25th 
percentile pays is 1.8 for total loan charges, 2.1 for the yield 
spread premium (indirect loan fee), and 2.4 for direct loan fees.
    It is apparent that half of the borrowers pay loan charges equal 
or greater than 3.2% of their loan amount; one-quarter pay loan 
charges of at least 4.2% of their loan amount; and five percent pay 
loan charges of at least 6.2% of their loan amount. The variation is 
similar for title charges and other third-party charges. Half of the 
borrowers pay total closing costs equal or greater than 5.1% of 
their loan; one-quarter pay closing costs of at least 6.4% of their 
loan amount, and five percent pay closing costs of at least 8.9% of 
their loan amount.
    HUD believes that these data provides strong indications of 
large price dispersion and thus price discrimination. Price 
discrimination will always lead to a loss in consumer surplus and 
unless price discrimination is perfect, it will also lead to a loss 
in social welfare. It should also be noted that if the variation of 
fees and charges paid is greater than the actual costs of providing 
the services, then that constitutes evidence of a violation of 
RESPA, which explicitly prohibits mark-ups.
    First, in a competitive market the price of the good should 
depend on its quality and not to whom and how it is sold. If there 
is dispersion because the negotiations are face-to-face, this would 
suggest that the nature of the market exacerbates the consumer's 
informational disadvantage. Indeed, there is strong evidence that 
individuals pay different prices for reasons other than how costly 
service provisions will be. The Urban Institute report (2008) finds 
that African Americans pay an additional $415 for their loans and 
that Latinos pay an additional $365 (after taking into account 
borrower differences such as credit score and loan amount). These 
loans are not subprime loans but standard FHA loans. Other 
researchers have found similar results: Jackson and Berry (2002, see 
the Regulatory Impact Analysis for reference) find that mortgage 
brokers charge African-Americans (by $474) and Hispanics (by $580) 
substantially more for settlement services than other borrowers. 
Discrimination by race or ethnicity is not economically efficient 
and would not survive in a perfectly competitive market.
    Second, reconsider the yield-spread premium. We mentioned that 
this is one of the elements of a mortgage that a consumer is not 
likely to understand. The yield-spread premium is compensation to 
the broker for selling a loan with a higher interest rate. Thus, as 
the interest rate rises so should the yield-spread premium. This 
relationship appears to hold in the data analyzed. The broker earns 
income from two sources: a yield-spread premium that is paid by the 
lender and fees that are paid by the consumer. However, the burden 
of the yield-spread premium is on the consumer, who pays a higher 
interest rate for loans with a higher yield-spread premium. If 
consumers were perfectly informed, there would be a negative one-to-
one relationship between up-front fees and the yield-spread premium. 
They simply represent two different ways of compensating the broker 
for the effort required to originate a loan.
    The Urban Institute (2008) finds no strong trade-off between the 
yield-spread premium and upfront cash payments. Ideally, each dollar 
of YSP generated by a higher interest rate would result in a one 
dollar reduction in upfront fees. The reality is that this is not 
even close to being true. The Urban Institute finds that paying one 
dollar of YSP to a mortgage broker reduces upfront fees by only 7 
cents.\22\
---------------------------------------------------------------------------

    \22\ In a sample, which is appropriate for investigating YSPs, 
of nonsubsidized loans with a rate above 7 percent, the Urban 
Institute finds that broker loan-origination fees, instead of being 
lower by a dollar for each dollar of YSP, are higher by 16 cents. 
This result is stunningly bad for borrowers. FHA borrowers appear to 
get no benefit from YSPSs on brokered loans with coupon rates above 
7 percent.
---------------------------------------------------------------------------

    This result is derived from a sample of nonsubsidized loans 
above with a rate above 7 percent, which is appropriate for 
investigating YSPs. FHA borrowers appear to get no benefit from 
YSPSs on brokered loans with coupon rates above 7 percent. The 
result is not much better when using the larger data set of all 
nonsubsidized loans: The Urban Institute finds that broker loan-
origination fees, instead of being lower by a dollar for each dollar 
of YSP, are higher by 16 cents. This result is stunningly bad for 
borrowers. Clearly, the average FHA borrower has no idea a higher 
interest rate can be used to reduce upfront charges. Such a 
relationship is contrary to what one would expect in a market where 
there were only minor imperfections. Further evidence is from 
Jackson and Berry (2002) who studies only brokered transactions, a 
description of which can be found in Section IV.D.2 of Chapter 2 of 
the Regulatory Impact Analysis. They find that the problem of price 
dispersion occurs when yield spread premiums are present, because in 
these situations there is no single price for broker services: 
``Most borrowers pay more than 1.5 percent of loan value; more than 
a third pay more than 2.0 percent of loan value; roughly ten percent 
pay more than 3.5 percent of loan value.'' Jackson and Berry find 
this ``price dispersion'' troubling, as it suggests that brokers use 
yield spread premiums as a device ``to extract unnecessary and 
excessive payments from unsuspecting borrowers'' (page 9).
    Third, consider the confusion that the variety of loan products 
and permutations of those products can create. If informational 
asymmetries are significant, then lenders will

[[Page 68269]]

be able to earn more when selling more complex products. Borrowers 
who simplify their mortgage shopping by rolling all lender/broker 
fees into the interest rate (i.e., get ``zero-cost'' loans) pay 
$1,200 less for their loans than brokers who pay lender or broker 
fees as measured by implicit YSPs. Borrowers who pay points realize 
only $20 of benefits for every $100 of points paid, for a net loss 
of $80. It appears that the industry is able to take advantage of 
loan complexity, which is evidence of price discrimination not 
related to the cost of originating the loan.
    Fourth, consider other settlement charges. Title insurance is an 
industry with a strong potential for natural monopoly. The costs of 
title insurance are primarily related to research of property 
transactions. There is a large fixed cost of entry which is 
compiling a database of transaction and lending records. There 
should not be a great variation in settlement charges since the only 
component that does vary substantially is the insurance premium. The 
Urban Institute (2008) finds an average $1,329 title charge in their 
sample of all loans with a standard deviation of $564. They also 
find a significant variation by state with New York, Texas, 
California, and New Jersey all costing at least $1,000 more (holding 
property values constant) than North Carolina, the lowest-cost 
state. A reasonable question is what extra benefits people in the 
high-cost states get relative to those in low cost states, or why 
costs are so high if there are no extra benefits. It is also useful 
to analyze total title costs on a state-by-state basis due to the 
different legal requirements that exist among the states and the 
different customs that might have evolved in them as well. HUD 
examined within state variation of settlement fees. One measure of 
variability that we calculated for each state was the difference 
between the median of the highest quartile of title charges and the 
median of the lowest quartile. This is a measure of the difference 
between the typical charge for the highest fourth of the borrowers 
and the lowest fourth of the borrowers within each state. This 
difference was over $1,000 for nine states. Due to the extent of 
price dispersion, we can expect significant savings from the final 
rule.
    The primary purpose of this discussion was to show that there is 
great variation in closing costs and thus room for price 
discrimination. HUD would like to emphasize that the goal was not to 
portray lenders, and especially mortgage brokers, as unscrupulous 
and harmful to economic welfare. On the contrary, HUD recognizes 
that mortgage brokers and other lenders have played a crucial role 
in recent trends in home ownership. It is also clear from the 
statistical evidence presented in this section that there are many 
ethical loan originators. One quarter of the borrowers in this 
sample paid no more than 2.4% in loan charges and 4.1% in total 
closing costs. Consider that if the entire market mirrored this more 
efficient segment, then RESPA reform would not be as urgent.

Issues Raised in Comments on the 2008 Initial Regulatory Flexibility 
Analysis

    Section IV.A presents a review of comments on the 2008 IRFA. 
Sections IV.B and IV.C serve as roadmaps to other issues regarding 
the rule.

Comments Concerning the Initial Regulatory Flexibility Analysis

    This section describes how HUD responded in this Final 
Regulatory Flexibility Analysis (FRFA) to comments received on the 
Initial Regulatory Flexibility Analysis of the 2008 proposed rule. 
The primary comments on the 2008 IRFA included: a report from the 
National Association of Realtors, prepared by Ann Schnare, who 
claimed that HUD had underestimated the costs of the rule; 
criticisms from advocates of small business that HUD had not 
adequately analyzed the impacts of its rule on industry structure; 
and an assertion by Representative Manzullo that HUD used obsolete 
data in its analysis.
    ``HUD Underestimated the Compliance Costs'' (National 
Association of Realtors) Ann Schnare prepared alternative estimates 
\23\ for the National Association of Realtors (NAR) of the 
compliance costs of HUD's 2008 proposed reform of the Real Estate 
Settlement Procedures Act (RESPA) to simplify the process and reduce 
the costs of obtaining a mortgage loan. Their report contains 
worthwhile suggestions, such as performing a sensitivity analysis 
with respect to the number of applications per loan. However, their 
cost estimates are inaccurate. In Sections IV, HUD discusses the 
NAR's major comments that are applicable to the Regulatory Impact 
Analysis of the final rule.
---------------------------------------------------------------------------

    \23\ Ann E. Schnare, ``The Estimated Costs of HUD's Proposed 
RESPA Regulations,'' prepared for the National Association of 
Realtors (June 3, 2008).
---------------------------------------------------------------------------

Below iS a Summary of the NAR's Comments and HUD's Responses

    The NAR states that HUD ignored a major compliance cost of the 
rule incurred by loan originators: the hedging costs of guaranteeing 
the interest rate for the shopping period of ten days. Including 
hedging costs dramatically increases compliance costs by a factor of 
four. However, the NAR made an erroneous assumption about the 
proposed GFE: there is no requirement of an interest-rate guarantee. 
Thus, hedging costs will be zero (See Section VII.D.1.).
    A second criticism of the analysis of the compliance cost of the 
GFE is that HUD does not consider the possibility that the rule 
could increase the administrative costs to loan originators by 
generating a greater demand for GFEs. Although HUD believes that it 
is just as likely that applications do not increase, HUD has 
included a sensitivity analysis of compliance costs by the number of 
applications. (See Section VII.D.2.)
    The NAR points to another cost not included in the IRFA: the 
cost of preliminary underwriting. However, this would only be a 
factor if the application to loan ratio were to increase. HUD 
assumed in the IRFA that this ratio would be constant. HUD's 
response was to include this cost in a high application-to-loan 
scenario. (See Section VII.D.3)
    HUD was criticized for using inconsistent estimates of the value 
of time in order to raise the value of the benefits of the rule 
relative to the costs. In fact, the reverse is true: HUD used a 
higher rate to estimate the costs and a lower one to estimate the 
benefits (See Section VII.D.4).
    The NAR questions the potential benefits of the GFE. For 
support, Schnare turned to a study that used a sample suffering from 
selection bias (See Section V.A.1.g of Chapter 2 for a description) 
and questioned whether the rule would solve the problem of ``bait 
and switch'' or any other misleading business practice. PD&R has 
recently received A Study of Closing Costs for FHA Mortgages 
(summarized above in Section III and at length in Chapter 2). The 
results strongly indicate that HUD's RESPA reform efforts are aimed 
directly at very serious problems in the market for these loan 
origination and other settlement services.

Impact of the Rule on Industry Structure

    Many industry commenters stated that there were elements of the 
rule that disadvantaged small business. One of the primary concerns 
of small title firms is the potential adverse effect of volume 
discounting. The 2008 final rule set a clearer standard for 
compliance in the context of the new GFE. HUD merely clarified that 
volume discounting is legal as long as the savings are passed along 
to the consumer. ALTA, ICBA, NAMB, and NAR contend that volume 
discounts will favor large settlement service providers and loan 
originators/lenders at the expense of small businesses and place 
them at a disadvantage. The Office of Advocacy formally endorsed 
this position in their comment letter (June 11, 2008) and predicted 
that HUD's proposed clarification ``may cause small businesses to 
leave the market and result in higher prices for consumers in the 
long term.''
    ALTA stated that the ability to negotiate volume discounts on 
the local services that are incidental to the issuance of a title 
policy (such as a title search) will disadvantage the small title 
insurance agency that does not have the resources to guaranty a 
stream of business to a third party or discount its own services 
when the services are performed in house. In addition, ALTA 
expressed concern that mortgage lenders and brokers will add to the 
anticompetitive effects by favoring affiliated title companies or 
those companies that can provide title related services on a 
nationwide basis.
    Comment. Both the NAR and ALTA asserted that the Regulatory 
Impact Analysis of the proposed rule did not adequately address the 
anti-competitive issues of the proposed rule.
    Response. In its Regulatory Impact Analysis, HUD very 
meticulously outlined the proportional impacts of the rule on small 
business. HUD continues to believe that as long as a small 
businesses is not charging consumers excessive fees, then small 
business will not suffer disproportionately.
    To a large extent, the issue of unfavorable impacts on small 
business is mute. The greatest objection by small business was to 
volume discounts. In response to the numerous objections to HUD's 
clarification, HUD will not address volume discounts in the rule. 
HUD wants to ensure that any change will adequately protect 
consumers while at the same time providing adequate flexibility and 
due consideration to small

[[Page 68270]]

business concerns. It remains HUD's position, however, that 
discounts negotiated between loan originators and other settlement 
service providers, or by an individual settlement service provider 
on behalf of a borrower, where the discount is ultimately passed on 
to the borrower, is not, depending upon the specific circumstances 
of a particular transaction, a violation of section 8 of RESPA. If 
the borrower fully benefits from the discount, these types of 
mechanisms that lower consumer costs are within RESPA's principal 
purposes.
    There may be other facets of the rule, such as tolerances, that 
are thought to have a disproportionate impact on small business, 
even on those small firms that are not charging excessive prices. 
Instead, HUD believes that the rule will create opportunities for 
efficient firms to expand their operations. This opinion is based on 
our observations that a distinguishing characteristic of the real 
estate industry is that it is very locally oriented. The value of 
proximity and local expertise make small firms more efficient in 
providing services to consumers. RESPA reform will not change that 
essential characteristic of the real estate industry. (See Section 
II.C.5. for a discussion).

Timeliness of Data

    Comment. Some criticized HUD for using ``old'' data in its 
Regulatory Impact Analysis of the 2008 proposed rule. For example, 
Representative Don Manzullo wrote in his comment letter that the 
market has changed significantly since the data was obtained in 2002 
and 2004; that these changes may impact how the rule is implemented; 
and that should wait until it has data on current market conditions 
before moving forward with the rule.
    Response. HUD's initial regulatory flexibility analysis of the 
proposed RESPA rule, which was completed in late 2007, used the 
latest, at that time, officially available federal government data 
on small businesses provided by the Small Business Administration 
(SBA) as derived from two Census Bureau data sources: the 2002 
Economic Census (business income or receipts), and the 2004 County 
Business Patterns data (number of businesses and firm employment 
size). These data are augmented, when possible, by highly regarded 
data from industry sources. For example, the SBA/Census data on 
mortgage brokers do not agree with estimates of the size of that 
industry made by the National Association of Mortgage Brokers and 
other observers. HUD ultimately based its analysis of the mortgage 
broker industry on these private sector data.
    Chapter 5 of the RIA provides extensive documentation of the 
characteristics of the industries directly affected by the rule, 
including various estimates of the numbers of small entities, 
reasons why various data elements are not reliable or unavailable, 
and descriptions of methodologies used to estimate (if possible) 
necessary data elements that were not readily available. The 
industries discussed in Chapter 5 of the RIA included the following 
(with Chapter 5 section reference): mortgage brokers (Section II); 
lenders including commercial banks, thrifts, mortgage banks, credit 
unions (Section III); settlement and title services including direct 
title insurance carriers, title agents, escrow firms, and lawyers 
(Section IV); and other third-party settlement providers including 
appraisers, surveyors, pest inspectors, and credit bureaus (Section 
V); and real estate agents (Section VI).
    The SBA does not expect to have an update (from the 2007 
Economic Census) of the 2002 Economic Census data (business income 
or receipts) available until sometime in 2010, well beyond the time 
horizon for this rulemaking effort. Thus, the FRFA of the final 
RESPA rule will continue to rely in part on data from 2002.
    More importantly, HUD's estimate of the annual regulatory burden 
depends primarily on our assumptions concerning the compliance cost 
per loan. HUD has used generous estimates of the costs of the rule 
but has received no hard data from industry that would allow us to 
refine our estimates. The aggregate impact of the rule depends on 
mortgage volume. Our approximation of the average year is 12.5 
million transactions. It is probable that the level of originations 
in 2008-2009 will be lower than this amount. However, the final rule 
requires a twelve-month implementation period. By the time the rule 
is in effect, the average mortgage volume is expected to return to 
that of the average year.

Alternatives Considered To Minimize Impact on Small Businesses

    Section VI of this chapter provides discussion of the 
alternatives considered by HUD in developing the final rule with a 
focus on those alternatives considered to minimize the impact on 
small business. Section VI includes a summary discussion of the 
following major alternatives: maintaining the status quo; not 
including the yield-spread premium calculation in the GFE; requiring 
the preparation and reading of a closing script; and clarification 
in the rule of the legality of volume discounting. Section VI also 
includes a discussion of steps HUD took to make the new GFE easier 
to implement for small businesses.

Comments and Responses to Other Issues

    Chapters 1-5 of the Regulatory Impact Analysis include detailed 
summaries of the comments submitted by small businesses and other 
firms on various aspects of the 2008 proposed rule and in response 
to the 2008 IRFA. Detailed discussion of comments received can be 
found in the preamble. Detailed analysis responding to comments 
received can be found in Sections VI and VIII of Chapter 3. Detailed 
discussion of comments related to the compliance burden of the rule 
can be found in Sections VII, VIII, and IX of this chapter. Analysis 
responding to some specific comments on the 2008 IRFA can be found 
in Chapter 3. Changes made to the 2008 proposed rule in response to 
comments received are summarized in Section VI of this chapter.

Description and Estimate of the Number of Small Entities

    Chapter 5 provides extensive documentation of the 
characteristics of the industries affected by the rule, including 
estimates of the numbers of small entities. The industries discussed 
in Chapter 5 included the following (with industry code and Chapter 
V section reference): mortgage brokers (Section II); lenders 
including commercial banks, thrifts, mortgage banks, credit unions 
(Section III); settlement and title services including direct title 
insurance carriers, title agents, escrow firms, and lawyers (Section 
IV); and other third-party settlement providers including 
appraisers, surveyors, pest inspectors, and credit bureaus (Section 
V); and real estate agents (Section VI). The specific industry names 
and industry codes (North American Industry Classification System, 
or NAICS code) for the mortgage originators and third-party firms 
covered in Chapter V are as follows:

Mortgage Origination Firms

    1. Mortgage Loan Brokers (522310).
    2. Commercial Banks (522110).
    3. Savings Institutions (522120).
    4. Real Estate Credit/Mortgage Bankers (522292).
    5. Credit Unions (522130).

Third-Party Service Firms

    1. Direct Title Insurance Carriers (524127).
    2. Title Abstract and Settlement Offices (541191).
    3. Offices of Lawyers (541110).
    4. Other Activities Related to Real Estate (531390).
    5. Offices of Real Estate Appraisers (531320).
    6. Surveying and Mapping (except geophysical) Services (541370).
    7. Credit Bureaus (561450).
    8. Exterminating and Pest Control Services (561710).
    9. Offices of Real Estate Agents and Brokers (531210).
    Chapter 5 supports Chapters 3 and 6 by providing basic mortgage-
related data on each industry and by explaining the various 
methodologies for estimating the share of industry revenue accounted 
by the different component industries and by small businesses within 
each component industry. Chapter 5 presents an overview of the 
industries involved in the origination and settlement of mortgage 
loans (see above list). Industry trends are briefly summarized and 
special issues related to RESPA are noted. There is also a 
description of the economic statistics for each industry, with an 
emphasis on each industry's share of small business activity. Both 
the estimation of the revenue share for various industry sub-sectors 
(e.g., large title insurers' share of total revenue in the title and 
settlement industry) and the estimation of the small business share 
of mortgage-related revenue within the industry, often involve 
several technical analyses that pull together data from a variety of 
sources, in addition to Census Bureau data. This leads to several 
sensitivity analyses to show the effects of alternative estimation 
methods and assumptions. This chapter also reports the revenue 
transfers from the RESPA rule for the specific industry sectors; 
these transfers are reported in dollar terms and, where possible, as 
a percentage of industry revenue. Finally, a number of technical 
issues and special topics, such as techniques for estimating the 
distribution of

[[Page 68271]]

retail mortgage originations, are discussed. A technical appendix to 
Chapter 5 provides relevant definitions and explains the methodology 
associated with the economic data obtained from the Census Bureau. A 
data appendix in Chapter 5 includes tables with the economic data 
(number of firms, employment, revenue, etc.) for each industry 
sector.
    Thus, the Regulatory Impact Analysis pulls together substantial 
data from the Bureau of the Census and industry sources to provide 
estimates of revenue transfers for different industries and for 
small businesses within those industries. Chapter 5 provides a full 
technical review of the data used and the various methodologies for 
estimating the small business share of industry revenues.
    Drawing from the analysis in Chapters 3 and 5, Appendix A to 
this chapter provides estimates of the revenue impacts from the new 
GFE. These data are presented in aggregate form ($ million) and on a 
per firm basis, covering all firms (both employer and non-employer), 
small firms (small employer firms plus non-employer firms), and very 
small firms (very small employer firms plus non-employer firms). 
Separate data for non-employer firms are also provided. In some 
cases, different projections are provided for some of the more 
important sensitivity analyses conducted in Chapters 3 and 5. The 
technical analyses presented in Chapter 5 indicate some uncertainty 
around some of the numbers (such as the number of small mortgage 
banks, the split of revenue among different sectors of the broad 
title industry, etc.). Readers are referred to the technical 
discussion in Chapter 5 for various qualifications with the data and 
for various sensitivity analyses that illustrate the effects on the 
estimates of alternative assumptions. In addition, Chapter 5 
explains the definitions of small and very small being used here.

Alternatives Which Minimize Impact on Small Businesses

    Under the Initial Regulatory Flexibility Analysis, HUD must 
discuss alternatives that minimize the economic impact on small 
entities consistent with the stated objectives of applicable 
statutes, including a statement of the factual, policy, and legal 
reasons for selecting the alternative adopted in the final rule and 
why each of the other significant alternatives to the rule 
considered by the agency was rejected. Many of the alternatives that 
HUD considered and implemented were directed at making the GFE less 
burdensome for small businesses. These changes are described below. 
A more detailed discussion of the changes to make the GFE easier to 
implement for small businesses are provided in Section VIII of 
Chapter 3. For a discussion of all of the major alternatives 
considered to the final GFE, see Chapter 4.
    This Regulatory Impact Analysis discusses several steps that HUD 
took that will assist small businesses involved in the mortgage 
origination and settlement process. Examples include simplifying the 
new GFE form (fewer numbers, etc.), designing the new GFE form so 
that there is a level playing field between lenders and brokers, and 
delaying the phase-out of today's GFE for twelve months. HUD also 
made numerous other changes that were designed to make the GFE 
easier to use, particularly for small businesses. These changes are 
discussed throughout Chapter 3 and summarized in several places in 
the Regulatory Impact Analysis. This section will list them again, 
as it is useful to provide a record of the changes made to the 2008 
proposed rule that should make the new GFE easier to implement for 
small businesses. Considered as a group, these changes are 
important. While many are designed to address a problem faced by 
large as well as small lenders, for the most part, they address 
problems that would place a greater burden on small than large 
businesses. Examples of the changes that HUD made are the following:
     Volume-based discounts. Small businesses, especially 
closing attorneys and escrow companies stated that lenders seeking 
volume discounts would place them at a competitive disadvantage to 
larger entities and force them out of business. HUD responded by not 
addressing volume discounts in its final rule.
     Tolerances. Some commented that large lenders would 
have an easier time meeting tolerances than small businesses by 
contracting with large third-party settlement-service providers, and 
thereby placing small settlement service providers at a competitive 
disadvantage. If exceeding the tolerance was an infrequent and 
unpredictable event, larger firms may be able to diversify the risk 
over a larger pool of loans. The final rule provides loan 
originators with an opportunity to cure any potential violation of 
the tolerance by reimbursing the borrower any amount by which the 
tolerances were exceeded. The opportunity to cure will permit loan 
originators to give an estimate of expected settlement charges in 
good faith, without subjecting them to harsh penalties if the 
estimate turns out to be lower than the actual charges at 
settlement. This change reduces the potential damages of exceeding 
the tolerances.

Compliance Costs and Regulatory Burden: New GFE

    This section focuses on the compliance, regulatory, and other 
costs associated with implementing the final rule. It examines 
compliance and regulatory impacts of the new GFE on originators. 
There are two types of compliance and regulatory costs--one-time 
start-up costs and recurring costs. Section VII.B discusses start-up 
costs, noting that HUD has lengthened the phase-in period for the 
new GFE in order to reduce any implementation burden on the 
industry, particularly small firms. Section VII.C discusses 
recurring costs that are related to implementing the new GFE. The 
simplicity of the new GFE, plus the changes that HUD has made to 
improve the new GFE, will limit these annual costs, as discussed in 
Section VII.D. Section VII.E discusses compliance issues related to 
tolerances on settlement party costs. Finally, Section VII.F 
outlines efficiencies associated with the new GFE.
    Before examining the specific regulatory and compliance costs, 
Section VII.A reviews the basic data used in estimating these costs. 
For a similar description of the costs on the settlement industry, 
see Section 0.

Data Used in Compliance Cost Estimates

    The following tables provide a summary of the industry 
characteristics data used to develop compliance cost estimates for 
the GFE. Details on the derivation of these data are available in 
Chapter 5. The compliance costs of the GFE provisions of the rule 
apply mainly to retail loan originators. While wholesale lenders, 
for example, are involved in the mortgage origination process, they 
are not responsible for issuing the GFE--rather the originating 
lender or broker is responsible for the issuing the GFE to the 
borrower.\24\ Therefore, data are presented only for those brokers 
and lenders that do retail mortgage loan originations. Settlement 
agents do not generate GFEs and therefore they would not be subject 
to these GFE-related costs. Settlement agents will, however, be 
involved generating HUD-1s; since there are some changes to the HUD-
1 form, there are compliance costs on settlement agents associated 
with that change. In most cases, HUD expects that loan originators 
will complete the comparison page of the HUD-1 form. However, a 
portion of the compliance cost will be the burden on settlement 
agents of completing the comparison page accurately in cases where 
there is additional information required from the settlement agent. 
Other third-party providers (e.g., appraisers) will face no 
compliance costs from the GFE provisions of the rule.
---------------------------------------------------------------------------

    \24\ If the wholesale lender generates the GFE, then there would 
be a charge to the originator (either a direct charge or a reduction 
in fees, compared with the case where the originator issues the 
GFE).
---------------------------------------------------------------------------

    Chapter 5 provides information on the total number of brokers 
and lenders that are likely to be affected by the new RESPA rule and 
its revised GFE form. Section II of that chapter explains that the 
number of brokers has grown substantially in recent years. In 2000, 
there were 30,000 brokers, but with the increase in refinancing, the 
number of brokers rose to 33,000 in 2001 and then jumped to 44,000 
in 2002 and then to 53,000 in 2004. According to Census Bureau data, 
practically all brokers (99.1%) qualify as a small business. Thus, 
it is estimated that small broker firms have ranged from 32,703 to 
52,523 over the past few years. As explained in Section III of 
Chapter 5, lenders that will be affected by the RESPA rule include: 
7,402 commercial banks (4,426 or 59.8% are small), 1,279 thrift 
institutions (641 or 50.1% are small), 1,287 mortgage banks (1,077 
or 83.7% are small), and 3,969 credit unions (3,097 or 78.0 % are 
small).\25\ Altogether, there are 13,937 lenders (including credit 
unions) affected by the RESPA rule, and 9,241 of these qualify as a 
small business.
---------------------------------------------------------------------------

    \25\ See Section III.B.5 of Chapter 5 for issues related to the 
number of small mortgage banks. As also explained in that section, 
the credit unions are the ones that report some mortgage origination 
activity.
---------------------------------------------------------------------------

    Table 6-6 provides the distribution of retail mortgage 
originations among the various industries and for small firms within 
each industry. Totals are estimated based on the number of mortgage 
originations (12,500,000 loans) that would occur in a ``normal'' 
year of mortgage originations (that is, not in a high-volume year 
with a

[[Page 68272]]

refinancing boom). The data below assume that brokers account for 
60% of mortgage originations and lenders, the remaining 40%.\26\ 
(See below for alternative origination volume and broker share 
estimates.)
---------------------------------------------------------------------------

    \26\ See Section III.B.5.d of Chapter 5 for the derivation of 
the distribution of retail originations among commercial banks, 
thrifts, and mortgage banks; the distribution used here is the 
``adjusted distribution'' for the number of loans. See Chapter 5 for 
reasons why there is some uncertainty with the estimated 
distribution and for analysis of an alternative distribution.

                                Table 6-6--Volume of Retail Mortgage Originations
----------------------------------------------------------------------------------------------------------------
                                                                                                Percent industry
                Industry                  All originations     Percent of      Originations by   originations by
                                                              originations       small firms       small firms
----------------------------------------------------------------------------------------------------------------
Mortgage Brokers........................         7,500,000             60.00         5,250,000             70.00
Commercial Banks........................         2,053,150             16.43           389,893             18.99
Thrifts.................................           974,750              7.80           120,089             12.32
Mortgage Banks..........................         1,551,500             12.41           644,803             41.56
Credit Unions...........................           420,600              3.36           122,563             29.14
                                         -----------------------------------------------------------------------
    Total...............................        12,500,000            100.00         6,527,349             52.22
----------------------------------------------------------------------------------------------------------------
As shown in Table 6-6, it is estimated that 52% of mortgages are originated by small brokers and lenders.

    Table 6-7 provides the total number of workers and the number of 
workers in small firms engaged in retail mortgage origination by 
industry. It is based on the mortgage origination volumes depicted 
in Table 6-6 and productivity rates of 20 loans per worker per year 
for mortgage brokers and lenders. See Section II.B.2.c of Chapter 5 
for the derivation of the 20 loans per worker in the broker industry 
and see Section III.B.5.g of Chapter 5 for a discussion of the 20 
loans per worker in the lender industry. Given the uncertainty 
around these estimates (and particularly the lender estimate which 
is obtained by simply assuming that lender workers are as productive 
as brokers), alternative estimates and sensitivity analyses are 
provided in Chapter 5. As noted in Chapter 5, one alternative would 
be to choose a lower productivity number for lenders, which would be 
consistent with the widely held belief that brokers are more 
productive than lenders; in addition, it may be more appropriate to 
overestimate the number of lender employees affected by the RESPA 
rule than to underestimate them.\27\ However, this analysis starts 
by assuming equal productivity for lenders and brokers.
---------------------------------------------------------------------------

    \27\ A comment should be made about the small business share for 
brokers. Section II.B.1 in Chapter 5 reports that small brokers 
account for 70% of broker industry revenue. Table 6-6 assumes that 
small brokers account for the same percentage (70%) of the number of 
loans originated by all brokers; it is possible that this percentage 
could be too low, given that Section II.B.2.c of Chapter 5 derives 
an estimate of 77% for the share of industry workers in small broker 
firms. The 77% figure is used in Table 6-7 (288,750 divided by 
375,000) for estimating the share of workers in small broker firms. 
The small business share of the number of workers in each of the 
four lender industries in Table 6-7 is assumed to be the same as in 
Table 6-6 for the number of loans. See Section III.B.5 of Chapter 5 
for the derivation of the small lender shares of lender 
originations.

                         Table 6-7--Workers Engaged in Retail Mortgage Loan Origination
----------------------------------------------------------------------------------------------------------------
                                                                                                   Percent of
                         Industry                             Total workers      Workers in        workers in
                                                                                 small firms       small firms
----------------------------------------------------------------------------------------------------------------
Mortgage Brokers..........................................           375,000           288,750             77.00
Commercial Banks..........................................           102,658            19,495             18.99
Thrifts...................................................            48,738             6,004             12.32
Mortgage Banks............................................            77,575            32,240             41.56
Credit Unions.............................................            21,030             6,128             29.14
                                                           -----------------------------------------------------
    Total.................................................           625,000           352,617             56.42
----------------------------------------------------------------------------------------------------------------

    As shown in Table 6-7, it is estimated there are 625,000 workers 
engaged in mortgage origination, with 352,617 of these operating in 
small businesses. As noted above, the mortgage volume figure 
(12,500,000 loans based on $2.4 trillion in originations) reflects 
industry projections of mortgage originations for 2008. Chapters 3, 
4, and 5 conduct sensitivity analyses with a higher level of 
originations. For example, one could consider an environment where 
15,500,000 loans were originated (compared with the 12,500,000 loans 
in the base case). In this case, the figures in Tables 6-6 and 6-7 
would change. For example, the number of workers in the broker 
industry would increase to 438,038 (with 337,293 in small firms) and 
the number of workers in the combined lender group would increase to 
271,250 (with 69,296 in small firms).\28\ Below, sensitivity 
analyses cover these higher estimates of the number of workers 
affected by the RESPA rule.
---------------------------------------------------------------------------

    \28\ As explained in Chapter 5, this scenario assumes that the 
increase in mortgage originations comes mainly from brokers; the 
loans-per-worker assumption is increased to 23 for brokers 
(consistent with that number increasing in Olson's surveys during 
higher volume years) but kept at 20 for lenders since their volume 
does not increase much during this scenario.
---------------------------------------------------------------------------

Compliance and Regulatory Burden: One-Time Costs

    Several one-time compliance burdens can be identified that will 
result from the new rule. All involve the adjustment process from 
the old rule to the new rule. Although HUD received comments on the 
one-time compliance cost issues associated with the new GFE, 
commenters did not provide any useful data on the magnitude of these 
costs. There are three major areas of expected one-time compliance 
costs of the new GFE. Those who generate the new GFE forms, loan 
originators, will need new software in order to produce the new 
forms.\29\ Their employees will need to be trained in the use of the 
new forms and software. Loan originators may seek legal advice to be 
certain that the arrangements they make to ensure that third-party 
service prices are accurate and within tolerances comply with the 
regulation. Loan originators may also seek legal advice regarding 
tolerances and average-cost pricing. In this section, it is 
estimated that these one-

[[Page 68273]]

time compliance costs will total $383 million, although it is 
recognized below that these costs could vary with several factors 
such as different levels of overall mortgage activity. Small brokers 
and small lenders firms will experience $268 million (or 70%) of 
these one-time compliance costs.
---------------------------------------------------------------------------

    \29\ This analysis assumes that the mortgage broker, not the 
wholesale lender, produces the GFE in transactions involving 
mortgage brokers. To the extent that the wholesale lender is 
involved in producing the GFE the use of the broker data will result 
in an overestimation of the impact on small businesses (since small 
businesses make up a much larger portion of broker businesses than 
they do of wholesale lender businesses).
---------------------------------------------------------------------------

Software Modification and Training Costs

    Loan originators would need alterations to their software to 
accommodate the requirements of the new rule since they generate the 
new GFE. There would be one-time costs for production and 
installation of the new GFE (software development, etc.). Software 
modification, or new software, is needed because the GFE has been 
changed. The implementation of software varies with business size. 
Small originators are likely to use commercial off-the-shelf (COTS) 
software products while larger originators may produce their own 
software if in-house development is cheaper than buying from outside 
suppliers. HUD reviewed several software products for loan 
origination and closing advertised on the Internet.\30\ Prices 
ranged from a flat $69 \31\ for one license to undisclosed 
negotiated prices based on the number of users and feature sets 
purchased. Software is generally priced according to the number of 
users (e.g., one license per user, or enterprise licenses based on 
the expected number of users in the enterprise). One new 
requirement, implicit from the tolerances, is that originators will 
have to keep track of the costs listed on the GFE in order to ensure 
that the tolerances are not exceeded at settlement. Most of the 
software products HUD examined have the capability to access 
databases of information, including pricing information, of third-
party service providers. Because these systems have the capability 
to access other databases, they would not need to be redesigned to 
carry forward prices from the GFE to the closing documents in order 
to determine if final settlement prices remain within tolerances. 
The GFE portion of the software would need to be modified to display 
the consolidated expense categories mandated in the rule. 
Redesigning the form appears to constitute a minor alteration of the 
software.
---------------------------------------------------------------------------

    \30\ Examples are: Vantage ILM, http://www.vantageilm.com; 
Utopia Originator from Utopia Mortgage Software, http://www.callutopia.com/support.html; The Mortgage OfficeTM from Applied 
Business Software,  http://www.themortgageoffice.com/main.asp; and 
MORvision Loan Manager from Dynatek, http://www.dynatek.com/products.asp.
    \31\ Good Faith Settlement Software by Law Firm Software; http://www.lawfirmsoftware.com/software/good-faith-estimate.htm. Note that 
this is very basic software compared to other alternatives. More 
sophisticated software is more expensive.
---------------------------------------------------------------------------

    The new GFE also requires additional information. The first page 
summarizes worst case scenarios for the borrower: the maximum 
monthly interest rate, the maximum monthly mortgage payment, and 
maximum loan balance. Such information is obvious for most types of 
loans but could require more effort to calculate for more exotic 
loans such as a negative amortizing loan. Some loan origination 
software will already possess analytical capabilities. However, 
producers of less sophisticated programs will need to write a few 
additional lines of code to create the output for the first page of 
the new GFE. Nonetheless, the final rule will have no impact on the 
primary function of origination software and would require only 
minor changes.
    Changes to the HUD-1 will have implications for loan origination 
software. The comparison page, which features a summary of the loan 
terms, requires lenders to provide information on the loan and 
settlement costs for page 3 of the HUD-1. Indeed, it is possible 
that most producers of loan origination software will begin to 
feature an application that generates an almost complete HUD-1 for 
the settlement agents to finish. One could add this application to 
loan origination software fairly easily. It will be a minor change 
since lenders enter most of the information needed for the 
comparison page for the GFE. The task facing the programmer will be 
to set up an interface for entry of additional escrow information 
needed in the comparison page, populate page 3 of the HUD-1 form 
with settlement cost and loan term data and print out the HUD-1 
form. The software would also perform the important task of 
calculating the difference between the figures on the initial GFE 
and the actual settlement costs and then check whether they are 
within the tolerances.
    Depending on the software that a firm has purchased there are 
three possibilities as to who pays the direct cost of developing new 
software. The first scenario is that a firm purchases an update of 
the program. This is a fairly standard option and is generally less 
than half the price of new software. Given that the changes required 
by the final rule are fairly minor, the price of an update should 
compensate software companies for the cost involved in altering 
their programs.
    The second possibility is that a firm purchases new software, in 
which case the cost of redesigning the forms to comply with the rule 
will be built into the purchase price. Firms that would purchase new 
software would include new entrants into the industry, pre-existing 
firms that would have bought new software for reasons unrelated to 
the final rule, and firms that use software for which updates are 
not offered. Many users routinely upgrade software as new versions 
are released and build the expected expenses into their business 
plans. To the extent that software is routinely upgraded, the extra 
costs of implementing the GFE changes will be reduced. In these 
cases, the software cost to the firm of the final rule is not the 
purchase price of the software but rather the increase in the 
purchase price as a result of the costs of redesigning software to 
meet RESPA guidelines.
    A third scenario is that software companies are obliged or 
volunteer to offer free updates, in which case the software cost of 
the final rule falls directly on software developers. However, 
indirectly, the cost of the new software will be shared by real 
estate and software firms. Software companies that offer free 
updates will price the risk of changes into the purchase price of 
the software. If a large unexpected change occurs, then the software 
company will bear the burden. However, the change required by RESPA 
will not be unexpected because the final rule will be made public 
and will not be costly for reasons previously discussed.
    In all three scenarios, the cost of an update is a good 
approximation of the software cost of the rule. In the first 
scenario in which firms purchase an update, it would probably be an 
overestimate of the cost to a purchaser because an update may 
contain other useful improvements to the software. However, it is a 
reasonable estimate of the cost in that many firms would not 
purchase an update if not for the final rule. In the second 
scenario, in which a firm purchases new software, the price of an 
update could serve as an approximation of the cost of implementing 
the required changes and thus an estimate of the resulting increase 
in the price of new software. In the third scenario, where the 
software companies bear the direct cost of the change, the price of 
an update could serve as an estimate of the cost to software firms 
of producing free updates.\32\
---------------------------------------------------------------------------

    \32\ Correctly estimating the cost to software firms is 
difficult given the nature of the output. Development is a one-time 
fixed cost, whereas the cost of delivering software to one user is 
very low. Given the decreasing average costs, the aggregate economic 
impact to the software industry would depend upon the number of 
firms.
---------------------------------------------------------------------------

    In the first two scenarios, where firms bear the burden of the 
change in the software; the costs of new or updated software will 
depend upon the number of employees in the firm using the software. 
Virtually all software companies providing software to lenders for 
loan origination offer volume discounts. Such a pricing policy 
reduces the average cost for large firms. Second, in larger firms 
many employees will have specialized duties that do not include 
completing the new GFE form and so will not require updated 
software. Thus, it is likely that small firms will bear a greater 
per employee software cost from the final rule.
    Based upon the discussion above and an examination of software 
pricing schemes, it is reasonable to make three assumptions in order 
to estimate the software costs of the final rule: (1) The cost per 
user is the cost of an update; (2) updates cost less than half of 
the cost of new software; (3) the costs per user for a firm decline 
significantly with the number of users. An example of the type of 
software that a firm might purchase is Bytepro Standard (by Byte 
Software, Inc., http://www.bytesoftware.com). This software has many 
analytical features such as the ability to calculate maximum loan 
amounts, which would be required by the new GFE. The software costs 
$395 for a two user package and $400 for five additional users. The 
per user cost for the first two is $198. The cost per user for an 
additional five is $80.
    We can safely assume that the industry average of the cost of an 
update would be no more than $150 for the first user, $100 per user 
for the average small firm, and $50 for the average large firm.\33\ 
Second, we assume that the proportion of workers involved in 
origination that use the software declines

[[Page 68274]]

with the size of the firm. For small firms, we assume that three-
quarters of all workers use the software and will need an update. 
For large firms, we assume that only half of the workers use 
origination software and need an update. Given these assumptions, 
the total cost to the industry of an update would be $33 million, of 
which $26 million is borne by small firms.\34\ This amounts to an 
average software update cost of $83 per user.
---------------------------------------------------------------------------

    \33\ Byte Software, Inc. offers an annual support service, which 
would include updates, for up to ten users for $300 per year. Every 
additional user over ten cost $30.
    \34\ To demonstrate that our estimate is a safe ceiling, suppose 
that there are one hundred software firms and that each one pays six 
programmers an average of $150,000 a year to upgrade the software to 
reflect the changes incurred by the proposed rule. The total cost to 
the software industry would be $90 million.
---------------------------------------------------------------------------

    In addition, each employee using the new software would require 
some time to adjust to the changes. The actual amount of time 
required to familiarize ones self with the new software is unknown. 
For this example it is assumed that 2 hours are required. If the 
opportunity cost of time is $72.12 per hour (based on a $150,000 
fully-loaded annual salary), then the opportunity cost of software 
training would be $144 per worker using the new software. Software 
users often learn about new modifications without formal training by 
using them with very little loss of time or productivity. Thus the 
software training costs estimated below are likely an upper bound. 
Table 6-8 shows the distribution of these costs by industry and the 
amount borne by small businesses within each industry. The table 
uses worker distributions from Table 6-7 and assumes half of the 
workers in large firms and three-quarters of the workers in small 
firms use the software and will require upgrades and training. Given 
these assumptions the total software training cost is $58 million, 
of which $38 million is borne by small firms. The grand total for 
software upgrade and training cost is $91 million, of which $65 
million is borne by small firms.

             Table 6-8--One-Time Software Upgrade and Training Costs of the Rule to Loan Originators
----------------------------------------------------------------------------------------------------------------
                                                             Total software
                         Industry                              upgrade and     Small business   Percentage small
                                                              training cost         cost
----------------------------------------------------------------------------------------------------------------
Mortgage Brokers..........................................       $61,267,428       $52,891,226              86.3
Commercial Banks..........................................        11,647,288         3,570,897              30.7
Thrifts...................................................         5,249,891         1,099,855              21.0
Mortgage Banks............................................        10,308,241         5,905,531              57.3
Credit Unions.............................................         2,569,710         1,122,511              43.7
                                                           -----------------------------------------------------
    Total.................................................        91,042,558        64,590,020              70.9
----------------------------------------------------------------------------------------------------------------

    Alternative estimates could be made. If 4 hours (instead of 2 
hours) of software training were required, then total costs would 
rise by $57 million to $148 million (with $103 million being the 
small business cost). Assuming that only two hours are required, but 
that the proportions of software users were raised to all of the 
workers in small firms and three-quarters of the workers in large 
firms, then the total software cost (including training) of the 
final rule would be $126 million, of which $86 million would be 
borne by small firms. If the proportions are increased (as in the 
latter scenario) and the hours are increased (as in the former 
scenario), then the total cost would be $206 (with $137 million 
being the small business cost).
    The estimates in Table 6-8 above are based on a ``normal'' level 
of mortgage origination activity and not that of a high volume year 
which might occur as a result of low interest rates. High volume 
years bring with them increases in productivity by existing firms 
and employees (higher rates of loans per employee), new employees, 
and new entrants. New employees and new entrants would require 
additional software licenses even if there were no new rule changing 
the GFE. For this reason, basing the software upgrade compliance 
burden on a high volume year would overstate the burden. Using the 
higher rates of productivity associated with refinancing booms to 
compute software upgrade costs would tend to understate them. 
Therefore, use of the normal business volume probably provides the 
most appropriate estimate of this cost. Still, assuming a higher 
level of origination activity (15,500,000 loans) and a 65% market 
share for brokers, estimated software costs would be $118 million, 
and $86 million would be accounted for by small businesses (with 
one-half of employees at large firms and three-quarters of workers 
at small firms using the software and requiring 2 hours of 
training). As noted earlier, the costs of software upgrades required 
to implement the new GFE apply only to retail loan originators. 
These costs do not apply to wholesale lenders.
    Another way of presenting the software and training costs to 
loan originators is to distinguish between the costs of the new GFE 
versus the HUD-1. This break-out is somewhat arbitrary but is useful 
for the discussion of the costs of the different components of the 
rule. Suppose the HUD-1 alterations constitute 20 percent of the 
software and training costs to loan originators, then of the 
$91,042,558 total costs to loan originators, $72,834,046 stem from 
the GFE and $18,208,512 from the HUD-1. The costs to small business 
would be distributed similarly: $52 million from the GFE and $13 
million from the HUD-1. One could experiment with different ratios 
of HUD-1 to GFE costs but the total would not change.

Legal Consultation

    Using the new GFE will entail a change in business practices, 
including making arrangements with third-party settlement service 
providers to ensure that prices charged will remain within the 
tolerances of the prices quoted. Loan originators will want to 
ensure that these arrangements do not violate RESPA. It is highly 
likely that the trade associations for the mortgage loan origination 
industries will produce model agreements or other guidance for 
members to help them comply with the new rule. Loan originators may 
also want to better understand if there any legal implications of 
average-cost pricing. Some originators may feel no further need for 
additional legal advice so that they would have no legal 
consultation expenses as a result of the rule. Larger originators 
may wish to seek a greater amount of legal advice, as they perceive 
themselves to be at greater risk of class action RESPA litigation.
    The actual amount and cost of legal services that will be 
incurred because of the new GFE are unknown. While it is recognized 
that all firms might not seek legal advice, it would seem that many 
firms engaged in retail mortgage origination would want some minimal 
legal advice, so that they understand the new rules and regulations. 
If all 57,937 firms sought two hours of legal advice at $200 per 
hour, the fixed legal consultation expense would amount to $23 
million. In addition, firms will seek further legal advice based on 
their volume of transactions; in this analysis, the total volume-
based legal expense amounts to 4 times the fixed expense or $93 
million. To show that this is a reasonable estimate, suppose a large 
originator, operating in all 50 states and the District of Columbia, 
required state-by-state legal reviews averaging 1-person-week (40 
hours) per state. At $200 per hour, this would amount to $408,000. 
If all of the 100 largest originators acquired a similar amount of 
legal advice, the cost would come to $40.8 million, which leaves 
approximately $52 million for variable legal costs for other 
originators.\35\ Under these estimates, total legal consultation 
expenses associated with the new GFE are expected to total $116 
million and are distributed among industries and small businesses, 
which bear 60.3% of the legal cost, as depicted in Table 6-9, which 
uses information on the distribution of firms and originations.
---------------------------------------------------------------------------

    \35\ If the per hour cost of legal consultation were greater 
than $200 per hour, then these estimates would rise proportionately 
with the increase in hourly legal costs.

[[Page 68275]]



                           Table 6-9--One-Time Legal Consultation Costs of the New GFE
----------------------------------------------------------------------------------------------------------------
                                                               Total legal                       Percentage cost
                         Industry                             consultation     Small business       to small
                                                                  cost              cost            business
----------------------------------------------------------------------------------------------------------------
Mortgage Brokers..........................................       $73,219,520       $56,375,264              77.0
Commercial Banks..........................................        18,186,829         4,934,375              27.1
Thrifts...................................................         7,740,284         1,182,697              15.3
Mortgage Banks............................................        12,020,625         5,212,708              43.4
Credit Unions.............................................         4,706,743         2,147,722              45.6
                                                           -----------------------------------------------------
    Total.................................................       115,874,000        69,852,767              60.3
----------------------------------------------------------------------------------------------------------------

    The costs of legal consultation required to implement the new 
GFE apply only to retail loan originators. Wholesale lenders and 
settlement agents and other third-party settlement service providers 
do not provide GFEs and therefore they would not be subject to these 
costs.

Employee Training on the New GFE

    Loan originators must fill out the new GFE and be familiar with 
its requirements so that they can fill out the form correctly and 
respond to the borrower's questions about it. So, there would be a 
one-time expense of training loan originators' employees in the 
requirements of the new rule in a range of issues such as the new 
forms and average-cost pricing. While the actual extent of the 
required training is unknown, a reasonable starting point would be 
that one quarter of the workers in large firms and one half of the 
workers in small firms would require training concerning the 
implications of the final rule. We assume that small firms pay 
tuition of $250 per worker but that large firms receive a discount 
and pay only $125 per trainee. If the training lasts an entire day, 
then the opportunity cost of the time, at $72.12 an hour (based on a 
$150,000 fully-loaded annual salary) would be $577 per trainee. The 
total tuition cost to the industry would be $53 million and the 
opportunity cost of lost time would be $141 million, amounting to a 
total training cost of $194 million. The total one-time cost for 
RESPA training for originator staff in the new rule would come to 
$194 million or $310 per worker (averaged across all workers). The 
one-time cost for small businesses is $146 million. Table 6-10 
depicts the distribution of training costs among the retail mortgage 
origination industries and for small businesses in each industry. It 
uses data on workers from Table 6-7.\36\
---------------------------------------------------------------------------

    \36\ Sensitivity analysis shows the effects of changing the 
number of workers participating in the training. If one half (rather 
than one-quarter) of workers at large firms and three-fourths 
(rather than one-half) of the workers at small firms attended 
training, then the total costs would be $314 million (with the small 
business share being $219 million); the average cost per employee 
would be $503. However, as noted in the text, there may be other, 
less costly ways in which the knowledge necessary to comply with the 
GFE provisions of the final rule can be imparted to workers, which 
will reduce the number of workers that need formal training.

                            Table 6-10--One-Time Worker Training Costs of the New GFE
----------------------------------------------------------------------------------------------------------------
                                                             Total training    Small business   Percentage small
                         Industry                                 cost              cost          business cost
----------------------------------------------------------------------------------------------------------------
Mortgage Brokers..........................................      $134,522,236      $119,387,019              88.7
Commercial banks..........................................        22,653,771         8,060,292              35.6
Thrifts...................................................         9,981,440         2,482,613              24.9
Mortgage Banks............................................        21,285,461        13,330,070              62.6
Credit Unions.............................................         5,148,741         2,533,751              49.2
                                                           -----------------------------------------------------
    Total.................................................       193,591,648       145,793,746              75.3
----------------------------------------------------------------------------------------------------------------

    As explained earlier, the costs of training are probably best 
estimated using the more normal mortgage environment, since many of 
the additional employees during a refinance wave are temporary 
employees who may either do only general office work that does not 
require any GFE-specific training or who may be trained on-the-job 
by existing permanent employees. Still, the higher figures are 
reported for those who believe they are the relevant figures.
    The data and table presented above depict what is likely to be 
an upper bound for training costs. There are other, less costly ways 
in which the knowledge necessary to comply with the provisions of 
the final RESPA rule can be imparted to workers. Small firms, in 
particular, are likely to take advantage of information on complying 
with the final rule provided by trade associations and their 
business partners (such as wholesale lenders), and these firms may 
find the time and expense of formal training unnecessary. To the 
extent that this is the case, the estimates reported above will over 
state the impact on small businesses.
    We assume that no training specific to the HUD-1 will be 
required. Any training in the rule concerning the GFE will cover the 
HUD-1 as well for the loan origination industry. Almost all of the 
information required for the HUD-1 is from the GFE. Training 
concerning tolerances is a GFE issue, even though the calculation is 
presented on the HUD-1.

Comments Concerning One-Time Adjustment Costs

    Comments. Lenders and their trade associations opposed a 12-
month implementation period on the basis that 12 months is 
insufficient time to prepare for compliance with the new 
requirements. According to one major lender, a 12-month period is 
far too short given the extensive nature of the changes. This lender 
estimated that an 18-24 month period will be required for 
implementation of the proposal as published on March 14, 2008. 
According to other major lenders, the proposed rule would require 
significant systems and operational changes well beyond the complex 
forms changes, and would take a minimum of two years to implement.
    Response. HUD has determined to adopt a 12-month implementation 
period. HUD recognizes that operational changes will be required in 
order to implement the new rule, in addition to training staff on 
the new requirements. However, the need for a standardized GFE with 
relevant information about the loan and settlement charges is 
critical in light of the problems in the current market and further 
delay is not warranted. HUD believes that a 12-month implementation 
period will provide sufficient time for systems changes and training 
to occur. In order to ensure a level playing field, during the 
transition period, settlement service providers will be required to 
comply with the current RESPA requirements. The requirements set 
forth in the rule will apply to all settlement service providers 12 
months after the effective date of the rule.

[[Page 68276]]

Compliance and Regulatory Burden: Recurring Costs of the GFE

    This section discusses recurring costs associated with the new 
GFE. Several topics are addressed, some of which have already been 
discussed in previous sections. We expect that the new GFE will 
probably be neutral (see the conclusion of Section 0) but that it 
may impose a burden of ten minutes per application. Assuming that to 
be the case and that the ratio of applications per loan remain at 
1.7, then the annual recurring compliance cost of the GFE from 
completing applications would be $20.40 per loan, $255 million on 
all firms, of which $134 is borne by small business. If the loan to 
application ratio increases to 2.7, then the annual recurring 
compliance cost of completing applications will be $32.40 per loan, 
$405 million in total, of which $213 million is imposed on small 
business (see Table 6-11 below and section VII.D.2). Costs of the 
additional time spent to arrange the pricing that protects the 
originator from the costs of the tolerances being exceeded is 
estimated to be $12 per loan or $150 million annually, of which $79 
million is paid by small business. This additional cost of arranging 
tolerances does not vary by the number of applications per loan.

          Table 6-11--Recurring Compliance Costs of the New GFE by the Number of Applications per Loan
 
 
                                          Per loan cost
                                      Total cost: all firms
                                           (millions)
                                     Total cost: small firms
                                           (millions)
Source of Additional Cost.........          1.7          2.7          1.7          2.7          1.7          2.7
Processing Applications...........       $20.40       $32.40         $255         $405         $134         $213
Arranging Tolerances..............        12.00        12.00          150          150           79           79
Initial Underwriting..............         0.00        11.00            0          138            0           72
                                   -----------------------------------------------------------------------------
    Total Cost of GFE.............        32.40        55.40          405          693          213          364
 

    A third source of recurring compliance costs is that of 
underwriting additional applications. If there is no change in the 
application per loan ratio as a result of the rule, then the 
compliance costs of underwriting additional applications will be 
zero. If the application per loan ratio increases to 2.7, then the 
recurring compliance cost from preliminary underwriting will be $11 
per loan, $138 million across all firms, of which $72 million is 
from small business (see Section VI.D.3). The total recurring 
compliance cost on loan originators of the rule at 1.7 applications 
per loan is estimated to be $32.40 per loan or a total of $405 
million ($213 million from small business). At 2.7 applications per 
loan, the annual recurring compliance cost of the GFE is $55.40 per 
loan or a total of $693 million ($364 million from small business).

Cost of Implementing the New GFE Form

    This section examines the various costs associated with filling 
out and processing the new GFE. In their comments on the 2008 
proposed rule, loan originators commented that the proposed GFE was 
longer than today's GFE and that it would take more time to fill 
out. In addition to settlement charges, the proposed GFE contained 
loan terms, a trade-off table, a breakout of lender and broker fees, 
and a breakout of title agent and insurance fees.
    There are several aspects of the new GFE that must be considered 
when estimating the overall additional costs of implementing it. The 
following discusses the various factors that will reduce costs and 
possibly add costs to the GFE process. As is made clear by the 
discussion, there should not be much, if any, additional cost with 
implementing the new GFE (as compared with implementing today's 
GFE).
    (1) Disclosure of YSP. Under the existing scheme, mortgage 
brokers are required to report yield spread premiums as ``paid 
outside of closing'' (POC) on today's GFE and HUD-1. Page 2 of the 
new GFE has a separate block for yield spread premiums (as well as 
for discount points). In order to fill out a GFE under the final 
rule, the mortgage broker must have a loan in mind for which the 
borrower qualifies from the information available to the originator. 
Pricing information is readily available to mortgage brokers, so 
there is no additional cost incurred in determining the yield spread 
premium or discount points since they have to look and see if there 
is a yield spread premium under the current regime anyway. Since it 
is reasonable to assume that all brokers consult their rate sheets 
prior to making offers to borrowers, it is reasonable to assume that 
they know the difference between the wholesale price and par. It 
does not appear that disclosing the yield spread premium or discount 
points adds any new burden.
    (2) Itemization of Fees. The reduction in the itemization of 
fees will lead to fewer unrecognizable terms on the new GFE.\37\ 
That should lead to fewer questions about them and less time spent 
answering those questions. Of course, to the extent that the 
originator is precluded from including junk fees on the GFE, he or 
she will not have to spend any time trying to explain what they are. 
The confusion avoided may lead the borrower to better understand 
what is being presented so that questions on useful topics are more 
likely to come up and the originator can spend his time giving 
useful answers (or more time will be spent explaining useful 
things). In all, the simpler GFE produces a savings in time for 
originators and borrowers.\38\
---------------------------------------------------------------------------

    \37\ The fees in the lender-required and selected services 
section will still be itemized (e.g., appraisal, credit report, 
flood certificate, or tax service) as will those in the lender-
required and borrower selected section (e.g., survey or pest 
inspection). There will, however, be no itemization or long lists of 
various sub-tasks of lender fees or title fees, often referred to as 
junk fees.
    \38\ Several items were dropped from the new GFE, as compared 
with the proposed GFE: The APR, the breakout of the origination fee 
into its broker and lender components, and the breakout of the title 
services fee were dropped. These were considered unnecessary for 
comparison shopping.
---------------------------------------------------------------------------

    (3) Summary Page. A summary page has been added to the new GFE 
in the final rule. But it should be noted that the summary page of 
the new GFE asks for basic information (e.g., note rate, loan 
amount) that is readily available to the originator and thus do not 
involve additional costs. The summary page simply moves items around 
or repeats items rather than requiring new work.
    (4) Trade-Off Table. There is a burden to producing and 
explaining the worksheet in Section IV (on page 3 of the GFE) 
showing the alternative interest rate and upfront fee combinations 
(the so-called ``trade-off'' table or worksheet). Many commenters 
said customizing the trade-off table with the individual applicant's 
actual loan information would be difficult; these commenters 
recommended a generic example, possibly placing it in the HUD 
Settlement Booklet, rather than providing it with the GFE. However, 
it is important to remember that the information in the worksheet is 
likely to be a reflection of a worksheet the originator already uses 
to explain the interest rate/upfront fee trade-off. While there may 
be a burden to explaining how the interest rate-point trade-off 
works, this explanation is something all conscientious originators 
are already doing in the origination process. In today's market, 
most lenders and brokers likely go over alternative interest-rate-
point combinations with potential borrowers. For these originators, 
there is no additional explanation burden arising from the 
production of this worksheet. To the extent that some lenders only 
explain one option to a particular borrower (even though they offer 
others), there would be some additional costs for those lenders. 
Today, most originators present to borrowers much more complicated 
sets of alternative products than captured by the worksheet. It is 
important to remember that the main purpose of the worksheet is 
simply to sensitize the borrower to the fact that alternative 
combinations of interest rates and closing costs are available.
    With respect to customizing the worksheet to the applicant's 
actual offer, the information on the applicant's loan is already on 
the new GFE, so that would not appear to be a significant problem, 
as that applicant information can be linked directly into the 
worksheet. Then, there is the issue of the two alternative 
combinations, one with a lower

[[Page 68277]]

interest rate and one with a higher interest rate. Most originators 
offer loans with several interest rate and point combinations from 
which the borrower chooses. As noted above, they probably have 
already discussed these alternative combinations with the applicant. 
The originator would pick two alternatives from among the options 
available but not chosen by the borrower when he picked the interest 
rate and point combination for which his GFE is filled out. The 
originator would have to punch these other two combinations into his 
GFE software (two interest rate and point combinations) in order for 
the software to fill out the form. In the event that the originator 
does not use software to make these calculations, they would have to 
be done by hand.
    (5) Documentation Costs. Loan originators are required to 
document the reasons for changes in any GFE when a borrower is 
rejected or when there are changed circumstances that result in cost 
increases. Once a GFE has been given, there are several potential 
outcomes. One is that the loan goes through to closing with 
tolerances and other requirements met. Another is the borrower 
terminates the application. Borrowers could also request changes, 
such as an increase in the loan amount. There could also be a 
rejection, a counteroffer, or unforeseen circumstances.
    The March 2008 proposed rule provided that a borrower could be 
rejected at the GFE application stage if the loan originator 
determined that the borrower was not credit worthy. The borrower 
could not be rejected at the mortgage application stage unless the 
originator determined there was a change in the borrower's 
eligibility based on final underwriting, as compared to information 
developed for such application prior to the time the borrower chose 
the particular originator. Under the proposed rule, the originator 
would have been required to document the basis for such a 
determination and maintain the records for no less than three years 
after settlement.
    One lender commented that under HUD's March 2008 proposed rule, 
lenders would be required to retain the GFE application for three 
years which is different from the 25 month retention requirement by 
TILA or ECOA. The lender commented that this difference presents 
additional expense without a substantive benefit to the consumer.
    The first two require no special treatment. Borrower requested 
changes do not require documentation but do require a new GFE, as 
explained in (5) above. The case of borrower rejection (which 
assumes there is no counteroffer accepted by the borrower) requires 
documentation today under the Equal Credit Opportunity Act (ECOA). 
Under ECOA, the originator must document the reason for a rejection 
and retain the records for 25 months, which is also the requirement 
in the final rule. Therefore, there is no additional documentation 
required in case of a rejection. There is no documentation 
requirement for a counteroffer, but the lender must issue a new GFE 
to the borrower; the minimal burden associated with issuing an 
additional GFE.
    Documentation for changed circumstances adds a new requirement. 
The additional burden associated with changed circumstances comes 
from having to document the reasons for the increase in costs and 
from determining that the amounts of the increases in charges to the 
borrower are no more than the increases in costs incurred by the 
changed circumstances. The Department does not require that a 
justification document be prepared. Since there are no special 
reporting requirements when changed circumstances occur, compliance 
could be met by simply retaining the documentation in a case binder, 
as any other relevant loan information might be retained in a case 
binder today. For example, itemized receipts for the increased 
charges would simply be put in the loan case binder (as they 
probably are today). Case binders are stored now. The additional 
cost of identifying and storing the documentation in that binder 
would be de minimus. This would represent little burden on the 
originator, particularly since unforeseen circumstances will not be 
the norm.
    There may be some record retention issues with small 
originators, such as brokers. If small originators retain case 
binders today, then their situation would be similar to other 
originators. If they do not retain the case binder today, then they 
may choose to do so, or they may rely on their wholesalers for 
record retention. It might well become a selling point for 
wholesalers. Relative costs of storage, reliability, and 
accessibility would determine who could best perform this function.
    (6) Crosswalk from New GFE to New HUD-1. The HUD-1 in the final 
rule has been changed so that it matches up with the categories on 
the new GFE--making it simple for the borrower to compare his or her 
new GFE with the final HUD-1 at closing. In addition, a comparison 
page has been added to the HUD-1 to clarify any changes in 
settlement fees. The simplification of the GFE does not add any 
burden for the borrower to the comparison of the figures on the two 
forms--rather it will be reduced since it will now be easier for the 
borrower to match the numbers from the GFE (issued at time of 
shopping) with those on the HUD-1 (issued at closing). Compared with 
today, it also eliminates the step of adding a pointless list of 
component originator charges to get the relevant figure, the total 
origination charge. In addition, the elimination of extra itemized 
fees on the GFE may lead to the elimination of them on the HUD-1 
since they may have been on the GFE only to overwhelm the comparison 
shopper. Even without the new comparison page, the settlement would 
have been more transparent for the borrower. However, requiring that 
an additional page be completed will impose some costs on the 
industry. Compliance costs of the this change are discussed in 
detail below.
    (7) Mortgage Comparison Chart (``Shopping Chart''). The shopping 
chart is on the third page of the GFE. It is delivered to the 
borrower as a blank form. The borrower is free to fill it out and 
use it to compare different loan offers. The loan originator is only 
required to hand it out, but has the option of answering borrower 
questions about it. The short, simple, and self-explanatory nature 
of the form leads the Department to believe that the additional 
costs per form, if any, borne by an originator would approach zero.
    Summary. To summarize, the discussion of the above factors 
identifies offsetting costs and suggests that there will be little 
if any additional annual costs associated with the new GFE. 
Practically all of the information required on the new GFE is 
readily available to originators, suggesting no additional costs. 
The fact that there are fewer numbers and less itemization of 
individual fees suggests reduced costs. The fact that the GFE 
figures are displayed on the HUD-1 will substantially simply the 
closing process. In addition, Section VII.D below lists further 
changes that HUD made to the form that are likely to reduce costs. 
On the other hand, there could be some small amount of additional 
costs associated with the optional trade-off table and documentation 
requirements. If there were additional costs of, for example, 10 
minutes per GFE, the dollar costs would total $255 million per year 
(if the number of applications did not increase as a result of the 
result).39 40 But given the above discussion of 
offsetting effects and the improvements made to the form, there are 
likely to be no additional net costs with implementing the new GFE. 
Note, however, that there is the potential for recurring costs from 
changes to the HUD-1. This issue is summarized in Section VIII.C.
---------------------------------------------------------------------------

    \39\ This calculation assumes a $150,000 fully-loaded annual 
salary; dividing by 2,080 hours yields $72 per hour, or $12 for ten 
minutes. Assuming 21,250,000 applications, produces a cost figure of 
$255 million. At 15 minutes, the cost estimate would rise to about 
$382.5 million. In the higher volume environment (26,350,000 
applications), the overall cost figure would be $316.2 million if 
the per application cost was $12 for ten minutes.
    \40\ We have used a fully-loaded hourly opportunity cost of 
$72.12 for highly-skilled professional labor throughout the Economic 
Analysis. For many functions as well as locations this amount is 
probably an overestimate of the hourly opportunity cost. However, 
our goal in the Economic Analysis is to accurately measure the upper 
bound of the costs of the rule. An alternative method would be to 
generate an estimate of the average variable cost from industry-
specific data. For example, in Tucson, Arizona, the average unit 
labor cost (salary, bonuses, time off, social-security, disability, 
healthcare, 401(k), and other benefits) is $30.73 per hour for loan 
officers ($23.97 for a Loan Officer/Counselor; $28.48 for a Consumer 
Loan Officer I; and $39.75 for a Consumer Loan Officer II). 
Additional costs to be considered are rent ($2812.50 per month for 
1500 square feet) and computer equipment ($560 per month). Summing 
this gives us an hourly cost of $31.14. An additional ten minutes 
per application from handling the forms and ten minutes arranging 
tolerances leads to an additional twenty-seven minutes per closing 
and would increase costs by $14 per loan. The estimate of the 
recurring annual burden of the new GFE could reasonably be assumed 
to be $175 million, much less than the $405 million used throughout 
this analysis.
---------------------------------------------------------------------------

Detailed Response to the NAR's Analysis of the 2008 IRFA

    The National Association of Realtors provided an alternative 
estimate of compliance costs prepared by Ann Schnare (2008). The 
main thrust of their report was that HUD had grossly underestimated 
the

[[Page 68278]]

compliance costs of the 2008 proposed rule. The following four 
sections summarize major comments relevant to estimates of the 
compliance costs of the new GFE.

Hedging Costs of the New GFE

    Comment. The NAR's primary objection to HUD's estimates of the 
compliance costs of the proposed GFE was that HUD does not account 
for the hedging costs that an interest rate guarantee would require 
(Schnare 2008). Indeed, the majority of the NAR's cost estimate for 
the GFE consists of so-called ``hedging'' expenses. They claim that 
the rule would require issuers of GFEs to insure against interest 
rate movements to keep GFE offers open for the required 10 business 
days. According to the NAR report, the hedging costs could range 
from $136 to $272 per loan. Making this assumption dramatically 
increases the cost estimate for the GFE. The NAR's addition of 
hedging costs quadruples HUD's baseline estimate of the compliance 
cost of the proposed rule from $45 to $181. Response. The NAR made 
an erroneous assumption about the proposed Good Faith Estimate (GFE) 
that lead them to overstate the compliance costs. A more accurate 
estimate of the hedging costs would be zero. Neither the proposed 
rule nor the final rule requires lenders to guarantee an interest 
rate quoted on a GFE for a period of ten days. Interest-dependent 
items on the GFE (interest rate, monthly payment, YSP/discount 
points, adjusted origination fees, and daily interest charges) can 
have a separate availability period that can be as short as the time 
until a new rate sheet is issued. Only the prices on non-interest-
dependent items on the GFE (total origination fees, appraisal fees, 
title fees, etc.) must remain available for 10 days. These interest-
rate-dependent items only become fixed, for purposes of comparison 
to the HUD-1 at closing, when the borrower locks the interest rate.
    Indeed, the NAR study acknowledges that there is no such 
requirement. Ann Schnare writes: ``HUD's revised GFE has multiple 
dates for the offer: One for the origination fee and third party 
settlement costs; one for the quoted interest rate; one for the 
settlement date; and one for the number of days that the loan must 
lock before closing (NAR, fn. 6, p. 10).'' HUD let these dates 
differ because HUD is aware that the hedging costs of an interest 
guarantee for a period as long as ten days would be very costly.
    The loan originator will probably choose a shorter guarantee 
period for the interest rate because of the hedging costs. Ann 
Schnare admits this to be a possibility: ``the originator could 
choose a lock-in \41\ period that is considerably shorter than the 
10 business days required for other components of the GFE in order 
to minimize its hedging costs (NAR, p. 9).'' Choosing the guarantee 
period of the interests rate is a profit maximizing decision made by 
the originator. The originator will balance the benefits of 
attracting more customers by extending the guarantee period with the 
hedging costs of doing so. The current practice of loan originators 
is to quote an interest rate and other interest-rate-dependent rates 
with the caveat that the offer would change if market interest rates 
change. Since there is no reason to believe that hedging behavior 
will be affected by the rule, hedging costs should not be included 
as a compliance cost. Once this understanding of the proposed rule 
is introduced into the NAR's cost estimate of the proposed rule, the 
NAR's estimate falls from $181 to $45 (identical to HUD's estimate 
of the cost of the proposed rule) in their low-cost scenario; from 
$316 to $101 in their intermediate-cost scenario; and from $413 to 
$141 in their high-cost scenario.
---------------------------------------------------------------------------

    \41\ HUD's understanding is that by ``lock-in'' period, the NAR 
meant ``guarantee'' period.
---------------------------------------------------------------------------

Administrative Costs of More GFE Applications

    Comment. A second major criticism by the National Association of 
Realtors of HUD's regulatory impact analysis of the 2008 proposed 
rule is that HUD underestimated the administrative costs of the 
proposed rule by not raising the number of loan applications per 
GFE. HUD's estimate of the ratio of applications to loans after the 
rule is implemented is equal to its estimate of the observed ratio 
of 1.7 in HMDA data. The NAR argues that the number of applications 
would rise because of increased shopping. Thus, the administrative 
costs of applications should rise.
    Response. It is reasonable to expect that given the improvements 
to the GFE and the greater rewards from shopping, that the demand 
for applications would increase. Note, however, that maintaining a 
ratio of 1.7 loans per application is not inconsistent with more 
shopping for loan products. First, consumers may shop around and ask 
a variety of lenders for informal quotes to compare with their GFE. 
Every inquiry will not necessitate a new GFE. Second, the rule is 
likely to lead to lower rejection and withdrawal rates of 
applications because consumers will be more informed going into the 
loan. HUD expects applications from increased shopping behavior to 
replace some mortgage applications that may have otherwise resulted 
in rejections. However, in response to this comment, HUD provides a 
sensitivity analysis of the effects on administrative costs of 
increasing applications per loan.
    For reasons explained in the above paragraph, the number of 
applications per loan may remain at 1.7 applications per loan. If 
the additional administrative burden of an application imposed by 
the rule is ten minutes per application (as discussed in Section 
VII.C.1), then the additional burden of the rule translates to 17 
minutes per loan (1.7 applications per loan x ten minutes). To 
derive the opportunity cost of the rule, we multiply 17 minutes by 
$1.20 per minute (equivalent to the $72 per hour fully-loaded 
opportunity cost of time, which comes from our $150,000 annual 
figure), to per loan cost of additional applications of $20.40 per 
loan. The aggregate impact on the loan origination industry of the 
administrative burden of completing applications is calculated using 
the per loan figure: the annual recurring compliance cost is $255 
million (12.5 million loans annually x $20.40 per loan). The small 
business share of the total recurring compliance cost of this 
administrative burden is $134 million (52.2 percent of $255 
million).
    Suppose that the number of applications per loans increased by 
one from 1.7 to 2.7. This was one of the scenarios considered in the 
NAR's analysis. The NAR hypothesized that this is likely given that 
consumers may have a greater demand for a GFE once HUD's new GFE, 
which provides useful and transparent information, is introduced. 
Calculating the compliance costs due to the additional burden of 
completing GFEs is straightforward. The additional time spent per 
loan would be 27 minutes (2.7 application per loan x 10 minutes) and 
the opportunity cost of that time would be $32.40 per loan (27 
minutes x $1.20 per minute). The total recurring compliance cost to 
the origination industry from applications would be $405 million 
(12.5 millions loan per year x $32.40 per loan), of which $213 
million is borne by small business (52.2 percent of $405 million).

Multiple Preliminary Underwritings

    Comment. Every application under the new rule requires 
preliminary underwriting. Since borrowers who shop may seek out 
multiple GFEs, there will be multiple underwritings. Commenters said 
this will add to the underwriting burden firms incur today. The 
National Association of Realtors calculated an additional cost of 
multiple underwriting at $30 per loan for an application per loan 
ratio of 2.7.
    Response. Every application under the final rule that generates 
a GFE will require preliminary underwriting in order to come up with 
an early offer for the borrower. Originators can charge a fee for 
issuing a new GFE limited to the cost of a credit report. It is 
hoped that the charge for this, if any, would be small enough so 
that it is not a significant deterrent to effective shopping. But 
whether or not there is a charge, there are real resource costs 
associated with preliminary underwriting. The additional cost 
generated depends on the number of applicants and the number of GFEs 
they receive. Since every completed loan eventually gets 
underwritten in full, the additional cost of preliminary 
underwriting depends mainly on the number of additional times that 
preliminary underwriting occurs beyond the one associated with the 
full underwriting that would have occurred under the existing 
scheme.
    It cannot be determined how many additional GFEs the average 
borrower would get under the new rule. Borrowers might continue the 
informal shopping method that many use today--gathering information 
and making inquiries to lenders and brokers about their products and 
their rates, even before deciding to proceed with the request for a 
more formal quote using the GFE. In other words, they may formally 
apply only after deciding who offers the best terms. The simple 
format and clarity of the new GFE form will enhance this informal 
information gathering process; in fact, the increased efficiency of 
informal shopping (calling around, checking web sites, etc.) could 
be an important benefit of the new GFE. Since shoppers as well as 
originators will be familiar with the GFE, these forms will likely

[[Page 68279]]

serve as a guide for practically any conversation between a shopper 
and an originator, or for any initial request by a shopper for 
preliminary information about rates, points, and fees. For these 
borrowers, the new GFE simply pins down the numbers. Others, on the 
other hand, may obtain multiple GFEs and use them to shop.
    Under the final rule, preliminary underwriting should decrease 
the number of applications that go to full underwriting (e.g., an 
applicant may be denied during the preliminary without having been 
charged for an appraisal); that is, some of the 8.75 million that 
are not originated may be disapproved at the preliminary stage 
rather than going through full underwriting (as they might today). 
This savings in appraisal, verification, and other incremental 
underwriting costs that are avoided would tend to offset the 
increase in cost resulting from the extra preliminary underwriting 
noted in the above paragraph. However, it is difficult to estimate 
these effects.
    An implication of a higher ratio of applications per loan is 
that the total underwriting costs would increase. Others, on the 
other hand, may obtain multiple GFEs and use them to shop. The 
National Association of Realtors estimates that the cost of a 
preliminary underwriting is $30 ($25 credit report and $5 labor 
cost). There are currently 1.7 times as many applications as loans 
originated. Thus, the additional cost per loan for the scenario of 
2.7 applications per loan is $30 ((2.7-1.7) x $30) and for 3.4 
applications per loan, the additional cost is $52 ((3.4-1.7) x $30). 
HUD uses different parameters to estimate the cost of increased 
applications. Instead of a preliminary credit report cost of $25, 
HUD would use $5. This lower number is not inconsistent with HUD's 
estimated cost of $25 for a full credit report. A preliminary credit 
report involves only the FICO score from one credit bureau and so 
will be much cheaper. Our assumption of an inexpensive preliminary 
credit report is consistent with what representatives of credit 
bureaus, in discussions of the effects of the proposed rule, told 
HUD is likely to happen. Instead of labor costs of $5 (ten minutes 
at $31.14 an hour); HUD uses $6 (five minutes at $72 an hour). HUD's 
estimated total cost of a preliminary underwriting would be $11, 
reducing the additional costs from $30 to $11 at 2.7 applications 
per loan.
    The aggregate impact on the loan origination industry of 
multiple preliminary underwriting is calculated using the per loan 
figure: the annual recurring compliance cost is $138 million (12.5 
million loans annually x $11 per loan) at 2.7 loans per application. 
The small business share of the total recurring compliance cost from 
additional underwriting is $72 million (52.2 percent of $138 
million). If the ratio of applications per loan does not change 
(remains at 1.7), then there will be no additional compliance cost 
from multiple preliminary underwriting.
    Finally, it should be emphasized that, under the final rule, 
preliminary underwriting should decrease the number of applications 
that go to full underwriting (e.g., an applicant may be denied 
during the preliminary without having been charged for an 
appraisal). Some of the assumed 8.75 million applications\42\ that 
are not originated may be disapproved at the preliminary stage 
rather than going through full underwriting (as they might today). 
We expect an increase in the ratio of accepted applications per 
loan. This savings in appraisal, verification, and other incremental 
underwriting costs that are avoided would tend to offset the 
increase in cost resulting from the extra preliminary underwriting 
noted above.
---------------------------------------------------------------------------

    \42\ There are currently 1.7 times as many applications as loans 
originated; therefore, if originations are 12.5 million, full 
underwriting is started (and probably completed) for about 21.25 
million applications, including 8.75 million (21.25 million minus 
12.5 million originations) that are not originated.
---------------------------------------------------------------------------

Estimate of the Opportunity Cost of Time

    Comment. The National Association of Realtors states (see NAR 
2008, fn. 10, p. 11) that HUD used one estimate of the value of an 
employee's time ($31.14 per hour) to calculate the burden of the 
proposed rule but a higher estimate ($72 per hour) of the 
opportunity cost of time to calculate the benefits of the time 
savings of the proposed rule.
    Response. HUD uses the estimate of $72 per hour as the 
opportunity cost of time consistently throughout the regulatory 
impact analysis to calculate the value of the costs and the benefits 
of the rule to industry. It is true that HUD includes a discussion 
of alternative estimates of labor costs in a footnote of Chapter 6 
(see below) 37 on page 6-6 of the Regulatory Flexibility Analysis. 
There, HUD explains that our estimate of $72 per hour may be far 
above other estimates of labor costs. HUD provides an example of an 
estimate based on industry data from Tucson, Arizona, where the 
hourly-wage weighted by industry is $31.14. However, this figure was 
only presented for illustrative purposes and was not used in the 
body of the analysis. Note also that HUD uses a lower value of $44 
per hour as the opportunity cost of time to consumers (see HUD, 3-
120).
    The NAR uses the $31.14 hourly wage as a measure of the 
opportunity cost of an employee's time in their cost estimates of 
additional underwriting. However, they do not apply this figure 
consistently throughout their analysis and do not explain why. 
Because $31 is only 43% of $72, a uniform application of the NAR 
labor cost estimate would lower the burden of the rule 
significantly. For example, the recurring costs of the GFE would 
fall from $32 per loan to $14 in the case of 1.7 applications per 
loan. Although HUD will consider the NAR's preference for a lower 
estimate of labor costs, HUD believes that its fully-loaded and 
upper-bound estimate of $72 is more appropriate for a regulatory 
impact analysis.

Tolerances on Third-Party Fees

    Under the March 2008 proposed rule, loan originators would have 
been prohibited from exceeding at settlement the amount listed as 
``our service charge'' on the on the GFE, absent changed 
circumstances (``zero tolerance''). The proposed rule also would 
have prohibited the amount listed as the charge or credit to the 
borrower for the interest rate chosen, if the interest rate was 
locked, absent unforeseeable circumstances, from being exceeded at 
settlement. In addition, the proposed rule would have prohibited 
Item A on the GFE, ``Your Adjusted Origination Charges'' from 
increasing at settlement once the interest rate was locked. The 
proposed rule also would have prohibited government and recording 
fees from increasing at settlement, absent changed circumstances.
    Under the March 2008 proposed rule, the sum of all the other 
services subject to a tolerance (originator-required services where 
the originator selects the third party provider, originator-required 
services where the borrower selects from a list of third party 
providers identified by the originator, and optional owner's title 
insurance, if the borrower uses a provider identified by the 
originator) would have been prohibited from increasing at settlement 
by more than 10 percent of the sum for services presented on the 
GFE, absent changed circumstances. Thus, a specific charge would 
have been able to increase by more than 10 percent, so long as the 
sum of all the services subject to the 10 percent tolerance did not 
increase by more than 10 percent.
    The rational for the zero tolerance was that a loan originator 
should know the price of a service if it required the use of its 
chosen provider. In the case of making referrals, the loan 
originator could be expected to have some knowledge of the market. 
In fact, it should have some knowledge if it is to meet even the 
weakest concept of ``good faith.'' The 10 percent tolerance seemed 
like a reasonable limit for price dispersion for services obtained 
in a market that could be competitive if the buyers had good 
information. It is also simple for borrowers quickly to compute 10 
percent of the total fee and determine if final charges are within 
the tolerance. In order to protect themselves from charges in excess 
of the limits set by the tolerances, originators would have to 
gather price information in the market and possibly set up 
agreements with some third-party providers to perform settlement 
services at prearranged prices. Those originators who would have 
gathered more information than they do today or made more pricing 
arrangements than they do today would have incurred an increase in 
regulatory burden resulting from the new rule.
    Comment. Loan originators wrote that they should not be required 
to pay the bills for third-party fees in excess of the tolerances 
since they do not control those fees. They argued that their 
expertise is as originators, not as appraisers or title companies. 
They claimed that they do not know who will perform all these 
services at application, so the price is indeterminate. In addition, 
there are occasions when services beyond the normal minimum will be 
required, but that cannot be known at application. For example, 
additional appraisal work may be required or some work may have to 
be done to clear up a title problem. So prices and even some 
services that end up as being required are unknown at application.
    Trade groups representing settlement service providers, 
especially realtors and title companies, focused on the potential 
anticompetitive effects of the tolerance

[[Page 68280]]

provisions. These groups suggested that large lenders would seek to 
manage the risks associated with tolerances by contracting with 
large third party settlement service providers, and thereby placing 
small settlement service providers at a competitive disadvantage.
    In addition to their general objections to the tolerance 
provisions, lenders and trade groups representing lenders and other 
settlement service providers strongly supported removing government 
recording and transfer charges from the tolerances. They stated that 
these charges are outside of the control of the loan originator and 
cannot be known with any certainty at the time the GFE is provided.
    If the loan originator solves its problem by using only those 
third-parties that agree to fixed prices, that shifts the burden to 
the third-party. Small third-party providers made the same argument 
that small originators made. They then will be disadvantaged 
relative to large third-party providers by having to bear the risk 
of the unpredictable cost that cannot be averaged out over a large 
number of transactions.
    Response. Based on the comments received in response to the 
proposed rule, HUD has revised a number of provisions dealing with 
the tolerances, and in particular has clarified the situations where 
the loan originator would no longer be bound by the tolerances. 
However, HUD has determined that only limited changes are necessary 
in the tolerances themselves. Through all of these provisions, the 
final rule seeks to balance the borrower's interest in receiving an 
accurate GFE early in the application process to enable the borrower 
to shop around, with the lender's interest in maintaining 
flexibility to address the many issues that can arise in a complex 
process such as loan origination.
    Many commenters recommended changes to the size of the 
tolerances for different categories of settlement costs, especially 
the zero tolerance for loan originator charges. With one exception 
(government recording and transfer charges), the final rule does not 
change the amounts of the tolerances permitted for the different 
categories of settlement costs. As noted in the rule, HUD considered 
the best available data on the variation in the costs of settlement 
services, in particular title services, in determining that a 10 
percent tolerance is reasonable. No commenters submitted or 
identified any alternative data sources that would support expanding 
the tolerances beyond 10 percent.
    With respect to the zero tolerance for a loan originator's own 
charges, HUD recognizes the comments characterizing the tolerance as 
a settlement cost guarantee. However, the final rule provides 
substantial flexibility to loan originators in providing a revised 
GFE when circumstances, unforeseeable or otherwise, necessitate 
changes. Section 19(a) provides explicit authority for the Secretary 
to make such interpretations as may be necessary to achieve the 
purposes of RESPA. Providing a clear, objective standard for what 
constitutes ``good faith'' under section 5 of RESPA is necessary to 
provide more effective advance disclosure to home buyers and sellers 
of settlement costs, and as such, falls directly within the 
Secretary's interpretive authority under section 19(a).
    The one exception to the amounts of the tolerances remaining the 
same as in the proposed rule is the tolerance for the government 
recording and transfer charges. HUD has adjusted how these charges 
are treated under the tolerances, based on the numerous comments 
received on this issue. The final rule splits the government 
recording and transfer charges into two categories: government 
recording charges, and transfer taxes. Recording charges will be 
subject to a 10 percent tolerance instead.
    The opportunity to cure potential violations of the tolerances 
is an important tool for loan originators to manage compliance with 
the tolerance requirements. Many lenders and groups representing 
lenders and other settlement service providers objected to the 
imposition of tolerances because of the difficulty of providing 
accurate estimates to prospective borrowers early in the application 
process. The opportunity to cure will permit loan originators to 
give an estimate of expected settlement charges in good faith, 
without subjecting them to harsh penalties if the estimate turns out 
to be lower than the actual charges at settlement.
    HUD understands that tolerances will impose some burden on 
originators. Since the protection of tolerances kicks in only if the 
originator requires the use of a particular provider or if the 
borrower comes to the originator and asks where the services may be 
purchased within the tolerances, the originator must have reliable 
third-party settlement service provider pricing information. Some 
originators might simply check out the market prices for third-party 
services from time to time, formulate estimates such that several of 
the prices charged by the third parties fall within the tolerance, 
and trust that nobody to whom they refer the borrower charges a 
price in excess of the tolerance.\43\ Other originators might want 
more protection and have contracts or business arrangements in place 
that have set prices for services that are not in excess of the 
tolerances.
---------------------------------------------------------------------------

    \43\ Other originators may rely on vendor management companies 
(or vendor management departments within their own company) for 
pricing information about third-party services.
---------------------------------------------------------------------------

    Either case requires the originator to do more than today, 
although even today originators fill out GFEs with estimates for 
third-party settlement services. In the first case, the liability in 
the event a tolerance is exceeded would lead to at least a little 
more work gathering information prior to filling out the GFE. In the 
second case, more work would be involved in formalizing an agreement 
to commit the third-party to a fixed price. But as noted above, 
originators today have to have a working knowledge of third-party 
settlement service prices to fill out a GFE. Therefore, it is only 
the increase in burden that would need to be accounted for here.
    It is difficult to estimate these incremental costs. But to 
provide an order of magnitude, it is estimated that it takes an 
average of 10 additional minutes per loan for the originator to 
arrange the pricing that protects the originator from the costs of 
the tolerances being exceeded.\44\ For a brokerage firm originating 
250 loans per year, 10 minutes per loan would come to 42 hours or 
about one week's worth of one employee's time per year. Thus, this 
seems to be a reasonable starting point for estimation. For the 
estimated 12,500,000 loans, that comes to 125,000,000 minutes or 
2,083,333 hours. At $72 per hour, which translates to $12 per loan, 
this comes to a total of $150 million for all firms and $78 million 
for small firms. If it takes 20 extra minutes per loan instead of 
10, these costs come to $300 million and $156 million respectively 
and would be two weeks of one employee's time per year for a 
brokerage firm making 250 loans per year. Table 6-12 details the 
distribution of these costs among the retail mortgage originating 
industries for the per loan burden of ten minutes. With a larger 
number of loans (15,500,000), total costs are $186 million for all 
firms (at 10 minutes per loan) and $97 million for small firms.
---------------------------------------------------------------------------

    \44\ These 10 minutes would be beyond what the originator spends 
today to seek out good choices for his borrowers.

  Table 6-12--Incremental Costs of Third-Party Pricing Arrangements for
                               the New GFE
------------------------------------------------------------------------
                                    Total third-party
             Industry                    pricing         Small business
                                     arrangement cost         cost
------------------------------------------------------------------------
Mortgage Brokers..................        $90,000,000        $63,000,000
Commercial Banks..................         24,637,800          4,678,718
Thrifts...........................         11,697,000          1,441,070
Mortgage Banks....................         18,618,000          7,737,641
Credit Unions.....................          5,047,200          1,470,754
                                   -------------------------------------
    Total.........................        150,000,000         78,328,183
------------------------------------------------------------------------


[[Page 68281]]

    One wholesale lender, ABN-AMRO, offers a One-fee program to 
brokers. In it, the borrower gets a fixed price for many services, 
including many third-party services. Under the new GFE, arrangements 
like this would solve the broker's tolerance compliance requirements 
with the wholesaler making the arrangements for many of the third-
party services and negotiating the prices for them. So it may be 
that (mostly large) wholesalers offer (mostly small) brokers a lower 
cost alternative to complying with the tolerance requirements of the 
new rule. If so, then the small business burden above would be an 
overestimate. Vendor management companies are increasingly appearing 
in the market, not only providing third-party pricing information, 
but also offering monitoring and quality control services for 
originators.

Changes in the Final Rule To Reduce the Regulatory Burden of the 
GFE 45
---------------------------------------------------------------------------

    \45\ See Chapter 3 for or a treatment of changes listed in this 
section.
---------------------------------------------------------------------------

    The final rule contains several changes from the 2008 proposed 
rule that are designed to reduce regulatory burden of the new GFE. 
Several items that commenters were concerned about have been changed 
from the 2008 proposed to the final GFE:
     Length of form. Many industry groups complained that 
the four-page proposed GFE was too long. HUD reduced the form in the 
final rule to three pages by consolidating the third and fourth 
pages but still retaining the essential trade-off table and shopping 
chart.
     Concept of ``GFE application''. Commenters objected to 
the bifurcated application process (a preliminary ``GFE 
application'' followed by the final ``mortgage application''), which 
was designed to promote shopping. There was a fear of commitment by 
lenders to loan terms based on a preliminary underwriting, as well 
as fear that that the preliminary underwriting would be based on 
information that was too limited (borrower's name, social security 
number, gross monthly income, property address; an estimate of the 
value of the property; and the amount of the mortgage loan sought). 
In response, HUD has adopted a single application process for the 
final rule. Under this approach, at the time of application, the 
loan originator will decide what application information it needs to 
collect from a borrower, and which of that collected application 
information it will use, in order to issue a meaningful GFE. HUD 
strongly urges loan originators to develop consistent policies or 
procedures concerning what information it will require to minimize 
delays in issuing GFEs.
     Volume-based discounts. Small businesses, especially 
closing attorneys and escrow companies stated that lenders seeking 
volume discounts would place them at a competitive disadvantage to 
larger entities and force them out of business. HUD responded by not 
addressing volume discounts in its final rule.
     Difficulty of meeting tolerances. Many lenders and 
groups representing lenders and other settlement service providers 
objected to the imposition of tolerances because of the difficulty 
of providing accurate estimates to prospective borrowers early in 
the application process. The final rule provides loan originators 
with an opportunity to cure any potential violation of the tolerance 
by reimbursing the borrower any amount by which the tolerances were 
exceeded. The opportunity to cure will permit loan originators to 
give an estimate of expected settlement charges in good faith, 
without subjecting them to harsh penalties if the estimate turns out 
to be lower than the actual charges at settlement.

Costs Associated With Changes to the HUD-1

    This section discusses costs on closing agents associated with 
the new HUD-1. Section VIII.A explains the data and VIII.B the 
analysis of costs.

Data on Settlement Service Providers

    Section VII.A reproduced background data on the retail mortgage 
origination industries. Since the GFE affects settlement service 
providers as well as retail mortgage originators, this section 
recapitulates data from Chapter 5 on the settlement services 
industries. Readers are referred to Section IV of Chapter 5 for a 
more detailed treatment of the data.
    Table 6-13 provides the total number of firms, the number of 
small employer firms, the number of nonemployer firms, and the 
percent of small firms (employer and nonemployer) in industries that 
provide settlement services (see Chapter 5 for details on the 
classification of small employer firms in these industries). These 
constitute all of the firms in these industries in 2004, according 
to the Census Bureau. As discussed below, for Offices of Lawyers, 
Other Activities Related to Real Estate (Escrow), Surveying & 
Mapping Services, Extermination & Pest Control Services, and Credit 
Bureaus, the figures in Table 6-13 almost certainly overstate the 
number of firms actually participating in residential real estate 
settlements.\46\
---------------------------------------------------------------------------

    \46\ As shown by the fourth column, practically all firms 
qualify as small businesses. This is partially due to the large 
number of non-employer firms (which automatically qualify as a small 
business) included in the Bureau of Census data. See Chapter 5 for 
further discussion of this issue and for small business percentages 
for employer firms only. Also note that while the number of firms is 
drawn from year 2004 data, the small business percentages are based 
on 2002 data from the Bureau of Census; while they are estimates, 
they are probably highly accurate ones. Also see Chapter 5 for the 
source of the small business percentages and for alternative, year-
2002-based small business percentages based on firms with less than 
100 employees.

                          Table 6-13--Firms in Industries Providing Settlement Services
----------------------------------------------------------------------------------------------------------------
                                                                  Small employer    Nonemployer    Percent small
                    Industry                        Total firms        firms           firms           firms
----------------------------------------------------------------------------------------------------------------
Direct title insurance carriers.................           2,094           1,865             135          95.5
Title abstract and settlement offices...........          14,211           7,889           6,203          99.2
Offices of lawyers..............................         401,553         165,127         234,849          99.6
Other activities related to real estate (escrow)         463,545          15,119         448,409          99.996
Offices of real estate appraisers...............          65,491          15,656          49,802          99.9
Surveying & mapping services....................          18,224           8,990           9,196          99.8
Extermination & pest control services...........          18,000          10,018           7,935          99.7
Credit bureaus..................................           1,285             710             545          97.7
                                                 ---------------------------------------------------------------
    Total.......................................         984,403         225,374         757,074          99.8
----------------------------------------------------------------------------------------------------------------
Source: Census Bureau.

    Table 6-14 provides the total number of employees in employer 
firms, and the number and percent of employees in small employer 
firms for each of the settlement services industries.\47\ The Census 
Bureau does not count owners of employer and non-employer firms as 
employees. The number of ``workers'' in these industries is 
understated by the number of employees as defined by the Census 
Bureau because in a nonemployer firm the owner is a production 
worker as is likely also true for the owner of a small employer 
firm. Using the Census Bureau's count of employees for computing the 
compliance burden of a rule may tend to

[[Page 68282]]

understate the burden.\48\ Thus in computing the number of workers 
in these industries, one worker is added for each small employer 
firm and each nonemployer firm to the total number of employees (see 
Table 6-16 below for these results).
---------------------------------------------------------------------------

    \47\ The ``Total Employees'' data in Table 6-10 are for the year 
2004. The ``Employees in Small Employer Firms'' data are obtained by 
multiplying the total employee data for 2004 by the percentage of 
employees in SBA-defined small firms obtained from 2002 Bureau of 
Census data; thus, the small employee data are estimates but 
probably highly accurate ones. See Chapter 5 for discussion of the 
2002 small business percentages.
    \48\ For example, if worker training were required by the rule, 
and burden estimates were based on Census Bureau employee 
statistics, the compliance burden for nonemployer firms would be 
estimated at zero, while clearly at least one ``worker,'' the owner, 
would require the training.

                        Table 6-14--Employees in Industries Providing Settlement Services
----------------------------------------------------------------------------------------------------------------
                                                             Total employees    Employees in         Percent
                         Industry                              in employer     small employer      employed by
                                                                  firms             firms          small firms
----------------------------------------------------------------------------------------------------------------
Direct Title Insurance Carriers...........................            75,702             7,144               9.4
Title Abstract and Settlement Offices.....................            79,819            47,913              60.0
Offices of Lawyers........................................         1,122,723           657,749              58.6
Other Activities Related to Real Estate (Escrow)..........            67,274            40,074              59.6
Offices of Real Estate Appraisers.........................            45,021            37,300              82.8
Surveying & Mapping Services..............................            61,623            53,610              87.0
Extermination & Pest Control Services.....................            95,437            55,565              58.2
Credit Bureaus............................................            25,555             5,135              20.1
                                                           -----------------------------------------------------
    Total.................................................         1,573,154           904,490              57.5
----------------------------------------------------------------------------------------------------------------
Source: Census Bureau (note: non-employer firms not included).

    Table 6-15 provides information on the volume of settlements for 
various industries that participate in the settlement process and 
the number and percent handled by small firms within each 
industry.\49\ Note that while the distribution among Direct Title 
Insurance Carriers, Title Abstract and Settlement Offices, Offices 
of Lawyers, Lawyers and Escrow, Offices of Real Estate Appraisers, 
and Credit Bureaus is based on all settlements, the numbers and 
percentages for the other industries (Surveying & Mapping Services 
and Extermination & Pest Control Services) represent the proportion 
of settlements in which they are involved.\50\ The allocation is 
based upon estimated dollar revenues from settlements for these 
industries.\51\ Totals are estimated based on the number of mortgage 
originations, 12,500,000 that would occur in a ``normal'' year of 
mortgage originations (i.e., not in a year with a refinancing boom).
---------------------------------------------------------------------------

    \49\ The small business percentages in Table 6-12 are the shares 
of revenue accounted for by small business, as reported and 
explained in Chapter 5--in other words, the small business share of 
revenues is being used here as a proxy for the small business share 
of settlements (or mortgage loans). There are two other points that 
should be made about these data. (1) Figures for Offices of Lawyers 
and Other Activities Related to Real Estate (Escrow) are combined 
into the new ``Lawyers and Escrow'' category. This is because there 
is insufficient information to allocate volumes of settlements 
between these two industries (see Section IV.B.5 of Chapter 5 for 
further explanation). As explained in Chapter 5, the small business 
revenue share for the combined ``Lawyers and Escrow'' category is 
raised to 90% (versus 47.8% for all lawyers and 86.9% for escrow 
firms based on 2002 Census Bureau revenue data) under the assumption 
that lawyer and escrow firms engaged in real estate activity are 
likely to be the smaller firms operating in these industries. Note 
that in Table 6-13 below, the 90% figure is also used for the share 
of employees in small firms in this combined industry. (2) As 
explained in Section IV.B.4 of Chapter 5, there are probably no 
small businesses in the Direct Title Insurance Carriers (DTIC) 
industry, which includes the large title insurance firms. The 4.8% 
figure in Table 6-12 (as well as the 9.4% figure in Table 6-10) is 
reported to remain consistent with the Bureau of Census data--
including it or excluding it does not affect the results in any 
significant way.
    \50\ See Step (9) in VII.E.1 of Chapter 3 for the calculation of 
the proportion of settlements for Surveying & Mapping Services and 
Extermination & Pest Control Services. Because of their relatively 
small shares of the overall mortgage business, different shares for 
these industries would not materially affect the overall small 
business shares of revenue. While it is recognized that the other 
industries may not be involved in every mortgage origination and 
settlement transactions (e.g., an appraisal may not be required for 
some mortgage originations), they are certainly involved in most 
such transactions and, therefore, it is assumed here that they are 
involved in all transactions.
    \51\ As explained in Chapter 5, there is also some uncertainty 
about the distribution of mortgage-related business and revenues 
among the various title-related industries. Table 6-12 assumes the 
following distribution: Direct Title Insurance Carriers (43.0%), 
Title Abstract and Settlement Offices (38.0%), and Lawyer and Escrow 
(19.0%). Section IV.B.5 of Chapter 5 considers other distributions 
and suggests the following ranges for the specific industry shares: 
Direct Title Insurance Carriers (35%-50%), Title Abstract and 
Settlement Offices (29%-43%), and Lawyer and Escrow (17%-29%). Given 
limited available information, it is difficult to determine a 
precise estimate, which is why Chapter 5 includes several 
sensitivity analyses. But obviously, reducing the relative weight of 
the DTIC or increasing the relative weight of the lawyer-escrow 
industry would increase the small business share of settlements. 
Readers are referred to Section IV of Chapter 5 for a more complete 
analysis of the relative importance of each title-related industry, 
particularly as it affects the overall small business percentage for 
title- and settlement-related work.

                                Table 6-15--Volume of Settlement Service Activity
----------------------------------------------------------------------------------------------------------------
                                                                                                      Percent
                                                        All         Percent of    Settlements by     industry
                    Industry                        settlements     settlements     small firms   settlements by
                                                                                                    small firms
----------------------------------------------------------------------------------------------------------------
Direct Title Insurance Carriers.................       5,375,000           43.00         258,000            4.80
Title Abstract and Settlement Offices...........       4,749,953           38.00       2,365,476           49.80
Lawyers and Escrow..............................       2,375,048           19.00       2,137,543           90.00
                                                 ---------------------------------------------------------------
    Total Settlements...........................      12,500,000          100.00       4,761,019           38.09
----------------------------------------------------------------------------------------------------------------
Offices of Real Estate Appraisers...............      12,500,000          100.00      10,387,500           83.10
Surveying & Mapping Services....................       3,600,000           28.80       2,926,800           81.30
Extermination & Pest Control Services...........       5,500,000           44.00       2,964,500           53.90
Credit Bureaus..................................      12,500,000          100.00       1,312,500           10.50
----------------------------------------------------------------------------------------------------------------

A larger volume of mortgage activity can also be examined, for 
example, to reflect a

[[Page 68283]]

``refinance environment''.\52\ In this case, the volume of 
settlement activity would be distributed as follows: 6,665,000 for 
Direct Title Insurance Carriers, 5,889,941 for Title Abstract and 
Settlement Offices, 2,945,059 for Lawyers and Escrow, 4,464,000 for 
Surveying & Mapping Services, 6,820,000 for Extermination & Pest 
Control Services, and 15,500,000 for both Offices of Real Estate 
Appraisers and Credit Bureaus.\53\
---------------------------------------------------------------------------

    \52\ In the projection given in the text, home purchase loans 
were assumed to stay the same (7.5 million, or 60% of the 12.5 
million in mortgages), while refinances increased from 5 million (or 
40% of the 12.5 million mortgages) to 8 million of the 15.5 million 
total (home purchases remain at 7.5 million).
    \53\ The settlement volume for small businesses during a high 
volume year can be obtained using the small business percentages 
from Table 6-12, giving: 319,920 for Direct Title Insurance 
Carriers, 2,933,191 for Title Abstract and Settlement Offices, 
2,650,553 for Lawyers and Escrow, 3,629,232 for Surveying & Mapping 
Services, 3,675,980 for Extermination & Pest Control Services, 
12,880,500 for Offices of Real Estate Appraisers, and 1,627,500 for 
Credit Bureaus.
---------------------------------------------------------------------------

    The employee figures reported in Table 6-14 misstate the number 
of workers actually participating in residential real estate 
settlements. This section offers some estimates of that figure, 
although it is recognized that they are subject to some uncertainty 
given the limited information that is available. Table 6-16 provides 
one estimate of the total number of workers and the number and 
percent of workers in small firms engaged in performing settlements 
by industry. For Title Abstract and Settlement Offices and the 
combined Lawyers and Escrow industry, it is based on the volumes of 
settlement activity depicted in Table 6-15 and the productivity 
level of Title Abstract and Settlement Offices (i.e., settlements 
per worker).
    The figure for total workers in Title Abstract and Settlement 
Offices is the sum of: All employees (79,819), small firms (7,889), 
and nonemployer firms (6,203), or 93,911. (Small firms and 
nonemployer firms are added to count the owners of those firms as 
production workers as discussed in the description of Table 6-14 
above). The corresponding figure for workers in small firms is the 
sum of: employees of small firms (47,913), small firms (7,889), and 
nonemployer firms (6,203), or 62,005 workers (representing 66% of 
all workers in Title Abstract and Settlement Offices). These figures 
are reported in Table 6-16 below. In this industry, there are 50.6 
settlements per worker (obtained by dividing the 4,749,953 
settlements from Table 6-15 by the 93,911 workers).\54\
---------------------------------------------------------------------------

    \54\ There are two caveats with this estimate. First, the 
estimate depends on the number of settlements in the Title Abstract 
and Settlement industry, which, as discussed in an earlier footnote, 
could differ from the number reported in Table 6-12 (see Section 
IV.B.5 of Chapter 5 as well as the earlier footnote for possible 
ranges of estimates). Second, not all workers in the Title Abstract 
and Settlement industry are engaged in single-family real estate 
transactions, which means that the number of workers is overstated 
and therefore the number of settlements per worker is understated. 
(Unfortunately, there is no information on the proportion of Title 
and Abstract workers engaged in single-family mortgage activity, 
although it is likely that most are.) If the number of settlements 
per worker is too low, the projection will overstate the number of 
workers needed.
---------------------------------------------------------------------------

    In the combined Lawyers and Escrow industry group, worker 
productivity is assumed to be half of that in Title Abstract and 
Settlement Offices on the grounds that these workers may not do 
settlements full time and because of the general lack of information 
on the degree of settlement activity in these broadly defined 
industries. Thus, the number of workers in this category (93,914) is 
computed by dividing the number of settlements handled by the 
industry from Table 6-15 divided by one-half the settlements per 
worker in the Title Abstract and Settlement Offices industry.
    For Direct Title Insurance Carriers, many workers are not 
engaged in actual settlements, but rather in the title insurance 
function itself. Direct Title Insurance Carriers provide title 
insurance through agents as well as both direct sales of title 
insurance and associated settlement services to consumers through 
branch offices. They also, of course, perform the title insurance 
function itself. HUD examined the annual reports of the large direct 
title insurance carrier companies to attempt to estimate the 
proportion of employees of these companies engaged in providing 
settlement services. It is estimated that approximately 70 percent 
of workers in this industry, or 54,391 workers, are engaged in 
providing settlement services. (See Table 6-16.) \55\
---------------------------------------------------------------------------

    \55\ In 2004, the DTIC industry employed 77,702 workers (based 
on the definition of worker used in the text). HUD estimates that 
approximately 70 percent, or 54,391, are engaged in providing 
settlement services. HUD computed an estimate of the proportion of 
salaries that large title insurance companies paid to workers 
engaged in settlement services as follows: (1) The amount of revenue 
required to carry out the insurance function for policies written by 
agents was computed as the difference between agent-generated 
revenue and agent commissions (or agent retention expenses); (2) two 
percentages were then calculated, (a) the percentage of agent-
generated revenue required for the insurance function in agent-
written policies as (1) divided by total agent-generated revenue, 
(b) the percent of all insurance revenue required for the insurance 
function for agent-written policies as (1) divided by total 
insurance revenue; (3) the salaries for employees providing the 
insurance function for agent-written policies was computed by 
multiplying (2)(b) by total salary expenses; (4) the total salaries 
for employees engaged in direct sales of insurance (including other 
settlement services) and providing the insurance function for 
direct-sales policies was computed by subtracting (3) from total 
salary expenses; (5) the salaries of employees providing the 
insurance function for direct-sales policies was computed by 
multiplying (2)(a) by (4); (6) the salaries of employees selling 
title insurance directly (and providing other settlement services) 
was computed by subtracting (5) from (4); finally (7) the percent of 
salaries paid to employees selling title insurance directly (and 
providing other settlement services) was computed by dividing (6) by 
total salary expenses. This analysis was carried out using 2005 data 
from the annual reports of four title insurance companies (First 
America, Land America, Fidelity National, and Stewart). The 
percentage computed in (7) ranged from 67.7 percent to 72.8 percent. 
Based on these results, HUD assumes that 70 percent of DTIC workers 
are engaged in providing direct title insurance sales and other 
settlement services.

                               Table 6-16--Workers Engaged Performing Settlements
----------------------------------------------------------------------------------------------------------------
                                                                                                    Percent of
                            Industry                               Total workers    Workers in      workers in
                                                                                    small firms     small firms
----------------------------------------------------------------------------------------------------------------
Direct Title Insurance Carriers.................................          54,391           6,401           11.77
Title Abstract and Settlement Offices...........................          93,911          62,005           66.03
Lawyers and Escrow..............................................          93,914          84,523           90.00
                                                                 -----------------------------------------------
    Total.......................................................         242,217         152,929           63.14
----------------------------------------------------------------------------------------------------------------

    The estimated numbers of title and settlement workers would be 
larger under market conditions producing a larger volume of mortgage 
activity. The estimated distribution of settlements when overall 
mortgage volume is 115,500,000 was given earlier. To adjust the 
worker estimates in Table 6-16 to reflect the higher mortgage volume 
requires information about the increase in productivity (i.e., loans 
per worker) during the higher volume (or heavy refinance) 
environment. It is not correct to simply adjust the number of 
workers up by the percentage increase in mortgage loans because the 
number of loans per worker increases during refinance booms. The 
earlier analysis of brokers and lenders provided estimates of 
additional workers in a higher volume market. That analysis was 
based heavily on trend data through 2002 for the number of workers 
in the broker industry, as reported by David Olson and his firm, 
Wholesale Access. The number of loans per broker increased between 
low and high volume years. Similar trend data do not exist showing 
the number of title and settlement workers during recent refinance 
booms. Thus, any adjustment would be somewhat speculative. But it is 
also important to emphasize that workers hired during high-

[[Page 68284]]

volume years, for example, are more likely to be temporary or part-
time workers. Temporary workers will likely rely on permanent 
workers for training or information about new rules and regulations. 
Thus, the numbers in Table 6-16 providing estimates of workers in 
the title and settlement industry serve as a reasonable basis for 
analyzing the effects of the new regulation among the various 
settlement and title industries, recognizing that the numbers could 
vary somewhat depending on the volume of mortgages considered in the 
analysis.
    Estimates of the number of single-family-mortgage-related 
workers in Surveying & Mapping Services, Extermination & Pest 
Control Services, and Credit Bureaus are not included because there 
are insufficient data upon which to base an estimate. Mortgage-
related work accounts for a relatively small portion of the overall 
activity of these industries, and information is not available to 
separate single-family-mortgage-related business from other 
activity. In addition, data on workers for these industries are not 
needed for the analysis of cost savings below. While this 
information is also not needed below for the appraisal industry, it 
is possible to produce reasonable estimates of workers for this 
industry because single-family-mortgage-related work likely accounts 
for most of the activity in this industry. Using the methodology 
described above (adding employees of employer firms, non-employer 
firms, and owners of small firms to arrive at the number of 
workers), the appraisal industry in the projection year would 
include 110,479 workers, and 102,758 of these work in small 
firms.\56\ While some of these appraisers focus on multifamily and 
commercial properties and/or conduct appraisals for local 
governments (e.g., estimating the value of properties for tax 
purposes), most are likely involved in single-family mortgage-
related activities.\57\
---------------------------------------------------------------------------

    \56\ The total number of workers is derived as follows: 45,021 
employees in employer firms (from Table 6-14) plus 49,802 non-
employer firms (from Table 6-13) plus 15,656 owners of small firms 
(from Table 6-13), which yields 110,479 workers. The number of 
workers in small businesses is derived as follows: 37,300 employees 
in small employer firms (from Table 6-14) plus 49,802 non-employer 
firms (from Table 6-13) plus 15,656 owners of small firms (from 
Table 6-13), which yields 102,758 workers in small businesses.
    \57\ One would think that practically all of the owners of the 
49,802 non-employed firms appraised single-family properties, as 
well as most of the 37,300 employees in small employer firms. One 
could argue that the number of workers for the entire industry in 
2004 is an upper bound since mortgage activity in that year was 
higher than in the projection year. Additionally, automated 
valuation models (AVMs) may have reduced the demand for appraisers; 
particularly on refinance loans (see Section V.A of Chapter 5 for a 
discussion of AVMs).
---------------------------------------------------------------------------

One-Time Costs of the New HUD-1

Introduction

    The new HUD-1 is simpler than the existing HUD-1. Nevertheless, 
there will be change in the form, including the introduction of the 
comparison page, and the settlement industry will need to learn how 
the new form works. The primary focus will be on how to put the 
numbers in the right place. The major changes in the HUD-1 itself 
are to make it more comparable to the GFE. Accordingly, to 
facilitate comparison between the HUD-1 and the GFE, each designated 
line in Section L on the final HUD-1 includes a reference to the 
relevant line from the GFE. Borrowers will be able to easily compare 
the designated line on the HUD-1 with the appropriate category on 
the GFE. Terminology on the HUD-1 has been modified as necessary to 
conform to the terminology of the GFE. For example, since Block 2 on 
the GFE is designated as ``your credit or charge for the specific 
interest rate chosen'', Line 802 on the HUD-1 is also designated 
``your credit or charge for the specific interest rate chosen.''
    The comparison page of the HUD-1, which is an additional page, 
will represent a more significant change for the industry than the 
slight revisions of the current pages. Although some training may be 
required, it is not likely to be substantial since settlement agents 
are already very familiar with what information to provide at a 
closing. The comparison page displays any differences between the 
settlement charges on the GFE and the HUD-1 on the top half. On the 
bottom half of the comparison page, there is a summary of loan, in a 
manner similar to the GFE. The burden of the comparison page of the 
HUD-1 is most likely to be felt as a one-time adjustment cost 
imposed on software developers. In response to the March 2008 
proposed rule, many lenders expressed the concern that the way the 
new HUD-1 forms are to be completed would require numerous changes 
with significant operational and technology impacts. These costs can 
be categorized similarly as for the new GFE: software costs 
(including training), legal consultation costs, and training costs. 
The total one-time compliance cost to the industry is $188 million, 
of which $139 million is borne by small business.

Settlement Software Costs

    Developers of settlement software and settlement agents will be 
subject to software costs. They will face the following two changes: 
A reorganization of the HUD-1 form and the requirement of the HUD-1 
comparison page explaining the crosswalk between the GFE and the 
final HUD-1. The changes to the HUD-1 form would not require much 
work from programmers. The only programming to be done is changing 
the manner in which information is displayed on the HUD-1 form. 
First, there will be fewer fees. Second, references to the 
corresponding figures in the GFE would need to be inserted by the 
software developers.
    Including the comparison page would require more effort because 
it is completely new. The programming itself would not be 
challenging since the new page only contrasts data from the HUD-1 
and the GFE, shows whether the tolerances are met, and displays data 
concerning loan terms. The more complex calculations concerning the 
loan terms are not required to be done by the settlement agent but 
by the lender. Loan originators must transmit settlement cost and 
loan term data to the settlement agents for page 3 (the comparison 
page) of the HUD-1 form. As discussed previously, lenders will 
provide most, if not all, of the data for the comparison page of the 
HUD-1. Settlement agents will need new software for the simple 
reason that the form will change. There will also be a strong demand 
by settlement agents for new software that checks the tolerance 
calculations given the importance of the comparison page as a means 
to double check the final figures.
    We will assume that the costs of software updates and software 
training to the settlement industry are the same as for the new GFE. 
Given the number of workers and the distribution by firm size, the 
total cost of new software and training is $62 million, of which $46 
million is borne by small business. The cost of the changes to 
software is $14 million (of which $11 million is borne by small 
business) and the opportunity cost of the time spent learning the 
new software is $48 million (of which $34 million is borne by small 
business).
    To arrive at a total one-time cost for the HUD-1, we add the 
additional cost of $18 million of new loan origination software as a 
result of the HUD-1 to the $62 million for the settlement industry's 
new software, which yields a total one-time software cost of $80 
million to the entire industry. Adding the $13 million of HUD-1 
related software costs from small loan originators to the $46 
million imposed on small settlement firms yields a total of small 
business one-time compliance costs of $59 million.

Legal Consultation Costs

    Legal consultation will be less involved for the HUD-1 form than 
for the new GFE. However, settlement firms may require additional 
legal consultation to inform on a diverse set of issues, such as 
average cost-pricing, to be on the safe side. We make the same 
assumptions as for the GFE: All firms purchase a minimum of two 
hours of legal consultation at a cost of $200 an hour and that 
additional legal services are demanded on the basis of the volume of 
business. We estimate that the total legal costs to the settlement 
industry will be $37 million of which $18 million is borne by small 
business. The cost of legal fees is lower for the HUD-1 form than 
for the GFE because there are fewer firms involved in settlement 
than in mortgage origination.

Training Costs

    Workers who perform settlements will need to learn how to fill 
out the new HUD-1 form and in some cases, calculate whether the 
change in settlement fees is within the tolerance. The quantities 
are provided to settlement agents by the GFE, so training will be 
much less involved. Assuming four hours of training at an 
opportunity cost of $72.12 per hour (based on a $150,000 fully-
loaded annual salary); tuition of $250 per worker for small firms 
and a discounted tuition of $125 per worker for large firms; and 
that half of the workers in small firms and one quarter of the 
workers in large firms require training; then the total cost of 
training is $71 million, of which $62 million is borne by small 
business.

Recurring Costs of the New HUD-1

    There are few recurring costs associated with the revised HUD-1. 
The revised HUD-

[[Page 68285]]

1 will very likely have fewer entries than the existing HUD-1 which 
will require fewer explanations of figures than is true with the 
existing forms. This is because of the combined subtotals presented 
in many sections in the new GFE in lieu of the frequently numerous 
broken out individual fees that we see on the GFE. The same is true 
when comparing the revised HUD-1 to the existing HUD-1. Comparing 
the new GFE to the revised HUD-1 should be simpler than in the past 
because it will be much easier to find entries on the new HUD-1 that 
correspond to the new GFE because they have the exact same 
description. And, of course, there are fewer entries to deal with. 
It is hard to imagine how simpler forms could be more costly to 
explain to borrowers.
    There may be recurring costs from the addition of the comparison 
page (page 3) of the HUD-1. This new page will serve two purposes: 
(1) as a crosswalk between the HUD-1 form and page 2 of the GFE and 
(2) presenting a summary of the loan terms similar to page 1 of the 
GFE. The costs of completing this page are minor. For originators it 
could be close to zero. Although the lender has to provide the 
settlement agent with information on the loan terms and some of the 
loan settlement charges, it should not constitute an additional 
burden. First, if the loan originator used a software program to 
generate the GFE, he or she would already have entered those data. A 
typical software program would print a HUD-1 for an originator that 
would contain all of the required data concerning loan terms and 
settlement costs. The only information that is not already there is 
information concerning the escrow account. Second, transmitting the 
information on page 3 to the settlement agent will not constitute an 
additional burden either: lenders and brokers already send documents 
to settlement agents, the cost of an additional page will not be 
noticeable. However, there may be a small burden in certain cases, 
and so we assume that the average burden is ten minutes per loan.
    Settlement agents may also face an additional burden, although 
this is not likely either since the lenders are responsible for 
providing the data. The settlement agent may have to fill out the 
form if the lender does not transmit it on a completed HUD-1 page 3. 
The settlement agent may also want to check the information 
concerning settlement costs, tolerances, and loan terms to make sure 
they agree with the GFE. In some cases, the settlement agent will 
have to calculate the tolerances. Preparing page 3 of the HUD-1 may 
also alert the settlement agent to inconsistencies that would not 
have to be resolved before closing. Thus, although the addition of 
this page may have a very small impact, we assume that it will add 
five minutes on average to the time it takes to prepare a 
settlement. Taking loan originators into account, the total time 
burden is fifteen minutes per loan. The compliance cost of the 
change to the HUD-1 for the industry as a whole is thus $18 per loan 
(fifteen minutes at $72 per hour).\58\ The recurring compliance cost 
to the industry would be $225 million annually ($18 per loan x 12.5 
million loans annually), of which small business would bear $107 
million annually. During a high-volume year (15.5 million loans 
annually), the annual recurring compliance cost of the HUD-1 would 
be $279 million annually.
---------------------------------------------------------------------------

    \58\ As for the GFE, an alternative method could be used to 
generate an estimate of the opportunity cost of time spent on a 
script. Instead of assuming a $72.12 opportunity cost (from a 
$150,000 fully-loaded salary), one could construct a cost estimate 
from industry-specific data. For example in Tucson, Arizona, the 
cost of labor (compensation and benefits) of a Real Estate Clerk is 
$16.66 per hour and $74.61 per hour for a Real Estate Attorney.
---------------------------------------------------------------------------

    The benefits of the comparison page of the HUD-1 are not 
estimated separately from the benefits of the new GFE ($6.48-$8.38 
billion, see Section I.B of Chapter 3). It is assumed that page 3, 
which displays tolerances and loan terms, reinforces the consumer 
savings of the new GFE by compelling settlement agents and borrower 
to check the compliance with the tolerances. The comparison page is 
a vital part of the reform. Requiring it is expected to increase the 
number of consumers who realize the full benefits of the final rule. 
The benefit of the comparison page is to double-check the final 
figures.

Changes in the Final Rule to Reduce the Regulatory Barrier of the 
HUD-1

Recurring Costs of the HUD-1 Addendum

    Comment. Many comments were opposed to the proposed HUD-1 
Addendum or ``script'' of the 2008 proposed rule. The purpose of 
requiring settlement agents to complete and read this form document 
was to have them describe, at settlement, the terms of the loan and 
to compare the settlement charges on the GFE to those on the HUD-1. 
The primary objection to the script was the time costs. HUD 
estimated the worst case scenario of the added time required of a 
non-conscientious agent dealing with a very complicated loan product 
to be an additional forty-five minutes. We assumed that the script 
would lead to an additional thirty minutes preparing the script, and 
an additional fifteen minutes to the actual closing procedure 
consisting of five minutes reading the script, and ten minutes 
answering questions. To be cautious, we applied this estimate to 
establish the outer bound of the opportunity cost of the closing 
script to the settlement firm at $54 per settlement. The total cost 
of the script in a normal year (12.5 million originations) could be 
$676 million. Settlement industry groups were concerned about the 
potential additional costs of preparing and reading the script.
    A second objection is that the script could place a settlement 
agent in the position of committing the unauthorized practice of 
law. This would occur if they were required to answer questions 
concerning issues such as the loan terms for which they had no 
responsibility.
    Response. At recent roundtables, representatives of the 
settlement industry have assured HUD that their primary goal is 
transparency and customer service. HUD assumed that without the 
script settlement agents would neither take any time to explain the 
HUD-1 to borrowers nor take any time to answer questions. Thus, 
HUD's cost estimate of the script may be exaggerated. In the world 
of the conscientious settlement agent, the additional burden of the 
script at closing would be closer to zero. However, because of the 
concern expressed concerning the implications of the potential cost 
and legal implications of the script, HUD will not require a script 
in its final rule.
    To replace the script, HUD has added a page to the HUD-1 form. 
This will contain much of the same information but will be much 
easier to fill out and will not have to be read by the settlement 
agent. The top half will contain a table that compares settlement 
charges with those on the GFE and shows the amount and percentage by 
which the charges have changed (in order to check whether the change 
is within the tolerance). The bottom half of the page consists of a 
summary of the loan terms, very similar to the first page of the 
GFE.
    The impact of this change is to reduce the maximum additional 
time imposed, which is expected to be imposed by the rule, from 45 
minutes to 15 minutes per loan. At an opportunity cost of time of 
$72 an hour for industry, this translates to a decrease in the 
regulatory burden of $36 per loan, or $450 million over an expected 
12.5 million loans.

Difficulty Comparing the New GFE and HUD-1

    Under the March 2008 proposed rule, the current HUD-1/1A 
Settlement Statements would have been modified to allow the borrower 
to easily compare specific charges at closing with the estimated 
charges listed on the GFE. The proposed changes would have 
facilitated comparison of the two documents by inserting, on the 
relevant lines of the HUD-1/1A, a reference to the corresponding 
block on the GFE, thereby replacing the existing line descriptions 
on the current HUD-1/1A. The proposed instructions for completing 
the HUD-1/1A would have clarified the extent to which charges for 
individual services must be itemized. The script was proposed to 
facilitate the comparison.
    Many commented that borrowers would require more help in 
comparing the new GFE to their HUD-1. Lenders, mortgage brokers and 
title and closing industry representatives generally stated that the 
HUD-1 should be in the same format as the GFE to enable comparisons 
of estimated and actual charges. A lender association stated that 
the proposed changes to the HUD-1 fall short of making the GFE and 
HUD-1 correspond. Lenders also stated that the proposed HUD-1 is not 
consistent with the disclosures mandated by TILA.
    A consumer group stated that while referencing the GFE lines on 
the settlement statement is an important step, HUD should mandate a 
summary settlement sheet that corresponds exactly to the summary 
sheet of the GFE. According to this group, this would obviate the 
need for a crosswalk between the GFE and the settlement statement. 
The consumer group stated that the HUD-1 should be easily comparable 
to the GFE and should facilitate, rather than hinder TILA and HOEPA 
compliance.
    One broker suggested that HUD had created three different 
documents--the GFE, the HUD-1 and the Closing Script--that

[[Page 68286]]

present the same information in completely different formats, and 
this will add to costs and confusion.
    HUD agrees with the many commenters who pointed out the 
importance of comparability between the GFE and the HUD-1. The main 
strategy for facilitating comparability between the GFE and HUD-1 
will be by inclusion of a new third page comparison chart with the 
HUD-1. This will clearly present whether settlement fees are within 
the tolerances on the top half of the page and will present a 
description of the loan in a similar fashion to the GFE on the 
bottom half.
    The final rule provisions for describing some loan terms in the 
page 1 of the GFE and page 3 of the HUD-1 are similar to the Truth 
in Lending Act (TILA) regulations, however the differences in 
approach between the TILA regulations and HUD's RESPA rule make them 
more complementary than duplicative. The TILA and RESPA approaches 
to mortgage loan terms disclosure are most similar when the loans 
are very simple, e.g., fixed interest rate, fixed payment loans. The 
approach differs for more complex loan products with variable terms. 
In general, TILA describes how variable terms can vary (e.g., the 
interest rate or index to which variable interest rates are tied, 
how frequently they can adjust, and what are the maximum adjustment 
amounts, if any), but forecasts the ``likely'' outcome based on an 
indefinite continuation of current market conditions (e.g., the note 
rate will be x in the future based in the index value y as of 
today). The RESPA disclosures in the GFE and HUD-1 comparison page 
focus the borrower on the ``worst case scenario'' for the loan 
product to ensure borrowers are fully cognizant of the potential 
risks they face in agreeing to the loan terms. The disclosures on 
the GFE are meant to be as simple and direct as possible to 
communicate differences among loan products. HUD's approach to these 
disclosures thus supports consumers' ability to shop for loans among 
different originators. For a given set of front-end loan terms 
(initial interest rate, initial monthly payment, and up-front fees), 
originators have an incentive to offer borrowers loans with worse 
back-end terms (e.g., higher maximum interest rate, higher 
prepayment penalty) to the extent capital markets are willing to pay 
more for loans with such terms. While brokers are required to 
disclose such differentials on the GFE and HUD-1, lenders are not. 
HUD's GFE will help consumers to quickly and easily identify and 
distinguish loan offers with similar front-end terms, but worse 
back-end terms, while shopping for the best loan. Requiring a 
comparison page will act to double-check the HUD-1 and thus enhance 
the realization of the benefits of the simpler GFE.

Efficiencies and Reductions in Regulatory and Compliance Burden

    Efficiencies come from time saved by both borrowers and 
originators as a result of forms that are easier to use, competitive 
impacts in the market, the decrease in the profitability of 
searching for victims, and the decrease in discouraged potential 
homeowners. All these are ongoing as opposed to one-time costs. The 
value of time saved for borrowers is $1,169 million and for industry 
$1,166 million (the sum of time saved answering borrowers' questions 
and from the simplicity of average-cost pricing). There are also 
positive spillovers of increasing consumers' level of awareness. 
First, consumers will be less susceptible to predatory lenders and 
therefore this type of wasteful activity will be discouraged, 
freeing up resources for more productive purposes. Second, by better 
understanding the loan product, there will be a decrease in the 
probability of default leading to foreclosure, which can cause 
dramatic social costs.

Shopping Time Saved by Borrowers

    Consumers will save time in shopping for both third-party 
services and mortgage loans as a result of the new GFE. HUD expects 
that the time savings for consumers will counterbalance some of the 
costs imposed on industry. The increased burden on originators of 
arranging third-party settlement services is likely to be much more 
than offset by a reduction in the aggregate shopping burden for 
third-party providers incurred by borrowers. Originators will be 
highly motivated to find low third-party prices. Originators could 
pass the savings on and make it easier to appeal to borrowers, or 
alternatively, could raise their origination fee by the savings in 
third-party fees and earn more profit per loan. Or the final result 
could fall somewhere in between the two. Regardless of which path 
any originator chooses, the lower third-party prices work to his or 
her advantage; originators will probably be aggressive in seeking 
out lower prices.
    The borrower benefits to the extent that, upon receipt of the 
GFE, he or she immediately has good pricing information on third-
party services. The borrower could immediately decide to use the 
originator's third parties, in which case his or her search is over. 
Or, the borrower could search further with the originator's prices 
as a good starting point and available as a fall-back, in which case 
the borrower's search efforts are likely to be greatly reduced. In 
both cases the borrower searches less, but spending less time 
searching does not imply less benefits from the search.
    The final GFE also creates time efficiencies by making mortgage 
loan details more transparent to consumers. Shopping will be 
encouraged because consumers will have an easier time understanding 
and comparing loans with a standard and comprehensible GFE. The 
final rule increases the amount of information processed by 
consumers; shopping accomplished; and the benefits realized from 
doing so.
    It is possible that under the final rule that some consumers 
will want to spend more time searching. Although additional time 
spent searching reduces the time spent on other activities such as 
leisure, the reward of search is an increase in consumer savings. 
Assuming that the GFE increases the productivity of every hour of 
search, it therefore also increases the relative opportunity cost of 
leisure. Consumers will spend more time shopping to receive 
additional income. Under these circumstances an increase in the time 
spent shopping does not constitute a burden imposed by the rule 
since the increase in time is voluntary. Consumers are free to 
remain at previous lower levels of shopping and enjoy a lower 
increase in saving from the rule.
    We do not expect the average consumer to spend more time 
searching because there are other effects that should dominate the 
incentive described above. First, the higher productivity in search 
of the new GFE increases a consumer's savings at all levels of 
search: Consumers will be able to reduce their level of effort and 
retain the same level of saving previous to the rule.\59\ Second, we 
expect that a large portion of the increase in savings will be 
independent of an individual's shopping behavior. As the market 
becomes more competitive, shoppers who are less sophisticated or 
less diligent may still benefit from the competitive pressure of 
others' shopping. This additional saving will allow consumers to 
spend less time searching. The time that they do spend searching, 
however, will be more effective and lead to greater savings. The new 
GFE will allow consumers to spend more time comparing and evaluating 
offers and less time trying to decipher the loan details.
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    \59\ These effects are equivalent to the income and substitution 
effects of consumer theory to understand the effect of a price 
change on the consumption of a good. In this case, the increase in 
productivity of shopping should be considered as reduction in the 
price of savings in terms of leisure. The income and substitution 
effect move in the same direction for the normal good whose price 
has changed but the opposite directions for the substitute.
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    Given that consumers will reduce the time spent searching as a 
result of this rule, then we would be underestimating the benefits 
to consumers by only counting the gain in income from reduced fees 
and not the gain in time saved. Considering the number of loans the 
average originator closes per year, the aggregate decrease in search 
efforts by borrowers is very likely to exceed the increase in 
aggregate search effort by the originators. For example, if each 
borrower saves an average of 15 minutes in shopping for third-party 
services, then the total savings to borrowers would be $234 
million.\60\ As discussed Sections VII.E.1 and VII.E.2 on 
tolerances, the new form and the tolerances will enable borrowers to 
save time shopping for loans and for third-party settlement service 
providers. If the new forms save the average applicant one hour in 
evaluating offers and asking originators follow-up questions, 
borrowers save $935 million.\61\ The total value of borrower time 
saved

[[Page 68287]]

shopping for a loan and third-party services comes to $1,169 
million.\62\
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    \60\ Calculated as follows: 21,250,000 projected mortgage 
applications (see Chapter 2) times $44 per hour times 0.25 hour (or 
15 minutes) gives $233.750 million. The $44 per hour figure is based 
on the average income ($92,000) of mortgage borrowers, as reported 
by HMDA; the $92,000 income figure is divided by 2,080 hours to 
arrive at the hourly rate of $44.23 or $44. If the borrower saved 30 
minutes in shopping time, then the total savings would be $468 
million.
    \61\ Calculated as follows: 12,500,000 loans times 1.7 
applications per loan times 1 hour per application times $44 per 
hour, the average hourly income of loan applicants ($92,000 per 
year/2,080 hours per year). See earlier footnote.
    \62\ The benefits are calculated by using the ratio of 1.7 
applications per loan, which is a measure of the current state of 
affairs. Although we calculate administrative costs for firms at 
different ratios (1.7 and 2.7), it would be misleading to calculate 
consumer benefits at higher ratios. Going from an average of 1.7 to 
2.7 applications per loan does not save the average consumer more 
time. It is clear that the consumer will not be harmed because the 
increase in applications is voluntary but should not be counted as 
an efficiency. As argued in the text, we believe that the net change 
in time spent searching will be negative.
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Time Saved by Originators and Third-Party Service Providers

    Originators and third-party settlement service providers will 
save time as well. If half the borrower time saved in (1) above 
comes from less time spent with originators and third-party 
settlement service providers, then originators spend half an hour 
less per loan originated answering borrowers' follow-up questions 
and third-party settlement service providers spend 7.5 minutes less 
with borrowers for a saving of $765 million \63\ and $191 million, 
respectively, for a total of $956 million.\64\
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    \63\ Calculated as follows: 12,500,000 loans times 1.7 
applications per loan times 0.5 hours per application times $72 per 
hour, the average hourly income of loan originators ($150,000 per 
year/2,080 hours per year).
    \64\ Just as we do for consumers, we estimate the value of time 
efficiencies using the 1.7 application per loan ratio even when 
comparing it to costs generated using the higher 2.7 ratio. It would 
not be logical to claim that we are saving a firm any time by 
requiring them to process additional applications. However, it may 
be sensible to reduce the recurring compliance costs from assuming a 
higher number of applications because the additional application 
will not be as much of a burden as it was before.
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Time Saved From Average Cost Pricing

    As discussed in Chapter 3, the final rule allows pricing based 
on average charges. This reduces costs because firms do not have to 
keep up with an itemized, customized cost accounting for each 
borrower. This not only saves costs when generating the GFE, it is 
also saves quality control and other costs afterwards. Industry 
sources have told HUD that this could be the source of significant 
cost savings.
    As explained above, there will be reductions in compliance costs 
from average cost pricing. It is estimated that the benefits of 
average cost pricing (e.g., reduction in the number of fees whose 
reported values must be those specifically incurred in each 
transaction) will lead to a reduction in originator costs of 0.5 
percent, or $210 million. No breakdown of fees is needed. No 
knowledge of an exact fee for each specific service needed for the 
loan is required for the GFE. In addition, no exact figure for the 
amount actually paid needs to be recorded for each loan and 
transmitted to the settlement agent for recording on the HUD-1. The 
originator only needs to know his or her approximate average cost 
when coming up with a package price that is acceptable. The cost of 
tracking the details for each item for each loan is gone.

Social Efficiencies

    In this section, we discuss two social efficiencies of the rule: 
The reduction of non-productive behavior and positive externalities 
of preventing foreclosures.

Reduction in Non-Productive Behavior

    By reducing the profitability of searching for less-informed 
borrowers, the rule will lead to a more efficient allocation of 
resources.
    The primary benefit to consumers is the transfer of surplus from 
firms that charge significant markups. Much of the excess fees 
earned by loan originators and settlement firms is extracted 
costlessly. Price-discriminating firms are able to assess the 
information asymmetry between themselves and potential borrowers and 
estimate the consumers' willingness to pay a markup beyond the costs 
of originating a loan. Most loan originators base their estimates of 
a consumer's level of information on signals from the consumer. They 
do not need to expend additional time or resources to do so. 
However, there is a minority of loan originators that devote 
significant resources to advertising to borrowers with a lower 
expected level of financial sophistication. If the rule leads to a 
reduction in predatory behavior, there will be a gain in social 
welfare equal to the costs of actively searching for less informed 
borrowers.
    The loan originator acts to maximize his or her expected profit. 
By raising the requested settlement charges above the settlement 
costs, a loan originator increases his or her mark-up but increases 
the probability that the consumer will reject the offer. The extent 
of a consumer's knowledge of the market will also raise the 
probability of rejecting a markup. The optimal markup is the one at 
which the net revenues from offering loans at higher prices and a 
higher rejection rate equals the net revenues from offering loans at 
lower competitive prices and a lower rejection rate. It is expected 
that the rule will increase the average individual's information; 
increase the likelihood that they would reject excessive fees; and 
thus reduce the prevalence of high markups. This reduction is what 
constitutes the transfer to borrowers of $668 per loan.
    An aggressive seeker of fees may choose to actively search for 
less informed borrowers who are more likely to accept loans with 
excessive fees. The optimal level of search effort is the one at 
which the marginal cost of searching is equal to the change in 
probability of acceptance from finding less informed clients times 
the markup (marginal benefit of search). By increasing the level of 
information among consumers, the rule will raise the marginal cost 
of searching for vulnerable borrowers and thus will lead to a lower 
optimal level of searching by loan originators.
    Whenever producers expend substantial effort to extract consumer 
surplus, there is a deadweight loss. The predatory lender diverts 
resources from producing output to producing markups (consumer 
loss). By creating transparency and enhancing a consumer's 
understanding, the rule will not only lead to transfers of excess 
fees to consumers but will inhibit costly predatory behavior. 
Reducing this activity will lead to a net gain in social welfare 
equal to the sum of the marginal costs of extracting the markup.
    The total transfer to consumers of $5.88 billion represents 14 
percent of the total revenue of originators, which is projected to 
be $42.0 billion. As explained above, this gain in surplus is 
greater than the loss to producers when firms are engaged in 
wasteful predatory behavior. If the decline in this activity 
represented 1 percent of current originator effort, this would 
result in $420 million in social surplus. In the absence of this 
activity, these resources could be devoted elsewhere making society 
richer. The transfer to consumers is composed of both the lost 
excess profits from markups and the deadweight loss from the 
inhibited predatory activity to achieve those markups. Thus, the 
gain to consumers will outweigh the loss in profits of predatory 
firms.

External Benefits of Preventing Foreclosures

    Another social benefit of the rule is its contribution to 
sustainable homeownership. It is more likely that consumers who 
understand the details of their loans will avoid default and thus 
foreclosure. There are two ways in which this rule will contribute 
to sustainable homeownership. The first is to encourage shopping by 
providing a transparent disclosure of settlement costs and other 
loan details. Such competitive market behavior should reduce 
settlement costs and provide a small cushion for borrowers in the 
eventuality of financial distress. The second is by educating 
consumers and helping them choose the loan that is most appropriate. 
A better understanding of the loan details should lead to a better 
understanding of the risks inherent in assuming a large financial 
obligation, and thus a better decision by the borrower as to the 
best loan or even whether homeownership is the optimal choice.
    Factors that precipitate default are downward trends in property 
values, a loss of income of the borrower, and an increase in 
interest rates for borrowers with adjustable-rate mortgages (ARMs). 
None of these events can be predicted with certainty and 
understanding the loan itself cannot eliminate the uncertainty. 
However, a full appreciation of the potential risks of the loan 
should lead to a careful decision as to whether the loan vehicle is 
the best one given the uncertainty. For example, knowing how high 
your interest rate and monthly payments can go should make the loan 
applicant hesitant to accept an ARM unless the borrower has the 
income security to do so. Given the same information, different 
borrowers may choose different loans depending on their risk and 
time preferences. However, it is important that they make an 
informed decision.
    There is strong evidence that borrowers underestimate the costs 
of adjustable rate loans. Buck and Pence (2008) assessed whether 
borrowers know their mortgage terms by comparing the distributions 
of these variables in the household-reported Survey of Consumer 
Finances (SCF) to the distributions in lender-reported data. The 
authors find that although most borrowers seem to know basic 
mortgage terms, borrowers with adjustable-rate mortgages

[[Page 68288]]

appear likely to underestimate or to not know how much their 
interest rates could change. Borrowers who could experience large 
payment changes if interest rates rose are more likely to report not 
knowing these contract terms. Difficulties with gathering and 
processing information appear to be a factor in borrowers' lack of 
knowledge. The final GFE would present critical loan terms such as 
the maximum monthly payment on the first page in order to better 
inform borrowers.
    The least desirable consequence of an uninformed decision is 
foreclosure. The Joint Economic Committee of the U.S. Congress 
estimates the total costs to society at close to $80,000 per 
foreclosure. The foreclosed upon household pays moving costs, legal 
fees, and administrative charges of $7,200. A study from the Federal 
Reserve Bank of Chicago reported that lenders alone can lose as much 
as $50,000 per foreclosure. Standard and Poor's describes these 
costs as consisting of loss on loan and property value, property 
maintenance, appraisal, legal fees, lost revenue, insurance, 
marketing, and clean-up. Of these costs, the primary cost to lenders 
is the cash loss on property.
    The lender and borrower are not the only parties to suffer from 
a foreclosure. It is often argued that there are negative impacts to 
the value of neighboring properties from a foreclosure. There are 
many reasons for these externalities. There is an amenity value to 
having an up kept property next door; foreclosed properties if 
vacant can attract crime; and there may also be a depressing effect 
on the local economy. A reasonable estimate of the negative 
externality of a foreclosure on nearby properties is $1,508. In 
addition, the local government loses $19,227 through diminished 
taxes and fees and a shrinking tax base as home prices decrease. The 
total benefits of preventing a foreclosure is $77,935 in averted 
costs. It is difficult to estimate how many foreclosures a uniform 
and transparent GFE with settlement fee tolerances would prevent. 
However, preventing 1,300 foreclosures nationwide would yield $100 
million of benefits.

Other Efficiencies

    There are other potential efficiencies that are anticipated from 
the new GFE approach but would be difficult to estimate. For 
example, studies indicate that one impediment to low-income and 
minority homeownership may be uncertainty and fear about the home 
buying and lending process. The new GFE approach should increase the 
certainty of the lending process and, over time, should reduce the 
fears and uncertainties expressed by low-income and minority 
families about purchasing a home (see Section VII.F of Chapter 3). 
As discussed in Section IV.D.4 of Chapter 2, improvements in lender 
information (e.g., interest and settlement costs) should also lend 
to a general increase in consumer satisfaction with the process of 
taking out a mortgage (see CFI Group, 2003).

[FR Doc. E8-27070 Filed 11-14-08; 8:45 am]
BILLING CODE 4210-67-P