Bill would require mortgage originators to main 5 percent of the risk of a loan sold to the secondary market

On Friday, Dec. 11, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act (H.R. 4173) by a vote of 223 to 202. The bill creates a new Consumer Financial Protection Agency to set and enforce industry-wide rules for consumer protection and addresses issues of systemic risk posed by large financial companies.

The bill was opposed by many trade groups in the financial services industry including the Mortgage Bankers Association (MBA), Iowa Bankers Association (IBA) and American Bankers Association (ABA). Following passage of the bill, MBA Chairman Robert E. Story expressed his disappointment.

"Unfortunately, we are not in a position where we can support this bill as currently constituted. Throughout this process, we have worked with members of the House on both sides of the aisle to enhance their understanding of the possible negative implications this bill has for current and future homeowners, the lending industry and the mortgage market as a whole," Story said in a news release. "Regrettably, the House moved forward and passed a bill that could adversely impact borrowers and lenders alike. By not creating a uniform, national regulatory standard, the bill continues the conflicting and confusing patchwork of state and local laws that result in increased costs for borrowers."

Another concern included in the bill is a requirement that mortgage originators maintain 5% of the risk of a loan sold to the secondary market.

"The risk retention provisions could make unsustainable the business models of hundreds of non-depository, independent mortgage banking firms that offer up more than a quarter of the mortgages made in this country today. On top of that, depository institutions will have to restrain their lending to meet the new requirements. Eliminating that much lending capacity will surely increase costs and limit borrowing options for many qualified homebuyers," Story said.

The industry was pleased that the House voted down a bankruptcy cram down amendment which was strongly opposed by the MBA, American Bankers Association, Iowa Bankers Association and other trade groups. The amendment would have allowed judges to revise mortgage contracts in bankruptcy.

The final rule implementing the mortgage loan originator registry can be found on the FDIC website at http://www.fdic.gov/news/board/2009nov12no8.pdf.

This summary is based upon the instructions for completing the settlement statement as found in the Nov. 17, 2008 Federal Register at and HUD’s Questions and Answers (Q&A) on the RESPA revisions.

The New HUD Statement
While the HUD statement is “new,” some things have not changed. The HUD statement completion continues to be the responsibility of the settlement agent and must itemize all the actual charges imposed upon the borrower and the seller as part of the transaction. Either the HUD–1 or the HUD–1A, as appropriate, must be used for every RESPA-covered transaction, unless its use is specifically exempted. RESPA has maintained its exemption for open-end lines of credit (home-equity plans) covered by the Truth in Lending Act from the HUD statement requirement.

The revised HUD statement has an additional page containing comparison charts and a loan terms summary. Many of the HUD lines also reference the GFE line the applicable fee was disclosed on. In addition, the HUD instructions specifically indicate some fees must be itemized outside the columns with an aggregate total detailed in the column. Therefore, statement preparers must carefully review the instructions.

Disclosure of Actual Charges
The general rule for completion of the HUD is that the statement should reflect the “actual charge” incurred for the settlement service. However, HUD introduces a new provision that permits lenders to assess an “average charge” rather than “actual charge.” Use of the new “average charge” method may be suitable in cases where the lender does not know the exact fee; for example, due to volume discount pricing.

The average charge for a settlement service can be no more than the average amount paid for a settlement service by one settlement service provider to another settlement service provider for a particular class of transactions. 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.

HUD provides for a rather complex manner in which to determine a lender’s average charge and requires lenders to re-evaluate the average interest charge at least every six months. 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. (E.g., an average charge may not be used for transfer taxes, interest charges, reserves, escrow or any type of insurance.) Should a lender elect to use average charge pricing, it must retain all documentation used to calculate the average charge for a particular class of transactions for at least three years after any settlement for which that average charge was used.

Items Paid on Behalf of the Borrower
Generally, charges that are paid for by the seller must be shown in the seller’s column on the second page 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, 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 two of the HUD–1. That charge should then be offset by listing a credit in that amount to the borrower on lines 204–209 on page one of the HUD–1, and by a charge to the seller in lines 506–509 on page one of the HUD–1.

If a lender (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 two of the HUD–1. An offsetting credit should then be included on page one of the HUD–1 in the 200 series, identifying the party paying the charge.

While the GFE does not permit items to be shown as Paid Outside of Closing (POC), the HUD does permit it. 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 POC and must not be included in computing totals. POC 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 POC items are paid for by the Borrower, Seller, or some other party by marking the items paid for by whoever made the payment as ‘‘POC” with the party making the payment identified in parentheses, such as ‘‘POC (borrower)’’ or ‘‘POC (seller).’’ It is also permissible to use POC(B); POC(S); and POC(L) if a key explaining the abbreviation is provided.

Line 801
Record ALL charges received by the loan originator, except any charge for the specific interest rate chosen (points) on Line 801. Include any amounts received for origination services, including administrative and processing services, performed by or on behalf of the loan originator on this line. Note each item is not individually itemized; rather, a total amount is detailed to the left of the column referencing Block 1 on the GFE.

HUD’s Q&A indicate a loan originator should designate any origination point(s) paid on Line 801 for IRS tax reporting purposes. The designation can follow “Our Origination Charge” either by adding the language “Includes Origination Point (__% or $__)” or by placing an asterisk (*) and adding the language at the bottom of the page.

Line 802
Line 802 is used to detail the charge or credit for the interest rate selected and is also disclosed to the left of the borrower’s column. For example, if the borrower bought down the interest rate, discount points would be disclosed as an additional charge to the borrower; or if the lender priced the loan above the PAR rate to reduce borrower upfront costs, a credit should be shown on line 802. Indirect payments from a lender to a mortgage broker must be also be included as a credit on Line 802 and may not be disclosed as POC.

Line 802 is also used to detail lender credits for “no cost” loans. When ‘‘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. When ‘‘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.

Note: After the GFE is issued, if a lender (other than for no cost loans) 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 two of the HUD-1, with an offsetting credit reported on page one of the HUD-1 in the 200 series, identifying the party paying the charge.

Line 803, the Adjusted Origination, is then detailed in the borrower’s column on line 803 and references GFE line A.

Required Services We Select
The remaining lines in the 800 series are used to detail providers required by the lender and disclosed in Block 4 on the GFE. 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 (‘‘POC’’), as described in the General Instructions. Additional numbered lines can be added as needed.

Title Services
Lines 1100 through 1108 are used to detail 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 (e.g., title examination, title search, and document preparation), fees for title insurance, and third party fees for conducting the closing, notary fees, and delivery fees related to the services covered in this series.

The aggregate total of all “title charges” is disclosed in the borrower’s column on line 1101. 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. Additional lines can be added to this section of the HUD for title-related services such as abstract costs and title opinion fees.

Recording Fees
The 1200 to 1206 series details government recording and transfer charges. Any amounts that are charged to the seller and that were not included on the GFE must be listed in the seller’s columns.

Line 1201 should record the total government recording charges paid by the borrower and the amount must be listed in the column.

The subsequent lines are then used to itemize the various fees outside of the columns. Line 1206 and additional sequentially numbered lines may be used to record specific itemized third party charges not listed in earlier lines for government recording and transfer services, but the amounts must be listed outside the columns and added to the total on line 1201 if paid by the borrower.

Additional Settlement Charges
Line 1301 and additional sequentially numbered lines are to be used to record required services that the borrower can shop for, such as fees for survey, pest inspection or other similar inspections. Each third party service the borrower can shop for is to be itemized in the 1300 series outside the column with the total amount detailed on line 1301 in the column.

The extra lines in the 1300 series may be used to record additional itemized 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. These optional services are often purchased by the borrower should be individually itemized in the borrower’s column.

Comparison Chart & Tolerance Errors
A new feature on the HUD statement is a series of “comparison charts” on page three of the HUD. The comparison charts 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. There are three charts:

• Charges that cannot increase;
• Charges that in total cannot increase more than 10%; and
• Charges that can change.