HUD Responds to the Mortgage Industry

By Hafez Daraee

On April 5, 2010, the Department of Housing and Urban Development (HUD) issued its long-awaited responses to certain questions frequently asked by those in the mortgage industry.

Where does transfer tax go on the GFE?
HUD's new good-faith estimate (GFE) form has caused great confusion. Settlement charges typically paid by the borrower must now be included in a GFE even if another party will pay them. HUD considers recordation tax, intangible taxes, excise taxes, document stamps, deed, and mortgage stamps to fall under the definition of transfer tax. In March of this year, HUD advised that if state law attributes all the transfer taxes to the seller, then $0 can be disclosed in Block 8 of the new GFE; if state law attributes some of the transfer taxes to the buyer, then the GFE must disclose that portion in Block 8.

HUD reversed course on this disclosure in its April release. The new rule is that the GFE must disclose the amount the buyer is likely to pay in Block 8. If this amount is governed by state law or if state law is unclear or does not attribute transfer tax to seller or buyer, then the amount disclosed on the GFE is governed by common practice in the locale of the property. HUD's conclusion is that the GFE need disclose only the amount of transfer tax that the buyer is likely to pay.

Can a loan originator request verification without a GFE?
In January of this year, HUD advised that a loan originator could not ask a consumer to provide verification documents or an authorization permitting the loan originator to verify employment, income, or deposits, without first providing the consumer with a GFE. HUD's position created a problem for buyers who had not yet identified a property to purchase but had requested prequalification letters from their loan originators. In April, HUD clarified its position: if a loan originator is missing one of the elements required for a loan application, such as a property address, and is not required to provide a GFE, the originator may verify information for which the consumer voluntarily provides documentation. HUD's new approach should assist loan originators with the preapproval/pre-qualification process.

Will HUD's formal guidance on prequalification and preapprovals match its informal guidelines?
In April, HUD answered the following two questions which were designed to resolve the ambiguity between its formal and informal guidelines as related to prequalification/pre-approval letters: "Is a loan originator required to provide a GFE without a property address?" and "Does Real Estate Settlement Procedures Act (RESPA) prevent a loan originator from verifying information on an application for a preapproval?"

HUD defines a preapproval as a document issued by the lender stating that the buyer qualifies for a specific loan amount. A preapproval is intended to assist a consumer who is shopping for a house by enabling the consumer to enter into a transaction without a financing contingency. But HUD explained that a preapproval can never replace a GFE, and if the property address is known, a GFE should be issued. HUD's position is that a GFE will allow the consumer to shop for a loan, not just a house. But is a GFE still required if the buyer has chosen a property but has not yet entered into a contract? HUD believes that because the buyer has a property identified, the rules requiring a GFE are triggered.

With respect to the second question, HUD stated that "RESPA regulations do not apply to preapprovals." HUD is legally correct but this position is, practically misleading. RESPA does not contain any provisions addressing how or when preapprovals are issued. RESPA does, however, affect what a loan originator may or may not do before a GFE is issued, which in turn affects the preapproval process. Unfortunately, HUD's recent release did not entirely close the loop on this issue.

To what extent is a yield spread premium to be included in Block 1 of the GFE?
HUD uses the term "yield spread premium" to refer to the entire credit provided by the lender for the interest rate, not just the compensation paid by the lender to the broker based on the rate. HUD explains that the portion of the credit for the rate chosen that is being paid to the broker must be included in Block 1 of the GFE, together with all other lender and broker compensation, and the entire credit for the rate chosen must be included in Block 2 of the GFE. Loan originators must recognize that HUD's approach to disclosure of yield spread premiums on GFE is a significant departure from past practices.

HUD recognizes that these new rules are complicated and represent changes in practice for the industry. HUD also recognizes that applying these new rules remains a work in progress, thus input from the industry will be a requirement on an on going basis as well.

Published Spring 2010

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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