[Federal Register: July 29, 2002 (Volume 67, Number 145)]
[Proposed Rules]               
[Page 49133-49174]
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Part III

Department of Housing and Urban Development


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24 CFR Part 3500

Real Estate Settlement Procedures Act (RESPA); Simplifying and 
Improving the Process of Obtaining Mortgages To Reduce Settlement Costs 
to Consumers; Proposed Rule

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-4727-P-01]
RIN 2502-AH85

 
Real Estate Settlement Procedures Act (RESPA); Simplifying and 
Improving the Process of Obtaining Mortgages To Reduce Settlement Costs 
to Consumers

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

ACTION: Proposed rule.

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SUMMARY: The Department of Housing and Urban Development is issuing 
this proposed rule under the Real Estate Settlement Procedures Act 
(RESPA), to simplify and improve the process of obtaining home 
mortgages and reduce settlement costs for consumers. The current 
disclosure requirements under RESPA have not been substantially revised 
in decades. The current disclosures were comprehensively reviewed as 
recently as 1998 by HUD and the Board of Governors of the Federal 
Reserve System, but the problems identified then remain. Nevertheless, 
since 1998, there have been continuing changes in the marketplace, new 
products, and greater accessibility of mortgage information via the 
Internet, all of which are reducing settlement costs and, if properly 
addressed by Government, could result in greater price reductions for 
consumers. First, to simplify and improve the mortgage loan process, 
this proposal would address the issue of loan originator compensation, 
specifically the problem of lender payments to mortgage brokers, by 
fundamentally changing the way in which these payments in brokered 
mortgage transactions are recorded and reported to consumers. Second, 
it would significantly improve HUD's Good Faith Estimate (GFE) 
settlement cost disclosure and HUD's related RESPA regulations to make 
the GFE firmer and more usable, to facilitate shopping for mortgages, 
to make mortgage transactions more transparent, and to prevent 
unexpected charges to consumers at settlement. Finally, the rule would 
promote competition by removing regulatory barriers to allow guaranteed 
packages of settlement services and mortgages to be made available to 
consumers, to simplify shopping by consumers and further reduce 
settlement costs. The proposed rule also includes proposed, revised 
forms and solicits comments on additional changes including changes to 
HUD's settlement disclosure form and disclosure requirements.

DATES: Comment Due Date: Deadline for comments on this proposed rule, 
including comments on the proposed information collection requirements: 
October 28, 2002.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Rules Docket Clerk, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, SW., Washington, DC 20410-0500. Communications should 
refer to the above docket number and title. Facsimile (FAX) comments 
are not acceptable. A copy of each communication submitted will be 
available for public inspection and copying between 7:30 a.m. and 5:30 
p.m. weekdays at the above address.
    HUD also invites interested persons to submit comments on the 
proposed information collection requirements of this proposed rule. 
Comments should refer to the above docket number and title, and should 
be sent to the Office of Information and Regulatory Affairs, Office of 
Management and Budget, Attention: Desk Officer for HUD, Washington, DC 
20503.

FOR FURTHER INFORMATION CONTACT: Ivy Jackson, Acting Director, 
Interstate Land Sales and RESPA Division, Room 9146, U.S. Department of 
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC 
20410; telephone (202) 708-0502 (this is not a toll-free number) or for 
legal questions Kenneth A. Markison, Assistant General Counsel for GSE/
RESPA, or Steven J. Sacks or Teresa L. Baker (Senior RESPA Attorneys); 
Room 9262, telephone (202) 708-3137. Persons with hearing or speech 
impairments may access this number via TTY by calling the toll-free 
Federal Information Relay Service at (800) 877-8339. The address for 
the above listed persons is: Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The American mortgage finance system is justifiably the envy of the 
world. It has offered unparalleled financing opportunities under 
virtually all economic conditions to a very wide range of borrowers 
that, in no small part, have led to the highest homeownership rate in 
the Nation's history. At the same time, however, the process of 
financing or refinancing a home, which is regulated under RESPA, 12 
U.S.C. 2601 et seq., remains too complicated, too costly, and too 
opaque for many borrowers. The monies needed to close on a home are a 
significant impediment to homeownership, and settlement costs are a 
significant component of these costs. In light of the Administration's 
commitment to reach even higher levels of homeownership, the RESPA 
regulatory scheme deserves particular scrutiny and necessary reform.
    The current disclosure requirements under RESPA have not been 
substantively revised in decades. Although the RESPA disclosures were 
comprehensively reviewed as recently as 1998 by both HUD and the Board 
of Governors of the Federal Reserve System, the problems identified in 
that review remain largely unaddressed.
    Recent judicial developments regarding lender \1\ payments to 
mortgage brokers \2\ (yield spread premiums and other named payments 
based on borrowers' transactions) have heightened the importance of 
increasing borrower awareness regarding how mortgage brokers are paid 
and how borrowers can benefit from payments made by lenders based on 
mortgages exceeding par interest rate.\3\ Some borrowers \4\ 
understand, agree to, and properly use higher interest rates to lower 
up front settlement costs. Others report, however, that they paid 
substantial origination costs in up front fees for mortgages and then 
learned that they were charged interest rates higher than those they 
qualified for merely to support an additional payment to their mortgage 
broker.
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    \1\ The term ``lender'' is used throughout this document to mean 
any person who is the ``real source of funds'' for a federally 
related mortgage loan.
    \2\ Except as specifically described in footnote 17, the term 
``mortgage broker'' is used throughout the document to mean a person 
(not an employee of a lender) who table funds or acts an 
intermediary in a federally related mortgage loan. Mortgage brokers 
that are the ``real source of funds'' for a federally related loan 
are not regarded as brokers in such transactions.
    \3\ The term ``par interest rate'' is used throughout this 
document to mean the interest rate at which there is not payment 
made by the lender to the borrower or from the borrower to the 
lender.
    \4\ The terms ``consumer'' and ``borrower'' are used 
interchangeably throughout the document.
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    Under the current rules, many borrowers are provided estimated 
settlement cost information on a GFE only after paying a significant 
fee required by a loan originator,\5\ which prevents the borrower from 
shopping among additional originators using the

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GFE. Also, when borrowers receive estimated settlement cost information 
after applying for a mortgage, the estimates are often unreliable and 
prove too low. Final charges at settlement often include additional 
surprise ``junk fees,''\6\ which increase the original estimates. HUD's 
current rules provide little guidance on the standards that originators 
should be held to in providing good faith settlement cost estimates.
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    \5\ The term ``loan originator'' is used throughout this 
document to refer to lenders and mortgage brokers.
    \6\ ``Junk fee'' is a term used throughout this document to mean 
any fee charged for a service to a borrower that has little or no 
value in relation to the charge, and/or may be duplicative, to 
increase a loan originator's profits.
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    By requiring a long listing on the GFE of each estimated settlement 
charge, the current disclosure fails to highlight the major costs and 
seems to lead only to a proliferation of charges without any actual 
increase in the work performed or enhanced borrower understanding to 
assist in shopping for services and guard against unnecessary charges. 
The current requirements allow an individual such as a loan originator, 
to charge several fees for origination, document preparation, and 
document review. It is difficult for borrowers to distinguish or 
understand the precise purpose of these various itemized services 
provided by the same originator. Excessive itemization thus enables 
originators to charge more than if the borrower could review and shop 
the total origination charges. The same holds true for title and other 
third party services. The types of fees charged by loan originators, 
title agents and other service providers have multiplied in recent 
years making it steadily more difficult for borrowers to compare 
settlement costs.
    Industry advocacy groups have indicated that they support better 
disclosure of mortgage broker compensation specifically and loan 
origination charges in general. Consumer groups have called for 
protections against yield spread premiums that were not bargained for, 
more shoppable settlement cost disclosures, and much firmer interest 
rates and settlement service costs.
    Settlement cost disclosures need to be improved so that the 
information they provide is simpler, clearer, more reliable, and 
reasonably available to facilitate shopping, increase competition, and 
lower settlement costs. Although HUD has called for better disclosures 
in policy statements and opinions, its regulations need to be updated 
to establish requirements that are more useful to consumers.
    While technology and market forces have played a significant role 
in lowering costs in the settlement process, it is not clear that under 
existing rules these benefits are passed on to the borrower in the form 
of lower settlement prices. HUD's rules implementing Section 8 of RESPA 
require originators to pass through third party costs without ``mark-
ups'' or ``upcharges,'' and generally prohibits volume discount 
arrangements. Many industry and consumer advocates assert, however, 
that these regulatory restrictions prevent activities and innovations 
which would lower prices to borrowers. Many mortgage industry providers 
also report that while they follow the rules, they are competitively 
disadvantaged by those who do not because of the lack of adequate 
enforcement by HUD.
    Specifically, some assert that HUD's RESPA rules impede 
arrangements for the packaging of settlement services, which would 
allow packagers to draw on their knowledge of the market and 
familiarity with the products offered by providers of specific services 
to develop lower settlement cost packages for borrowers. They assert 
that such packages would increase competition and enhance borrower 
shopping, lowering costs more effectively than restrictions against 
referral fees or unearned fees. In the joint HUD and the Board of 
Governors of the Federal Reserve System, Joint Report to the Congress 
Concerning Reform of the Truth in Lending Act and the Real Estate 
Settlement Procedures Act, (July 1998), (hereafter HUD-Federal Reserve 
Report) both agencies agreed that an exemption should be established to 
facilitate the provision of settlement services and to improve 
consumers' ability to shop effectively for a mortgage loan and thereby 
allow competitive forces to reduce the cost of financing a home. HUD-
Federal Reserve Report at 33. At that time, some settlement service 
providers claimed that such an exemption would legalize kickbacks and 
referral fees. HUD has examined this concern and concluded that 
guaranteed packaging arrangements should be permitted in a carefully 
circumscribed safe harbor. Deregulation, transparency and a free market 
will wring out kickbacks, referral fees, and other excesses more 
effectively than the current restrictions and, for this reason, the 
establishment of a safe harbor is warranted. Under this proposal, 
settlement service providers may choose either to operate using an 
improved GFE disclosure, or to participate in packages qualifying for 
the safe harbor. Accordingly, this dual approach will provide industry 
and borrowers alike with an opportunity to test both methods where they 
should be tested, in the marketplace, to determine which is more 
effective in lowering settlement costs.
    Late last year, in Statement of Policy 2001-1, Clarification of 
Statement of Policy 1999-1 Regarding Lender Payments to Mortgage 
Brokers, and Guidance Concerning Unearned Fees Under Section 8(b), 66 
FR 53052 (October 18, 2001), the Secretary announced his intention to 
make full use of his regulatory authority to provide clear requirements 
and guidance regarding the disclosure of mortgage broker fees, and more 
broadly, to improve the mortgage settlement process to better serve 
borrowers. The Secretary has established the following principles to 
guide HUD's RESPA reform and enforcement efforts:
    1. Borrowers should receive settlement cost information early 
enough in the process to allow them to shop for the mortgage product 
and settlement services that best meet their needs;
    2. Disclosures should be as firm as possible to avoid surprise 
costs at settlement;
    3. Regulatory amendments should be utilized to remove unintended 
barriers to marketing new products, competition, and technological 
innovations that could lower settlement costs;
    4. Many of the current system's problems derive from the complexity 
of the process; with simplification of disclosures and better borrower 
education, the loan origination process can be improved; and
    5. RESPA should be vigorously enforced to protect borrowers and 
ensure that honest industry providers have a level, competitive playing 
field.
    In accordance with these principles, this proposed rule would first 
fundamentally change the way in which mortgage broker compensation is 
reported by requiring, in all loans originated by mortgage brokers, 
that any payments from a lender based on a borrower's transaction, 
other than the payment for the par value \7\ of the loan, including 
payments based upon an above par interest rate on the loan (payments 
commonly denominated ``yield spread premiums''), be reported on the 
Good Faith Estimate (and the HUD-1/1A Settlement Statement) as a lender 
payment to the borrower. Additionally, in brokered loans, any borrower 
payments to reduce the interest rate (``discount points'') must

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equal the discount in the price of the loan paid by the lender, and be 
reported on the GFE (and HUD-1/1A) as borrower payments to the lender. 
These changes would require mortgage brokers to disclose, at the 
outset, the maximum amount of compensation they could receive from a 
transaction, and include the amount in the ``origination fees'' block 
of the GFE and separately on the GFE Attachment A-1. They would then 
disclose the amount of the lender payment to the borrower that would be 
received at the interest rate quoted, if any. Mortgage brokers would be 
unable to increase their compensation without the borrower's knowledge, 
either by placing the borrower in an above par loan, and receiving a 
payment from the lender (yield spread premiums), or by retaining any 
part of any borrower payment intended to reduce the loan rate (discount 
points).
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    \7\ The term ``par value'' of the loan is used throughout this 
document to mean the principal amount of the loan.
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    Through these changes in reporting requirements, HUD believes that 
virtually all disputes regarding broker compensation in table funded 
transactions and intermediary transactions involving yield spread 
premiums would be resolved. Maximum broker compensation would be clear 
and brokers would have no incentive to seek out lenders paying the 
largest yield spread. They would instead be motivated to find the best 
loan product they can for the borrower. At the same time, HUD believes 
that since these new disclosure requirements will allow borrowers to 
focus on the total origination costs for shopping purposes, they will 
not disadvantage brokers in competition with lenders.
    Second, the proposed rule would improve the existing RESPA 
disclosure scheme by establishing a new required format for the Good 
Faith Estimate providing greater accuracy and usefulness for borrowers, 
which would: (1) Inform the borrower that mortgage brokers and other 
loan originators do not offer loans from all funding sources and cannot 
guarantee the lowest price or best terms available in the market; (2) 
explain to the borrower the option of paying his or her settlement 
costs through the use of lender payments based on higher interest 
rates, or reducing the interest rate by paying the lender additional 
amounts at settlement; (3) disclose the loan originators' fees, 
including the mortgage broker's and lender's total charges to 
borrowers; and (4) require, in transactions originated by mortgage 
brokers, that all payments from a lender other than for the par value 
for the loan (including ``yield spread premiums,'' servicing release 
premiums, and all other payments from lenders), be reported on the GFE 
and the HUD-1 Settlement Statement as a lender payment to the borrower 
and any discount points charged to the borrower must equal the discount 
in the price of the loan paid by the lender and be reported on the GFE 
and the HUD-1 Settlement Statement as borrower payments to the lender. 
These changes will ensure that borrowers receive the full benefit of 
any payments from or to lenders in brokered transactions, either by 
reducing their up front settlement costs in exchange for accepting a 
loan with a higher rate, or by reducing their interest rate and monthly 
payments by paying additional amounts to the lender at settlement.
    The new GFE would also better inform borrowers of the costs of 
obtaining a mortgage loan from a mortgage broker, as well as from 
mortgage bankers, lenders or other loan originators, and would better 
protect borrowers from unnecessary surprise charges at settlement. It 
would:
    (1) Include an interest rate quote in the form of the mortgage 
loan's note rate and APR, and notification of any prepayment penalties, 
to assist the borrower in shopping among mortgages;
    (2) Disclose subtotals of major categories of settlement costs 
(including, for example, loan origination costs and title services) to 
borrowers to eliminate the proliferation of fees by individual 
settlement service providers, and to allow borrowers to focus on and 
compare major fees; and
    (3) Provide additional shopping information for borrowers that 
would provide a breakdown of lender and broker origination charges, 
title insurance and title agent charges, and inform the borrower of 
lender required and selected services and those third party services 
that can be shopped for by the borrower.
    The proposed rule would further improve the existing disclosure 
scheme, by amending Regulation X to establish new rules for the 
provision of the GFE which would: (1) Clarify the basic information 
needed in an ``application'' to obtain a GFE; (2) limit fees paid by 
borrowers for the GFE, if any, to the amounts necessary to provide the 
GFE itself and exclude amounts used to defray later appraisal or 
underwriting charges, in order to facilitate shopping with GFEs; (3) 
require that loan originators not exceed the amounts reported on the 
GFE regarding their total compensation, lender required and selected 
third party services, and government charges through settlement (absent 
unforeseeable and extraordinary circumstances); (4) require that loan 
originators comply with upper limits or ``tolerances'' for specified 
major settlement charge categories so they do not exceed those stated 
on the GFE by more than 10%; and (5) clarify that loan originators can 
make arrangements with third party settlement service providers to 
lower prices for their customers, provided that these prices and any 
charges are reflected accurately on the GFE and are not ``marked up'' 
or ``up charged.''
    Third, the proposed rule would remove regulatory barriers to allow 
packages of settlement services and mortgage loans to be made available 
to borrowers. These transactions would be even simpler and more 
transparent for borrowers, and would allow market forces, borrower 
shopping, and competition to further reduce the costs of settlement 
services to better achieve the purposes of the statute.
    To accomplish this objective, HUD would establish a carefully 
circumscribed safe harbor under RESPA for ``Guaranteed Mortgage 
Package'' (GMP) transactions. Any entity (a lender, broker, other 
settlement service provider, or other entity), hereinafter a 
``packager,'' may qualify for the safe harbor as long as it offers a 
GMP. The packager must offer the GMP to a borrower following his or her 
submission of application information, but before the borrower's 
payment of any fee to the packager. The GMP must include: (1) A 
guaranteed package price for a comprehensive package of loan 
origination and virtually all other settlement services required by the 
lender to close the mortgage (including without limitation, all 
application, origination and underwriting services, the appraisal, pest 
inspection, flood review, title services and insurance, and any other 
lender required services except hazard insurance, per diem interest, 
and escrow deposits); (2) a mortgage loan with an interest rate 
guarantee, whether when the ``Guaranteed Mortgage Package Agreement'' 
(GMPA) is given or subject to change (prior to borrower lock-in) only 
pursuant to market changes evident from an observable and verifiable 
index or other appropriate data or means; and (3) a contract offer in 
the form of a GMPA to guarantee the price for settlement services and 
the mortgage interest rate through settlement, if the offer is accepted 
by the borrower. Additionally, in order to ensure that the borrower 
receives the settlement package of services and the mortgage loan, the 
proposed rule would require that the packager sign the GMPA agreeing to 
provide the Guaranteed Mortgage Package at the Guaranteed Mortgage 
Package price and that non-lender packagers have a lender sign the

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GMPA after borrower acceptance agreeing to provide the loan included in 
the Guaranteed Mortgage Package.
    The GMPA would describe the package as ``including all services 
required by the lender to close the mortgage'' but would not itemize 
the specific services to be provided. The packager would, however, be 
required to inform the borrower if certain items of interest to the 
borrower are anticipated to be excluded from the package, specifically 
lender's title insurance, pest inspections, and a property appraisal. 
Additionally, where the packager anticipates obtaining a pest 
inspection, appraisal, or credit report, the packager must disclose 
that information on Attachment A-1 and make such documents available at 
the borrower's request. The HUD-1 would list the services ultimately 
provided, but not the charges for specific services. HUD is requesting 
comments on whether this approach satisfies, or whether alternative 
approaches should be developed, to ensure that consumers' rights under 
TILA and HOEPA are protected while facilitating packaging.
    The Secretary is exercising the exemption authority under Section 
8(c)(5) and Section 19 of RESPA to establish this Guaranteed Mortgage 
Packaging safe harbor for those Guaranteed Mortgage Package 
transactions that meet the requirements set forth in this rule. The 
Secretary has determined that the establishment of this carefully 
circumscribed safe harbor is necessary to allow this class of 
transactions to be available to consumers and to achieve the purposes 
of the Act. The Secretary has concluded that the availability of these 
packages to consumers at single guaranteed prices with an interest rate 
guarantee will simplify consumers' shopping for mortgages and allow 
them to gain the benefit of an active competitive marketplace in which 
market forces produce lower settlement costs. For the same reasons, the 
Secretary has determined that payments among packagers and 
participating settlement service providers and the earnings of packager 
in Guaranteed Mortgage Packages, as set forth in this rule, shall not 
be construed as prohibited under Section 8 of RESPA as long as the 
requirements in this rule are satisfied. Pursuant to Section 8(c)(5) 
the Secretary has undertaken the necessary consultation with other 
agency heads as required prior to promulgating this exemption.
    The safe harbor from Section 8 will permit the packager to charge 
for services within the package and will permit payments to, or 
exchanges of other things of value between entities participating in 
the package. Section 8 would, however, continue to prohibit any 
payments for the referral of business, kickbacks, splits of fees and 
unearned fees between the packager and any of the entities 
participating in the package on the one hand and entities outside of 
the package on the other. Under the safe harbor, packagers would 
provide the GMPA in lieu of a GFE. HUD regards such provision of a GMPA 
as fully, indeed more than, satisfying the requirements of Section 5 of 
RESPA that borrowers receive a Good Faith Estimate of the amount of 
charges for settlement services the borrower is likely to incur. HUD 
believes that the GMPA, by providing a Guaranteed Mortgage Package 
price encompassing virtually all settlement charges, along with a 
limited number of itemized charges, including owner's title insurance, 
also more than satisfies the requirements of Section 4 of RESPA. 
Nevertheless, as long as the requirements of the safe harbor are 
satisfied, HUD is also prepared to exercise the exemption authority 
under Section 19 to create a safe harbor for packagers from the 
requirements of Sections 4 and 5 of RESPA, if it deems such an 
exemption necessary.
    The safe harbor is proposed to be available only where the 
transaction does not result in a high cost loan as that term is defined 
in the Home Ownership Equity Protection Act, 15 U.S.C.1601(Supp II 
1996). The safe harbor also may not be available to mortgages that 
exceed other limits, or include other features identified through this 
rulemaking, resulting in unreasonable settlement charges or loan terms 
inimical to the purposes of RESPA.
    The proposed rule's new regulatory requirements will apply to first 
and second lien transactions, purchase money loans, and refinances. 
Home equity transactions are addressed in Sec. 3500.7(f), under current 
RESPA regulation. At Question 26 the Department invites comments on 
this issue.
    The Department also is inviting comments specifically on whether, 
and to what extent modification of the existing HUD-1/1A Settlement 
Statement and Instructions, found at 24 CFR part 3500, Appendix A, is 
necessary to make it comparable to the new GFE. HUD also announces that 
it plans to revise the Special Information Booklet concerning 
settlement costs consistent with the final rule, and to develop new 
booklets for refinance and junior lien transactions.
    In this proposed rule at Appendix C and F, the Department is 
publishing for comment new proposed required formats for the Good Faith 
Estimate (GFE) and new GMPA. HUD believes that the content of the 
material in these proposed forms gives the consumer the information 
needed to shop for loan products and to assist them during the 
settlement process. HUD recognizes that in order for these forms to be 
useful shopping tools, they must be consumer friendly. The Department 
seeks public comment on these proposed forms In addition, the 
Department will arrange focus groups during the comment period to 
elicit comments on how to make the material in the new proposed forms 
as consumer friendly as possible including considering, among other 
things, how the new proposed forms are best compared by consumers to 
the HUD-1 and what revisions, if any, to the HUD-1 would be most 
helpful.
    In addition, the Department will facilitate the provision of web 
based information to consumers on settlement costs and pursue other 
efforts to ensure that RESPA regulation encourages technological 
advances to facilitate competition, and lower costs and prices to 
consumers. Beyond this rulemaking, the Department is examining possible 
changes to its rules to facilitate electronic mortgage transactions 
consistent with the Electronic Signatures in Global and National 
Commerce Act, Public Law 106-229. The Department will also undertake 
efforts with Federal and State regulators and others to better address 
technological changes to lower costs.
    Additionally, the Department plans to finalize the 1997 Section 6 
transfer of servicing proposed rule; however, in the meantime the 
Section 6 language in the statute may be provided in conjunction with 
the GFE. Separate from this rulemaking, the Secretary is increasing the 
resources dedicated to enforcing and regulating RESPA.
    Following the background materials, this proposal includes a 
description of today's proposed rule, specific questions for public 
comment, and proposed rule language. Public comment on this proposal 
will be important to formulating a final rule that is consistent with 
RESPA's purpose, workable in the marketplace, and best serves the 
financing needs of America's families.

II. General Background

A. Legal Authority

    The Department is proposing this rule in accordance with 5 U.S.C. 
552, Sections 19 and 8(c)(5) of the Real Estate

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Settlement Procedures Act of 1974 (12 U.S.C. 2617).
RESPA Overview
    In 1974, Congress enacted the Real Estate Settlement Procedures Act 
(Pub. L. 93-533, 88 Stat. 1724, 12 U.S.C. 2601 et seq.) after finding 
that ``significant reforms in the real estate settlement process are 
needed to ensure that borrowers throughout the Nation are provided with 
greater and more timely information on the nature and costs of the 
settlement process and are protected from the unnecessarily high 
settlement charges that have developed in some areas of the country.'' 
Id. RESPA's stated purpose is to ``effect certain changes in the 
settlement process for residential real estate that will result:
    (1) In more effective advance disclosure to home buyers and sellers 
of settlement costs;
    (2) In the elimination of kickbacks or referral fees that tend to 
increase unnecessarily the costs of certain settlement services;
    (3) In a reduction in the amounts home buyers are required to place 
in escrow accounts established to ensure the payment of real estate 
taxes and insurance; and
    (4) In significant reform and modernization of the local record 
keeping of land title information.'' Id.

    RESPA's requirements apply to transactions involving ``settlement 
services'' for ``federally related mortgage loans.'' Under the statute 
the term ``settlement services'' includes any service provided in 
connection with a real estate settlement.\8\ The term ``federally 
related mortgage loan'' is broadly defined to encompass virtually all 
purchase money and refinance mortgages.\9\ Section 4(a) of RESPA 
requires the Secretary to develop and prescribe ``a standard form for 
the statement of settlement costs which shall be used * * * as the 
standard real estate settlement form in all transactions in the United 
States which involve federally related mortgage loans.'' The rule 
further requires that the form ``conspicuously and clearly itemize all 
charges imposed upon the borrower and all charges imposed upon the 
seller in connection with the settlement. * * *'' Section 5 requires 
the Secretary to prescribe a Special Information Booklet for borrowers. 
Section 5(c) requires that a Good Faith Estimate (GFE) be provided at 
or within 3 days of loan application, authorizes the Secretary to 
prescribe the contents of the GFE, and requires that the GFE state 
``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.'' Notice of transfer of servicing language 
was added to RESPA at Section 6 in 1990 and amended most recently in 
1996, and requires notification to borrowers at the time of application 
for the mortgage, and during the life of the loan, of whether the 
servicing of the loan may be or has been assigned, sold, or 
transferred.
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    \8\ These services include, but are not limited to, ``title 
searches, title examinations, the provision of title certificates, 
title insurance, services rendered by an attorney, the preparation 
of documents, property surveys, the rendering of credit reports or 
appraisals, pest and fungus inspections, services rendered by a real 
estate agent or broker, the origination of a federally related 
mortgage loan (including, but not limited to, the taking of loan 
applications, loan processing, and the underwriting and funding of 
loans), and the handling of the processing, and closing of 
settlement.'' 12 U.S.C. 2602(3).
    \9\ Specifically, the term covers mortgages ``secured by a first 
or subordinate lien on residential real property (including 
individual units of condominium and cooperatives) designed 
principally for the occupancy of one to four families''; mortgages 
made ``in whole or in part by any lender the deposits or accounts of 
which are insured by the Federal Government or is made in whole or 
in part by any lender which is regulated by any agency of the 
Federal Government'' or ``insured, guaranteed, supplemented or 
assisted in any way by HUD or any officer or agency of the Federal 
Government,'' intended to be sold to Fannie Mae, Ginnie Mae, Freddie 
Mac or an institution from which it will be purchased by Freddie 
Mac, or is made in whole or in part by any loan originator, among 
other things, ``who makes or invests in residential real estate 
loans aggregating more than $1,000,000.00 per year.'' 12 U.S.C. 
2602(3).
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    Section 8(a) prohibits any person from giving and any person from 
accepting ``any fee, kickback, or thing of value pursuant to any 
agreement or understanding, oral or otherwise,'' that real estate 
settlement service business shall be referred to any person. 12 U.S.C. 
2607(a). Section 8(b) prohibits anyone from giving or accepting ``any 
portion, split, or percentage of any charge made or received'' for the 
rendering of a real estate settlement service ``other than for services 
actually performed.'' 12 U.S.C. 2607(b). Section 8(c) of RESPA 
provides, in part, that ``[n]othing in [Section 8] shall be construed 
as prohibiting * * * (2) the payment to any person of a bona fide 
salary or compensation or other payment for goods or facilities 
actually furnished or for services actually performed.'' * * * or ``(5) 
such other payments or classes of payments or other transfers as are 
specified in regulations prescribed by the Secretary, after 
consultation with the Attorney General, the Secretary of Veterans 
Affairs, the Federal Home Loan Bank Board,\10\ the Federal Deposit 
Insurance Corporation, the Board of Governors of the Federal Reserve 
System and the Secretary of Agriculture.'' 12 U.S.C. 2607(c)(2).
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    \10\ The Federal Home Loan Bank Board (FHLBB) was abolished 
Effective October 8, 1989, by the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989, (Pub. L. 101-73). Its 
successor agency, the Office of Thrift Supervision, Department of 
the Treasury, assumed the FHLBB's regulatory functions.
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    Section 9 forbids any seller of property from requiring buyers to 
purchase title insurance covering the property from any particular 
title company as a condition of sale. Section 10 limits the amounts 
that lenders or servicers may require borrowers to deposit in escrow 
accounts, and requires that borrowers be provided with both initial and 
annual escrow account statements. Section 12 prohibits lenders and loan 
servicers from imposing any fee or charge on any other person for the 
preparation and submission of the Settlement Statement, the escrow 
account statements required under Section 10(c), or any disclosures 
required by the Truth in Lending Act.
    Section 19 of RESPA specifically authorizes the Secretary ``to 
prescribe such rules and regulations, * * * and to grant such 
reasonable exemptions for classes of transactions * * *, as may be 
necessary to achieve the purposes of [RESPA].''

B. Background

HUD's RESPA Rules
    In 1975, HUD promulgated its first set of RESPA rules including 
limited disclosure requirements. Real Estate Settlement Procedures and 
Cost, 40 F.R. 22448 (1975). These rules included a requirement that the 
HUD-1 form be given to borrowers within seven days of a loan 
commitment, with the provision that estimates were permitted for those 
items the lender could not accurately provide cost information for at 
the time of loan commitment. Congress amended the RESPA statute in 1976 
and included a requirement that borrowers be provided with a Good Faith 
Estimate along with the special information booklet at, or within 3 
days of a loan application. Following these amendments, HUD promulgated 
rules in 1977 that included a suggested format for the GFE and 
requirements for its provision to borrowers at or within 3 days of 
application, as well as a Uniform Settlement Statement, designated as 
the HUD-1, to itemize settlement charges to borrowers in every 
settlement involving a federally related mortgage loan where there is a 
borrower

[[Page 49139]]

and a seller, along with instructions and requirements for its use.
    On November 2, 1992, HUD amended its rules to implement the 1984 
amendments to RESPA establishing a ``controlled business exemption'' 
(now known as an ``affiliated business exemption''), a controlled (now 
known as an ``affiliated'') business disclosure to be provided at the 
time of a referral, and a disclosure of required providers to accompany 
the GFE. 57 FR 49600. The 1992 amendments also made other significant 
additions and changes, including defining the term mortgage broker,\11\ 
and applying disclosure requirements to mortgage brokers, as more fully 
discussed below. In 1994, at 59 FR 6506, HUD amended its rules to 
conform with the 1992 amendments to the law covering refinancings and 
junior lien transactions. At that time, HUD promulgated a new 
disclosure form, the HUD-1A, for use in refinancing and subordinate 
loan transactions where there is no seller. While the 1992 and 1994 
amendments necessitated additional disclosures, the formats of the GFE 
and HUD-1, and the disclosure requirements, have remained substantially 
unchanged since they were originally established in 1977.
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    \11\ HUD's RESPA rules, found at 24 CFR part 3500 (Regulation 
X), currently define a ``mortgage broker'' to be ``a person (not an 
employee or exclusive agent of a lender) who brings a borrower and 
lender together to obtain a federally-related mortgage loan, and who 
renders services'' as described in the rule (24 CFR 3500.2(b)).
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Contents of Good Faith Estimate and the HUD-1
    HUD's RESPA rules require that lenders and mortgage brokers who are 
not exclusive agents of lenders provide a GFE to all applicants for 
federally related mortgage loans, and contain a suggested format in 
Appendix C to 24 CFR part 3500. The suggested GFE format lists twenty 
common settlement services and provides spaces for the charges for such 
services. The instructions indicate that any other possible services 
and charges should also be listed.\12\ The GFE provides a place for the 
``amount of or range'' of each charge that the borrower is likely to 
incur in connection with the settlement. Between the name and amount of 
each charge is a reference to where the same charge will be disclosed 
on the HUD-1 or HUD 1-A at settlement. If the lender requires the use 
of particular settlement service provider(s) and requires the borrower 
to pay for any portion of such provider's services, the rules require 
that the GFE state: that the use of the provider is required and that 
the estimate is based on the selected provider's price; the provider's 
name, address and telephone, and the nature of any relationship between 
the provider and the lender.\13\ The current GFE does not identify the 
particular items that the borrower may shop for after he has selected a 
lender or broker, such as a title or settlement agent, title insurance, 
and a pest inspector.
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    \12\ Specifically, the GFE format lists the loan origination 
fee, loan discount fee, appraisal fee, credit report, inspection 
fee, mortgage broker fee, CLO access fee, tax related service fee, 
interest at ``dollars'' per day, mortgage insurance premium, hazard 
insurance premium, reserves, settlement fee, abstract or title 
search, document preparation fees, attorney's fee, title insurance, 
recording fees, city/county tax stamps, state tax, survey, pest 
inspection and the form provides space for additional fees that may 
be added.
    \13\ 24 CFR 3500.7(e)(3). Except for a provider that is the 
lender's chosen attorney, credit reporting agency, or appraiser, if 
the lender is in an affiliated business relationship with the 
provider (see Sec. 3500.15), the lender may not require the use of 
that provider.
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    The HUD-1, described in detail in Appendix A of HUD's RESPA rules, 
discloses the charges at settlement in major groupings or series. The 
left hand column on the front of the HUD-1 summarizes the borrower's 
transaction, listing the cash due at settlement from the borrower, as a 
result of the gross amounts due less any amounts paid by or on behalf 
of the borrower prior to settlement. This part of the HUD-1 lists 
credits to the borrower as well as the total settlement charges due 
from line 1400 on the back of the form. The right hand column on the 
front of the HUD-1 summarizes the seller's transaction, listing the 
total amount due to the seller as the gross amount due to the seller 
adjusted for items such as settlement charges to the seller and the 
payoff(s) of any mortgages, and any other items due from seller (such 
as taxes), to arrive at a total amount due seller.
    The 700 series of the HUD-1 lists real estate broker commissions; 
the 800 series lists origination fees and certain third party 
settlement services payable in connection with the loan; the 900 series 
lists items required by the lender to be paid in advance; the 1000 
series lists reserves deposited with lender; the 1100 series lists all 
title related charges; the 1200 series lists government charges; the 
1300 series lists any additional settlement charges; and line 1400 
discloses the total settlement charges.
    The current GFE and HUD-1/1A forms require a listing of the 
settlement charge for each service, which appears to have led to an 
increasing proliferation of enumerated services by individual 
settlement service providers (e.g., loan originators, title agents, 
etc.) and an artificial separation and inflation of the total charges 
of certain settlement service providers resulting in higher total costs 
to borrowers than a more consolidated list would provide. For example, 
the current requirements encourage loan originators to charge for 
several separate ``services''-- origination, document preparation, 
document review. Similarly, title service providers are required to 
separate their charges into ``abstract,'' ``document preparation,'' 
``attorney's fees,'' and other charges. Moreover, neither the GFE nor 
the HUD-1 specify the total amount of fees that each major recipient 
receives and retains, including the lender, the broker, and the title 
agent. It is reported that some originators charge ``junk'' fees for 
``services'' to increase profits by filling in as many blank lines on 
the form as possible. It also has been reported that some originators 
compete on rate and points when giving quotes and then charge a variety 
of additional fees to increase their profits.
Provision of the Good Faith Estimate
    The RESPA rules require that the loan originator must provide the 
GFE either by delivering it or placing it in the mail to the borrower 
not later than three business days after a loan application \14\ is 
received or prepared. In practice, loan originators frequently insist 
on the borrower's completion of a full application form and payment of 
a significant fee to cover the costs of an appraisal and credit check 
before a GFE is provided. Therefore, by the time that the borrower 
receives a GFE he or she has typically already selected a particular 
loan originator, and paid substantial fees, and is highly unlikely to 
shop further for another loan originator. In addition, because the GFE 
is not generally provided until the borrower applies for a loan, the 
form does not provide borrowers with sufficient opportunity to focus on 
and compare the full costs of the originator and other major recipients 
of fees, nor does it indicate clearly other individual settlement 
services including title services that the borrower may shop for. 
Borrowers must shop on their own without the aid of a GFE.
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    \14\ The rules define an ``application'' as the submission of a 
borrower's financial information in anticipation of a credit 
decision involving a federally related loan on a specific property. 
24 CFR 3500.2(b).
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Current Definition of ``Good Faith''
    HUD's RESPA rules currently require that a GFE must be made in good 
faith, bear a ``reasonable relationship'' to the charge the borrower is 
likely to be

[[Page 49140]]

required to pay at settlement, and ``be based upon experience in the 
locality of the mortgaged property.'' 24 CFR 3500.7(c)(2). The rules, 
however, do not establish any bright lines or tolerances to assure that 
there is, in fact, a reasonable relationship between these estimates 
and final costs at settlement. Although the rules do require additional 
disclosure where the lender requires the use of a particular provider, 
stating that the lender must ``make its estimate based upon the 
lender's knowledge of the amounts charged by the provider,'' the rules 
do not establish any bright lines for the loan originator with respect 
to their estimates of these or other third party charges, or even with 
respect to their own charges. Id.\15\ Under HUD's rules, charges on the 
Good Faith Estimate are to be disclosed as ``a dollar amount or range 
of each charge'' which will be listed in section L of the HUD-1 or HUD-
1A. Frequently, borrowers report to HUD that brokers' or lenders' own 
charges at settlement include one or more additional fees that were not 
disclosed on the GFE, or that the charges for particular services 
rendered by or for the loan originator substantially exceed the 
estimated amounts. RESPA contains no sanctions for inaccurate or 
incomplete GFEs, or even for outright failure to provide a GFE. Bank 
and other regulators do enforce these requirements with respect to 
regulated institutions, although other originators are not subject to 
such enforcement.
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    \15\ While the current rules need improvement, they are not 
entirely without standards. They do require estimates to be in good 
faith and tell the borrower what charges he or she is likely to 
incur at settlement based on the originator's experience. For 
example, on July 5, 2002, HUD issued a letter to the State of 
Washington that indicated that a range of charges of 0-$15,000 on a 
GFE for points did not meet these requirements.
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Use and Provision of the HUD-1, 
HUD-1A
    Settlement agents are required to use the HUD-1 in every settlement 
transaction involving a federally related mortgage loan in which there 
is a borrower and a seller.\16\ The settlement agent is required to 
complete the HUD-1 in accordance with the instructions at Appendix A to 
HUD's RESPA rules and to deliver a completed HUD-1 (or HUD-1A where 
applicable) at or before the settlement to the borrower, the seller (if 
applicable), and the lender (if the lender is not the settlement agent) 
or their agents. 24 CFR 3500.8(a). RESPA and HUD's RESPA rules permit 
the borrower to inspect, a day before settlement, the HUD-1 or HUD-1A 
containing those items that are known to the settlement agent at the 
time of the inspection. 24 CFR 3500.10.
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    \16\ 16 Under current rules, where there is a borrower and no 
seller, such as in a refinance or a subordinate lien loan, the HUD-1 
may be utilized using the borrower's side of the HUD-1 statement, or 
the HUD-1A may be used as an alternative.
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Mortgage Brokers \17\
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    \17\ In the discussion of mortgage brokers in the background 
section of this preamble, the term is being used in a broader sense 
than the proposed amended HUD definition, and the way the term is 
used throughout the rest of the proposed rule. In this section when 
referring to mortgage brokers the term also includes those 
individuals who are the real source of funds through a warehouse 
line of credit or otherwise.
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    At the time RESPA was enacted, single-family mortgages were mainly 
originated and held by savings and loans, commercial banks, and 
mortgage bankers. During the 1980's and 1990's, the rise of secondary 
mortgage market financing resulted in the emergence of new retail 
entities, notably mortgage brokers, to compete with traditional 
mortgage originators, lending institutions, and mortgage bankers. 
Today, mortgage brokers are estimated to originate more than 60% of the 
nation's mortgages.
    Mortgage brokers essentially provide retail lending services, 
including counseling borrowers on loan products, collecting application 
information, ordering required reports and documents, and otherwise 
gathering data required to complete the loan package and mortgage 
transaction. As retailers, brokers also provide the borrower and lender 
with goods and facilities such as reports, equipment, and office space 
to carry out retail functions.\18\ The amount of work mortgage brokers 
provide in particular transactions depends, in part, on the level of 
difficulty involved in qualifying applicants for particular loan 
programs. Differences in credit ratings, employment status, levels of 
debt, assets, and experience frequently translate into varying degrees 
of effort required to originate a loan. Also, mortgage brokers may be 
required to perform different components of origination services (i.e., 
underwriting) pursuant to specific agreements with individual wholesale 
lenders.\19\
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    \18\ HUD Statement of Policy-1999-1 Regarding Lender Payments to 
Mortgage Brokers provided a list of compensable loan origination 
services originally developed by HUD in a response to an inquiry 
from the Independent Bankers Association of America (IBAA), which 
HUD considers relevant in evaluating mortgage broker services. In 
analyzing each transaction to determine if services are performed by 
mortgage brokers, HUD stated that it believes the 1999 Statement of 
Policy should be used as a guide. As stated there, the IBAA list is 
not exhaustive, and while technology is changing the process of 
performing settlement services, HUD believes that the list is still 
a generally accurate description of settlement services.
    \19\ The terms ``wholesale lender'' or ``funding lender'' are 
used throughout the document to mean a lender who does not originate 
the mortgage loan but provides funds for the loan and may purchase 
the loan.
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    Mortgage brokers have various means of obtaining funding for the 
loans they originate. Some mortgage brokers close mortgage loans in 
their own name but, at the time of settlement, transfer the loan to a 
lender that simultaneously advances funds for the loan. Immediately 
after the loan is consummated, the mortgage broker delivers the loan 
package to that lender, including the promissory note, mortgage, 
evidence of insurance, and all rights in the loan that the mortgage 
broker held. This type of transaction is known in the lending industry, 
and defined in HUD's regulations, as ``table funding.''
    Some mortgage brokers function purely as intermediaries between 
borrowers and lending sources. They originate loans by providing loan 
processing and arranging for the provision of funds by lenders. Loans 
which they originate are closed in the names of the funding lenders.
    Other mortgage brokers originate loans that are closed in the 
mortgage brokers' names, fund the loans temporarily using their own 
funds or a warehouse line of credit, and sell the loans after 
settlement. These transactions by mortgage brokers are treated 
similarly to loans made by mortgage bankers, and other lenders, and 
hence any compensation received by the mortgage broker, as a result of 
the bona fide transfer of a loan obligation in the secondary market, is 
not subject to Section 8 of RESPA due to the ``secondary market 
transaction'' exemption. 24 CFR 3500.5(b)(7).
Mortgage Broker Functions and Compensation
    Since the advent of mortgage brokers in the mid-1980s, there has 
been confusion among borrowers concerning the mortgage broker's 
functions and fees,--i.e., whether brokers do or do not shop on the 
borrower's behalf, as well as how they are paid and how much they are 
paid, and by whom.
    Some mortgage brokers indicate to borrowers that they will, in 
essence, act as their agent to shop for the best mortgage loan for 
them.\20\ Other brokers state that they work with a number of funding 
sources to provide loans, and

[[Page 49141]]

will arrange a favorable loan with one of them for their borrower. 
Whether brokers serve as the borrower's agent as a strict legal matter, 
the fact is that many brokers are perceived by borrowers as shopping on 
their behalf for the best loan to meet the borrower's needs. This 
perception frequently deters borrowers from shopping themselves for the 
loan originator and mortgage product that best meets their needs.
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    \20\ In some states, for example North Carolina, mortgage 
brokers may be held to have an agency relationship or a legal 
responsibility to the borrower.
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    Mortgage brokers receive compensation for their services by various 
methods. A broker may be paid directly by the borrower, indirectly by 
the lender or wholesale lender who purchases the mortgage loan, or 
through a combination of both. Brokers may charge borrowers directly at 
or before settlement for loan origination as well as for other services 
including the application, document preparation and document review. In 
some cases, broker origination charges may be denominated as an 
origination fee and sometimes as an ``origination point'' (one point 
equals 1% of the loan amount), while other fees for named services 
(e.g., application fees, document preparation fees, processing fee, 
etc.) are charged as separate cost items on the GFE.\21\ Some brokers 
receive both percentage based fees and fees for named services.
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    \21\ Mortgage broker fees are not always described in the same 
terms. Sometimes mortgage brokers fees are expressed in straight 
dollar amounts and sometimes as ``points.'' ``Points'' are charges 
based on a percentage of the borrower's loan. Points therefore have 
a dollar equivalent to the borrower.
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    Where brokers receive a payment for compensation from someone other 
than the borrower, most commonly the lender, it is called indirect 
compensation. Such indirect compensation from lenders is ordinarily 
based upon an above market interest rate on the loan entered into by 
the broker with the borrower. This type of compensation is often 
referred to as a ``yield spread premium,'' (YSP) though it sometimes 
shows up under a different label, e.g. servicing release premium.
    The use of a YSP can reduce up front settlement costs to a borrower 
by building these costs into the borrower's interest rate and monthly 
payments over the life of the borrower's loan. In issuing RESPA Policy 
Statement 2001-1, discussed in greater detail below, HUD stated that 
borrowers should continue to have the choice of paying their total 
settlement costs up-front or using the yield spread premium payment as 
a credit to pay all or part of these costs. Consumer advocates assert, 
however, that all too frequently brokers place the borrower in an above 
par rate loan without the borrower's knowledge, provide the borrower 
with little or no benefit in the form of reduced up front costs, and 
use the YSP payment solely or primarily as a means of increasing their 
total compensation.
Current Broker Disclosure Requirements
    Under HUD's current rules, where mortgage brokers originate and 
table fund loans or act as intermediaries, they are required to 
disclose their direct charges and any indirect payments to be made to 
them on the GFE, and deliver or mail it to the borrower no later than 3 
days after loan application. 24 CFR 3500.7(a)-(c). Such disclosure must 
also be provided to borrowers, as a final figure, at settlement on the 
HUD-1 and HUD-1A settlement statement. 24 CFR 3500.8. In table funded 
and intermediary transactions, direct broker fees are treated like the 
fees of other settlement service providers, such as title agents, 
attorneys, appraisers, etc, whose fees are disbursed at or before 
settlement. However, HUD's current rules require that on the GFE and 
HUD-1, lender-paid (indirect) mortgage broker fees are to be shown as 
``Paid Outside of Closing'' (P.O.C.), listed outside the columns, and 
excluded from the computation of borrower's total settlement costs. 24 
CFR 3500.7(a)(2). This approach does not assure that YSPs are 
understood and credited to the borrower to reduce up front settlement 
costs.
Disclosure of Fees by Lenders
    Lenders are also compensated by borrowers through various methods. 
When lenders originate mortgage loans, they may charge borrowers 
directly at or before settlement for loan origination as well as for 
other services including the application, document preparation and 
document review. In some cases, lender origination charges may be 
denominated as an origination fee and sometimes as an ``origination 
point'' (one point equals 1% of the loan amount), while other fees for 
named services (e.g., application fees, document preparation fees, 
processing fee, etc.) are charged as separate cost items on the 
GFE.\22\
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    \22\ Lenders' fees are not always described in the same terms. 
Sometimes lenders' fees are expressed in straight dollar amounts and 
sometimes as ``points.'' ``Points'' may be used to describe 
``origination fees'' or ``discount points'' and both types of points 
may be charged in the same transaction. ``Points'' are just 
percentage amounts of the borrowers loans, and these ``points,'' 
just like any other terms used to describe fees to loan originators, 
have a dollar equivalent to the borrower.
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    Lenders may also require ``discount points'' from the borrower for 
the stated purpose of lowering the interest rate of the loan. It is 
unclear to what extent discount points represent the present value of 
the difference between the par mortgage interest rate and the rate on 
the loan on one hand, or provide additional compensation to lenders on 
the other.
    The functional equivalent of a yield spread premium may also be 
present in loans originated by lenders. Lenders routinely offer loans 
with low or no up front costs required at settlement. They can do so 
just like brokers do by charging higher interest rates for these loans 
and then recouping the costs by selling the loans into the secondary 
market for a premium representing the difference between the interest 
rate on the loan and the par, or wholesale market interest rate. 
Alternatively, the lender can hold the loan and earn the above market 
return in exchange for any lender paid settlement costs.
    HUD's current rules require lenders to disclose only direct fees 
paid to them by borrowers including origination fees or ``origination 
points'' as well as other direct fees for named services and discount 
points. However, neither the current GFE, nor the HUD-1, provides 
totals of all charges paid to the lender. The rules also do not require 
lenders to disclose indirect fees earned in secondary market 
transactions from the sale of borrowers' loans. This is because the 
compensation earned from the bona fide transfer of the loan obligation 
in the secondary market is exempt from HUD's RESPA rules. HUD's RESPA 
rules provide ``[i]n determining what constitutes a bona fide transfer 
HUD will consider the real source of funding and the real interest of 
the funding lender.'' 24 CFR 3500.5(b)(7). HUD's rules explicitly 
provide, however, that table-funded mortgage broker transactions are 
not secondary market transactions. Lender sales into the secondary 
market are considered secondary market transactions.
Legality of Mortgage Broker Fees
    Over the last decade, there has been persistent litigation 
concerning the legality of indirect fees to mortgage brokers. More than 
150 lawsuits have been brought since the mid-1990s seeking class action 
certification, based in whole or in part on the theory that the 
indirect fees paid by lenders to mortgage brokers are fees for the 
referral of business in violation of section 8 of RESPA.\23\
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    \23\ See e.g., Mentecki v. Saxon Mortgage, No. 96-1629-A, slip 
op. (E.D. Va. Jan. 10, 1997). The court held initially that indirect 
fees to mortgage brokers in the form of ``yield spread premiums'' 
violated section 8(a) of RESPA as referral fees. However, 
subsequently, in an order and opinion dated July 11, 1997, the Court 
refused to certify the class. Culpepper v. Inland Mortgage Corp., 
953 F.Supp. 367 (N.D. Ala. 1997). The court held that a payment for 
a loan above market was permissible under section 8(c) of RESPA as 
payment for a ``good.'' Barbosa v. Target Mortgage, No. 94-1938, 
U.S.D.C., Southern District of Florida; Martinez v. Weyerhauser 
Mortgage, No. 94-160, U.S.D.C., Southern District of Florida; Monoz 
v. Crossland Mortgage Company, Civil Action No. 96-12260, U.S.D.C. 
for the District of Massachusetts. These last two Federal district 
courts concluded that yield spread premiums (or differentials) were 
not per se violations of RESPA and therefore refused to certify 
class actions on this issue.

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[[Page 49142]]

    HUD's RESPA rules, amended in 1992 to require disclosure of 
indirect fees to mortgage brokers, did not explicitly take a position 
on whether yield spread premiums or any other named class of back-
funded or indirect fees paid by lenders to brokers are per se legal or 
illegal. See Illustrations of Requirements of RESPA, Fact Situations 5 
and 12 in Appendix B to 24 CFR part 3500. The rule specifically listed 
``servicing release premiums'' and ``yield spread premiums'' as fees 
required to be itemized on the HUD-1/1A Settlement Statement. 
Accordingly, while the rule specifically acknowledged the existence of 
such fees and provided illustrations of how they are to be reflected on 
HUD disclosure forms, HUD took the position that the rule does not 
create a presumption of per se legality or illegality.
    Between 1992 and 1999, HUD provided various interpretations and 
other issuances under its RESPA rules stating the Department's position 
that the legality of a payment to a mortgage broker does not depend on 
the name of the particular fee. Rather, HUD has consistently advised 
that the issue under RESPA is whether the total compensation to a 
mortgage broker is reasonably related to the total value of the goods 
or facilities actually furnished or services actually performed. If the 
compensation, or a portion thereof, is not reasonably related to the 
goods or facilities actually furnished or the services actually 
performed, there is a compensated referral or an unearned fee in 
violation of Section 8(a) or 8(b) of RESPA, whether the compensation 
results from a direct or indirect payment or a combination thereof.
    In 1995, as a result of concerns that the requirement that mortgage 
brokers disclose indirect fees placed mortgage brokers on an unequal 
footing with other mortgage loan providers, and that information on 
indirect fees was confusing to borrowers, HUD issued a proposed rule to 
obtain the public's views on the disclosure and legality of broker 
fees. 60 FR 47650 (September 13, 1995). At that time, plaintiff 
borrowers began initiating class action lawsuits claiming that payments 
to mortgage brokers by lenders were per se illegal. Shortly afterwards, 
HUD embarked on a negotiated rulemaking on these subjects. See notices 
published on October 25, 1995 (60 FR 54794) and December 8, 1995 (60 FR 
63008).
    The 1995-1996 negotiated rulemaking on mortgage broker fees did not 
result in a final rule. It did, however, result in a clear consensus by 
rulemaking participants that borrowers were confused about the 
functions of mortgage brokers and the amounts and sources of their 
fees. See Report on Negotiated Rulemaking on Mortgage Broker 
Disclosure--Final Report, A.L.J. Alan W. Heifetz, (July 19, 1996). This 
confusion may translate into borrowers failing to compare services and 
fees, thereby paying unnecessarily high settlement costs. Most of the 
rulemaking participants, except for the representative of the mortgage 
brokerage industry and one consumer advocate, agreed on a regulatory 
framework that would create a pre-application agreement between a 
borrower and a broker fully disclosing the broker's function and 
compensation, in return for a limited ``safe harbor'' for transactions 
where these contracts were entered into. In 1997, HUD issued a proposed 
rule on mortgage broker fees that would have established a safe harbor 
for brokers who contractually commit to borrowers regarding their total 
compensation, along the lines agreed to by the majority in the 
negotiated rulemaking. The proposed rule also provided that during the 
rulemaking process, a ceiling on the amount of fees eligible for the 
safe harbor would be established to protect against predatory lending. 
The rule was strongly opposed by the mortgage brokerage industry and 
other segments of the mortgage industry. HUD did not finalize the 1997 
rule and efforts to do so were soon eclipsed by HUD's effort to clarify 
its position on the legality of mortgage broker fees under existing 
law.
1999 Statement of Policy on Lender Payments to Mortgage Brokers
    In 1998, in the Conference Report on HUD's 1999 Appropriations Act, 
Congress directed HUD to clarify its position on the legality of 
mortgage broker fees and to work with industry, Federal agencies, 
consumer groups, and other interested parties on a statement of policy 
on the subject. The Report also stated that Congress never intended 
payments by lenders for goods or facilities actually furnished or for 
services actually performed to violate Section 8(a) or (b) of RESPA.
    On March 1, 1999, in response to Congress's directive, HUD issued 
RESPA Statement of Policy 1999-1 Regarding Lender Payments to Mortgage 
Brokers, following extensive discussions with industry, consumer 
groups, and essential agreement among them on the interpretation 
embodied in the Statement. The Statement said that, in applying Section 
8 and HUD's regulations to lender payments to mortgage brokers, HUD did 
not consider such payments to be legal or illegal per se. The Statement 
said that the ``fees in cases and classes of transactions are illegal 
if they violate the prohibitions of Section 8 of RESPA.'' 64 FR 10084.
    The Statement established a two-part test to determine the legality 
of lender payments to mortgage brokers under RESPA which requires that: 
(1) Goods or facilities must actually be furnished or services actually 
performed for the compensation paid; and (2) payments must be 
reasonably related to the value of the goods or facilities that were 
actually furnished or services that were actually performed. In 
applying this test, HUD stated that total compensation should be 
scrutinized to assure that it is reasonably related to goods, 
facilities, or services furnished or performed to determine whether it 
is legal under RESPA.\24\
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    \24\ The 1999 Statement of Policy also said, ``[t]he Department 
considers that higher interest rates alone cannot justify higher 
total fees to mortgage brokers. All fees will be scrutinized as part 
of total compensation to determine that total compensation is 
reasonably related to the goods or facilities actually furnished or 
services actually performed.'' 64 FR 10084.
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    As a Statement of Policy, the 1999 Statement interpreted HUD's 
existing rules. Nonetheless, beyond these rules, the Statement 
emphasized the importance of disclosing brokerage fees, including yield 
spread premiums, to borrowers as early as possible in the borrower's 
process of shopping for a mortgage. See 64 FR at 10087.
    The 1999 Statement said:
    There is no requirement under existing law that consumers be fully 
informed of the broker's services and compensation prior to the GFE. 
Nevertheless, HUD believes that the broker should provide the consumer 
with information about the broker's services and compensation, and 
agreement by the consumer to the arrangement should occur as early as 
possible in the process. Mortgage brokers and lenders can improve their 
ability to demonstrate the reasonableness of their fees if the broker 
discloses the nature of the broker's services and the various methods 
of compensation at the time the consumer

[[Page 49143]]

first discusses the possibility of a loan with the broker. 64 FR at 
10087.

Post 1999-1 Statement of Policy Circuit Court Decision

    After HUD issued its 1999 Statement of Policy, most Federal 
District courts held that yield spread premium payments from lenders to 
mortgage brokers are legal provided that such payments meet the test 
for legality articulated in the 1999 Statement of Policy and otherwise 
comport with RESPA. However, in Culpepper v. Irwin Mortgage Corp., 253 
F.3d 1324 (11th Cir. 2001), the U.S. Court of Appeals for the Eleventh 
Circuit upheld class certification in a case alleging that yield spread 
premiums violated Section 8 of RESPA where the defendant lender, 
pursuant to a prior understanding with mortgage brokers, paid yield 
spread premiums to brokers based on the lender's use of a rate sheet 
and the brokers' delivery of above par interest rate loans, without the 
lender knowing whether, or to what extent, the brokers had performed 
services. The court concluded that a jury could find that yield spread 
premiums were illegal kickbacks or referral fees under RESPA where the 
lender's payments were based exclusively on interest rate differentials 
reflected on rate sheets, and the lender had no knowledge of what 
services, if any, the brokers had performed. The court also said that 
HUD's 1999 Statement of Policy was ambiguous.
    Following Culpepper,\25\ representatives of the mortgage industry 
urged HUD to issue a clarification to the 1999 Statement of Policy to 
make clear that the lenders could make payments to brokers through rate 
sheets and that, to properly apply the 1999 test, all payments must be 
examined, not simply the payment from the lender, to determine if the 
broker's total compensation is reasonable. These representatives said 
that if the Culpepper interpretation prevailed, without further 
guidance from HUD, the industry could no longer offer yield spread 
premiums as an option to borrowers to lower their up front settlement 
costs.
---------------------------------------------------------------------------

    \25\ In this proposed rule Culpepper refers to Culpepper v. 
Irwin Mortgage Corp., 253 F.3d 1324 (11th Cir. 2001). There were 
earlier reported decisions in this same litigation.
---------------------------------------------------------------------------

    Representatives of the mortgage industry, including representatives 
of the Mortgage Bankers Association and the National Association of 
Mortgage Brokers, assured the Department that following a clarification 
by HUD, they also would support a HUD rule requiring improved fee 
disclosure.\26\
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    \26\ Letter to Secretary Martinez, Submitted by America's 
Community Bankers, American Banking Association, Consumer Mortgage 
Coalition, and Mortgage Bankers Association of America (December 27, 
2001); National Association of Mortgage Brokers, Position Paper: 
Prospective HUD Rulemaking Concerning Mortgage Originator 
Disclosure, Correspondence to the Department (December 4th, 2001).
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Statement of Policy 2001-1
    On October 17, 2001, the Department issued Statement of Policy 
2001-1, Clarification of Statement of Policy 1999-1 Regarding Lender 
Payments to Mortgage Brokers, and Guidance Concerning Unearned Fees 
Under Section 8(b). The 2001 Policy Statement reiterated and clarified 
the test articulated in the 1999 Statement of Policy that where 
compensable services are performed, application of both parts of the 
HUD test is required before a determination can be made regarding the 
legality of a lender payment to a mortgage broker. 66 FR 53052, 53054-
55. The 2001 Statement also said:

[n]either Section 8(a) of RESPA nor the 1999 Statement of Policy 
supports the conclusion that a yield spread premium can be presumed 
to be a referral fee based solely upon the fact that the lender pays 
the broker a yield spread premium that is based upon a rate sheet, 
or because the lender does not have specific knowledge of what 
services the broker has performed. 66 FR 53052, 53055.

    The 2001 Statement of Policy also interpreted HUD's existing rules 
then further detailed what HUD regards as meaningful disclosure of 
mortgage broker fees to borrowers:

    In HUD's view, meaningful disclosure includes many types of 
information: What services a mortgage broker will perform, the 
amount of the broker's total compensation for performing those 
services (including any yield spread premium paid by the lender), 
and whether or not the broker has an agency or fiduciary 
relationship with the borrower. The disclosure should also make the 
borrower aware that he or she may pay higher up front costs for a 
mortgage with a lower interest rate, or conversely pay a higher 
interest rate in return for lower up front costs, and should 
identify the specific trade-off between the amount of the increase 
in the borrower's monthly payment (and also the increase in the 
interest rate) and the amount by which up front costs are reduced. 
HUD believes that disclosure of this information, and written 
acknowledgment by the borrower that he or she has received the 
information, should be provided early in the transaction. Such 
disclosure facilitates comparison shopping by the borrower, to 
choose the best combination of up front costs and mortgage terms 
from his or her individual standpoint. HUD regards full disclosure 
and written acknowledgment by the borrower, at the earliest possible 
time, as a best practice. 66 FR 53056.

    The 2001 Policy Statement also specifically acknowledged the 
utility to borrowers of treating and reporting all interest rate based 
lender payments as monies belonging to the borrower. The Policy 
Statement endorsed this approach, stating:

[I]t has been suggested to the Department that the yield spread 
premium should be reported as a credit to the borrower in the 
``200'' series, among the ``Amounts Paid by or in Behalf of 
Borrowers.'' The homebuyer or homeowner could then see that the 
yield spread premium is reducing closing costs, and also see the 
extent of the reduction.
    HUD believes that improved early disclosure regarding mortgage 
broker compensation and the entry of yield spread premiums as 
credits to borrowers on the GFE and the HUD-1 settlement statement 
are both useful and complementary forms of disclosure. The 
Department believes that used together these methods of disclosure 
offer greater assurance that lender payments to mortgage brokers 
serve borrowers' best interests. 66 FR 53056.

C. HUD's Commitment to Mortgage Reform

The HUD-Federal Reserve Report
    Since the mid-1990s, HUD has been examining ways to improve the 
mortgage process for borrowers to lower settlement costs.\27\ In June 
of 1998, in response to a Congressional directive in Section 2101 of 
the Economic Growth and Regulatory Paperwork Reduction Act of 1996 
(Pub. L. 104-208, 110 Stat. 3009), HUD and the Board of Governors of 
the Federal Reserve (``the Board'') issued a joint report on reforming 
RESPA. The HUD-Federal Reserve Report. The Report called for 
legislative changes to reform both laws. The Report did not attempt to 
differentiate where changes could be made under existing law pursuant 
to the Board's and HUD's existing regulatory authorities from areas 
where new legislation was required. Subsequently, the Board has 
exercised its regulatory authority under TILA to effectuate certain of 
the Report's recommendations. See 66 FR 65604, December 20, 2001.
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    \27\ HUD and others have considered proposals to permit lenders 
to package settlement services almost from the time the law was 
enacted. Senator Proxmire introduced S. 2775 which would have 
required lenders to bear certain settlement costs with the view that 
the lenders have the sophistication and bargaining power to keep 
costs down.
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Major Findings of the Report
    The HUD-Federal Reserve Report posed and addressed several 
questions involving the disclosure scheme under both RESPA and TILA, 
and both HUD

[[Page 49144]]

and the Board recommended in part \28\ that:
---------------------------------------------------------------------------

    \28\ The Report also concluded that the APR and finance charge 
disclosures under TILA should be retained and improved to include 
all costs required by the creditor to get the credit and that 
additional substantive protections should be added to TILA.
---------------------------------------------------------------------------

     Loan originators be required to provide firmer quotes for 
settlement costs disclosed under RESPA; and
     The timing of RESPA and TILA disclosures to borrowers be 
advanced, so that borrowers receive them earlier and use them to shop.
    In order to achieve firmer cost information, both agencies also 
recommended that lenders and other providers be given the choice of:
     Offering a ``packaging'' or a guaranteed cost approach; or
     Providing a GFE where estimated costs would be subject to 
tolerances, to improve the current disclosure scheme by reducing the 
instances in which consumers may incur additional costs at closing.
    Both agencies recommended an exemption from Section 8 to facilitate 
packaging. HUD also said that to receive the exemption, both the 
settlement costs and the interest rate on a mortgage should be 
guaranteed.
Timing of Disclosures
    The Report observed that in home secured transactions, the borrower 
currently receives TILA or RESPA disclosures at several different 
times. Borrowers receive generic information such as HUD's Special 
Information Booklet at the time of application. Additionally, for 
residential mortgage transactions, lenders and brokers provide through 
mailing or delivery within 3 days after application, specific 
information including the GFE and the initial TILA disclosure 
disclosing the finance charge and the ``APR'' or ``annual percentage 
rate'' for the mortgage. TILA Sec. 128(b)(2); Reg. Z Sec. 226.19(a). 
TILA may require additional new disclosures for home-purchase loans if 
early disclosures have become inaccurate. See TILA 128(b) and Reg. Z 
Sec. 226.17(b). A settlement agent gives final disclosures on the HUD-1 
at settlement based on information provided by the lender.
    Both agencies recommended that the disclosure process could be 
improved for industry if the timing requirements for disclosures were 
made more consistent between RESPA and TILA \29\ and it would be 
improved for borrowers if disclosures were given when they would be 
most useful. In the Report, HUD recommended that generic information, 
e.g., HUD's Special Information Booklet, be given when the borrower 
first contacts settlement service providers, including loan originators 
and real estate agents. Both HUD and the Board also recommended that 
borrowers be given initial disclosures, including firm information 
about settlement costs, interest rates and points as early in the 
shopping process as possible so that they can shop and make informed 
choices. The HUD-Federal Reserve Report at 41. Although HUD and the 
Board differed somewhat in their approaches, both indicated that 
advances in technology and market competition promised to provide 
borrowers better information at or near the time of application. HUD 
said that it supported requiring that estimated costs disclosures be 
provided earlier than three days after application--ideally at first 
contact with lenders. HUD indicated, however, that while it seeks early 
disclosures, it recognizes that sometimes there will be a trade-off 
between having an early disclosure and ensuring that a disclosure is 
firm and complete enough to allow borrowers to shop and protect against 
increases in costs. In such cases, HUD recommended that timing 
requirements be flexible to allow enough time to provide guaranteed 
information.
---------------------------------------------------------------------------

    \29\ Under current TILA rules, Regulation Z, the TILA disclosure 
may be given simultaneously along with the GFE, TILA Sec. 128 (b); 
Reg. Z Sec. 226.17(b).
---------------------------------------------------------------------------

    Moreover, in the interest of promoting shopping, HUD recommended 
that borrowers not be required to pay a significant fee to the loan 
originator prior to receiving initial cost information. Id. at 42.
Providing Firmer Cost Disclosures
    In arriving at the recommendation that cost disclosures must be 
firmer, the Report observed that borrowers reported many instances in 
which the costs disclosed on the GFE were significantly lower than 
those actually charged at settlement or that costs were completely left 
out of the GFE. The HUD-Federal Reserve Report at 20. The Report noted 
that more reliable settlement cost information could promote shopping. 
Id. at 32. In recommending that the choice of providing ``guaranteed 
cost packages'' or a more reliable GFE subject to tolerances be 
offered, the agencies stated that a dual system would create an 
opportunity for the market to test whether guaranteed cost arrangements 
offer more economical and efficient means for consumers to obtain 
mortgage loans.
Packages/Guaranteed Costs
    Under the packaging or guaranteed cost approach envisioned in the 
Report, the lender or other packager would set a lump-sum price for 
settlement costs and would be held to that figure from the time the 
package is agreed to through settlement. Most charges for services that 
the borrower currently pays at settlement for origination, title work 
and insurance, credit report, appraisal, document review, inspection, 
up front mortgage insurance, pest inspection and flood review, etc., 
would be included in the package.\30\ Government charges associated 
with filing a mortgage or release that can be determined easily also 
would be included. The Report suggested that any costs excluded from 
the guaranteed settlement costs would be disclosed as either ``other 
required costs'' or as ``optional costs.'' ``Other required costs'' 
would include charges such as per diem interest, which fit the 
definition of those costs that the borrower will have to pay at 
settlement, but the amount of which the packager cannot be readily 
determined at the time the package is provided to the borrower.\31\ The 
Report suggested, however, that there are means for per diem interest 
to be included in the package; lenders could be required to state a 
maximum amount

[[Page 49145]]

based on thirty days (a full month) or to disclose the daily interest 
to allow borrowers to calculate the actual amount as the date of 
settlement becomes certain. The Report also suggested that mortgage 
insurance should be included in the package price even though it is 
difficult to calculate until final underwriting.
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    \30\ In developing the Report, the agencies considered whether 
services should be itemized within the package. Some entities claim 
that for there to be true competition, borrowers must be able to 
know what is included in each package to compare. These entities 
point out that borrowers generally like to know what services are 
included in packages and that without itemization lenders may choose 
to forego many services for their packages while insisting that 
nonlenders have more expansive packages, making borrower information 
and competition impossible. On the other hand, it was observed that 
a requirement for full itemization of services might lead some 
packagers to create longer lists, ultimately confusing borrowers and 
hindering their evaluation of different loans. Also, lenders pointed 
out that services are performed in large measure to protect their 
security and when the initial disclosure is provided they may not 
know what is needed in each case. The Board and HUD concluded that 
in packages, lenders could disclose the guaranteed amount for 
settlement costs without any elaboration on the early disclosure, 
and subsequently provide a list of services actually performed on 
the final settlement disclosure. Alternatively, lenders could 
provide a list of services that might be performed on the early 
disclosure with an explanation, if appropriate, that all items may 
not be performed, and then indicate on the settlement statement the 
services actually performed. The Report also observed that 
disclosing the cost of each service also could present problems, 
particularly where lenders or other packagers enter into volume-
based contracts. The HUD-Federal Reserve Report at 25-26.
    \31\ Charges for per diem or ``odd days'' interest, which floats 
along with the interest rate, cover the time between the date of 
settlement and the date regular monthly interest starts accruing. As 
an illustration, if a loan closes on January 15 and the first 
monthly payment (due on March 1) begins to accrue interest on 
February 1, interest for the days between January 15 and February 1 
is generally required to be paid at settlement as per diem interest. 
Some lenders do not collect per diem interest at settlement but add 
the amount to the first monthly payment.
---------------------------------------------------------------------------

    According to the Report ``optional costs'' would include charges 
that depend on whether the borrower chooses to purchase the service, 
and on the level of service chosen. The HUD-Federal Reserve Report at 
27-28. Examples include owner's title insurance and optional hazard 
insurance chosen by the borrower.
    The Report observed that packagers would arrive at their package 
prices based on their experience or, more likely, enter into volume-
based contracts with affiliated and other settlement service providers 
for those goods and services required by lenders to close a loan. Id. 
at 23.
Support for Packaging
    Many of the nation's largest mortgage lenders and their 
representatives expressed support for a ``packaging'' approach. They 
said that borrowers rarely shop for individual settlement services, and 
also that borrowers are more interested in the overall price of their 
mortgage loan than the prices of individual settlement services, and 
that borrowers would shop for mortgages if all they needed to compare 
was a single guaranteed price for all the settlement services needed to 
close the loan. Advocates of packaging said that by packaging services, 
discounts that would be secured by lenders under these arrangements 
will be passed on to borrowers. Through this dynamic and by making it 
easier for borrowers to shop, costs would be lowered.\32\
---------------------------------------------------------------------------

    \32\ For example, a packager could contract to have XYZ 
Appraisal Company complete all its appraisals for a given period for 
$300 each rather than the $350 the company normally charges for a 
standard appraisal. The packager could rely on that discounted 
contract price in pricing the package of guaranteed costs to the 
borrower. With their own costs negotiated in advance, packagers 
could disclose the cost for the entire package early in the 
borrower's mortgage shopping process with certainty, and the 
borrower then could compare different vendors' packages.
---------------------------------------------------------------------------

    In the development of the Report, entities other than lenders, 
including real estate firms and affinity groups, also expressed some 
interest in packaging. These entities asserted that if packaging was 
restricted only to lenders, competition would be unnecessarily 
restricted and borrowers could be deprived of lower prices. Some 
industry representatives voiced the fear that large lenders will make 
it difficult for non-lenders to develop any packages other than those 
the lenders themselves retail, by refusing to participate in other 
entities' packages.\33\ On the other hand, lenders asserted that since 
settlement services are largely required to protect the lender's 
security, lenders should not have to accept unconditionally any other 
settlement service providers' settlement packages. In the HUD-Federal 
Reserve Report HUD recommended that any entity should be permitted to 
package as long as it can provide a Guaranteed Mortgage Package and a 
mortgage loan at a guaranteed interest rate.
---------------------------------------------------------------------------

    \33\ Nonlenders also suggested that to provide a level playing 
field, the services in the package should be itemized.
---------------------------------------------------------------------------

    Consumer advocates also supported packaging, but asserted that any 
packages must include a loan with an interest rate guarantee to be 
useful to borrowers. Although consumer advocacy groups believed that 
guaranteeing settlement costs has value, they noted that these costs 
are a small portion of the overall cost of a mortgage loan. Advocates 
said that unless borrowers also receive a firm commitment on the 
interest rate and any applicable points they cannot truly comparison 
shop. Without such a firm commitment, consumer advocates said some 
lenders may provide the borrower with a guaranteed settlement cost 
quote and then increase the interest rate to offset any savings offered 
to the borrower on the settlement costs. These lenders would then 
realize additional profits based on the mortgage's pricing. These 
advocates expressed the fear that unwary borrowers will be lured into 
particular loan products by inexpensive or below-market settlement cost 
packages and then find themselves in higher rate loans that more than 
offset any purported cost savings. The HUD-Federal Reserve Report at 
22.
    Lender representatives expressed varying views on guaranteeing 
rates as part of a specific package. Some lenders stated that 
underwriting is costly and time-intensive and that mortgage brokers and 
other retail originators cannot provide guaranteed rates that bind 
lenders early in the mortgage loan process. Other industry 
representatives asserted, however, that requiring lenders to provide 
guaranteed rates along with guaranteed settlement costs is viable. Many 
of today's mortgage originators provide firm rate information to 
shoppers early in the process based on nearly instantly available 
credit information, without any assurance that the borrower will go 
forward with the transaction and the originator will receive 
compensation.
Section 8  Exemption for Packaging
    Lenders' representatives asserted at the time of the Report that an 
exemption from RESPA's Section 8 prohibitions is necessary for 
packaging to work. These representatives pointed out that Section 8 
prohibits volume-based discounts between settlement service providers, 
since they fear such arrangements would be viewed as compensated 
referral arrangements in violation of the statute. Also, while Section 
8 prohibits kickbacks, compensated referrals, and unearned fees, the 
statute provides no bright line on how to determine when a payment has 
been earned for goods or services (which is permissible under RESPA) or 
is compensation for a referral, or is an unearned fee (which are 
illegal and subject to criminal sanctions and civil action under 
Section 8). Moreover, RESPA prohibits requiring the use of an 
affiliated settlement service provider except in limited 
circumstances,\34\ which can be an additional impediment to packaging 
services. Proponents of packaging further asserted that because of 
Section 8's prohibitions and questions about how they apply, lenders 
and others do not currently package. These proponents said that were an 
exemption granted and packaging of services prevalent, borrowers would 
benefit more from the resulting lower costs than they do from RESPA's 
current Section 8 prohibitions. The HUD-Federal Reserve Report at 30. 
Consumer groups generally also supported an exemption for packaging, as 
long as packagers are required to guarantee both settlement costs and 
interest rates.
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    \34\ Generally, under Section 8(c)(4) of RESPA an entity may 
refer business to an affiliate as long as the affiliate arrangement 
is disclosed, there is no required use, and the only return to the 
entity making the referral is a return on capital.
---------------------------------------------------------------------------

    Members of the settlement services industry other than large 
lenders, however, including small lenders and title companies, 
expressed strong concern about and, in some cases, outright opposition 
to an exemption from Section 8 to encourage packaging. They said that 
only lenders would offer packages and that the lenders would squeeze 
out savings from small providers and then retain these savings in the 
form of higher profits, without passing them on to borrowers. Small 
settlement service providers also said that the only way they could 
remain competitive would be by offering packages themselves, and they 
expressed serious concern about their ability to do so. They further 
asserted

[[Page 49146]]

that borrowers do in fact already shop for settlement services, that 
prices for these services are currently competitive, and that lifting 
Section 8 restrictions will harm rather than help borrowers because any 
savings from packaging will not be passed on to borrowers and fewer 
providers will be available to compete. Id. at 22.
    During the development of the HUD-Federal Reserve Report the 
agencies noted that technology is enabling the provision of earlier, 
firmer, settlement cost information. Id. at 39. Moreover, during the 
development of the Report, HUD became aware of promising proposals that 
were advanced by consumer advocates and some industry representatives 
where lenders, after obtaining credit reports, would provide borrowers 
guaranteed rate and point information.\35\ This guarantee would be 
subject to appropriate conditions such as market changes in the cost of 
money (where the rate and points are not locked), and verification of 
the value of the collateral and the borrower's creditworthiness. HUD 
supported these and similar efforts because it regards the full costs 
of obtaining a loan--including settlement costs, interest rate, and 
points--as the information that is essential to assist borrowers in 
shopping for a mortgage loan.
---------------------------------------------------------------------------

    \35\ At the time of the Report some consumer and industry groups 
discussed the possibility that borrowers could pay credit 
repositories the costs of and arrange the provision of credit 
information to lenders to expedite the process and to avoid 
significant fees.
---------------------------------------------------------------------------

    HUD concluded that an exemption should be provided for packaging to 
facilitate earlier comparison shopping by borrowers, greater 
competition among mortgage lenders and others, and guaranteed prices to 
borrowers from the time the borrower applies for a mortgage through 
settlement. The Board recommended an exemption to improve the 
consumer's ability to shop effectively and to allow competition to 
reduce the cost of financing a home. To encourage packaging, HUD 
recommended that a Section 8 exemption should be made available to loan 
originators and others who: (1) Offer borrowers a comprehensive package 
of settlement services needed to close a loan; (2) provide borrowers 
with a simple prescribed disclosure that gives the guaranteed maximum 
price for the package of services through settlement; and (3) disclose 
the rate offered to the borrower for the loan, with a guarantee that 
the rate will not increase, subject to prescribed conditions.
    The Report suggested that fees paid and arrangements within 
packages would be exempt from Section 8. Fees for referrals to or from 
the packager of settlement services to or from those outside the 
package would continue to be subject to Section 8. For example a real 
estate agent could not receive a fee for referring a borrower to a 
packager. Entities that do not meet the requirements of the exemption 
would be subject to Section 8. The HUD-Federal Reserve Report at 33.
A More Reliable GFE
    As an alternative to packaging, both the Board and HUD also 
recommended making disclosures firmer under the current practice, by 
requiring a more reliable GFE, subject to tolerances. The HUD-Federal 
Reserve Report at 31.
    The Report suggested that tolerances could be based on a percentage 
of the total estimated costs; if the actual costs at settlement 
exceeded the sum of the estimated costs and the amount of the 
tolerance, the loan originator would generally be held liable. 
Alternatively, the tolerance could apply only to certain categories of 
costs such as those within the loan originator's control. The Report 
said that charges imposed directly by the loan originator would have to 
be accurate. On the other hand, an increase in costs resulting from a 
borrower's choice would not count against the loan originator in 
determining whether the total costs exceeded the tolerance. The HUD-
Federal Reserve Report at 31.
The HUD-Treasury Report
    Early in 2000, HUD, in cooperation with the Department of the 
Treasury, reviewed the problem of predatory mortgage lending. Following 
five hearings in New York, Chicago, Atlanta, Los Angeles and Baltimore, 
in June, HUD and the Treasury issued a major report on the subject of 
predatory mortgage lending. The Report, entitled ``Curbing Predatory 
Home Mortgage Lending'' (HUD-Treasury Report), detailed predatory or 
abusive lending practices in connection with higher cost loans in the 
mortgage market. In addition, among numerous recommendations to address 
predatory lending, the Report reiterated support for RESPA/TILA reform 
along the lines recommended in the HUD-Federal Reserve Report.
    The HUD-Treasury Report stated: ``that borrowers need firm 
information early in the loan process so that they can compare the 
products of one settlement service provider with another. If borrowers 
receive firm information but it comes too late in the loan process, 
they will not have the opportunity to shop. Moreover, if the 
information is available but the borrower must pay a significant fee to 
obtain it, borrowers may be disinclined to seek comparable information 
from multiple sources. See HUD-Treasury Report, 2000 at 66.
    The HUD-Treasury Report pointed out that unscrupulous mortgage 
brokers ``may receive compensation as a result of inflated upfront 
charges paid by borrowers and indirect fees paid by lenders * * *. 
Brokers and lenders may also structure charges so that they are less 
transparent to the borrower, through the use of mechanisms such as 
yield spread premiums, which may disguise the true cost of credit.'' 
HUD-Treasury Report, 2000, at 80.

III. This Proposed Rule

    With the above background in mind, today's rule proposes a new 
framework for borrower disclosures under RESPA that would:
    1. Address the issue of mortgage broker compensation, specifically 
the problem of lender payments to mortgage brokers, by fundamentally 
changing the way in which such lender payments in brokered mortgage 
transactions are recorded and reported to borrowers;
    2. Significantly improve HUD's Good Faith Estimate (GFE) settlement 
cost disclosure, and amend HUD's related RESPA regulations, to make the 
GFE firmer and more usable, to facilitate shopping for mortgages, and 
to avoid unexpected charges to borrowers at settlement; and
    3. Remove regulatory barriers to allow guaranteed packages of 
settlement services and mortgages to be made available to borrowers, to 
make borrower shopping for mortgages easier and further reduce 
settlement costs. A description of each of these aspects of the rule 
follows.

A. Addressing Mortgage Broker Compensation and Lender Payments to 
Brokers

    The proposed rule would fundamentally change the way in which 
information on the mortgage broker's functions and charges are reported 
in the Good Faith Estimate as described below.
1. Describing the Loan Originator's Function
    Under this proposed rule, the new GFE at Section I would require 
that mortgage brokers and all other loan originators describe their 
services. The proposed form does not ask that only brokers provide this 
description because the description of other originators' services is 
equally useful to borrowers. The GFE would advise that the loan 
originator performs origination services by arranging funding from one 
or more

[[Page 49147]]

sources for the borrower. It also advises that the originator does not 
shop for nor offer loans from all mortgage funding sources and the 
originator cannot guarantee the lowest price or best terms available in 
the market. The GFE makes clear that the borrower should compare the 
prices on the form and shop for the loan originator, mortgage product, 
and settlement services that best meet the borrower's needs.
    The rule would require that this information be provided on the GFE 
to effectuate the GFE's purpose of providing borrowers with settlement 
cost information and avoiding confusion particularly with respect to 
the role of mortgage brokers. This language seeks to disabuse borrowers 
of the notion that brokers or other loan originators are their agents, 
and therefore are automatically shopping for them, a notion that can 
prevent their own shopping. This new provision will be coupled with 
increased education through the Settlement Cost Booklet and other means 
to help borrowers.
2. Explaining to the Borrower the Option of Paying Settlement Costs 
through the Use of Lender Payments Based on Higher Interest Rate
    The new GFE, at Section IV, would clearly show borrowers the effect 
of alternative interest rates and their effect on monthly payments and 
cash needed for settlement. The GFE would inform borrowers that they 
have the options to pay settlement costs: (1) Through cash payments at 
settlement, (2) by borrowing additional funds to pay settlement costs, 
(3) by paying settlement costs through a higher interest rate and 
higher monthly payment, or (4) by lowering the interest rate and 
monthly payment by paying discount points. These options are available 
in loans from originators other than brokers. The Department in both 
the 1999 and 2001 Policy Statements on Mortgage Broker Fees especially 
called for the provision of this information to borrowers by brokers in 
brokered loans.
    The provision of this information on the form will help borrowers 
understand their options for paying settlement costs and decide whether 
to use any lender payments to the borrower, discussed in (4) below, to 
help defray some costs or all of their settlement costs, including but 
not limited to the mortgage broker's charges.
3. Disclosing the Loan Originators' Charges--Including the Mortgage 
Broker's and Lender's Total Charges to Borrowers
    HUD's current rules require that the broker's direct charges be 
disclosed on the GFE while all indirect payments including yield spread 
premiums are disclosed separately as ``Paid Outside of Closing'' 
(P.O.C.).\36\ The existing disclosure requirements and instructions do 
not make clear to the borrower the broker's total charges so that the 
borrower can focus on them, shop among brokers, or negotiate these 
total costs with the broker. Instead, because of the way indirect 
broker compensation is currently disclosed, many borrowers conclude 
incorrectly that such indirect payments have no effect on their loan 
costs.\37\
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    \36\ HUD's existing RESPA regulations do not provide explicit 
guidance on where to place a yield spread premium on the GFE, nor is 
there any express reference to such indirect payments on the GFE 
format. The regulations do suggest generally, however, that Appendix 
A Instructions for the HUD-1 should be followed in completing the 
GFE. See 24 CFR 3500.7(c)(1). As described above, these Instructions 
state that a mortgage broker's fee is to be disclosed on one of the 
blank lines in the 800 series. A corresponding line appears on HUD's 
current suggested GFE format (Appendix C to Regulation X) for 
listing such fees. HUD's instructions, however, do not require that 
the amount to be reported in the 800 series for mortgage broker fees 
must include yield spread premiums. To the contrary, HUD's Appendix 
A Instructions advise that yield spread premiums and other lender 
payments to mortgage brokers should be disclosed on the HUD-1 as 
payments by the lender to the broker that are ``paid outside of 
closing'' (``P.O.C.''), and expressly state that such amounts should 
not be shown in the borrower's column. 24 CFR part 3500, Appendix A.
    \37\ HUD's Settlement Cost Booklet is also not helpful. It 
suggests, incorrectly, that yield spread premiums are not costs to 
the borrower. It will be revised.
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    Section III A of the GFE, as proposed, would disclose to the 
borrower as a consolidated figure the total origination charges of the 
mortgage broker and the lender. (The zero tolerance applies to the 
total origination charges of the mortgage broker and the lender rather 
than any split between them.) Additionally, on Attachment A-1 there 
would be a breakdown of the origination charges into the total charges, 
respectively, of the broker and of the lender. This approach of 
providing total origination charges initially is taken to assist 
borrowers in comparing total origination charges of brokered loans to 
loans originated by lenders. At the same time, it ensures that the 
borrower knows the broker's and lender's charges. For mortgage brokers, 
these charges shall include all charges from the borrower that are paid 
to the mortgage broker for the transaction. For lenders, these charges 
shall include all or any portion of direct charges from the borrower 
that the lender receives for the transaction, other than discount 
points reported in line III B (2). Under the secondary market 
exemption, any additional fees realized by a lender from a bona fide 
transfer of a loan is not required to be disclosed under HUD's RESPA 
regulations. See 24 CFR 3500.5 (b)(7).
4. Requiring That in Brokered Transactions Lender Payments to the 
Borrower and Borrower Payments to the Lender Be More Appropriately 
Reported
    A major provision of this rule is the requirement that in all loans 
originated by mortgage brokers, any payments from a lender based on a 
borrower's transaction, other than a payment to the broker for the par 
value of the loan, including payments based upon an above par interest 
rate on the loan (including payments formerly denominated as yield 
spread premium), be reported on the GFE (and the HUD-1/1A Settlement 
Statement) as a lender payment to the borrower. Additionally, the rule 
would require that any borrower payments to reduce the interest rate 
(discount points) in brokered loans must equal the discount points paid 
to the lender, and be reported as such on the GFE (and HUD-1/1A) as a 
borrower payment to the lender. These changes would require mortgage 
brokers to disclose the maximum amount of compensation they could 
receive from a transaction, by including the amount in the 
``origination charges'' block of the GFE, and indicating the amount of 
the lender payment to borrower that would be received at the interest 
rate quoted, if any. Mortgage brokers would be unable to increase their 
compensation without the borrower's knowledge, by placing the borrower 
in an above par loan and receiving a payment from the lender (yield 
spread premiums), or by retaining any part of any borrower payment 
intended to reduce the loan rate (discount points).
    Through these changes in reporting requirements, HUD believes that 
virtually all disputes regarding broker compensation in table-funded 
transactions and intermediary transactions involving yield spread 
premiums will be resolved. All mortgage broker compensation will be 
reported as direct compensation in the origination block of the GFE, 
maximum broker compensation will be clear and brokers will have no 
incentive to seek out lenders paying the largest yield spread. They 
will, instead, be motivated to find the best loan product they can for 
the borrower.
    In requiring this methodology for reporting lender payments and 
discount points, it is important to note what the Department has not 
done. HUD has not taken away from borrowers the ability to select a 
higher rate loan in order to pay settlement costs (including, where the

[[Page 49148]]

borrower so chooses, broker compensation), or to pay additional sums at 
settlement in order to lower their interest rate and monthly payments. 
HUD has long recognized that these financing tools provide flexibility 
and have value to borrowers in specific circumstances. The Department 
emphasized this point most recently in Statement of Policy 2001-1. 
HUD's proposed rule, therefore, preserves these options, but seeks to 
the maximum extent possible within the Department's statutory and 
regulatory framework, to eliminate the possibility of abuse in the 
application of these financing tools, by ensuring that the full value 
of selecting either option is known and redounds to the borrower.
    The Department acknowledges that the proposed rule results in 
different treatment of compensation in loans originated by lenders and 
those originated by mortgage brokers. This is not because the 
Department believes that the latter are necessarily more suspect or 
susceptible of abuse than the former. It results simply from the fact 
that the reporting of total lender compensation cannot be meaningfully 
regulated under RESPA, while total broker compensation can be 
regulated. This is so for both legal and practical reasons; first, as 
indicated above, lenders enjoy a secondary market exemption from RESPA 
Section 8 scrutiny, meaning that under HUD's regulations any 
compensation derived from the sale of a loan in the secondary market by 
a lender is outside RESPA's purview. Second, were there no such 
exemption, measuring indirect lender compensation (compensation derived 
from the loan rate) would be very difficult. A lender may retain the 
loan in its portfolio for the life of the loan, or sell it long after 
the settlement. Payments from lenders to borrowers in brokered loans, 
however, based on the lenders' rate sheets or otherwise, as well as 
discount points paid to lenders, are capable of quantification down to 
the last penny.
    Currently, as indicated in the background, the GFE requires 
disclosure of the lender payment to the borrower (formerly the ``yield 
spread premium'') as a charge that is ``POC'' or ``paid outside of 
closing,'' which has been a cause of confusion for borrowers. The form 
as proposed would now require that the lender payment be disclosed 
immediately after the origination charges. HUD believes that this new 
location for the disclosure of the lender payment will cure any 
confusion and clearly tell borrowers how much their mortgage broker is 
earning from the transaction. Furthermore in order to avoid borrower 
confusion about the mortgage brokers' charges as compared to other loan 
originators' charges and the impact of a lender payment, the proposed 
rule would require that immediately following disclosure of the lender 
payment the form will show the net loan origination charge due from the 
borrower. It is this number that HUD intends the borrower to focus on 
and HUD seeks to achieve this by highlighting that total on the form, 
so that the borrower understands that the payment is applied as a 
credit to reduce the borrower's total origination charges. HUD believes 
that this approach ensures clearer disclosure of all relevant broker 
fees and lender payments while avoiding disadvantaging brokers. With 
the understanding provided by the form the borrower can compare his or 
her net origination charges loan-to-loan, originator-to-originator.

B. Significantly Improved Good Faith Estimate (GFE)

    As described in the Background, under RESPA and its implementing 
regulations, loan originators must provide the GFE either by delivering 
the GFE or by placing it in the mail to the loan applicant, not later 
than 3 business days after an application is received or prepared.\38\ 
Frequently, a GFE is provided only after the borrower pays a 
significant fee or fees. The current suggested GFE calls for a listing 
of charges that may itself lead to a proliferation of charges. 
Moreover, there are few standards for loan originators to follow in 
calculating estimated costs, which allows the GFE to be unreliable.\39\ 
For these reasons, the GFE is generally not a useful shopping tool to 
compare the charges of loan originators, other settlement service 
providers, or loan products. The GFE, and its attendant rules, also do 
not effectively prevent surprise costs at settlement.
---------------------------------------------------------------------------

    \38\ The rule indicates that the GFE must be given within 3 days 
of the time an application is received or prepared to accommodate 
those instances where originators prepare applications for 
borrowers.
    \39\ See note 13, infra.
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    Today's rule would make the GFE firmer and more usable, to 
facilitate borrower shopping for mortgages by making the mortgage 
transaction more transparent, and to prevent unexpected charges to the 
borrower at settlement. In order to improve the GFE HUD has concluded 
that establishment of a new required GFE format is necessary.
    The rule therefore would establish a new, more informative, 
required GFE format to be provided to borrowers by loan originators in 
all RESPA covered transactions and new requirements for its provision. 
HUD believes that the content of the material in these proposed forms 
gives the consumer the information needed to shop for loan products and 
to assist them during the settlement process. HUD recognizes that in 
order for these forms to be useful shopping tools, they must be 
consumer friendly. The Department seeks public comment on these forms. 
In addition, the Department will arrange focus groups during the 
comment period to elicit comments on how to make the material in the 
new proposed forms as consumer friendly as possible, including 
considering how the new proposed forms are best compared by consumers 
to the HUD-1 and what revisions, if any, to the HUD-1 would be most 
helpful.
1. The New GFE
    The proposed format for the new GFE and Instructions for completing 
it appear as Appendix C to this rule. The proposed form is intended for 
use in all federally related mortgage transactions. In addition to the 
changes to the GFE described in A above, the new required GFE format 
would:
a. Provide the Interest Rate and Costs for the Loan the Borrower Seeks
    The current requirements for the GFE do not require the inclusion 
of an interest rate. Nonetheless, borrowers shop for mortgages based on 
the interest rate as well as settlement costs, and the inclusion of 
this information would be useful to borrowers. Accordingly, the new 
GFE, in Section II, would list the note rate, Annual Percentage Rate 
(APR), and loan amount for the loan that the GFE is based on. Any 
mortgage insurance premium included in the APR would be separately 
disclosed in Section II. Section V would contain information on 
interest rates and adjustments to adjustable rate mortgages and 
applicable prepayment penalties and balloon payments. In Section III, 
the GFE would include a disclaimer indicating that unless the borrower 
locks at this time, the interest rate may change.
b. Simplify and Consolidate Major Categories on the GFE
    As detailed in the Background section, under current RESPA rules, 
the GFE simply lists estimated charges or ranges of charges for 
settlement services. There is no requirement for grouping or 
subtotaling charges to the same recipients. The costs listed on the GFE 
include loan originator/lender-retained charges, such as loan 
origination and underwriting charges; charges by third parties for 
lender required services, such as appraisal, title and title

[[Page 49149]]

insurance fees; state and local charges imposed at settlement, such as 
recording fees or city/county stamps; and amounts the borrower is 
required to put into an escrow account, or reserves, for items such as 
property taxes or hazard insurance. At settlement, borrowers receive a 
second RESPA disclosure--the Uniform Settlement Statement (the HUD-1/
1A)--that enumerates the final costs associated with both the loan and, 
if applicable, the purchase transaction.
    As proposed, the revised GFE, in Section III, would group and 
consolidate all fees and charges into major settlement cost categories, 
with a single total amount estimated for each category. This approach 
would reduce any incentive for loan originators and others to establish 
a myriad of ``junk fees'' and provide them in a long list, in order to 
increase their profits. Loan originators would be required to include 
all fees they receive in their total, including all points and 
origination charges. The interest rate dependent payment would include 
all fees formerly to the mortgage broker from the lender as well as any 
such fees in the future.
    In addition to the loan originator charges and the interest rate 
dependent payment, the major cost categories on the revised GFE would 
be: (1) Lender required and selected third party services; (2) title 
charges and title insurance premiums; (3) shoppable lender required 
third party services; (4) state and local government charges; (5) 
escrow/reserves (for taxes and insurance); (6) hazard insurance; (7) 
per diem interest; and (8) optional owner's title insurance. The 
proposed form then would include a final total of all settlement 
charges so the borrower can focus on the total costs to properly 
compare offers.
c. Identifies Shoppable and Required Services
    The GFE in Section III E, would aid shopping after application by 
requiring loan originators to separately identify those third party 
settlement services that are loan originator selected and required and 
those that the borrower may shop for independently.\40\ This provision 
will enable borrowers to shop for major services to the extent 
possible, even after the borrower has selected a loan originator. As 
described above, HUD's current rules at 24 CFR 3500.7(e) requires 
lenders to list on the GFE the particular providers of settlement 
services that they require their customers to use.\41\ Attachment A-1 
to the proposed form will list those ``Required Use'' providers while 
also identifying the services that are required, but which borrowers 
can shop for providers on their own. Additionally, the rule proposes to 
ease the ``Required Use'' disclosure requirement, by only requiring the 
loan originator to state the service, the name of the provider, and the 
cost estimate. The Department proposes to forego the requirement that 
this listing also include the lender's relationship to the required 
provider.
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    \40\ Lender required, lender selected third party services are 
to include items such as flood certification services and mortgage 
insurance, to the extent an upfront premium is charged.
    \41\ HUD's RESPA regulations contain certain restrictions on 
Affiliated Business Arrangements. See 24 CFR 3500.15. Section 9 of 
RESPA also prohibits sellers of property from requiring, directly or 
indirectly, the buyer to purchase title insurance from any 
particular title company.
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    Attachment A-1 will, as noted, also include the breakdown of the 
origination charges into lender and broker charges so that borrowers 
can better understand the respective lender and broker charges, and 
where possible even negotiate lower costs. In a similar vein, 
Attachment A-1 also breaks out title agent services and title insurance 
into separate subtotals for the actual title insurance versus 
compensation to the title agent. Title agents routinely receive direct 
payments from borrowers for their services as well as commissions from 
the insurance premium for the sale of insurance. The title agent 
subtotal will add up these costs so that the borrower can compare, and 
possibly negotiate, these charges.
2. New GFE Requirements
    To improve the existing disclosure scheme, this proposed rule would 
amend Regulation X to establish new rules for the GFE including the 
following:
a. Clarifying the Application Requirements
    Under the proposed rule, the GFE would be delivered or mailed at or 
within 3 days of application. The proposed rule, however, would only 
require a borrower to provide basic credit information and a property 
address in verbal, written or computerized form, but before the payment 
of any significant fee to the loan originator in order to receive a 
GFE. The GFE would be conditioned on the borrower's credit approval 
following final underwriting and appraisal of the property to be 
secured by the mortgage.
    To carry out this approach, the rule proposes to first clarify the 
definition of the term application, in HUD's RESPA rules at 24 CFR 
3500.2(b). The new definition of application would make clear, in 
accordance with informal HUD advice, that an application is deemed to 
exist whenever a prospective borrower provides a loan originator 
sufficient information (typically a social security number, a property 
address, basic employment information, the borrower's information on 
the house price or a best estimate on the value of the property, and 
the mortgage loan needed), whether verbally, in writing or computer 
generated, to enable the loan originator to make a preliminary credit 
decision concerning the borrower so that the originator can provide a 
GFE. See HUD Old Informal Opinion (March 27, 1980) and HUD Old Informal 
Opinion (October 15, 1982). HUD proposes this new definition to 
facilitate the provision of GFEs in response to virtually any type of 
request for a GFE, in order to give the borrower the necessary 
information for shopping. Under current rules, an application is the 
``submission of a borrower's financial information, in anticipation of 
a credit decision whether written or computer generated relating to a 
federally related loan'' identifying a specific property. The proposed 
rule would explicitly broaden the definition to cover verbal and other 
requests as long as these requests contain sufficient information for 
the originator to provide a GFE. HUD also will consider comments on 
whether it should provide a brief form for the application.
    Under RESPA, a ``Good Faith Estimate'' is to be provided with a 
settlement cost booklet by a lender to each person ``from whom it 
receives or for whom it prepares a written application.'' 12 U.S.C. 
2604(d). Because an originator begins the process of preparing an 
application on behalf of the borrower when the borrower submits 
application information, the borrower's information itself need not be 
provided in writing.
    RESPA's time limits for delivery of the GFE would run from the 
point that an originator receives ``an application.'' While the statute 
allows the loan originator to mail or deliver the GFE 3 days after 
application, it is likely that the originator will provide the GFE as 
quickly after the borrower's request as possible.\42\ HUD recognizes 
that the proposed rule's change of the definition of application, and 
the requirement that

[[Page 49150]]

GFE be provided to prospective borrowers early in the shopping process, 
frequently before they select a loan originator, may have implications 
for the content and delivery of required disclosures under the Truth in 
Lending Act (TILA). Question 28 specifically seeks comments on how 
HUD's proposed GFE changes impact other federal disclosure 
requirements, and invites suggestions on ways to consolidate or 
coordinate existing statutory disclosure requirements.
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    \42\ As indicated in the background section, supra, during the 
development of the HUD/Fed Report, HUD became aware of proposals 
where borrowers would arrange and pay for credit reports to loan 
originators of their selection. HUD supports these efforts as a way 
to lessen the burden on the originator's customers of paying the 
costs of those who are shopping.
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    The rule proposes that GFE estimates would be valid for a minimum 
of 30 days from when the document is delivered or mailed to the 
borrower. This is proposed in light of the tolerances to avoid 
committing originators indefinitely. Within the 30 days the borrower 
must agree to go forward and pay any additional money required to 
complete the underwriting process. If the borrower fails to accept the 
offer within 30 days, the borrower would need to return to the loan 
originator to request the originator to provide a new GFE or ratify the 
previous one. Commenters are asked in Question 5 below whether this is 
an appropriate time period for the GFE.
b. Facilitating Shopping With the GFE
    As stated above, to achieve the purposes of the Act, the proposed 
rule would limit fees paid by the borrower for the GFE, if any, to the 
amounts necessary for the originator to provide the GFE itself. The fee 
could not include amounts to defray later appraisal or underwriting 
costs. This approach would both facilitate shopping and reduce the 
possibility that fees for the GFE are unearned, in violation of RESPA's 
proscription against such fees. While HUD recognizes that there may be 
costs attendant to obtaining credit information from third parties and 
evaluating that information manually and/or electronically, the 
provision of the GFE does not today, and would not in the future, 
necessitate full underwriting and appraisal. These steps come 
afterwards, and under the approach in this proposal, GFEs explicitly 
would be given subject to underwriting and appraisal. Therefore, any 
charge at the time of application should be limited only to those costs 
that result directly from providing the GFE. This is not to say that 
all loan originators would be expected to charge for GFEs. HUD would 
prefer that originators not impose any charge for a GFE, since 
providing a GFE before the payment of any fee will further facilitate 
shopping. HUD believes it would be reasonable for loan originators to 
treat shoppers for mortgages in much the same way other retailers treat 
shoppers, where the price of the product includes marketing expenses 
and purchasers pay the costs incurred to serve shoppers who do not 
purchase the goods or services. Such an approach would better serve the 
purposes of the statute.
c. Providing an Accurate GFE
    As described in the background section, Regulation X currently 
defines ``Good faith estimate'' as ``an estimate, prepared in 
accordance with Section 5 of RESPA, of charges that a borrower is 
likely to incur in connection with a settlement.'' Pursuant to 24 CFR 
3500.7(c) of Regulation X, loan originators are required to state on 
the GFE the dollar amount or range of charges that the borrower will 
normally pay at or before settlement based upon common practice in the 
locality of the mortgaged property. While the rules require that the 
estimate be made in ``good faith'' and ``bear a reasonable 
relationship'' to the charges the borrower is likely to incur at 
settlement, there is no further explication of what a ``Good Faith 
Estimate'' demands, either with respect to the loan originator's own 
charges/compensation, or with regard to lender required third party 
charges and other settlement costs.
    Three decades of experience has shown that too often the estimates 
appearing on GFEs are significantly lower than the amount ultimately 
charged at settlement, are not made in good faith (e.g., a range of $0-
$10,000), and do not provide meaningful guidance on the costs borrowers 
ultimately will face at settlement. The Department recognizes that, 
occasionally, unforeseeable circumstances can and do drive up costs in 
particular transactions. HUD believes, however, that in most cases loan 
originators have the ability to estimate final settlement costs with 
great accuracy. The loan originator's own fee/compensation, which is 
entirely within the originator's control, can be stated with certainty, 
absent unforeseeable and extraordinary circumstances. Moreover, most 
third party costs such as appraisal charges, pest inspection fees, and 
tax/flood reviews, are fixed, and others, such as upfront mortgage 
insurance premiums, and title services and insurance, typically only 
vary depending on the value of the property or the loan amount. State 
and local recording charges, stamps, taxes are also generally well 
known to loan originators or, where necessary, can readily be 
calculated based on the loan amount or estimated precisely, on a pro 
rata basis, based on a projected settlement date.
    HUD also believes that recent advances in technology and 
telecommunications in loan processing make the routine provision of 
accurate estimates of third party costs both easier and cheaper.
    Notwithstanding, the GFE has too often failed to represent an 
accurate estimate of final settlement costs for a number of reasons. 
The absence of more precise regulatory standards for measuring accuracy 
has not helped ensure greater accuracy and reliability. Beyond that, 
some originators appear to purposely underestimate settlement costs as 
a means of inducing prospective borrowers to use their services, or as 
a way to obfuscate the amounts they plan to receive later in the final 
mortgage transaction. In too many cases, charges that never appeared on 
the GFE materialize at settlement. Such ``junk fees'' typically result 
in additional compensation for the originator and/or third party 
settlement service providers.
    In light of these considerations, HUD believes that in order for 
the GFE to serve its intended purpose, which is to apprise prospective 
borrowers of the charges they are likely to incur at settlement, new 
standards must be established under existing law to better define 
``good faith'' and the standards applicable to the GFE.\43\ 
Accordingly, the proposed rule would make a number of specific changes 
to GFE requirements.
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    \43\ Differing editions of Black's Law Dictionary have defined 
``good faith'' as ``a state of mind consisting in * * * honesty in 
belief or purpose * * * [and faithfulness to one's duty or 
obligation,'' and ``freedom from knowledge of circumstances which 
ought to put the holder upon inquiry'' as well as ``absence of all 
information, notice, or benefit or belief of facts which render [a 
transaction unconscientious.'' Inherent in these definitions is the 
concept that where a party makes an estimate in good faith they will 
take into account all relevant information available to them, and 
will exercise reasonable care in ascertaining and evaluating such 
information before providing such an estimate.
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    First, the rule would prohibit loan originators from exceeding the 
charges stated on the GFE for their own services, lender required and 
lender selected third party services, and government charges at 
settlement absent ``unforeseeable and extraordinary circumstances'' 
beyond the loan originator's control such as acts of God, war, 
disaster, or any other emergency, making it impossible or impractical 
to perform.
    Second, the rule would establish an upper limit, or 10% 
``tolerance,'' so that actual charges at settlement for shoppable 
lender required third party services, borrower selected title services 
and insurance, and reserves/escrow, cannot vary by more than 10% of the 
estimates of those fees and charges

[[Page 49151]]

stated on the GFE absent unforeseeable and extraordinary circumstances. 
The 10% tolerance applies to all lender selected third party services, 
and to third party services from providers who have been suggested to 
the borrower by the loan originator. It does not apply to third party 
services from providers selected by the borrower independently of the 
originator's recommendation.
    The inclusion of these tolerances will assure that borrowers can 
either find prices within the estimates in the marketplace or return to 
the lender who will identify sources that will honor those prices. 
However, if the borrower chooses to purchase a more expensive service 
than is available or than the lender can provide, the lender will not 
be held to have exceeded the tolerance. The 10% level for tolerances 
has been selected to inject discipline into estimates while providing a 
margin for legitimate error based on market changes. Commenters are 
asked to provide their views on whether this is or is not the 
appropriate tolerance level, tolerance, and why.
    Third, the rule would include redisclosure requirements triggered 
by changed circumstances. Specifically, if, after full underwriting, a 
loan originator selected by a borrower to obtain a mortgage loan 
determines that the prospective borrower does not qualify for the loan 
product identified in a previously provided GFE, the loan originator 
shall inform the borrower that the loan originator does not offer loan 
products meeting the borrower's needs or credit status. Alternatively 
if the loan originator does offer other products meeting the borrower's 
circumstances, the loan originator must so inform the borrower and the 
borrower may request a new GFE. Furthermore, when, after receiving a 
GFE, a borrower selects a loan originator to obtain a mortgage loan and 
qualifies for the loan product identified, but elects not to lock-in 
the interest rate and the interest rate dependent payment quoted on the 
GFE, the loan originator shall provide the borrower with an amended GFE 
at such time as the borrower does lock the rate and the interest rate 
dependent payment if either has changed from that quoted on the 
original GFE. The amended GFE shall identify those cost categories that 
have changed as a result of the change in the interest rate. In no case 
may an amended GFE include increases in cost categories which are not 
dependent on the interest rate (Section III. B.).
    By limiting the extent to which final settlement charges can exceed 
GFE estimates, the Department intends to render the GFE a much firmer, 
more reliable, and meaningful disclosure for borrowers. If the cost at 
settlement exceeds the amount reported on the Good Faith Estimate, 
absent unforeseeable and extraordinary circumstances, the borrower may 
withdraw the application and receive a full refund of all loan-related 
fees. Such circumstances would have to be documented in writing by the 
loan originator and such documentation retained by the loan originator. 
These circumstances may be further defined in HUD's final regulations, 
and comments are requested in response to Question 2 below on both the 
definition of unforeseeable and extraordinary circumstances, and 
borrower rights where there is noncompliance with GFE requirements. 
Concurrent with finalization of this rule, HUD also will establish 
procedures for closely scrutinizing loan originators that fail to meet 
these new GFE requirements for possible Section 8 violations.
d. Negotiating Discounts From Third Party Settlement Service Providers
    The establishment of tolerances under the proposal will require 
that loan originators actively follow the market prices for settlement 
services in their communities. HUD recognizes that the new GFE's 
tighter requirements on estimated third party charges may cause many 
loan originators not already doing so to seek to establish pricing 
arrangements with specific third party settlement service providers in 
advance, in order both to ensure they are able to meet the tolerances 
and to ensure lower prices for their customers. As part of negotiations 
for such arrangements, many originators, particularly those with a 
substantial volume of business, may seek prices from third party 
providers that are lower than those providers offer on a retail basis. 
However, because Section 8 of RESPA broadly prohibits providing a 
``thing of value,'' which is specifically defined to include discounts, 
in exchange for the referral of business, many loan originators have 
been reluctant to openly seek such pricing benefits, even where any 
such discount in the price is passed on to the borrower. HUD believes 
that the fundamental purpose of RESPA is to lower settlement costs to 
borrowers, and it is therefore contrary to the law's objectives to 
interpret the anti-referral fee provisions of Section 8 to prohibit one 
settlement service provider from using its market power to negotiate 
discounted prices, as long as the entire discounted price negotiated by 
the originator is charged to the borrower and reported as part of the 
total charge within Sections III(C) through (J) as appropriate. The 
proposed rule amends Regulation X to make this clear. HUD also solicits 
comments on this issue in Question 4 below.
e. Revising the HUD-1/1A and Appendix A Instructions
    Consistent with the proposed rule's new approach to the reporting 
of lender payments to borrowers, the proposal would require that on the 
HUD-1 all such payments be reflected in the borrower's column, in the 
applicable series (e.g., 800 series for payments to mortgage brokers; 
1300 series for payments to other third party settlement service 
providers). However, inasmuch as there is no place for identifying and 
reporting credits on the HUD-1 A, in any transaction where there is 
such payment, the rule requires that the HUD-1 must be used. The 
proposed rule's revisions to the Appendix A instructions for the HUD-1 
appear immediately following the proposed amendments to Regulation X.
    Also, the proposed new GFE, while reducing the number of cost items 
reported on the face page, and consolidating the presentation to the 
borrower of important cost information, is not readily comparable to 
either the HUD-1 or HUD-1A form, which the borrower will receive at 
settlement. This is because certain cost items on the GFE are currently 
reported in numbered sections of the HUD1/1A forms not corresponding to 
their GFE counterparts. Thus, for example, while the proposed GFE 
clearly distinguishes between those settlement costs attributable to 
the loan originator(s) (section A. on the new GFE) and other lender 
required third party settlement services (sections C. and E. on the new 
GFE), the HUD-1/1A forms combine loan originator costs and some third 
party costs under the same heading (``Items Payable in Connection with 
the Loan'') and numbered section (800). The HUD1/1-A forms include 
credit report fees, appraisal fees, mortgage insurance application 
fees, and inspection fees in this category. Other third party services, 
such as pest inspection fees, permit fee, and surveys are separately 
reported on the HUD-1/1A (1300). In addition, the new GFE identifies as 
separate major cost categories some items reported, in whole or in 
part, under the same heading on the HUD-1/1A. For example, the new GFE 
lists hazard insurance and per diem interest as separate categories. 
However, on the HUD-1/1A, where hazard insurance premiums are paid in 
advance they are reported, along with other items such as per diem 
interest and pre-paid mortgage insurance premiums, in section 900, 
``Items Required by Lender to be Paid in

[[Page 49152]]

Advance.'' Moreover, where a portion of the hazard insurance premium is 
required to be escrowed, that amount is reported on the HUD-1/1A in 
section 1000, along with other escrow items, as ``Reserves Deposited 
With Lender.''
    As proposed, the new GFE would consolidate certain charges into 
lump sum categories (e.g. lender required third party services). The 
Department has made only minor changes to the HUD-1 instructions, to 
assist the borrower in comparing the new GFE to the HUD-1. The 
Department took this approach because the HUD-1 is well accepted as a 
listing of settlement service charges by industry and consumers alike 
and HUD is reluctant to change the form unnecessarily. However, there 
is a risk that if the forms are not clearly comparable, lenders could 
deviate from the prices given in the GFE or GMPA and the borrower would 
not realize the deviations. Modifications could be made to the HUD-1 so 
that the fee categories on the new GFE would correspond to similar 
groupings on the HUD-1 and the two documents could be more easily 
compared. HUD invites comments in Question 9 below on whether or not 
the HUD-1 should be modified. HUD plans to use focus groups to ensure 
that the proposed forms are consumer friendly including considering, 
among other things, how the new proposed forms are best compared by 
consumers to the HUD-1 and what revisions, if any, to the HUD-1 would 
be most helpful.
    For purposes of TILA, the packager must list the finance charges 
needed to calculate the APR on an addendum to the HUD-1 or HUD-1A and 
HUD invites comments in Question 20 on this issue. The proposed rule 
seeks comment on whether there should be further modifications to the 
HUD-1/1A forms so that they more accurately correspond to the new GFE. 
However, the Department believes that, in the absence of further 
changes to the HUD-1/1A forms, borrowers can be assisted in comparing 
the two disclosures, and, to that end, the new GFE identifies, next to 
each GFE category, where on the current HUD-1/1A the corresponding cost 
information is to be found. As the preceding discussion makes clear, 
this necessitates identifying more than one HUD-1/1A section number 
next to some GFE categories.\44\
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    \44\ Specifically, the new GFE contains the following cross-
references to the HUD-1/1A for each GFE category: A. Origination 
Fees, 800; C. Lender Required/SelectedThird Party Services, 800, 
900, 1000, 1300; D. Title Services/Insurance, 1100; E. Lender 
Required/Shoppable Third Party Services, 800, 900, 1000, 1300; F. 
Government Charges--Taxes, 1000, 1200; G. Reserves/Escrow, 1000; H. 
Per Diem Interest, 900; I. Hazard Insurance, 900, 1000; J. Optional 
Owner's Title, 1100.
---------------------------------------------------------------------------

3. Section 6 Transfer of Servicing Language
    In 1990, Congress amended RESPA to include a disclosure, which 
informs borrowers that their loan or the servicing of their loan, may 
be sold. 12 U.S.C. 2605, Public Law 93-533 section 6 (November 28, 
1990). In 1997, HUD proposed a rule to implement the amended statute. 
Many comments were received and the rule was never finalized. 62 FR 
25740. The Department plans to finalize the 1997 proposed rule shortly. 
However, in the meantime, the Section 6 language in the statute may be 
provided in conjunction with the GFE instead of the language currently 
indicated in Sec. 3500.21 and Appendix MS-1.

C. Remove Regulatory Barriers To Allow Guaranteed Packages of 
Settlement Services and Mortgages To Be Made Available to Borrowers

1. A New Safe Harbor for Guaranteed Mortgage Packages (GMP) Created 
Through HUD's Exemption Authority
    Consistent with its earlier recommendations in the HUD-Federal 
Reserve Report, described in the background section of this rule, the 
Department believes that the most effective means of simplifying the 
process of obtaining a mortgage, promoting competition to lower costs 
and facilitating shopping is to offer borrowers Guaranteed Mortgage 
Packages containing a lump sum price for all loan originator and 
governmental required settlement costs associated with obtaining a 
mortgage combined with an interest rate guarantee for the loan. The 
Department believes that such packages offer borrowers the possibility 
of lower prices through innovation by packagers, the pricing discipline 
involved in arranging packages, and competition among packagers.
    Under a Guaranteed Mortgage Package approach packagers would offer 
a lump-sum price for settlement costs, and an interest rate guarantee 
at no cost to the borrower until the borrower selects the package. The 
packager would be held to those figures from the time the package is 
agreed to through settlement. This approach would allow the borrower to 
rely on the quoted price and rate and to compare fewer numbers in 
shopping for the best loan to meet his or her needs. Even with 
improvements to the current disclosure scheme, including more reliable 
quotes for major settlement costs under the new GFE (see B(2)(c), 
above), it will not be as easy for borrowers to shop and compare as it 
would be if they could simply comparison shop for mortgages based on a 
few prices as under this proposal.
    The Secretary has determined, therefore, that effective packaging 
of settlement services will depend on packagers negotiating lower costs 
with third party settlement service providers, and then providing 
borrowers with an alternative disclosure, the Guaranteed Mortgage 
Package Agreement (GMPA). This proposal will increase the opportunities 
for borrowers to shop among packages fostering competition to lower 
costs further. Under Section 8(c)(5) of the Act, the Secretary is 
authorized to issue regulations that remove certain payments or classes 
of payments or other transfers from the Section 8 prohibitions on 
kickbacks and unearned fees after consultation with designated 
regulatory agencies. Also, under Section 19 (a) of the Act, the 
Secretary is authorized to grant reasonable exemptions for classes of 
transactions as may be necessary to achieve the purposes of the Act. 
Accordingly, under these authorities, HUD is proposing to establish a 
carefully circumscribed safe harbor from RESPA's provisions at Section 
8 to facilitate the development and marketing of Guaranteed Mortgage 
Packages.
2. Who May Package
    The purpose of the Guaranteed Mortgage Package safe harbor is to 
stimulate competition and improve the borrower's ability to shop. Under 
this proposal, entities other than lenders may qualify as packagers for 
a safe harbor, as long as their packages include a mortgage and 
otherwise satisfy the requirements of the safe harbor. In this 
connection, in order to ensure that the borrower receives the 
settlement package of services and the mortgage loan, the proposed rule 
would require that the packager sign the GMPA agreeing to provide the 
Guaranteed Mortgage Package at the Guaranteed Mortgage Package price 
and that non-lender packagers have a lender sign the GMPA after 
borrower acceptance agreeing to provide the loan included in the 
Guaranteed Mortgage Package.
3. Requirements for the Safe Harbor
    Packagers that provide the GMP and abide by its terms and the other 
requirements of this rule, along with any settlement service providers 
participating in such a package, would receive a safe harbor from 
scrutiny under Section 8 of RESPA as described below. Specifically, to 
qualify for the

[[Page 49153]]

safe harbor, packagers, within 3 days of borrower's application, would 
have to offer, without an upfront fee: (1) A guaranteed price for the 
loan origination and virtually all other lender required settlement 
services needed to close the mortgage, including without limitation, 
all application, origination, underwriting, appraisal, pest inspection, 
flood and tax review, title services and insurance, and any other 
lender required services, and governmental charges; (2) a mortgage loan 
with an interest rate guarantee, subject to change (prior to borrower 
lock-in) resulting only from a change in an observable and verifiable 
index or based on other appropriate data or means to ensure the 
guarantee; \45\ and (3) a Guaranteed Mortgage Package Agreement (GMPA) 
as a prospective contract with the borrower that is binding through 
settlement containing the maximum settlement costs. The GMP offer would 
remain open as an offer for a minimum of 30 days from when the document 
is delivered or mailed to the borrower. The GMPA becomes a binding 
contractual commitment immediately upon borrower acceptance of the 
package and payment of a minimal engagement fee, subject only to 
acceptable final underwriting and property appraisal.
---------------------------------------------------------------------------

    \45\ Through this requirement, discussed infra, HUD seeks to 
ensure that the rate of the loan does not vary after the borrower 
commits to a packager for reasons other than an increase in the cost 
of funds. There may be a variety of ways to solve this problem and 
HUD is seeking comments, in particular, on how to implement an 
interest rate guarantee.
---------------------------------------------------------------------------

    The guaranteed package also would include up-front costs of 
mortgage insurance. The cost of mortgage insurance is based on the 
ratio of the loan amount to the value of the property and is not 
finally determined with certainty until the lender knows the property 
value. In the GMP price, the packager shall include any maximum upfront 
mortgage insurance premium based upon the borrower's estimate of the 
property value and the amount that needs to be borrowed. The GMPA will 
inform the borrower that the upfront mortgage insurance premium, if 
any, may decrease or become unnecessary depending on the final 
appraised value of the property. The ``Other Required Settlement 
Costs'', discussed immediately below, would include any required 
reserves for mortgage insurance premiums. Because full underwriting 
information will not be available to the packager at the time the GMPA 
is provided, implementation issues are presented. Commenters are 
invited in Question 21 below to provide their views on how mortgage 
insurance should be addressed in Guaranteed Mortgage Package 
Agreements.
    Under the proposal, reserves that are escrowed would be disclosed 
on the GMPA as ``Other Required Costs'' and subject to a 10% tolerance. 
The only costs that could be excluded from the guarantee and not 
subject to any tolerance would be those that fluctuate depending upon 
the borrower's choice, such as hazard insurance, per diem interest, and 
optional owner's title insurance. However, the Questions below ask 
commenters whether these items should also be included in the package 
at the required minimum amounts with a notation that ``optional costs'' 
are the responsibility of the borrower.
    The proposal does not require packagers to itemize the services 
included in the GMPA. HUD believes however, that there are certain 
settlement services that are of specific interest and value to the 
borrower such as pest inspection, appraisal and the purchase of 
lender's title insurance (which may affect the cost of owner's title 
insurance). Some lenders may choose to forego some or all of these 
services. Therefore, HUD proposes that if any of these particular 
services are not anticipated to be included in the GMP, this fact must 
be disclosed on the GMPA.
    Packagers may in GMP transactions provide a GMPA in lieu of the 
GFE. The revised instructions for the HUD-1/1A require that in 
Guaranteed Mortgage Packages, the HUD-1/1A must itemize the services 
provided, but not the specific charges for those services. However, 
because the amounts of certain individual charges needed to compute the 
finance charge and the APR under TILA and HOEPA, the packager must list 
the finance charges needed to calculate the APR on an addendum to the 
HUD-1 or HUD-1A. At Question 20, commenters are asked to provide their 
views on whether this approach adequately protects and preserves 
consumers' rights under TILA and HOEPA while facilitating packaging, 
and to suggest alternatives, if needed. Entities that do not choose to 
seek this safe harbor will continue to provide the GFE and HUD-1/1A 
disclosure scheme, as amended by this rule.
4. Contents of the Guaranteed Mortgage Package Agreement
    The premise underpinning packaging is that firm, simple, guaranteed 
price quotes will enable borrowers to shop for mortgage loans with much 
greater confidence and certainty. The GMPA starts with a brief 
description of the function of the packager--what the packager is 
providing--and a statement that the interest rate on the proposed form, 
and the settlement costs quotation (if any), represent an offer to the 
borrower which is open and guaranteed for 30 days from when the 
document is delivered or mailed to the borrower, and which will 
immediately become a binding contractual agreement upon borrower 
acceptance and payment of a minimal engagement fee, subject only to 
acceptable final underwriting and property appraisal. The opening 
description also makes clear that any required settlement costs not 
separately itemized and estimated in Section III of the GMPA are the 
responsibility of the packager.
    Section I of the GMPA provides the interest rate guarantee and APR 
along with an explanation that the interest rate is guaranteed through 
settlement if the borrower agrees now to the GMPA and locks-in this 
rate by a specified date/time. Any mortgage insurance premium included 
in the APR would be separately disclosed in Section I. It provides that 
if the borrower does not choose to commit immediately, it is guaranteed 
that the quoted interest rate will not change except in relation to 
changes in a specified index rate (or other such appropriate data or 
means as HUD may determine to assure that changes in the rate are 
reflective of the cost of funds and not simply to increase the 
packager's compensation).
    Section II of the GMPA states that this package price covers all 
services, besides those listed in Section III, that are necessary to 
close the loan. The packager would, however, be required to inform the 
borrower if certain designated items are not anticipated to be included 
as part of the package including lender's title insurance, the pest 
inspection, and appraisal. Under the GMPA, any pest inspection report, 
credit report, and appraisal would be provided to the borrower upon the 
borrower's request. (On the HUD-1, borrowers will receive a listing of 
the specific services provided, but not the specific prices for each 
service. The total settlement costs will be provided.)
    Section III of the GMPA provides a description of ``Other Required 
Settlement Costs'' which are outside the package and informs the 
borrower that reserves/escrow are subject to a 10% upper limit, or 
tolerance, at settlement absent unforeseeable and extraordinary 
circumstances. However, the 10% tolerance does not apply to hazard 
insurance and per diem interest in this category. The GMPA also makes 
clear that any required settlement cost not specifically identified on 
the GMPA as

[[Page 49154]]

outside a package, and itemized on the GMPA, is included in the 
guaranteed price quote and is the responsibility of the packager.
    Section IV of the GMPA provides the borrower the cost of owner's 
title insurance, if available. For any package where the packager 
offers the borrower the option of paying all or part of the stated 
guaranteed and/or estimated settlement costs through a higher interest 
rate, that option will be explained in accordance with Section V of the 
GMPA. Similarly, where a packager offers the borrower the option of 
lowering the stated guaranteed interest rate by paying additional 
amounts at settlement, commonly referred to as discount points, that 
option will also be explained in accordance with Section V of the GMPA.
    Section VI provides interest rates and adjustment terms related to 
adjustable rate mortgages, applicable prepayment penalties, and balloon 
payments. Section VII of the GMPA must be signed by an authorized agent 
of the packager and the borrower to become a binding contract for the 
Guaranteed Mortgage Package at the Guaranteed Mortgage Package price. 
After acceptance by the borrower, non-lender packagers must ensure that 
the lender sign the GMPA agreeing to provide the loan included in the 
Guaranteed Mortgage Package. HUD solicits comments on the issue of 
lender signatures on the GMPA in Question 18 below. Notwithstanding the 
basic objective of packaging, which is to dramatically improve the 
borrower's capacity to comparison shop, different entities may offer 
two types of packages. Some packagers may offer GMPs in which all 
settlement costs are included in the interest rate guarantee (in which 
case no guaranteed settlement cost quote will be provided), while other 
packagers may quote a guaranteed price for all settlement costs along 
with a (presumably lower) interest rate guarantee. The Special 
Information Booklet and other consumer education materials will alert 
borrowers to compare the combined impact of both settlement cost and 
interest rate guarantees when shopping among packagers, and will 
suggest that a borrower might wish to compare the APRs of the two 
products as well as consider how long the borrower plans to stay in the 
property; a longer mortgage term may mitigate in favor of a borrower 
choosing to pay settlement costs through a higher rate.
5. Interest Rate Guarantee
    In the rule, HUD is requiring that Guaranteed Mortgage Packages 
include an interest rate guarantee. HUD's rationale for this 
requirement is that both the settlement costs and the interest rate 
need to be firm for borrowers to compare loan products. HUD recognizes, 
however, that after a borrower requests a GMPA but before locking in a 
rate, the interest rate on a loan may change based on market forces. 
Similarly, some borrowers choose to float even after they have 
committed to an originator, in the hopes that market interest rates 
will fall. In such instances, HUD believes that in the context of GMPs, 
it is necessary to assure that when the borrower is ready to lock, the 
interest rate will only be changed based on observable market changes, 
or based on other data or appropriate means to ensure the guarantee. 
One possibility is to have the rate move with an observable and 
verifiable index. Another is to have a rate publicly available. 
Whatever the ultimate methodology, it must be easily useable and 
verifiable by the borrower and the industry. Commenters are asked to 
address Question 13 concerning the use of an index or a substitute 
therefore to address this problem.
6. Scope of the Safe Harbor
    The Secretary is exercising exemption authority under Section 
8(c)(5) and Section 19 of RESPA to establish this carefully 
circumscribed guaranteed mortgage packaging safe harbor. The Secretary 
is establishing this safe harbor only for those Guaranteed Mortgage 
Package transactions that meet the requirements set forth in this rule. 
The Secretary has determined that the establishment of this safe harbor 
is necessary to allow this class of transactions-- guaranteed packages 
of settlement services with the protections required under this rule-- 
to be available to consumers to achieve the purposes of the Act. The 
Secretary has concluded that the availability of these packages to 
consumers will simplify their shopping for settlement services and 
allow them to gain the benefit of an active competitive marketplace 
where market forces lower settlement costs. For the same reasons, the 
Secretary has determined that payments and pricing arrangements between 
packagers and participating settlement service providers for Guaranteed 
Mortgage Packages as set forth in this rule shall not be construed as 
prohibited under Section 8 of RESPA as long as the requirements in this 
rule are satisfied. Pursuant to Section 8(c) (5) the Secretary has 
undertaken the necessary consultation with other agency heads as 
required prior to promulgating this exemption.
    This safe harbor will allow packagers to inject pricing discipline 
to negotiate firm overall prices for essentially all settlement 
services and mortgage interest rates with participating settlement 
service providers. Some GMPs may require the use of affiliated 
entities, a practice prohibited by Section 8 except in limited 
circumstances. Other GMPs may involve arrangements between independent 
providers based on the projected volume of business to be referred. The 
safe harbor will apply in both of these arrangements. Without this safe 
harbor, Section 8(a)'s prohibition on referral fees may bar such 
arrangements and Section 8 (b)'s prohibitions may deter packagers from 
retaining profits that result from packaging, which could be regarded 
as unearned. Outside the safe harbor, where loan originators arrange 
discounted prices that are charged to consumers, HUD is proposing in 
this rulemaking to clarify that Section 8 is not violated (see above). 
Because HUD believes that the benefits to borrowers of packaging 
outweigh any protections offered by Section 8's provisions, the 
Secretary has concluded that such a carefully circumscribed safe harbor 
is appropriate, subject to the eligibility conditions set forth in this 
rule.
    Accordingly, pursuant to Section 19, the Secretary has determined 
that the safe harbor is necessary for these prescribed transactions to 
achieve the purposes of the Act. Where the requirements are met, the 
safe harbor from Section 8 will permit payments or other things of 
value exchanged between a packager and entities participating in the 
package, and will insulate packager earnings from Section 8 scrutiny. 
Section 8 would, however, continue to prohibit any payments for the 
referral of business, kickbacks, splits of fees and unearned fees 
between the packager and any of the entities participating in the 
package on the one hand, and entities outside of the package on the 
other.\46\ As long as the requirements of the safe harbor are 
satisfied, the exemption authority under Section 19 will create a safe 
harbor for packagers from the Section 8 requirements.
---------------------------------------------------------------------------

    \46\ Thus, for example, a real estate agent, outside of the 
package, would continue to be subject to Section 8 for accepting a 
payment from a packager for referring a customer to a package.
---------------------------------------------------------------------------

    Under the safe harbor, as noted above, packagers would provide the 
GMPA in lieu of a GFE. HUD regards the provision of a GMPA as fully, 
indeed, more than satisfying the requirements of Section 5 of RESPA 
that borrowers receive a Good Faith Estimate of the

[[Page 49155]]

amount of charges for settlement services the borrower is likely to 
incur. Additionally, HUD believes that the GMPA, by itemizing a 
Guaranteed Mortgage Package price encompassing virtually all settlement 
charges, along with a limited number of itemized charges, including 
owner's title insurance, also more than satisfies the requirements of 
Section 4 of RESPA. Nevertheless, HUD is prepared to exercise the 
exemption authority under Section 19 to create a safe harbor for 
packagers from the disclosure requirements of Sections 4 and 5 of 
RESPA, if it deems such an exemption necessary.
    The safe harbor is proposed to be available only where the 
transaction does not result in a high cost loan as that term is defined 
in the Home Ownership Equity Protection Act. See 15 U.S.C. 1601 (Supp 
II 1996). The safe harbor also may not be available for mortgages that 
exceed other limits or include other features identified by the 
Department during the course of this rulemaking as resulting in 
unreasonable settlement charges or other loan terms inimical to the 
purposes of RESPA.
    In this rulemaking, in Question 12 below, HUD is soliciting 
comments on the scope of the safe harbor and in particular, how the 
safe harbor should apply to affiliated business arrangements.

D. Scope of the Proposed Rule

    The proposed rule's new regulatory requirements will apply to first 
and second lien transactions, purchase money loans, and refinances. 
Home equity transactions are addressed in Sec. 3500.7(f), under current 
RESPA regulations. At Question 26 the Department invites comments on 
this issue.

E. Contractual Remedies and Enforcement Priorities

    For the safe harbor, the proposed rule intends that borrowers, 
individually or, where appropriate, as a class, may sue for specific 
performance or for damages pursuant to applicable State contract law 
provisions in the event a packager breaches a contract entered into 
pursuant to C., above.
    Beyond any contractual remedies available to borrowers under state 
laws, HUD will regard noncompliance with a GMPA as an enforcement 
priority, and any entity found in violation of such a contract will not 
be able to claim a safe harbor under Section 8. As a result, those 
found in violation of a GMPA will be subject to Section 8 scrutiny and 
possible penalties as well as individual or class relief.

F. Preemption

    Pursuant to Section 18 of RESPA, 12 U.S.C. 2616, the Secretary is 
authorized to determine whether any provisions of State law are 
inconsistent with any provision of RESPA. Where such a determination is 
made, after consultation with other appropriate Federal agencies, the 
Secretary may exempt any person subject to RESPA from compliance with 
said State law to the extent such compliance is inconsistent with 
RESPA. Question 22 below seeks comments on how this provision of RESPA 
should be applied in light of the provisions in the proposed rule.

IV. Questions for Commenters

    Commenters are asked to address the following questions in their 
comments to the extent that they have views on these subjects.

The New Good Faith Estimate (GFE) Requirements

    1. As proposed in Section III.A.(1), the proposed GFE form would 
briefly explain the originator's functions and that the borrower, not 
the originator, is responsible for shopping for his or her best loan. 
Does the language proposed adequately convey this message? If the 
commenter thinks otherwise, it should provide alternative language for 
the form that better explains the loan originator 's function to the 
borrower. Should the form also address agency requirements under state 
laws and how?
    2. In Section III.B.(2) c., the proposed rule requires that the 
amounts estimated on the GFE for mortgage broker and lender origination 
charges may not vary at settlement absent unforeseeable circumstances. 
Should the rule provide for this ``unforeseeable circumstances'' 
exception? Are the particular circumstances specified in HUD's 
formulation in this proposal sufficiently encompassing? What evidence 
should a broker or lender be required to retain to prove the existence 
of such circumstances and justify any increase in charges at 
settlement?
    3. In Section III.B.(2) c., the proposed rule establishes a 10% 
limit, or ``tolerance,'' for categories of settlement services and 
costs including third party services that the borrower shops for and 
escrow/reserves by which such costs cannot exceed the GFE estimates by 
10% at settlement absent unforeseeable and extraordinary circumstances. 
It also establishes zero tolerances for origination charges and lender 
required lender selected third party costs and government charges that 
cannot vary from the estimate through settlement absent unforeseen 
circumstances. Are these appropriate tolerances and tolerance levels or 
should other tolerances/tolerance levels be established for these 
categories? Also, should a tolerance be established for borrower's 
title insurance? What alternative or additional means might be employed 
to ensure that loan originators take the care necessary to complete the 
GFE to ensure that it represents a Good Faith Estimate of final 
settlement costs?
    4. In Section III.B.(2) d., the proposed rule would amend 
Regulation X to make clear that loan originators may enter into volume 
arrangements where such discounted prices are charged to their 
customers. Commenters are invited to provide their views on the 
ramifications, if any, of this clarification.
    5. In Section III.B.(2) c., the proposed rule requires that the 
tolerances will apply to the GFE from the time the form is given by the 
loan originator through settlement. Also, in case it takes a 
substantial time for the borrower to decide to use the loan originator 
from the date the form is given, the rule and the form provide that the 
GFE need only be open for borrower acceptance for a minimum of 30 days 
from when the document is delivered or mailed to the borrower. After 
that time, the GFE could be ratified or superseded by the originator at 
the borrower's request. Is this expiration date appropriate to protect 
against unnecessary costs flowing from an indeterminate liability or 
for other reasons? Is 30 days too long or too short? Another 
possibility that commenters may consider is whether the numbers on the 
GFE should apply only from the time the borrower enters into an 
agreement with the loan originator. HUD also invites commenters' views 
on whether HUD now should require a borrower's signature on the GFE to 
memorialize acceptance and begin the period during which the estimates 
are binding.
    6. In Section III.B.(1) b., the proposed rule simplifies the GFE by 
placing all loan origination costs in a small number of primary 
categories. This is intended to facilitate borrower understanding and 
shopping of major loan costs and minimize the proliferation of ``junk 
fees'' and duplicative charges. How could the GFE be made even simpler 
to facilitate borrower shopping? If the commenter believes greater 
itemization is desirable, what should be itemized and why?
    7. In Section III.A.(3), the proposed rule requires that on the 
front of the proposed form mortgage brokers disclose the lender credit 
right below the total origination charges to: (a) Make

[[Page 49156]]

the borrower aware of the effect that the credit has to reduce total 
origination costs; (b) avoid confusion among borrowers; and (c) avoid 
giving any competitive disadvantage to either a broker or lender for 
the same loan. What, if any, other approach to address these concerns 
is better and why? Should the new GFE form disclose this credit at the 
bottom of the proposed form because the credit can be applied to all 
settlement costs?
    8. As proposed in Section III. A. (3), as another step to avoid 
borrower confusion and any competitive disadvantage among lenders and 
brokers, the proposed rule breaks out on Attachment A-1, rather than on 
the front of the proposed form, the ``Loan Origination Charges'' into 
``Lender Charge'' and ``Broker Charge.'' How, if at all, does this 
approach advantage or disadvantage either lenders or brokers or confuse 
borrowers in comparison shopping? Would the industry and borrowers be 
better served if there is a breakout of ``Lender charges'' and ``Broker 
charges'' on the front of the form and why?
    9. As proposed in Section III. B. (2) e, the new GFE will 
consolidate certain charges into lump sum categories (e.g. lender 
required third party services). To permit the borrower to compare the 
new GFE to the HUD-1, it will be necessary for HUD to establish 
additional instructions to guide the reader so that the new GFE could 
be compared to the HUD-1. Would it be better to change the HUD-1 so the 
fee categories correspond to the groupings on the GFE and the two 
documents can be more easily compared? If commenters support changes to 
the HUD-1 to make it more comparable to and compatible with the new 
GFE, how extensive should these changes be and in what areas? Should 
the HUD-1 continue to list all charges for services or should it also 
be shortened and simplified as well to cover only categories of 
services?
    10. Should a safe harbor from Section 8 scrutiny be established for 
transactions where the mortgage broker signs and contractually commits 
to its charges on the GFE? The purpose of proposing this safe harbor 
would be to encourage a firm contractual commitment to borrowers, 
before they pay a fee and commit to a particular mortgage broker, so 
that the borrower can shop among mortgage brokers. Considering the 
proposed changes to the GFE, the proposed packaging safe harbor and 
HUD's current guidance on mortgage broker fees, is this safe harbor 
necessary for industry or borrowers and why? In light of the proposed 
rule's other provisions is any other additional disclosure for mortgage 
brokers warranted, such as an additional statement of what the broker's 
fees are and how they function?

Guaranteed Mortgage Package Agreements

    11. Is a safe harbor along the lines proposed in Section III. C. 
(1) of this rule necessary to allow lump sum packages of settlement 
services to become available to borrowers? Would the proposed 
clarification by HUD that discounts may be arranged, if passed on to 
borrowers and not marked up, suffice to make packages available to 
borrowers? Would a rule change to approve volume discounts and/or mark-
ups when a package is involved suffice? Would it suffice to trim the 
disclosure requirements for packaging and offer the option of providing 
a streamlined GFE to those who packaged?
    12. As proposed in Section III. C. (6) is the scope of the safe 
harbor appropriately bounded in applying to all packagers and 
participants in packages? The safe harbor also currently does not apply 
to referrals to the package. Should there also be a bar against part 
time employees of other providers working for the package to steer 
business? How should the safe harbor apply to affiliated business 
arrangements to protect borrowers from steering?
    13. As proposed in Section III. C (5), to qualify for the safe 
harbor, the packager must include an interest rate guarantee with a 
means of assuring that when the rate floats, it reflects changes in the 
cost of funds not an increase in originator compensation. For this 
purpose, the rule suggests tying the rate to an observable index or 
other appropriate means. What other means could assure borrowers that 
the rate of a lender was not simply being increased to increase 
origination profits? For example, would a lender's commitment to 
constantly make rates public on a web site be a useful control? If an 
index is the best approach, how should it be set? If an index approach 
is approved, should each lender be allowed to pick its own observable 
index?
    14. As discussed in the preamble to the rule in Section III. C (5), 
if an observable index or other appropriate means of protecting 
borrowers from increases in lender compensation when the borrower 
floats in a guaranteed packaging approach is not practical, should HUD 
provide a packaging safe harbor only for mortgage brokers? Such a 
mortgage broker safe harbor would require disclosing the lender credit 
to the borrower in broker guaranteed packages. The theory for the safe 
harbor would be that any amounts in indirect fees could be credited to 
borrowers taking away any incentive for an increase in rates to 
increase compensation. Should this be offered in any event?
    15. As proposed in Section III. C (6), under the rule, mortgages 
with total fees or a rate covered by the Home Ownership and Equity 
Protection Act (HOEPA) would be subject to the new GFE disclosure 
requirements; however, HOEPA loans would not qualify for the guaranteed 
package safe harbor. Is this exclusion appropriate considering, on the 
one hand, that packaging promises borrowers a simpler way to shop and 
make transactions more transparent? On the other hand, the safe harbor 
could be provided for a loan that has very high rate and/or fees and 
may be predatory. The proposal also says that during the rulemaking 
other limitations may be established to exclude high cost and/or loans 
with predatory features from the packaging provisions. HUD invites 
comments on whether HOEPA loans, any other loans, or features of loans 
should be included or excluded from the safe harbor and why.
    16. As proposed in Section III.C (3), the GMPA provides that the 
offer must be open to the borrower for at least 30 days from when the 
document is delivered or mailed to the borrower. Is this an appropriate 
minimum time period to ensure that the borrower has an adequate 
opportunity to shop?
    17. As proposed in Section III. C (4), the rule currently provides 
that the Guaranteed Mortgage Package agreement must indicate that 
certain reports such as the appraisal, credit report, and pest 
inspection are available to the borrower upon the borrower's request. 
Also, packagers may decide to forego such reports or services (i.e. 
lender's title insurance) and must inform the borrower that such 
reports or services are not anticipated to be included in the package 
price. Are these adequate protections for the borrower? HUD is aware 
that other laws such as Regulation B (ECOA) provide certain rights to 
borrowers with respect to obtaining some of these reports. In order to 
qualify for the safe harbor HUD has created additional reporting 
requirements. Are these additional reporting requirements appropriate?
    18. Should additional consumer protections be established for 
packaging? For example, should additional qualifications be established 
for ``packagers'' to ensure that borrowers are protected against non-
performance including the unavailability of a mortgage that could 
result in a borrower ``losing'' a house? For example, should

[[Page 49157]]

there be a requirement that a packager must have sufficient financial 
resources to credibly back the guarantee? Is it necessary to require a 
lender signature on the GMPA to ensure that the borrower receives the 
loan at the time of settlement? How can the borrower's interests be 
protected without unduly burdening the process or unduly limiting the 
universe of packagers?
    19. Consistent with the HUD-Fed Report, the rule proposes that 
certain charges, such as hazard insurance and reserves, are outside the 
package as other or optional costs. Is this the right approach or 
should these charges be disclosed as the minimum amounts required by 
the lender and required to be inside the package? Would the latter 
better serve the objective of establishing a single figure for the 
borrower to shop with?
    20. The rule proposes in Section III. C (3), that under Guaranteed 
Mortgage Packaging, the HUD-1 will list the settlement services in the 
package but not the specific charges for each service. Certain third 
party charges are excluded from the calculation of the finance charge 
and the APR under TILA and HOEPA. Commenters are invited to express 
their views on whether the approach in the rule satisfies or whether 
alternative approaches to cost disclosures should be established to 
ensure consumers' rights under TILA and HOEPA are protected while 
facilitating packaging. More broadly, commenters are invited to provide 
their views on means of better coordinating RESPA and TILA disclosures.
    21. Commenters are asked to provide their views on how the rules 
should treat mortgage insurance? The rule proposes in Section III. C 
(3), that the guaranteed package would include any mortgage insurance 
premiums in the APR and up-front costs of mortgage insurance in the 
guaranteed package. ``Other Required Costs'' would include reserves for 
mortgage insurance premiums. However, because the packager will not 
have an appraisal at the time the GMPA is provided, the packager may 
not have firm information to provide a definite figure. Another 
possibility is to exclude mortgage insurance from the package but 
notify the borrower that mortgage insurance may be an ``Other Required 
Costs'' and present the borrower an estimate subject to a tolerance, if 
mortgage insurance is necessary. This approach would exclude a major 
charge from the package. HUD recognizes that there are state laws that 
prohibit rebates or any splitting of commissions for mortgage 
insurance. How, if at all, should this impact the decision to include 
mortgage insurance in packages of settlement services?
    22. To what extent, if any, do inconsistencies currently exist, or 
would they exist upon promulgation of the proposed rule between State 
laws and RESPA? Specifically, what types of State laws result in such 
inconsistencies and merit preemption? What, if any, provisions of the 
proposal should be revised to facilitate any necessary preemption?
    23. The rule proposes that the GFE and the GMPA be given subject to 
appraisal and underwriting. How should the final rule address the 
matter of loan rejection or threatened rejection as a means of allowing 
the originator to change the GFE or GMPA to simply earn a higher 
profit?
    24. To what extent, if any, should direct loan programs such as 
those provided by the Rural Housing Service of the Department of 
Agriculture be treated differently under the new regulatory 
requirements proposed by this rule?
    25. As proposed, the GFE and GMPA currently contain sections for 
loan originators and packagers to indicate the specific loan terms for 
adjustable rate mortgages, prepayment penalties, and balloon payments. 
Are these appropriate loan terms to include on these forms, and what, 
if any, other mortgage terms or conditions should be listed on the 
forms?
    26. What are the arguments for or against limiting the proposed 
rule to purchase money, first and second lien, and refinancing loans as 
opposed to offering it to home equity, reverse mortgage and other 
transactions? Should there be any additional requirements for so-called 
B, C, and D loans?
    27. As proposed, the Guaranteed Mortgage Package includes one fee 
for settlement services required to complete a mortgage loan. The fee 
for the package will include loan origination fees, typically referred 
to as ``points.'' As points are generally deductible under IRS rules, 
comments are invited as to how to determine which portion of the 
package prices should be deemed to constitute points.
    28. To what extent do the proposed changes to the definition of 
application in Section III. B (2) a., and requirements for delivery of 
the GFE impact other federal disclosure requirements, such as those 
mandated by the Truth in Lending Act? How can the disclosure objectives 
of the proposed rule be harmonized with such other disclosure 
requirements?
    29. The proposed rule in Section III. B (2) c., would require a 
loan originator capable of offering an alternative loan product to 
provide a prospective borrower, upon the borrower's request, with a new 
GFE if, after full underwriting, the borrower does not qualify for the 
loan identified on the original GFE. Is this approach appropriate? What 
other options should be considered where borrowers do not qualify for 
the loan product initially sought?
    30. The proposed rule in Section III. B (2) c., would require loan 
originators to provide qualified borrowers with an amended GFE, 
identifying any changes in costs associated with changes in the 
interest rate, where the borrower elects not to lock-in the interest 
rate quoted on the original GFE at the time it is provided. Is this an 
appropriate requirement? What alternatives, if any, should HUD 
consider?

V. Findings and Certifications

The Paperwork Reduction Act

    The information requirements contained in this proposed rule have 
been submitted to the Office of Management and Budget for review in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 
35). The Real Estate Settlement Procedures Act of 1974 requires 
settlement providers to disclose to homebuyers certain information at 
or before settlement and pursuant to the servicing of the loan and 
escrow account. This includes a Special Information Booklet, a Good 
Faith Estimate, an Initial Servicing Disclosure, a Settlement Statement 
(the Form HUD-1 or Form HUD 1-A), and when applicable an Initial Escrow 
Account Statement, an Annual Escrow Account Statement, an Escrow 
Account Disbursement Disclosure, an Affiliated Business Arrangement 
Disclosure, and a Servicing Transfer/Disclosure. This information 
requirement under OMB control number 2502-0265 consolidates information 
previously collected under OMB control numbers 2502-0458, 2502-0491, 
2502-0501, 2502-0516, and 2502-0517.
    Estimate of the total reporting and recordkeeping burden that will 
result from this information requirement is as follows:

    Respondents: Individuals or households, business or other for-
profit entities.
    Frequency of submission: On occasion and annually.
    Reporting burden: Number of respondents: 20,000, Annual responses: 
105,300,000, Hours per response: 0.04.
    Total estimated burden hours: 6,500,000.

[[Page 49158]]

    The status of this information collection is that it is a 
reinstatement, with changes, of a previously approved collection. In 
accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments from 
members of the public and affected agencies concerning this collection 
of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond; including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this proposal. Comments must be 
received within sixty (60) days from the date of this proposal. 
Comments must refer to the proposal by name and docket number (FR-4668) 
and must be sent to:

Lauren Wittenberg, HUD Desk Officer, Office of Management and Budget, 
New Executive Office Building, Washington, DC 20503, 
lauren_wittenberg@opm.eop.gov, Fax: (202) 395-6974
    and;
Gloria Diggs, Reports Liaison Officer, Office of the Assistant 
Secretary for Housing--Federal Housing Commissioner, Department of 
Housing & Urban Development, 451 Seventh Street, SW, Room 9116, 
Washington, DC 20410.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made 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. 4223). The Finding of No Significant Impact is 
available for public inspection between the hours of 7:30 a.m. and 5:30 
p.m. weekdays in the Office of General Counsel, Regulations Division, 
Room 10276, U.S. Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410-0500.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''), which the President issued on September 30, 1993. This rule 
was determined economically significant under E.O. 12866. Any changes 
made to the proposed rule subsequent to its submission to OMB are 
identified in the docket file, which is available for public inspection 
in the office of the Rules Docket Clerk, Room 10276, U.S. Department of 
Housing and Urban Development, 451 Seventh Street, SW, Washington, DC, 
20410-0500. The Initial Economic Analysis prepared for this rule is 
also available for public inspection in the Office of the Rules Docket 
Clerk.

Federalism Impact

    This proposed 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 proposed rule and has 
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, 
an Initial Regulatory Flexibility Analysis (IRFA) has been prepared and 
has been made part of the Economic Analysis prepared under Executive 
Order 12866. The IRFA portion, however, of the combined analysis is 
published as an appendix to this proposed rule. The IRFA was also 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for review and comment on its impact on business.

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 proposed rule does not, within the meaning of 
the UMRA, impose any Federal 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). At the final rule stage, 
this rule will have a 60-day delayed effective date and be submitted to 
the Congress in accordance with the requirements of the Congressional 
Review Act.

VI. Rule Language

List of Subjects in 24 CFR part 3500

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

    Accordingly, for the reasons set out in the preamble, part 3500 of 
title 24 of the Code of Federal Regulations is proposed to be amended 
as follows:
    1. The authority citation shall continue to read as follows:

    Authority: 12 U.S.C. 2601 et. seq.; 42 U.S.C. 3535(d).

    2. In Sec. 3500.2, paragraph (b) is amended by revising the 
definitions of Application, Good faith estimate, and Mortgage broker 
and adding the following definitions of Guaranteed mortgage package, 
Loan originator, Mortgage broker loan, No tolerance, Packager, Packaged 
services, Participating settlement service provider, Par value, 
Tolerance, Unforeseeable and extraordinary circumstances, and Zero 
tolerance:


Sec. 3500.2  Definitions.

* * * * *
    (b) * * *
    Application means the submission of credit information (Social 
Security number, property address, basic income information, the 
borrower's information on the house price or a best estimate on the 
value of the property, and the mortgage loan needed) by a borrower in 
anticipation of a credit decision, whether oral, written or electronic, 
relating to a federally related mortgage loan. If the submission does 
not state or identify a specific property, the submission is an 
application for a pre-qualification and not an application for a 
federally related mortgage loan under this part. The subsequent 
addition of an identified property to the submission converts the 
submission to an application for a federally related mortgage loan.
* * * * *
    Good faith estimate means an estimate of settlement costs on the 
required format prescribed at Appendix C to this part prepared in 
accordance with Sec. 3500.7.
* * * * *

[[Page 49159]]

    Guaranteed mortgage package means a guaranteed package of mortgage 
related settlement services and an interest rate guarantee for a 
federally related mortgage loan that is offered to a consumer under a 
Guaranteed Mortgage Package Agreement (GMPA) in accordance with 
Sec. 3500.16.
    Loan originator means a lender or mortgage broker.
* * * * *
    Mortgage broker means a person or entity that renders origination 
services in a table funding or intermediary transaction. Where a 
mortgage broker is the source of the funds for a transaction, the 
mortgage broker is a ``lender'' for purposes of this part.
* * * * *
    Mortgage broker loan is a federally related mortgage loan that is 
originated by a mortgage broker.
    No tolerance means that the charges may vary without being subject 
to any tolerance.
    Packager means a person or other entity that offers and provides 
guaranteed mortgage packages to borrowers in accordance with 
Sec. 3500.16.
    Packaged services are settlement services that the lender requires 
for settlement and includes all services except per diem interest, 
hazard insurance, escrow/reserves, and optional settlement services.
    Participating settlement service provider means a settlement 
service provider that provides settlement services in a guaranteed 
mortgage package and whose charges are included in the guaranteed 
mortgage package price.
    Par value means the principal amount of the loan.
* * * * *
    Tolerance means a variation above an estimate of a category of 
settlement costs. Tolerance is expressed as a percentage of the 
estimate.
    Unforeseeable and extraordinary circumstances means acts of God, 
war, disaster, or any other emergency, making it impossible or 
impractical to perform.
    Zero tolerance means the amount listed may not vary at closing, 
except in unforeseeable and extraordinary circumstances.
* * * * *
    3. In Sec. 3500.7, paragraph (a) introductory text and (a)(2) 
through (e) are revised, paragraph (f) is redesignated as paragraph 
(g); and a new paragraph (f) is added to read as follows:


Sec. 3500.7  Good faith estimate

    (a) Lender to provide. Except as provided in paragraphs (a), (b) or 
(f) of this section, or where a guaranteed mortgage package agreement 
is provided in accordance with Sec. 3500.16 of this part, the lender 
shall provide all applicants for a federally related mortgage loan with 
a good faith estimate. The lender shall provide the good faith estimate 
either by delivering the good faith estimate or by placing it in the 
mail to the loan applicant, not later than three business days after an 
application is received or prepared. If the application is denied 
before the end of the three-business-day period, the lender need not 
provide the denied borrower with a good faith estimate. A lender shall 
not collect any fee in connection with the application or the good 
faith estimate beyond that which is necessary to provide the good faith 
estimate.
* * * * *
    (2) For all mortgage loans, third party settlement services, 
governmental fees and charges, any other loan related expenses that are 
not paid to and retained by the originator must be reported in their 
entirety in the appropriate categories on the good faith estimate.
* * * * *
    (b) Mortgage broker to provide. In the event an application is 
received by a mortgage broker who is not an exclusive agent of the 
lender, the mortgage broker must provide a good faith estimate by 
delivering the good faith estimate or by placing it in the mail to the 
loan applicant, not later than three business days after an application 
is received or prepared. As long as the mortgage broker has provided 
the good faith estimate, the funding lender is not required to provide 
an additional good faith estimate, but the funding lender is 
responsible for ascertaining that the good faith estimate has been 
delivered. If the application is denied before the end of the three-
business-day period, the mortgage broker need not provide the denied 
borrower with a good faith estimate. A mortgage broker shall not 
collect any fee in connection with the application or the good faith 
estimate beyond that which necessary to provide the good faith 
estimate.
    (c) Content of good faith estimate. As prescribed in and completed 
in accordance with the instructions in Appendix C to this part, the 
good faith estimate must state the property address, loan amount, 
interest rate used to calculate the estimated amounts, the Annual 
Percentage Rate (APR) for the loan including mortgage insurance, and 
the monthly payment for principal and interest and mortgage insurance. 
The form must also state whether the loan is an adjustable rate 
mortgage, contains a prepayment penalty clause or has a balloon 
payment, the functions of the originator, and the total amount of 
charges for each category of services: loan origination, interest rate 
dependent payment, lender required and selected third party services, 
title services and title insurance, shoppable lender required third 
party services, government services, amounts for escrow/reserves, per 
diem interest, hazard insurance and optional owner's title insurance. 
Attachment A-1 of the good faith estimate must indicate the subtotals 
of the origination charges to the lender and to the mortgage broker, 
and the subtotals of all the charges and fees for title and for 
settlement agent services.
    (d) Accuracy of good faith estimate. (1) The amounts of the 
categories of loan origination charges, lender required and selected 
third party settlement service provider charges, lender selected title 
services and title insurance, and governmental fees and charges 
reported on the good faith estimate shall not vary from the time the 
good faith estimate is given to the borrower and may not be exceeded at 
settlement absent unforeseeable and extraordinary circumstances. The 
estimates in the good faith estimate shall be open to the borrower for 
a minimum of 30 days from when the document is delivered or mailed to 
the borrower. Within the 30 days the borrower must agree to go forward 
and pay the additional money to complete the underwriting process. If 
the offer expires, the borrower may ask the loan originator to ratify 
such estimate or request a new one. If the cost at settlement exceeds 
the estimate reported on the good faith estimate, absent unforeseeable 
and extraordinary circumstances, the borrower may withdraw the 
application and receive a full refund of all loan-related fees and 
charges. The loan originator must document any such circumstances and 
retain the document in accordance with Sec. 3500.10(e).
    (2) The amounts for lender required third party services must 
include an estimate of the maximum mortgage insurance premium to be 
charged upfront to the borrower based upon the borrower's assertion of 
the value of the property and loan amount needed and indicate that the 
mortgage insurance premium may decrease or be removed after full 
underwriting;
    (3) The amounts of the categories of borrower selected title 
services and title insurance, shoppable lender required third party 
services, and reserves/escrow deposits charged to a borrower may not 
vary at settlement by greater

[[Page 49160]]

than a tolerance of 10% from the amounts for such categories reported 
on the good faith estimate, except when a borrower chooses to purchase 
a more expensive service, absent unforeseeable and extraordinary 
circumstances.
    (4) The amounts of the categories of per diem interest, hazard 
insurance and optional owner's title insurance reported on the good 
faith estimate shall be carefully prepared based upon the originator's 
knowledge of relevant prices, but are not subject to tolerances, which 
means that charges may vary without being subject to any tolerance.
    (5) In mortgage broker loans, the borrower payment to the lender 
for a lower interest rate must be paid in full to the lender and the 
lender payment to the borrower for a higher rate must include any 
lender payments for the transaction other than for the par value of the 
loan.
    (6) Loan originators must include all charges correctly within 
their prescribed category on the good faith estimate and not include 
any ``mark ups'' or ``up charges'' in their estimates of charges for 
categories III(C) through (J) of the good faith estimate. The Loan 
originator shall include all of its charges in the origination charges 
and interest rate dependent categories.
    (7) No loan originator shall be held responsible for charges 
imposed on the borrower at settlement for shoppable lender required 
third party services unless the borrower asked where the services could 
be obtained within the tolerance, used a settlement service provider 
identified by the originator, and was charged an amount in excess of 
the tolerance.
    (e) Form of good faith estimate. A good faith estimate required 
format is set forth in Appendix C to this part. The good faith estimate 
may be provided together with disclosures required by the Truth in 
Lending Act, 15 U.S.C. 1601 et seq., so long as all required material 
for the good faith estimate is grouped together.
    (f) Particular providers required by lender. (1) If the lender 
requires the use (see Sec. 3500.2, ``required use'') of a particular 
provider of a settlement service, other than the lender's own 
employees, and also requires the borrower to pay any portion of the 
cost of such service, the good faith estimate must identify the 
required settlement service provider.
    (2) Except for a provider that is the lender's chosen attorney, 
credit reporting agency, or appraiser, if the lender is in an 
affiliated business relationship (see Sec. 3500.15) with a provider, 
the lender may not require the use of that provider.
    (3) If the lender maintains a controlled list of required providers 
(five or more for each discrete service) or relies on a list maintained 
by others, and at the time of application the lender has not yet 
decided which provider will be selected from that list, then the lender 
may satisfy the requirements of this section if the lender provides the 
borrower, on the good faith estimate, with the names of the required 
providers, and the estimated charge for the particular settlement 
service.
* * * * *
    4. In Sec. 3500.8, the third sentence of paragraph (a) is revised 
to read as follows:


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

    (a) * * * Alternatively, the form HUD-1A may be used for these 
transactions, but not for transactions in which there is a lender 
credit to the borrower. * * *
* * * * *
    5. In Sec. 3500.10, a new sentence is added to paragraph (e) to 
immediately follow the second sentence to read as follows:


Sec. 3500.10  One-day advance inspection of HUD-1 or HUD-1A settlement 
statement; delivery; recordkeeping.

    (e) * * * Loan originators shall retain documentation of 
unforeseeable and extraordinary circumstances related to good faith 
estimates provided to borrowers and packagers shall retain 
documentation of such circumstances related to guaranteed mortgage 
package agreements provided to borrowers for five years after 
settlement.* * *
* * * * *
    6. In Sec. 3500.14, a new paragraph (g)(1)(viii) is added to read 
as follows:


Sec. 3500.14  Prohibition against kickbacks and unearned fees.

* * * * *
    (g)(1)(viii) Any discounts negotiated among settlement service 
providers, packagers, or any other entities for settlement services 
provided that the entire discounted price is charged to the borrower 
and reported as part of the total charge within Sections III(C) through 
(J) of the good faith estimate as appropriate.
* * * * *


Sec. 3500.16  [Redesignated as Sec. 3500.20]

    7. In Sec. 3500.16 is redesignated as Sec. 3500.20 and a new 
Sec. 3500.16 is added to read as follows:


Sec. 3500.16  Guaranteed Mortgage Package--Safe Harbor.

    (a) General. A guaranteed mortgage package is defined in 
Sec. 3500.2.
    (b) Violation and safe harbor. A guaranteed mortgage package, 
including payments, discounts, pricing arrangements or any other 
exchanges of things of value by and between persons or entities 
offering their services and compensated through guaranteed mortgage 
packages (hereinafter ``packagers'') and participating settlement 
service providers as part of such a transaction, shall not violate 
section 8 of RESPA or Sec. 3500.14 and satisfies sections 4 and 5 of 
RESPA if the conditions set forth in this section are met.
    (c) Criteria for guaranteed mortgage package. In order to qualify 
for the safe harbor stated in paragraph (b) of this section, packagers 
must deliver a guaranteed mortgage package offer within 3 days of 
application or such time as may be reasonable in special cases but 
prior to the borrower paying any fee, that includes:
    (1) A package of designated lender required settlement services at 
a guaranteed price from the time the guaranteed mortgage package is 
offered by the packager to the borrower through settlement provided 
that the borrower accepts the guaranteed mortgage package agreement 
within 30 days, or such greater period offered by the packager, from 
when the document is delivered or mailed to the borrower;
    (2) A mortgage loan with an interest rate guarantee and an Annual 
Percentage Rate (APR) that is guaranteed through settlement provided 
that the borrower accepts the guaranteed mortgage package agreement 
within 30 days, or such greater period offered by the packager, and the 
interest rate is adjusted only to reflect changes in market interest 
rates based on movement in a observable and verifiable index or other 
appropriate measure; and
    (3) A guaranteed mortgage package agreement as prescribed in and 
completed in conformity with Appendix F to this part which:
    (i) Explains that the guaranteed mortgage package includes 
necessary settlement services required by the lender and guarantees a 
package price for these services through settlement provided that the 
borrower accepts the GMPA within 30 days, or such greater period 
offered by the packager, from when the document is delivered or mailed 
to the borrower;
    (ii) Commits the packager to provide all settlement services and 
includes all charges required to complete your mortgage except those 
specified as other required settlement costs and advises the borrower 
if the packager anticipates whether a pest inspection, lender's title

[[Page 49161]]

insurance, credit report, and/or appraisal will be anticipated;
    (iii) Identifies and provides estimates for other required 
settlement costs, such as per diem interest, reserves/escrow, and 
hazard insurance, and optional owner's title insurance and explains 
that any required settlement costs not separately itemized and 
estimated are the responsibility of the packager;
    (iv) Identifies and explains any borrower option to utilize 
payments to or from the lender as a result of the interest rate to pay 
settlement costs or adjust the interest rate and mortgage payments;
    (v) Identifies any reports such as the pest inspection, lender's 
title insurance, appraisal or credit report for the loan transaction 
that are available to the borrower at the borrower's request;
    (vi) Specifies that the packager will ensure that a mortgage loan 
is provided as part of the package and that, after acceptance by the 
borrower and the lender, the lender participating in the package shall 
provide a loan with the same terms as set forth in the guaranteed 
mortgage package agreement;
    (vii) Advises the borrower of whether the loan is an adjustable 
rate mortgage and the terms of the mortgage, whether there is a 
prepayment penalty and that the borrower can request its terms, whether 
there is a balloon payment, whether the guaranteed mortgage package 
price includes an upfront maximum mortgage insurance premium based upon 
the borrowers assertion of the value of the property and loan amount 
needed and that the mortgage insurance premium may decrease or be 
removed after full underwriting; and
    (viii) Commits the packager to the terms of the guaranteed mortgage 
package agreement upon borrower acceptance and payment of any fee, 
subject only to acceptable final underwriting and property appraisal.
    (d) Impact on Good faith estimate and HUD-1/1A. Where a packager 
satisfies the criteria in paragraph (c) of this section, the packager 
shall provide the borrower the guaranteed mortgage package agreement in 
lieu of the good faith estimate. In loans originated through guaranteed 
mortgage package agreements, the HUD-1/1-A shall be completed at 
settlement by itemizing all the included services (but not the charges) 
of third party settlement service providers that were performed for the 
guaranteed mortgage package price. The guaranteed mortgage package 
price shall be shown as the origination fee on line 801 of the HUD-1/
HUD-1A. Additionally, the packager must list the finance charges needed 
to calculate the APR on an addendum to the HUD-1 or HUD-1A.
    (e) Exclusions from safe harbor.
    (1) Notwithstanding the existence of a guaranteed mortgage package, 
section 8 of RESPA remains applicable to payments by and between 
packagers or participating settlement service providers and parties 
outside the guaranteed mortgage package.
    (2) The Affiliated Business Arrangement (AfBA) exemption 
requirements, set forth in Sec. 3500.15, remain in effect when a 
borrower is referred to a packager by a person or entity not otherwise 
participating in the guaranteed mortgage package who is an affiliate of 
the packager or any participating settlement service provider.
    (3) The guaranteed mortgage package safe harbor shall not be 
available where the rate or points and fees of a Federally related 
mortgage loan make the loan subject to the Home Ownership Equity 
Protection Act (HOEPA).


Sec. 3500.19  [Amended]

    8. In Sec. 3500.19(c) the cross references to ``Sec. 3500.16'' and 
to ``section 3500.16'' are both revised to read ``Sec. 3500.20''
    9. Appendix A to part 3500--Instructions for Completing HUD-1 and 
HUD-1A Settlement Statements is amended as follows:

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

    a. The second paragraph of the General Instructions is revised to 
read as follows:

General Instructions

* * * * *
    Except with respect to a loan resulting from a Guaranteed 
Mortgage package, 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 for at settlement. 
Charges to be paid outside of settlement, including cases where a 
non-settlement agent (i.e., attorneys, title companies, escrow 
agents, real estate agents or brokers) holds the Borrower's deposit 
against the sales price (earnest money) and applies the entire 
deposit towards the charge for the settlement service it is 
rendering, shall be included on the HUD-1 but marked ``P.O.C.'' for 
``Paid Outside of Closing'' (settlement) and shall not be included 
in computing totals. P.O.C. items should not be placed in the 
Borrower or Seller columns, but rather on the appropriate line next 
to the columns. In the case of loans where settlement services are 
paid through the interest rate, any charges to be paid by the lender 
should not be marked as P.O.C. but should be shown in the 
appropriate column and used in computing totals. In loans originated 
through guaranteed mortgage package agreements, the HUD-1/1-A shall 
indicate through checkmarks in the appropriate column which third 
party settlement services were performed for the guaranteed mortgage 
package price. The guaranteed mortgage package price shall be shown 
on line 801. Additionally, the finance charges needed to calculate 
the APR will be disclosed in an addendum on the HUD-1.
* * * * *
    b. The Line Item Instructions for the HUD-1 paragraph describing 
line 204-209 are revised to read as follows:
* * * * *
    Lines 204-209 are used for other items paid by or on behalf of 
the Borrower. Examples include cases in which the Seller has taken a 
trade-in or other property from the Borrower in part payment for the 
property being sold. They may also be used in cases in which a 
Seller (typically a builder) is making an ``allowance'' to the 
Borrower for carpets or drapes which the Borrower is to purchase 
separately. Lines 204-209 can also be used to indicate any Seller 
financing arrangements or other new loan not listed in Line 202. For 
example, if the Seller takes a note from the Borrower for part of 
the sales price, insert the principal amount of the note with a 
brief explanation on Lines 204-209. Additionally, a blank line in 
this series shall be used to record the total of all payments from 
the Lender to the Borrower based on the transaction, including 
payments based on a higher interest rate.
* * * * *
    c. Following the instructions for HUD-1 Line 603, Section L. 
Settlement Charges is revised to read as follows:
* * * * *
    Section L. Settlement charges. For all items except for those 
paid to and retained by the Loan Originator, the name of the person 
or firm ultimately receiving the payment should be shown. In the 
case of loans where settlement services are paid through the 
interest rate, any charges to be paid by the lender should be shown 
in the appropriate column used in computing totals.
* * * * *
    d. The paragraph immediately following ``Line Item Instructions for 
Completing HUD--1A'' is revised to read as follows:
* * * * *

    Note: 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 or does not 
involve any lender payments to the borrower based on the 
transaction, including any payments based on a higher interest rate. 
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 Line Item Instructions. The use of the HUD-1 or HUD-A is not 
mandatory for open-end lines

[[Page 49162]]

of credit (home-equity plans), as long as the provisions of 
Regulation Z are followed.

* * * * *
    e. For HUD 1-A, the second paragraph following ``General 
Instructions'' is revised to read as follows:
* * * * *
    The settlement agent shall complete the HUD-1A to itemize all 
charges imposed upon the borrower by the lender, whether to be paid 
at settlement or outside of settlement, and any other charges that 
the borrower will pay for at settlement. For all items except for 
those paid to and retained by the lender, the name of the person or 
firm ultimately receiving the payment should be shown together with 
the total amount paid to such person in connection with the 
transaction. In loans originated through guaranteed mortgage package 
agreements, the HUD-1A shall be completed at the time of settlement 
by indicated through checkmarks in the appropriate column which 
settlement services were performed for the guaranteed mortgage 
package price. The guaranteed mortgage package price shall be shown 
on line 801. Additionally, the finance charges needed to calculate 
the APR will be disclosed in an addendum on the HUD-1A.

    10. 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; Sample Good Faith Estimate

Instructions for completing the Good Faith Estimate

    The following are instructions for completing the Good Faith 
Estimate required under section 5 of RESPA and Regulation X of the 
Department of Housing and Urban Development (24 CFR 3500.7). This 
form is to be used as a statement of estimated settlement charges. 
The instructions for completion of the Good Faith Estimate 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 Good Faith Estimate.

General Instructions

    The loan originator preparing the Good Faith Estimate 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 Good 
Faith Estimate form.
    All fees and charges shall be disclosed in dollar amounts. 
Percentages may be added, when applicable.

Specific Instructions

    I. Our Services. Loan originators shall include a paragraph 
substantially the same as the paragraph set forth on the form in 
this Appendix. This paragraph explains the services provided by the 
loan originator and emphasizes that the borrower should shop and 
compare different loans and originators to find the best loan for 
his or her individual situation.
    II. Loan Terms. Loan originators shall fill in the mortgage 
amount, indicate whether the loan is a fixed or variable loan, 
specify the interest rate and Annual Percentage Rate (APR) and fill 
in the length of the loan (i.e. number of years/months) and the 
monthly payment, including any mortgage insurance.
    III. Settlement Costs. This section covers the settlement costs 
associated with the mortgage loan and warns the borrower that the 
costs may change if a different mortgage product is chosen or the 
interest rate changes.
    III.A. Origination Charges. Loan originators shall total all 
origination charges to the lender and the broker in this category on 
the form. For mortgage brokers, these charges shall include all 
charges from the borrower that are paid to the mortgage broker for 
the transaction. For lenders, these charges shall include all direct 
charges from the borrower for the transaction, other than discount 
points reported in line III B (2). The estimated total origination 
charges shall not vary from the actual costs at the time of 
settlement (0% tolerance), absent unforeseeable and extraordinary 
circumstances.
    III.B. Interest Rate Dependent Payment.
    (1) In loans originated by mortgage brokers, mortgage brokers 
shall subtotal any lender payments to the borrower for a higher 
interest rate as well as any other lender payments for the 
transaction other than for the par value of the loan in this 
category on the form.
    (2) In loans originated by mortgage brokers, mortgage brokers 
shall subtotal any borrower payments to the lender for a lower 
interest rate.
    The mortgage broker shall include the payments in (1) and (2) 
when computing the net loan origination charge due from borrower 
(Sum of A and B). Lenders may complete this section at their option.
    III.C. Lender Required and Selected Third Party Services. Loan 
originators shall subtotal all charges for lender required and 
lender selected third party services in this section on the form. 
This subtotal shall cover all such services except for title related 
services and title insurance in connection with the borrower's loan 
and shall not vary from actual costs at the time of settlement (0% 
tolerance), absent unforeseeable and extraordinary circumstances.
    III.D. Title Services and Title Insurance. Loan originators 
shall subtotal all fees or charges for title and settlement agent 
services and title insurance in this category of the form. On the 
form, the loan originator also must indicate whether the services 
and insurance are loan originator selected or borrower selected. If 
title services and insurance are loan originator/lender selected, 
the estimate shall not vary from actual costs at the time of 
settlement (0% tolerance), absent unforeseeable and extraordinary 
circumstances. If title services and/or insurance are shoppable by 
the borrower, and the borrower ultimately elects to use a provider 
identified by the loan originator/lender, the final amount at 
settlement may not exceed the estimate by more than 10% (10% 
tolerance) absent unforeseeable and extraordinary circumstances, 
except when a borrower chooses to purchase a more expensive service.
    III.E. Shoppable Lender Required Third Party Services. Loan 
originators shall subtotal all charges for loan originator/lender 
required third party services in this section. If services are 
shoppable by the borrower, and the borrower ultimately elects to 
obtain some or all of these services through the loan originator, 
the final amount at settlement may not exceed the loan originator's 
estimate by more than 10% (10% tolerance) absent unforeseeable and 
extraordinary circumstances, except when a borrower chooses to 
purchase a more expensive service.
    III.F. Government Charges--Taxes (State and Local). Loan 
originators shall subtotal all state and local fees, charges, and 
taxes that will be required at settlement in this section. This 
estimate shall be based on an assumed settlement date that the loan 
originator will specify on the form. The estimate shall not vary 
from actual costs at the time of settlement (0% tolerance) for the 
assumed settlement date, absent unforeseeable and extraordinary 
circumstances.
    III.G. Reserves/Escrow. Loan originators shall subtotal 
reserves/escrow amounts that will be required by the lender at 
settlement. This section shall include only required escrow items 
such as taxes, hazard insurance, and mortgage insurance. The 
estimate shall not vary from the actual costs required for reserves/
escrow at the time of settlement by more than 10% (10% tolerance) 
absent unforeseeable and extraordinary circumstances, except when a 
borrower chooses to purchase a more expensive service.
    III.H. Per Diem Interest. Loan originators shall disclose the 
estimated cost of the minimum amount of per diem interest that the 
lender will charge in this section. Although loan originators are 
expected to provide reliable figures in this section based on their 
experience, no tolerance applies to this section, which means that 
charges may vary without being subject to any tolerance.
    III.I. Hazard Insurance. Loan originators shall disclose the 
estimated cost of the minimum amount of hazard insurance that the 
lender will require in this section. Although loan originators are 
expected to provide reliable figures in this section based on their 
experience, no tolerance applies to this section, which means that 
charges may vary without being subject to any tolerance.
    III.J. Optional Owner's Title Insurance. Loan originators shall 
disclose the estimated subtotal of optional homeowner's title 
insurance that the borrower may choose to purchase. Although loan 
originators are expected to provide reliable figures in this section 
based on their experience, no tolerance applies to this section, 
which means that charges may vary without being subject to any 
tolerance.
    IV. Options to Pay Settlement Costs and Lower Your Interest 
Rate. Loan originators shall explain the borrower's options for 
paying settlement costs in this section of the form by using 
material that is essentially the same as that contained in 
paragraphs A, B, C and D of this section at Appendix C along with 
discussing these issues with the

[[Page 49163]]

borrower, as needed. The loan originator must fill in the chart to 
demonstrate to the borrower how the borrower's chosen interest rate, 
monthly payments, and settlement costs compare to a loan of the same 
size with a lower and a higher interest rate. The completed chart 
serves as an example for the loan originator of how to fill out the 
categories. Loan originators shall use figures relevant to the 
borrower's transaction.
    V. Additional Loan Terms. Loan originators shall indicate 
whether the mortgage loan is subject to a prepayment penalty and 
whether the loan has a balloon payment due at the conclusion of the 
loan term. If there is a prepayment penalty, the loan originator 
shall advise the borrower that he or she is entitled to a copy of 
the prepayment penalty terms upon request.
For Adjustable Rate Mortgage Loans, loan originators must indicate 
the interest rates and adjustment terms of the adjustable rate 
mortgage loan.

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[[Page 49166]]



Attachment A-1 instructions

    Attachment A-1. ``Required Use'' and Shoppable Third Party 
Providers.
    A. The loan originator must itemize on this form any services 
that may be independently obtained by the borrower and the estimated 
cost (based on local market averages for the area where the property 
is located). The loan originator must also indicate (by checking the 
appropriate box) any lender-required, lender selected services, 
along with the estimated charge (based on local market averages for 
the area where the property is located), and name of the provider.
    B. In reporting subtotals for mortgage broker/lender and title 
agent/title insurance, the loan originator must indicate the names 
of the service providers and the subtotals of all their charges and 
fees.

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BILLING CODE 4210-27-C

[[Page 49167]]

    11. A New Appendix F to part 3500 is added to read as follows:

Appendix F to Part 3500--Instructions for Completing Guaranteed 
Mortgage Package Agreement; Sample Guaranteed Mortgage Package 
Agreement

Instructions for Completing the Guaranteed Mortgage Package 
Agreement

    The following are instructions for completing the guaranteed 
mortgage package agreement under Regulation X of the Department of 
Housing and Urban Development (24 CFR 3500.16(g)(1)(ix)). This form 
is to be used as a statement of guaranteed settlement charges, 
interest rate, and costs. The instructions for completion of the 
guaranteed mortgage package agreement are primarily for the benefit 
of the packager who prepares the form and need not be transmitted to 
the borrower(s) as an integral part of the guaranteed mortgage 
package agreement.

General Instructions

    The loan packager preparing the guaranteed mortgage package 
agreement 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 guaranteed mortgage package agreement form.
    The guarantee includes all services provided in connection with 
the mortgage package, except for per diem interest, reserves/escrow, 
hazard insurance, and optional owner's title insurance.

Specific Instructions

    Packagers shall include a paragraph substantially the same as 
the introductory paragraph set forth in Appendix F that explains the 
nature of the package and that the guaranteed mortgage package 
agreement remains open for a minimum of 30 days, or such greater 
period offered by the packager, from when the document is delivered 
or mailed to the borrower. Within that time period the borrower must 
accept the agreement and pay a minimal fee to make it binding. The 
packager shall fill out the property address and indicate whether 
the transaction is a purchase or refinance.
    I. Interest Rate Guarantee. The packager shall specify an 
interest rate guarantee and Annual Percentage Rate (APR), as well as 
the amount of any mortgage insurance that is the APR, in this 
section of the form, which the borrower may accept and lock at 
application. While the guaranteed mortgage package agreement offer 
is open, if the borrower does not accept or lock, the interest rate 
shall be tied to an observable and verifiable index, or other 
appropriate data or means, and may not change except in relation to 
said index or measure during the time the offer is pending. If the 
borrower does not apply for a loan within 30 days, or such greater 
period offered by the packager, the offer will expire.
    II. Guaranteed Mortgage Package. The packager shall specify a 
lump sum package price for covered settlement services in this 
section of the form. At a minimum, this amount must include all 
origination services, title services and title insurance, other 
packager or lender required third party services, all government 
charges, and an upfront maximum mortgage insurance premium, if 
applicable.
    III. Other Required Settlement Costs. The packager shall itemize 
any other required settlement charges in this section of the form as 
permitted under Sec. 3500.16. Any settlement costs not separately 
itemized in this section are presumed to be included in the Section 
II guarantee.
    III.A. Per Diem Interest. The packager shall disclose the 
estimated cost of the minimum amount of per diem interest that the 
lender will require in this section. Although loan originators are 
expected to provide reliable figures in this section based on their 
experience, no tolerance applies to this section, which means that 
charges may vary without being subject to any tolerance.
    III.B. Reserves/Escrow. The packager shall accurately indicate 
the estimated subtotal for reserves/escrow in this section on the 
form. This estimate shall cover all reserves/escrow deposits 
required by the lender for such items as taxes, hazard insurance, 
and mortgage insurance. The final amount required to be placed in 
reserves/escrow at settlement may not exceed the estimate by more 
than 10% (10% tolerance), absent unforeseeable and extraordinary 
circumstances. The packager must document any such circumstances and 
retain the document in accordance with Sec. 3500.10(e) of this part.
    III.C. Hazard Insurance. The packager shall estimate the cost of 
the minimum amount of hazard insurance that the lender will require 
in this section on the form. Although loan originators are expected 
to provide reliable figures in this section based on their 
experience, no tolerance applies to this section, which means that 
charges may vary without being subject to any tolerance.
    IV. Optional Owner's Title Insurance. The packager shall 
estimate the cost of optional owner's title insurance that the 
borrower may choose to purchase. Although packagers are expected to 
provide reliable figures in this category, no tolerance applies to 
this section, which means that charges may vary without being 
subject to any tolerance.
    V. Options to Pay Settlement Costs and Lower Your Interest Rate. 
Packagers shall explain the borrower's options for paying settlement 
costs in this section by using material that is essentially the same 
as that contained in paragraphs A, B, C and D of this section at 
Appendix F, along with discussing these issues with the borrower, as 
needed. The packager must fill in the chart to demonstrate to the 
borrower how the borrower's chosen interest rate, monthly payments, 
and settlement costs compare to a loan of the same size with lower 
and higher interest rates. The completed chart serves as an example 
for the packager of how to fill out the categories. Packagers shall 
use figures relevant to the borrower's transaction.
    VI. Additional Loan Terms. Packagers shall indicate whether the 
mortgage loan is subject to a prepayment penalty and whether the 
loan has a balloon payment due at the conclusion of the loan term. 
If there is a prepayment penalty, the packager shall advise the 
borrower that he or she is entitled to a copy of the prepayment 
penalty terms upon request. For Adjustable Rate Mortgage Loans, 
packagers must indicate the interest rates and adjustment terms of 
the adjustable rate mortgage loan.
    VII. Guaranteed Mortgage Package Agreement. This section must be 
signed by an authorized agent of the packager and the borrower to 
become a binding contract for the guaranteed mortgage package at the 
guaranteed mortgage package price. After acceptance by the borrower, 
non-lender packagers must ensure that the lender signs the GMPA 
agreeing to provide the loan included in the guaranteed mortgage 
package.

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Attachment A-1 instructions

    Attachment A-1. The packager shall indicate in the chart (either 
yes or no) whether specific services are anticipated to be included 
in the guaranteed mortgage package price, such as the pest 
inspection, lender's title insurance, appraisal, and credit report.
[GRAPHIC] [TIFF OMITTED] TP29JY02.005

BILLING CODE 4210-27-C

    Dated: July 5, 2002.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.

Appendix to FR-4727 Proposed Rule Regulatory Flexibility Analysis

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

    The following Regulatory Flexibility Analysis is Chapter 5 of 
the rule's Economic Impact Analysis, which is available for public 
inspection.

Summary of the Rule's Benefits and Impacts on Small Businesses

    The proposed RESPA rule offers a dual approach to problems in 
the settlement market: A new, simplified GFE combined with 
tolerances on final settlement costs and a new method for reporting 
wholesale lender payments in broker transactions; and a guaranteed 
cost approach based on packaging of settlement services. This 
chapter provides a summary of benefits, costs, transfers, 
efficiencies, and market impacts of these two approaches, 
highlighting the effects on small businesses. Section I discusses 
the new GFE approach while Section II discusses the guaranteed cost 
approach, or packaging. The chapter also summarizes alternative 
approaches that HUD considered that potentially impacted small 
businesses. The format in this chapter is to list the major 
findings; additional details about the new GFE approach and 
packaging are available in Chapters 3 and 4, respectively.

I. New GFE Approach

    The main benefits, costs, transfers, and market impacts of the 
new GFE approach are outlined below, along with the specific impacts 
on small businesses. Since most brokers and settlement service 
providers are small businesses, the main impacts of the new GFE 
approach on these entities are highlighted below in subsections I.C, 
I.D and I.F.

A. Shopping Benefits

    The new GFE approach will improve consumer shopping for 
mortgages, which will result in better mortgage products at lower 
prices for consumers.
     The new GFE format in the proposed 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, which contains a long list of individual charges that 
encourages fee proliferation and junk fees, and can often overwhelm 
and confuse consumers.
     The new GFE contains a statement that clarifies the 
role that the originator plays in the loan process. It states, for 
example, that the originator does not distribute the loan products 
of all funding sources, that the originator does not guarantee the 
best loan terms, and that the consumer should shop. This will put 
all borrowers on notice that they should protect their interests by 
shopping.
     The new GFE also makes cost estimates more certain, by 
requiring that loan originators adhere to amounts reported on the 
GFE for major cost categories (such as origination fees), and on 
additional cost categories give estimates subject to a 10% upper 
limit, or tolerance. This will reduce the all too frequent problem 
of borrowers being surprised by additional costs at settlement.
     The new GFE will better inform consumers about their 
financing choices by requiring that lenders explain the different 
interest rate and closing cost options available to consumers. For 
example, consumers will fully understand the trade-offs between 
reducing their closing costs and increasing the interest rate on the 
mortgage.
     Altogether, the simplicity and certainty offered by the 
new GFE should improve comparison shopping for mortgage loans, 
reduce interest rates and settlement prices for borrowers, and 
eliminate surprises at settlement. There will be less of the sub-
optimal consumer shopping that often characterizes today's mortgage 
market. In addition, originators will be less able to take advantage 
of uninformed shoppers.

B. Summary of Estimated Benefits, Costs, Transfers, and Efficiencies

    Chapter 3 provided estimates of the magnitude of the benefits, 
costs, transfers, and efficiencies. Transfers totaled $6.3 billion 
to borrowers, with $4.5 billion coming from originators and $1.8 
billion from third party settlement service providers. In addition 
to these transfers, there are efficiency gains: Borrowers realize 
$826 million in efficiency gains from less time spent shopping; and 
loan originators and third party settlement service providers 
experience $1.630 billion in efficiency gains, some or all of which 
have the potential to be passed through to borrowers through 
competition. Costs to originators rise by approximately $250-$275 
million. These estimates are explained further below. While they are 
based on specific assumptions (see Chapter 3), they provide a sense 
of the overall effects of the new GFE approach.
     Under one set of assumptions, Chapter 3 estimates that 
$7.5 billion of the $15 billion in total yield premium payments 
(YSPs) is not passed through to borrowers to reduce closing costs. 
If the proposed rule results in half of this $7.5 billion being 
recaptured by borrowers, then the annual impact would be $3.75 
billion. While this figure will vary depending on specific 
assumptions, it provides a sense of how large the effects of the 
proposed rule could be on the return of YSPs to borrowers as reduced 
closing costs.
     Direct origination fees are estimated to be $15 billion 
(which when added to the $15 billion in YSPs results in total 
originator compensation of $30 billion). In addition to the $3.75 
billion in YSPs recaptured by borrowers, it is also assumed that 
improved shopping enables borrowers to capture five percent (or 
$0.75 billion) of originators' direct origination fees of $15 
billion.
     Chapter 3 estimates that $18 billion in third-party 
fees would be subject to increased price pressure as a result of the 
imposition of tolerances and expanded shopping by originators. While 
it is difficult to estimate how much tolerances and expanded 
originator shopping will reduce the $18 billion, this figure 
provides a base on which this effect will be felt. The estimates 
reported below assume that third-party fees would fall by 10 
percent, or $1.8 billion.
     It was estimated that borrowers would save $6.3 billion 
in annual settlement

[[Page 49171]]

charges.\1\ This $6.3 billion represents transfers to borrowers from 
higher priced producers, with $4.5 billion coming from originators 
\2\ and $1.8 billion from third party settlement service providers. 
While these figures will vary depending on specific assumptions, it 
provides a sense of how large the effects of the proposed rule could 
be on settlement charges to borrowers.
---------------------------------------------------------------------------

    \1\ As explained in Section IV.C of Chapter 3, the $6.3 billion 
represents about 13 percent of the baseline settlement costs, which 
include origination fees and selected third party costs (appraisal, 
credit report, tax service and flood certificate and title insurance 
and settlement agent charges). Survey, pest inspection, and mortgage 
insurance are not included, as they are not required on all loans. 
Thus, the $6.3 billion may be a conservative figure. This assumes, 
of course, that all the other assumptions underlying this scenario 
are correct.
    \2\ The $3.75 billion in YSPs recaptured by borrowers plus the 
$0.75 billion in reduced direct origination fees give $4.5 billion 
in transfers to borrowers from originators.
---------------------------------------------------------------------------

     In addition to the transfers, there are several 
efficiencies associated with the GFE. Borrowers realize $826 million 
savings in time spent shopping for loans and third party services. 
Loan originators save $1.280 billion in time spent with shoppers, in 
efforts spent seeking out vulnerable borrowers, and from the 
substitution of more efficient for less efficient originators. Third 
party settlement service providers save $350 million in time spent 
with shoppers and from the substitution of more efficient for less 
efficient third party settlement service providers. Some or all of 
the $1.280 billion and $350 million in efficiency gains have the 
potential to be passed through to borrowers through competition.
     Costs to originators rise by $226 million if it takes 
10 extra minutes to handle the forms and by $26 to $52 million to 
make third party arrangements in response to tolerances. (See 
``Costs and other Impacts'' below.)
     As discussed throughout this chapter, the benefit, 
cost, transfer, and efficiency estimates are based on specific 
assumptions. The estimates provide a sense of the overall net 
benefits of the proposed new GFE approach to consumers. The rest of 
this summary highlights the main impacts of the new GFE approach.

C. New Treatment of Wholesale Lender Payments and Impacts on Brokers

    An important feature of the new GFE approach is that it 
addresses the problem of lender payments to mortgage brokers.
     The proposed rule ensures that in brokered 
transactions, borrowers receive the full benefit of the higher price 
paid by wholesale lenders for a loan with an above-par interest 
rate, that is, yield spread premiums will go directly to the 
borrower. 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 directly 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.
     Similarly, the proposed rule ensures that in brokered 
transactions, consumers who choose to pay discount points receive 
the full market benefit in terms of lower mortgage interest rates.
     Under these new rules, brokers must report the total 
origination fees they receive on the GFE and the HUD-1--rather than 
their origination fees net of any yield spread premium they receive. 
Thus, the new GFE clarifies what brokers are receiving for loan 
origination.
     Most brokers are small businesses. The above changes in 
the method for reporting wholesale lender payments on the GFE and 
HUD-1 will reduce the incomes of those brokers who have been 
overcharging consumers by receiving a combination of origination 
fees and yield spread premium payments that is greater than that 
suggested by competitive markets. The new GFE will clearly indicate 
both (a) the broker's total origination fee received and (b) the net 
upfront origination fee to the borrower, after reduction for any 
yield spread premium that the wholesale lender pays the borrower. 
Consumers will have full information about broker fees, which will 
allow them to comparison shop and pay lower fees, compared with the 
situation they face in today's market.
     As explained in the proposed rule, it is not practical 
to implement such a system for lenders, which means that lenders can 
continue to report their origination fees on a net basis if they so 
choose.\3\ However, HUD has designed the new GFE form so that it 
reduces any anti-competitive effects between brokers and lenders. 
For purposes of comparing lender and broker offers, the new GFE 
focuses the borrower's attention on the right number, which is the 
subtotal after reducing total origination fees by any lender payment 
to the borrower (i.e. yield spread premium). This should reduce any 
anti-competitive impacts of the proposed rule on small businesses.
---------------------------------------------------------------------------

    \3\ This also includes those brokers who have wholesale lines of 
credit.
---------------------------------------------------------------------------

     Furthermore, it is anticipated that market competition 
will increase the likelihood that yield spread premium payments will 
be passed through to borrowers throughout the market, in lender 
(i.e., non-broker) as well as broker transactions. The information 
that consumers gain from broker transactions concerning the money 
back on premium loans should make consumers act competitively with 
respect to premiums on similar loans from non-brokers.
     Brokers as a group will remain highly competitive 
actors in the mortgage market. Chapter II discusses the factors that 
will continue to keep brokers competitive with other lenders. As 
noted above, HUD has also designed the GFE to lessen any anti-
competitive effects from the different reporting requirements of 
lenders and brokers on the new GFE. Therefore, there is no evidence 
to suggest that there would be any major anti-competitive impact on 
the broker industry as a whole from the new GFE provisions in the 
proposed rule.
     Rather, the main impact on brokers (both small and 
large) of the proposed new treatment of payments by wholesale 
lenders would 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. As noted above, 
it is anticipated that market competition, under this new GFE 
approach, will have a similar impact on those lenders (non-brokers) 
who have been overcharging consumers through a combination of high 
yield spread premiums and origination costs.
     As noted above, according to some estimates $7.5 
billion in YSPs is not passed through to borrowers to reduce closing 
costs. While this figure will vary depending on specific 
assumptions, it provides a sense of how large the effects of the 
proposed rule could be on the return of YSPs to borrowers as reduced 
closing costs.

D. Lower Settlement Service Prices

    In addition to reducing originator fees, the tighter tolerances 
of the new GFE approach would result in lower prices for third party 
settlement services. Settlement service providers who are small 
businesses would be impacted by any reduction in settlement service 
prices arising from the tighter tolerances on settlement fees.
     The imposition of tolerances on fees will encourage 
originators to seek discounts and cut settlement service prices. The 
proposed rule clarifies that loan originators can make arrangements 
with their third party settlement service providers (appraisers, 
settlement service agents, etc.) to lower prices for their customers 
(i.e., borrowers), provided these prices or any fees on the GFE are 
not ``marked up'' or ``up charged.''
     Section V of Chapter 3 examines the magnitude of third-
party fees that would be subject to increased price pressure as a 
result of the imposition of tolerances and expanded shopping by the 
originator. As noted above, $18 billion in third party fees would 
fall into this category. While it is difficult to estimate how much 
tolerances and expanded originator shopping will reduce the $18 
billion, this figure provides a base on which this effect will be 
felt. The estimates reported above under ``Summary of Estimated 
Impacts'' assumed that third-party revenues would fall by $1.8 
billion, or 10 percent.
     It is estimated that small settlement service providers 
would account for $1.3 billion of the $1.8 billion decline in third 
party revenues. But as discussed in Chapter 3, this estimate is 
subject to variation.

E. Costs and Other Impacts

    Chapter 3 identifies several factors might impact the costs of 
handling the new GFE form. As noted below, many of these factors 
tend to offset each other with end result being that annual 
additional costs appear to be small.
     There are some direct costs to originators from 
complying with the GFE portion of the proposed rule. These do not 
appear to be very large. While the new GFE format requires less 
itemization than today's GFE, the HUD-1, with its detailed 
itemization, remains essentially the same. Originators and closing 
agents will have to expend some minimal effort in explaining to 
consumers the cross walk between the new streamlined GFE and the 
more detailed HUD-1. There is a new page of the GFE showing interest 
rate

[[Page 49172]]

alternatives, which should not impose much additional costs, given 
that most originators do that in some form today. Annual costs to 
originators rise by $226 million if it takes 10 extra minutes to 
handle the new GFE form. Chapter 3 also estimates that first-year 
startup costs could range from $55-$95 million.
     There will be some costs to originators from the need 
for additional preliminary underwriting in order to generate new 
GFEs. While this underwriting is already occurring for full 
applications today, it is expected that some borrowers under the new 
GFE will get multiple applications and use them to shop. However, it 
is difficult to estimate how many additional GFEs and preliminary 
underwritings will result under the new GFE scheme. In addition, as 
discussed in Chapter 3, the number of applicants going to full 
underwriting could decline under the proposed rule.
     The imposition of zero and 10 percent tolerances on 
fees will require lenders to take some actions that will increase 
their costs. For example, arrangements will have to be made with 
third party settlement service providers, in order for the 
originator to come up with estimates that can be delivered within 
the 10 percent tolerance. As noted above, these are estimated to 
range from $26 to $52 million.

F. Small Business Impacts--A Summary and Alternatives Considered

    Chapter 3 estimates that $3.5 billion of the $6.3 billion in 
transfers would come from small businesses. The above summary 
bullets highlight the mechanisms in which this will happen. Improved 
consumer shopping among originators and more aggressive competition 
by originators for settlement services will lead to price 
reductions. 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. Of the 
$3.5 billion impact on small businesses, it is estimated the $2.2 
billion will come from small originators and $1.3 billion, from 
small settlement service providers.
    Market impacts on different types of businesses are discussed 
throughout Chapter 3, as well as in the summary bullets under C and 
D above. Chapter 3 also discussed alternative policies that HUD 
considered when developing the rule. Examples of alternatives that 
would impact small businesses include:
     One alternative considered was to place the interest 
rate dependent payment at the bottom of the form rather than 
directly after the origination charge. This was rejected since an 
unsophisticated borrower might misinterpret the broker's higher 
origination charge (relative to a lender who can net the yield 
spread premium out of the origination charge rather than list it 
separately as a lender payment to the borrower) as indicating that 
the broker's loan is more costly.
     The Department considered placing the division of the 
origination charge into broker and lender portions on the front page 
of the GFE but rejected that idea since the information was not 
useful in bottom line comparison shopping. Loans with identical 
origination charges will now have the same numbers presented in the 
origination charge whether originated by a broker or lender.
     The Department considered having zero tolerance on both 
the lender and broker components of the origination charge instead 
of zero tolerance on the total. Zero tolerance on the components 
would have given brokers less flexibility in switching lenders, even 
if the total of the lender and broker fees would remain the same. 
The method selected makes it easier for brokers to switch lenders, 
so long as the total origination charge does not rise.
     The Department considered having different statements 
of the services of the originator. The purpose of this section of 
the GFE is to alert borrowers to shop in order to protect their 
interests. Different statements could favor brokers over lenders, or 
vice versa. The Department adopted the idea that every originator 
would have to deliver the same message, so that every borrower gets 
the same warning and no originator is at a disadvantage in 
delivering the message.

II. Guaranteed Cost Packaging or Packaging

    The main benefits, costs, transfers, and market impacts of the 
guaranteed cost or packaging are outlined below, along with the 
specific impacts on small businesses. Since most brokers and 
settlement service providers are small businesses, the main impacts 
of packaging on these entities are highlighted below in subsection 
II.F.

A. Overview of Packaging Benefits

    First, guaranteed packaging will improve and increase borrower 
shopping for mortgages. Basically, guaranteed packaging reduces the 
loan offer to:a settlement package price, an interest rate, an APR, 
and a PMI premium rate. The package price and the PMI premium has 
zero tolerance, and the interest rate is guaranteed if locked 
(otherwise the rate varies with a market index). In addition, the 
offer is free and, if agreed upon by the borrower, the offer becomes 
a contract that is enforceable. These are all advantages over 
today's process of shopping for mortgages. Economic efficiencies 
result from easier and less time consuming shopping under packaging. 
Borrowers are better informed, shop better, and reach better deals.
    Second, the guaranteed packing approach would remove regulatory 
barriers that are today preventing market competition from reducing 
settlement prices. Under current law, a providers' efforts to enter 
into volume arrangements with settlement service firms may be 
regarded as illegal and restrictions against mark-ups of third party 
costs may impede the packaging of services. Under HUD's proposed 
rule, packagers will be able to enter into cost-reducing, volume-
discount arrangements, and competition among packagers will pass 
these lower costs through to borrowers at mortgage settlement.

B. Summary of Estimated Benefits, Costs, Transfers, and Efficiencies

    Chapter 4 presents estimates of the magnitude of the benefits, 
costs, transfers, and efficiencies associated with packaging. 
Transfers total $10.3 billion to borrowers, with $6.7 billion coming 
from originators and $3.6 billion from third party settlement 
service providers. In addition to these transfers, there are 
efficiency gains: borrowers realize $1.652 billion in efficiencies 
from less time spent shopping and loan originators and third party 
settlement service providers realize $3.410 in efficiency gains, 
some or all of which have the potential to be passed through to 
borrowers through competition. These estimates are explained further 
below. While they are based on specific assumptions (see Chapter 4), 
they provide a sense of the overall effects of packaging.
    While these benefits of packaging are basically similar to the 
benefits of the new Good Faith Estimate approach discussed in 
Section I, it is anticipated that packaging will improve shopping 
and lower settlement costs to an even greater extent than the GFE 
approach. Above, it was estimated that borrowers could save $6.3 
billion in annual settlement costs under the new GFE approach. It is 
anticipated that a system based on packaging alone would lead to 
even greater savings for borrowers, as transfers from firms to 
borrowers will rise by $4 billion for a total of $10.3 billion. 
Originators contribute $6.7 billion of this and third party 
settlement service providers, $3.6 billion. This benefit to 
consumers comes from further reductions in overcharges that 
competition passes on to borrowers. Under this scenario, the final 
savings to the borrower would depend on how the market settles down 
between the two methods of loan origination--the new GFE approach 
and packaging. If it is half and half, borrower gains are slightly 
over $8 billion.
    In addition to the transfers, there are several efficiencies 
associated with packaging (see the summary in Section VII in Chapter 
4). Borrowers realize $1.652 billion savings in time spent shopping 
for loans and third party services. Loan originators save $2.710 
billion in time spent with shoppers, in efforts spent seeking out 
vulnerable borrowers, and from the substitution of more efficient 
for less efficient originators. Third party settlement service 
providers save $700 million in time spent with shoppers and from the 
substitution of more efficient for less efficient third party 
settlement service providers. Some or all of the $2.710 billion and 
$700 million in efficiency gains have the potential to be passed 
through to borrowers through competition.
    The simplification and other advantages of the new GMPA will 
lead to lower costs than under the new GFE. It is assumed that costs 
under the GMPA will be the same as today's GFE. As discussed in 
Chapter 4, one area of uncertainty about packaging and the new GMPA 
concerns the index that is used to ensure that changes in the 
interest (note) rate reflect changes in the market. Until the exact 
mechanism is selected, it is difficult to determine the effect of 
the index on packaging.
    Concerns have been expressed about the impacts of the packaging 
approach on small lenders and small service providers. Chapter 4 
estimated that small businesses (i.e., small originators and small 
service providers) would account for $5.9 billion of the $10.3 
billion in transfers. The effects on small businesses are discussed 
below in II.F.

[[Page 49173]]

C. Shopping Benefits

    Packaging offers numerous shopping advantages for consumers, 
compared to today's process of shopping for mortgages. Under 
packaging, borrowers are better informed and better able to 
comparison shop.
     Guaranteed packaging will improve and increase borrower 
shopping for mortgages. Basically, guaranteed packaging reduces the 
loan offer to two numbers (a settlement package price and an 
interest rate), has zero tolerance on the package price, and 
guarantees the interest rate if locked (otherwise the rate varies 
with a market index). In addition, the offer is free and, if agreed 
upon by the borrower, the offer becomes a contract that is 
enforceable. These are all advantages over today's process of 
shopping for mortgages, as well as over the Good Faith Estimate 
approach outlined in Chapter 3.
     The simplified loan offer under packaging does away 
with the proliferation of fees, including junk fees that often 
characterizes today's mortgage offers.
     The packaging agreement eliminates the separate 
reporting of the premium or discount associated with brokered loans. 
This is done to facilitate competition and comparison shopping.
     Economic efficiencies result from easier and less time 
consuming shopping under packaging. Borrowers are better informed, 
shop better, and reach better deals.
     In this case, the main transfers will be from 
originators who are charging above market prices to borrowers who 
are more informed and better able to comparison shop (see the $6.7 
billion estimate reported above).

D. Lower Settlement Service Prices

    The packaging approach will result in even lower prices for 
third party settlement services than estimated above for the new GFE 
approach.
     The Section 8 safe harbor will allow greatest 
protection to entities within the package from charges of illegal 
referral fees, kickbacks, and unearned fees. This will free up 
packagers to pursue lower prices for third party services in their 
package without concern that the technique used could be a Section 8 
violation. Competition is substituted for regulation.
     Thus, packaging will result in lower prices paid for 
settlement services, as packagers aggressively seek discounts in 
third-party service prices. A better shopper (the packager) is 
substituted for the borrower as the searcher for third party 
settlement services.
     In addition, there are several efficiencies associated 
with packaging that could lead to lower costs. Under packaging, 
originators may deal with one packager, rather than a whole array of 
third party providers and the packager, who specializes in this 
activity, may be more efficient than the originator.
     Given the likelihood that there will be competition 
among a number of packagers, the lower third party service prices 
will be passed through to borrowers as lower costs for closing a 
loan. In this case, the main transfers will be from settlement 
service providers to borrowers (see the $3.6 billion estimate 
reported above).

E. Impact on Business Operations and Market Structure

    The proposed RESPA rule offers a dual approach to settlement 
market problems--(1) a new, simplified GFE combining tolerances on 
final settlement costs and a new method for reporting wholesale 
lender payments; and (2) a guaranteed cost approach based on 
packaging. Consumers and originators can use either approach, which 
has the advantage of allowing the market determine the best approach 
under a given set of circumstances. While there are reasons to 
expect originators to move toward the packaging approach, it is 
difficult to estimate the share of the market that will ultimately 
fall under packaging, as well as the timing of the move toward 
packaging.
     An uncertainty with respect to the implementation of 
packaging concerns the interest rate index that determines changes 
in mortgage rates for borrowers who are shopping (before they sign 
the guaranteed packaging offer) and for borrowers who choose to 
``float'' rather than ``lock-in'' their interest rate (at the time 
they sign the offer). Packaging depends on lenders finding an 
acceptable interest rate index, or some other mechanism for ensuring 
that any changes in the interest rate reflect overall market 
changes. As noted below, there will likely be some costs associated 
with lenders' guaranteeing that interest rates move only with market 
conditions, depending on the indexing technique chosen.
     As explained in this chapter, packaging could take 
several forms--for example, originators could develop their own 
packages or specialized firms could develop packages, or components 
of packages, which they would then sell them to originators. The 
section on small business below highlights several additional market 
impacts of packaging.

F. Compliance and Other Costs

    The simplification and other advantages of the new Guaranteed 
Mortgage Packaging Agreement (GMPA) will lead to lower costs than 
under the new GFE.
     The GMPA and HUD-1 with packaging will have 
substantially fewer numbers and less detail than the current GFE and 
HUD-1. Only six numbers are required on the first page of the 
Guaranteed Mortgage Packaging Agreement. This will lead to a more 
efficient origination process since less time will be spent by the 
originator and the borrower in deciphering the proliferation of fees 
that now characterizes the GFE and HUD-1.
     Packaging eliminates the reporting of individual fees 
within the package and in so doing permits, in effect, average cost 
pricing. This reduces costs because firms do not have to keep up 
with an itemized, customized cost for each borrower.
     As mentioned above, there could be some additional 
costs associated with lenders having to use an as yet undetermined 
index in order to guarantee market interest rates (a) during the 
time that the consumer is shopping (after the packager has made the 
offer) and (b) during the time between the offer being accepted and 
final closing for those borrowers who choose to ``float'' rather 
than ``lock-in'' their interest rate. The proposed rule asks for 
comments on how the interest rate index could be determined.
     Originators make a free offer that is also guaranteed. 
This will require additional information gathering and preliminary 
underwriting to the extent that borrowers seek multiple offers, 
beyond what they do in today's market. There could also develop some 
degree of uncertainty and costs associated with originator's making 
guaranteed offers based on preliminary underwriting, particularly 
for those borrowers who typically require extensive underwriting. As 
explained in Chapter 4, however, this would simply result in the 
originator making a new loan offer or sending their customer 
elsewhere.
     There will be some costs associated with the 
arrangements that packagers have to make with third party settlement 
service providers, in order for the packager to ensure that there 
would be no change in the pre-arranged third party prices. But as 
discussed in Chapter 4, other efficiencies resulting from packagers 
dealing with third party providers are expected to offset these 
costs.

G. Summary of Small Business Impacts and Alternatives Considered

    As noted above, concern has been expressed about the market 
impacts of packaging, particularly as they relate to small 
businesses. The main findings regarding the effects of packaging on 
small businesses are as follows:
     The nature of locally-provided, third party services 
(such as appraisal, survey, pest inspection, closing agents) could 
remain the same under packaging--the main change will involve who 
purchases these services. Packagers will be the new purchasers of 
these services, and third party service prices will be lower.
     Under packaging, those third party service providers 
(both large and small) who are currently charging high prices for 
their settlement services would experience reductions in the prices 
of their services. To the extent that third party settlement service 
providers happen to be small businesses, they would, of course, 
experience a reduction in their revenues. Of the $3.6 billion in 
price reductions for third party services, the small business share 
is $2.5 billion.
     It is estimated that small businesses (i.e., small 
originators and small service providers) would account for $5.9 
billion of the $10.3 billion in transfers to consumers noted above--
$3.4 billion of this would come from small originators and $2.5 
billion would come from small settlement service providers. As in 
the case with the new GFE approach, firms suffering losers under 
packaging are originators and third party providers who are 
currently charging high prices for their services.
     Still, there is no strong reason to expect that 
locally-based small businesses could not continue providing third 
party settlement services under packaging, albeit at possibly lower 
prices and revenues, as noted above. Services that are local in 
nature (such as appraisals) will continue to be demanded under the 
packaging approach. Services that are national in nature and 
characterized by economies of scale (such as credit reporting)

[[Page 49174]]

are already being conducted by larger firms on a national scale.
     There has also been a concern that small lenders would 
be placed at a disadvantage under packaging because of the ``bulk'' 
buying power of large lenders. While this may be the case, it does 
not have to be. First, there is no evidence of this effect today 
where large lenders can purchase services such as appraisals on a 
``bulk'' basis. Second, if specialized packaging firms develop, it 
seems reasonable to expect them to offer their packages to small 
lenders as well as large lenders. It is difficult to reach firm 
conclusions about the magnitude of the impact on small lenders.
     Brokers, most of whom are small businesses, could 
pursue a number of avenues under packaging. They could develop their 
own package, purchase one from specialized firms, or use the package 
offered by the wholesale lender they are dealing with. Under 
packaging, brokers will continue their main function of reaching the 
consumer, just as they do today. This customer outreach function is 
not going to go away with packaging.
     Furthermore, Chapter 2 of this Economic Analysis 
reports that technology improvements and other recent changes in the 
mortgage market have probably increased the competitive position of 
brokers relative to other originators. These underlying strengths of 
brokers are also not going to disappear with packaging.
    Chapter 4 discusses alternative policies that were considered 
with respect to packaging. The Department considered writing this 
proposed rule as if only lenders could package. This idea was 
rejected in favor of allowing anyone to package so long as the 
package contains a loan. This further affords smaller firms the 
opportunity to offer their services and benefit from a packaging 
environment.
    Under packaging, there is no separate treatment of yield spread 
premiums or discounts and no special rules for brokers. Thus, all 
originators present their loans the same way and all the market's 
competitive forces are applied to everything in the package 
regardless of the type of originator. No broker, or any other kind 
of originator for that matter, is at a competitive disadvantage.

References

    Bradley, Donald, S., and Peter Zorn. 1996. ``Fear of Homebuying: 
Why Financially Able Households May Avoid Ownership.'' Secondary 
Mortgage Markets.
    Forrester Research, Inc., 2001. Resucitating Mortgage Lending, 
(May).
    Getter, Darryl, E. 2002. ``Credit-Constrained or Less 
Creditworthy?'' Unpublished Paper.
    Gramlich, Edward, M. 2002. Remarks before the National Community 
Reinvestment Coalition, 11th Annual Conference, (March).
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``Predatory Mortgage Lending Practices: Abusive Used of Yield Spread 
Premiums'' before U.S. Senate Committee on Banking, Housing, and 
Urban Affairs. (January 8).
    Jackson, Howell, E., and Jackson Berry. 2002. ``Kickbacks or 
Compensation: The Case of Yield Spread Premiums.'' Unpublished 
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Posner and Mita Nambiar), (February).
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``Predatory Mortgage Lending Practices: Abusive Used of Yield Spread 
Premiums'' before U.S. Senate Committee on Banking, Housing, and 
Urban Affairs, (January 8).
    Scheessele, Randall M. 2002. Black and white Disparities in 
Subprime Mortgage Refinance Lending. Working Paper No. HF-014. 
Office of Policy Development and Research, U.S. Department of 
Housing and Urban Development, (April).
    U.S. Department of Housing and Urban Development and Federal 
Reserve Board. 1998. Joint Report to the Congress Concerning Reform 
of the Truth and Lending Act and the Real Estate Settlement 
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Banking, Housing, and Urban Affairs. Unpublished Paper.
[FR Doc. 02-18960 Filed 7-26-02; 8:45 am]
BILLING CODE 4210-27-P