[Federal Register Volume 73, Number 51 (Friday, March 14, 2008)]
[Proposed Rules]
[Pages 14030-14124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 08-1015]



[[Page 14029]]

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Part III





Department of Housing and Urban Development





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24 CFR Parts 203 and 3500



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

Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / 
Proposed Rules

[[Page 14030]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 203 and 3500

[Docket No. FR-5180-P-01]
RIN 2502-AI61


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

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule presents HUD's proposal to simplify and 
improve the disclosure requirements for mortgage settlement costs under 
the Real Estate Settlement Procedures Act of 1974 (RESPA), to protect 
consumers from unnecessarily high settlement costs. This proposed rule 
takes into consideration: discussions during HUD's RESPA Reform 
Roundtables held in July and August 2005; public comments in response 
to HUD's July 29, 2002, proposed rule that addressed RESPA reform; and 
comments received and views expressed through congressional hearings; 
meetings with affected parties; and consultation with other federal 
agencies, including the Small Business Administration Office of 
Advocacy.
    HUD's objective in proposing these revisions is to protect 
consumers from unnecessarily high settlement costs by taking steps to: 
Improve and standardize the Good Faith Estimate (GFE) form, to make it 
easier to use for shopping among settlement service providers; ensure 
that page one of the GFE provides a clear summary of the loan terms and 
total settlement charges so that borrowers will be able to use the GFE 
to comparison shop among loan originators for a mortgage loan; provide 
more accurate estimates of costs of settlement services shown on the 
GFE; improve disclosure of yield spread premiums to help borrowers 
understand how they can affect their settlement charges; facilitate 
comparison of the GFE and the HUD-1/HUD-1A Settlement Statements (HUD-1 
settlement statement or HUD-1); ensure that at settlement borrowers are 
made aware of final loan terms and settlement costs, by reading and 
providing a copy of a ``closing script'' to borrowers; clarify HUD-1 
instructions; clarify HUD's current regulations concerning discounts; 
and expressly state when RESPA permits certain pricing mechanisms that 
benefit consumers, including average cost pricing and discounts, 
including volume based discounts.

DATES: Comment Due Date: May 13, 2008.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule. There are two methods for comments to be submitted 
as public comments and to be included in the public comment docket for 
this rule. Regardless of the method selected, all submissions must 
refer to the above docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 Seventh Street, SW., Room 10276, 
Washington, DC 20410-0001.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows 
commenters maximum time to prepare and submit comments, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule. No Facsimile Comments. Facsimile (FAX) comments are not 
acceptable.

    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available, without 
charge, for public inspection and copying between 8 a.m. and 5 p.m. 
weekdays at the above address. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the public 
comments must be scheduled by calling the Regulations Division at (202) 
708-3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number through TTY by calling the 
toll-free Federal Information Relay Service at (800) 877-8339. Copies 
of all comments submitted are available for inspection and downloading 
at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Ivy Jackson, Director, or Barton 
Shapiro, Deputy Director, Office of RESPA and Interstate Land Sales, 
U.S. Department of Housing and Urban Development, 451 Seventh Street, 
SW., Room 9158, Washington, DC 20410; telephone number (202) 708-0502 
(this is not a toll-free number). For legal questions, contact Paul S. 
Ceja, Assistant General Counsel for GSE/RESPA, Joan L. Kayagil, Deputy 
Assistant General Counsel for GSE/RESPA or Rhonda L. Daniels, Attorney-
Advisor for GSE/RESPA, Room 9262; telephone number (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 and Principles

    The process for disclosing settlement costs in the financing or 
refinancing of a home is regulated under RESPA, 12 U.S.C. 2601-2617. 
HUD seeks to make improvements to its regulations implementing RESPA 
(24 CFR part 3500), to make the process clearer and more useful and 
ultimately less costly for consumers. The mortgage industry has changed 
considerably since RESPA was enacted in 1974, and the regulations 
implementing RESPA's original disclosure requirements are no longer 
adequate.
    The settlement costs associated with a mortgage loan are 
significant. In the case of purchase transactions, these costs can 
become an impediment to homeownership, particularly for low- and 
moderate-income households. HUD's current RESPA rules do not facilitate 
shopping or competition to lower these costs. HUD estimates that with 
the changes proposed to its RESPA regulations in this rulemaking, 
settlement costs will be lowered by $6.5 to $8.4 billion annually, with 
an average savings of $518 to $670 per transaction.
    RESPA's purposes include the provision of effective advance 
disclosure of settlement costs and elimination of practices that tend 
to unnecessarily increase the costs of settlement services. Similarly, 
the Administration is committed to extending homeownership 
opportunities. HUD's regulatory reform and enforcement efforts for 
RESPA

[[Page 14031]]

remain guided by the following principles:
    1. Borrowers should receive loan terms and 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. Costs should be disclosed and should be as firm as possible to 
avoid surprise charges at settlement;
    3. Many of the current problems arise from the complexity of the 
mortgage loan settlement process. The process can be improved with 
simplification of disclosures and better borrower information;
    4. Increased shopping by borrowers will lead to greater pricing 
competition, so that market forces will lower prices and lessen the 
need for regulatory enforcement;
    5. The key final terms of the loan a borrower receives should be 
disclosed to the borrower in an understandable way at closing; and
    6. HUD will continue to vigorously enforce RESPA to protect 
borrowers and ensure that honest settlement service providers can 
compete for business on a level playing field.

II. RESPA Overview

    Congress enacted the Real Estate Settlement Procedures Act of 1974 
(Pub. L. 93-533, 88 Stat. 1724, 12 U.S.C. 2601-2617) after finding that 
``significant reforms in the real estate settlement process are needed 
to ensure that consumers throughout the Nation are provided with 
greater and more timely information on the nature and costs of the 
settlement process and are protected from unnecessarily high settlement 
charges caused by certain abusive practices * * *.'' (12 U.S.C. 
2601(a)). 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 insure the payment of real 
estate taxes and insurance; and
    ``(4) In significant reform and modernization of local 
recordkeeping of land title information.'' (12 U.S.C. 2601(b)).

    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.\1\ The term ``federally 
related mortgage loan'' is broadly defined to encompass virtually all 
purchase money and refinance mortgages.\2\
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    \1\ ``Settlement services'' include ``* * * 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). The term is further defined at 24 
CFR 3500.2.
    \2\ The term ``federally related mortgage loan'' generally 
includes a loan that both: (i) Is ``secured by a first or 
subordinate lien on residential real property (including individual 
units of condominiums and cooperatives) designed principally for the 
occupancy of from one to four families''; and (ii) is ``made in 
whole or in part by any lender the deposits or accounts of which are 
insured by any agency of 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 ``is made * * * or insured, guaranteed, 
supplemented, or assisted in any way, by [HUD] or any other officer 
or agency of the Federal Government or * * * in connection with a 
housing or urban development program administered by [HUD]'' or 
other federal officer or agency; or ``is intended to be sold * * * 
to [Fannie Mae, Ginnie Mae, Freddie Mac], or a financial institution 
from which it is to be purchased by [Freddie Mac]; or is made in 
whole or in part by any creditor * * * who makes or invests in 
residential real estate loans aggregating more than $1,000,000 per 
year * * *.'' 12 U.S.C. 2602(1).
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    Section 4(a) of RESPA (12 U.S.C. 2603(a)) 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 law 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 * * *'' (Id).
    Section 5 of RESPA (12 U.S.C. 2604) requires the Secretary to 
prescribe a Special Information Booklet for borrowers. Sections 5(c) 
and (d) of RESPA require each lender to provide a Good Faith Estimate 
(GFE), as prescribed by the Secretary, within 3 days of loan 
application, and 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 * * *.''
    In 1990, language was added in Section 6 of RESPA (12 U.S.C. 2605) 
to require certain disclosures to each borrower, both at the time of 
loan application and during the life of the loan, about the servicing 
of the loan.
    Section 8(a) of RESPA (12 U.S.C. 2607(a)) prohibits persons from 
giving and 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) of RESPA prohibits persons 
from giving and from 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) 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 
Administrator of Veterans' Affairs, the Federal Home Loan Bank 
Board,\3\ 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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    \3\ The Federal Home Loan Bank Board (FHLBB) was abolished 
effective October 8, 1989, by the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA) (Pub. L. 101-73, 103 
Stat. 183). Its successor agency, the Office of Thrift Supervision, 
Department of the Treasury, assumed the FHLBB's regulatory 
functions. 12 U.S.C. 1462a(e).
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    Section 9 of RESPA (12 U.S.C. 2608) forbids any seller of property 
from requiring, directly or indirectly, buyers to purchase title 
insurance covering the property from any particular title company. 
Section 10 of RESPA (12 U.S.C. 2609) limits the amounts that lenders or 
servicers may require borrowers to deposit in escrow accounts, and 
requires servicers to provide borrowers with both initial and annual 
escrow account statements. Section 12 of RESPA (12 U.S.C. 2610) 
prohibits lenders and loan servicers from imposing any fee or charge on 
any other person for the preparation and submission of the uniform 
settlement statement required under Section 4 of RESPA or the escrow 
account statements required under Section 10(c) of RESPA, or for any 
statements required by the Truth in Lending Act (TILA).
    Section 18 of RESPA (12 U.S.C. 2616) provides that the Act does not 
annul, alter, affect, or exempt any person from complying with the laws 
of any State with respect to settlement practices,

[[Page 14032]]

``except to the extent that those laws are inconsistent with any 
provision of [RESPA], and then only to the extent of the 
inconsistency.'' Section 18 further authorizes the Secretary to 
determine whether such inconsistencies exist, but provides that the 
Secretary may not determine a State law to be inconsistent with RESPA 
if the Secretary determines the State law gives greater protection to 
consumers.
    Section 19 of RESPA (12 U.S.C. 2617), among other provisions, 
authorizes the Secretary to seek to achieve the purposes of RESPA by 
prescribing regulations, making interpretations, and granting 
reasonable exemptions for classes of transactions.

III. Overview of HUD's Efforts Since 2002

    On July 29, 2002 (67 FR 49134), HUD issued a proposed RESPA reform 
rule ``Real Estate Settlement Procedures Act (RESPA); Simplifying and 
Improving the Process of Obtaining Mortgages to Reduce Settlement Costs 
to Consumers'' (2002 Proposed Rule) that would have provided for a 
revised GFE that would have simplified and standardized estimated 
settlement cost disclosures to make such estimates more reliable, as 
well as to prevent unexpected charges at settlement. In addition, the 
2002 Proposed Rule would have modified mortgage broker compensation 
disclosure requirements and would have provided an exemption from 
Section 8 of RESPA for guaranteed packages of settlement services.
    The 2002 Proposed Rule followed several years of consultation with 
industry, consumer, and government groups on changes to RESPA. The 2002 
Proposed Rule also followed two reports to Congress that examined ideas 
to improve the mortgage loan settlement process: The 1998 joint report 
by HUD and the Board of Governors of the Federal Reserve (Federal 
Reserve or the Board) on reform of RESPA and the Truth in Lending Act; 
and the 2000 HUD-Treasury Report on Predatory Lending. Both of these 
reports are described in more detail in the 2002 Proposed Rule (see 67 
FR at 49143-6).
    In response to the 2002 Proposed Rule, HUD received over 40,000 
comments, of which 400 contained in-depth discussions of various issues 
raised by the proposal. Comments were submitted by real estate, 
mortgage broker, banking, mortgage lending, financial services, and 
title industry trade groups; consumer advocacy organizations; mortgage 
companies; settlement service providers; banks; credit unions and 
related organizations; State agencies; Members of Congress; lawyers; 
and other concerned persons.
    Generally, the extensive comment letters supported the overall 
goals of the proposal, but disagreed with or expressed reservations 
concerning specific aspects of the proposal. For example, some lender 
organizations (including the Mortgage Bankers Association) strongly 
supported the packaging proposal, while the National Association of 
Realtors supported the GFE changes. Consumer advocacy organizations 
(including AARP and the National Consumer Law Center) largely supported 
the mortgage broker compensation disclosure changes, the other GFE 
changes; and, subject to some exceptions, the packaging proposal. 
Several industry organizations supported better disclosure of total 
mortgage broker compensation. On the other hand, the National 
Association of Mortgage Brokers opposed HUD's proposed approach to 
disclosing the yield spread premium as part of the total mortgage 
broker compensation, and the American Land Title Association opposed 
HUD's packaging proposal and offered a two-package approach as an 
alternative.
    In response to the considerable and varied comments from the 
public, as well as from other federal agencies and Congress, the 
Secretary withdrew the proposed rule in early 2004. At that time, the 
Secretary committed HUD to gather additional information about 
settlement service costs and the process of obtaining mortgages, as 
well as to engage in outreach to Congress, members of potentially 
affected industries, consumers, and other federal agencies, before 
proceeding with any proposed changes related to HUD's RESPA 
regulations.
    In June 2004, in preparation for outreach to the industry and 
consumer groups, HUD began consulting with its federal agency partners, 
including the Small Business Administration (SBA) Office of Advocacy, 
on RESPA reform. These meetings continued through 2005. In Spring 2005, 
HUD also consulted with Members of Congress and congressional staff on 
RESPA reform.
    After these initial consultations, in July and August 2005, HUD 
held a series of seven consumer and industry roundtables both at HUD 
Headquarters in Washington, DC, and jointly with the SBA Office of 
Advocacy in Chicago, Los Angeles, and Fort Worth. As discussed in the 
public notice announcing the roundtables (70 FR 37646, June 29, 2005), 
in selecting participants for the roundtables, HUD sought a cross-
section of representatives of consumer advocacy organizations, all 
segments of the settlement services industry, State mortgage industry 
regulators, and other interested persons who had analyzed the 2002 
Proposed Rule or had offered alternative proposals for HUD's 
consideration. Over 150 companies, organizations, and other persons 
were invited to attend, and 122 of these attended at least one of the 
roundtables.
    At the roundtables, HUD presented an overview of an approach to 
RESPA reform that included revision of the GFE, clarification of the 
yield spread premium disclosure, and the option of providing an 
exemption from the Section 8 provisions prohibiting referral fees, 
kickbacks, and unearned fees to encourage packaging of settlement 
services. After HUD's presentation, participants were encouraged to 
present their views on RESPA reform issues.
    Participants generally agreed that HUD should pursue revision of 
the GFE. Many participants stated that the GFE should reflect the HUD-1 
settlement statement, so that borrowers could better compare the GFE to 
the HUD-1. Consumer representatives stated that disclosure of the yield 
spread premium (YSP) is necessary, while mortgage brokers recommended 
that the YSP disclosure be dropped from the GFE. Mortgage broker 
participants noted that lenders are not required to disclose any 
secondary market fees on otherwise identical loans. Mortgage brokers 
expressed concern that focusing on a requirement for more effective 
disclosure of YSPs puts mortgage brokers at a severe disadvantage, as 
compared to lenders, in originating a loan. Lenders maintained that it 
would be impractical for a lender to disclose on the GFE how much a 
lender would earn if or when the loan is sold on the secondary market. 
These concepts also are discussed in more detail in HUD's Real Estate 
Settlement Procedures Act Statement of Policy 2001-1 (66 FR 53052, at 
53256-7, October 18, 2001).
    With respect to packaging, small business representatives asserted 
that a Section 8 exemption for packaging would be harmful to small 
business providers of settlement services because lenders would 
dominate packaging and would extract kickbacks from small businesses in 
exchange for inclusion in a package. Consumer groups opposed packaging 
with a Section 8 exemption on the grounds that the exemption would 
provide a safe harbor for loans with high costs and fees and other 
potentially predatory features. These groups also asserted that there 
would be no way to determine costs and fees for packaged loans for 
purposes of determining compliance with the Truth

[[Page 14033]]

in Lending Act. Lender representatives generally supported packaging 
under a Section 8 exemption as the most efficient method to ensure cost 
savings to consumers, but some indicated that packaging could also be 
delivered with limited Section 8 relief, such as for volume-based 
discounts and average cost pricing.

IV. This Proposed Rule

A. Generally

    Today's proposed rule builds on all of this history and 
specifically recognizes many of the suggestions made at the roundtables 
with respect to the GFE and comparability of the HUD-1. The rule 
proposes a new framework under RESPA that would:
    (1) Improve and standardize the GFE form to make it easier to use 
for shopping among settlement service providers;
    (2) Ensure that page one of the GFE provides a clear summary of 
loan terms and total settlement charges so that borrowers will be able 
to use the GFE to comparison shop among loan originators for a mortgage 
loan;
    (3) Provide more accurate estimates of costs of settlement services 
shown on the GFE;
    (4) Improve the disclosure of yield spread premiums to help 
borrowers understand how they can affect their settlement charges;
    (5) Facilitate comparison of the GFE and the HUD-1/HUD-1A 
Settlement Statements (HUD-1 settlement statement or HUD-1);
    (6) Ensure that at settlement, borrowers are aware of final loan 
terms and settlement costs, by reading and providing a copy of a 
``closing script'' to borrowers;
    (7) Clarify HUD-1 instructions;
    (8) Clarify HUD's current regulations concerning discounts; and
    (9) Expressly state when RESPA permits certain pricing mechanisms 
that benefit consumers, including average cost pricing and discounts, 
including volume-based discounts.
    A detailed description of each aspect of the proposed rule that 
involves these concepts follows in Sections B-E of this preamble.
    This proposal also includes certain technical amendments to the 
current RESPA rules, as set forth below.

B. Legislative Proposals Related to RESPA Reform

    In order to further bolster consumer protection, as well as to 
ensure uniform and consistent enforcement under RESPA, HUD intends to 
seek legislative changes to RESPA that will complement the regulatory 
improvements made in this rule. HUD firmly believes that the proposed 
rule will improve the mortgage loan settlement process through better 
disclosures to consumers, but greater consumer protection can be 
achieved by also strengthening certain statutory disclosure 
requirements and improving the remedies available under RESPA.
    In today's proposed rule, HUD seeks to ensure that consumers are 
provided with meaningful and timely information. While HUD can make 
certain regulatory improvements to the disclosures that will help 
consumers shop for mortgage loans, HUD needs additional statutory 
authority to make further warranted improvements in disclosures that 
will help consumers understand the final terms of the loans and costs 
to which they commit at closing. Moreover, as currently framed, RESPA 
establishes limited and inconsistent enforcement authority, and does 
not provide HUD with any enforcement authority for key disclosure 
provisions. The 1998 joint report by HUD and the Federal Reserve on 
reform of RESPA and the Truth in Lending Act recommended that RESPA be 
amended to provide for more effective enforcement.\4\ In its April 2007 
report on the title insurance industry, the Government Accountability 
Office recommended that Congress consider whether modifications to 
RESPA are needed to better achieve its purposes, including by providing 
HUD with increased enforcement authority.\5\
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    \4\ See Section III of this preamble.
    \5\ Title Insurance: Actions Needed to Improve Oversight of the 
Title Industry and Better Protect Consumers, Government 
Accountability Office, April 2007, GAO-07-401.
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    As part of its efforts to improve the protections provided under 
RESPA, HUD intends to seek statutory modifications that would include 
the following provisions: (1) Authority for the Secretary to impose 
civil money penalties for violations of specific RESPA sections, 
including sections 4 (provision of uniform settlement statement), 5 
(GFE and special information (settlement costs) booklet), 6 
(servicing), 8 (prohibition against kickbacks, referral fees, and 
unearned fees), 9 (title insurance), and portions of 10 (escrow 
accounts), as well as authority for the Secretary and State regulators 
to seek injunctive and equitable relief for violations of RESPA; (2) 
requiring delivery of the HUD-1 to the borrower 3 days prior to 
closing; and (3) a uniform and expanded statute of limitations 
applicable to governmental and private actions under RESPA.
    RESPA does not currently provide HUD with enforcement mechanisms 
for some of the most important consumer disclosures, including the 
section 4 requirements related to provision of the HUD-1, and section 5 
requirements related to provision of the GFE and the special 
information (settlement costs) booklet. HUD believes that a lack of 
enforcement authority and of clear remedies for violations of critical 
sections of RESPA negatively impacts consumers and diminishes the 
effectiveness of the statute. Accordingly, HUD intends to seek 
authority to impose civil money penalties to enforce violations of 
RESPA. In addition to civil money penalty authority, HUD intends to 
seek authority for additional injunctive and equitable remedies for 
violations of RESPA.
    Improving the ability of consumers to shop for the best mortgage 
loan and control settlement costs--using the new GFE form and comparing 
it to the HUD-1 at closing--is a key component of today's proposed 
rule. Additional statutory authority would enable HUD to improve its 
efforts at providing borrowers with necessary and timely information 
about their mortgage loans and other settlement services. Section 4 of 
RESPA currently provides that a borrower may request to inspect the 
HUD-1 the day before settlement, but many borrowers are unaware of this 
right, and the time currently provided to inspect the HUD-1 allows 
little margin for identifying and challenging problematic charges 
before settlement.
    HUD also intends to seek reform of the statute of limitations 
provisions of RESPA. Currently, there are different limitation periods 
depending on which section of the statute is alleged to have been 
violated, and who is pursuing a remedy of the violation. HUD believes 
that enforcement efforts would be enhanced, and the requirements of the 
statute simplified, by standardizing the statute of limitations.

C. Federal Reserve Board Proposed Rule Amending Regulation Z

    On January 9, 2008, the Federal Reserve Board (Board) issued a 
proposed rule that would amend its Regulation Z which implements the 
Truth in Lending Act, 16 U.S.C. 1601, et seq. (73 FR 1672, January 9, 
2008). The proposed rule is intended to accomplish three goals: (1) To 
protect consumers in the mortgage market from unfair, abusive, or 
deceptive lending and servicing practices while preserving responsible 
lending and sustainable homeownership; (2) to ensure that mortgage loan 
advertisements provide accurate and balanced information and

[[Page 14034]]

do not include misleading or deceptive representations; and (3) to 
require earlier mortgage disclosures for non-purchase money mortgage 
transactions which would include mortgage refinancings, closed-end home 
equity loans, and reverse mortgages (73 FR 1672).
    In its proposal, the Board would establish new protections for 
higher-priced mortgages, a newly defined category of loans, and for all 
mortgage loans. The proposed rule contains four key protections for 
higher-priced mortgage loans to prohibit creditors from: (1) Engaging 
in a pattern or practice of extending credit based on the collateral 
without regard to the consumer's ability to repay; (2) making a loan 
without verifying the income and assets relied upon to make the loan; 
(3) imposing prepayment penalties in certain circumstances; and (4) 
making loans without establishing escrows for taxes and insurance (73 
FR 1673).
    The Board also proposes, for all mortgage transactions, to prohibit 
creditors from paying mortgage brokers more than the consumer agreed 
the broker would receive. Specifically, the proposed rule would 
prohibit a creditor from making a payment, ``directly or indirectly, to 
a mortgage broker unless the broker enters into an agreement with a 
consumer'' (73 FR 1725). Further, a creditor payment to a mortgage 
broker could not exceed the total amount of compensation stated in the 
written agreement, reduced by any amounts paid directly by the consumer 
or by any other source (Id).
    In proposing the mortgage broker agreement, the Board recognizes 
HUD's current policy statements and regulatory requirements regarding 
disclosure of mortgage broker compensation and noted that HUD had 
announced its intention to propose improved disclosures under RESPA (73 
FR 1700). The Board stated that it intends that its proposal ``* * * 
would complement any proposal by HUD and operate in combination with 
that proposal to meet the agencies' shared objectives of fair and 
transparent markets for mortgage loans and for mortgage brokerage 
services.''
    HUD believes its proposals regarding the GFE and mortgage broker 
compensation are consistent with those of the Board. As HUD moves 
forward to finalize this rule, it will continue to work with the Board 
to make the respective rules consistent, comprehensive, and 
complementary.

D. Planned Implementation of Final Rule

    Given the significant changes that would be made in its RESPA 
regulations by this proposed rule, the Department intends to include a 
transition period in the final rule. During the 12-month transition 
period, settlement service providers and other persons may comply with 
either the current requirements or the revised requirements of the 
amended provisions. HUD is seeking comments on whether such a 
transition period is appropriate.

E. The GFE and GFE Requirements

    Problems Identified with the Existing GFE. Under RESPA, loan 
originators must provide a GFE of the borrower's settlement costs 
(along with HUD's Special Information Booklet in home purchase 
transactions) at or within 3 days of a mortgage loan application. RESPA 
authorizes HUD to prescribe regulations concerning the GFE, and HUD's 
regulations at 24 CFR 3500.7, along with the suggested format set forth 
in Appendix C to the regulations, constitute the current GFE guidance. 
At the closing, a borrower must receive the Uniform Settlement 
Statement (HUD-1 or HUD-1A), which itemizes final settlement charges to 
borrowers. The regulations at 24 CFR 3500.8-3500.10 and the 
instructions in Appendix A to the regulations specify HUD's 
requirements for the HUD-1/1A.
    HUD believes that the GFE could better facilitate borrowers 
shopping for the best loan. Further, the GFE could better achieve the 
statute's purposes of preventing unnecessarily high settlement costs by 
requiring a more accurate and consistent presentation of costs. The 
regulations do not require that the GFE be given to the borrower until 
after he or she submits a full application to an originator. This can 
result in a borrower paying significant fees before receiving a GFE, 
inhibiting the possibility of shopping beyond the provider with whom 
the applicant first applies. HUD's RESPA regulations require that the 
GFE include a list of charges but they do not prescribe a standard 
form. Consequently, it is virtually impossible to shop and compare the 
charges of various originators and settlement service providers using 
the GFE, because different originators may list different types or 
categories of charges, or may identify specific charges by different 
names, or both. The current regulations also do not require that the 
GFE contain information on the terms of loans, such as the loan's 
interest rate, for purposes of comparison. Further, while the HUD 
Special Information Booklet supplements the GFE, the GFE does not 
provide certain important explanatory information to the borrower 
including, for example, how the borrower can use the document to shop 
and compare loans. The GFE also does not make clear the relationship 
between the closing costs and the interest rate on a loan.
    HUD's current regulations require loan originators to list on the 
GFE the ``amount of or range of'' each charge that the borrower is 
likely to incur in connection with the settlement.\6\ The suggested GFE 
format, found in Appendix C to the regulations, lists 20 common 
settlement services. The suggested format also provides a space for 
listing any other applicable services and charges. These requirements 
have led, in many instances, to a proliferation of charges for separate 
``services'' without any actual increase in the work performed by 
individual settlement service providers.
---------------------------------------------------------------------------

    \6\ 24 CFR 3500.7(a).
---------------------------------------------------------------------------

    The RESPA regulations do not require that the GFE clearly identify 
the total charges of major providers of settlement services, including 
lenders and brokers (loan originators), title agents and insurers 
(title charges), and other third party settlement service providers. 
Without the simplification provided by presenting totals for major 
items, it is difficult for borrowers to know how much they are paying 
for major items, including origination and title related charges, or 
how they can compare loans and select among service providers to get 
the best value.
    The estimated costs on GFEs are frequently unreliable or 
incomplete, or both, and final charges at settlement often include 
significant increases in items that were estimated on the GFE, as well 
as additional surprise ``junk fees,'' which can add substantially to 
the consumer's ultimate closing costs.
    New GFE Requirements. In light of these considerations, HUD 
believes that in order for the GFE to better serve its intended 
purpose, which is to apprise borrowers of the charges they are likely 
to incur at settlement, a number of specific changes to the GFE 
requirements are required to make it firmer and more useable. 
Accordingly, today's proposed rule would establish a new required GFE 
form to be provided to borrowers by loan originators in all RESPA 
covered transactions.\7\ HUD

[[Page 14035]]

believes that the content of the material in the proposed form gives 
the consumer the information needed to shop for loan products and to 
assist them during the settlement process. The Department seeks public 
comment on the proposed GFE, as well as the proposed HUD-1/1A 
Settlement Statement forms. The following sections address the proposed 
changes, and, where appropriate, include a summary of comments received 
on the issue in response to the 2002 Proposed Rule, as well as comments 
voiced during the 2005 RESPA Reform Roundtables.
---------------------------------------------------------------------------

    \7\ HUD's RESPA rules currently provide that in the case of a 
federally related mortgage loan involving an open-end line of credit 
(home equity plan) covered under the Truth in Lending Act and 
Regulation Z, a lender or broker that provides the borrower with the 
disclosures required by 12 CFR 226.5b of Regulation Z at the time 
the borrower applies for such loan shall be deemed to comply with 
GFE requirements set forth at 24 CFR 3500.7. Nothing in this 
proposed rule is intended to change this provision.
---------------------------------------------------------------------------

    1. Changes to Facilitate Shopping
    The Proposed Rule. Today's rule proposes to establish a new 
definition for a ``GFE application'' and a separate new definition for 
``mortgage application.'' The GFE application would be comprised of 
those items of information that the borrower would submit to receive a 
GFE. Such an application would include only such information as the 
originator considered necessary to arrive at a preliminary credit 
decision and provide the borrower a GFE. Specifically, a GFE 
application would include six items of information (name, Social 
Security number, property address, gross monthly income, borrower's 
information on the house price or best estimate of the value of the 
property, and the amount of the mortgage loan sought) in order to 
enable a loan originator to make a preliminary credit decision 
concerning the borrower. The proposed rule will also require that the 
GFE application be in writing or in computer-generated form. Oral 
applications can be accepted at the option of the lender. In such 
cases, the lender must reduce the oral application to a written or 
electronic record.
    The proposed rule also provides that when a borrower chooses to 
proceed with a particular loan originator, the loan originator may 
require that the borrower provide a ``mortgage application'' to begin 
final underwriting. The mortgage application will ordinarily expand on 
the information provided in the GFE application, including bank and 
security accounts and employment information as well as asset and 
liability information and all the other information that the originator 
requires to underwrite the loan.
    To facilitate shopping and lower the cost burden of shopping on 
consumers and industry alike, the proposed rule would not require that 
all underwriting information be supplied at the GFE application stage. 
Nevertheless, borrowers must be protected against ``bait and switch.'' 
Accordingly, the proposed rule provides that during final underwriting, 
the originator may verify the information in and developed from the GFE 
application, including employment and income information, ascertain the 
value of the property to secure the loan, update the credit analysis, 
and analyze any relevant information collected in the entire 
application process, including, but not limited to, information on the 
borrower's assets and liabilities. However, borrowers may not be 
rejected unless the originator determines that there is a change in the 
borrower's eligibility based on final underwriting, as compared to 
information provided in the GFE application and credit information 
developed for such application prior to the time the borrower chooses 
the particular originator.\8\ The originator must document the basis 
for any such determination and keep these records for no less than 3 
years after settlement, in accordance with proposed subsection 24 CFR 
3500.7(f)(1)(iii).
---------------------------------------------------------------------------

    \8\ Unforeseeable circumstances resulting in a change in the 
borrower's eligibility may also be a basis for rejecting the 
borrower. Unforeseeable circumstances are also discussed in Section 
8(b) below.
---------------------------------------------------------------------------

    Where a borrower is rejected for a loan for which a GFE has been 
issued, and another loan product is available to the borrower, the loan 
originator must provide the borrower with a revised GFE. Where a 
borrower is rejected, the borrower must be notified within one business 
day and the applicable notice requirements satisfied.
    Loan originators will provide GFEs based on the GFE applications 
that are memorialized in writing or electronic form. A separate GFE 
must be provided for each loan where a transaction will involve more 
than one mortgage loan. For loans covered by RESPA, Truth in Lending 
Act (TILA) disclosures would also be provided within 3 days of a 
written GFE application, unless the creditor, i.e., loan originator, 
determines that the application cannot be approved on the terms 
requested. (See comments 19(a)(1)-3 and 4 of the Federal Reserve 
Board's Official Staff Commentary on the Truth in Lending Act (TILA).) 
Based on consultations with representatives of the Federal Reserve, 
when a GFE application is submitted, an initial TILA disclosure should 
also be provided so long as the application is in writing, or, in the 
case of an oral application, committed to written or electronic form.
    By obtaining multiple GFEs, borrowers will be in a position to 
decide which loan provider and which mortgage product they wish to 
select. When the borrower makes those decisions, the borrower will 
notify the originator, who may then require a more comprehensive 
``mortgage application,'' and possibly a fee or fees, to initiate the 
loan origination. As indicated, this application would consist of the 
more detailed information required by the originator, submitted in 
order to obtain a final underwriting decision, leading to origination 
of a mortgage loan.\9\
---------------------------------------------------------------------------

    \9\ HUD anticipates that in most cases a mortgage application 
will be the Uniform Residential Loan Application, Freddie Mac Form 
65, or Fannie Mae Form 1003.
---------------------------------------------------------------------------

    Discussion. Under RESPA, a GFE must be provided to a borrower at or 
within 3 days of application. HUD's current regulations define an 
application as the ``submission of a borrower's financial information 
in anticipation of a credit decision, whether written or computer 
generated, relating to a federally related mortgage loan'' identifying 
a specific property.\10\ The 2002 Proposed Rule sought to make GFEs 
more readily available to consumers and, therefore, more useful as a 
shopping tool by clarifying the minimum information needed to obtain a 
GFE and by broadening the rules to allow oral applications, consistent 
with earlier informal interpretations by HUD, so long as such requests 
contained sufficient information for the originator to provide a GFE. 
Accordingly, the 2002 Proposed Rule also revised the definition of 
``application'' in the regulations to make it clear that an application 
would be deemed to exist, and that the GFE should be provided once the 
consumer provided sufficient information to enable a loan originator to 
make an initial determination regarding the borrower's creditworthiness 
(typically, a Social Security number, a property address, basic income 
information, the borrower's information on the house price or best 
estimate of the value of the property, and the mortgage loan amount 
needed), whether orally, in writing or computer-generated. The GFE 
would be given to the borrower, conditioned on final loan approval 
following full underwriting and appraisal of the property securing the 
mortgage.
---------------------------------------------------------------------------

    \10\ 24 CFR 3500.2.
---------------------------------------------------------------------------

    HUD acknowledged in the 2002 Proposed Rule that the proposed 
changes in the definition of ``application'' and the requirement that a 
GFE be provided to prospective borrowers early in the shopping process

[[Page 14036]]

might have implications for the content and delivery of required 
disclosures under TILA requirements. As a result, HUD invited comments 
on how the proposed GFE changes might impact other disclosure 
requirements, and also invited comments on how the proposed GFE changes 
could be harmonized with the other disclosure requirements.
    As indicated above, under today's proposal, the definition of ``GFE 
application'' provides the trigger for initial RESPA disclosures. After 
a consumer decides to proceed with a particular loan originator's GFE, 
the loan originator will generally require a separate ``mortgage 
application'' as defined under this proposed rule, before making a 
credit decision. Consumer representatives recommended that HUD consult 
with the Federal Reserve Board to coordinate the timing of RESPA and 
TILA disclosures. Industry commenters on the 2002 Proposed Rule were 
generally concerned that HUD's proposal to require disclosures earlier 
in consumers' process of shopping for a mortgage would trigger 
requirements under the Home Mortgage Disclosure Act (HMDA) and the 
Equal Credit Opportunity Act (ECOA).
    By refining the definition of ``application'' under RESPA, and 
dividing the application process as described, HUD believes that 
today's proposal will facilitate the availability of shopping 
information and avoid unnecessary regulatory burden on the industry and 
an unwarranted increase in notices of loan denials to borrowers. 
Whether a GFE application under a particular set of facts triggers HMDA 
or ECOA requirements must be determined under Regulation B and 
Regulation C, as interpreted in the Federal Reserve Board's official 
staff commentary. It should be noted that by proposing such a change to 
the current definition of ``application,'' HUD does not intend to 
prevent a loan originator from prequalifying a borrower for a mortgage 
loan.
2. Addressing Up-Front Fees That Impede Shopping
    The Proposed Rule. The proposal would allow a loan originator, at 
its option, to collect a fee limited to the cost of providing the GFE, 
including the cost of an initial credit report, as a condition for 
providing a GFE to the prospective borrower.
    Discussion. HUD would prefer that originators not impose any 
charges 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 cost incurred to 
serve shoppers who do not purchase the goods or services. Such an 
approach would better serve the purposes of the statute. However, HUD 
recognizes that there may be incidental or nominal costs to provide 
GFEs to prospective borrowers. Therefore, in order to facilitate 
shopping using GFEs, the proposed rule would allow a loan originator, 
at its option, to collect a fee limited to the cost of providing the 
GFE, including the cost of an initial credit report, as a condition for 
providing a GFE to a prospective borrower. HUD is interested in 
receiving comments on this approach.
3. Introductory Language
    The Proposed Rule. The proposed GFE explains to the borrower: (1) 
The purpose of the GFE, i.e., that it is an ``* * * estimate of your 
settlement costs and loan terms if you are approved for this loan'' and 
(2) informs the borrower that he or she is the ``* * * only one who can 
shop for the best loan for you. You should compare this GFE with other 
loan offers. By comparing loan offers, you can shop for the best 
loan.''
    Discussion. The GFE proposed today informs the borrower that he or 
she is the only one who can shop for the best loan. HUD believes that 
this formulation should be useful to consumers dealing with all types 
of loan originators.
    The 2002 Proposed Rule had included language in this section of the 
previously proposed GFE that was intended to describe the role of the 
loan originator and to encourage borrowers to shop for themselves. 
Comments both from consumer groups and industry generally favored 
removing language on the GFE that discussed the role of the loan 
originator, on the grounds that the language was misleading, confusing, 
and might conflict with state law. AARP, however, supported retaining 
the portion of the proposed language that encourages the borrower to 
shop among loan originators.
    In light of the comments received on the 2002 proposal, today's 
proposed GFE does not include any language on the role of the loan 
originator. Instead, the language on the proposed GFE informs the 
consumer that he or she is the only one who can shop for the best loan.
4. Terms on the GFE (Summary of Loan Details)
    The Proposed Rule. The proposed GFE includes a summary of the key 
terms of the loan. The form discloses the initial loan amount; the loan 
term; the initial interest rate on the loan; the initial monthly 
payment owed for principal, interest, and any mortgage insurance; and 
the rate lock period. The form also discloses whether the interest rate 
can rise, whether the loan balance can rise; whether the monthly amount 
owed for principal, interest and any mortgage insurance can rise; 
whether the loan has a prepayment penalty or a balloon payment and 
whether the loan includes a monthly escrow payment for property taxes 
and possibly other obligations. HUD is requiring the terms ``prepayment 
penalty'' and ``balloon payment'' to be interpreted consistent with 
TILA (15 U.S.C. 1601 et seq.). The Annual Percentage Rate (APR) is not 
included on the proposed GFE.
    Discussion. One of HUD's objectives in proposing revisions to the 
current RESPA regulations is to ensure that consumers are able to use 
page one of the GFE to comparison shop among loan originators for a 
mortgage loan. Accordingly, page one of the proposed GFE contains a 
summary of the loan terms and details, as well as a summary of the 
total estimated settlement charges for the loan. The new summary format 
of page one of the proposed GFE with its list of important loan terms 
will increase consumer awareness and allow borrowers the opportunity to 
shop among loan originators and easily compare various loan offers.
    The proposed GFE is designed to provide clear information on both 
fixed and adjustable rate mortgages. The disclosure of terms on the 
latter is complicated due to their variable structure and to future 
changes in interest rates. Adjustable rate mortgages have recently 
experienced high default rates. HUD seeks comment on possible 
additional ways to increase consumer understanding of adjustable rate 
mortgages.
    The 2002 proposed GFE advised the borrower of the terms of the 
mortgage and included the interest rate and the APR. It also advised 
the borrower whether or not the loan had a prepayment penalty or 
balloon payment, and whether the loan had an adjustable rate and, if 
so, its terms. Comments on the 2002 GFE primarily concerned whether it 
should include information also appearing on the TILA disclosure. 
Consumers generally supported the inclusion of TILA disclosure 
information on the GFE. Lenders generally recommended that information 
appearing on TILA disclosures should be removed from the GFE because 
borrowers will continue to receive separate TILA disclosure forms, and 
inclusion on the GFE is unnecessary and would potentially lead

[[Page 14037]]

to borrower confusion. Some participants at the RESPA Reform 
Roundtables suggested that more information on new loan products such 
as interest-only loans should be included on the GFE.
    While mindful of the need to present consumers with key loan 
information on the GFE, HUD has determined not to include the APR on 
today's proposed GFE. The APR is central to the TILA disclosure that 
will be provided in purchase transactions at the same time as the GFE 
and ordinarily at the same time in other transactions. However, the 
terms ``prepayment penalty'' and ``balloon payment'' have been retained 
on the form to facilitate consumer shopping, even though these terms 
are also included on the TILA disclosure.
    With respect to today's proposed GFE, HUD notes that there are 
differences between how the GFE discloses the monthly payment and how 
the TILA form will disclose the monthly payment. Specifically, the 
proposed GFE requires disclosure of principal, interest, and any 
mortgage insurance, while the TILA disclosure may include amounts for 
taxes. HUD will revise its Special Information Booklet to explain this 
difference, to avoid consumer confusion.
    The interest rate listed on the GFE will reflect the loan offered 
at the time the GFE is given. Until locked in, the interest rate will 
float. For loans originated by mortgage brokers, the amount of any 
``charge or credit to the borrower for the specific interest rate 
chosen'' will float with the wholesale market.\11\ This is because 
mortgage brokers must report the precise difference between the price 
of the loan and its par value in the ``charge or credit for the 
specific interest rate chosen.'' As a result, borrowers who use brokers 
as defined in this proposed rule and choose to float will float 
according to wholesale lenders' changes.
---------------------------------------------------------------------------

    \11\ The ``charge or credit for the interest rate chosen'' 
concerns the discount points and the yield spread premium that are 
further discussed in Section C of this preamble.
---------------------------------------------------------------------------

    Current federal regulations allow originators to provide GFE and 
TILA information together.\12\ However, the proposed GFE is designed as 
a distinct, required form to promote shopping by consumers. HUD 
believes it is best complemented by providing a separate TILA 
disclosure along with the GFE.
---------------------------------------------------------------------------

    \12\ 24 CFR 3500.7(d).
---------------------------------------------------------------------------

5. Period During Which the GFE Terms Are Available to the Borrower
    The Proposed Rule. The interest rate stated on the GFE would be 
available until a date set by the loan originator for the loan. After 
that date, the interest rate, some of the loan originator charges, the 
per diem interest, and the monthly payment estimate for the loan could 
change until the interest rate is locked. The estimate of the charges 
for all other settlement services would be available until 10 business 
days from when the GFE is provided, but it may remain available longer, 
if the loan originator extends the period of availability.
    Discussion. In order to promote competition while avoiding 
committing originators to open-ended offers, the 2002 Proposed Rule 
would have required that the GFE be held open for a minimum of 30 days. 
Commenters on the 2002 Proposed Rule were specifically asked whether 30 
days was an appropriate period, and considerable comment was elicited 
on this subject. A major consumer group supported the 30-day period, 
while the majority of lenders commenting on the 2002 proposal 
recommended a 10-day shopping period or less.
    Today's proposed rule reflects HUD's determination that the 
appropriate period for which GFE terms are generally to be available is 
10 business days, excluding the interest rate of the loan set forth in 
the GFE, some of the loan origination charges related to the interest 
rate, the per diem interest, and the monthly payment estimate. The 
interest rate stated on the GFE would be available until a date set by 
the loan originator for the loan. After that date, the interest rate, 
some of the loan originator charges, the per diem interest, and the 
monthly payment estimate for the loan could change until the interest 
rate is locked.
    A central purpose of RESPA regulatory reform is to facilitate 
shopping in order to lower settlement costs, and there is legitimate 
concern that requiring GFEs to be open for too long a shopping period 
could unintentionally operate to increase borrower costs. By requiring 
that the GFE terms be generally available for 10 business days, GFEs 
will be effectively open for 2 weeks, thereby providing borrowers with 
sufficient time to shop among various offers and providers. Borrowers 
may request, and originators at their option may lengthen the shopping 
period for a loan or loans beyond 10 business days. In such cases, the 
originator should note and initial the increased duration the GFE is 
open on the borrower's GFE.
6. Consolidating Major Categories on the GFE
    The Proposed Rule. The proposed GFE would group and consolidate all 
fees and charges into major settlement cost categories, with a single 
total amount estimated for each category.
    Discussion. 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 charges 
such as loan origination and underwriting charges; charges by third 
parties for lender-required services, such as appraisal, title, and 
title 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.
    The proposed GFE 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.
    In the 2002 Proposed Rule, HUD had proposed a GFE that grouped and 
consolidated charges into major cost categories, with a single total 
amount for each category. In commenting on the 2002 proposal, consumer 
groups were split on the best approach to addressing fee proliferation 
on the GFE. AARP strongly supported consolidation of major cost 
categories, and recommended that HUD's proposed categories be further 
consolidated into three categories for enhanced consumer comprehension. 
The National Consumer Law Center (NCLC) filed comments on its own 
behalf, and on behalf of the Consumer Federation of America, National 
Association of Consumer Advocates, Consumers Union, and U.S. Public 
Interest Research Group. These commenters noted that while subtotaling 
is helpful to consumers, itemization on the HUD-1 is necessary to 
ensure that compliance with TILA and the Home Ownership and Equity 
Protection Act (HOEPA) can be determined. The National Community 
Reinvestment Coalition and the National Center on Poverty Law indicated 
their belief that the

[[Page 14038]]

tolerance \13\ levels will address the issue of proliferation of fees, 
and commented that the GFE must be as similar as possible to the HUD-1 
for comparison purposes. Lenders who commented on this proposed change 
to the GFE in 2002 expressed concern that lumping costs together in 
large categories will confuse consumers when they compare data on the 
GFE with data on the HUD-1/1A.
---------------------------------------------------------------------------

    \13\ ``Tolerance'' refers to the maximum amount by which the 
charge for a category of settlement costs may exceed the amount of 
the estimate for such category on a GFE, and is expressed as a 
percentage of an estimate. See Section (h) below.
---------------------------------------------------------------------------

    Having considered the results of consumer testing of the forms as 
detailed below in Section F and comments received on the 2002 Proposed 
Rule, HUD has determined to propose a standardized GFE, containing 
major cost categories, to facilitate better borrower understanding of 
settlement services and their costs, and empower borrowers to shop, 
compare, and negotiate major cost items where possible. HUD is not 
proposing to further consolidate the categories, because it believes 
that each of the proposed categories provides useful information to 
borrowers. Although today's proposed GFE does not itemize the services 
required in each category, it does explain to the borrower the exact 
nature of each category of services. For example, origination services 
are characterized as the services and charges to obtain and process the 
loan for the borrower. HUD also regards the information on required 
services that can and cannot be shopped for as useful information that 
borrowers should have in choosing an originator and later to facilitate 
shopping for services to lower costs.
    HUD's current RESPA regulations require that the GFE include a list 
of any lender-required providers, including the name, address and 
telephone number of the provider and the nature of the lender's 
relationship with the provider. Under today's proposed rule, if the 
lender requires the use of a particular provider other than its own 
employees, and requires the borrower to pay any portion of such 
service, the lender must identify on the GFE the service, and the 
estimated cost or range of charges for the service. HUD has determined 
to eliminate the requirement to identify the name of the required 
service provider, because it believes that consumers will use the GFE 
to shop among loan originators based on cost rather than on the 
identity of individual settlement service providers.
    Where a lender permits a borrower to shop for a required settlement 
service, under today's proposed rule the lender must provide the 
borrower with a written list of identified providers at the time the 
GFE is provided. Such a list may be included on the GFE form or on a 
separate sheet of paper.
    The GFE set forth in the 2002 Proposed Rule would also have 
referenced the corresponding series on the HUD-1, to facilitate 
comparison between the GFE and HUD-1. While these references have been 
removed in the GFE proposed today in the interest of simplifying the 
form, HUD is also proposing changes to the HUD-1/1A to facilitate 
comparison of the GFE to the HUD-1/1A. Section II.D. of this preamble 
discusses today's proposed changes to the HUD-1/1A.
    Pursuant to 24 CFR 3500.15, originators seeking to satisfy the 
requirements for the affiliated business exemption must provide the 
requisite affiliated business arrangement disclosure at the time of any 
referral to an affiliated settlement service provider. The GFE proposed 
by today's Proposed Rule does not attempt to include this information. 
However, under HUD's existing RESPA regulations, the affiliated 
business disclosure must be given on a separate form consistent with 
Appendix D of HUD's existing regulations. Where such a referral occurs 
at the time a GFE is given, the affiliated business disclosure must be 
given along with the GFE.
7. Option to Pay Settlement Costs
    The Proposed Rule. The GFE Form shall advise the borrower how the 
interest rate of the loan affects the borrower's settlement costs, and 
shall include actual available options in this regard on the form.
    Discussion. In addressing the problem of lender payments to 
mortgage brokers in the 1999 and 2001 Policy Statements,\14\ HUD made 
it clear that consumers should be advised as early as possible when 
shopping for a loan of how their interest rate affects their settlement 
costs and that their options in this regard should be presented on the 
GFE form. In order to decide which rate/cost combination is best, HUD 
regards it as essential that borrowers be presented actual offers of 
the loan originator on the chart on page 3 of today's proposed GFE. The 
GFE would inform borrowers that: (1) They can choose the loan presented 
in the GFE; (2) they can choose an otherwise identical loan with a 
lower interest rate and monthly payments that will raise settlement 
costs by a specific amount; or (3) they can choose an otherwise 
identical loan with a higher interest rate and monthly payments that 
will lower settlement costs by a specific amount. If a higher or lower 
interest rate is not in fact available from the originator, the 
originator must provide those options that are available and indicate 
``not available'' on the form for those options that are not available. 
While some commenters on the 2002 Proposed Rule recommended that HUD 
require loan originators to feature specific types of loans on the loan 
option chart on the GFE, HUD does not believe that it should impose 
requirements on loan originators on what types of loans are offered to 
borrowers. Therefore, HUD does not propose such requirements in today's 
proposed rule. HUD's consumer testing has demonstrated that consumers 
responded very positively to the trade-off chart on the GFE that 
presents information on different interest rates and up-front fees. In 
fact, this was the feature that consumers liked best about the form.
---------------------------------------------------------------------------

    \14\ 64 FR 10080 (March 1, 1999), 66 FR 53052 (October 18, 
2001).
---------------------------------------------------------------------------

    The provision of this information on page 3 of the form will help 
borrowers understand their options for paying settlement costs. If the 
borrower chooses one of the two alternative options presented on the 
form, the borrower must receive a new GFE.
8. Establishing Meaningful Standards for GFEs
a. Tolerances.
    The Proposed Rule. The proposal would prohibit loan originators 
from exceeding at settlement the amount listed as ``our service 
charge'' on the GFE, absent unforeseeable circumstances. The charge or 
the credit to the borrower for the interest rate chosen, if the 
interest rate is locked, absent unforeseeable circumstances, also 
cannot be exceeded at settlement. The proposal would also prohibit Item 
A on the GFE, ``Your Adjusted Origination Charges'' from increasing at 
settlement once the interest rate is locked. In addition, the proposal 
would prohibit government recording and transfer charges from 
increasing at settlement, absent unforeseeable circumstances. The 
proposal would prohibit the sum of all the other services subject to a 
tolerance (originator required services where the originator selects 
the third party provider, originator required services where the 
borrower selects from a list of third party providers identified by the 
originator, and optional owner's title insurance, if the borrower uses 
a provider identified by the originator) from increasing at settlement 
by more than 10 percent absent unforeseeable

[[Page 14039]]

circumstances. Thus, a specific charge may increase by more than 10 
percent at settlement, so long as the sum of all the services subject 
to the 10 percent tolerance does not increase by more than 10 percent.
    Discussion. Current RESPA regulations at 24 CFR 3500.7(a) require a 
lender to provide a ``good faith estimate'' of the ``amount of or range 
of charges for the specific settlement services the borrower is likely 
to incur in connection with the settlement.'' 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, HUD is proposing to clarify what a ``Good Faith Estimate'' 
demands, both with regard to the loan originator's own charges, as well 
as to lender-selected, third party charges and other settlement costs.
    Estimates appearing on the GFEs can be significantly lower than the 
amount ultimately charged at settlement and do not provide meaningful 
guidance on the costs borrowers will incur at settlement. While 
unforeseeable circumstances can drive up costs in particular 
circumstances, in most cases loan originators have the ability to 
estimate final settlement costs with great accuracy. The loan 
originator's own charges, which are entirely within the originator's 
control, can be stated with certainty, absent unforeseeable 
circumstances. Government recording and transfer charges are well known 
to loan originators or can be calculated based on the purchase price or 
value of the property. Moreover, many third party costs such as credit 
report fees, pest inspection fees, tax services, and flood reviews are 
readily ascertainable. Other third party costs such as title services 
and title insurance and up-front mortgage insurance premiums, typically 
only vary depending on the value of the property or the loan amount. 
HUD also is aware that recent advances in technology and 
telecommunications in loan processing make routine provision of 
accurate estimates of third party costs easier and cheaper.
    Some borrowers have indicated that the GFE has often failed to 
represent an accurate estimate of final settlement costs, for a number 
of reasons. In too many cases, fees that were not included on the GFE 
materialize at settlement. These unexpected fees often result in extra 
compensation for the originator and/or the third party settlement 
service providers and in higher charges to the borrower. The absence of 
more precise regulatory standards for providing a good faith estimate 
of final settlement costs has not helped ensure greater accuracy and 
reliability.
    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.\15\ Accordingly, the 
proposed rule states that loan originators may not increase their own 
charges (the service charge) from that stated on the GFE, absent 
``unforeseeable circumstances.'' Government recording and transfer 
charges would also not be able to increase at settlement, absent 
``unforeseeable circumstances.'' While the interest rate is locked, the 
charge or the credit to the borrower for the interest rate chosen also 
cannot be exceeded at settlement, absent ``unforeseeable 
circumstances.'' While fees for the service charge have a ``zero 
tolerance'' under the proposed rule, absent unforeseeable 
circumstances, the sum of all the other services subject to a 
tolerance--required services the loan originator selects, title and 
closing services, lender's title insurance and optional owner's title 
insurance if chosen or identified by the originator, and required 
services that borrowers can shop for when the borrower elects to use 
the provider identified by the originator--would be subject to a single 
overall 10 percent tolerance. Thus, a specific charge may increase by 
more than 10 percent, so long as the total does not increase by more 
than 10 percent.
---------------------------------------------------------------------------

    \15\ 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, the 
party will take into account all available relevant information, and 
will exercise reasonable care in evaluating such information before 
providing such an estimate.
---------------------------------------------------------------------------

    The subject of tolerances received considerable attention from 
commenters in the 2002 proposed RESPA rulemaking, as well as during the 
RESPA Reform Roundtables. Generally, lending industry groups commenting 
on the 2002 Proposed Rule opposed tolerances on the grounds that 
settlement costs are extremely variable and subject to change after 
appraisal and underwriting. Many other comments from lenders on the 
2002 Proposed Rule noted that costs often change after property 
appraisal and as a result of borrower product changes or changes in the 
loan amount or closing date. Consumer groups, on the other hand, 
supported tolerances as a means to prevent ``bait and switch'' tactics 
by loan originators. Regulators, including the Conference of State Bank 
Supervisors and the American Association of Residential Mortgage 
Regulators, were generally supportive of tolerances. During the RESPA 
reform roundtables, many participants who expressed comments on the 
need for tolerances agreed that it is possible to get solid estimates 
of costs at the GFE stage, while others expressed concern that a 10 
percent tolerance level is too strict.
    In its written comments in response to the 2002 Proposed Rule, the 
American Land Title Association (ALTA) questioned HUD's authority to 
adopt tolerances in light of the legislative history of the good faith 
estimate requirement in Section 5(c) of RESPA. ALTA noted that as part 
of the original RESPA statute, Congress enacted a separate section that 
required lenders, at the time of loan commitment, but not later than 12 
days prior to settlement, to provide the prospective buyer and seller 
with an ``itemized disclosure in writing of each charge arising in 
connection with the settlement.'' Section 6 of the original statute 
imposed a duty on the lender to obtain from persons who were to provide 
services in connection with the settlement ``the amount of each charge 
they intend to make.'' If the exact charge was not available, a good 
faith estimate could be provided. Section 6(b) provided for lender 
liability to the buyer or seller for failure to provide the requisite 
disclosures in the amount of actual damages or $500, whichever was 
greater, and, if the action was successful, attorney's fees and court 
costs.
    ALTA noted that due to concerns raised by lenders about Section 6, 
that provision of RESPA was repealed within one year of enactment. 
Congress substituted for Section 6 the language of Section 5(c) 
requiring lenders to provide a good faith estimate of settlement costs, 
along with a Special Information Booklet, within 3 days of loan 
application. ALTA also noted that Congress did not impose any sanctions 
for violations of the Section 5(c) obligation. In light of this 
legislative history, ALTA contends that HUD does not have statutory 
authority to adopt tolerances as proposed.
    While mindful of the legislative history of RESPA with respect to 
the enactment and later repeal of the section requiring lenders to 
provide disclosures of the amount of each charge arising in

[[Page 14040]]

connection with the settlement, HUD believes that the tolerance 
approach it is proposing today is distinguishable from the requirement 
to provide an itemized disclosure of each charge. Unlike the 
requirement in the original Section 6 of RESPA that required lenders to 
provide exact figures for individual settlement charges, today's 
proposed approach permits considerable flexibility. The proposal would 
permit all charges to decrease between the time the GFE is provided and 
the date of settlement; all charges may increase in the event of 
unforeseeable circumstances; and some third party charges such as 
homeowners' insurance are not subject to any tolerance. Moreover, 
individual charges for certain third party services that originators 
require and either select or identify may increase by more than 10 
percent at settlement, as long as the sum of such charges increases by 
no more than 10 percent at settlement.
    In considering the appropriate tolerance for third party settlement 
services on the GFE, HUD considered the available data on the variation 
in the cost of title services within individual market areas. Title 
services is the largest component of third party settlement service 
costs, accounting for slightly over two-thirds of the total among the 
sample of Federal Housing Administration (FHA) insured-loans discussed 
in the Economic Analysis. A study by Consumers Union on the dispersion 
of title costs within each of five large California metropolitan areas 
provides the best available data. Consumers Union found that, for four 
of the five metropolitan areas--Los Angeles, San Francisco, San Diego, 
and Sacramento--the highest reported prices for title services were 
between 9.95 percent and 13.84 percent above the average price in the 
local market. The exception is Fresno, where the highest price is 27.90 
percent above the average. These data indicate that a title insurance 
company should be able to remain within about 10 percent of its 
originally quoted price, in the event that a particular loan turns out 
to involve more extensive title work than originally anticipated. HUD 
therefore has concluded that a 10 percent tolerance is reasonable. To 
provide a further margin for unexpected cost increases, HUD extended 
the 10 percent tolerance per service in the 2002 Proposed Rule to a 10 
percent tolerance for the combined total cost of all third party 
settlement services selected by the lender. Other services are a much 
smaller share of the total cost of third party settlement services, and 
therefore increases in their cost are likely to have a much smaller 
impact on the combined total cost of all third party settlement 
services covered by the 10 percent tolerance.
    The proposal also clarifies that if the borrower requests a change 
in the type of loan, loan amount, or loan product, or otherwise makes a 
change to the mortgage transaction, the originator is not bound by the 
original GFE. However, because the borrower is in effect initiating a 
new application, today's proposed rule would require that the 
originator must either adhere to the original GFE or must redisclose to 
the borrower by providing a new GFE, and the originator would then be 
subject to the tolerances applicable to that GFE, provided the 
originator chooses to accommodate the change and the borrower qualifies 
for the change.
    In addition, to meet the tolerances, today's proposed rule provides 
that originators must include all charges correctly within their 
prescribed category on the GFE (and the HUD-1/1A). This means that 
third party fees estimated on the GFE must be reported as the estimated 
prices to be paid to third parties only, and fees reported on the HUD-
1/1A must not exceed those actually paid to third parties, except where 
the prices are based on an average calculated in accordance with 
proposed Sec.  3500.8(b)(2). (See Section G discussion on average cost 
pricing in this preamble.)
    While loan originators are expected to issue a GFE of settlement 
costs where a borrower submits a GFE application, in the case of new 
construction, settlement costs can change between the time a purchase 
contract is signed and settlement. Such estimates are subject to the 
provisions regarding unforeseeable circumstances and the provision for 
borrower requested changes, including the documentation requirements 
discussed below. The proposed rule provides that the loan originator 
may provide the GFE to the borrower with a clear and conspicuous 
disclosure stating that at any time up until 60 days prior to closing, 
the loan originator may issue a revised GFE. If no such disclosure is 
provided with the initial GFE, the loan originator would not be able to 
issue a revised GFE except as otherwise provided in the rule.
b. Unforeseeable Circumstances
    The Proposed Rule. The proposal provides that loan originators 
should not be held to tolerances where actions by the borrower or 
circumstances concerning the borrower's particular transaction result 
in higher costs that could not have reasonably been foreseen at the 
time of the GFE application, or where other legitimate circumstances 
beyond the originator's control result in such higher costs. The 
proposal also provides that if unforeseeable circumstances result in a 
change in the borrower's eligibility for the specific loan terms 
identified in the GFE, the borrower must be notified of the rejection 
for the loan and be provided a new GFE if another loan is made 
available.
    Discussion. While tolerances are necessary to provide ``bright 
line'' standards for consumers and industry alike, HUD recognizes that 
there may be circumstances under which loan originators should not be 
held to tolerances. The proposed rule details the circumstances under 
which tolerances may not apply, but indicates further that if it is 
possible for the loan originator to perform at all in such 
circumstances, the loan originator's charges may increase only to the 
extent caused by the particular circumstances.
    Today's proposed rule defines ``unforeseeable circumstances'' as 
either: (1) Acts of God, war, disaster, or other type of emergency that 
makes it impossible or impracticable for the originator to perform; or 
(2) circumstances that could not be reasonably foreseen at the time of 
the GFE application, that are particular to the transaction and that 
result in increased costs, such as a change in the property purchase 
price, boundary disputes, or environmental problems that were not 
described to the loan originator in the GFE application; the need for a 
second appraisal; and flood insurance. As with any business 
transaction, the borrower has the ability to call off the transaction 
in such circumstances. The proposed rule specifically excludes market 
fluctuations from being regarded as unforeseeable circumstances.
    Where an originator cannot perform or meet the tolerances because 
of unforeseeable circumstances, the originator must document the costs 
occasioned by the unforeseeable circumstances, and, as indicated, 
charge the borrower only the increased costs caused by such 
circumstances. Additionally, as indicated, when an increase in costs is 
necessary because of unforeseeable circumstances beyond the 
originator's control, the borrower should be notified within 3 days of 
such charges--as though a new application was filed--before any 
additional costs are incurred, and a new GFE reflecting the charges 
must be provided to the borrower. Finally, when unforeseeable 
circumstances result in a change in a borrower's eligibility for the 
loan identified in the GFE, the borrower

[[Page 14041]]

should be notified within one business day of the decision to reject 
the loan, and, if another loan is made available to the borrower, a new 
GFE must be provided to the borrower. In all cases, the loan originator 
must retain appropriate documentation explaining any unforeseeable 
circumstances for a transaction for no less than 3 years after 
settlement.
9. Important Information for Borrowers
    Page 4 of the GFE provides important information for the borrower, 
including information on how to apply for the loan set forth in the 
GFE. Page 4 also informs borrowers that they may wish to consult 
government publications about loans and settlement charges that have 
been published by HUD and the Federal Reserve Board. In addition, Page 
4 provides important information to borrowers about their financial 
responsibilities as homeowners. This section of the GFE notifies the 
borrower that in addition to the monthly loan payment for principal, 
interest, and mortgage insurance, the borrower will be required to pay 
other annual charges to keep the property. The section provides the 
borrower with an estimate for annual property taxes, along with 
homeowner's flood, and other required property protection insurance, 
but estimates for other annual charges such as homeowner's association 
fees or condominium fees are not required to be provided on the form. 
The section informs the borrower that the borrower may have to identify 
such other charges and ask for additional estimates from other sources. 
The section also states that such charges will not change based on the 
loan originator chosen by the borrower and advises the borrower not to 
consider the loan originator's estimates of such charges, when shopping 
for the best loan.
    Page 4 also notes that lenders can receive additional fees from 
other sources by selling the loan at some future date after settlement. 
However, the borrower is informed that once the loan is obtained at 
settlement, the loan terms, the borrower's adjusted origination 
charges, and total settlement charges cannot change.
    Page 4 also includes a mortgage shopping chart that allows 
borrowers to compare GFEs from different loan originators.
10. Enforcement
    The Proposed Rule. Today's proposed rule provides that charging a 
fee in excess of the tolerance, or any other failure to follow the GFE 
requirements, constitutes a violation of Section 5 of RESPA. As 
discussed below, HUD is also considering a provision that would allow 
loan originators a limited period of time to remedy any potential 
violations of the tolerances established under the rule, and thereby 
ease their possible exposure to liability for such violations.
    Discussion. In enacting RESPA, Congress sought to protect consumers 
from unnecessarily high settlement charges. Accordingly, HUD believes 
that charging of a fee in excess of the tolerance, or other failure to 
follow the GFE requirements, constitutes a violation of Section 5 of 
RESPA.
    HUD is soliciting comments on whether to add a provision to HUD's 
regulations that would allow loan originators, for a limited time after 
closing, to address the failure to comply with tolerances under HUD's 
GFE requirements, and if so, how such a provision should be structured. 
HUD is considering providing in the final rule that if, within a 
specified period (such as 14 business days) after the closing, a loan 
originator identifies a charge that exceeded the tolerance and repays 
the excess amount of the charge to the consumer within the specified 
period, the loan originator would be in compliance with Section 5. HUD 
is interested in commenters' views on whether such a procedure would be 
useful, and if so, what would be the appropriate time frame for finding 
and refunding excess charges. HUD is also soliciting comments on 
whether such a provision could be abused and therefore harmful to 
consumers, and whether the ability of prosecutors to exercise 
enforcement discretion obviates the need for such a provision.

F. Lender Payments to Mortgage Brokers--Yield Spread Premium (YSP)

    Background. Lenders routinely provide the funds for mortgages that 
mortgage brokers originate for borrowers. Mortgage brokers also may be 
compensated for their services in originating the mortgage by the 
borrower and/or the lender. When the interest rate on the loan exceeds 
the par interest rate of the lender, the lender pays the broker at 
closing an amount in excess of the principal amount of the loan, and 
this excess is commonly referred to in the mortgage industry as a 
``yield spread premium'' (YSP). For the past decade, such payments have 
been the subject of numerous lawsuits and consumer complaints, 
typically because consumers claim they were unaware that their broker 
was receiving such compensation, in addition to the direct compensation 
they paid the broker. Moreover, these consumers assert that such 
payments resulted from their being placed in mortgages with higher than 
necessary interest rates without their knowledge. Some consumer 
advocates have argued that all such payments should be treated as 
referral fees or kickbacks and thus should be illegal per se under 
RESPA.
    HUD has taken the position, however, that YSPs can be useful and 
should remain available as an option for mortgage borrowers to help pay 
their closing costs, particularly those borrowers with limited 
available cash who choose to pay some or all closing costs through a 
higher interest rate. HUD made its position on the issue clear in HUD's 
Policy Statement 2001-1 (2001 Policy Statement).\16\ In the 2001 Policy 
Statement, HUD restated its view \17\ that as long as the broker's 
compensation is for services, and total compensation is reasonable, 
interest rate-based lender payments to the mortgage broker are legal 
under RESPA. HUD did not mandate new disclosure requirements in the 
2001 Policy Statement, but did commit itself to making full use of its 
regulatory authority to establish clearer requirements for disclosure 
of mortgage broker fees, and to improve the settlement process for 
lenders, mortgage brokers, and consumers.\18\ In the 2001 Policy 
Statement, HUD stressed that disclosure of broker compensation was 
``extremely important and that many of the concerns expressed by 
borrowers over YSPs can be addressed by disclosing YSPs, borrower 
compensation to the broker, and the terms of the mortgage loan, so that 
the borrower may evaluate and choose among alternative loan options.'' 
\19\ In brief, it has been HUD's consistent position that the existence 
of a YSP in any loan should be at the borrower's choice, based upon a 
complete understanding of the trade-off between up-front settlement 
costs and the interest rate.
---------------------------------------------------------------------------

    \16\ Real Estate Settlement Procedures Act 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), published October 18, 2001, at 66 FR 53052.
    \17\ 66 FR 53052.
    \18\ 66 FR 53052.
    \19\ 66 FR 53056.
---------------------------------------------------------------------------

    HUD's current RESPA regulations require that a rate-based payment 
from a lender to a broker be reported on the GFE, and later on the HUD-
1. Such payments are frequently characterized on the GFE and HUD-1 as a 
``YSP'' or ``yield spread premium,'' and then are designated as a 
``paid outside closing''

[[Page 14042]]

or ``POC.'' \20\ The YSP is not often understood by the borrower. In 
addition, it is not listed as an expense to the borrower. At the same 
time, many brokers hold themselves out as shopping among various 
funding sources for the best loan for the borrower, and do not explain 
to the borrower that the payment they receive from the lender is 
derived from the borrower's interest rate. Some may even assert that 
the YSP is not a payment the borrower needs to be concerned with. The 
2001 Policy Statement emphasized that earlier disclosure and the entry 
of yield spread premiums, as credits to borrowers would ``offer greater 
assurance that lender payments to mortgage brokers serve borrowers' 
best interests.'' \21\
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    \20\ ``YSP POC'' sometimes appears on the second page of the 
HUD-1/1-A to represent ``Yield Spread Premium Paid Outside of 
Closing,'' which is rarely understood by borrowers as a payment they 
make out of their above-par interest rate.
    \21\ 66 FR 53056.
---------------------------------------------------------------------------

    2002 Proposed Rule. The 2002 Proposed Rule provided that on the 
GFE, all brokers first disclose their total compensation charges and 
disclose any YSP as a lender payment to the borrower and discount 
points as additional borrower payments. The amounts of any lender 
payment or discount points would be combined with the total origination 
charges, to arrive at a net origination charge. It was this final 
figure that was to be emphasized and highlighted for borrower 
comparison among lenders and brokers.
    The purpose of these changes in the GFE disclosure requirements, as 
proposed by the 2002 Proposed Rule, was to: (a) Make the borrower aware 
of the fact that the lender payments were a part of total origination 
costs, since they were directly related to the borrower's choice of a 
higher interest rate and monthly payment; (b) ensure that these 
payments worked to reduce out of pocket costs of the borrower; and (c) 
encourage the borrower to compare net origination costs of all loans 
whether from a lender or a broker, in order to select the loan product 
that best meets the borrower's needs. The rationale for the disclosure 
changes was to promote transparency, reduce borrower confusion, 
facilitate shopping, and, at the same time, avoid giving any 
competitive advantage to brokers or lenders in the marketplace.
    Nearly all commenters on the 2002 Proposed Rule that discussed YSPs 
other than individual mortgage brokers or their national and state 
associations expressed support for greater broker fee disclosure. 
Consumer representatives, in particular, were strong supporters of 
disclosure along the lines that HUD proposed, and offered suggestions 
for making the requirements more enforceable. Consumer groups recounted 
the class action litigation that resulted from the payment of yield 
spread premiums and HUD's past statements committing the Department to 
ensuring better disclosure of yield spread premiums. The National 
Consumer Law Center (NCLC) said that to date, yield spread premiums are 
generally paid by the lender solely as compensation for a higher 
interest rate loan. In most cases, according to NCLC, the borrower is 
not only paying an up-front fee, but is also paying a higher interest 
rate as a result of being steered into above-par loans. Consumer groups 
asserted that the YSP should be defined for the consumer in simple, 
easy-to-understand language on the GFE.
    Lenders and their trade groups, on the other hand, tended to favor 
HUD's requiring a separate Mortgage Broker Fee Agreement, as proposed 
by the lending industry in the last few years, which would be entered 
into by brokers and their customers, in addition to the GFE.
    Mortgage brokers and their trade groups expressed vigorous 
opposition to disclosing the YSP as a credit to the borrower. They 
maintained that such a characterization is misleading, unfair, and 
anti-small business. The brokers stated that HUD's proposal: (1) 
Created confusion for the borrower; (2) would unnecessarily increase 
HOEPA transactions; (3) would stifle FHA and low/moderate-income 
lending; (4) would unfairly target brokers; (5) would create an uneven 
playing field with retail lenders; and (6) could adversely affect tax 
treatment of borrowers.
    FHA Issue. Currently, FHA regulations limit origination fees for 
loans insured under the FHA program generally to one percent of the 
mortgage amount (see 24 CFR 203.27(a)(2)(i)). FHA does not have 
authority under the National Housing Act (12 U.S.C. 1709(b)(2)) to 
limit payments between loan originators, and yield spread premiums are 
not included in calculating the FHA limits on origination fees. Some 
industry commenters argued that the YSP disclosure, as proposed in 
2002, would have adversely affected the origination of FHA loans. 
Specifically, the National Association of Mortgage Brokers (NAMB) 
commented that if the 2002 Proposed Rule were finalized, many mortgage 
brokers would cease to originate FHA loans because of the origination 
fee limitation. The MBA and some of its member firms argued for removal 
or adjustment of the FHA origination fee cap.
    RESPA Roundtables. At the 2005 RESPA Reform Roundtables, consumer 
representatives generally continued to support disclosure of yield 
spread premium on the GFE. Mortgage broker representatives maintained 
their opposition to any yield spread premium disclosure on the GFE on 
the grounds that disclosure would put mortgage brokers at a competitive 
disadvantage as compared to lenders. Mortgage brokers also stated that 
if brokers are required to disclose yield spread premiums, lenders 
should also be required to disclose par, plus pricing, and gain on 
sales in the secondary market. Many lender representatives at the 
roundtables noted that it would be difficult for a lender to disclose 
any profit on a loan sold in the secondary market on the GFE, since the 
amount could not be ascertained with any certainty in advance, but in 
general, they did not express support for or opposition to a 
requirement for broker disclosure of the yield spread premium. Some 
participants at the roundtables, including consumer as well as industry 
representatives, recommended the use of a separate mortgage broker fee 
agreement in lieu of the yield spread premium disclosure requirement.
    The Proposed Rule. Lender payments to mortgage brokers in table 
funded and intermediary transactions should be clearly disclosed to 
consumers on the GFE, and on the HUD-1 settlement statements as set 
forth below. The proposed rule would also streamline the current 
regulatory definition of ``mortgage broker.''
    Discussion. For the past decade, HUD has required the disclosure of 
YSPs on the GFE and HUD-1 documents as a ``payment outside closing'' or 
``POC.'' This means of disclosure proved to be of little use to 
consumers. Moreover, notwithstanding that lender payments to brokers 
are directly based on the rate of the borrower's loan, under current 
HUD guidance, such lender payments are not required to be included in 
the calculation of the broker's total charges for the transaction, nor 
are they clearly listed as an expense to the borrower. The confusion 
that can result when borrowers do not understand that mortgage brokers' 
total compensation includes lender payments derived from the interest 
rate is exacerbated by the fact that many brokers hold themselves out 
as shopping among various funding sources for the best loan for the 
borrower, while failing to explain to the borrower that the payment 
they receive from the lender is derived from the borrower's interest 
rate. On the other hand, some brokers tell their customers

[[Page 14043]]

how they can use lender payments to lower the customer's up-front 
settlement costs.
    The 2001 Policy Statement made clear that earlier disclosure and 
the entry of yield spread premiums as credits to borrowers would 
``offer greater assurance that lender payments to mortgage brokers 
serve borrowers' best interests.'' \22\ HUD could not mandate new 
disclosure requirements in the 2001 Policy Statement. HUD did, however, 
commit itself in the 2001 Policy Statement to making full use of its 
regulatory authority to establish clearer requirements for disclosure 
of mortgage broker fees, and to improve the settlement process for 
lenders, mortgage brokers, and consumers.\23\
---------------------------------------------------------------------------

    \22\ 66 FR 53056.
    \23\ 66 FR 53053.
---------------------------------------------------------------------------

    It is for this reason that HUD proposed its new disclosure 
requirements in the July 2002 Proposed Rule. Having carefully 
considered the NAMB's and other comments in response to the 2002 
proposal, as well as the comments presented at the RESPA Roundtables, 
and the results of consumer testing by the Federal Trade Commission 
(FTC) and HUD, as discussed below, HUD maintains that while YSPs to 
mortgage brokers must be clearly disclosed to borrowers, at the same 
time, mortgage brokers also must not be disadvantaged in the 
marketplace, since such disadvantage will only result in decreased 
competition and higher costs to consumers. Many mortgage brokers offer 
products that are competitive with and frequently lower priced than the 
products of retail lenders, as evidenced by brokers' large and growing 
share of the loan origination market, and HUD wishes to preserve 
continued competition and lower cost choices for consumers.
    Today's proposed rule also streamlines the current regulatory 
definition of ``mortgage broker.'' Under the proposed definition, 
``mortgage broker'' means a person (not an employee of the lender) or 
entity that renders origination services in a table funded or 
intermediary transaction. The definition would also apply to a loan 
correspondent approved under 24 CFR 202.8 for FHA programs.
    The proposed definition would eliminate the current exclusion of an 
``exclusive agent'' of a lender from the definition of ``mortgage 
broker.'' The current definition essentially excludes some persons who 
perform the same services as mortgage brokers as defined in 24 CFR 
3500.2. In order to improve disclosure of settlement charges and 
increase transparency, HUD believes that all persons who perform 
mortgage broker services should be subject to the disclosure 
requirements. Therefore, an ``exclusive agent'' of a lender who is not 
an employee of the lender, but who renders origination services in a 
table funded or intermediary transaction, would be subject to the 
mortgage broker disclosure requirements set forth in this proposed 
rule.
HUD Research on Mortgage Broker Disclosures
    1. HUD's Testing of the GFE. In October 2002, HUD contracted with a 
communication and consumer testing expert, Kleimann Communication 
Group, to revise and test the GFE and mortgage package forms,\24\ in 
order to assure that the forms were user-friendly and enabled consumers 
to identify the least expensive loan. With respect to the GFE, the 
testing had the additional purpose of showing and explaining yield 
spread premiums and discount points to borrowers. New homebuyers and 
experienced homebuyers were part of the groups tested. The groups 
included members from diverse racial and ethnic groups, the elderly, 
and low-education and low-income groups. The testing of the GFE form 
was conducted in two phases.
---------------------------------------------------------------------------

    \24\ As noted in Section III above (Overview of HUD's Efforts 
Since 2002), the 2002 Proposed Rule included a ``guaranteed mortgage 
package agreement'' or ``GMPA,'' and HUD's contractor initially 
tested both the GFE and GMPA forms. In subsequent rounds of testing, 
the name of the GMPA form was changed to ``mortgage package offer'' 
or ``MPO'' and is referred to in this document as ``MPO.''
---------------------------------------------------------------------------

    2. Phase 1 HUD Testing. In Phase 1, the contractor conducted three 
rounds of one-on-one testing interviews to collect data about form 
comprehension and potential sources of confusion. The goal of the 
testing was to fine-tune and develop the GFE form and ensure that 
consumers can use the GFE in the way intended. Testing in this phase 
solicited consumer feedback through individual interviews with 
consumers as they actually used the GFEs in the simulated task of 
buying a home and needed to select between several loan offers. The 
data provide guidance about problems consumers have and the reasons for 
those problems. This phase consisted of three rounds of testing.
    Each of the first two rounds of testing involved interviews with a 
total of 45 consumers in three cities. The contractor made several 
format and language changes to the form, as it was published in the 
July 2002, proposed rule, to improve readability and clarity. Among 
other changes, a summary page was developed and tested, with the 
specific charges for individual categories of settlement services 
appearing on a second page of the form. Kleimann then developed a 
comprehensive testing protocol that addressed the key objectives of the 
GFE form for consumers. The interviews with each participant lasted for 
90 minutes with a 10-minute break. The interviews had two parts, one 
unstructured and one structured. In the unstructured portion of the 
interview, participants were asked to think aloud as they looked at 
each form for the first time. This unstructured and unprompted portion 
of the interview allowed Kleimann to capture users' initial reactions, 
including to areas that they responded well, to areas they did not 
understand, and to areas they questioned. The unstructured portion also 
ensured that the testers did not influence the comments of the 
participants by leading them to discuss information they would not have 
noticed on their own.
    In the structured portion of the interview, Kleimann gave each 
consumer completed GFEs (as well as MPOs) and asked targeted questions 
to determine how well participants understood certain areas of the 
forms, whether the consumers could determine the least expensive loan, 
and how the forms might be improved. The study design focused on how 
the forms performed as stand-alone documents. The interviewer neither 
helped the participant understand any of the information on the forms 
nor answered any questions the participant asked to clarify 
information.
    In these tests, 90 percent of participants chose the least 
expensive loan, when confronted with a choice between a GFE 
representing a loan from a lender (with no YSP shown) and a GFE 
representing a loan from a broker (with the YSP disclosed). The 
percentage increased slightly to 93 percent when an MPO was included as 
a third option.
    Participants also understood the forms well. They could identify 
the basic loan costs and loan features. Over 90 percent could identify 
the total estimated settlement charges. The tested forms retained the 
trade-off table shown on the forms in the 2002 Proposed Rule, showing 
borrowers that if they wanted to receive a lower interest rate, they 
would have to pay more at settlement, and vice versa; 90 percent 
understood the trade-off table. About two-thirds of the participants 
could distinguish between items they, as consumers, could shop for and 
items for which they would use the broker's or lender's

[[Page 14044]]

providers; almost two-thirds could explain the adjusted origination 
charge; and 70 percent of participants were able to identify the 
tolerances correctly in round 2 testing.
    During the testing, Kleimann asked participants a number of 
questions about how they felt about the forms--how comfortable or 
uncomfortable they felt with the forms, what they liked and disliked, 
and how they perceived the information and the level of writing. 
Participants reacted very positively to the GFE layout and language, 
and to the clear delineation of charges. They found the summary page on 
page 1, the breakdown of charges on page 2, and the trade-off table on 
page 3 to be particularly useful. In round 2 of testing, 86 percent 
said the GFE had the right information for them, almost 90 percent said 
the GFE was written at the right level for them, and about two-thirds 
of participants said they were comfortable with the forms.
    This testing was designed to see how the GFE form would perform as 
a stand-alone document. The interviewer neither coached nor led the 
participant by asking questions before the participant could work alone 
with the document. While this technique identifies how well 
participants use the GFE form as a stand-alone in a testing situation, 
consumers using these forms in the context of actual situations may 
perform even better. First, this testing involved no interaction at all 
between the potential borrower and a loan originator. In an actual 
situation, a loan originator would be able to answer borrower questions 
about the information on the forms and improve the borrower's 
understanding of it. Of course, some originators might try to confuse 
the borrower in order to collect higher fees, but a competitor might be 
more than willing to clear up that confusion, since doing so might get 
him the borrower's business. In addition to the help coming from the 
originator, borrowers could always ask someone else for help: A spouse, 
friend, their real estate agent, etc. Moreover, local consumer groups 
that focus on lending issues will also assist borrowers in 
understanding the new, streamlined GFE form. Since none of these 
sources were available during the testing, the Kleimann results should 
be viewed as underestimates of how much the new forms will help 
consumers once the forms are placed in an actual context of obtaining 
financing to purchase a home or refinance an existing loan. The third 
round of testing consisted of 60 participants, with 15 each in four 
cities, following the same procedures as in the first two rounds of 
testing.\25\ The GFE form was changed in order to consider whether an 
alternative presentation of the discount points and yield spread 
premium, suggested by the National Association of Mortgage Brokers, 
would increase consumer understanding. The yield spread premium (YSP) 
and discount point disclosure was removed from the top of page 2, where 
it had been integrated into the calculation of total up-front charges 
to the borrower, and moved to page 3. As a consequence, page 2 included 
only the adjusted origination charge at the top. Thus, otherwise 
identical loans from a broker and a lender would have identical figures 
on page 2 as well as on page 1 of the summary. Page 3 contained the YSP 
and discount points. The form did not include a full calculation of 
total broker compensation, and thus differed from both the proposed 
rule and the first two rounds of testing.
---------------------------------------------------------------------------

    \25\ The cities were Wilmington (Delaware), Tulsa, Minneapolis, 
and Los Angeles.
---------------------------------------------------------------------------

    The results showed that participants could continue to identify the 
cheapest loan: 93 percent of the participants correctly selected the 
broker loan as the cheaper loan as opposed to 90 percent in round 2. 
Also, in round 3 of testing, 89 percent of participants would have 
chosen the cheaper broker loan as opposed to 86 percent in round 2. 
None of the differences between these percentages in round 2 and round 
3 is statistically significant. Also, as in the first two rounds, 
participants generally liked the form and would use it to comparison 
shop. They could identify the basic terms of the mortgage and the 
estimate of total settlement costs, and 86 percent understood the 
trade-off table. The material seemed to be presented at the right level 
and to be clearly laid out. Participants again identified the summary 
page, the breakdown of charges, and the trade-off table as useful.
    However, participants had trouble understanding the concepts of YSP 
and discount points.\26\ Only 3 percent and 30 percent, respectively, 
of the participants could paraphrase what YSPs and discount points 
represented, leaving over two-thirds of the participants unable to 
paraphrase. Participants did not understand how these two concepts (now 
located on page 3) related to other settlement charges (on page 2). 
Essentially, placing these terms outside the calculation of origination 
charges (that is, on page 3 instead of page 2 as in the first two 
testing rounds) seems to decrease participants' understanding of how 
the YSP and discount points fit into total loan costs. Since there was 
no significant improvement in participants' ability to determine the 
cheapest loan, and most participants did not understand the concept of 
YSP, HUD decided to keep the YSP on page 2 in the calculation in the 
2005 Proposed Rule, as was the case in the 2002 Proposed Rule.
---------------------------------------------------------------------------

    \26\ These results are consistent with the work of Jackson and 
Berry (2001) and Woodward (2003a).
---------------------------------------------------------------------------

    3. FTC Testing. During the same period that HUD was developing the 
revised GFE, FTC tested the effect of YSP disclosure to see if the 
disclosure had an adverse effect on the consumer's ability to 
comparison shop. Using a variation on the GFE form tested by Kleimann 
in round 2 testing, FTC extracted and tested a portion of the form. The 
first page of the extract consisted of an abbreviated version of the 
Summary Table from page 1 of the GFE. The second page of the extract 
contained the ``Your Charges for Loan Origination'' box and an 
abbreviated version of the ``Your Charges for All Other Settlement 
Services'' box from page 2 of the GFE. As a control, FTC took these 
same two extracts and eliminated the YSP and service charge, producing 
a second set of extracts. Thus, FTC isolated elements of the proposed 
GFE and created two variations of their extracts: with the YSP and 
without the YSP. FTC also tested the YSP disclosure from the GFE in 
HUD's 2002 Proposed Rule, and an alternative disclosure using language 
developed by FTC to describe the YSP and other loan terms.
    FTC testers gave each participant a pair of loan extracts to 
evaluate: one had no YSP and thus represented a lender loan, and the 
other contained a YSP and thus represented a broker loan. The broker 
loan was $300 less than the lender loan. FTC asked participants which 
loan was cheaper and also which loan the participant would choose. Each 
participant also received a second set of extracts in which each loan 
offer was the same cost. The participants were asked the same two 
questions: which loan was cheaper and which loan would the participant 
choose.
    FTC tested five groups with 103 or 104 participants per group. The 
results using the GFE variation of HUD's second round of testing are 
most relevant to the 2005 Proposed Rule. When the YSP was disclosed and 
the broker loan offer was cheaper, 72 percent of participants could 
correctly identify the broker loan as the cheaper loan; 17 percent 
incorrectly identified the lender loan as cheaper. Asked to identify 
which loan offer they would choose, 70 percent of participants

[[Page 14045]]

would have chosen the cheaper broker loan; and 16 percent would have 
chosen the lender loan. In contrast, when the form extract did not 
disclose the YSP, 90 percent correctly identified the broker loan as 
cheaper, and 85 percent would have chosen it. Disclosing the YSP caused 
an 18 percent drop in participants correctly identifying the cheaper 
loan and a 14 percent drop in the number who would choose it in the 
market. When costs of the broker and lender loans were the same on GFE 
forms that contained the YSP, participant performance decreased. Fifty-
three percent reported that the loan costs were a tie; 30 percent 
believed the lender was cheaper; 11 percent believed the broker was 
cheaper. When asked to identify which loan offer they would choose, 25 
percent of the participants chose either the lender or the broker loan 
offers; 46 percent selected the lender loan offer; and 17 percent 
selected the broker offer. In contrast, when the form omitted the YSP, 
96 percent correctly identified the tie, and 78 percent chose one or 
the other as their preference.
    FTC concluded that the YSP disclosure on the GFE form extract it 
tested had two drawbacks. First, its YSP disclosure impaired the 
ability of borrowers to comparison shop leading many to choose the more 
costly alternative. Second, the YSP disclosure introduced bias in the 
selection process that favored lenders over brokers. The Department's 
goal is to promote consumer shopping for mortgages and to prevent bias 
against any loan originator.
    4. Phase 2 HUD Testing. FTC conducted its tests in February and 
March of 2003, and briefed HUD on the results during the summer of 
2003. HUD decided to undertake additional testing and to incorporate 
the FTC test results in the further testing. For round 4 of testing, 
HUD asked Kleimann Communication Group to parallel aspects of the FTC 
study, including the questions asked, the difference between the 
amounts of each offer, and the length of the test situation.\27\ HUD 
continued to test a full-length GFE rather than the portion tested by 
FTC, because HUD thought that the context of the entire form might 
provide a more accurate measure of participants' understanding of the 
GFE.
---------------------------------------------------------------------------

    \27\ Kleimann's report, entitled Consumer Testing Results for 
HUD's Good Faith Estimate (GFE) Form: Rounds 4 & 5 (dated March 19, 
2004), provides information on the specific characteristics of the 
consumers tested, revisions that Kleimann made to the form and the 
reasons for those revisions, the specific cities where the tests 
were conducted, the testing protocols, testing conditions, and the 
main results from each round of testing.
---------------------------------------------------------------------------

    For round 4 of testing, 600 participants were selected; all 
received full GFEs. The control group received GFEs that omitted the 
YSP disclosure, while the experimental group received GFEs with the YSP 
disclosed. Each participant was given two pairs of loans: one in which 
the broker loan was $300 less than the lender and one in which the 
broker and lender loan offers were the same cost. Each participant was 
asked three questions for each set of GFEs: (1) Which offer was cheaper 
or if they cost the same, (2) which offer would they choose, and (3) 
why they made that choice. The results of this testing showed both 
consistency with and divergence from the FTC results.
    When the YSP was disclosed, 83 percent of the participants 
correctly identified the broker loan as cheaper, and 8 percent 
incorrectly identified the lender as cheaper. These results were an 
improvement over the FTC results of 72 percent and 17 percent. In this 
GFE scenario, 72 percent of the participants said they would choose the 
broker offer and 11 percent said they would choose the lender. 
Similarly, in the FTC study, 70 percent of the participants chose the 
broker offer and 16 percent chose the lender offer.
    When the YSP disclosure was removed, 92 percent correctly 
identified the broker loan as cheaper, and 1 percent incorrectly 
identified the lender as cheaper. These results are quite similar to 
FTC's results of 90 percent and 4 percent. When asked to choose a loan, 
88 percent of participants chose the broker offer, while 1 percent 
chose the lender loan. These results compare to 85 percent and 3 
percent respectively in the FTC testing.
    When given same cost loan offers with a YSP, 81 percent correctly 
identified both loans as costing the same; 15 percent incorrectly 
identified the lender as cheaper; and 3 percent incorrectly identified 
the broker as cheaper. In contrast, in the FTC study, only 53 percent 
correctly identified the offers as costing the same; 30 percent 
incorrectly identified the lender as cheaper; and 11 percent 
incorrectly identified the broker as cheaper. In this GFE scenario, 50 
percent of participants would have chosen either offer; 39 percent 
chose the lender offer; and only 5 percent chose the broker's. In 
contrast in the FTC study, only 25 percent chose either offer; 46 
percent chose the lender offer; and 17 percent chose the broker's 
offer.
    Of particular concern was the difference between participants who 
could identify the cheapest loan offer, but did not choose it. Analysis 
of the participant responses to the open-ended question of ``why did 
you choose that offer'' led to further modifications of the GFE to 
address this concern and to a fifth round of testing. In many comments, 
participants stated that they chose a particular offer because they did 
not want the ``higher interest rate'' indicated on page 2 of the GFE. 
They concluded from the language on the YSP disclosure that the 
interest rate was higher than the rate cited on page 1 under ``Loan 
Details.'' Also, many of those who had no preference for the cheaper 
broker loan indicated that $300 was not a sufficient difference to be a 
deciding factor.
    As a result of the testing and analysis, revisions were made to the 
GFE. First, the language in box 2 on page 2 of the GFE referring to the 
``higher interest rate'' and ``lower interest rate'' was modified to 
reduce the possibility of borrowers'' misinterpreting that the interest 
rate had changed from what was reported on the first page. Second, a 
third option was added to the YSP/discount points section on page 2 so 
a lender could indicate that its credits or charges were already 
included in ``Our Service Charge.'' This addition was designed to 
ensure that participants would understand that a lender's origination 
charge might include a YSP or discount points, even though the YSP or 
points would not necessarily be known at the time of settlement, 
because the loan would not have been sold into the secondary market. 
The third option thus creates a closer parallel between broker and 
lender loans. Third, arrows were added on pages 1 and 2 to focus the 
borrower's attention on the subtotals and the total estimated charges, 
rather than on individual components. In addition, the typeface point 
size in the Total Estimated Settlement Charges on the bottom of page 1 
was increased to further draw attention to the bottom-line.
    For purposes of testing, three other changes were made to the GFEs. 
First, the difference in the total cost was changed to $500, to 
increase the likelihood that the difference would be a deciding factor. 
Second, another pair of loan options was added in which the lender 
offer was $500 less than the broker offer. This addition was intended 
to identify any bias for or against the broker and lender options. 
Finally, a set of four loans was added, to investigate whether the 
comparison across more than two offers increased or decreased 
participant performance. No version was tested without the YSP and 
discount points language.

[[Page 14046]]

    For round 5 of testing, 600 participants were divided into two 
groups, both of which received the revised GFE.\28\ The first group 
received the revised GFE with changed language and with the addition of 
a third option so that lenders could indicate that YSP and discount 
points had been included in ``Our Service Charge.'' The second group 
received the identical revised GFE, but the third option box was 
removed. All participants received three pairs of loans, one with the 
broker offer being lower by $500, one with the lender offer being lower 
by $500, and one in which both offers were the same. In addition, each 
participant received a set of four offers to compare.
---------------------------------------------------------------------------

    \28\ Participants were chosen for demographic diversity in the 
same five cities: Atlanta, Boston, Denver, Seattle, and Tulsa. No 
participant from round 4 was permitted to participate in round 5.
---------------------------------------------------------------------------

    The three option GFE and the two option GFE performed quite 
similarly with the three option form consistently getting slightly 
better results. The proposed rule therefore discusses only the three 
option form, and that form is included in the proposed rule.
    In the GFE in which the broker was cheaper, 92 percent of the 
participants correctly identified the broker as the cheaper loan offer. 
This result represents an improvement over the 72 percent reported by 
the FTC study and the 83 percent reported in the round 4 results. Only 
3 percent of the participants incorrectly identified the lender as the 
cheaper loan offer, compared to the 17 percent reported by the FTC and 
8 percent in round 4. When asked to choose a loan, 87 percent of the 
participants chose the cheaper broker loan as compared to 70 percent of 
the participants in the FTC study and 72 percent of the participants in 
round 4. These results of round 5 of testing are significantly better 
than the FTC's results and are based on a much larger sample.
    In the GFE in which the lender was cheaper, 92 percent of the 
participants correctly identified the lender as the cheaper loan offer. 
Only 1 percent incorrectly identified the broker as cheaper. When asked 
to choose a loan, 89 percent of the participants chose the lender loan 
and less than 1 percent chose the broker.
    The purpose of testing the case in which the lender was cheaper 
than the broker was to test for bias by seeing if the GFE forms 
performed equally well when either the lender or broker was the cheaper 
loan. A comparison of the results indicates that there is no bias 
against brokers when the loans have different borrower costs.
    In the GFE in which the broker and lender loan offers were of equal 
cost, 90 percent of the participants were able to correctly identify 
that fact. This result compares very favorably with the 53 percent 
reported by FTC and the 81 percent from round 4 of testing. 
Participants in round 5 misidentified the lender as cheaper seven 
percent of the time, compared to 30 percent in the FTC results and 15 
percent in round four. Participants misidentified the broker as cheaper 
1 percent of the time as compared to 11 percent in the FTC study and 3 
percent in round 4. Participants said they would choose either loan 70 
percent of the time, a dramatic increase over the 25 percent in the FTC 
study and the 50 percent in round four. Twenty-one percent would choose 
the lender as compared to 46 percent in the FTC study and 40 percent in 
round 4. Four percent of participants chose the broker compared to 17 
percent in the FTC study and 5 percent in round 4 of testing.
    To further test whether increased context improved or decreased 
consumer performance with the revised GFE, the Department asked 
Kleimann to give the participants a four-loan comparison as well. For 
this four-way comparison, HUD included a blank worksheet or shopping 
chart to aid participants in comparing the loans, as page 4 of the GFE 
form. The worksheet contained spaces for the originator's name, loan 
amount, interest rate, term, monthly payment, adjusted origination 
charge, charges for all other settlement services, and total estimated 
settlement charges. On page 1 of the GFE, a sentence telling 
participants to use the table to compare offers was inserted. 
Additionally, half of the participants were given explicit verbal 
directions to use the worksheet.
    The 300 participants who had received the three option GFE were 
included in this four-way comparison. Half were given a set in which a 
broker loan offer was the cheapest. The other half were given a set in 
which a lender and a broker loan offer cost exactly the same and were 
the cheapest at $6,500. Only 150 participants received explicit verbal 
instructions to use the worksheet in their comparison, while half 
received no instructions.
    In the comparison in which a broker loan offer was the cheapest, 92 
percent of participants who were not verbally reminded to use the 
comparison worksheet correctly reported the broker loan as the 
cheapest. Very few of the participants who were not verbally reminded 
to use the comparison worksheet used it. When instructed to use the 
comparison sheet, many participants did, and 97 percent correctly 
identified the broker loan as the cheapest. The overall success rate 
for correctly identifying the correct loan as the cheapest for both 
those getting and those not getting the verbal instructions to use the 
comparison worksheet was 95 percent, with only 1 percent misidentifying 
a lender loan as cheaper.
    In the case where both loans cost the same and no verbal 
instructions were given to use the comparison sheet, 41 percent picked 
the broker loan as cheaper and 49 percent picked the lender loan. With 
verbal instructions to use the worksheet, 57 percent picked the broker 
at $6,500 and 35 percent picked the lender at $6,500. The combined 
average was 49 percent for the broker and 41 percent for the lender. 
There was no bias against the broker when costs were the same.
    5. Sixth Round of Testing. HUD conducted a sixth round of consumer 
testing in November 2007. The testing consisted primarily of 
qualitative tests of the GFE and an introductory qualitative test of 
the closing script (referred to in testing as ``the summary''). 
Compared to previous rounds of testing, the testers found that 
participants were more aware, due to recent intensive media coverage of 
mortgage market difficulties, personal experience, and the experiences 
of relatives and friends, of the issues facing a consumer choosing a 
mortgage loan. The modifications to the GFE for round 6 included an 
expanded disclosure of loan terms on page 1 of the GFE, clarifying 
language regarding the important dates when actions must be taken by 
the consumer, changes in the title and description of government 
recording and transfer charges, and new language regarding additional 
compensation lenders may receive after closing for selling the loan.
    Consumers appreciated the enhanced loan terms disclosures designed 
to alert the borrower to potentially unfavorable changes in their 
obligations during the term of their loans. Participants stated that 
they liked the form length, the language of the GFE, and the layout of 
pages 1 and 2. Participants appreciated the trade-off table on page 3 
and used it to compare loans. As a result of the round six testing, 
information on the existence of an escrow account was added in the 
``Summary of your loan terms'' section on page 1, and a section 
entitled ``Your financial responsibilities as a homeowner'' was added 
at the top of page 4. Finally, the tolerance presentation was changed 
from a pure list of headings and bullets on page 3,

[[Page 14047]]

to bullets within columns according to the tolerance that applies.
    Testers conducted settlement/closing simulations to test the idea 
of the closing script. Participants thought the loan details were clear 
and understandable and reacted positively to having the summary read 
aloud. Participants were more attentive to loan details, were more 
aware of the tolerance categories and how they related to charges, and 
were better able to identify tolerance violations when the script was 
read aloud than when they reviewed the script documents independently.
Revisions to the GFE Based on Testing
    The GFE form proposed today is the result of an iterative testing 
process comprised of six rounds of consumer testing of the form during 
the 2003-2007 period. HUD's testing contractor used the data collected 
from testing participants during each round to improve and modify the 
form throughout the testing process. A summary report with detailed 
information on each round of testing is available at http://www.huduser.org/publications/hsgfin/GoodFaith.html. Based on this 
testing, HUD has made revisions in the GFE disclosure form and now 
presents the net origination charge on the first page of the form as 
``your adjusted origination charges.'' This amount is added to the 
charges for all other services to arrive at the total estimated 
settlement charges for the mortgage on the first page. This new 
approach to disclosure helps consumers focus appropriately on the net 
charges of the originator when comparing similar loans, from either a 
lender or a broker, and on the total estimated settlement charges. The 
fourth page of the form provides a Mortgage Shopping Chart that also 
helps borrowers compare total charges for various mortgage loans.
    The second page of the new GFE informs the consumer how the 
adjusted origination charge is computed. Block 1 discloses as ``Our 
service charge'' the originator's total charge to the borrower for the 
loan. (The form no longer refers to this total charge in Block 1 as 
``maximum'' compensation.)
    Today's proposed rule proposes to require that in the case of loans 
originated by mortgage brokers, the amount in Block 1 must include all 
charges received by the broker and any other originator for, or as a 
result of, the mortgage loan origination, including any payments from 
the lender to the broker for the origination. In the case of loans 
originated by originators other than mortgage brokers, the amount in 
Block 1 must include all charges to be paid by the borrower that are to 
be received by the originator for, or as a result of, the loan 
origination to the borrower, except any amounts denominated by the 
lender as discount points or amounts that the lender chooses to call a 
credit and which are disclosed in Block 2.
    Block 2 discloses for loans originated by mortgage brokers whether 
there is any charge or a credit to the borrower for the specific 
interest rate chosen for the GFE. The second check box indicates 
whether there is a payment for a higher interest rate loan described, 
as the ``credit of $---- for this interest rate of --%. This credit 
reduces your upfront charges.'' The third check box indicates any 
``charge of $---- for the interest rate of --%. This payment (discount 
points) increases your upfront charges.'' Any lender payment is then 
subtracted and any points are added to arrive at ``your adjusted 
origination charge'' that is also disclosed on the first page of the 
form. For mortgage brokers, the amounts of any charge or credit in 
Block 2 must equal the difference between the price the wholesale 
lender pays the broker for the loan and the initial loan amount.
    At page 2, while lenders are not required to check the second or 
third boxes of Block 2, in loans where they do not make such 
disclosures, they are required to check box 1 that indicates that ``The 
credit or charge for the interest rate chosen is included in the 
service charge.'' If lenders denominate any amounts due from the 
borrower as ``discount points,'' they must check the third box 
indicating that there are charges for the interest rate and enter the 
appropriate amount for points as a positive number. If lenders 
denominate any amounts as a credit to the borrower for the particular 
interest rate covered by the GFE, they must check the second box and 
enter the appropriate amount as a negative number. Lenders must also 
add any such positive amounts or deduct any negative amounts to arrive 
at ``Your Adjusted Origination Charge,'' which is also to be disclosed 
on page 1 of the form.
    Considering that mortgage brokers are required to disclose payments 
from lenders while lenders are not required to disclose payments they 
receive from the secondary market, by virtue of the ``secondary market 
exemption,'' \29\ HUD considered providing only the adjusted 
origination charge and disclosing the YSP and discount points elsewhere 
on the form without the calculation. HUD concluded, however, that a 
complete disclosure of payments to the broker as presented on page 2 of 
the form, read in conjunction with the chart on page 3 of the form, was 
essential to borrower understanding of: (1) The broker's total 
compensation; (2) how rate-based payments from lenders can help reduce 
borrowers' up-front origination charges and settlement costs in 
brokered loans; and (3) how payments to reduce the interest rate and 
monthly payment increase up-front charges. Because mortgage broker 
compensation occurs at settlement and can be readily ascertained, full 
disclosure of total broker compensation is appropriate. On the other 
hand, even in the absence of the secondary market exemption, a similar 
disclosure of lender compensation would not be appropriate because it 
is difficult to measure secondary market payments with any precision at 
the time of settlement and because a lender may or may not choose to 
sell a particular loan at some point in the future. However, the GFE 
form includes a notation on page 4 that lenders may also receive an 
additional payment if they sell the loan after settlement.
---------------------------------------------------------------------------

    \29\ As set forth in 24 CFR 3500.5(b)(7), a bona fide transfer 
of a loan obligation in the secondary market is not covered by RESPA 
and this part, except as set forth in section 6 of RESPA (12 U.S.C. 
2605) and 24 CFR 3500.21.
---------------------------------------------------------------------------

    Furthermore, based on testing by HUD's contractor, as discussed 
above, the YSP disclosure without an explanation of its context was not 
useful to consumers. On the other hand, based on testing, by moving to 
a form that requires in Block 2 that lenders disclose that credits or 
charges may be included in their service charge as well, even when the 
calculation is on the form for brokered loans, borrowers are not 
confused and correctly compare adjusted origination charges between 
loans from mortgage brokers and loans from lenders even when the YSP is 
included in the calculation of the adjusted origination charge. 
Nevertheless, to help borrowers identify the lowest-cost loan without 
being confused by the presence of a YSP, HUD established the first page 
of the form as a summary page that only includes adjusted origination 
charges, moved the ``calculation'' of any credit (YSP) or charge to the 
second page of the new GFE, and then established the new Mortgage 
Shopping Chart at page 4 to facilitate comparison shopping. HUD is now 
convinced that by making these changes, any disadvantage to brokers is 
virtually eliminated. Also, consistent with the FTC's 2002 comment, HUD 
proposes to include in the revised Special Information Booklet advice 
to borrowers that lenders also may receive payments from financial 
institutions when they sell the mortgage but are not

[[Page 14048]]

required to disclose such payments and, for this reason, borrowers 
should focus on net origination charges of loan originators for 
comparable mortgages.
    To avoid borrower confusion, the term ``lender payment to the 
borrower'' that had been included in the 2002 Proposed Rule also has 
been dropped. Through its use of this term in the earlier proposal, HUD 
had sought to have borrowers focus on the payment, and understand that 
it was a consequence of their choice of rate. HUD now recognizes the 
original terminology warranted improvement.
    In arriving at changes in the proposed revised GFE form, HUD also 
considered the possibility of adopting the Mortgage Broker Fee 
Agreement developed by representatives of the lending and brokerage 
industries. These forms disclose the total amount of fees to the broker 
and explain that the fees may include lender payments, but not the 
specific amount of such payments. HUD believes, however, that it is 
better for the borrower to understand the lender payment and its 
relationship to higher interest rates so that he or she can use the 
payment to lower his or her up-front costs, rather than simply to 
disclose the possibility of such payment to the borrower. For these 
reasons, HUD remains committed to improving the GFE disclosure rather 
than requiring yet another new form or agreement.
    In its consultations with staff of the Federal Reserve, HUD raised 
the concern expressed by some commenters that treating lender payments 
to mortgage brokers as a credit toward the origination charges could 
increase the points and fees of each brokered mortgage loan, resulting 
in more loans coming under HOEPA coverage. Federal Reserve staff 
advised HUD that, notwithstanding HUD's changed requirements, 
determinations of whether payments to a mortgage broker must be 
included in the finance charge and whether a loan is covered by HOEPA 
are based on the statutory definitions and requirements in TILA as 
implemented by the Board's Regulation Z, which are unaffected by HUD's 
RESPA rulemaking.
    HUD also recognizes that many loan originators today offer loans 
with no up-front fees due from the borrower. These loans have become 
more popular over the years. The proposed GFE can easily accommodate 
these ``no cost'' loans. In the case where ``no cost'' means no up-
front payment to the loan originator, the figure in Block A equals 
zero. This implies that any credit identified in Block 2 would exactly 
offset the charge in Block 1. While a mortgage broker would always be 
required to enter the actual amount of any yield spread premium in 
Block 2, a lender could alternatively enter zero for the credit, in 
which case the charge in Block 1 would also have to equal zero so that 
the combination to be reported in Block A would equal zero.
    Alternatively, the borrower might want to pay a lower interest rate 
and monthly payment than that associated with a ``no cost'' loan. The 
borrower generally may do this by buying the interest rate down. This 
is done by paying an up-front fee to the loan originator that 
compensates the loan originator for the lower interest rate and monthly 
payments it will receive over the life of the loan. The more the 
borrower pays, the lower the interest rate and monthly payments will 
be. The amount the borrower pays to buy the rate down shows up in Block 
A as a positive number. This would result from a higher value in Block 
1 or a higher value in Block 2. (A lower credit in Block 2 or a higher 
charge in Block 2 yields a higher value in Block 2, and in Block A as 
well.) Thus, either ``no cost'' loans or those where the borrower buys 
down the interest rate can be accommodated on the proposed GFE. In the 
first case, the value in Block A is zero. In the second, Block A 
represents what is paid to buy the interest rate down.
    In the case where ``no cost'' encompasses some third party fees as 
well as the up-front payment to the loan originator, the figure in 
Block A would have to be a negative value large enough to offset the 
third party fees covered under this definition of ``no cost.'' For 
brokers, who are required to report yield spread premiums, this implies 
that the yield spread premium identified in Block 2 as a credit would 
be larger than the charge in Block 1. The sum of the positive value in 
Block 1 and the negative value, the credit, in Block 2 would equal a 
negative value large enough to offset the third party fees. Lenders are 
not required to report yield spread premiums. But they are permitted to 
enter credits in Block 2. If a lender chooses to do so, then the yield 
spread premium identified in Block 2 as a credit would have to be 
larger than the charge in Block 1. Just as in the broker case, the sum 
of the two would equal a negative value large enough to offset the 
third party fees for a ``no cost'' loan. Finally, today's proposed rule 
states that loan originators must include all charges correctly within 
their prescribed category on the GFE and the HUD-1 (or HUD-1A). The 
amounts for categories involving third parties can include only amounts 
paid to the third party, and must not include amounts retained by the 
loan originator for related services performed by the loan originator. 
The amount charged to the borrower and shown on the HUD-1 in an 
individual transaction may be based on an average calculated in 
accordance with proposed Sec.  3500.8(b)(2). (See Section E discussion 
on average cost pricing.) HUD believes these rules are required to 
assure that, pursuant to Sections 4 and 5 of RESPA, originators provide 
borrowers accurate disclosures of settlement charges on the GFE, HUD-1, 
and HUD-1A.
    FHA Limit. Under its current regulations, HUD places specific 
limits on the amount a mortgagee may collect from a mortgagor to 
compensate a mortgagee for expenses incurred in originating and closing 
a FHA-insured mortgage loan (see 24 CFR 203.27).\30\ In light of the 
considerations below and its proposed changes to the HUD-1/1A, HUD is 
today proposing a change to the FHA regulations limiting origination 
fees of mortgagees. FHA considered deregulating the loan origination 
fee limitation in 1988 (see 53 FR 15408, April 28, 1988), but did not 
pursue a final rule at that time.
---------------------------------------------------------------------------

    \30\ Under 24 CFR 203.27(a)(2)(i), origination fees are limited 
to one percent of the mortgage amount. For new construction 
involving construction advances, that charge may be increased to a 
maximum of 2.5 percent of the original principal amount of the 
mortgage to compensate the mortgagee for necessary inspections and 
administrative costs connected with making construction advances. 
For mortgages on properties requiring repair or rehabilitation, 
mortgagor charges may be assessed at a maximum of 2.5 percent of the 
mortgage attributable to the repair or rehabilitation, plus one 
percent on the balance of the mortgage. (See 24 CFR 203.27(a)(2)(ii) 
and (iii).)
---------------------------------------------------------------------------

    HUD believes that its RESPA policy statements on lender payments to 
mortgage brokers restrict the total origination charges for mortgages, 
including FHA mortgages, to reasonable compensation for goods, 
facilities, or services. \31\ While the FHA limit on origination fees 
only regulates fees from mortgagors to mortgagees and does not include 
any payments between mortgagees, HUD is aware that in recent years 
mortgage brokers have routinely utilized yield spread premiums in FHA 
mortgage transactions to supplement their compensation beyond the 
amount they receive directly from the borrower. Studies by HUD confirm 
this.
---------------------------------------------------------------------------

    \31\ See Statement of Policy 1999-1, 64 FR 10080, March 1, 1999, 
and Statement of Policy 2001-1, 66 FR 53052, October 18, 2001.
---------------------------------------------------------------------------

    HUD believes that improvements to the disclosure requirements for 
all loans sought to be achieved as a result of the rulemaking should 
make total loan charges more transparent and allow market forces to 
lower these charges for all borrowers, including FHA borrowers. 
Therefore, HUD is proposing in this

[[Page 14049]]

rulemaking to remove the current specific limitations on the amounts 
mortgagees presently are allowed to charge borrowers directly for 
originating and closing an FHA loan. The FHA Commissioner would retain 
authority to set limits on the amount of any fees that mortgagees 
charge borrowers directly for obtaining an FHA loan.
    The proposed rule would also permit other government program 
charges to be disclosed on the blank lines in Section 800 of the HUD-1/
1A.

G. Modification of the HUD-1 Settlement Statement

    The Proposed Rule. The current HUD-1/1A Settlement Statements would 
be modified to allow the borrower to easily compare specific charges at 
closing with the estimated charges listed on the GFE. In addition, an 
addendum would be added to the HUD-1/1A that would compare the loan 
terms and settlement charges estimated on the GFE to the final charges 
on the HUD-1 and would describe in detail the loan terms for the 
specific mortgage loan and related settlement information. The 
settlement agent would be required to read the addendum aloud to the 
borrower at settlement and provide a copy of it at settlement.
    Discussion. As recommended at the 2005 RESPA Roundtables, HUD is 
today proposing to modify the HUD-1/1A form to make it comparable to 
the GFE. The HUD-1 is well accepted as a listing of settlement service 
charges by industry and consumers alike. However, there is a risk that 
if a borrower cannot easily compare the estimated charges listed on the 
GFE with the settlement charges listed on the HUD-1/1A, a settlement 
service provider could deviate from the prices listed on the GFE and 
the borrower would not realize such deviation prior to closing. Thus, 
borrowers would not be able to fully realize the financial savings that 
will result from comprehensive RESPA reform. Many participants at the 
RESPA Reform Roundtables recommended that in order to ensure the 
maximum cost savings to borrowers, the GFE and the HUD-1 should be 
easily comparable so that borrowers will be able to compare the 
estimated costs with the actual costs at closing. While some 
participants recommended that a new GFE be designed to correspond to 
the HUD-1, others recommended that the HUD-1 be redesigned to 
correspond to a new GFE that includes major cost categories.
    HUD recognizes that the HUD-1/1A forms are the most widely used and 
accepted forms in the mortgage industry and does not undertake changes 
to these forms lightly. However, because HUD believes that the GFE and 
the HUD-1 should be easily comparable, today's proposal sets forth 
changes to the HUD-1/1A that will allow borrowers to easily compare the 
figures on the GFE to the final charges at settlement. The proposed 
changes facilitate comparison of the two documents by inserting, on the 
relevant lines of the HUD-1/1A, a reference to the corresponding block 
on the GFE. With such changes, a borrower would be able to easily 
compare a figure in a particular column on the HUD-1/1A with the 
corresponding figure on the GFE. In addition, creating new labels for 
lines, showing totals while still permitting disclosure of details so 
long as not shown in either column or paid outside closing (POC), and 
leaving blank lines allows the HUD-1 to still function as an effective 
settlement document.
    The instructions for completing the HUD-1 will clarify the extent 
to which charges for individual services must be itemized. In general, 
the HUD-1 must separately itemize every service provided by a third 
party (i.e., other than the loan originator) to show the name of the 
party ultimately receiving the payment, along with the total amount 
received. However, services connected to the origination of the loan 
must not be separately itemized, even if a loan originator uses a third 
party to perform those services. For example, charges for document 
handling or processing should not be separately itemized, but instead 
should be included in the loan originator's own charge, since those 
types of services are ordinarily performed by the loan originator 
itself. Today's proposed rule adds a definition of ``origination 
services'' to clarify the types of services that may not be separately 
itemized on the HUD-1.
    The instructions for completing the HUD-1 also clarify the extent 
to which charges for title services must be itemized. In general, the 
HUD-1 must separately identify each service provider that is performing 
title services, along with the total amount received. If a party other 
than the title company listed on line 1101 of the HUD-1 provides 
services that are separate from providing title insurance, such as 
attorney and settlement or escrow agent services, the title company 
should separately itemize those services with the total amount paid to 
that provider, to the left of the columns. However, charges for 
services defined as ``primary title services'' such as abstract, 
binder, copying, document handling, or notary fees, should not be 
separately itemized on the HUD-1, even if a party other than the title 
company listed on line 1101 of the HUD-1 provides those services.
    Today's proposed GFE distinguishes between those settlement costs 
attributable to the loan originator and charges for all other 
settlement services. However, Section 800 of the current HUD-1/1A forms 
combines loan originator costs and some third party costs under the 
same heading (``Items Payable in Connection with Loan''). In order to 
facilitate comparison between the GFE and the HUD-1/1A for this 
section, the proposed HUD-1 replaces the existing line descriptions on 
the current HUD-1/1A with the relevant headings from the GFE. Thus, 
Line 801 on the proposed HUD-1 lists ``Our service charge (from GFE 
<greek-i>1)'' to refer back to Block 1 on the GFE. In lieu of the 
``Loan discount'' terminology on the current Line 802 of the HUD-1/1A, 
the proposed Line 802 includes ``Your charge or credit for the specific 
interest rate chosen (from GFE <greek-i>2)'' to refer back to Block 2 
on the GFE. Line 803 of the proposed HUD-1/1A lists ``Your Adjusted 
Origination Charges (from GFE Block A)'' and corresponds to GFE Block 
A. Lines 804 to 807 on the proposed HUD-1/1A for appraisal fee, credit 
report, tax service, and flood certification include notations 
indicating that the charges are listed in Block 3 on the GFE (required 
services selected by the loan originator). The dollar value showing up 
in GFE Block A can show up as POC, in the borrower's column, or in the 
seller's column. On line 803, the sum of the figures labeled as POC, in 
the borrower's column and in the seller's column should be compared to 
the figure in GFE Block A. The figures on Blocks 1 and 2 of the GFE 
must not show up in either column or as POC in order to avoid double-
counting.
    For Section 900, ``Items Required by Lender to be Paid in 
Advance,'' Line 901 of the proposed HUD-1/1A lists ``Daily Interest 
Charges (from GFE <greek-i>8)''; Line 902 lists ``Mortgage insurance 
premium (from GFE <greek-i>3 or <greek-i>5);'' and Line 903 lists 
``Homeowner's insurance (from GFE <greek-i>9).''
    For Section 1000, ``Reserves Deposited with Lender,'' the proposed 
HUD-1/1A inserts Line 1001 ``Reserves or escrow (from GFE <greek-i>7)'' 
and then renumbers the current lines. For Section 1100, ``Title 
Charges,'' the proposed form inserts Line 1101 ``Title services and 
lender's title insurance (from GFE <greek-i>4)'' and then renumbers the 
current lines. Line 1110 lists ``Optional owner's title insurance (from 
GFE <greek-i>10).''
    For Section 1200 ``Government Recording and Transfer Charges,'' the 
proposed HUD-1/1A inserts Line 1201, ``Government Recording and 
Transfer Charges (from GFE <greek-i>6)'' and renumbers

[[Page 14050]]

current lines. For Section 1300 ``Additional Settlement Charges,'' Line 
1301 includes ``Survey (from GFE <greek-i>5)''and Line 1302 ``Pest 
inspection (from GFE <greek-i>5).''
    The figures from Blocks 3 and 5 on the GFE are broken out and 
listed individually on the HUD-1 in the columns or as POC. The totals 
are not listed as POC or in the columns to avoid double-counting.
    All items on the HUD-1/1A that correspond to an item on the GFE are 
made to stand out by using a different font from the other text on the 
HUD-1, such as by bolding the text or using italics, so it is easier 
for the borrower to find these numbers when comparing the forms.
    Addendum to the HUD-1/1A, ``Closing Script.'' In addition to the 
proposed changes to the HUD-1/1A discussed above, HUD is proposing an 
addendum to the HUD-1 that would be provided to the borrower at 
closing. The loan originator would transmit to the settlement agent all 
information necessary to complete the prescribed addendum to the HUD-1/
1A settlement form, referred to as the ``closing script.'' The addendum 
would be prepared by the settlement agent and would have to accurately 
reflect the loan documents and related settlement information provided 
by the lender. The settlement agent would be required to read the 
addendum aloud to the borrower at settlement. The addendum would 
compare the loan terms and settlement charges estimated on the GFE with 
those on the HUD-1 and would describe in detail the loan terms for the 
specific mortgage loan as stated in the mortgage note, and related 
settlement information. The length of the addendum would vary depending 
on the specifics of the borrower's loan.
    HUD is proposing the addendum to address the frequent complaints it 
receives from borrowers that the costs quoted at the GFE stage varied 
considerably from the costs imposed at settlement. In addition, HUD 
continues to receive complaints from borrowers indicating that they 
were unaware or unsure of the terms of the loan provided at settlement. 
HUD believes that by making borrowers aware of their loan terms at the 
settlement, many problems after settlement can be avoided.
    HUD believes that greater borrower awareness and understanding of 
the settlement charges will help prevent the imposition of charges at 
settlement that were not included at the GFE stage. By reviewing each 
charge with the borrower at settlement, the closing agent will be able 
to highlight those charges that may have changed between the GFE stage 
and the settlement. In this fashion, the borrower will be able to more 
easily question any charges at the settlement, rather than after the 
settlement, when it becomes more difficult to address the issue or 
provide borrower satisfaction. HUD believes that the addendum to the 
HUD-1 complements the proposed GFE by apprising the borrower as to 
whether the tolerances imposed by the proposed GFE have been met, 
thereby minimizing post-settlement questions as to any cost variances 
between the GFE and the HUD-1.
    With respect to issues arising from the loan provided at 
settlement, the most frequent complaints stem from the following: The 
interest rate for the loan the borrower received was not the interest 
rate applied for; the borrower applied for a fixed rate loan but 
received an adjustable rate loan at settlement; and the closing 
documents were not explained to the borrower, leaving the borrower 
unaware or unsure of important loan information. In addition, HUD is 
aware that in many cases, borrowers are unaware of or confused by 
certain loan terms. This problem has become more acute with the rise of 
non-traditional mortgages. For example, many borrowers do not have a 
solid understanding of negative amortization or are unaware of the 
potential for negative amortization. For borrowers with adjustable rate 
loans, many do not understand the maximum amount their monthly mortgage 
payment could reach when the interest rate adjusts. In addition, many 
borrowers are unaware of the prepayment penalty in their loan until 
they try to refinance.
    To address these issues, today's proposed rule would require the 
settlement agent or other person conducting the settlement to read the 
closing script document aloud to the borrower and explain: (1) The 
comparison between the loan terms and the settlement charges listed on 
the HUD-1/1A settlement form with the estimate of charges listed on the 
GFE; (2) whether or not the tolerances have been met; and (3) the loan 
terms, as contained in the mortgage note and related settlement 
information. Any inconsistencies between the mortgage note, between 
related settlement information and the GFE, and between the HUD-1/1A 
settlement charges and the GFE would have to be disclosed and explained 
to the borrower. The proposed rule would also require that the closing 
script addendum be delivered to the borrower as part of the HUD-1/1A at 
the closing. Upon request of the borrower, the HUD-1/1A and the closing 
script addendum would have to be made available for review by the 
borrower 24 hours prior to the settlement, in accordance with 24 CFR 
3500.10.
    The instructions to the preparer of the closing script are included 
in Appendix A to the rule. Examples of closing scripts are also 
provided in Appendix A to the rule. All instructions for completing the 
closing script are proposed to be codified with the rule at the final 
rule stage.
    Enforcement. The Proposed Rule. The proposed rule provides that 
failure to complete the HUD-1 in accordance with the regulations 
constitutes a violation of Section 4 of RESPA.

H. Permissibility of Average Cost Pricing and Negotiated Discounts

    The Proposed Rule. The proposed rule would recognize pricing 
mechanisms that result in greater competition and lower costs to 
consumers, specifically average cost pricing and some discounts among 
settlement service providers, including volume-based discounts. The 
proposed rule would amend 24 CFR 3500.8 and would explain that charges 
for third party services may be calculated using average cost pricing 
mechanisms based on appropriate methods established by HUD. These 
mechanisms would also accommodate certain volume-based discounts. 
Although the third party charge on any one loan may be higher than the 
average, the third party charge on another loan may be lower, provided 
that borrowers are being charged no more than the average price 
actually received by the third parties during the period on which the 
average price is computed. The proposed rule would allow loan 
originators to disclose on the HUD-1 an average cost price in 
accordance with one of several specific methods. The proposed rule 
would also amend 24 CFR 3500.14(d) and the definition of ``thing of 
value'' to clarify that it is permissible for settlement service 
providers to negotiate discounts in the prices for settlement services, 
so long as the borrower is not charged more than the discounted price. 
The practice of negotiating discounts in prices--whether among 
settlement service providers, such as with volume-based discounts, or 
by a settlement service provider on behalf of consumers--can serve to 
reduce prices to consumers.
    Discussion. In this proposed rule, HUD is seeking to facilitate 
pricing arrangements that will benefit consumers. HUD has determined 
that in the evolving marketplace, certain loan originators and third 
party settlement service providers may wish to adopt average cost 
pricing and to offer

[[Page 14051]]

discounts, including volume-based discounts. HUD welcomes comment on 
these and any other pricing techniques that may result in greater 
competition and lower costs to consumers and that are consistent with 
the purposes of RESPA.
    Congress authorized the Secretary, pursuant to Section 19(a) of 
RESPA, to prescribe such rules and regulations and to make such 
interpretations as may be necessary to achieve the purposes of RESPA. 
In enacting RESPA, Congress found that reforms in the real estate 
settlement process were needed to protect consumers from the 
unnecessarily high settlement charges that had evolved in some areas of 
the country. Congress explained the purpose of RESPA as being to effect 
changes in the residential settlement process that will result ``in 
more effective advance disclosure to home buyers and sellers of 
settlement costs'' and ``the elimination of kickbacks or referral fees 
that tend to increase unnecessarily the costs of certain settlement 
services.''
    Congress sought to achieve its purposes through both prohibitions 
on conduct and better consumer disclosures. The Senate Committee Report 
on S.3164, the bill that was eventually enacted as RESPA, noted that 
the Committee on Housing, Banking, and Urban Affairs recommended an 
approach to the problems of settlement costs that would regulate the 
underlying business relationships and procedures of which the costs are 
a function, rather than regulating closing costs directly. (See S Rep. 
93-866, at 3 (1974).) Through the prohibitions against kickbacks and 
unearned fees in Section 8 and the escrow account requirements in 
Section 10, the Senate Committee was aiming to ensure that the costs of 
buying a home would not be ``unreasonably or unnecessarily inflated'' 
(Id). In fact, the Committee expected that advance disclosure of 
settlement charges would reduce or eliminate many ``unnecessary or 
unreasonably high settlement charges'' (Id).
    Section 4(a) of RESPA authorizes the Secretary to prescribe the 
primary disclosure document for settlement, the Uniform Settlement 
Statement, generally known as the HUD-1 (or HUD-1A) Settlement 
Statement. This standard form is used at settlement to disclose all 
charges imposed on the borrower and the seller. Section 4 is silent, 
however, on how such charges are calculated. Congress expressly 
encouraged flexibility on the application of at least some of the 
Section 4 requirements relating to the HUD-1 Settlement Statement, by 
allowing for the deletion from the form of items that are not required 
by local custom.
    In Section 5(c) of RESPA, Congress required that the lender provide 
to the borrower ``a good faith estimate of the amount or range of 
charges'' that the borrower is likely to incur at settlement. Section 
5, like Section 4, is silent on how such charges are to be calculated. 
This GFE of charges is to be included with a special information 
booklet that contains information about the homebuying and home finance 
process. Section 5(b)(1) of RESPA requires that the booklet include ``a 
description and explanation of the nature and purpose of each cost 
incident to a real estate settlement,'' but does not require that each 
charge be calculated on a per-transaction cost basis. Section 8(c) of 
RESPA is evidence of the approach that regulates the underlying 
business relationships and procedures, in that it exempts specific 
kinds of business payments from being found to violate RESPA's 
prohibitions on kickbacks, referral fees, and unearned fees. Section 
8(c)(1) establishes exemptions for payments between title companies and 
their agents, between lenders and their agents, and to attorneys, for 
services actually performed. Similar exemptions are established in 
subsections (c)(3) and (c)(4) for payments between real estate brokers 
and their agents, and among affiliated businesses. In section 8(c)(2), 
Congress permits settlement service providers to be compensated ``for 
goods or facilities actually furnished [and] for services actually 
performed,'' without requiring a particular, regimented pricing 
structure.
    Section 8(c)(5) of RESPA gives the Secretary discretion to permit 
``such other payments or classes of payments * * * as are specified in 
regulations prescribed by the Secretary, after consultation with [other 
Federal officials and entities].'' Through this section and section 19, 
the Secretary has been given broad regulatory authority to address 
changes in the real estate marketplace under RESPA.
    HUD's current regulations implementing RESPA have sometimes been 
cited as obstacles to consumer-friendly business practices, however. 
Discussions at the RESPA Reform Roundtables during 2005 and additional 
comments from both industry representatives and consumer advocates have 
suggested the need for greater competition among settlement service 
providers. In light of these suggestions, the Secretary has determined 
that, in HUD's implementation of RESPA, there should be greater 
flexibility for cost pricing formulas that bring more innovation and 
increased price competition to the settlement process. HUD proposes to 
recognize in the regulations that innovative approaches such as average 
cost pricing and certain discounts, including volume-based discounts, 
may serve to lower settlement costs to consumers without violating the 
statutory requirements of RESPA.
    The practices of negotiating price reductions--whether among 
settlement service providers or by an individual settlement service 
provider on behalf of consumers--can serve to reduce prices to 
consumers. Such arrangements are not contrary to the purposes of RESPA 
and do not violate section 8 when any and all pricing benefits are 
passed on to consumers. Accordingly, in today's proposed rule, HUD is 
amending the definition of ``thing of value'' set forth in 24 CFR 
3500.14(d) to exclude discounts negotiated by settlement service 
providers based on negotiated pricing arrangements, provided that no 
more than the reduced price is charged to the borrower and disclosed on 
the HUD-1/1A.
    In the 2002 proposed rulemaking, in the context of loan originators 
being subject to tolerances for their GFE estimates of settlement 
service charges, HUD recognized that:

    [T]he 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. * * *

67 FR 49134, 49151 (July 29, 2002).

    Lender comments on the 2002 Proposed Rule and discussions during 
the RESPA Reform Roundtables in 2005

[[Page 14052]]

continued to cite a need for a complete exemption from section 8 before 
lenders could use pricing models that would allow them to introduce 
more price competition in the marketplace. These comments were 
primarily in the context of the mortgage packaging proposal, however, 
and in 2002 HUD had proposed a ``safe harbor'' or section 8 exemption 
in that context. In advance of that proposal, HUD had determined that 
in order to fully develop the potential to reduce closing costs, loan 
originators would be able to seek discounts, including volume-based 
discounts, and to utilize average cost pricing. Today's proposed rule 
relies on adapting the GFE requirements to broaden the mortgage lending 
and settlement services marketplace, without a need for specific 
packaging proscriptions and requirements or a section 8 exemption.
    HUD believes that no such exemption is necessary in order to permit 
average cost pricing and discounting, including volume-based discounts. 
Rather, HUD has determined that RESPA provides enough flexibility to 
permit a variety of approaches to fee calculations, so long as they do 
not unnecessarily increase fees charged to consumers. During the 2005 
RESPA Roundtables, some loan originators and third party settlement 
service providers also took the position that neither a full section 8 
exemption nor formal authority for packaging is needed. These providers 
believed that development of different pricing mechanisms and some 
discounts could promote market innovation and increased price 
competition.
    In this rule, the Secretary is proposing to use the authority under 
section 19(a) of RESPA to permit pricing techniques using average cost 
pricing and certain discounts, consistent with RESPA's GFE and 
settlement statement requirements, and with section 8. HUD believes 
that consumers will ultimately benefit from negotiated pricing among 
and by settlement service providers. This proposed rule seeks to lower 
consumer costs by permitting settlement service providers who procure, 
or who help consumers to obtain, third party settlement services, to 
negotiate the pricing of those services by the third party provider. By 
using average cost pricing, settlement service providers could avoid 
having to track individual prices paid for third party services on a 
transaction-by-transaction basis, thereby lowering administrative costs 
that would be passed on to consumers.
    The proposed rule would make clear that where average cost pricing 
is used, the evaluation of prices of third party services should focus 
on all of the loan originator's transactions together, rather than 
viewing each transaction separately. An individual borrower might be 
charged more or less than the actual amount paid for that service in an 
individual transaction, provided that borrowers are being charged no 
more than the average price actually received by third parties during 
the period in which the average price is computed.
    The proposed rule sets forth two specific methods that loan 
originators may use to calculate an average price for a particular 
settlement service. The loan originator would designate a recent 6-
month period as the ``averaging period'' for purposes of calculating 
the average price. The same average price must then be used in every 
transaction in that class of transactions for which a GFE is provided 
following the averaging period until a new averaging period is 
established. The average price would be calculated either as: (1) The 
actual average price for the settlement service during the averaging 
period; or (2) a projected average under a tiered pricing contract, 
based on the number of transactions that actually closed during the 
recent averaging period. If a loan originator uses one of these methods 
to calculate the average price for a settlement service, HUD will deem 
the loan originator to have complied with the requirements of the rule.
    HUD welcomes comments on its proposed methods for calculating 
average cost prices and on any alternative methods that should be 
permitted. Specifically, HUD welcomes comments on how to define ``class 
of transactions.'' For example, ``class of transactions'' could be 
defined by loan type, or loan-to-value ratio. HUD is also interested in 
suggestions on alternative average cost pricing methods and other 
pricing methods that benefit consumers and are based on factors that 
would lead to charges to the consumer (and the disclosure of such 
charges) that are easily calculated, verified, and enforced, but 
difficult to manipulate in an abusive manner. Such factors could 
include, for example:
    (a) Experience over a period of time that is longer or shorter than 
that currently provided in the proposed rule;
    (b) Prices for the service among the usual third party providers 
upon which the lender or other settlement service usually relies;
    (c) General industry practices; and
    (d) A reasonable projection of future costs.
    Finally, with regard to any pricing method used by a settlement 
service provider, if a violation of section 8 of RESPA is alleged and 
an investigation ensues, the proposed rule would place the burden on 
the targeted settlement service provider to demonstrate compliance with 
a permissible pricing method through the production of relevant 
records.

I. Changes To Strengthen Prohibition Against Requiring the Use of 
Affiliates

    The Proposed Rule. The proposed rule would change the definition of 
``required use'' in Sec.  3500.2, so that consumers would be more 
likely to shop for the homes and home features, and the loans and other 
settlement services, that are best for them, free from the influence of 
disingenuous referral arrangements. HUD intends the rule to establish 
that, in a real estate transaction covered by RESPA, incentives that 
consumers may want to accept and disincentives that consumers may want 
to avoid should be analyzed similarly for compliance with RESPA.
    This change would make it clear that HUD views economic 
disincentives that a consumer can avoid only by purchasing a settlement 
service from particular providers or businesses to which the consumer 
has been referred to be potentially as problematic under RESPA as are 
economic incentives that are contingent on the consumer's choice of a 
particular settlement service provider. In particular, the change 
proposed today may affect the analysis under section 8(a) of 
disincentives that are avoided only by using an affiliated settlement 
service provider. The change may also affect sellers who use 
disincentives to influence a borrower's choice of a particular title 
company.
    Consumer business captured through economic incentive or 
disincentive arrangements can raise questions about violations of 
section 8(a) of RESPA. The change proposed today may eliminate the 
argument by affiliated businesses that there is no ``required use'' 
that prevents them from invoking the affiliated business exemption to 
section 8 violations that involve consumer incentives and 
disincentives. The modifications in the proposed rule are not intended 
to prevent discounts that are beneficial to consumers, however. The 
revised definition states that the offering by a settlement service 
provider of an optional package or a combination of bona fide 
settlement services to a borrower at a total price lower than the sum 
of the prices of the individual settlement services would not 
constitute a ``required use.'' By separate amendment to Sec.  
3500.14(d), such arrangements are defined as not being a thing of 
value, and so would not be in violation of the referral prohibitions in 
section 8(a) of RESPA.
    The proposed revision to the ``required use'' definition would

[[Page 14053]]

continue to apply in two sections of the regulations: The affiliated 
business exemption in Sec.  3500.15, and the prohibition on the seller 
requiring the buyer to purchase title insurance from a particular 
company in Sec.  3500.16. However, as part of the proposed amendment of 
Sec.  3500.7, and in light of other changes that would be made by this 
proposed rule, the term ``required use'' would no longer apply as it 
does currently in Sec.  3500.7(e).
    Discussion. Section 8(a) of RESPA prohibits persons from giving or 
receiving a thing of value, pursuant to an agreement for the referral 
of business incident to a settlement service in a covered transaction. 
RESPA was amended in 1983 to allow businesses to make referrals to 
affiliated businesses, however, and to receive a benefit from their 
ownership interest in the affiliated businesses, so long as three 
conditions are met (see section 8(c)(4)).\32\ One of the three 
conditions is that affiliated businesses may not require consumers to 
use any particular provider of settlement services. The term ``required 
use'' is currently defined in Sec.  3500.2 of HUD's regulations to mean 
a situation in which a person must use a particular provider of a 
settlement service in order to have access to some distinct service or 
property. In addition, the term appears in section 9 of RESPA \33\, and 
in Sec. Sec.  3500.7(e), 3500.14(f), 3500.15(b)(2), and 3500.16 of 
HUD's implementing regulations.
---------------------------------------------------------------------------

    \32\ Section 8(c)(4) (12 U.S.C. 2607(c)(4)) of RESPA states in 
part that ``Nothing in this section shall be construed as 
prohibiting * * * affiliated business arrangements so long as (A) a 
disclosure is made of the existence of such an arrangement to the 
person being referred * * *, (B) such person is not required to use 
any particular provider of settlement services, and (C) the only 
thing of value that is received from the arrangement, other than the 
payments permitted under this subsection, is a return on the 
ownership interest * * *.''
    \33\ Section 9 states in part that ``[n]o seller of property * * 
* shall require directly or indirectly, as a condition to selling 
the property, that title insurance covering the property be 
purchased by the buyer from any particular title company.''
---------------------------------------------------------------------------

    HUD believes that some businesses have used the affiliated business 
arrangement exception in section 8 of RESPA to steer consumers to 
affiliated settlement service providers that may not provide the best 
mortgage products or settlement services for those consumers. A number 
of such complaints stem from builders, who are in a position to refer 
settlement service business, that use incentives or penalties to steer 
consumers to the builders' affiliated mortgage and title companies. 
Consumers have frequently contacted HUD to express concerns and 
register complaints about these practices, which usually fall into one 
of two categories.
    First, consumers complain that the cost to the builders of 
incentives and discounts related to the homes themselves have been 
built into the sales price of the homes, so that they are not true 
incentives and discounts, but are penalties (i.e., higher sales prices) 
that are imposed if the consumer chooses an unaffiliated settlement 
service provider. Second, consumers complain that the rates and fees 
charged by builders' affiliated settlement service providers are higher 
than what would be charged by unaffiliated settlement service 
providers. In both of these cases, consumers may be confused about the 
value of the ``deal,'' and may forego shopping for lower rates and fees 
offered by unaffiliated settlement service providers.
    For example, HUD has recently received complaints such as:

    <bullet> A buyer was offered a $22,000 discount on the price of 
a home for using the builder's affiliated lender, but the interest 
rate offered by the lender was \1/2\ point higher than the market 
rate, and the origination fee charged by the affiliated lender was 
higher.
    <bullet> A buyer would be required to make a higher earnest 
money deposit and would lose a $2,000 ``closing incentive'' if the 
buyer did not use the builder's affiliated lender.
    <bullet> A builder promised a $3,000 incentive on the purchase 
price and $6,000 toward closing costs if the buyer used the 
builder's affiliated lender, which charged an interest rate that was 
1 percent higher than the market rate and additional fees.

    The effect of the change made by the proposed rule in the 
definition of ``required use'' is not limited to builders and their 
affiliated settlement service providers. Any businesses that are either 
clearly affiliated because of their company structures, or that would 
be deemed to be in an ``affiliated business arrangement'' under RESPA's 
definitions of that term and the related term of ``associate,'' should 
be aware of the change in the definition of ``required use'' in this 
proposed rule. This change could affect the applicability of the 
affiliated business requirements to those businesses.
    Further, the definition applies to all sellers of property in RESPA 
covered transactions, for purposes of the prohibitions in section 9 of 
RESPA against requiring directly or indirectly that buyers purchase 
title insurance from any particular title company.
    HUD is requesting comments on whether the proposed change in the 
definition of ``required use'' will better serve the purposes of RESPA 
and whether further improvements could be made in the definition to 
accomplish the intent of both the affiliated business exemption in 
section 8 and the prohibition in section 9 on the required use of a 
title company.

J. Technical Amendments to Current RESPA Regulations

    The Proposed Rule. The proposed rule would update the current RESPA 
regulations concerning the provision of the mortgage servicing 
disclosure statement within 3 days of an application for a mortgage 
loan, to ensure consistency with current statutory requirements. In 
addition, the proposed rule would update the current escrow 
regulations, by removing outdated provisions.
    Specifically, the proposed rule would amend current Sec.  3500.21 
to conform to the Economic Growth and Regulatory Paperwork Reduction 
Act of 1996 (Title II of the Omnibus Consolidated Appropriations Act, 
1997) (Pub. L. 104-208) (the Act). Section 2103(a) of the Act amended 
section 6(a) of RESPA to eliminate the requirement that applicants for 
federally related mortgage loans be provided a disclosure describing 
the lender's historical practice regarding the sale or transfer of 
servicing rights, and the requirement that loan applications contain 
signed statements from applicants acknowledging that they have read and 
understood the disclosure provided.
    On May 9, 1997, the Department published a proposed rule (62 FR 
25740) designed in part to modify HUD's existing RESPA regulations 
concerning the disclosure to mortgage borrowers of information 
pertaining to the lender's practices regarding the transfer or sale of 
servicing rights (RESPA section 6(a)), in order to make the regulations 
consistent with 1996 statutory amendments effected by the Economic 
Growth and Regulatory Paperwork Reduction Act. The Department received 
numerous comments on the proposed rule, and the comments were generally 
favorable. However, the Department never finalized that proposed rule. 
Due to the amount of time that has passed since the first proposed 
rule, today's proposed rule seeks comment on changes to conform the 
transfer of servicing disclosure requirements to the current statutory 
requirements.
    In addition, the proposed rule would make changes to current Sec.  
3500.17 to eliminate the phase-in period for aggregate accounting for 
escrow accounts. The phase-in period was a transitional provision that 
expired on October 27, 1997. All servicers are currently required to 
use the aggregate accounting method. Today's proposed

[[Page 14054]]

rule would clarify this by eliminating provisions from Sec.  3500.17 
that relate only to the alternate accounting methods that were 
permitted during the phase-in period.

K. ESIGN Applicability to RESPA Disclosures

    The Proposed Rule. The proposed rule would amend HUD's RESPA rules 
to explicitly recognize the current statutory applicability of the 
Electronic Signatures in Global and National Commerce Act (ESIGN), 15 
U.S.C. 7001-7031, to RESPA. This amendment is intended to make clear 
that all RESPA disclosures may be provided to consumers in electronic 
form, so long as the consumer consents to receive such disclosures in 
electronic form and the other specific conditions of ESIGN are met. 
This recognition of the applicability of ESIGN to RESPA would also make 
clear that all documents required to be retained under RESPA may be 
retained in electronic format, so long as the ESIGN requirements for 
document retention are met.

V. Questions for Commenters

    HUD welcomes comments on all aspects of the proposal. In addition, 
HUD specifically requests comment on the following issues:
    1. Whether a 12-month implementation period for the GFE is 
appropriate. (Section IV.D.)
    2. The proposed GFE, as well as the proposed HUD-1/1A Settlement 
Statement Forms.
    3. Possible additional ways to increase consumer understanding of 
adjustable rate mortgages.
    4. Whether the proposed requirements for completing and delivering 
the Addendum to the HUD-1/1A, including the mandatory reading of the 
Closing Script by the party conducting the closing to the borrower(s), 
are the best methods for assuring that borrower(s) understand their 
loan terms and the differences between the GFE and the HUD-1/1A.
    5. Whether a provision should be added to the RESPA regulations 
allowing a loan originator, for a limited time after closing, to 
address the failure to comply with tolerances under the proposed GFE 
requirements, and if so, how should such a provision be structured? 
(Section IV.E. 10) Would such a provision be useful, and if so, what 
would be the appropriate time frame for finding and refunding excess 
charges? Could such a provision be abused, and therefore harmful to 
consumers? Would the ability of prosecutors to exercise enforcement 
discretion obviate the need for such a provision?
    6. Proposed methods for calculating average cost prices and on any 
alternative methods that should be permitted. (Section IV.H.) 
Specifically, how to define ``class of transactions.'' Comments are 
also invited on alternative average cost pricing methods and other 
pricing methods that benefit consumers and are based on factors that 
would lead to charges to the consumer and disclosure of such charges 
that are easily calculated, verified, and enforced, but difficult to 
manipulate in an abusive manner. Such factors could include:
    (a) Experience over a period of time that is longer or shorter than 
that currently provided in the proposed rule;
    (b) Prices for the service among the usual third party providers 
upon which the lender or other settlement service usually relies;
    (c) General industry practices; and
    (d) A reasonable projection of future costs.
    7. Whether the proposed change in the definition of ``required 
use'' will better serve the purposes of RESPA and whether further 
improvements could be made in the definition to accomplish the intent 
of both the affiliated business exemption in section 8 and the 
prohibition in section 9 on the required use of a title company. 
(Section IV.I.)
    8. With respect to the revised definition of ``Good Faith 
Estimate'' set forth in the proposed rule language at 24 CFR 3500.2, is 
the standard set forth sufficient to ensure that good faith estimates 
will be filled out consistently by all loan originators in a particular 
community?
    9. Should the Section 6 disclosure on transfer of servicing that is 
required under RESPA be included on the GFE?
    10. Should a loan originator be required to include a ``no cost 
loan'' on the trade-off chart on page 3 of the GFE as one of the 
alternative loans if it is not the loan for which the GFE is written?

VI. Findings and Certifications

The Paperwork Reduction Act

Information Collection Requirements
    The information collection requirements contained in this proposed 
rule have been submitted to the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In 
accordance with the Paperwork Reduction Act, an agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information, unless the collection displays a currently valid OMB 
control number.
    The burden of the information collections in this proposed rule is 
estimated as follows:

                                                           Reporting and Recordkeeping Burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Number of     Frequency of    Responses per    Burden hour    Annual burden
         Information collection             respondents      response          annum       per response        hours        Hourly cost     Annual cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
GFE/Information Booklet.................          50,000             425      21,250,000            0.17     5,3,612,500          $31.14    $112,493,250
Servicing Disclosure....................               0               0               0               0               0               0               0
Transfer Disclosure.....................          20,000           3,000      60,000,000            0.03       1,800,000           10.00      18,000,000
HUD-1 or HUD-1A and Closing Script......          20,000             625      12,500,000            0.58       7,250,000           33.74     244,615,000
Initial Escrow..........................           2,000           4,875       9,750,000            0.08         780,000          * 0.00               0
Annual Escrow...........................           2,000          21,100      42,200,000            0.08       3,376,000         * 20.00      67,520,000
Voluntary Escrow Account Payments.......           2,000             600       1,200,000            0.08          99,600           20.00       1,920,000
AfBA....................................          10,000             269       2,689,500            0.10         268,950           20.00       5,379,000
                                         ---------------------------------------------------------------------------------------------------------------
    Totals..............................  ..............  ..............     149,589,500  ..............      17,183,450  ..............    $449,927,250
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 14055]]

    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 rule. Under the provisions 
of 5 CFR part 1320, OMB is required to make a decision concerning this 
collection of information between 30 and 60 days after today's 
publication date. Therefore, a comment on the information collection 
requirements is best assured of having its full effect if OMB receives 
the comment within 30 days of today's publication. Comments must refer 
to the proposal by name and docket number (FR-5180) and must be sent 
to: HUD Desk Officer, Office of Management and Budget, New Executive 
Office Building, Washington, DC 20503, Fax number: (202) 395-6947 and 
Reports Liaison Officer, Office of Housing--Federal Housing 
Commissioner, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Room 9136, Washington, DC 20410-8000.

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. 4332(2)(C)). The Finding of No Significant 
Impact is available for public inspection between the hours of 8 a.m. 
and 5 p.m. weekdays in the Regulations Division, Office of General 
Counsel, U.S. Department of Housing and Urban Development, 451 Seventh 
Street, SW., Room 10276, Washington, DC 20410-0500. Due to security 
measures at the HUD Headquarters building, an advance appointment to 
review the public comments must be scheduled by calling the Regulations 
Division at (202) 402-3055 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
via TTY by calling the toll-free Federal Information Relay Service at 
(800) 877-8339.

Executive Order 12866, Regulatory Planning and Review

    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 the executive order. 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 Regulations 
Division, Office of General Counsel, U.S. Department of Housing and 
Urban Development, 451 Seventh Street, SW., Room 10276, Washington, DC 
20410-0500. The Initial Economic Analysis prepared for this rule is 
available online at http://www.hud.gov/respa, and for public inspection 
in the Regulations Division. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the public 
comments must be scheduled by calling the Regulations Division at (202) 
402-3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number through TTY by calling the 
Federal Information Relay Service at (800) 877-8339.

Federalism Impact

    This 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.

List of Subjects

24 CFR Part 203

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

24 CFR Part 3500

    Consumer protection, Condominiums, Housing, Mortgagees, Mortgage 
servicing, Reporting, and Recordkeeping requirements.
    For the reasons stated in the preamble, HUD proposes to amend 24 
CFR parts 203 and 3500 as follows:

PART 203 -- SINGLE FAMILY MORTGAGE INSURANCE

    1. The authority citation for part 203 continues to read as 
follows:

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

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


Sec.  203.27  Charges, fees, or discounts.

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

[[Page 14056]]

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

    3. The authority citation for part 3500 continues to read as 
follows:

    Authority: 12 U.S.C. 2601 et seq.; 42 U.S.C. 3535(d).
    4. In Sec.  3500.2, paragraph (b) is amended by removing the 
definition of Application; revising the definitions of Good faith 
estimate or GFE, Mortgage broker; and Required use and add, in 
alphabetical order, the following new definitions of Adjustable rate, 
Balloon payment, Closing script, Credit or charge for the specific 
interest rate chosen, Good faith estimate applicant or GFE applicant, 
Good faith estimate application or GFE application, Loan originator, 
Mortgage application, Origination service, Prepayment penalty, Primary 
title service, Third party, Tolerance, and Unforeseeable circumstances 
to read as follows:


Sec.  3500.2  Definitions.

* * * * *
    (b) * * *
    Adjustable rate has the same meaning as ``adjustable rate'' under 
the Truth in Lending Act, 15 U.S.C. 1601 et seq. (``TILA'').
    Balloon payment has the same meaning as ``balloon payment'' under 
the Truth in Lending Act, 15 U.S.C. 1601 et seq. (``TILA'').
* * * * *
    Closing script means the disclosure document prepared for the 
closing by the settlement agent, pursuant to information provided by 
the loan originator, that compares the loan terms and settlement 
charges estimated on the GFE with the HUD-1/HUD-1A and that describes, 
in detail, the required loan terms for the specific mortgage loan and 
related settlement information. It is an addendum to the HUD-1/HUD-1A.
    Credit or charge for the specific interest rate chosen means, for a 
mortgage broker, the credit or charge for the specific interest rate 
chosen is the difference between the initial loan amount and the 
payment to the mortgage broker (i.e., the sum of the price paid for the 
loan by the lender and any other payments to the mortgage broker from 
the lender). When the amount paid to the mortgage broker exceeds the 
initial loan amount, there is a credit to the borrower and it is 
entered as a negative amount in block 2 of the GFE. When the initial 
loan amount exceeds the amount paid to the mortgage broker, there is a 
charge to the borrower and it is entered as a positive amount in block 
2 of the GFE.
* * * * *
    Good faith estimate or GFE means an estimate of settlement charges 
a borrower is likely to incur, as a dollar amount, and related loan 
information, based upon common practice and experience in the locality 
of the mortgaged property, provided on the form prescribed in Appendix 
C to this part that is prepared in accordance with Sec.  3500.7 and the 
Instructions in Appendix C to this part.
    Good faith estimate applicant or GFE applicant means any 
prospective borrower for a federally related mortgage loan who submits 
a GFE application.
    Good faith estimate application or GFE application means a written 
or oral submission to a loan originator by a prospective borrower to 
obtain a GFE for a specific loan product. The loan originator may 
require the GFE applicant to provide no more than the prospective 
borrower's name, Social Security number, property address, monthly 
income, the borrower's best estimate of the value of the property, and 
the mortgage loan amount sought by the borrower to obtain a GFE. A GFE 
application shall either be in writing or electronically submitted, 
including a written record of an oral application, so that the loan 
originator can retain a record of the application. If the submission 
does not state or identify a specific property, the submission is not a 
GFE application. The subsequent addition of an identified property to 
the submission converts the submission to a GFE application. Neither a 
GFE application nor an application for a prequalification is a mortgage 
application for a federally related mortgage under this part.
* * * * *
    Loan originator means a lender or mortgage broker.
* * * * *
    Mortgage application means a submission to a loan originator by a 
prospective borrower of such financial and other information, whether 
written or computer-generated, as a loan originator may require to 
begin final underwriting, and such other steps as are necessary to 
originate a mortgage loan for the prospective borrower.
    Mortgage broker means a person (not an employee of a lender) or 
entity that renders origination services in a table funded or 
intermediary transaction. A loan correspondent approved under 24 CFR 
202.8 for Federal Housing Administration programs is a mortgage broker 
for purposes of this part.
* * * * *
    Origination service means any service involved in the creation of a 
mortgage loan, including but not limited to the taking of loan 
applications, loan processing, and the underwriting and funding of 
loans, and the processing and administrative services required to 
perform these functions.
* * * * *
    Prepayment penalty has the same meaning as ``prepayment penalty'' 
under the Truth in Lending Act, 15 U.S.C. 1601 et seq. (``TILA'').
    Primary title service means any service involved in the provision 
of title insurance (lender or owner policy) and settlement or closing 
services, including but not limited to: title examination and 
evaluation; preparation and issuance of title commitment; clearance of 
underwriting objections; preparation and issuance of a title insurance 
policy or policies; and the processing and administrative services 
required to perform these functions.
* * * * *
    Required use means a situation in which a borrower's access to some 
distinct service, property, discount, rebate, or other economic 
incentive, or the borrower's ability to avoid an economic disincentive 
or penalty, is contingent upon the borrower using or failing to use a 
referred provider of settlement services. However, the offering by a 
settlement service provider of an optional combination of bona fide 
settlement services to a borrower at a total price lower than the sum 
of the prices of the individual settlement services does not constitute 
a required use.
* * * * *
    Third party means a settlement service provider other than a loan 
originator.
* * * * *
    Tolerance means the maximum amount by which the charge for a 
category or categories of settlement costs may exceed the amount of the 
estimate for such category or categories on a GFE.
    Unforeseeable circumstances means:
    (1) Acts of God, war, disaster, or other emergency making it 
impossible or impracticable for the loan originator to complete the 
transaction; and
    (2) Circumstances that could not be reasonably foreseen by a loan 
originator at the time of GFE application that are particular to the 
transaction and that result in increased costs, such as a change in the 
property purchase price, boundary disputes, the need for a second 
appraisal or flood insurance, or environmental problems. Market 
fluctuations by themselves shall not be considered unforeseeable 
circumstances.

[[Page 14057]]

Sec.  3500.6  [Amended]

    5. Section 3500.6 is amended in paragraph (a) introductory text by 
adding ``GFE or a'' before ``federally related mortgage loan'', and in 
paragraph (a)(1) by adding ``GFE'' before the word ``application'' the 
first time it appears.
    6. In Sec.  3500.7, the section heading and paragraphs (a) through 
(e) are revised; paragraph (f) is redesignated as paragraph (g); and 
new paragraphs (f) and (h) are added, as follows:


Sec.  3500.7  Good faith estimate or GFE.

    (a) Lender to provide. (1) Except as otherwise provided in 
paragraphs (a), (b), or (g) of this section, not later than 3 business 
days after a lender receives a GFE application from a GFE applicant, or 
information sufficient to complete a GFE application, the lender must 
provide the GFE applicant with a GFE. In the case of dealer loans, the 
lender must either provide the GFE or ensure that the dealer provides 
the GFE.
    (2) The lender must provide the GFE to the GFE applicant by hand 
delivery, by placing it in the mail, or, if the GFE applicant agrees, 
by fax, email, or other electronic means.
    (3) The lender is not required to provide the GFE applicant with a 
GFE if, before the end of the 3-business-day period:
    (i) The lender denies the GFE application of the GFE applicant;
    (ii) The lender denies the mortgage application of the GFE 
applicant; or
    (iii) The applicant withdraws its GFE application.
    (4) The lender is not permitted to collect, as a condition for 
providing a GFE, any fee for an appraisal, inspection, or other similar 
service needed for final underwriting. The lender may, at its option, 
collect a fee limited to the cost of providing the GFE, including the 
cost of an initial credit report.
    (b) Mortgage broker to provide. (1) Except as otherwise provided in 
paragraphs (b) or (g) of this section, either the lender or the 
mortgage broker must provide a GFE to the GFE applicant not later than 
3 business days after a mortgage broker receives from the GFE applicant 
either a GFE application or information sufficient to complete a GFE 
application. The lender is responsible for ascertaining whether the GFE 
has been provided. If the mortgage broker has provided a GFE that is 
acceptable to the lender, the lender is not required to provide an 
additional GFE.
    (2) The mortgage broker must provide the GFE by hand delivery, by 
mail, or, if the applicant agrees, by fax, email, or other electronic 
means.
    (3) The mortgage broker is not required to provide the GFE 
applicant with a GFE if, before the end of the 3-business-day period:
    (i) The mortgage broker or lender denies the GFE application of the 
GFE applicant;
    (ii) The mortgage broker or lender denies the mortgage application 
of the GFE applicant; or
    (iii) The applicant withdraws its GFE application.
    (4) The mortgage broker is not permitted to collect, as a condition 
for providing a GFE, any fee for an appraisal, inspection, or other 
similar service needed for final underwriting. The mortgage broker may, 
at its option, collect a fee limited to the cost of providing the GFE, 
including the cost of an initial credit report.
    (c) Availability of GFE terms. The estimate of the charges for all 
settlement services other than the charge or credit for the interest 
rate chosen, the adjusted origination charges, and per diem interest 
must be available until 10 business days from when the GFE is 
delivered, but it may remain available longer, if the loan originator 
extends the period of availability. Once a mortgage application is 
submitted to the loan originator, the non-interest rate-dependent 
settlement charges of the GFE that is the basis for the mortgage 
application must remain in effect until closing. If the interest rate 
was not locked when the mortgage application was submitted, or a locked 
interest rate has expired, all interest rate-dependent charges and 
disclosures may change. If the GFE applicant notifies the loan 
originator to proceed with a mortgage application after the period of 
availability has expired, the loan originator may:
    (1) Continue to abide by the terms and conditions contained within 
the GFE for which the period of availability has expired;
    (2) Deny the GFE applicant an opportunity to submit a mortgage 
application at that time for that specific loan because the applicant 
did not respond within the period of availability; or
    (3) Provide a new GFE for a new loan to the GFE applicant within 3 
business days.
    (d) Content and form of GFE. The loan originator must prepare the 
GFE in accordance with the requirements of this section and the 
Instructions in Appendix C to this part when preparing the GFE Form in 
Appendix C to this part. The instructions in Appendix C to this part 
allow for flexibility in the preparation and distribution of the GFE in 
hard copy and electronic format.
    (e) Tolerances for amounts included on GFE. (1) Absent 
unforeseeable circumstances, the actual charges at settlement may not 
exceed the amounts included on the GFE for:
    (i) The loan originator's service charge;
    (ii) While the borrower's interest rate is locked, the credit or 
charge for the interest rate chosen;
    (iii) While the borrower's interest rate is locked, the adjusted 
origination charge; and
    (iv) Government recording and transfer charges.
    (2) Absent unforeseeable circumstances, the sum of the charges at 
settlement for the following services may not be greater than 10 
percent above the sum of the amounts included on the GFE:
    (i) Lender-required settlement services, where the lender selects 
the third party settlement service provider; and
    (ii) Lender-required services, and optional owner's title insurance 
selected by the borrower, when the borrower uses a settlement service 
provider identified by the loan originator.
    (3) The amounts charged for all other settlement services included 
on the GFE may change at settlement.
    (4) If a loan originator cannot meet the tolerances under this 
section because of unforeseeable circumstances, the loan originator 
must document the unforeseeable circumstances that resulted in the 
increased costs and charge the borrower only the amount of the 
increased costs. In such situations, the loan originator must notify 
the borrower within 3 business days of the increase in charges arising 
from the unforeseeable circumstances, and a new GFE reflecting the 
revised charges must be provided to the borrower.
    (5) Loan originators must retain documentation of any unforeseeable 
circumstances resulting in final costs in excess of the established 
tolerances for amounts stated on GFEs for no less than 3 years after 
settlement.
    (f) Changes to the GFE. (1) The loan originator must complete final 
underwriting within a reasonable time after a borrower's mortgage 
application is complete. If final underwriting or unforeseeable 
circumstances result in a change in the borrower's eligibility for the 
specific loan terms identified in the GFE, the loan originator must:
    (i) Notify the borrower within one business day of the decision to 
reject the loan;

[[Page 14058]]

    (ii) If another loan is made available, provide a revised GFE to 
the borrower; and
    (iii) Document the reasons for the revised GFE and retain the 
documentation for no less than 3 years after settlement.
    (2) If a borrower requests changes to the mortgage loan identified 
in the GFE that change the settlement charges or the terms of the loan, 
the loan originator is no longer bound by the GFE, and the loan 
originator must:
    (i) Notify the borrower within one business day of the decision to 
reject the loan;
    (ii) If another loan is made available, provide a revised GFE to 
the borrower; and
    (iii) Document the reasons for the revised GFE and retain the 
documentation for no less than 3 years after settlement.
    (3) In transactions involving new home purchases, where settlement 
is anticipated to occur more than 60 days from the time of a GFE 
application, the loan originator may provide the GFE to the borrower 
with a clear and conspicuous disclosure stating that at any time up 
until 60 days prior to closing, the loan originator may issue a revised 
GFE. If no such separate disclosure is provided, the loan originator 
cannot issue a revised GFE, except as otherwise provided in paragraph 
(f) of this section.
* * * * *
    (h) Violations of section 5 of RESPA (12 U.S.C. 2604). A loan 
originator that violates the requirements of this section, including by 
exceeding the charges listed on the GFE at settlement by more than the 
permitted tolerances, shall be deemed to have violated section 5 of 
RESPA.
    7. In Sec.  3500.8, paragraphs (b) and (c) are revised; and new 
paragraphs (d) and (e) are added to read as follows:


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

* * * * *
    (b) Charges to be stated. The settlement agent shall complete the 
HUD-1 or HUD-1A in accordance with the instructions set forth in 
Appendix A to this part.
    (1) In general. The settlement agent shall state the actual charges 
paid by the borrower and seller on the HUD-1 or HUD-1A. The settlement 
agent must separately itemize each third party charge paid by the 
borrower and seller. Origination services performed by or on behalf of 
the loan originator must be included in the loan originator's own 
charge. Primary title services performed by or on behalf of the title 
underwriter or title agent must be included in the title underwriter's 
or title agent's own charge. The amount stated on the HUD-1 or HUD-1A 
for any itemized service cannot exceed the amount actually received by 
the third party for that itemized service, unless the charge is based 
on an average cost price in accordance with paragraph (b)(2) of this 
section.
    (2) Average cost pricing. (i) The charge shown on the HUD-1 or HUD-
1A for a settlement service provided by a third party may be an average 
price calculated based on either of the following methods:
    (A) The average price used on a HUD-1 or HUD-1A may be based on the 
actual average price for that service in all loans closed by the loan 
originator, on a national or more limited basis, during the averaging 
period; or
    (B) The average price used on a HUD-1 or HUD-1A may be based on a 
tiered pricing contract, provided the projected number of loans used in 
calculating the average is equal to the number of loans actually closed 
by the loan originator during the averaging period.
    (ii) For purposes of calculating an average price, the averaging 
period must be a specific recent period of 6 consecutive months 
preceding the receipt of a GFE application, as designated by the loan 
originator. The same method of determining the averaging period must be 
used for each borrower from whom a GFE application is received, until 
such time as the average is recomputed.
    (iii) If a loan originator uses average cost pricing for any class 
of transactions in a particular period, the loan originator must use 
the same average cost price in every transaction within that class for 
which a borrower's GFE application was received during that period.
    (iv) The loan originator must retain all documentation that the 
average cost pricing is accurate in a given time period, under the 
pricing formula used, for at least 3 years.
    (c) Aggregate accounting at settlement. After itemizing individual 
deposits in the 1000 series, the servicer must make an adjustment based 
on aggregate accounting. This adjustment equals the difference in the 
deposit required under aggregate accounting and the sum of the itemized 
deposits. The computation steps for aggregate accounting are set out in 
Sec.  3500.17(d). The adjustment will always be a negative number or 
zero (-0-). The settlement agent shall enter the aggregate adjustment 
amount on a final line in the 1000 series of the HUD-1 or HUD-1A 
statement. Appendix E to this part sets out an example of aggregate 
analysis. Appendix A to this part contains instructions for completing 
the HUD-1 or HUD-1A settlement statements using an aggregate analysis 
adjustment.
    (d) Closing script. (1) The loan originator must transmit to the 
settlement agent all information necessary to complete the prescribed 
closing script disclosure document, which is an addendum to the HUD-1/
1A settlement form and is prepared by the settlement agent. This 
addendum must accurately reflect the required information provided by 
the loan originator regarding the loan terms and related settlement 
information.
    (2) The settlement agent or other person conducting the closing 
must read the closing script aloud to the borrower and explain:
    (i) The comparison between the final settlement charges listed on 
the HUD-1/1A settlement form and the estimate of charges listed on the 
GFE;
    (ii) Whether or not the tolerances have been met; and
    (iii) Other required loan information as shown on the closing 
script addendum forms in Appendix A to this part.
    (3) Any inconsistencies between the loan documents (including the 
mortgage note) and the summary of loan terms on the GFE, and between 
the HUD-1/1A settlement charges and the charges stated on the GFE, must 
be disclosed and explained to the borrower.
    (4) Upon request of the borrower, the HUD-1/1A and the closing 
script addendum must be made available for review by the borrower 24 
hours prior to the closing in accordance with Sec.  3500.10(a). The 
closing script addendum must be delivered to the borrower with the HUD-
1/1A at the closing in accordance with Sec.  3500.10(a) and (c). The 
prescribed closing script addendum formats, with instructions, are set 
forth in Appendix A to this part.
    (e) Violations of section 4 of RESPA (12 U.S.C. 2604). A violation 
of any of the requirements of this section will be deemed to be a 
violation of section 4 of RESPA.


Sec.  3500.10  [Amended].

    8. Section 3500.10 is amended by adding the phrase ``, with 
addendum,'' as follows:
    a. In paragraph (a) after the word ``statement'';
    b. In paragraph (b) after the reference ``HUD-1A'' in the first and 
last sentences; and
    c. In paragraphs (c), (d), and (e) after each reference to ``HUD-
1A''.
    9. In Sec.  3500.14, the text after the heading in paragraph (d) is 
redesignated

[[Page 14059]]

as paragraph (d)(1), and new paragraph (d)(2) is added, to read as 
follows:


Sec.  3500.14  Prohibition against kickbacks and unearned fees.

* * * * *
    (d) Thing of value. (1) * * *
    (2) A discount negotiated by settlement service providers in the 
price of a third party settlement service is not a thing of value, 
provided that no more than the discounted price is charged to the 
borrower and disclosed on the HUD-1/1A.
* * * * *
    10. Section 3500.17 is amended:
    a. In paragraph (b) by removing the definitions of Acceptable 
accounting method, Conversion date, Phase-in period, Post-rule account, 
and Pre-rule account;
    b. In paragraph (c) by revising the heading and paragraphs (c)(4), 
(5), (6), and (8);
    c. In paragraph (d) by removing paragraph (d)(2), redesignating 
paragraph (d)(1) as paragraph (d)(2), revising newly designated 
paragraph (d)(2)(i) introductory text, and redesignating the 
introductory text as paragraph (d)(1) and revising it; and
    d. In paragraph (e) by removing paragraph (e)(3), to read as 
follows:


Sec.  3500.17  Escrow accounts.

* * * * *
    (c) Limits on payments to escrow accounts. * * *
    (4) Aggregate accounting required. All servicers must use the 
aggregate accounting method in conducting escrow account analyses.
    (5) Cushion. The cushion must be no greater than one-sixth (\1/6\) 
of the estimated total annual disbursements from the escrow account.
    (6) Restrictions on pre-accrual. A servicer must not practice pre-
accrual.
* * * * *
    (8) Provisions in mortgage documents. The servicer must examine the 
mortgage loan documents to determine the applicable cushion for each 
escrow account. If the mortgage loan documents provide for lower 
cushion limits, then the terms of the loan documents apply. Where the 
terms of any mortgage loan document allow greater payments to an escrow 
account than allowed by this section, then this section controls the 
applicable limits. Where the mortgage loan documents do not 
specifically establish an escrow account, whether a servicer may 
establish an escrow account for the loan is a matter for determination 
by State law. If the mortgage loan document is silent on the escrow 
account limits and a servicer establishes an escrow account under State 
law, then the limitations of this section apply unless State law 
provides for a lower amount. If the loan documents provide for escrow 
accounts up to the RESPA limits, then the servicer may require the 
maximum amounts consistent with this section, unless an applicable 
State law sets a lesser amount.
* * * * *
    (d) Methods of escrow account analysis. (1) The following sets 
forth the steps servicers must use to determine whether their use of 
aggregate analysis conforms with the limitations in Sec.  
3500.17(c)(1). The steps set forth in this section result in maximum 
limits. Servicers may use accounting procedures that result in lower 
target balances. In particular, servicers may use a cushion less than 
the permissible cushion or no cushion at all. This section does not 
require the use of a cushion.
    (2) Aggregate analysis. (i) In conducting the escrow account 
analysis using aggregate analysis, the target balances may not exceed 
the balances computed according to the following arithmetic operations:
* * * * *
    11. Section 3500.21 is amended by revising paragraphs (b) and (c) 
to read as follows:


Sec.  3500.21  Mortgage servicing transfers.

* * * * *
    (b) Servicing Disclosure Statement; Requirements. (1) At the time a 
GFE application for a mortgage servicing loan is submitted, or within 3 
business days after submission of the GFE application, the lender, 
mortgage broker who anticipates using table funding, or dealer who 
anticipates a first lien dealer loan shall provide to each person who 
applies for such a loan a Servicing Disclosure Statement. A format for 
the Servicing Disclosure Statement appears as Appendix MS-1 to this 
part. The specific language of the Servicing Disclosure Statement is 
not required to be used. The information set forth in ``Instructions to 
Preparer'' on the Servicing Disclosure Statement need not be included 
with the information given to applicants, and material in square 
brackets is optional or alternative language. The model format may be 
annotated with additional information that clarifies or enhances the 
model language. The lender, table funding mortgage broker, or dealer 
should use the language that best describes the particular 
circumstances.
    (2) The Servicing Disclosure Statement must indicate whether the 
servicing of the loan may be assigned, sold, or transferred to any 
other person at any time while the loan is outstanding. If the lender, 
table funding mortgage broker, or dealer in a first lien dealer loan 
will not engage in the servicing of the mortgage loan for which the 
applicant has applied, the disclosure may consist of a statement that 
such entity intends to assign, sell, or transfer servicing of such 
mortgage loan before the first payment is due. Alternatively, if the 
lender, table funding mortgage broker, or dealer in a first lien dealer 
loan will engage in the servicing of the mortgage loan for which the 
applicant has applied, the disclosure may consist of a statement that 
the entity will service such loan and does not intend to sell, 
transfer, or assign the servicing of the loan.
    (c) Servicing Disclosure Statement; Delivery. The lender, table 
funding mortgage broker, or dealer that anticipates a first lien dealer 
loan shall deliver Servicing Disclosure Statements to each applicant 
for a mortgage servicing loan at the time a GFE application is 
received, or by placing it in the mail with prepaid first-class postage 
within 3 business days from receipt of the GFE application. In the 
event the borrower is denied credit within the 3 business-day period, 
no servicing disclosure statement is required to be delivered. If co-
applicants indicate the same address on their GFE application, one copy 
delivered to that address is sufficient. If different addresses are 
shown by co-applicants on the GFE application, a copy must be delivered 
to each of the co-applicants.
* * * * *
    12. A new Sec.  3500.22 is added to read as follows:


Sec.  3500.22  Severability.

    If any particular provision of this part or the application of any 
particular provision to any person or circumstance is held invalid, the 
remainder of this part and the application of such provisions to other 
persons or circumstances shall not be affected by such holding.
    13. A new Sec.  3500.23 is added to read as follows:


Sec.  3500.23  ESIGN applicability.

    The Electronic Signatures in Global and National Commerce Act 
(``ESIGN''), 15 U.S.C. 7001-7031, shall apply to this part.
    14. Appendix A to part 3500 is amended:
    a. By revising the first two sentences of the first paragraph of 
the Appendix;
    b. By removing the second paragraph of the General Instructions and 
adding four new paragraphs in its place;

[[Page 14060]]

    c. By revising the first paragraph after the heading ``Section L. 
Settlement Charges'';
    d. By revising the paragraphs for ``Line 801'' through ``Lines 808-
811'' after the heading ``Section L. Settlement Charges'';
    e. By revising the second paragraph and removing the third 
paragraph of instructions for ``Lines 1000-1008'' after the heading 
``Section L. Settlement Charges'', and by removing the heading for the 
instructions for ``Lines 1000-1008'' and adding in its place ``Lines 
1000-1009'';
    f. By removing the paragraphs for ``Lines 1100-1113'' through 
``Lines 1111-1113'' after the heading ``Section L. Settlement Charges'' 
and adding in their place nine paragraphs of instructions for lines 
1100-1114;
    g. By removing the paragraph for ``Lines 1201-1205'' after the 
heading ``Section L. Settlement Charges'' and adding in its place two 
paragraphs of instructions for lines 1200-1205;
    h. By removing the paragraphs for ``Lines 1301 and 1302'' and for 
``Lines 1303-1305'' after the heading ``Section L. Settlement Charges'' 
and adding in their place a paragraph of instructions for lines 1301-
1305;
    i. By revising the paragraph for ``Line 1400'';
    j. By revising the first sentence in the first paragraph following 
the heading ``Line Item Instructions for Completing HUD-1A'';
    k. By adding after the paragraph of instructions for ``Line 1604'' 
a new heading ``General Instructions for Completing Closing Script 
Addendum to HUD-1/1A Settlement Form'' and a new paragraph of 
instructions;
    l. By revising the Forms ``Settlement Statement'' and ``Settlement 
Statement Optional Form for Transactions without Sellers''; and
    m. By adding new Instructions to Closing Script Preparer and 
Examples of Completed Closing Scripts 1 through 6, as follows:

APPENDIX A TO PART 3500--INSTRUCTIONS FOR COMPLETING HUD-1 AND HUD-1A 
SETTLEMENT STATEMENTS; SAMPLE HUD-1 AND HUD-1A STATEMENTS

    The following are instructions for completing sections A through 
L and the closing script addendum of the HUD-1 settlement statement, 
required under section 4 of RESPA and Regulation X of the Department 
of Housing and Urban Development (24 CFR part 3500). This form is to 
be used as a statement of actual charges and adjustments paid by the 
borrower and the seller and received by each settlement service 
provider, to be given to the parties in connection with the 
settlement. * * *

General Instructions

* * * * *
    The settlement agent shall complete the HUD-1 to itemize all 
charges imposed upon the Borrower and the Seller by the loan 
originator and all sales commissions, whether to be paid at 
settlement or outside of settlement, and any other charges which 
either the Borrower or the Seller will pay at settlement. 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 must 
be shown together with the total amount paid to such person in 
connection with the transaction. Charges that are customarily paid 
for by the seller must be shown in the seller's column on page 2 of 
the HUD-1 (unless paid outside closing), and charges that are 
customarily paid for by the borrower must be shown in the borrower's 
column (unless paid outside closing). If a seller pays for a charge 
that is customarily paid for by the borrower, the charge should not 
be shown on page 2 of the HUD-1 but instead should be listed as an 
adjustment in lines 506-509 of the HUD-1. If a borrower pays for a 
charge that is customarily paid for by the seller, the charge should 
not be shown on page 2 of the HUD-1, but instead should be listed as 
an adjustment in lines 204-209 of the HUD-1.
    Charges to be paid outside of settlement by the borrower, 
seller, or loan originator, including cases where a non-settlement 
agent (i.e., attorneys, title companies, escrow agents, real estate 
agents, or brokers) holds the Borrower's deposit toward the sales 
price (earnest money) and applies the entire deposit towards the 
charge for the settlement service it is rendering, must be included 
on the HUD-1 but marked ``P.O.C.'' for ``Paid Outside of Closing'' 
(settlement) and cannot be included in computing totals. P.O.C. 
items must not be placed in the Borrower or Seller columns, but 
rather on the appropriate line next to the columns. The settlement 
agent must indicate whether P.O.C. items are paid for by the 
Borrower, Seller, or some other party by marking the items paid for 
by whoever made the payment as ``P.O.C. (payor).''
    In the case of ``no cost'' loans where ``no cost'' encompasses 
third party fees as well as the up-front payment to the loan 
originator, the third party services to be paid for out of the 
adjusted origination charge must be itemized and listed on the HUD-
1/1A with the charge for the third party service. These itemized 
charges must be recorded in the columns.
    For charges disclosed using average cost pricing, the amount 
stated on the HUD-1 Settlement Statement as a charge to the borrower 
or seller for the settlement service must be the average price 
established pursuant to 24 CFR 3500.8(e).
* * * * *

Line Item Instructions

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 must be shown. In the case of loans where third party 
settlement services, other than origination services, are paid from 
the adjusted origination charge by the loan originator, the 
individual third party settlement services should be itemized, with 
the charges shown in the columns. In those cases, the adjusted 
origination charge in line 803 will be a negative number large 
enough to offset the amounts of the third party settlement services 
that are paid out of the adjusted origination charge.
* * * * *
    Line 801 is used to record ``Our Service Charge,'' which is 
received by the loan originators. This number must not be listed in 
either the buyer's or seller's column.
    Line 802 is used to record ``Your charge or credit for the 
specific interest rate chosen,'' which states the charge or credit 
adjustment as applied to ``Our Service Charge,'' if applicable. This 
number must not be listed in either column or shown on page one of 
the HUD-1.
    Line 803 is used to record ``Your Adjusted Origination 
Charges,'' which states the net amount of the loan origination 
charges. This number must be listed in either the buyer's column or 
as ``paid outside closing.''
    Lines 804-811 may be used to record each of the ``Required 
services that we select''. Each settlement service provider must be 
identified by name and the amount paid recorded inside the columns 
or ``P.O.C.''.
    Lines 808-811 may also be used to record other required lender 
or loan program disclosures. In such a case, any charge must be 
listed outside the columns.
* * * * *
    Lines 1000-1009. * * *
    After itemizing individual deposits in the 1000 series, the 
servicer shall make an adjustment based on aggregate accounting. 
This adjustment equals the difference between the deposit required 
under aggregate accounting and the sum of the itemized deposits. The 
computation steps for aggregate accounting are set out in Sec.  
3500.17(d). The adjustment will always be a negative number or zero 
(-0-). The settlement agent shall enter the aggregate adjustment 
amount on a final line of the 1000 series of the HUD-1 or HUD-1A 
statement.
    Lines 1100-1115. This series covers title charges and charges by 
attorneys. The title charges include a variety of services performed 
by title companies or others, and include fees directly related to 
the transfer of title (title examination, title search, document 
preparation) and fees for title insurance. The legal charges include 
fees for Lender's, Seller's, or Buyer's attorney, or the attorney 
preparing title work. The series also includes any settlement, 
notary, or delivery fees.
    Line 1101 is used to record the total for the category of 
``Title services and lender's title insurance,'' and the amount must 
be listed in the columns.
    Lines 1102-1108 may be used to itemize charges paid other than 
those defined as ``primary title services,'' such as for a closing 
attorney or escrow agent, and those charges paid must be listed 
outside the columns. Lines 1102-1108 may also be used to itemize 
some required title services whose costs are already included in 
Line 1101. In such a

[[Page 14061]]

case, any charge must be listed outside the columns.
    Line 1109 is used to record ``Lender's title insurance 
premium,'' and the amount must be listed outside the columns.
    Line 1110 is used to record ``Optional owner's title 
insurance,'' and the amount must be listed in the columns.
    Line 1111 is used to record the lender's title insurance policy 
limits of coverage, and the amount must be listed outside the 
columns.
    Line 1112 is used to record the owner's title insurance policy 
limits of coverage, and the amount must be listed outside the 
columns.
    Line 1113 is used to record the title agent's portion of the 
total title insurance premium, and the amount must be listed outside 
the columns.
    Line 1114 is used to record the underwriter's portion of the 
title insurance premium, and the amount must be listed outside the 
columns.
    Line 1201 is used to record the total ``Government recording and 
transfer charges,'' and the amount must be listed in the columns.
    Lines 1202-1205 may be used to record specific itemized third 
party charges for government recording and transfer services, but 
the amounts must be listed outside the columns.
    Lines 1301-1305 may be used to record additional itemized 
settlement charges, and the amounts must be listed in either column.
    Line 1400 must state the total settlement charges stated within 
each column.

Line Item Instructions for Completing HUD-1A

    Note: The HUD-1A, including the closing script addendum, 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.\34\ * * *

    \34\ Note the HUD-1A and its instructions will be conformed to 
changes to the HUD-1 and HUD-1 instructions at the final rule stage.
---------------------------------------------------------------------------

* * * * *

General Instructions for Completing Closing Script Addendum to HUD-1/1A 
Settlement Form

    The settlement agent must complete the closing script addendum 
to the HUD-1/1A settlement form pursuant to Sec.  3500.8(d) and in 
accordance with the instructions and example closing script forms 
contained in this Appendix A.
BILLING CODE 4210-67-P

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BILLING CODE 4210-67-C

[[Page 14093]]

?>
    15. Appendix C to part 3500 is revised to read as follows:

APPENDIX C TO PART 3500--INSTRUCTIONS FOR COMPLETING GOOD FAITH 
ESTIMATE (GFE) FORM

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

General instructions

    The loan originator preparing the GFE may fill in information 
and amounts on the form by typewriter, hand printing, computer 
printing, or any other method producing clear and legible results. 
Under these instructions, the ``form'' refers to the required, 
standardized GFE form. Although the standardized, required GFE is a 
prescribed form, sections 3 and 5 on page 2 may be adapted for use 
in particular loan situations, similarly to the way the Form HUD-1 
Settlement Statement is adaptable, so that if additional lines are 
needed in those blocks on the GFE, additional lines may be inserted 
there.
    All fees for categories of charges shall be disclosed in U.S. 
dollar amounts.

Specific instructions

    Page 1.
    Top of the Form--The loan originator must enter its name, 
business address, telephone number and email address on the top of 
the form, along with the borrower's (GFE applicant's) name, the 
address of the property for which financing is sought, and the date 
of the GFE.
    ``Instructions''--This section requires no loan originator 
action.
    ``Important dates.''--This section briefly states important 
deadlines that the GFE applicant must meet during the GFE 
application and mortgage application processes in order to obtain 
the loan product that is the subject of the GFE. In Line 1, the loan 
originator must state the date until which the interest rate for the 
GFE will be available. In Line 2, the loan originator must state the 
date until which the estimate of all other settlement charges for 
the GFE will be available. In Line 3, the loan originator must state 
how many days within which time the GFE applicant has to go to 
settlement from the start of the mortgage application process, and 
how many days prior to settlement the interest rate would have to be 
locked.
    ``Summary of Your Loan Terms''--In the section entitled ``Your 
Loan Details'', for all loans, the loan originator must fill in:
    (i) The initial loan balance;
    (ii) The loan term;
    (iii) The initial interest rate; and
    (iv) The initial monthly amount owed for principal, interest and 
any mortgage insurance.
    The loan originator must also specify the rate lock period in 
days informing the borrower that after the borrower locks in his or 
her interest rate, the borrower must go to settlement within this 
period to receive that interest rate.
    The loan originator must indicate whether the interest rate can 
rise, and, if so, insert the maximum rate to which it can rise. The 
loan originator must indicate whether the loan balance can rise, 
and, if so, insert the maximum amount to which it can rise. (If the 
loan balance will increase only because escrow is run out of the 
loan balance, the loan originator is not required to check the box 
indicating that the loan balance can rise.) The loan originator must 
indicate whether the monthly amount owed for principal, interest, 
and any mortgage insurance might rise, and, if so, insert the 
maximum amount to which it can rise. The loan originator must 
indicate whether the loan includes a prepayment penalty, and, if so, 
the maximum amount that it could be. The loan originator must 
indicate whether the loan requires a balloon payment and, if so, the 
maximum amount, and in how many years it will be due. The loan 
originator must also indicate whether the loan includes a monthly 
escrow payment for property taxes and other financial obligations.
    ``Summary of your settlement charges''--In this section, the 
loan originator must state its own charges (``Your Adjusted 
Origination Charge'') based on the calculation of Blocks 1 and 2 on 
page 2, as entered at highlighted Line A on page 2. The loan 
originator must provide the total charge for all other services 
(``Your Charges for All Other Settlement Services'') based on the 
addition of the sums in Blocks 3 through 10 on page 2, as entered at 
highlighted Line B on page 2. The loan originator must provide the 
sum of these two numbers (``Total Estimated Settlement Charges''), 
as entered at highlighted Line A+B on page 2.
    Page 2.
    ``Understanding Your Estimated Settlement Charges''--This 
section details the ten settlement cost categories and amounts 
associated with the mortgage loan. For purposes of determining 
whether the tolerance has been met, the amount on the GFE should be 
compared with the total of any amounts shown on the HUD-1 in the 
borrower's column and any amounts shown as ``P.O.C. (borrower).''

``Your Loan Details''

    Block 1, ``Our service charge''--The loan originator must state 
here all charges that all loan originators involved in this 
transaction will receive, except for any charges for the interest 
rate chosen noted in Block 2. The amount stated in Block 1 is 
subject to zero tolerance, i.e., the amount may not increase at 
settlement.
    Block 2, ``Your credit or charge for the specific interest rate 
chosen (points)''--The loan originator must indicate through check 
boxes whether there is a credit to the borrower for the interest 
rate chosen on the loan, and the amount of the credit, or whether 
there is an additional up-front charge to the borrower for the 
interest rate chosen on the loan, and the amount of that charge. A 
credit and charge cannot occur together in the same transaction. A 
lender may choose not to separately disclose any credit or charge 
for the interest rate chosen on the loan in this block; however, if 
this block does not include any positive or negative figure, the 
lender must check the first box to indicate that ``The credit or 
charge for the interest rate you have chosen'' is included in ``Our 
service charge'' above. (See Block 1 instructions above.) For a 
mortgage broker, the credit or charge for the specific interest rate 
chosen is the difference between the initial loan amount and the 
payment to the mortgage broker (i.e., the sum of the price paid for 
the loan by the lender and any other payments to the mortgage broker 
from the lender). When the amount paid to the mortgage broker 
exceeds the initial loan amount, there is a credit to the borrower 
and it is entered as a negative amount in Block 2 of the GFE. When 
the initial loan amount exceeds the amount paid to the mortgage 
broker, there is a charge to the borrower and it is entered as a 
positive amount in Block 2 of the GFE. The amount stated in Block 2 
is subject to zero tolerance while the interest rate is locked, 
i.e., any charge for the interest rate chosen cannot increase and 
any credit for the interest rate chosen cannot decrease in absolute 
value terms.
    Line A, ``Your Adjusted Origination Charges''--The loan 
originator must add the numbers in Blocks 1 and 2 and enter this 
subtotal at highlighted Line A. The subtotal at Line A will be a 
negative number if there is a credit in Block 2 that exceeds the 
charge in Block 1. The amount stated in Line A is subject to zero 
tolerance while the interest rate is locked.
    In the case of ``no cost'' loans where ``no cost'' refers only 
to the loan originator's fees, Line A must show a zero charge as the 
adjusted origination charge. In the case of ``no cost'' loans where 
``no cost'' encompasses third party fees as well as the up-front 
payment to the loan originator, the third party fees listed in Block 
3 through Block 10, to be paid for by the loan originator, must be 
itemized and listed on the GFE, and the total for Line A will result 
in a negative number equal to the third party fees covered in the 
loan originator's definition of ``no cost.''

``Your Charges for All Other Settlement Services''

    Block 3, ``Required services that we select''--In this block, 
the loan originator must identify each third party settlement 
service required and selected by the loan originator (excluding 
title services), along with the estimated price to be paid to the 
provider of each service. The loan originator must identify the 
specific required services and provide an estimate of the price of 
each service. Loan originators are also required to add the 
individual prices disclosed in this block and place the total in the 
right-hand column of this block. Where a loan originator permits a 
borrower to shop for third party settlement services, the loan 
originator must

[[Page 14094]]

provide the borrower with a written list of settlement services 
providers at the time of the GFE, on a separate sheet of paper. The 
10 percent tolerance applies to the sum of the prices of each 
service listed in Block 3, Block 4, Block 5, and Block 10, where the 
loan originator requires the use of a particular provider or the 
borrower uses a provider selected or identified by the loan 
originator. Any services in Block 4, Block 5, or Block 10 for which 
the borrower selects a provider other than one identified by the 
loan originator are not subject to any tolerance and should not be 
included in the sum of the prices on which the 10 percent tolerance 
is based.
    Block 4, ``Title services and lender's title insurance''--In 
this block, the loan originator must state the estimated total price 
paid to third party settlement service providers for all title 
related services and lender's title insurance premiums, when such 
services are required by the loan originator, regardless of whether 
they are selected by the prospective borrower or the loan 
originator. Where a loan originator permits a borrower to shop for 
title services and lender's title insurance, the loan originator 
must provide the borrower with a written list of title services 
providers at the time of the GFE on a separate sheet of paper. The 
price shown in this block is subject to an overall 10 percent 
tolerance as described in the instructions for Block 3 above, if the 
borrower selects one of the title services providers identified by 
the loan originator.
    Block 5, ``Required services that you can shop for''--In this 
block, the loan originator must identify each third party settlement 
service required by the loan originator where the borrower is 
permitted to shop for and select the settlement service provider 
(excluding title services), along with the estimated price to be 
paid to the provider of each service. The loan originator must 
identify the specific required services and provide an estimate of 
the price of each service. The loan originator must also add the 
individual prices disclosed in this block and place the total in the 
right-hand column of this block. Where a loan originator permits a 
borrower to shop for a required settlement service, the loan 
originator must provide the borrower with a written list of 
settlement service providers at the time of the GFE, on a separate 
sheet of paper. The prices shown in this block are subject to an 
overall 10 percent tolerance as described in the instructions for 
Block 3 above, if the borrower selects a settlement service provider 
identified by the loan originator.
    Block 6, ``Government Recording and Transfer Charges''--Based 
upon the proposed loan amount and/or sales price, and the property 
address, a loan originator must estimate in this block the sum of 
all state and local government fees, charges, and taxes, usually 
resulting from the mortgage loan or property transfer, which can be 
expected to be charged at settlement. A zero tolerance applies to 
the sum of these estimated fees.
    Block 7, ``Reserves or escrow''--In this block, the loan 
originator must estimate the amount that the borrower will be 
required to place in a reserve or escrow account at settlement to be 
applied to periodic property tax, homeowner's insurance, mortgage 
insurance payments, or other periodic charges.
    Block 8, ``Daily interest charges''--In this block, the loan 
originator must enter the daily interest amount applicable to the 
proposed loan and estimate the total amount that will be due at 
settlement, based on a closing date that the loan originator is to 
identify in this block, and list the specific number of days.
    Block 9, ``Homeowner's insurance''--The loan originator must 
estimate in this block the premium amount for a hazard insurance 
policy meeting the loan originator's requirements. To the extent a 
loan originator requires that hazard insurance be part of the escrow 
account, the amount of the initial escrow deposit must be properly 
included in Block 7.
    Block 10, ``Optional owner's title insurance''--In this block, 
the loan originator must estimate the price of an owner's title 
insurance policy. The loan originator must provide the borrower with 
a written list of providers of owner's title insurance at the time 
of the GFE on a separate sheet of paper. The price shown in this 
block is subject to an overall 10 percent tolerance as described in 
the instructions for Block 3 above, if the borrower selects a title 
services provider identified by the loan originator.
    Line B, ``Your Charges for All Other Settlement Services''--The 
loan originator shall add the numbers in Blocks 3 to10 and enter 
this subtotal at highlighted Line B.
    Line A + B, ``Total Estimated Settlement Charges''--The loan 
originator shall add the numbers at highlighted Lines A and B and 
enter the total at highlighted Line A + B.
    Page 3.

``Important Information and Instructions''

    ``Shopping for a loan offer''--The section requires no loan 
originator action.
    ``Understanding Which Charges Can Change at Settlement''--This 
section informs the prospective borrower of which categories of 
settlement charges can increase at closing, and by how much, and 
which categories of settlement charges cannot increase at closing. 
This section requires no loan originator action.
    ``Looking at Trade-offs''--This section is designed to make 
borrowers aware of the relationship between their total estimated 
settlement charges on one hand, and the proposed interest rates and 
resulting monthly payments on the other hand. The loan originator 
must complete the left hand column using the loan amount, interest 
rate, monthly payment figure, and the total estimated settlement 
charges from page 1. The loan originator must provide the borrower 
with the same information for two alternative loans, one with a 
higher interest rate, if available, and one with a lower interest 
rate, if available, from the loan originator. The alternative loans 
must use the same loan amount and be otherwise identical to the loan 
in the GFE. The loan originator must fill in the trade-off chart to 
show the borrower the loan amount, alternative interest rate, 
alternative monthly payment, the change in the monthly payment from 
the loan in this GFE to the alternative loan, the change in the 
total settlement charges from the loan in this GFE to the 
alternative loan, and the total settlement charges for the 
alternative loan. If either of the alternative loans are not 
available from the loan originator, the loan originator should so 
indicate with N. A. (i.e., Not Available), in the appropriate 
column(s). If these options are available, an applicant may request 
a new GFE, and a new GFE must be provided by the loan originator.
    Page 4.
    ``Your financial responsibilities as a homeowner''--In this 
section, the loan originator must enter the estimated annual amount 
for property taxes, and any homeowner's, flood, or other required 
property protection insurance that the GFE applicant may incur in 
order to retain the mortgaged property. The remainder of this 
section requires no loan originator action.
    ``Applying for this loan''--In this section, the loan originator 
must provide its contact information, i.e., name and telephone 
number or email address, and specify any fee the borrower must pay 
to proceed with the mortgage application.
    ``Getting More Information''--The section requires no loan 
originator action.
    ``Using the shopping chart''--This chart is a shopping tool to 
be provided by the loan originator for the borrower to complete to 
compare GFEs.
    ``If your loan is sold in the future''--This section requires no 
loan originator action.
BILLING CODE 4210-67-P

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BILLING CODE 4310-67-C
    16. Appendix E to part 3500 is amended by removing the 
parenthetical ``(Existing Accounts)'' from the heading,

[[Page 14099]]

``II. Example Illustrating Single-Item Analysis (Existing Accounts)''.
    17. Appendix MS-1 to part 3500 is revised to read as follows:

APPENDIX MS-1 TO PART 3500

[Sample language; use business stationery or similar heading]

[Date]

SERVICING DISCLOSURE STATEMENT

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

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

Servicing Transfer Information

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

    Dated: February 8, 2008.
Brian D. Montgomery,
Assistant Secretary for Housing--Federal Housing Commissioner.


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

Appendix to FR-5180 Proposed Rule on Regulatory Flexibility Analysis

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

Appendix I. Introduction to the Rule's Benefits and Impacts on 
Small Businesses

    This appendix is the Initial Regulatory Flexibility Analysis 
(IRFA) of the proposed rule as described under Section 604 of the 
Regulatory Flexibility Act. The requirements of the IRFA are listed 
below along with references to where the requirements are covered in 
the IRFA and where more detailed discussion can be found in other 
chapters of the Regulatory Impact Analysis (RIA).
    (1) A description of the reasons why action by the agency is 
being considered can be found in Section III of this appendix, in 
Section II of Chapter 1 of the Regulatory Impact Analysis (RIA), and 
in greater detail in the first sections of Chapters 3 and 4 of the 
RIA.
    (2) A succinct statement of the objectives of, and legal basis 
for, the proposed rule is provided in Section III of this appendix. 
This is also discussed in Section II of Chapter 1 of the Regulatory 
Impact Analysis and in greater detail in the first sections of 
Chapters 3 and 4 of the RIA.
    (3) A description and an estimate of the number of small 
entities to which the rule will apply or an explanation of why no 
such estimate is available. Section V of this Appendix provides data 
on small businesses that may be affected by the rule. As explained 
in Section V, Chapter 5 of the Regulatory Impact Analysis also 
provides extensive documentation of the characteristics of the 
industries directly affected by the rule, including various 
estimates of the numbers of small entities, reasons why various data 
elements are not reliable or unavailable, and descriptions of 
methodologies used to estimate (if possible) necessary data elements 
that were not readily available. The industries discussed in Chapter 
5 of the RIA included the following (with section reference): 
mortgage brokers (Section II); lenders including commercial banks, 
thrifts, mortgage banks, credit unions (Section III); settlement and 
title services including direct title insurance carriers, title 
agents, escrow firms, and lawyers (Section IV); and other third-
party settlement providers including appraisers, surveyors, pest 
inspectors, and credit bureaus (Section V); and real estate agents 
(Section VI). As explained in Section V of this chapter, Appendix A 
includes estimates of revenue impacts for the new Good Faith 
Estimate (GFE).
    (4) A description of the projected reporting, record keeping, 
and other compliance requirements of the rule, including an estimate 
of the classes of small entities that will be subject to the 
requirement and the types of professional skills necessary for 
preparation of the report or record. Compliance requirements and 
costs are discussed in Sections VII through IX of this appendix. In 
no case are any professional skills required for reporting, record 
keeping, and other compliance requirements of this rule that are not 
otherwise required in the ordinary course of business of firms 
affected by the rule. As noted above, Chapter 5 of the RIA includes 
estimates of the small entities that may be affected by the rule.
    (5) An identification, to the extent practicable, of all 
relevant Federal rules which may duplicate, overlap or conflict with 
the proposed rule. The proposed rule provisions for describing loan 
terms in the new GFE and the HUD-1 closing script are somewhat 
duplicative of the Truth in Lending Act (TILA) regulations; however 
the differences in approach between the TILA regulations and HUD's 
proposed RESPA rule make the duplication less than complete. 
Overlaps are discussed further in this chapter.
    In addition, this appendix contains (c) a description of any 
significant alternatives to the proposed rule which accomplish the 
stated objectives of applicable statutes and which minimize any 
significant impact of the proposed rule on small entities. The IRFA 
also describes comments dealing with compliance and regulatory 
burden in the 2002 proposed rule. Some of the comments were on 
provisions of the 2002 proposed rule that have been dropped. Other 
comments were on impacts that the Department believes will be small 
or non-existent. Some of the compliance and regulatory burden 
comments concerned costs that are only felt during the start-up 
period and are one-time costs. These are discussed in Section VII.B 
of the Appendix, while comments on recurring costs of implementing 
the new GFE form are addressed in Section VII.C. Section VII.D pf 
the Appendix discusses GFE-related changes in the proposed rule that 
reduce regulatory burden. Section VII.E discusses compliance issues 
related to GFE tolerances on settlement party costs, while Section 
VII.F discusses efficiencies associated with the new GFE.
    Before proceeding further, Section II provides a brief summary 
of the main findings from the Regulatory Impact Analysis that relate 
to the proposed rule. The summary is provided for those readers who 
do not have ready access to the other chapters of the Regulatory 
Impact Analysis. Some readers may want more details on the 
anticipated competitive and market effects of the new GFE on small 
businesses. These are discussed in Chapter 3 of the RIA in Sections 
VIII.A (mortgage brokers), VIII.B (lenders), VIII.C (title and 
settlement third-party firms), and VIII.D (other third-party firms).

Appendix II. Summary of the Regulatory Impact Analysis

    This summary follows the same outline as the Executive Summary 
of the RIA: beginning with an overview of the proposed rule; a 
discussion of the problems with the mortgage shopping process and 
the current GFE; followed by a description of the main components of 
the changes to the GFE; and a review of the anticipated benefits and 
market effects of the proposed rule.

Appendix III. Overview of Proposed Rule

    HUD has issued a proposed rule under the Real Estate Settlement 
Procedures Act (RESPA) to simplify and improve the process of 
obtaining home mortgages and to reduce settlement costs for 
consumers. This Regulatory Impact Analysis and Regulatory 
Flexibility Analysis examine the economic effects of that rule.\35\ 
As this Regulatory Impact Analysis demonstrates, the proposed rule 
is expected to improve consumer shopping for mortgages and to reduce 
the costs of closing a mortgage transaction for the consumer. 
Consumer savings were estimated under a variety of scenarios about 
originator and settlement costs. In the base case, the estimated 
price reduction to borrowers comes to $8.35 billion or $668 per 
loan. This

[[Page 14100]]

represents the substantial savings that can be achieved with the 
proposed rule.
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    \35\ The term ``Economic Analysis'' will often be used to refer 
to both the Regulatory Flexibility Analysis as well as the 
Regulatory Impact Analysis.
---------------------------------------------------------------------------

    The proposed RESPA rule includes a new, simplified Good Faith 
Estimate (GFE) that includes tolerances on final settlement costs 
and a new method for reporting wholesale lender payments in broker 
transactions. The proposed rule allows settlement service providers 
to seek discounts, including volume based discounts, for settlement 
services, which should lead to lower third-party settlement service 
prices. In addition, the proposed rule allows service providers to 
use average cost pricing for third-party services they purchase, 
making their business operations simpler and less costly. 
Competition among loan originators will put pressure for these cost 
savings to be passed on to borrowers. The proposed GFE will produce 
substantial shopping and price-reduction benefits for both 
origination and third-party settlement services.
    To increase the value of the new GFE as a shopping document, HUD 
is proposing revisions to the HUD-1 Settlement Statement form that 
will make the GFE and HUD-1 easier to compare. The revised HUD-1 
uses the same language to describe categories of charges as the GFE, 
and orders the categories of charges in the same way. This makes it 
much simpler to compare the two documents and confirm whether the 
tolerances required in the new GFE have been met or exceeded. In 
addition, the proposed rule requires as an addendum to the revised 
HUD-1, the preparation and reading of a closing script that would: 
(1) Compare the GFE to the HUD-1 and advise borrowers whether 
tolerances have been met or exceeded; (2) verify that the loan terms 
summarized on the GFE match those in the loan documents, including 
the mortgage note; and (3) provide additional information on the 
terms and conditions of the mortgage. All three of these components 
of the rule, together, are required fully to realize the consumer 
saving on mortgage closing cost estimated here.
    Given that there has been no significant change in the basic 
HUD-1 structure and layout, generating this new HUD-1 should not 
pose any problem for firms closing loans--in fact, the closing 
process will be much simpler given that borrowers and closing agents 
can precisely link the information on the initial GFE to the 
information on the final HUD-1.
    Because the proposed rule calls for significant changes in the 
process of originating a mortgage, this Regulatory Impact Analysis 
identifies a wide range of benefits, costs, efficiencies, transfers, 
and market impacts. The effects on consumers from improved borrower 
shopping will be substantial under this rule. Similarly, the use of 
tolerances will place needed controls on origination and third-party 
fees. Ensuring that yield spread premiums are credited to borrowers 
in brokered transactions could cause significant transfers to 
consumers. The increased competition associated with RESPA reform 
will reduce settlement service costs and result in transfers to 
consumers from service providers. Entities that will suffer revenue 
losses under the proposed rule are usually those who are charging 
prices higher than necessary or are benefiting from the current 
system's market failure.

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

Appendix II.B. Problems With the Mortgage Shopping Process and the 
Current GFE

    The current system for originating and closing mortgages is 
highly complex and suffers from several problems that have resulted 
in high prices for borrowers. Studies indicate that consumers are 
often charged high fees and can face wide variations in prices, both 
for origination and third-party settlement services. The main points 
are as follows:
    <bullet> There are many barriers to effective shopping for 
mortgages in today's market. The process can be complex and can 
involve rather complicated financial trade-offs, which are often not 
fully and clearly explained to borrowers.
    <bullet> Consumers often pay non-competitive fees for 
originating mortgages. Most observers believe that the market 
breakdown occurs in the relationship between the consumer and the 
loan originator--the ability of the loan originator to price 
discriminate among different types of consumers leads to some 
consumers paying more than other consumers.\36\
---------------------------------------------------------------------------

    \36\ One could see price discrimination in a competitive market 
that was the result of different costs associated with originating 
loans for different applicants. For example, those who required more 
work by the originator to obtain loan approval might be charged more 
than those whose applications required little work in order to 
obtain an approval. The price discrimination we refer to in this 
paragraph and elsewhere in this analysis is not cost-based. It is 
the result of market imperfections, such as poor borrower 
information on alternatives that leads borrowers to accept loans at 
higher cost than the competitive level.
---------------------------------------------------------------------------

    <bullet> There is convincing statistical evidence that yield 
spread premiums are not always used to offset the origination and 
settlement costs of the consumer. Studies, including a recent HUD-
sponsored study of FHA closing costs by the Urban Institute, find 
that yield spread premiums are often used for the originator's 
benefit, rather than for the consumer's benefit.\37\
---------------------------------------------------------------------------

    \37\ See Section IV.D of Chapter 2 for a discussion of these 
studies.
---------------------------------------------------------------------------

    <bullet> Borrowers can be confused about the trade-off between 
interest rates and closing costs. It may be difficult for borrowers 
(even sophisticated ones but surely unsophisticated ones) to 
understand the financial trade-offs associated with discount points, 
yield spread premiums, and upfront settlement costs. While many 
originators explain this to their borrowers, giving them an array of 
choices to meet their needs, some originators may only show 
borrowers a limited number of options.
    <bullet> There is also evidence that third-party costs are 
highly variable, indicating that there is much potential to reduce 
title, closing, and other settlement costs. For example, a recent 
analysis of FHA closing costs by the Urban Institute shows wide 
variation in title and settlement costs. There is not always an 
incentive in today's market for originators to control these costs. 
Too often, high third-party costs are simply passed through to the 
consumer. And consumers may not be the best shoppers for third-party 
service providers due to their lack of expertise and to the 
infrequency with which they shop for these services. Consumers often 
rely on recommendations from the real estate agent (in the case of a 
home purchase) or from the loan originator (in the case of a 
refinance as well as a home purchase).
    Today's GFE. Today's GFE does not help the above situations, as 
it is not an effective tool for facilitating borrower shopping nor 
for controlling third-party settlement costs. The current GFE is 
typically comprised of a long list of charges, as today's rules do 
not prescribe a standard form and consolidated categories. Such a 
long list of individual charges can be overwhelming, often confuses 
consumers, and seems to provide little useful information for 
consumer shopping. The current GFE certainly does not inform 
consumers what the major costs are so that they can effectively shop 
and compare mortgage offers among different loan originators. The 
current GFE does not explain how the borrower can use the document 
to shop and compare loans. Also, the GFE fails to make clear the 
relationship between the closing costs and the interest rate on a 
loan, notwithstanding that many mortgage loans originated today 
adjust up-front closing costs due at settlement, either up or down, 
depending on whether the interest rate on the loan is below or above 
``par.'' Finally, current rules do not assure that the ``good faith 
estimate'' is a reliable estimate of final settlement costs. As a 
result, under today's rules, the estimated costs on GFEs may be 
unreliable or incomplete, and final charges at settlement may 
include significant increases in items that were estimated on the 
GFE, as well as additional fees, which can add to the consumer's 
ultimate closing costs.
    Thus, today's GFE is not an effective tool for facilitating 
borrower shopping or for controlling origination and third-party 
settlement costs. There is enormous potential for cost reductions in 
today's market, which is too often characterized by relatively high 
and highly variable charges for both origination and third-party 
services.
    In addition, today's RESPA rules hold back efficiency and 
competition by acting as a barrier to innovative cost-reduction 
arrangements. While today's mortgage market is characterized by 
increased efficiencies and lower prices due to technological 
advances and other innovations, that is not the case in the 
settlement area where aggressive competition among settlement 
service providers simply does not always take place. Under current 
law, a provider's efforts to enter into volume arrangements with 
settlement service firms may be regarded as illegal, which likely 
impedes efforts to reduce the costs of third-party services. 
Similarly, existing RESPA regulations inhibit average cost pricing 
\38\ (another example of a

[[Page 14101]]

cost reduction technique). Thus, a framework is needed that would 
encourage competitive negotiations and other arrangements that would 
lead to lower settlement prices. The proposed GFE will provide such 
a framework.
---------------------------------------------------------------------------

    \38\ The charges reported on the HUD-1 are required to be the 
specific charge paid in connection with the specific loan for which 
the HUD-1 is filled out. Average cost pricing is the practice of 
charging all borrowers the same expected average charge for all the 
loans they work on. Average cost pricing requires less record 
keeping and tracking for any individual loan since the numbers 
reported to the settlement agent need not be transaction specific. 
Average cost pricing is not permissible under RESPA because loan-
specific prices are required.
---------------------------------------------------------------------------

Appendix II.C. Proposed Approach

Appendix II.C.1. Main Components of the Proposed GFE and HUD-1

    The proposed GFE format simplifies the process of originating 
mortgages by consolidating costs into a few major cost 
categories.\39\ The proposed GFE ensures that in brokered 
transactions, borrowers receive the full benefit of the higher price 
paid by wholesale lenders for a loan with a high interest rate; that 
is, so-called yield spread premiums. On both the GFE and HUD-1, the 
portion of any wholesale lender payments that arise because a loan 
has an above-par interest rate is passed through to borrowers as a 
credit against other costs. Thus, there is assurance that borrowers 
who take on an above-par loan receive funds to offset their 
settlement costs. The proposed GFE also includes a trade-off table 
that will assist consumers in understanding the relationship between 
higher interest rates and lower settlement costs.
    HUD conducted consumer tests to further improve the GFE form in 
the 2002 proposed rule. Numerous changes were made to make the GFE 
more user-friendly. A summary page containing the key information 
for shopping was added; during the tests, consumers reported that 
the summary page was a useful addition to the GFE. The trade-off 
table, another component of the proposed GFE that consumers found 
useful, has also been improved. The end result is a form that 
consumers find to be clear and well written and, according the tests 
conducted, one that they can use to determine the least expensive 
loan. In other words, it is a shopping tool that is a vast 
improvement over today's GFE with its long list of fees that can 
change (i.e., increase) at settlement.
---------------------------------------------------------------------------

    \39\ See the proposed GFE in Exhibit 3-B of Chapter 3.
---------------------------------------------------------------------------

    The proposed GFE includes a set of tolerances on originator and 
third-party costs: Originators must adhere to their own origination 
fees, and give estimates subject to a 10 percent upper limit on the 
sum of certain third-party fees. The tolerances on originator and 
third-party costs will encourage originators not only to lower their 
own costs but also to seek lower costs for third-party services.
    The proposed rule would allow settlement service providers to 
seek discounts, including volume based discounts, for settlement 
services, providing the price charged on the HUD-1 is no more than 
the price paid to the third-party settlement service provider for 
the discounted service. This should lead to lower third-party 
settlement service prices. The proposed rule would allow service 
providers to use average cost pricing for third-party services they 
purchase so long as the average is calculated using an acceptable 
method and the charge on the HUD-1 is no greater than the average 
paid for that service. This will make internal operations for the 
loan originator simpler and less costly and competition among 
lenders will put pressure for these cost savings to be passed on to 
borrowers as well. The end result of all these changes should be 
lower third-party fees for consumers.
    The HUD-1 has also been adjusted to ensure that the proposed GFE 
(a shopping document issued early in the process) and the HUD-1 (a 
final settlement document issued at closing) work well together. The 
layout of the proposed HUD-1 has new labeling of some lines so that 
each entry from the proposed GFE can be found on the proposed HUD-1 
with the exact wording as on the GFE. This will make it much easier 
to determine if the fees actually paid at settlement are consistent 
with the GFE, whether the borrower does it alone or with the 
assistance of the settlement agent. The reduced number of HUD-1 
entries that should result, as well as use of the same terminology 
on both forms should reduce the time spent by the borrower and 
settlement comparing and checking the numbers.
    No sections of the current HUD-1 have been eliminated so the 
proposed HUD-1 should work for any settlement using the existing 
HUD-1. Given that there has been no significant change in the basic 
HUD-1 structure and layout, generating this new HUD-1 should not 
pose any problem for firms closing loans--in fact, the closing 
process will be much simpler given borrowers and closing agents can 
precisely link the information on the initial GFE to the information 
on the final HUD-1.

Appendix II.C.2. Estimates and Sources of Consumer Savings From the 
Proposed Rule

    Overall Savings. Chapter 3 discusses the consumer benefits 
associated with the proposed GFE form and provides dollar estimates 
of consumer savings due to improved shopping for both originator and 
third-party services. Consumer savings were estimated under a 
variety of scenarios about originator and settlement costs.\40\ In 
the base case, the estimated price reduction to borrowers comes to 
$8.35 billion, or 12.5 percent of the $66.7 billion in total charges 
(i.e., origination fees, appraisal, credit report, tax service and 
flood certificate and title insurance and settlement agent 
charges).\41\ Thus, there is an estimated $8.35 billion in transfers 
from firms to borrowers from the improved disclosures and tolerances 
of the proposed GFE. This would represent savings of $668 per loan. 
Sensitivity analysis was conducted with respect to the savings 
projection in order to provide a range of estimates. Because title 
fees account for over 70 percent of third-party fees and because 
there is widespread evidence of lack of competition and overcharging 
in the title and settlement closing industry, one approach projected 
third-party savings only in that industry. This approach (called the 
``title approach'') projected savings of $200 per loan in title and 
settlement fees. In this case, the estimated price reduction to 
borrowers comes to $8.38 billion ($670 per loan), or 12.6 percent of 
the $66.7 billion in total charges--savings figures that are 
practically identical to the base case mentioned above.\42\ Other 
projections also showed substantial savings for consumers. As 
explained in Chapter 3, estimated consumer savings under a more 
conservative projection totaled $6.48 billion ($518 per loan), or 
9.7 percent of total settlement charges. Thus, while consumer 
savings are expected to be $8.35 billion (or 12.5 percent of total 
charges) in the base case or $8.38 billion (12.7 percent of total 
charges) in the title approach, they were $6.48 billion (or 9.7 
percent of total charges) in a more conservative sensitivity 
analysis. This $6.48-$8.38 billion ($518-$670 per loan) represents 
the substantial savings that can be achieved with the proposed GFE.
---------------------------------------------------------------------------

    \40\ Throughout this Economic Analysis, the terms ``borrowers'' 
and ``consumers'' are often used interchangeably.
    \41\ Government fees and taxes and escrow items are not included 
in this analysis, as they are not subject to competitive market 
pressures.
    \42\ If the savings in title and settlement closing fees due to 
RESPA reform were only $150, then the estimated price reduction to 
borrowers comes to $7.76 billion, or 11.6 percent of the $66.7 
billion in total charges.
---------------------------------------------------------------------------

    Industry Breakdown of Savings. Chapter 3 also disaggregates the 
sources of consumer savings into the following major categories: 
Originators with a breakdown for brokers and lenders, and third-
party providers with a breakdown for the title and settlement 
industry and other third-party providers.\43\ In the base case, 
originators (brokers and lenders) contribute $5.88 billion, or 70 
percent of the $8.35 billion in consumer savings. This $5.88 billion 
in savings represents 14.0 percent of the total revenue of 
originators, which is projected to be $42.0 billion.\44\ The $5.88 
billion is divided between brokers, which contribute $3.53 billion, 
and lenders (banks, thrifts, and mortgage banks), which contribute 
the remaining $2.35 billion. The shares for brokers (60 percent) and 
lenders (40 percent) represent their respective shares of mortgage 
originations.
---------------------------------------------------------------------------

    \43\ Readers are referred to Chapter 5 for a more detailed 
examination of the various component industries (e.g., title 
services, appraisal, etc.) as well as for the derivations of many of 
the estimates presented in this chapter.
    \44\ This assumes a 1.75 percent origination fee for brokers and 
lenders, which, when applied to projected originations of $2.4 
trillion, yields $42.0 billion in total revenues from origination 
fees (both direct and indirect). See Steps (3)-(5) of Section 
VII.E.1 of Chapter 3 of the RIA for the explanation of origination 
costs. Sensitivity analyses are conducted for smaller origination 
fees of 1.5 percent and larger fees of 2.0 percent; see Step (21) in 
Section VII.E.4 of Chapter 3.
---------------------------------------------------------------------------

    In the base case, third-party settlement service providers 
contribute $2.47 billion, or 30 percent of the $8.35 billion in 
consumer savings. This $2.47 billion in savings represents 10.0 
percent of the total revenue of third-party providers, which is 
projected to be $24.738 billion.\45\ The $2.47 billion is divided 
between title and settlement agents, which contribute $1.79 billion, 
and other

[[Page 14102]]

third-party providers (appraisers, surveyors, pest inspectors, 
etc.), which contribute $0.68 billion. Title and settlement agents 
contribute a large share because they account for 72.5 percent of 
the third-party services included in this analysis. In the title 
approach, title and settlement agents account for all third-party 
savings, which total $2.5 billion if per loan savings are $200 and 
$1.88 billion if per loan savings are $150.
---------------------------------------------------------------------------

    \45\ See Step (7) of Section VII.E.1 of Chapter 3 of the RIA for 
the derivation of the $24.738 billion.
---------------------------------------------------------------------------

    Section II.C.4 of this appendix presents the revenue impacts on 
small originators and small third-party providers.
    Sources of Savings: Lower Origination and Third-Party Fees. The 
Regulatory Impact Analysis presents evidence that some consumers are 
paying higher prices for origination and third-party services. The 
proposed GFE format in the proposed rule will improve consumer 
shopping for mortgages, which will result in better mortgage 
products, lower interest rates, and lower origination and third-
party costs for borrowers.
    <bullet> 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 that is not 
standardized and can contain a long list of individual charges that 
encourages fee proliferation. This makes it easier for the consumer 
to become overwhelmed and confused. The consistent and simpler 
presentation of the proposed GFE will improve the ability of the 
consumer to shop.
    <bullet> A GFE with a summary page, which includes the terms of 
the loan, will make it to clear to the consumer whether they are 
comparing similar loans.
    <bullet> A GFE with a summary page will make it simpler for 
borrowers to shop. The higher reward for shopping, along with the 
increased ease with which borrowers can compare loans, should lead 
to more effective shopping, more competition, and lower prices for 
borrowers.
    <bullet> The proposed GFE makes cost estimates more reliable by 
applying tolerances to the figures reported. This will reduce the 
all too frequent problem of borrowers being surprised by additional 
costs at settlement. With fees firmer under the proposed GFE, 
shopping is more likely to result in borrowers saving money when 
they shop.
    <bullet> The proposed GFE will disclose yield spread premiums 
and discount points in brokered loans prominently, accurately, and 
in a way that should inform borrowers how they may be used to their 
advantage. Both values will have to be calculated as the difference 
between the price of the loan and its par value. Their placement in 
the calculations that lead to net settlement costs will make them 
very difficult to miss. That placement should also enhance borrower 
comprehension of how yield spread premiums can be used to reduce up-
front settlement costs. Tests of the form indicate that consumers 
can determine the cheaper loan when comparing a broker loan with a 
lender loan.
    <bullet> The proposed GFE will better inform consumers about 
their financing choices by requiring that lenders present the 
different interest rate and closing cost options available to them. 
For example, consumers will better understand the trade-offs between 
reducing their closing costs and increasing the interest rate on the 
mortgage.
    <bullet> The proposed rule allows settlement service providers 
to seek discounts, including volume based discounts, for settlement 
services. In addition, the rule allows service providers to use 
average cost pricing for third-party services they purchase.
    <bullet> The above changes and the imposition of tolerances on 
fees will encourage originators to seek discounts, which should 
lower settlement service prices. The tolerances will lead to well-
informed market professionals either arranging for the purchase of 
the settlement services or at least establishing a benchmark that 
borrowers can use to start their own search. Under either set of 
circumstances, this should lead to lower prices for borrowers than 
if the borrowers shopped on their own, since the typical borrower's 
knowledge of the settlement service market is limited, at best.

Appendix II.C.3. Savings and Transfers, Efficiencies, and Costs

    As explained above, it is estimated that borrowers would save 
$8.35 billion in origination and settlement charges. This $8.35 
billion represents transfers to borrowers from high priced 
producers, with $5.88 billion coming from originators and $2.47 
billion from third-party settlement service providers. In addition 
to the transfers, there are efficiencies associated with the rule as 
well as costs.
    Mortgage applicants and borrowers realize $1,073 million savings 
in time spent shopping for loans and third-party services. Loan 
originators save $1,404 million in time spent with shoppers, in 
efforts spent seeking out vulnerable borrowers, and from average 
cost pricing. Third-party settlement service providers save $113 
million in time spent with shoppers. Some or all of the $1,404 
million and $113 million in efficiency gains have the potential to 
be passed through to borrowers through competition.
    The total one-time compliance costs to the lending and 
settlement industry of the proposed GFE and HUD-1 are estimated to 
be $570 million, $390 million of which is borne by small business. 
These costs are summarized below. Total recurring costs are 
estimated to be $1.231 billion annually or $98.48 per loan. The 
share of the recurring costs on small business is $548 million. This 
chapter examines in greater detail the compliance and other costs 
associated with the proposed GFE and HUD-1 forms and its tolerances.
    The proposed GFE has some features that would increase the cost 
of providing it and some that would decrease the cost. Practically 
all of the information required on the GFE is readily available to 
originators, suggesting no additional costs. The fact that there are 
fewer numbers and less itemization of individual fees suggests 
reduced costs. On the other hand, there could be a small amount of 
additional costs associated with the trade-off table but that is not 
clear. Thus, while it is difficult to estimate, it appears that 
there could be a net of zero additional costs. However, if the 
proposed GFE added 10 minutes to the time it takes to handle the 
forms today, annual costs would rise by $255 million ($12 per 
application or $20 per loan). (See Section VII.C.1 of this 
appendix.)
    The presence of tolerances will lead to some additional costs to 
originators of making additional arrangements for third parties to 
provide settlement services. If the average loan originator incurs 
an average of 10 minutes per loan of effort making third-party 
arrangements to meet the tolerances, then the total cost to 
originators of making third-party arrangements to meet the tolerance 
requirements comes to $300 million ($24 per loan). (See Section 
Appendix VII.E.2.)
    In addition to the recurring costs of the proposed GFE, there 
will be one-time adjustment costs of $401 million in switching to 
the new form. Loan originators will have to upgrade their software 
and train staff in its use in order to accommodate the requirements 
of the new rule. It is estimated that the software cost will be $33 
million and the training cost will be $58 million, for a total of 
$91 million (see Section Appendix III.B.1). Once the new software is 
functioning, the recurring costs of training new employees in its 
use and the costs associated with periodic upgrades simply replace 
those costs that would have been incurred doing the same thing with 
software for the old rule. They represent no additional costs of the 
new rule. Similarly, there will be a one-time adjustment cost for 
legal advice on how to deal with the changes related to the new GFE. 
The one-time adjustment cost for legal fees is estimated to be $116 
million (see Appendix III.B.2). Once the adjustment has been made, 
the ongoing legal costs are a substitute for the ongoing legal costs 
that would have been incurred under the old rule and do not 
represent any additional burden.
    Finally with respect to the GFE, employees will have to be 
trained in the new GFE beyond the software and legal training 
already mentioned. This one time adjustment cost is estimated to be 
$193 million (see Section Appendix III.B.3). Again, once the 
transition expenses have been incurred, any ongoing training costs 
are a substitute for the training costs that would have been 
incurred anyway and do not represent an additional burden.
    There will be recurring costs of the new HUD-1 on the settlement 
industry arising from the addition of the closing script. Requiring 
the script would impose a cost on the settlement industry only when 
it increases the average time spent to complete a settlement. 
Settlement agents would be obliged to collect data from the GFE, 
fill out the script, read it to the borrower, and answer any 
questions engendered by the script. The typical agent will perform 
this kind of work regardless of whether they are required to do so. 
A script only standardizes the explanation of the correspondence 
between the GFE and the HUD-1 forms. It is conceivable that the 
burden imposed on the average conscientious agent is very modest. 
However, to be cautious, we assume that the script would lead to an 
additional forty-five minutes spent on the average settlement. The 
opportunity cost of that time to the

[[Page 14103]]

settlement firm would be $54 (derived from a $150,000 fully loaded 
salary). The total cost of the script in a normal year (12.5 million 
originations) would be $676 million and $838 million in a high 
volume year (15.5 million originations). (See Section VII.C.2 of 
this appendix for a lengthier discussion.)
    There will be one-time adjustment costs of $169 million in 
switching to the new HUD-1 form and its new addendum, the 
standardized closing script. Settlement firms will have to upgrade 
their software and train staff in its use in order to accommodate 
the requirements of the new rule. It is estimated that the software 
cost will be $14 million and the training cost will be $48 million, 
for a total of $62 million (see Section Appendix VII.B.). Once the 
new software is functioning, the recurring costs of training new 
employees in its use and the costs associated with periodic upgrades 
simply replace those costs that would have been incurred doing the 
same thing with software for the old rule. They represent no 
additional costs of the new rule.
    Similarly, there will be a one-time adjustment cost for legal 
advice on how to deal with the changes related to the new HUD-1. The 
one-time adjustment cost for legal fees is estimated to be $37 
million (see Section Appendix VII.B.). Once the adjustment has been 
made, the ongoing legal costs are a substitute for the ongoing legal 
costs that would have been incurred under the old rule and do not 
represent any additional burden.
    Finally, employees will have to be trained in the new HUD-1 
beyond the software and legal training already mentioned. This one 
time adjustment cost is estimated to be $71 million (see Section 
Appendix VII.B.). Again, once the transition expenses have been 
incurred, any ongoing training costs are a substitute for the 
training costs that would have been incurred anyway and do not 
represent an additional burden.
    The consumer savings, efficiencies and costs associated with the 
proposed GFE are discussed further in the Appendix and in Chapter 3 
of the RIA. A summary of the compliance costs for the base case of 
12.5 million loans annually is presented below in Table A-1.

               Table A-1.--Compliance Costs of the Proposed Rule (If 12.5 Million Loans Annually)
----------------------------------------------------------------------------------------------------------------
                                     One-time compliance costs      Recurring compliance costs
                                  incurred during the first year      (in millions annually)
                                           (in millions)         --------------------------------   $ cost per
                                 --------------------------------                                      loan
                                     All firms      Small firms      All firms      Small firms
----------------------------------------------------------------------------------------------------------------
GFE.............................            $401            $280            $555            $290          $44.40
HUD-1...........................             169             110             676             258           54.08
                                 -------------------------------------------------------------------------------
    Total.......................             570             390           1,231             548           98.48
----------------------------------------------------------------------------------------------------------------

    The costs of the closing script are included in the HUD-1 costs. 
Note that all of the recurring costs from the HUD-1 stem entirely 
from the required closing script.

Appendix II.C.4. Alternatives Considered To Make the GFE More 
Workable for Small and Other Businesses

    Chapter 3 discusses the many comments that HUD received on the 
GFE in the 2002 proposed rule and in the 2005 RESPA Reform 
Roundtables. Chapter 4 discusses alternatives. The most basic 
alternative was to make no change in the current GFE. Some 
commenters, particularly those who favored packaging, argued that 
the current GFE should be left in place while packaging was given a 
chance to work. The proposed rule does allow the current GFE to be 
used for one year after the proposed GFE is introduced. This one-
year adjustment period responds to lenders' comments that there 
would be significant implementation issues with switching to a 
proposed GFE.
    The main alternative concerning small businesses considered the 
brokers' argument that they were disadvantaged by the reporting of 
yield spread premiums. HUD improved the proposed GFE to ensure that 
there will not be any anti-competitive impacts on the broker 
industry. A summary page was added that presents the key cost 
figures for borrower shopping, that does not report yield spread 
premiums, and that provides identical treatment for brokers and 
lenders. The proposed GFE adds language that clarifies how yield 
spread premiums reduce the upfront charge that borrowers pay.
    HUD changed the GFE to make it more workable for small lenders 
and brokers. Some examples of the changes are the following:
    <bullet> In response to concerns expressed by lenders and 
brokers about their ability to control third-party costs and meet 
the specified tolerances in the 2002 proposed rule, the proposed 
rule clarifies that ``zero tolerance'' does not pertain in 
``unforeseeable circumstances'' beyond the originator's control. The 
tolerance for fees for lender-required, lender-selected third-party 
services was also increased from zero percent to 10 percent. The sum 
of the fees to which the ten percent tolerance applies may not 
exceed the initial sum by more than ten percent. However, individual 
fees in this category may increase by more than ten percent.
    <bullet> Consistent with the above, the rule clarifies the 
definition of ``unforeseeable circumstances'' to include 
circumstances that could not be reasonably foreseen at the time of 
GFE application--examples include the need for a second appraisal or 
flood insurance.
    <bullet> The definition of an application was changed to be 
consistent with the way consumers and lenders operate today--a ``GFE 
application'' would serve as a shopping application and a ``mortgage 
application'' would be submitted once a shopper chooses a particular 
loan originator, and would resemble the standard application in 
today's market and be the basis for full underwriting.
    <bullet> The proposed rule clarifies that only the ``mortgage 
application'' would be subject to Regulations B (ECOA) and C (HMDA), 
which is the current situation today.
    <bullet> HUD reduced the guarantee period for tolerances to 10 
business days, which gives borrowers ample time to shop and does not 
impose large operational and hedging costs on lenders and brokers 
(as 30 days might have).
    <bullet> Lenders and brokers objected to the requirement that 
they calculate the Annual Percentage Rate (APR) on the GFE; for a 
variety of reasons, HUD dropped the APR from the proposed GFE. They 
also disagreed with splitting out the broker and lender portions of 
the origination fee on the back page of the GFE; HUD dropped that 
from the proposed GFE.
    The above changes address a number of practical and 
implementation problems raised by lenders and brokers about the 
proposed GFE. The changes make the proposed GFE easier to use for 
small lenders and brokers.
    Alternatives. This chapter and Chapter 4 discuss other major 
alternatives that HUD considered, including single packaging, dual 
packaging, and a Settlement Service Package. These chapters discuss 
the pros and cons of these alternatives and why HUD decided not to 
include them in this proposed rule. For example, HUD did consider 
the option of offering a Mortgage Package Offer (MPO, or single 
packaging) with a Section 8 safe harbor in combination with the 
proposed GFE. HUD rejected this alternative for several reasons. 
First, HUD included tolerances in the proposed GFE, which will 
encourage lenders to negotiate with third-party providers in order 
to reduce their costs. Second, this proposed rule encourages volume 
discount arrangements (one of the cost-reduction features of single 
packaging), which will also lead to more competitive third-party 
prices. Third, the proposed rule allows lenders and other service 
providers to average cost price (another cost-reduction feature of 
single packaging). Fourth, the proposed GFE itself is a much 
improved shopping document over the existing GFE; for example, 
individual fees are consolidated into broad categories and a 
summary, first page provides the shopper with key information to 
select the least expensive loan package. Thus, the proposed GFE 
already includes many of the cost-reducing features that would 
supposedly be offered by packing. Finally, this is all

[[Page 14104]]

accomplished without having to offer a Section 8 exemption to the 
industry.

Appendix II.C.5 Market and Competitive Impacts on Small Businesses 
From the Proposed Rule

    Transfers from Small Businesses. It is estimated that $4.13 
billion, or 49.5 percent of the $8.35 billion in consumer savings 
comes from small businesses, with small originators contributing 
$3.01 billion and small third-party firms, $1.13 billion.\46\ Within 
the small originator group, most of the transfers to consumers come 
from small brokers ($2.47 billion, or 82 percent of the $3.01 
billion); this is because small firms account for most of broker 
revenues but a small percentage of lender revenues. Within the small 
third-party group, most of the transfers come from the title and 
closing industry ($0.68 billion, or 60 percent of the $1.13 
billion), mainly because this industry accounts for most third-party 
fees. In the title approach, small title and settlement closing 
companies account for $0.95 billion of the $2.5 billion in savings. 
Section VII.E.2 of Chapter 3 of the Regulatory Impact Analysis IA 
explains the steps in deriving these revenue impacts on small 
businesses, and Section VII.E.4 of Chapter 3 reports several 
sensitivity analyses around the estimates. In addition, Chapter 5 of 
the RIA provides more detailed revenue impacts for the various 
component industries.\47\
---------------------------------------------------------------------------

    \46\ In the more conservative scenario of $6.48 billion in 
consumer savings, small businesses would account for $3.21 billion 
of the transfers to consumers, with small originators accounting for 
$2.36 billion, and small third-party providers, $0.84 billion.
    \47\ In Chapter 5 of the RIA, see Section II for brokers, 
Section III for the four lender groups (commercial banks, thrifts, 
mortgage banks, and credit unions), Section IV for the various title 
and settlement groups (large insurers, title and settlement agents, 
lawyers, and escrow firms), Section V.A for appraisers, Section V.B 
for surveyors, Section V.C for pest inspectors, and Section V.D for 
credit bureaus.
---------------------------------------------------------------------------

    The summary bullets in Section Appendix II.C.2 highlight the 
mechanisms through which these transfers are expected to happen. 
Improved understanding of yield spread premiums, discount points, 
and the trade-off between interest rates and upfront costs; improved 
consumer shopping among originators; more aggressive competition by 
originators for settlement services; and increased competition 
associated discounting--all will lead to reductions in both 
originator and third-party fees. As noted earlier, there is 
substantial evidence of non-competitive prices charged to some in 
the origination and settlement of mortgages. Originators (both small 
and large) and settlement service providers (both small and large) 
that have been charging high prices will experience reductions in 
their revenues as a result of the proposed GFE. There is no evidence 
that small businesses have been disproportionately charging high 
prices; for this reason, there is no expectation of any 
disproportionate impact on small businesses from the proposed GFE. 
The revenue reductions will be distributed across firms based on 
their non-competitive price behavior.
    Small Brokers.\48\ The main issue raised by the brokers 
concerned the treatment in the 2002 proposed rule of yield spread 
premiums on the proposed Good Faith Estimate. This was also the main 
small business issue with the 2002 proposed GFE since practically 
all brokers qualify as small businesses. As explained above, the 
current proposed rule addresses the concern expressed by brokers 
that the reporting of yield spread premiums in the 2002 proposed 
rule would disadvantage them relative to lenders. The Department 
hired forms development specialists, the Kleimann Communication 
Group, to analyze, test, and improve the forms. They reworked the 
language and presentation of the yield spread premium to emphasize 
that it offsets other charges to reduce up-front charges, the cash 
needed to close the loan. The subjects tested seemed to like the 
table on page 3 of the form that shows the trade-off between the 
interest rate and up-front charges. It illustrates how yield spread 
premiums can reduce upfront charges. There is the new summary page 
designed to simplify the digestion of the information on the form by 
including only summary information from page two: The adjusted 
origination charge, the sum of all other charges, and the total. 
This is the first page any potential borrower would see. It contains 
only the essentials for comparison-shopping and is simple: A 
standard set of yes-no questions describing the loan and a very 
simple summary of costs and the bottom line. Yield spread premiums 
are never mentioned here. Lender and broker loans get identical 
treatment on page 1. A mortgage shopping chart has been added as a 
last page of the GFE, to help borrowers comparison shop. Arrows were 
added to focus the borrower on overall charges, rather than one 
component. All of these features work against the borrower 
misinterpreting the different required presentation of loan fees 
required of brokers vis-[agrave]-vis lenders.
---------------------------------------------------------------------------

    \48\ Practically all (98.9%) of the 30,000-44,000 brokers 
qualify as a small business. The Bureau of Census reports that small 
brokers account for 70% of industry revenue.
---------------------------------------------------------------------------

    HUD has redesigned the proposed GFE form to focus borrowers on 
the right numbers so that competition is maintained between brokers 
and lenders. The forms adopted in the proposed rule were tested on 
hundreds of subjects. The tests indicate that borrowers who 
comparison shop will have little difficulty identifying the cheapest 
loan offered in the market whether from a broker or a lender.
    The customer outreach function that brokers perform for 
wholesale lenders is not going to change with RESPA reform. 
Wholesale lending, which has fueled the rise in mortgage 
originations over the past ten years, will continue to depend on 
brokers reaching out to consumer customers and supplying them with 
loans. Brokers play the key role in the upfront part of the mortgage 
process and this will continue with the proposed GFE.
    RESPA reform is also not going to change the basic cost and 
efficiency advantages of brokers. Brokers have grown in market share 
and numbers because they can originate mortgages at lower costs than 
others. There is no indication that their cost competitiveness is 
going to change in the near future. Thus, brokers, as a group, will 
remain highly competitive actors in the mortgage market, as they 
have been in the past.
    While there is no evidence to suggest any anti-competitive 
impact, there will be an impact on those brokers who are charging 
non-competitive prices. And there is convincing evidence that some 
brokers (as well as some lenders) overcharge consumers (see studies 
reviewed in Chapter 2). As emphasized throughout the Regulatory 
Impact Analysis, the proposed GFE will lead to improved and more 
effective consumer shopping, for many reasons--the proposed GFE is 
simple and easy to understand, it includes reliable cost estimates, 
it effectively discloses yield spread premiums and discounts in 
brokered loans without disadvantaging brokers, it ensures that 
consumers are shown options, and it explains the trade-off between 
closing costs and yield spread premiums. This increased shopping by 
consumers will reduce the revenues of those brokers who are charging 
non-competitive prices. Thus, the main impact on brokers (both small 
and large) of the proposed rule will be on those brokers (as well as 
other originators) who have been overcharging uninformed consumers, 
through the combination of high origination fees and yield spread 
premiums.\49\ As noted above, small brokers are expected to 
experience $2.47 billion in reduced fees.
---------------------------------------------------------------------------

    \49\ As explained throughout this chapter, it is anticipated 
that market competition, under this proposed GFE approach, will have 
a similar impact on those lenders (non-brokers) who have been 
overcharging consumers through a combination of high origination 
costs and yield spread premiums.
---------------------------------------------------------------------------

    Section VIII.A of Chapter 3 of the RIA discusses other concerns 
raised by brokers about the 2002 proposed GFE, such as the 
following:
    1. Brokers were concerned about their ability to control costs 
and meet the specified tolerances in the 2002 proposed rule. As 
explained above, the proposed rule made several adjustments to the 
tolerance rules and clarified when tolerances would or would not be 
in effect.
    2. Brokers supported a generic trade-off table but the 
Department concluded, based on consumer testing, that a customized 
trade-off chart was essential for increasing consumer understanding 
of the complex yield spread premium issue.
    3. Brokers disagreed with splitting out the broker and lender 
portions of the origination fee on the back page of the GFE; HUD has 
dropped that on the 2007 proposed GFE.
    4. Brokers did not agree with the 30-day shopping period for the 
GFE; HUD reduced that to 10 days, which should provide adequate time 
for consumers to shop.
    5. Brokers raised objections to having brokers calculate the 
Annual Percentage Rate (APR) on the GFE; for a variety of reasons, 
HUD has dropped the APR from the GFE.
    To a large extent, brokers raised many of the same 
implementation issues voiced by lenders in their comments. The 
changes that HUD made in the 2007 proposed rule will

[[Page 14105]]

make the GFE more workable for small brokers and small lenders.
    Small Lenders. Lenders include mortgage banks, commercial banks, 
credit unions, and thrift institutions.\50\ There are over 10,000 
lenders that would be affected by the RESPA rule, as well as almost 
4,000 credit unions that originate mortgages. While two-thirds of 
the lenders qualify as a small business (as do four-fifths of the 
credit unions), these small originators account for only 23 percent 
of industry revenues. Thus, small lenders (including credit unions) 
account for only $540 million of the projected $2.35 billion in 
transfers from lenders.\51\ Section VIII.B of Chapter 3 of the RIA 
provides a detailed discussion of the anticipated impacts of the 
rule on lenders, and the pros and cons of the various policy 
alternatives that the Department considered.
---------------------------------------------------------------------------

    \50\ While it is recognized that the business operations and 
objectives of these lender groups can differ--not only between the 
groups (a mortgage banker versus a portfolio lender) but even within 
a single group (a small community bank versus a large national 
bank)--they raised so many of the same issues that it is more useful 
to address them in one place.
    \51\ Section III of Chapter 5 describes the characteristics of 
these component industries (number of employees, size of firms, 
etc.), their mortgage origination activity, and the allocation of 
revenue impacts between large and small lenders. That section also 
explains that the small business share of revenue could vary from 20 
percent to 26 percent.
---------------------------------------------------------------------------

    In general, there was less concern expressed by lenders (as 
compared with brokers) about potential anti-competitive impacts of 
the GFE on small businesses. Small lenders--relative to both brokers 
and large lenders--will remain highly competitive actors in the 
mortgage market, as they are today. Small mortgage banks, community 
banks and local savings institutions benefit from their knowledge of 
local settlement service providers and of the local mortgage market. 
Nothing in the 2007 proposed GFE rule changes that.
    For the most part, lenders supported the packaging concept but 
wanted to delay the enhanced GFE while packaging was given a chance 
to work. As explained above, HUD allows a 12-month implementation 
period during which the current GFE could be used, which should give 
lenders time to adjust their computer systems and train employees to 
use the proposed GFE.
    Lenders had numerous comments on most aspects of the 2002 
proposed GFE form--some of them dealing with major issues such as 
the difficulty in predicting costs within a three day period and 
many dealing with practical and more technical issues. HUD responded 
to many of the issues and concerns raised by lenders; Sections V, 
VI, and VIII of Chapter 3 discuss lenders' comments and HUD's 
response.
    Some lenders were concerned about their ability to produce firm 
cost estimates (even of their own fees) within a three-day period, 
given the complexity of the mortgage process. Lenders wanted 
clarification on their ability to make cost adjustments as a result 
of information they gain during the full underwriting process. The 
tolerances in the proposed rule require that lenders play a more 
active role in controlling third-party costs than they have in the 
past. However, some lenders emphasized that they have little control 
over fees of third-party settlement providers, while others seem to 
not anticipate problems in this regard. As explained in I.B above, 
the proposed rule made several adjustments to the tolerance rules, 
which should make them workable for lenders. In addition, the 
proposed rule allows volume discounting and average cost pricing, 
which should help lenders reduce their costs. Practically all 
lenders wanted clarification on the definition of application, and 
HUD did that, along the same lines that lenders suggested in their 
comments.
    There will be an impact on those lenders (both large and small) 
who are charging non-competitive prices. Improved consumer shopping 
with the proposed GFE will reduce the revenues of those lenders who 
are charging non-competitive prices. Thus, as with brokers, the main 
negative impact on lenders (both small and large) of the proposed 
GFE will be on those lenders who have been overcharging uninformed 
consumers.
    Small Title and Settlement Firms. The title and settlement 
industry--which consists of large title insurers, title agents, 
escrow firms, lawyers, and others involved in the settlement 
process--is expected to account for $1.79 billion of the $2.47 
billion in third-party transfers under the proposed GFE. Within the 
title and settlement group, small firms are expected to account for 
38.1 percent ($0.68 billion) of the transfers, although there is 
some uncertainty with this estimate.\52\ Step (8) of Section VII.E 
of Chapter 3 conducts an analysis that projects all of the consumer 
savings in third-party costs coming from the title industry; 
evidence suggests there are more opportunities for price reductions 
in the title industry, as compared with other third-party 
industries. In this case, consumer savings in title costs ($150-$200 
per loan) ranged from $1.88 billion to $2.50 billion. To a large 
extent, the title and closing industry is characterized by local 
firms providing services at constant returns to scale. The demand 
for the services of these local firms will continue under the 
proposed GFE.
---------------------------------------------------------------------------

    \52\ Section IV of Chapter 5 describes the component industries 
and estimates the share of overall industry revenue going to small 
businesses.
---------------------------------------------------------------------------

    Section VIII.C of Chapter 3 summarizes the key competitive 
issues for this industry with respect to the proposed rule. As noted 
there, the overall competitiveness of the title and closing industry 
should be enhanced by the RESPA rule. Chapters 2 and 5 and Section 
III.E of Chapter 3 of the Regulatory Impact Analysis provide 
evidence that title and closing fees are too high and that there is 
much potential for price reductions in this industry. Increased 
shopping by consumers, as well as increased shopping by loan 
originators to stay within their tolerances, will reduce the 
revenues of those title and closing companies that have been 
charging non-competitive prices.\53\ Excess charges will be reduced 
and competition will ensure that reduced costs are passed through to 
consumers.
---------------------------------------------------------------------------

    \53\ The reasons why the proposed GFE and its tolerances will 
lead to improved and more effective shopping for third-party 
services by consumers and loan originators has already been 
discussed, and need not be repeated here.
---------------------------------------------------------------------------

    The title industry argued that greater itemization was needed in 
order for consumers to be able to adequately comparison shop among 
estimates. HUD's view is that the consolidated categories on the 
proposed GFE form provide consumers with the essential information 
needed for comparison-shopping. Itemization encourages a long list 
of fees that confuse borrowers.
    It is important to emphasize that the services of the title and 
closing industry, as well as other third-party industries 
(appraisers, surveyors, and pest inspectors), are local in nature 
and are performed near or at the site. Local firms have advantages 
of knowledge and networks of clients, as well as transportation cost 
advantages. As explained in Chapter 3, these advantages of small, 
locally based firms will not be negatively impacted by the new Good 
Faith Estimate. In fact, RESPA reform should open up opportunities 
for efficient third-party firms to expand their operations.

Appendix III. Statement of Need for and Objectives of the Rule \54\
---------------------------------------------------------------------------

    \54\ For a detailed discussion of problems with the current 
system, and thus the need for this proposed rule, see Sections IV 
and V of Chapter 2 and Sections I and VII of Chapter 3.
---------------------------------------------------------------------------

    Acquiring a mortgage is one of the most complex transactions a 
family will ever undertake. The consumer requires a level of 
financial sensibility to fully understand the product. For example, 
consider the trade-off between the yield spread premium and interest 
rate payments. Borrowers do not have access to the rate sheets that 
describe this trade-off. Indeed, many consumers may not even 
understand that there is a trade-off. To further complicate matters, 
the mortgage industry is continuously evolving: The range and 
complexity of products expands every year. Because consumers borrow 
fairly infrequently, the average borrower will be at an extreme 
informational disadvantage compared to the lender. To exacerbate 
this situation, the typical homebuyer may be rushed and easily 
steered into a bad loan because they are under pressure to make an 
offer on a home. This is especially the case for first-time 
homebuyers who will not be as likely to challenge lenders, whom they 
may view as unquestionable experts.
    Closing costs (lender fees and title charges) add to the 
borrower's confusion. They are not as significant as the loan itself 
and total on average approximately four percent of the loan amount. 
However, the direct lender fees and the title charges are perhaps 
just as perplexing to the consumer. First, the multiplicity of fees 
is confusing (see Exhibits 1-3 of Chapter 3 for a list of the 
different names of upfront lender fees and settlement charges). The 
purpose of every fee and title charge is likely to be neither 
understood nor questioned by the average first-time homebuyer, who 
may be intimidated by the formality of the transaction. Second, to 
add to the confusion and uncertainty, even once the charges have 
been agreed upon, they are subject to change until the day of 
closing.

[[Page 14106]]

Such informational asymmetries between the buyer and seller impede 
the ability of the consumer to be an effective shopper and 
negotiator.
    Consumers have strong incentives to ensure that they are getting 
the best deal possible on a mortgage loan and the associated third-
party settlement costs, but poorly-informed decisions have drastic 
consequences. First, the household itself will lose by paying more 
for housing and possibly by ruining their credit history in the 
event of default. Second, market imperfections stemming from 
information asymmetries may stand in the way of achieving one of 
this administration's domestic priorities: Expansion of 
homeownership. There is a wide range of positive economic 
externalities from homeownership that have been investigated in the 
empirical housing economics literature. These include household 
saving, wealth accumulation, property improvements, a more pleasing 
urban environment, an increase in political activity, a reduction of 
crime, better child outcomes, and a positive impact on the labor 
supply of women. The average loan amount is 3.5 times a household's 
income: Even minor inefficiencies in this market will have sizeable 
impacts on the U.S. economy.
    The current GFE format contains a long list of individual 
charges that can be overwhelming, often confuses consumers, and 
seems to provide little useful information for consumer shopping. 
Current RESPA regulations have led to a proliferation of charges 
that makes consumer shopping and the mortgage settlement process 
both difficult and confusing, even for the most informed shoppers. 
Long lists of charges certainly do not highlight the bottom-line 
costs so consumers can shop and compare mortgage offers among 
different originators. In addition, under today's rules, the 
estimated costs on GFEs may be unreliable or incomplete, or both, 
and final charges at settlement may include significant increases in 
items that were estimated on the GFE, as well as additional 
unexpected fees, which can add substantially to the consumer's 
ultimate closing costs. The process of shopping for a mortgage can 
also involve complicated financial trade-offs, which are not always 
clearly explained to borrowers. Today's GFE is not an effective tool 
for facilitating borrower shopping nor for controlling origination 
and third-party settlement costs.
    The potential for cost reductions in today's market is also 
indicated by studies showing relatively high and highly variable 
charges for third-party services, particularly for title and closing 
services that account for the major portion of third-party fees. 
There is not enough incentive for loan originators to control 
settlement costs by negotiating lower costs from third-party 
providers; rather, they too often simply pass through increases in 
third-party costs to consumers. Because of their lack of expertise, 
consumers may not be the best shoppers for third-party services 
providers, leaving them to rely on recommendations from real estate 
agents and lenders. Thus, a framework is needed that would encourage 
competitive negotiations and other arrangements that would lead to 
lower third-party settlement prices.
    Current RESPA regulations are acting as a major barrier to 
competition and lower settlement costs. Today's mortgage market is 
increasingly characterized by the introduction of efficiency 
enhancing improvements such as automated underwriting systems and, 
through competition, these improvements are leading to lower prices 
for consumers. But the one area where efficiencies and competition 
are being held back is the production and pricing of settlement 
services. Under current law, a provider's efforts to enter into 
volume arrangements with settlement service firms may be regarded as 
illegal, which may impede the cost-reducing arrangements to deliver 
third-party settlement services. Similarly, average cost pricing 
(another cost reduction technique) is inhibited by existing RESPA 
regulations.
    The goal of HUD's proposed RESPA reform is to even the playing 
field. The rule will accomplish this by requiring lenders to provide 
consumers information that lenders already have in a format that is 
transparent. One of the major inefficiencies of imperfect 
information is the costs of acquiring information. The proposed 
RESPA reform will go a long way toward educating consumers. The 
first page of the new GFE presents a brief summary of the terms of 
the loan that would warn prospective borrowers of potentially 
expensive aspects of the loan including loan amount, maximum 
interest rate, prepayment penalties, and the total estimated 
settlement charges. The second page provides more detail on the 
charges for loan origination and other settlement services. The 
third page provides a trade-off table so that consumers will learn 
the relationship between the interest rate and the yield-spread 
premium. The fourth page includes a table so that the consumer can 
take notes on alternative loan offers and thus comparison shop. 
Tolerances will limit how much settlement charges can vary once the 
GFE has been made and the closing script will serve to double-check 
the GFE and provide a summary of the key terms of the borrower's 
loan. The proposed rule also allows settlement service providers to 
use average cost pricing and volume discounting, making their 
business operations simpler and less costly. It is expected that the 
proposed GFE will encourage shopping, increase efficiency, lower 
housing costs, and promote the purchase of loans that are more 
suited to a household's needs.
    Empirical Evidence of Price Discrimination. Studies indicate 
that consumers are often charged relatively high fees and can face 
wide variations in settlement prices, both for origination and 
third-party settlement services. Chapter 2 offers convincing 
evidence that not only do borrowers find it difficult to comparison 
shop in today's mortgage market, but that they are all too often 
charged excessive prices. The enormous potential for cost reductions 
in today's market is indicated by studies showing that yield spread 
premiums do not always offset consumers' origination costs. Studies 
show that consumers are, in effect, charged relatively high prices 
in some transactions involving yield-spread premiums, and that the 
mortgage market is characterized by ``price dispersion.'' In other 
words, some borrowers get market price deals, but other borrowers do 
not. Studies show that less informed and unsuspecting borrowers are 
particularly vulnerable in this market. But given the fact that a 
borrower may be more interested in the main transaction (the home 
purchase), even more sophisticated borrowers may not shop 
aggressively for the mortgage or may not monitor the lending 
transaction very closely.
    The (2007a) conducts an analysis of 5,926 non-subsidized FHA 
loans. The median total loan closing cost is $5,334. Total charges 
are composed of loan charges ($3,392), title charges ($1,267), and 
other third party charges ($574). It is apparent from the 
distribution presented below that there is significant variation in 
closing costs. The ratio of what the 75th percentile pays to what 
the 25th percentile pays is 1.7 for total closing costs, 2.0 for 
total loan charges, 2.4 for the yield-spread premium (indirect loan 
fee), 2.9 for direct loan fees, 1.7 for title charges, and 1.6 for 
other third-party charges. These results are shown below in Table A-
2.

                             Table A-2.--Distribution of Categories of Closing Costs
                                       [Exhibit 11, Urban Institute 2007a]
----------------------------------------------------------------------------------------------------------------
                                                                       50th
             Series               5th percentile       25th         percentile         75th            95th
                                                    percentile       (median)       percentile      percentile
----------------------------------------------------------------------------------------------------------------
 
Total Closing Cost..............          $2,663          $4,045          $5,334          $6,889         $10,183
Total Loan Charges..............            1104           2,310           3,392           4,714           7,394
Yield-spread premium (indirect)              250           1,249           2,041           3,016           4,658
 loan fee.......................
Direct loan fees................              21             683           1,387           2,008           3,696
Total Title Charges.............             666             953           1,267           1,652           2,407
Total Other Third-Party Charges.             293             469             574             744           1,097
----------------------------------------------------------------------------------------------------------------


[[Page 14107]]

    The greatest degree of variation appears in the lender fees. 
Since total loan charges are correlated with loan amount, it would 
be useful to examine the distribution of closing costs as a 
percentage of loan amounts to ascertain whether the variation in 
fees is still present. There is slightly less variation when 
measured as a percentage but it is still substantial: The ratio of 
what the 75th percentile pays as a percentage of the loan to what 
the 25th percentile pays is 1.8 for total loan charges, 2.1 for the 
yield spread premium (indirect loan fee), and 2.4 for direct loan 
fees. (See Table A-3 below.)

             Table A-3.--Distribution of Categories of Closing Costs as a Percentage of Loan Amount
                         [Calculated by HUD from the data used by Urban Institute 2007a]
----------------------------------------------------------------------------------------------------------------
                                                                       50th
             Series               5th percentile       25th         percentile         75th            95th
                                                    percentile       (median)       percentile      percentile
----------------------------------------------------------------------------------------------------------------
Total Closing Cost..............             2.9             4.1             5.1             6.4             8.9
Total Loan Charges..............             1.3             2.4             3.2             4.2             6.2
Yield-spread premium (indirect)              0.3             1.3             2.0             2.7             3.8
 loan fee.......................
Direct loan fees................             0.0             0.8             1.3             1.8             3.3
Total Title Charges.............             0.6             0.9             1.2             1.6             2.3
Total Other Third-Party Charges.             0.2             0.4             0.6             0.8             1.4
----------------------------------------------------------------------------------------------------------------

    It is apparent that half of the borrowers pay loan charges equal 
or greater than 3.2% of their loan amount; one-quarter pay loan 
charges of at least 4.2% of their loan amount; and five percent pay 
loan charges of at least 6.2% of their loan amount. The variation is 
similar for title charges and other third-party charges. Half of the 
borrowers pay total closing costs equal or greater than 5.1% of 
their loan; one-quarter pay closing costs of at least 6.4% of their 
loan amount, and five percent pay closing costs of at least 8.9% of 
their loan amount.
    HUD believes that these data provides strong indications of 
large price dispersion and thus price discrimination. Price 
discrimination will always lead to a loss in consumer surplus and 
unless price discrimination is perfect, it will also lead to a loss 
in social welfare. It should also be noted that if the variation of 
fees and charges paid is greater than the actual costs of providing 
the services, then that constitutes evidence of a violation of 
RESPA, which explicitly prohibits mark-ups.
    First, in a competitive market the price of the good should 
depend on its quality and not to whom and how it is sold. If there 
is dispersion because the negotiations are face-to-face, this would 
suggest that the nature of the market exacerbates the consumer's 
informational disadvantage. Indeed, there is strong evidence that 
individuals pay different prices for reasons other than how costly 
service provisions will be. An Urban Institute report (2007b) finds 
that African Americans pay an additional $415 for their loans and 
that Latinos pay an additional $365 (after taking into account 
borrower differences such as credit score and loan amount). These 
loans are not subprime loans but standard FHA loans. Other 
researchers have found similar results: Jackson and Berry (2002, see 
the Regulatory Impact Analysis for reference) find that mortgage 
brokers charge African-Americans (by $474) and Hispanics (by $580) 
substantially more for settlement services than other borrowers. 
Discrimination by race or ethnicity is not economically efficient 
and would not survive in a perfectly competitive market.
    Second, reconsider the yield-spread premium. We mentioned that 
this is one of the elements of a mortgage that a consumer is not 
likely to understand. The yield-spread premium is compensation to 
the broker for selling a loan with a higher interest rate. Thus, as 
the interest rate rises so should the yield-spread premium. This 
relationship appears to hold in the data analyzed. The broker earns 
income from two sources: A yield-spread premium that is paid by the 
lender and fees that are paid by the consumer. However, the burden 
of the yield-spread premium is on the consumer, who pays a higher 
interest rate for loans with a higher yield-spread premium. If 
consumers were perfectly informed, there would be a negative one-to-
one relationship between up-front fees and the yield-spread premium. 
They simply represent two different ways of compensating the broker 
for the effort required to originate a loan.
    The Urban Institute (2007b) finds no clear trade-off between the 
yield-spread premium and upfront cash payments. (This analysis is 
based on loans with interest rates of over 7 percent. In this 
sample, there are 4,603 loans; the average upfront cash is $1,179 
with a standard deviation of $1,125; and the average YSP is $2,365 
with a standard deviation of $1,044.) There is even a slight 
positive relationship between the upfront cash divided by the loan 
and the YSP divided by the loan amount. That is, upfront cash as a 
percentage of loan amount increases with the YSP as a percentage of 
loan amount. FHA borrowers appear to get no benefit from YSPs on 
brokered loans with coupon rates above 7 percent. Such a 
relationship is contrary to what one would expect in a market where 
there were only minor imperfections. Further evidence is from 
Jackson and Berry (2002) who studies only brokered transactions, a 
description of which can be found in Section IV.D.2 of Chapter 2 of 
the Regulatory Impact Analysis. They find that the problem of price 
dispersion occurs when yield spread premiums are present, because in 
these situations there is no single price for broker services: 
``Most borrowers pay more than 1.5 percent of loan value; more than 
a third pay more than 2.0 percent of loan value; roughly ten percent 
pay more than 3.5 percent of loan value.'' Jackson and Berry find 
this ``price dispersion'' troubling, as it suggests that brokers use 
yield spread premiums as a device ``to extract unnecessary and 
excessive payments from unsuspecting borrowers'' (page 9).
    Third, consider the confusion that the variety of loan products 
and permutations of those products can create. If informational 
asymmetries are significant, then lenders will be able to earn more 
when selling more complex products. The Urban Institute (2007b) 
reports that all borrowers see a benefit (in lower upfront cash 
costs) of only 20 cents for each dollar of yield-spread premium 
(actual or inferred) paid. Those who borrow through mortgage brokers 
see a benefit of only 7 cents per dollar, for a net loss of 93 cents 
on the dollar. Borrowers who simplify their mortgage shopping by 
rolling all lender/broker fees into the interest rate (i.e., get 
``zero-cost'' loans) pay $1,200 less for their loans than brokers 
who pay lender or broker fees as measured by implicit YSPs. It 
appears that the industry is able to take advantage of loan 
complexity, which is evidence of price discrimination not related to 
the cost of originating the loan.
    Fourth, consider other settlement charges. Title insurance is an 
industry with a strong potential for natural monopoly. The costs of 
title insurance are primarily related to research of property 
transactions. There is a large fixed cost of entry which is 
compiling a database of transaction and lending records. There 
should not be a great variation in settlement charges since the only 
component that does vary substantially is the insurance premium. The 
Urban Institute (2007b) finds an average $1,200 title charge in 
their sample of all loans with a standard deviation of $500. They 
also find a significant variation by state with New York, Texas, 
California, and New Jersey all costing at least $1,000 more than 
North Carolina, the lowest-cost state. A reasonable question is what 
extra benefits people in the high-cost states get relative to those 
in low cost states, or why costs are so high if there are no extra 
benefits. It is also useful to analyze total title costs on a state-
by-state basis due to the different legal requirements that exist 
among the states and the different customs that might have evolved 
in them as well. HUD examined within state variation of settlement 
fees. One measure of variability that we calculated for each state 
was the difference between the median of the highest quartile of 
title charges and the median of the lowest quartile. This is a 
measure of the difference between the typical charge for the highest 
fourth of the borrowers and the lowest fourth of the borrowers 
within each state. This difference was over $1,000 for nine states. 
Due to the

[[Page 14108]]

extent of price dispersion, we can expect significant savings from 
the proposed rule.
    The primary purpose of this discussion was to show that there is 
great variation in closing costs and thus room for price 
discrimination. HUD would like to emphasize that the goal was not to 
portray lenders, and especially mortgage brokers, as unscrupulous 
and harmful to economic welfare. On the contrary, HUD recognizes 
that mortgage brokers and other lenders have played a crucial role 
in recent trends in home ownership. It is also clear from the 
statistical evidence presented in this section that there are many 
ethical lenders. One quarter of the borrowers in this sample paid no 
more than 2.4% in loan charges and 4.1% in total closing costs. 
Consider that if the entire market mirrored this more efficient 
segment, then RESPA reform would not be as urgent.

Appendix IV. Summary of Significant Issues Raised in Comments on 
the 2002 Initial Regulatory Flexibility Analysis

    This section describes how HUD responded in this Initial 
Regulatory Flexibility Analysis (IRFA) to comments received on the 
2002 IRFA. The primary comments on the 2002 IRFA included: a desire 
for more detailed information on the industries potentially affected 
by the rule and the expected effects of the rule on these industries 
on a per-firm basis, and more discussion of alternatives considered 
by HUD to minimize the impact of the rule on small business 
consistent while still achieving the stated objectives of the 
statute. The Office of Advocacy of the Small Business 
Administration, in particular, wanted to see more details on the 
industries and small businesses affected by RESPA reform.

Appendix IV.A. Detailed Industry Data and Analysis

    Section Appendix V provides data on small businesses that may be 
affected by the rule and provides detailed breakdowns of the 
anticipated effects of the rule on all firms, small firms and very 
small firms. The analysis includes both industry total effects and 
per-firm effects. As explained in Section V below, Chapter 5 of the 
RIA provides extensive documentation of the characteristics of the 
industries directly affected by the rule, including various 
estimates of the numbers of small entities, reasons why various data 
elements are not reliable or unavailable, and descriptions of 
methodologies used to estimate (if possible) necessary data elements 
that were not readily available. The industries discussed in Chapter 
5 of the EA included the following (with Chapter 5 section 
reference): mortgage brokers (Section II); lenders including 
commercial banks, thrifts, mortgage banks, credit unions (Section 
III); settlement and title services including direct title insurance 
carriers, title agents, escrow firms, and lawyers (Section IV); and 
other third-party settlement providers including appraisers, 
surveyors, pest inspectors, and credit bureaus (Section V); and real 
estate agents (Section VI).

Appendix IV.B. Alternatives Considered To Minimize Impact on Small 
Businesses

    Section VI of the Appendix provides discussion of the 
alternatives considered by HUD in developing the proposed rule with 
a focus on those alternatives considered to minimize the impact on 
small business. Section VI includes summary discussion of the 
following major alternatives: Maintaining the status quo; not 
including the yield-spread premium calculation in the GFE; 
introducing the Settlement Services Package; offering packaging; and 
allowing dual packaging. Section VI also includes a discussion of 
steps HUD took to make the new GFE easier to implement for small 
businesses.

Appendix IV.C. Comments and Responses

    Chapters 1-5 of the Regulatory Impact Analysis include detailed 
summaries of the comments submitted by small businesses and other 
firms on various aspects of the 2002 proposed rule and in response 
to the 2002 IRFA. Detailed discussion of comments received can be 
found in the preamble. Detailed analysis responding to comments 
received can be found in Sections VI and VIII of Chapter 3 of the 
RIA. Detailed discussion of comments related to the compliance 
burden of the rule can be found in Sections VII and VIII of this 
appendix. Analysis responding to some specific comments on the 2002 
IRFA can be found in Chapter 3 of the RIA. Changes made to the 2002 
proposed rule in response to comments received are summarized in 
Section VI of the Appendix.

Appendix V. Description and Estimate of the Number of Small 
Entities

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

Mortgage Origination Firms

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

Third-Party Service Firms

    1. Direct Title Insurance Carriers (524127)
    2. Title Abstract and Settlement Offices (541191)
    3. Offices of Lawyers (541110)
    4. Other Activities Related to Real Estate (531390)
    5. Offices of Real Estate Appraisers (531320)
    6. Surveying and Mapping (except geophysical) Services (541370)
    7. Credit Bureaus (561450)
    8. Exterminating and Pest Control Services (561710)
    9. Offices of Real Estate Agents and Brokers (531210)
    Chapter 5 supports Chapters 3 and 6 by providing basic mortgage-
related data on each industry and by explaining the various 
methodologies for estimating the share of industry revenue accounted 
by the different component industries and by small businesses within 
each component industry. Chapter 5 presents an overview of the 
industries involved in the origination and settlement of mortgage 
loans (see above list). Industry trends are briefly summarized and 
special issues related to RESPA are noted. There is also a 
description of the economic statistics for each industry, with an 
emphasis on each industry's share of small business activity. Both 
the estimation of the revenue share for various industry sub-sectors 
(e.g., large title insurers' share of total revenue in the title and 
settlement industry) and the estimation of the small business share 
of mortgage-related revenue within the industry, often involve 
several technical analyses that pull together data from a variety of 
sources, in addition to Census Bureau data. This leads to several 
sensitivity analyses to show the effects of alternative estimation 
methods and assumptions. This chapter also reports the revenue 
transfers from the RESPA rule for the specific industry sectors; 
these transfers are reported in dollar terms and, where possible, as 
a percentage of industry revenue. Finally, a number of technical 
issues and special topics, such as techniques for estimating the 
distribution of retail mortgage originations, are discussed. A 
technical appendix to Chapter 5 provides relevant definitions and 
explains the methodology associated with the economic data obtained 
from the Census Bureau. A data appendix in Chapter 5 includes tables 
with the economic data (number of firms, employment, revenue, etc.) 
for each industry sector.
    Thus, the Regulatory Impact Analysis pulls together substantial 
data from the Bureau of the Census and industry sources to provide 
estimates of revenue transfers for different industries and for 
small businesses within those industries. Chapter 5 provides a full 
technical review of the data used and the various methodologies for 
estimating the small business share of industry revenues.
    Drawing from the analysis in Chapters 3 and 5, Appendix A to 
this chapter provides estimates of the revenue impacts from the new 
GFE. These data are presented in aggregate form ($ million) and on a 
per firm basis, covering all firms (both employer and non-employer), 
small firms (small employer firms plus non-employer firms), and very 
small firms (very small employer firms plus non-employer firms). 
Separate data for non-employer firms are also provided. In some 
cases, different projections are provided for some of the more 
important sensitivity analyses conducted in Chapters 3 and 5. The 
technical analyses presented in Chapter 5

[[Page 14109]]

indicate some uncertainty around some of the numbers (such as the 
number of small mortgage banks, the split of revenue among different 
sectors of the broad title industry, etc.). Readers are referred to 
the technical discussion in Chapter 5 for various qualifications 
with the data and for various sensitivity analyses that illustrate 
the effects on the estimates of alternative assumptions. In 
addition, Chapter 5 explains the definitions of small and very small 
being used here.

Appendix VI. Alternatives Which Minimize Impact on Small Businesses

    Under the Initial Regulatory Flexibility Analysis, HUD must 
discuss alternatives that minimize the economic impact on small 
entities consistent with the stated objectives of applicable 
statutes, including a statement of the factual, policy, and legal 
reasons for selecting the alternative adopted in the proposed rule 
and why each of the other significant alternatives to the rule 
considered by the agency was rejected. Many of the alternatives that 
HUD considered and implemented were directed at making the proposed 
GFE less burdensome for small businesses. These changes are 
described below. A more detailed discussion of the changes to make 
the GFE easier to implement for small businesses are provided in 
Section VIII of Chapter 3. For a discussion of all of the major 
alternatives considered to the proposed GFE, see Chapter 4.
    This Regulatory Impact Analysis discusses several steps that HUD 
took that will assist small businesses involved in the mortgage 
origination and settlement process. Examples include simplifying the 
new GFE form (fewer numbers, etc.), designing the new GFE form so 
that there is a level playing field between lenders and brokers, and 
delaying the phase-out of today's GFE for twelve months. HUD also 
made numerous other changes that were designed to make the GFE 
easier to use, particularly for small businesses. These changes are 
discussed throughout Chapter 3 and summarized in several places in 
the Regulatory Impact Analysis. This section will list them again, 
as it is useful to provide a record of the changes made to the 2002 
proposed rule that should make the new GFE easier to implement for 
small businesses. Considered as a group, these changes are 
important. While many are designed to address a problem faced by 
large as well as small lenders, for the most part, they address 
problems that would place a greater burden on small rather than 
large businesses.
    Some examples of the changes that HUD made are the following:
    <bullet> Clarifying that ``zero tolerance'' in the new GFE does 
not pertain in ``unforeseeable circumstances'' beyond the 
originator's control. This was in response to concerns expressed by 
lenders and brokers about their ability to control third-party costs 
and meet the specified tolerances in the 2002 proposed rule, the 
proposed rule. The tolerance for fees for lender-required, lender-
selected third-party services was also increased from zero percent 
to 10 percent; further, tolerances no longer apply to items such as 
escrow expenses and government charges and fees. Relaxing tolerances 
benefit smaller firms, which would be more impacted by an 
underestimated fee.
    <bullet> Clarifying the definition of ``unforeseen 
circumstances'' to include circumstances that could not be 
reasonably foreseen at the time of GFE application--examples include 
the need for a second appraisal or flood insurance.
    <bullet> Changing the definition of an application so that it is 
consistent with the way consumers and lenders operate today--a ``GFE 
application'' would serve as a shopping application and a ``mortgage 
application'' would be submitted once a shopper chooses a particular 
lender, and would resemble the standard application in today's 
market and be the basis for full underwriting.
    <bullet> Clarifying that only the ``mortgage application'' would 
be subject to Regulations B (ECOA) and C (HMDA), which is the 
current situation today.
    <bullet> Reducing the period for the GFE tolerances to 10 
business days, which gives borrowers ample time to shop and does not 
impose large operational and hedging costs on small lenders and 
brokers (as 30 days might have).
    <bullet> Dropping the Annual Percentage Rate (APR) from the new 
GFE. Lenders and brokers objected to the requirement that they 
calculate the APR on the GFE; for a variety of reasons, HUD dropped 
the APR.
    <bullet> Dropping the broker-lender split of fees from the GFE. 
Lenders and brokers disagreed with splitting out the broker and 
lender portions of the origination fee on the back page of the 
proposed GFE; HUD dropped that from the new GFE, as it was not 
useful for comparison shopping.
    <bullet> Dropping the Title Agent/Title Insurance Premium 
Breakout. Title agents argued that breaking out the title insurance 
premium that goes to the underwriter from the rest of the title 
charges is costly and serves no useful purpose. This requirement has 
been eliminated, so there will be no compliance burden associated 
with the title agent/title insurance premium breakout on the GFE. 
The breakout was not useful for comparison shopping.
    <bullet> Clarifying the ability to make cost adjustments as a 
result of information gained during the full underwriting process; 
and
    <bullet> Allowing average cost pricing which will reduce the 
costs of keeping up with every ``nickel and dime'' of third-party 
costs.
    The above changes address a number of practical and 
implementation problems raised by lenders, brokers, and others about 
the new GFE. They make these GFE form easier to use, particularly 
for small lenders and brokers.

Appendix VII. Compliance Costs and Regulatory Burden: New GFE

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

Appendix VII.A. Data Used in Compliance Cost Estimates

    The following tables provide a summary of the industry 
characteristics data used to develop compliance cost estimates for 
the GFE. Details on the derivation of these data are available in 
Chapter 5. The compliance costs of the GFE provisions of the rule 
apply mainly to retail loan originators. While wholesale lenders, 
for example, are involved in the mortgage origination process, they 
are not responsible for issuing the GFE--rather the originating 
lender or broker is responsible for the issuing the GFE to the 
borrower.\55\ Therefore, data are presented only for those brokers 
and lenders that do retail mortgage loan originations. Settlement 
agents do not generate GFEs and therefore they would not be subject 
to these GFE-related costs. Settlement agents do, however, generate 
HUD-1s; since there are some changes to the HUD-1 form, there are 
compliance costs on settlement agents associated with that change. A 
major portion of the compliance cost will be the burden of 
performing the closing script accurately. Other third-party 
providers (e.g., appraisers) will face no compliance costs from the 
GFE provisions of the rule.
---------------------------------------------------------------------------

    \55\ If the wholesale lender generates the GFE, then there would 
be a charge to the originator (either a direct charge or a reduction 
in fees, compared with the case where the originator issues the 
GFE).
---------------------------------------------------------------------------

    Chapter 5 of the RIA provides information on the total number of 
brokers and lenders that are likely to be affected by the new RESPA 
rule and its revised GFE form. Section II of that chapter explains 
that the number of brokers has grown substantially in recent years. 
In 2000, there were 30,000 brokers, but with the increase in 
refinancing, the number of brokers rose to 33,000 in 2001 and then 
jumped to 44,000 in 2002 and then to 53,000 in 2004. According to 
Census Bureau data, practically all brokers (99.1%) qualify as a 
small business. Thus, it is estimated that small broker firms have 
ranged from 32,703 to 52,523 over the past few years. As explained 
in Section III of Chapter 5, lenders that will be affected by the 
RESPA rule include: 7,402 commercial banks (4,426 or 59.8% are 
small), 1,279 thrift institutions (641 or 50.1% are small), 1,287 
mortgage banks (1,077 or 83.7% are small), and 3,969 credit unions 
(3,097 or 78.0% are small).\56\

[[Page 14110]]

Altogether, there are 13,937 lenders (including credit unions) 
affected by the RESPA rule, and 9,241 of these qualify as a small 
business.
---------------------------------------------------------------------------

    \56\ See Section III.B.5 of Chapter 5 for issues related to the 
number of small mortgage banks. As also explained in that section, 
the credit unions are the ones that report some mortgage origination 
activity.
---------------------------------------------------------------------------

    Table A-4 provides the distribution of retail mortgage 
originations among the various industries and for small firms within 
each industry. Totals are estimated based on the number of mortgage 
originations (12,500,000 loans) that would occur in a ``normal'' 
year of mortgage originations (that is, not in a high-volume year 
with a refinancing boom). The data below assume that brokers account 
for 60% of mortgage originations and lenders, the remaining 40%.\57\
---------------------------------------------------------------------------

    \57\ See Section III.B.5.d of Chapter 5 for the derivation of 
the distribution of retail originations among commercial banks, 
thrifts, and mortgage banks; the distribution used here is the 
``adjusted distribution'' for the number of loans. See Chapter 5 for 
reasons why there is some uncertainty with the estimated 
distribution and for analysis of an alternative distribution.
---------------------------------------------------------------------------

    (See below for alternative origination volume and broker share 
estimates.)

                               Table A-4.--Volume of Retail Mortgage Originations
----------------------------------------------------------------------------------------------------------------
                                                                                                      Percent
                                                        All         Percent of     Originations      industry
                    Industry                       originations    originations   by small firms   originations
                                                                                                  by small firms
----------------------------------------------------------------------------------------------------------------
Mortgage Brokers................................       7,500,000           60.00       5,250,000           70.00
Commercial Banks................................       2,053,150           16.43         389,893           18.99
Thrifts.........................................         974,750            7.80         120,089           12.32
Mortgage Banks..................................       1,551,500           12.41         644,803           41.56
Credit Unions...................................         420,600            3.36         122,563           29.14
                                                 ---------------------------------------------------------------
    Total.......................................      12,500,000          100.00       6,527,349           52.22
----------------------------------------------------------------------------------------------------------------

    As shown in Table A-4 it is estimated that 52% of mortgages are 
originated by small brokers and lenders.
    Table A-5 provides the total number of workers and the number of 
workers in small firms engaged in retail mortgage origination by 
industry. It is based on the mortgage origination volumes depicted 
in Table A-4 and productivity rates of 20 loans per worker per year 
for mortgage brokers and lenders. See Section II.B.2.c of Chapter 5 
for the derivation of the 20 loans per worker in the broker industry 
and see Section III.B.5.g of Chapter 5 for a discussion of the 20 
loans per worker in the lender industry. Given the uncertainty 
around these estimates (and particularly the lender estimate which 
is obtained by simply assuming that lender workers are as productive 
as brokers), alternative estimates and sensitivity analyses are 
provided in Chapter 5.
    As noted in Chapter 5, one alternative would be to choose a 
lower productivity number for lenders, which would be consistent 
with the widely held belief that brokers are more productive than 
lenders; in addition, it may be more appropriate to overestimate the 
number of lender employees affected by the RESPA rule than to 
underestimate them.\58\ However, this analysis starts by assuming 
equal productivity for lenders and brokers.
---------------------------------------------------------------------------

    \58\ A comment should be made about the small business share for 
brokers. Section II.B.1 in Chapter 5 reports that small brokers 
account for 70% of broker industry revenue. Table A-4 assumes that 
small brokers account for the same percentage (70%) of the number of 
loans originated by all brokers; it is possible that this percentage 
could be too low, given that Section II.B.2.c of Chapter 5 derives 
an estimate of 77% for the share of industry workers in small broker 
firms. The 77% figure is used in Table A-5 (288,750 divided by 
375,000) for estimating the share of workers in small broker firms. 
The small business share of the number of workers in each of the 
four lender industries in Table A-5 is assumed to be the same as in 
Table A-4 for the number of loans. See Section III.B.5 of Chapter 5 
for the derivation of the small lender shares of lender 
originations.

                         Table A-5.--Workers Engaged in Retail Mortgage Loan Origination
----------------------------------------------------------------------------------------------------------------
                                                                                                    Percent of
                            Industry                               Total workers    Workers in      workers in
                                                                                    small firms     small firms
----------------------------------------------------------------------------------------------------------------
Mortgage Brokers................................................         375,000         288,750           77.00
Commercial Banks................................................         102,658          19,495           18.99
Thrifts.........................................................          48,738           6,004           12.32
Mortgage Banks..................................................          77,575          32,240           41.56
Credit Unions...................................................          21,030           6,128           29.14
                                                                 -----------------------------------------------
    Total.......................................................         625,000         352,617           56.42
----------------------------------------------------------------------------------------------------------------

    As shown in Table A-5, it is estimated there are 625,000 workers 
engaged in mortgage origination, with 352,617 of these operating in 
small businesses. As noted above, the mortgage volume figure 
(12,500,000 loans based on $2.4 trillion in originations) reflects 
industry projections of mortgage originations for 2008. Chapters 3, 
4, and 5 conduct sensitivity analyses with a higher level of 
originations. For example, one could consider an environment where 
15,500,000 loans were originated (compared with the 12,500,000 loans 
in the base case). In this case, the figures in Tables A-4 and A-5 
would change. For example, the number of workers in the broker 
industry would increase to 438,038 (with 337,293 in small firms) and 
the number of workers in the combined lender group would increase to 
271,250 (with 69,296 in small firms).\59\ Below, sensitivity 
analyses cover these higher estimates of the number of workers 
affected by the RESPA rule.
---------------------------------------------------------------------------

    \59\ As explained in Chapter 5, this scenario assumes that the 
increase in mortgage originations comes mainly from brokers; the 
loans-per-worker assumption is increased to 23 for brokers 
(consistent with that number increasing in Olson's surveys during 
higher volume years) but kept at 20 for lenders since their volume 
does not increase much during this scenario.
---------------------------------------------------------------------------

Appendix VII.B. Compliance and Regulatory Burden: One-Time Costs

    Several one-time compliance burdens can be identified that will 
result from the new rule. All involve the adjustment process from 
the old rule to the new rule. Although HUD received comments on the 
one-time compliance cost issues associated with the new GFE, 
commenters did not provide any useful data on the magnitude of these 
costs (see Section Appendix VII.B.5 below).
    There are three major areas of expected one-time compliance 
costs of the new GFE. Those who generate the new GFE forms, loan 
originators, will need new software in order

[[Page 14111]]

to produce the new forms.\60\ Their employees will need to be 
trained in the use of the new forms and software. Loan originators 
may seek legal advice to be certain that the arrangements they make 
to ensure that third-party service prices are accurate and within 
tolerances comply with the regulation. Loan originators may also 
seek legal advice regarding discount arrangements that are 
permissible under the new GFE. In this section, it is estimated that 
these one-time compliance costs will total $401 million, although it 
is recognized below that these costs could vary with several factors 
such as different levels of overall mortgage activity. Small brokers 
and small lenders firms will experience $280 million (or 70%) of 
these one-time compliance costs.
---------------------------------------------------------------------------

    \60\ This analysis assumes that the mortgage broker, not the 
wholesale lender, produces the GFE in transactions involving 
mortgage brokers. To the extent that the wholesale lender is 
involved in producing the GFE the use of the broker data will result 
in an overestimation of the impact on small businesses (since small 
businesses make up a much larger portion of broker businesses than 
they do of wholesale lender businesses).
---------------------------------------------------------------------------

Appendix VII.B.1. Software Modification and Training Costs

    Loan originators would need alterations to their software to 
accommodate the requirements of the new rule since they generate the 
new GFE. There would be one-time costs for production and 
installation of the new GFE (software development, etc.). Software 
modification, or new software, is needed because the GFE has been 
changed. The implementation of software varies with business size. 
Small originators are likely to use commercial off-the-shelf (COTS) 
software products while larger originators may produce their own 
software if in-house development is cheaper than buying from outside 
suppliers. HUD reviewed several software products for loan 
origination and closing advertised on the Internet.\61\ Prices 
ranged from a flat $69 \62\ for one license to undisclosed 
negotiated prices based on the number of users and feature sets 
purchased. Software is generally priced according to the number of 
users (e.g., one license per user, or enterprise licenses based on 
the expected number of users in the enterprise).
---------------------------------------------------------------------------

    \61\ Examples are: Vantage ILM, http://www.vantageilm.com; 
Utopia Originator from Utopia Mortgage Software, http://www.callutopia.com/support.html; The Mortgage OfficeTM from Applied 
Business Software, http://www.themortgageoffice.com/main.asp; and 
MORvision Loan Manager from Dynatek, http://www.dynatek.com/products.asp.
    \62\ Good Faith Settlement Software by Law Firm Software; http://www.lawfirmsoftware.com/software/good-faith-estimate.htm. Note that 
this is very basic software compared to other alternatives. More 
sophisticated software is more expensive.
---------------------------------------------------------------------------

    One new requirement, implicit from the tolerances, is that 
originators will have to keep track of the costs listed on the GFE 
in order to ensure that the tolerances are not exceeded at 
settlement. Most of the software products HUD examined have the 
capability to access databases of information, including pricing 
information, of third-party service providers. Because these systems 
have the capability to access other databases, they would not need 
to be redesigned to carry forward prices from the GFE to the closing 
documents in order to determine if final settlement prices remain 
within tolerances. The GFE portion of the software would need to be 
modified to display the consolidated expense categories mandated in 
the rule. Redesigning the form appears to constitute a minor 
alteration of the software.
    The new GFE also requires additional information. The first page 
summarizes worst case scenarios for the borrower: The maximum 
monthly interest rate, the maximum monthly mortgage payment, and 
maximum loan balance. Such information is obvious for most types of 
loans but could require more effort to calculate for more exotic 
loans such as a negative amortizing loan. Some loan origination 
software will already possess analytical capabilities. However, 
producers of less sophisticated programs will need to write a few 
additional lines of code to create the output for the first page of 
the new GFE. Nonetheless, the proposed rule would have no impact on 
the primary function of origination software and would require only 
minor changes.
    Depending on the software that a firm has purchased there are 
three possibilities as to who pays the direct cost of developing new 
software. The first scenario is that a firm purchases an update of 
the program. This is a fairly standard option and is generally less 
than half the price of new software. Given that the changes required 
by the proposed rule are fairly minor, the price of an update should 
compensate software companies for the cost involved in altering 
their programs.
    The second possibility is that a firm purchases new software, in 
which case the cost of redesigning the forms to comply with the 
proposed rule will be built into the purchase price. Firms that 
would purchase new software would include new entrants into the 
industry, pre-existing firms that would have bought new software for 
reasons unrelated to the proposed rule, and firms that use software 
for which updates are not offered. Many users routinely upgrade 
software as new versions are released and build the expected 
expenses into their business plans. To the extent that software is 
routinely upgraded, the extra costs of implementing the GFE changes 
will be reduced. In these cases, the software cost to the firm of 
the proposed rule is not the purchase price of the software but 
rather the increase in the purchase price as a result of the costs 
of redesigning software to meet RESPA guidelines.
    A third scenario is that software companies are obliged or 
volunteer to offer free updates, in which the case the software cost 
of the proposed rule falls directly on software developers. However, 
indirectly, the cost of the new software will be shared by real 
estate and software firms. Software companies that offer free 
updates will price the risk of changes into the purchase price of 
the software. If a large unexpected change occurs, then the software 
company will bear the burden. However, the change required by RESPA 
will not be unexpected because the proposed rule will be made public 
and will not be costly for reasons previously discussed.
    In all three scenarios, the cost of an update is a good 
approximation of the software cost of the rule. In the first 
scenario in which firms purchase an update, it would probably be an 
overestimate of the cost to a purchaser because an update may 
contain other useful improvements to the software. However, it is a 
reasonable estimate of the cost in that many firms would not 
purchase an update if not for the proposed rule. In the second 
scenario, in which a firm purchases new software, the price of an 
update could serve as an approximation of the cost of implementing 
the required changes and thus an estimate of the resulting increase 
in the price of new software. In the third scenario, where the 
software companies bear the direct cost of the change, the price of 
an update could serve as an estimate of the cost to software firms 
of producing free updates.\63\
---------------------------------------------------------------------------

    \63\ Correctly estimating the cost to software firms is 
difficult given the nature of the output. Development is a one-time 
fixed cost, whereas the cost of delivering software to one user is 
very low. Given the decreasing average costs, the aggregate economic 
impact to the software industry would depend upon the number of 
firms.
---------------------------------------------------------------------------

    In the first two scenarios, where firms bear the burden of the 
change in the software; the costs of new or updated software will 
depend upon the number of employees in the firm using the software. 
Virtually all software companies providing software to lenders for 
loan origination offer volume discounts. Such a pricing policy 
reduces the average cost for large firms. Second, in larger firms 
many employees will have specialized duties that do not include 
completing the new GFE form and so will not require updated 
software. Thus, it is likely that small firms will bear a greater 
per employee software cost from the proposed rule.
    Based upon the discussion above and an examination of software 
pricing schemes, it is reasonable to make three assumptions in order 
to estimate the software costs of the proposed rule: (1) The cost 
per user is the cost of an update; (2) updates cost less than half 
of the cost of new software; (3) the costs per user for a firm 
decline significantly with the number of users. An example of the 
type of software that a firm might purchase is Bytepro Standard (by 
Byte Software, Inc., http://www.bytesoftware.com). This software has 
many analytical features such as the ability to calculate maximum 
loan amounts, which would be required by the new GFE. The software 
costs $395 for a two user package and $400 for five additional 
users. The per user cost for the first two is $198. The cost per 
user for an additional five is $80.
    We can safely assume that the industry average of the cost of an 
update would be no more than $150 for the first user, $100 per user 
for the average small firm, and $50 for the average large firm.\64\ 
Second, we assume that the proportion of workers involved in 
origination that use the software declines with the size of the 
firm. For small firms, we assume that three-quarters of all workers 
use the software and will need an update. For

[[Page 14112]]

large firms, we assume that only half of the workers use origination 
software and need an update. Given these assumptions, the total cost 
to the industry of an update would be $33 million, of which $26 
million is borne by small firms.\65\ This amounts to an average 
software update cost of $83 per user.
---------------------------------------------------------------------------

    \64\ Byte Software, Inc., offers an annual support service, 
which would include updates, for up to ten users for $300 per year. 
Every additional user over ten cost $30.
    \65\ To demonstrate that our estimate is a safe ceiling, suppose 
that there are one hundred software firms and that each one pays six 
programmers an average of $150,000 a year to upgrade the software to 
reflect the changes incurred by the proposed rule. The total cost to 
the software industry would be $90 million.
---------------------------------------------------------------------------

    In addition, each employee using the new software would require 
some time to adjust to the changes. The actual amount of time 
required to familiarize ones self with the new software is unknown. 
For this example it is assumed that 2 hours are required. If the 
opportunity cost of time is $72.12 per hour (based on a $150,000 
fully-loaded annual salary), then the opportunity cost of software 
training would be $144 per worker using the new software. Software 
users often learn about new modifications without formal training by 
using them with very little loss of time or productivity. Thus the 
software training costs estimated below are likely an upper bound. 
Table A-6 shows the distribution of these costs by industry and the 
amount borne by small businesses within each industry. The table 
uses worker distributions from Table A-5 and assumes half of the 
workers in large firms and three-quarters of the workers in small 
firms use the software and will require upgrades and training. Given 
these assumptions the total software training cost is $58 million, 
of which $38 million is borne by small firms. The grand total for 
software upgrade and training cost is $91 million, of which $65 
million is borne by small firms.

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

    Alternative estimates could be made. If 4 hours (instead of 2 
hours) of software training were required, then total costs would 
rise by $57 million to $148 million (with $103 million being the 
small business cost). Assuming that only two hours are required, but 
that the proportions of software users were raised to all of the 
workers in small firms and three-quarters of the workers in large 
firms, then the total software cost (including training) of the 
proposed rule would be $126 million, of which $86 million would be 
borne by small firms. If the proportions are increased (as in the 
latter scenario) and the hours are increased (as in the former 
scenario), then the total cost would be $206 million (with $137 
million being the small business cost).
    The estimates in Table A-6 above are based on a ``normal'' level 
of mortgage origination activity and not that of a high volume year 
which might occur as a result of low interest rates. High volume 
years bring with them increases in productivity by existing firms 
and employees (higher rates of loans per employee), new employees, 
and new entrants. New employees and new entrants would require 
additional software licenses even if there were no new rule changing 
the GFE. For this reason, basing the software upgrade compliance 
burden on a high volume year would overstate the burden. Using the 
higher rates of productivity associated with refinancing booms to 
compute software upgrade costs would tend to understate them. 
Therefore, use of the normal business volume probably provides the 
most appropriate estimate of this cost. Still, assuming a higher 
level of origination activity (15,500,000 loans) and a 65% market 
share for brokers, estimated software costs would be $118 million, 
and $86 million would be accounted for by small businesses (with 
one-half of employees at large firms and three-quarters of workers 
at small firms using the software and requiring 2 hours of 
training). As noted earlier, the costs of software upgrades required 
to implement the new GFE apply only to retail loan originators. 
These costs do not apply to wholesale lenders.

Appendix VII.B.2. Legal Consultation

    Using the new GFE will entail a change in business practices, 
including making arrangements with third-party settlement service 
providers to ensure that prices charged will remain within the 
tolerances of the prices quoted. Loan originators will want to 
ensure that these arrangements do not violate RESPA. Loan 
originators may also seek legal advice regarding discount 
arrangements that are permissible under the new GFE. It is highly 
likely that the trade associations for the mortgage loan origination 
industries will produce model agreements or other guidance for 
members to help them comply with the new rule. Some originators may 
feel no further need for additional legal advice so that they would 
have no legal consultation expenses as a result of the rule. Larger 
originators may wish to seek a greater amount of legal advice, as 
they perceive themselves to be at greater risk of class action RESPA 
litigation.
    The actual amount and cost of legal services that will be 
incurred because of the new GFE are unknown. While it is recognized 
that all firms might not seek legal advice, it would seem that many 
firms engaged in retail mortgage origination would want some minimal 
legal advice, so that they understand the new rules and regulations. 
If all 57,937 firms sought two hours of legal advice at $200 per 
hour, the fixed legal consultation expense would amount to $23 
million. In addition, firms will seek further legal advice based on 
their volume of transactions; in this analysis, the total volume-
based legal expense amounts to 4 times the fixed expense or $93 
million. To show that this is a reasonable estimate, suppose a large 
originator, operating in all 50 states and the District of Columbia, 
required state-by-state legal reviews averaging 1-person-week (40 
hours) per state. At $200 per hour, this would amount to $408,000. 
If all of the 100 largest originators acquired a similar amount of 
legal advice, the cost would come to $40.8 million, which leaves 
approximately $52 million for variable legal costs for other 
originators.\66\ Under these estimates, total legal consultation 
expenses associated with the new GFE are expected to total $116 
million and are distributed among industries and small businesses, 
which bear 60.3% of the legal cost, as depicted in Table A-7, which 
uses information on the distribution of firms and originations.
---------------------------------------------------------------------------

    \66\ If the per hour cost of legal consultation were greater 
than $200 per hour, then these estimates would rise proportionately 
with the increase in hourly legal costs.

[[Page 14113]]



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

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

Appendix VII.B.3. Employee Training on the New GFE

    Loan originators must fill out the new GFE and be familiar with 
its requirements so that they can fill out the form correctly and 
respond to the borrower's questions about it. So, there would be a 
one-time expense of training loan originators' employees in the 
requirements of the new rule. While the actual extent of the 
required training is unknown, a reasonable starting point would be 
that one quarter of the workers in large firms and one half of the 
workers in small firms would require training concerning the 
implications of the proposed rule. We assume that small firms pay 
tuition of $250 per worker but that large firms receive a discount 
and pay only $125 per trainee. If the training lasts an entire day, 
then the opportunity cost of the time, at $72.12 an hour (based on a 
$150,000 fully-loaded annual salary) would be $577 per trainee. The 
total tuition cost to the industry would be $53 million and the 
opportunity cost of lost time would be $141 million, amounting to a 
total training cost of $194 million. The total one-time cost for 
RESPA training for originator staff in the new rule would come to 
$194 million or $310 per worker (averaged across all workers). The 
one-time cost for small businesses is $146 million. Table A-8 
depicts the distribution of training costs among the retail mortgage 
origination industries and for small businesses in each industry. It 
uses data on workers from Table A-5.\67\
---------------------------------------------------------------------------

    \67\ Sensitivity analysis shows the effects of changing the 
number of workers participating in the training. If one half (rather 
than one-quarter) of workers at large firms and three-fourths 
(rather than one-half) of the workers at small firms attended 
training, then the total costs would be $314 million (with the small 
business share being $219 million); the average cost per employee 
would be $503. However, as noted in the text, there may be other, 
less costly ways in which the knowledge necessary to comply with the 
GFE provisions of the final rule can be imparted to workers, which 
will reduce the number of workers that need formal training.

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

    As explained earlier, the costs of training are probably best 
estimated using the more normal mortgage environment, since many of 
the additional employees during a refinance wave are temporary 
employees who may either do only general office work that does not 
require any GFE-specific training or who may be trained on-the-job 
by existing permanent employees. Still, the higher figures are 
reported for those who believe they are the relevant figures.
    The data and table presented above depict what is likely to be 
an upper bound for training costs. There are other, less costly ways 
in which the knowledge necessary to comply with the provisions of 
the final RESPA rule can be imparted to workers. Small firms, in 
particular, are likely to take advantage of information on complying 
with the final rule provided by trade associations and their 
business partners (such as wholesale lenders), and these firms may 
find the time and expense of formal training unnecessary. To the 
extent that this is the case, the estimates reported above will over 
state the impact on small businesses.

Appendix VII.B.4. One-Time Adjustment Costs

    Comments. Loan originators commented that it would be costly to 
develop systems and train people in the new rule and the new 
systems. They commented that it would be especially costly to engage 
in two changes, the new GFE and GMPA, simultaneously. (Of course, 
the proposed rule only requires them to implement the new GFE.) Even 
worse, they said, would be to make both changes without the old GFE 
as an alternative. For example, the Consumer Mortgage Coalition 
(2002) commented that from a training, compliance and systems 
changes standpoint, HUD's proposals were of such a magnitude that 
they should be implemented in stages. The Mortgage Banking 
Association of America (2002) commented that the proposed changes to 
the GFE would impose operational difficulties and would serve to 
complicate the implementation of packaging. The MBAA stated:
    The cost burden of requiring a lender to overhaul its 
operational and compliance infrastructure on a single level is 
always significant. Doubling this task--by introducing the revised 
GFE and the GMPA at the same time--will likely increase costs 
exponentially. Lenders have limited human resources in their 
technology departments. These resources are already taxed in 
updating systems caused by the proliferation of law and regulation 
changes on the local, state, and Federal levels. (p. 11)
    Bank of America (2002) said that two years are needed to 
implement the new rule, stating:
    [The rule] will require significant systems changes, possibly 
occupying full time all of the technical staff a mortgage loan 
originator has. It will also require changes to the way lenders 
price their loans. Extensive testing and training time will be 
needed. (p. 20)

[[Page 14114]]

    America's Community Bankers (2002) said there would be a ``host 
of compliance and operational difficulties'' with the proposed GFE. 
The American Bankers Association (2002) notes the following with 
respect to the GFE:
    If the changes proposed by HUD, especially modification of the 
GFE, were to become final it would necessitate the banking 
industry's expenditure of extensive resources and time to become 
fully compliant. Banks would have to modify their mortgage 
origination policies and practices. They would have to retrain their 
employees involved in the mortgage process as well as those 
overseeing compliance with RESPA and Regulation Z. They would have 
to redesign their software programs to accommodate the changes 
incorporated in such a final regulation. (p.3)
    America's Community Bankers, the Consumer Banker Association, 
and the Missouri Bankers Association wanted two years lead time to 
implement the proposed GFE.
    Response. An important feature simplifying implementation of the 
proposed rule is that it does not allow for the MPO (or GMPA as it 
was called in the 2002 proposed rule). Another important feature 
simplifying implementation is a twelve-month period during which the 
new GFE could be used by an originator who wanted to make the 
switch, or the old GFE could be used as an alternative by one who is 
more reluctant. This allows those who want to use the new GFE to do 
so as soon as possible. At the other extreme, it allows others to 
wait up to twelve months to make the adjustment. Several points can 
be made about this option:
    <bullet> Some might prefer to wait to see how the new GFE 
actually works in practice before deciding exactly how they want to 
proceed. With HUD's implementation schedule, they will have some 
time to see how others have fared.
    <bullet> Some might want to see how borrowers have responded to 
the new loan origination option, thus increasing the likelihood of 
making the best choices for their firm when they implement the new 
GFE. The 12-month implementation schedule will allow time to observe 
borrower reactions.
    <bullet> Some might want to see how other loan originators have 
coped with new arrangements with other settlement service providers. 
The implementation period will allow them some time to adopt those 
arrangements most likely to work for them.
    <bullet> Some might want to see how competing software systems 
are serving various clients' needs, increasing the likelihood of 
picking the software system that would work best for them.
    <bullet> Some might want simply to follow the lead of their 
wholesale lender or other lenders that they do business with. There 
will be some competitive pressure on wholesale lenders to develop 
products and systems that meet the needs of brokers and loan 
correspondents who provide them with their loans. The implementation 
period allows time for this to be worked out.
    In short, there will be twelve months for those more eager to 
embrace the changes to be the guinea pigs for the transition. This 
should help ease the burden of adjustment for those who might find 
it most difficult to adjust quickly. One would also anticipate that 
information about the new GFE rules and about new software systems 
for handling the forms would be highly publicized through several 
means (industry conferences, seminars, advertisements, 
demonstrations, etc.).

Appendix VII.C. Compliance and Regulatory Burden: Recurring Costs

    This section discusses recurring costs associated with the new 
GFE. Several topics are addressed, some of which have already been 
discussed in previous sections. It is estimated that the new GFE may 
impose recurring costs of $255 million per year but will probably be 
neutral (see the conclusion of Section VII.C.1). Costs of the 
additional time spent to arrange the pricing that protects the 
originator from the costs of the tolerances being exceeded is $300 
million annually or $24 per loan (see Section VII.E.2). The 
potential recurring costs are thus $555 million annually or $44.40 
per loan. The recurring cost on small business would amount to $290 
million (52.2 percent of the total).

Appendix VII.C.1. Cost of Implementing the New GFE Form

    This section examines the various costs associated with filling 
out and processing the new GFE. In their comments on the 2002 
proposed rule, loan originators commented that the proposed GFE was 
longer than today's GFE and that it would take more time to fill 
out. In addition to settlement charges, the proposed GFE contained 
loan terms, a trade-off table, a breakout of lender and broker fees, 
and a breakout of title agent and insurance fees.
    There are several aspects of the new GFE that must be considered 
when estimating the overall additional costs of implementing it. The 
following discusses the various factors that will reduce costs and 
possibly add costs to the GFE process. As is made clear by the 
discussion, there should not be much, if any, additional cost with 
implementing the new GFE (as compared with implementing today's 
GFE).
    (1) Disclosure of YSP. Under the existing scheme, mortgage 
brokers are required to report yield spread premiums as ``paid 
outside of closing'' (POC) on today's GFE and HUD-1. Page 2 of the 
new GFE has a separate block for yield spread premiums (as well as 
for discount points). In order to fill out a GFE under the proposed 
rule (as well under the 2002 proposed rule), the mortgage broker 
must have a loan in mind for which the borrower qualifies from the 
information available to the originator. Pricing information is 
readily available to mortgage brokers, so there is no additional 
cost incurred in determining the yield spread premium or discount 
points since they have to look and see if there is a yield spread 
premium under the current regime anyway. Since it is reasonable to 
assume that all brokers consult their rate sheets prior to making 
offers to borrowers, it is reasonable to assume that they know the 
difference between the wholesale price and par. It does not appear 
that disclosing the yield spread premium or discount points adds any 
new burden.
    (2) Itemization of Fees. The reduction in the itemization of 
fees will lead to fewer unrecognizable terms on the new GFE.\68\ 
That should lead to fewer questions about them and less time spent 
answering those questions. Of course, to the extent that the 
originator is precluded from including junk fees on the GFE, he or 
she will not have to spend any time trying to explain what they are. 
The confusion avoided may lead the borrower to better understand 
what is being presented so that questions on useful topics are more 
likely to come up and the originator can spend his time giving 
useful answers (or more time will be spent explaining useful 
things). In all, the simpler GFE produces a savings in time for 
originators and borrowers.\69\
---------------------------------------------------------------------------

    \68\ The fees in the lender-required and selected services 
section will still be itemized (e.g., appraisal, credit report, 
flood certificate, or tax service) as will those in the lender-
required and borrower selected section (e.g., survey or pest 
inspection). There will, however, be no itemization or long lists of 
various sub-tasks of lender fees or title fees, often referred to as 
junk fees.
    \69\ Several items were dropped from the new GFE, as compared 
with the proposed GFE: the APR, the breakout of the origination fee 
into its broker and lender components, and the breakout of the title 
services fee were dropped. These were considered unnecessary for 
comparison shopping.
---------------------------------------------------------------------------

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

[[Page 14115]]

for those lenders. Today, most originators present to borrowers much 
more complicated sets of alternative products than captured by the 
worksheet. It is important to remember that the main purpose of the 
worksheet is simply to sensitize the borrower to the fact that 
alternative combinations of interest rates and closing costs are 
available.
    With respect to customizing the worksheet to the applicant's 
actual offer, the information on the applicant's loan is already on 
the new GFE, so that would not appear to be a significant problem, 
as that applicant information can be linked directly into the 
worksheet. Then, there is the issue of the two alternative 
combinations, one with a lower interest rate and one with a higher 
interest rate. Most originators offer loans with several interest 
rate and point combinations from which the borrower chooses. As 
noted above, they probably have already discussed these alternative 
combinations with the applicant. The originator would pick two 
alternatives from among the options available but not chosen by the 
borrower when he picked the interest rate and point combination for 
which his GFE is filled out. The originator would have to punch 
these other two combinations into his GFE software (two interest 
rate and point combinations) in order for the software to fill out 
the form. In the event that the originator does not use software to 
make these calculations, they would have to be done by hand.
    (5) Costs of Re-Disclosing the New GFE. As discussed in Chapter 
3, if the borrower does not qualify for the loan presented in the 
originator's GFE and a new loan is offered, a new GFE must be filled 
out with the appropriate changes. In addition, if there are 
unforeseen circumstances or changes requested by the borrower, a new 
GFE must be issued with the appropriate changes. But the borrower 
would be given these changes today for a new loan (but a new GFE 
would not be issued). The rule simply requires that the new 
information be conveyed to the borrower through a new revised GFE. 
For further information, see the discussion of re-disclosure costs 
below in Section VII.D.2.
    (6) Documentation Costs. Loan originators are required to 
document the reasons for changes in any GFE when a borrower is 
rejected or when there are unforeseeable circumstances that result 
in cost increases. Once a GFE has been given, there are several 
potential outcomes. One is that the loan goes through to closing 
with tolerances and other requirements met. Another is the borrower 
terminates the application. Borrowers could also request changes, 
such as an increase in the loan amount. There could also be a 
rejection, a counteroffer, or unforeseen circumstances.
    The first two require no special treatment. Borrower requested 
changes do not require documentation but do require a new GFE, as 
explained in (5) above. The case of borrower rejection (which 
assumes there is no counteroffer accepted by the borrower) requires 
documentation today under the Equal Credit Opportunity Act (ECOA). 
Under ECOA, the originator must document the reason for a rejection 
and retain the records for 25 months, which is also the requirement 
in the proposed rule. Therefore, there is no additional 
documentation required in case of a rejection. There is no 
documentation requirement for a counteroffer, but the lender must 
issue a new GFE to the borrower; the minimal burden associated with 
issuing an additional GSE as discussed in Section VII.D.2 below.
    Documentation for unforeseeable circumstances adds a new 
requirement. The additional burden associated with unforeseen 
circumstances comes from having to document the reasons for the 
increase in costs and from determining that the amounts of the 
increases in charges to the borrower are no more than the increases 
in costs incurred by the unforeseeable circumstances. The Department 
does not require that a justification document be prepared. Since 
there are no special reporting requirements when unforeseeable 
circumstances occur, compliance could be met by simply retaining the 
documentation in a case binder, as any other relevant loan 
information might be retained in a case binder today. For example, 
itemized receipts for the increased charges would simply be put in 
the loan case binder (as they probably are today). Case binders are 
stored now. The additional cost of identifying and storing the 
documentation in that binder would be de minimus. This would 
represent little burden on the originator, particularly since 
unforeseen circumstances will not be the norm.
    There may be some record retention issues with small 
originators, such as brokers. If small originators retain case 
binders today, then their situation would be similar to other 
originators. If they do not retain the case binder today, then they 
may choose to do so, or they may rely on their wholesalers for 
record retention. It might well become a selling point for 
wholesalers. Relative costs of storage, reliability, and 
accessibility would determine who could best perform this function.
    (7) Crosswalk from New GFE to New HUD-1. The HUD-1 has been 
changed so that it matches up with the categories on the new GFE--
making it simple for the borrower to compare his or her new GFE with 
the final HUD-1 at closing. In addition, a closing script has been 
added so that the settlement agent is required to explain the 
crosswalk. The simplification of the GFE does not add any burden for 
the borrower to the comparison of the figures on the two forms--
rather it will be reduced since it will now be easier for the 
borrower to match the numbers from the GFE (issued at time of 
shopping) with those on the HUD-1 (issued at closing). Compared with 
today, it also eliminates the step of adding a pointless list of 
component originator charges to get the relevant figure, the total 
origination charge. In addition, the elimination of junk fees on the 
GFE may lead to the elimination of them on the HUD-1 since they may 
have been on the GFE only to overwhelm the comparison shopper. Even 
without the script, the settlement would have been more transparent 
for the borrower. However, requiring that a script be completed by 
the settlement agent and read to the borrower will impose some costs 
on the settlement agent. Compliance costs of the script are 
discussed in detail in Section VII.C.2 below.
    (8) Mortgage Comparison Chart. The Mortgage Comparison Chart is 
the fourth page of the GFE. It is delivered to the borrower as a 
blank form. The borrower is free to fill it out and use it to 
compare different loan offers. The loan originator or packager is 
only required to hand it out, but has the option of answering 
borrower questions about it. The short, simple, and self-explanatory 
nature of the form leads the Department to believe that the 
additional costs per form, if any, borne by an originator or 
packager would approach zero.
    Summary. To summarize, the discussion of the above factors 
identifies offsetting costs and suggests that there will be little 
if any additional annual costs associated with the new GFE. 
Practically all of the information required on the new GFE is 
readily available to originators, suggesting no additional costs. 
The fact that there are fewer numbers and less itemization of 
individual fees suggests reduced costs. The fact that the GFE 
figures are displayed on the HUD-1 will substantially simplify the 
closing process. In addition, Section D below lists further changes 
that HUD made to the form that are likely to reduce costs. On the 
other hand, there could be some small amount of additional costs 
associated with the trade-off table and documentation requirements. 
If there were additional costs of, for example, 10 minutes per GFE, 
the dollar costs would total $255 million per year.<SUP>70 71</SUP> 
But given the above discussion of offsetting effects and the 
improvements made to the form, there are likely to be no additional 
net costs with implementing the new GFE. Note, however, that there 
is the potential for recurring costs from the script required at 
closing. This issue is summarized in Section VIII.
---------------------------------------------------------------------------

    \70\ This calculation assumes a $150,000 fully-loaded annual 
salary; dividing by 2,080 hours yields $72 per hour, or $12 for ten 
minutes. Assuming 21,250,000 applications, produces a cost figure of 
$255 million. At 15 minutes, the cost estimate would rise to about 
$382.5 million. In the higher volume environment (26,350,000 
applications), the overall cost figure would be $316.2 million if 
the per application cost was $12 for ten minutes.
    \71\ We have used a fully-loaded hourly opportunity cost of 
$72.12 for highly-skilled professional labor throughout the Economic 
Analysis. For many functions as well as locations this amount is 
probably an overestimate of the hourly opportunity cost. However, 
our goal in the Economic Analysis is to accurately measure the upper 
bound of the costs of the rule. An alternative method would be to 
generate an estimate of the average variable cost from industry-
specific data. For example, in Tucson, Arizona, the average unit 
labor cost (salary, bonuses, time off, social-security, disability, 
healthcare, 401(k), and other benefits) is $30.73 per hour for loan 
officers ($23.97 for a Loan Officer/Counselor; $28.48 for a Consumer 
Loan Officer I; and $39.75 for a Consumer Loan Officer II). 
Additional costs to be considered are rent ($2812.50 per month for 
1500 square feet) and computer equipment ($560 per month). Summing 
this gives us an hourly cost of $31.14. An additional ten minutes 
per closing would increase costs by $5.19 per loan. The estimate of 
the recurring annual burden of the new GFE could reasonably be 
assumed to be $110 million, much less than the $255 million used 
throughout this analysis.

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[[Page 14116]]

Appendix VII.C.2. Crosswalk Between the GFE to the HUD-1

    The following paragraphs describe HUD's response to comments 
from the 2002 proposed rule on the crosswalk between the GFE and 
HUD-1 as well as a description of the development of the crosswalk. 
The compliance costs of the crosswalk are described in Section VIII.
    Comment. Many commented that borrowers would require more help 
in comparing the proposed GFE to their HUD-1. The HUD-1 may contain 
all of the detail it has today while the GFE shows subtotals for 
major categories of settlement costs.
    Response. While the forms do not match-up fee-for-fee, they do 
not have to match-up that way today under the GFE. In the area of 
lender fees on the GFE under today's rules, there would typically be 
several itemized fees (e.g., application fee, underwriting fee, 
etc.) despite the fact that they all go to the originator. Thus, the 
borrower would have to make several GFE-versus-HUD-1 comparisons of 
lender fees that do not have to match up dollar-for-dollar. Under 
the new rule, the borrower would add up the lender fees (which would 
typically be in the 800 series on the HUD-1) and look for that one 
number, ``Our Service Charge,'' on the new GFE. This would be no 
more difficult than before.
    The HUD-1 has been changed so that it matches up with the 
categories on the new GFE--making it simple for the borrower to 
compare his or her new GFE with the final HUD-1 at closing. The GFE 
has been standardized and the titles of sections in the HUD-1 have 
been renamed to match with the GFE. Numbered references to the lines 
in the GFE are included in the HUD-1 to make it easier to match the 
appropriate lines. Finally, a crosswalk between the GFE and the HUD-
1 has been added to the HUD-1 as an addendum. The settlement agent 
will be required to read the script to the borrower and guide him or 
her through the comparison of the GFE and the HUD-1 forms.
    It should be noted, however, that even without the script, the 
borrowers might require less help in comparing GFEs to HUD-1s under 
the new rule. There is only one space for originator fees on the 
GFE. Originators who might otherwise break up their fee into a large 
number of components to overwhelm borrowers do not have that option 
on the new GFE. Borrowers will make their choices based on the GFE 
that has only one originator fee. Once the borrower is committed, 
originators might decide there is no advantage to splitting this 
figure into a large number of components since delivering 
overwhelming detail designed to affect the choice of loans after the 
choice has been made is pointless. If so, they would report only one 
originator fee on the HUD-1. If borrowers have only one originator 
fee on the HUD-1 and it matches the only originator fee on the GFE, 
then borrowers will require less help in comparing the originator's 
fees on the two documents.
    In the area of title services, today the lender might estimate 
this cost with one number or an array. But if the originator does 
not initially know who will perform this service, the figures on the 
HUD-1 in the end could bear little semblance to those on the GFE. 
Under the new rule, title services, owner's title insurance, and 
borrower's title insurance are shown. The latter two will be 
itemized in the 1100 series and title services will be the sum of 
the rest of the numbers in the 1100 series of the HUD-1. Adding up 
the figures in the 1100 series and subtracting out the owner's title 
insurance premium (which is not covered by the 10% tolerance) is 
simple arithmetic. Adding that sum to the other third-party fees is 
more addition. Seeing if the total of these third-party fees is ten 
percent over the estimates involves one comparison. The new rule 
changes the procedure from making numerous charge-by-charge 
comparisons, for which matching entries may be missing on either 
form, to an exercise in adding first and then making a few 
comparisons. It is not clear that the new rule involves more 
difficulty or time than the old rule for a borrower who wants to 
compare the GFE to the HUD-1. It may well be easier for borrowers to 
compare GFEs to HUD-1s under the new rule than it was under the old. 
In addition, the required script will provide a standard explanation 
of the crosswalk.
    The crosswalk tested by the Kleimann Communication Group met 
with mixed results. The crosswalk was tested in rounds two and three 
of the consumer testing of the forms. The conditions tested in round 
three were different than in round two since the form and tolerance 
scheme had changed. The first two numbers on page 2 of the round two 
GFE were dropped and the form began with what had been the adjusted 
origination charge. Also, the tolerances had changed from an 
individual zero tolerance for the fees of originator selected third-
party providers and an individual ten percent tolerance for third-
party providers where the borrower used a referral made by the 
originator, to an overall ten percent tolerance on originator and 
third-party fees so long as the borrower selected providers had been 
a referral from the originator. Also, the tolerance was dropped on 
reserves or escrow.
    The crosswalk was tested as a stand-alone document; the subjects 
got no help at all from the testers. No verbal instructions were 
given and no questions of substance were answered. Under these 
circumstances, the subjects had a wide range of success rates in 
filling out the crosswalk. In the ordinary course of a closing, 
however, the borrower could be accompanied by a spouse, friend, or 
real estate agent who might help the borrower figure the crosswalk 
out. There is also the settlement agent who is likely to be an 
expert in this field, would understand the crosswalk, and could 
answer questions the borrower had about comparing charges on their 
GFE and HUD-1, i.e, performing the crosswalk. The crosswalk is 
likely to work much better in practice than it did in the isolation 
of stand-alone testing.
    The proposed rule provisions for describing loan terms in the 
new GFE and the HUD-1 closing script are somewhat duplicative of the 
Truth in Lending Act (TILA) regulations, however the differences in 
approach between the TILA regulations and HUD's proposed RESPA rule 
make the duplication less than complete. The TILA and RESPA 
approaches to mortgage loan terms disclosure are most similar when 
the loans are very simple, e.g., fixed interest rate, fixed payment 
loans. The approach differs for more complex loan products with 
variable terms. In general, TILA describes how variable terms can 
vary (e.g., the interest rate or index to which variable interest 
rates are tied, how frequently they can adjust, and what are the 
maximum adjustment amounts, if any), but forecasts the ``likely'' 
outcome based on an indefinite continuation of current market 
conditions (e.g., the note rate will be x in the future based in the 
index value y as of today). The RESPA disclosures in the GFE and 
HUD-1 closing script focus the borrower on the ``worst case 
scenario'' for the loan product to ensure borrowers are fully 
cognizant of the potential risks they face in agreeing to the loan 
terms. The disclosures on the GFE are meant to be as simple and 
direct as possible to communicate differences among loan products. 
HUD's approach to these disclosures thus supports consumers ability 
to shop for loans among different originators. For a given set of 
front-end loan terms (initial interest rate, initial monthly 
payment, and up-front fees), originators have an incentive to offer 
borrowers loans with worse back-end terms (e.g., higher maximum 
interest rate, higher prepayment penalty) to the extent capital 
markets are willing to pay more for loans with such terms. While 
brokers are required to disclose such differentials on the GFE and 
HUD-1, lenders are not. HUD's proposed GFE will help consumers to 
quickly and easily identify and distinguish loan offers with similar 
front-end terms, but worse back-end terms, while shopping for the 
best loan. Requiring a script will act to double-check the HUD-1 and 
thus enhance the realization of the benefits of the simpler GFE.

Appendix VII.C.3. Multiple Preliminary Underwritings

    Comment. Every application under the new rule requires 
preliminary underwriting. Since borrowers who shop may seek out 
multiple GFEs, there will be multiple underwritings. Commenters said 
this will add to the underwriting burden firms incur today.
    Response. Every application under the 2002 proposed rule that 
generates a GFE will require preliminary underwriting in order to 
come up with an early offer for the borrower. Originators can charge 
a fee for issuing a new GFE. It is hoped that the charge for this, 
if any, would be small enough so that it is not a significant 
deterrent to effective shopping. But whether or not there is a 
charge, there are real resource costs associated with preliminary 
underwriting. The additional cost generated depends on the number of 
applicants and the number of GFEs they get. Since every completed 
loan eventually gets underwritten in full, the additional cost of 
preliminary underwriting depends mainly on the number of additional 
times that preliminary underwriting occurs beyond the one associated 
with the full underwriting that would have occurred under the 
existing scheme. It cannot be determined how many additional GFEs 
the average borrower would get under the new rule. Borrowers might

[[Page 14117]]

continue the informal shopping method that many use today--gathering 
information and making inquiries to lenders and brokers about their 
products and their rates, even before deciding to proceed with the 
request for a more formal quote using the GFE. In other words, they 
may formally apply only after deciding who offers the best terms. 
The simple format and clarity of the new GFE form will enhance this 
informal information gathering process; in fact, the increased 
efficiency of informal shopping (calling around, checking web sites, 
etc.) could be an important benefit of the new GFE. Since shoppers 
as well as originators will be familiar with the GFE, these forms 
will likely serve as a guide for practically any conversation 
between a shopper and an originator, or for any initial request by a 
shopper for preliminary information about rates, points, and fees. 
For these borrowers, the new GFE simply pins down the numbers. 
Others, on the other hand, may obtain multiple GFEs and use them to 
shop.
    There are currently 1.7 times as many applications as loans 
originated; therefore, if originations are 12.5 million, full 
underwriting is started (and probably completed) for about 21.25 
million applications, including 8.75 million (21.25 million minus 
12.5 million originations) that are not originated. Under the 
proposed rule, preliminary underwriting should decrease the number 
of applications that go to full underwriting (e.g., an applicant may 
be denied during the preliminary without having been charged for an 
appraisal); that is, some of the 8.75 million that are not 
originated may be disapproved at the preliminary stage rather than 
going through full underwriting (as they might today). This savings 
in appraisal, verification, and other incremental underwriting costs 
that are avoided would tend to offset the increase in cost resulting 
from the extra preliminary underwriting noted in the above 
paragraph. However, it is difficult to estimate these effects.

Appendix VII.D. Changes in the Proposed Rule That Reduce Regulatory 
Burden <SUP>72</SUP>
---------------------------------------------------------------------------

    \72\ See Chapter 3 for a more detailed treatment of changes 
listed in this section.
---------------------------------------------------------------------------

    The proposed rule contains several changes from the 2002 
proposed rule that are designed to reduce regulatory burden.

Appendix VII.D.1 Items Dropped From the Proposed GFE

    Several items that commenters were concerned about are not 
included on the final GFE:
    Lender/Broker Breakout. Loan originators argued that breaking 
out the origination charges into its broker and lender components is 
costly and serves no useful purpose. This requirement has been 
eliminated so there will be no compliance burden associated with the 
lender/broker breakout on the GFE.
    Title Agent/Title Insurance Premium Breakout. Title agents 
argued that breaking out the title insurance premium that goes to 
the underwriter from the rest of the title charges is costly and 
serves no useful purpose. This requirement has been eliminated, so 
there will be no compliance burden associated with the title agent/
title insurance premium breakout on the GFE.
    APR. Loan originators commented that including the APR on the 
GFE was an unnecessary burden since it is duplicated on the TILA 
forms. There will be no compliance burden with the APR since that 
term has been dropped from the GFE.

Appendix VII.D.2 Cost of Re-Disclosure

    Comment. Loan originators commented that re-disclosure would be 
costly. Under the 2002 proposed rule, a new GFE was to be filled out 
if the borrower did not qualify for the loan presented to him or her 
on the original GFE or if the borrower requested a change in the 
loan that would invalidate the original GFE. The GFE in the proposed 
rule has similar requirements. For example, the appraisal might come 
in lower than the value stated by the borrower and result in the 
need for mortgage insurance or a change in the mortgage insurance 
rate. Or, the borrower might request a change in loan product, 
interest rate, or loan amount. These situations would require a new 
GFE.
    Response. If the borrower does not qualify for the loan 
presented in the originator's GFE and a new loan is offered, a new 
GFE must be filled out with the appropriate changes. If a borrower 
did not qualify for the loan under the old rule, no new GFE would be 
required, but the borrower would be told of the changes in the loan 
program and changes in fees that would result. The proposed rule (as 
well as the 2002 proposed rule) requires that the new information be 
conveyed to the borrower through a new revised GFE rather than 
through some other medium.
    The only change is the method of communication. The data and 
other information on the counteroffer are readily available to the 
originator. In addition, one who receives a counteroffer must be 
made aware of the changes in the loan terms in order to properly 
prepare for the closing. For example, the borrower would have to 
know the new settlement costs in order to show up at settlement with 
a check for the right amount. So, counteroffer information is 
certainly already being conveyed today under existing rules. There 
would seem to be little cost in the change to require this 
information to be conveyed in a new GFE. If it took 10 extra minutes 
per new GFE over and above the time spent today conveying the 
information for the new offer, that would come to $12 extra cost per 
form. But there would be offsetting decreases in costs as well. 
There would be a decrease in confusion at the settlement table that 
would result from the borrower having a ``correct'' GFE for the 
offer accepted rather than the irrelevant GFE for the loan for which 
the applicant did not qualify. Any attempt to reconcile the old GFE 
with the HUD-1 would be confusing and ultimately unsuccessful. The 
new GFE, of course, could be reconciled with the HUD-1. The value of 
the time saved from being able to match the correct GFE with the 
HUD-1 should far exceed any additional cost resulting from the 
requirement that the new offer cost estimates must be conveyed in 
the form of a new GFE.

Appendix VII.D.3 Increase in HOEPA Loans

    Comment. Loan originators commented that the reporting 
requirements for the yield spread premium would increase the fees 
reported by brokers and increase the number of loans subject to 
HOEPA regulations. As a result, HOEPA compliance costs will be 
incurred on a larger number of loans.
    Response. The will be no compliance burden associated with 
increased HOEPA coverage since there will be no increase in HOEPA 
coverage. The comment assumes that the finance charge used to 
calculate the APR in the future would include the service charge 
rather than the adjusted origination charge that is the equivalent 
of what is reported under current rules. If it were true that the 
service charge was to be used under the new rule, the finance charge 
and APR would rise leading to more HOEPA loans and more HOEPA 
compliance burden. The Federal Reserve, however, will require the 
adjusted origination charge, equivalent to what is required today, 
to be used in calculating the finance charge and APR under the new 
rule. Consequently, there will be no RESPA mandated change to the 
calculation of the finance charge or APR on loans originated under 
the new GFE, and, therefore, no resulting increase in HOEPA 
compliance burden for loans originated under the new GFE.

Appendix VII.D.4 Treatment of Government Fees and Reserves/Escrow

    Comment. Loan originators argued that these tolerances (zero on 
government fees and 10 percent on escrow) imposed burdens on them 
that were unnecessary. Escrow deposits can be difficult to determine 
within three days, especially when the property is new construction. 
These are not retained by the lender but are held on behalf of the 
borrower and are covered by the escrow rule. As with the other 
tolerances, small firms commented that they would be at a 
disadvantage relative to their large counterparts from the risks 
associated with having to cover any charges in excess of the 
tolerances.
    Response: In the proposed rule, there will be no compliance 
costs resulting from tolerances on escrow since this tolerance 
protection has been eliminated. The zero tolerance on government 
recording fees and transfer taxes remains.

Appendix VII.D.5 Required Time for the GFE To Be Open to the 
Borrower

    Comment. Loan originators argued that 30 days was too long for a 
GFE to be binding. In that time, some prices could change and the 
originator would have to bear the price increases that resulted.
    Response. The time period for which the GFE will be open has 
been reduced from 30 days to 10 business days. It is unlikely that 
there would be any changes in that short a time that would be 
unanticipated and lead to the loan originator having to cover any 
charge in excess of the tolerances.

Appendix VII.D.6. Earlier Triggers for HMDA and Fair Credit

    Comment. The new definition of application in the 2002 proposed 
rule was

[[Page 14118]]

designed to get the borrower good shopping information earlier in 
the application than under the current scheme. Loan originators 
complained that the new definition would trigger more GFEs than it 
had before. It would also trigger more Truth in Lending Forms as 
well as more Regulation B and C (HMDA and Fair Credit) reporting 
requirements for applicants who were at an earlier stage in the 
process than before. This would generate additional compliance 
burden as a result of having to generate more of these forms.
    Response. As discussed in Section VI of Chapter 3 of the RIA, 
the definition of application has been bifurcated. The definition of 
``application'' for GFE and TILA purposes will remain as in the 2002 
proposed rule and result in earlier delivery of these forms while 
the definition for Regulations B and C purposes will be met when the 
borrower completes the application process by selecting a loan 
originator with whom his application will go forward. There will be 
no increase in reporting burdens because the timing requirements 
have not changed under the proposed rule.

Appendix VII.E. Other Compliance Costs: New GFE

    This section discusses compliance issues related to the zero 
tolerances on lender fees (Section III.E.1) and the 10% tolerance on 
third-party fees (Section III.E.2).

Appendix VII.E.1. Zero Tolerances on Lender Fees

    Comment. Originators commented that the zero tolerance on lender 
fees makes it difficult to switch borrowers from one loan to another 
if the fees are different. Such switching can be in the borrower's 
best interest. In such cases, the originator could keep the same GFE 
and possibly earn less on the loan, or have to fill out a new GFE 
for the borrower. The commenters said either alternative is costly 
to the originator.
    Small originators commented that zero tolerance puts a greater 
burden on them than on larger originators. Their smaller number of 
transactions gives them a smaller base over which things can average 
out. One particular loan that turned out to be much more costly than 
estimated would have a larger proportionate negative effect on a 
small firm than on a larger counterpart that could average this out 
over a much larger number of transactions.
    Response. This feature of the proposed GFE remains. The 
Department believes that it is not difficult for a loan originator 
to figure out its own price for its own product in three days. If 
the borrower does not qualify for the loan product described in the 
GFE and is rejected for that loan, the originator may offer the 
borrower another loan for which he may qualify and present the 
borrower with a new GFE for that loan. If the fees are higher for 
the new product, the GFE may reflect those higher fees and the 
originator is not limited to the lower fees of the original loan 
product.

Appendix VII.E.2 Tolerances on Third-Party Fees

    The GFE tolerance requirements in the new rule require loan 
originators to bear the full burden of any third-party charges that 
exceed the limits set by the tolerances. Paying the excess to 
borrowers or incurring the costs to ensure that the third-party fees 
fall within the tolerances is a compliance burden.
    Under the 2002 proposed rule, zero tolerance applied to fees for 
third-party services that are required by and selected by the 
lender. A ten percent tolerance applied to the required third-party 
services where the borrower chooses a firm referred by the 
originator.
    No tolerance applied to third-party fees where the borrower 
chose a provider without a referral from the originator. The 
rational for the zero tolerance was that a loan originator should 
know the price of a service if it required the use of its chosen 
provider. In the case of making referrals, the loan originator could 
be expected to have some knowledge of the market. In fact, it should 
have some knowledge if it is to meet even the weakest concept of 
``good faith.'' The 10 percent tolerance seemed like a reasonable 
limit for price dispersion for services obtained in a market that 
could be competitive if the buyers had good information. It is also 
simple for borrowers quickly to compute 10 percent of the total fee 
and determine if final charges are within the tolerance. In order to 
protect themselves from charges in excess of the limits set by the 
tolerances, originators would have to gather price information in 
the market and possibly set up agreements with some third-party 
providers to perform settlement services at prearranged prices. 
Those originators who would have gathered more information than they 
do today or made more pricing arrangements than they do today would 
have incurred an increase in regulatory burden resulting from the 
new rule.
    Comment. Loan originators wrote that they should not be required 
to pay the bills for third-party fees in excess of the tolerances 
since they do not control those fees. They argued that their 
expertise is as originators, not as appraisers or title companies. 
They claimed that they do not know who will perform all these 
services at application, so the price is indeterminate. In addition, 
there are occasions when services beyond the normal minimum will be 
required, but that cannot be known at application. For example, 
additional appraisal work may be required or some work may have to 
be done to clear up a title problem. So prices and even some 
services that end up as being required are unknown at application.
    Small originators made the same argument that they made on the 
zero tolerance for lender fees. They will be at a disadvantage if 
they have to cover the third-party fees in excess of the tolerances 
since they have a smaller base on which to average out these excess 
fees. If the loan originator solves its problem by using only those 
third-parties that agree to fixed prices, that shifts the burden to 
the third-party. Small third-party providers made the same argument 
that small originators made. They then will be disadvantaged 
relative to large third-party providers by having to bear the risk 
of the unpredictable cost that cannot be averaged out over a large 
number of transactions.
    Response. The tolerance scheme for third-party services has been 
changed in the proposed rule. An overall tolerance of ten percent 
now applies to the sum of (a) third-party fees for services where 
the originator requires the use of a specific provider or (b) third-
party fees where the borrower uses a provider whose name was given 
to him by the originator in response to a request for a 
referral.\73\ As mentioned above, the 2002 proposed rule had a zero 
tolerance on (a) and a 10 percent tolerance on (b). The sum of the 
fees on the HUD-1 for third-party providers selected by the 
originator or used as a result of the referral process cannot exceed 
the sum of these fees on the new GFE by more than 10 percent. As in 
the 2002 proposed rule, no tolerance applies where the borrower 
elects to use a provider without the referral from the originator.
---------------------------------------------------------------------------

    \73\ Upfront mortgage insurance is not included in the overall 
10% tolerance. It has a zero tolerance because upfront private 
mortgage insurance charges (which are rare) along with upfront FHA 
and VA insurance charges are well known.
---------------------------------------------------------------------------

    Tolerances will impose some burden on originators. Since the 
protection of tolerances kicks in only if the originator requires 
the use of a particular provider or if the borrower comes to the 
originator and asks where the services may be purchased within the 
tolerances, the originator must have reliable third-party settlement 
service provider pricing information or risk paying the charge in 
excess of the tolerance. Some originators might simply check out the 
market prices for third-party services from time to time, formulate 
estimates such that several of the prices charged by the third 
parties fall within the tolerance, and trust that nobody to whom 
they refer the borrower charges a price in excess of the 
tolerance.\74\ Other originators might want more protection and have 
contracts or business arrangements in place that have set prices for 
services that are not in excess of the tolerances.
---------------------------------------------------------------------------

    \74\ Other originators may rely on vendor management companies 
(or vendor management departments within their own company) for 
pricing information about third-party services.
---------------------------------------------------------------------------

    Either case requires the originator to do more than today, 
although even today originators fill out GFEs with estimates for 
third-party settlement services. In the first case, the liability in 
the event a tolerance is exceeded would lead to at least a little 
more work gathering information prior to filling out the GFE. In the 
second case, more work would be involved in formalizing an agreement 
to commit the third-party to a fixed price. But as noted above, 
originators today have to have a working knowledge of third-party 
settlement service prices to fill out a GFE. Therefore, it is only 
the increase in burden that would need to be accounted for here.
    It is difficult to estimate these incremental costs. But to 
provide an order of magnitude, it is estimated that it takes an 
average of 10 additional minutes per loan for the originator to 
arrange the pricing that protects the originator from the costs of 
the tolerances being exceeded.\75\ For a brokerage firm originating 
250 loans per year, 10 minutes per loan would come to 42 hours or 
about

[[Page 14119]]

one week's worth of one employee's time per year. Thus, this seems 
to be a reasonable starting point for estimation. For the estimated 
12,500,000 loans, that comes to 125,000,000 minutes or 2,083,333 
hours. At $72 per hour, this comes to a total of $150 million for 
all firms and $78 million for small firms. If it takes 20 extra 
minutes per loan instead of 10, these costs come to $300 million and 
$156 million respectively and would be two weeks of one employee's 
time per year for a brokerage firm making 250 loans per year. Table 
A-9 details the distribution of these costs among the retail 
mortgage originating industries. With a larger number of loans 
(15,500,000), total costs are $186 million for all firms (at ten 
minutes per loan) and $97 million for small firms.
---------------------------------------------------------------------------

    \75\ These 10 minutes would be beyond what the originator spends 
today to seek out good choices for his borrowers.

                Table A-9.--Incremental Costs of Third-Party Pricing Arrangements for the New GFE
----------------------------------------------------------------------------------------------------------------
                                                                     Total third-
                                                                     party pricing  Small business
                             Industry                                 arrangement        cost
                                                                         cost
--------------------------------------------------------------------------------------------------
Mortgage Brokers..................................................    $180,000,000    $126,000,000
Commercial Banks..................................................      49,275,600       9,357,436
Thrifts...........................................................      23,394,000       2,882,141
Mortgage Banks....................................................      37,236,000      15,475,282
Credit Unions.....................................................      10,094,400       2,941,508
                                                                   ---------------------------------------------
    TOTAL.........................................................     300,000,000     156,656,367
----------------------------------------------------------------------------------------------------------------

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

Appendix VII.F. Efficiencies and Reductions in Regulatory and 
Compliance Burden: The New GFE

    Efficiencies come from time saved by both borrowers and 
originators as a result of forms that are easier to use, competitive 
impacts in the market, the decrease in the profitability of 
searching for victims, and the decrease in discouraged potential 
homeowners. All these are ongoing as opposed to one-time costs.

Appendix VII.F.1. Shopping Time Saved by Borrowers

    It should be noted that the increased burden on originators of 
arranging third-party settlement services is likely to be much more 
than offset by a reduction in the aggregate shopping burden for 
third-party providers incurred by borrowers. Originators will be 
highly motivated to find low third-party prices. Originators could 
pass the savings on and make it easier to appeal to borrowers, or 
alternatively, could raise their origination fee by the savings in 
third-party fees and earn more profit per loan. Or the final result 
could fall somewhere in between the two. Regardless of which path 
any originator chooses, the lower third-party prices work to his or 
her advantage; originators will probably be aggressive in seeking 
out lower prices. The borrower benefits to the extent that, upon 
receipt of the GFE, he or she immediately has good pricing 
information on third-party services. The borrower could immediately 
decide to use the originator's third parties, in which case his or 
her search is over. Or, the borrower could search further with the 
originator's prices as a good starting point and available as a 
fall-back, in which case the borrower's search efforts are likely to 
be greatly reduced. In both cases the borrower searches less.
    Considering the number of loans the average originator closes 
per year, the aggregate decrease in search efforts by borrowers is 
very likely to exceed the increase in aggregate search effort by the 
originators. For example, if each borrower saves an average of 15 
minutes in shopping for third-party services, then the total savings 
to borrowers would be $234 million.\76\ As discussed Sections 
VII.E.1 and VII.E.2 on tolerances, the new form and the tolerances 
will enable borrowers to save time shopping for loans and for third-
party settlement service providers. If the new forms save the 
average applicant one hour in evaluating offers and asking 
originators follow-up questions, borrowers save $935 million.\77\ 
The total value of borrower time saved shopping for a loan and 
third-party services comes to $1,169 million.
---------------------------------------------------------------------------

    \76\ Calculated as follows: 21,250,000 projected mortgage 
applications (see Chapter 2) times $44 per hour times 0.25 hour (or 
15 minutes) gives $233.750 million. The $44 per hour figure is based 
on the average income ($92,000) of mortgage borrowers, as reported 
by HMDA; the $92,000 income figure is divided by 2,080 hours to 
arrive at the hourly rate of $44.23 or $44. If the borrower saved 30 
minutes in shopping time, then the total savings would be $330 
million.
    \77\ Calculated as follows: 12,500,000 loans times 1.7 
applications per loan times 1 hour per application times $44 per 
hour, the average hourly income of loan applicants ($92,000 per 
year/2080 hours per year). See earlier footnote.
---------------------------------------------------------------------------

Appendix VII.F.2. Time Saved by Originators and Third-Party Service 
Providers

    Originators and third-party settlement service providers will 
save time as well. If half the borrower time saved in (1) above 
comes from less time spent with originators and third-party 
settlement service providers, then originators spend half an hour 
less per loan originated answering borrowers' follow-up questions 
and third-party settlement service providers spend 7.5 minutes less 
with borrowers for a saving of $765 million \78\ and $191 million, 
respectively, for a total of $956 million.
---------------------------------------------------------------------------

    \78\ Calculated as follows: 12,500,000 loans times 1.7 
applications per loan times 0.5 hours per application times $72 per 
hour, the average hourly income of loan originators ($150,000 per 
year/2,080 hours per year).
---------------------------------------------------------------------------

Appendix VII.F.3. Average Cost Pricing

    As discussed in Chapter 3, the proposed rule allows average cost 
pricing. This reduces costs because firms do not have to keep up 
with an itemized, customized cost accounting for each borrower. This 
not only saves costs when generating the GFE, it also saves quality 
control and other costs afterward. Industry sources have told HUD 
that this could be a significant cost savings under packaging.

Appendix VII.F.4 Time Saved From Average Cost Pricing

    As explained above, there will be reductions in compliance costs 
from average cost pricing. It is estimated that the benefits of 
average cost pricing (e.g., reduction in the number of fees whose 
reported values must be those specifically incurred in each 
transaction) will lead to a reduction in originator costs of 0.5 
percent, or $210 million. No breakdown of fees is needed. No 
knowledge of an exact fee for each specific service needed for the 
loan is required for the GFE. In addition, no exact figure for the 
amount actually paid needs to be recorded for each loan and 
transmitted to the settlement agent for recording on the HUD-1. The 
originator only needs to know his or her approximate average cost 
when coming up with a package price that is acceptable. The cost of 
tracking the details for each item for each loan is gone.

Appendix VII.F.5. Other Efficiencies

    Chapter 3 discusses additional efficiencies of the new GFE. The 
lower profitability of seeking out vulnerable borrowers for non-
competitive and abusive loans should lead to a reduction in this 
activity. If the decline in

[[Page 14120]]

this activity represented one percent of current originator effort, 
this would result in $420 million in savings to firms (see Section 
VII.B of Chapter 3 of the RIA).
    There are other potential efficiencies that are anticipated from 
the new GFE approach but would be difficult to estimate. For 
example, studies indicate that one impediment to low-income and 
minority homeownership may be uncertainty and fear about the home 
buying and lending process. The new GFE approach should increase the 
certainty of the lending process and, over time, should reduce the 
fears and uncertainties expressed by low-income and minority 
families about purchasing a home (see Section VII.F of Chapter 3). 
As discussed in Section IV.D.4 of Chapter 2, improvements in lender 
information (e.g., interest and settlement costs) should also lend 
to a general increase in consumer satisfaction with the process of 
taking out a mortgage (see CFI Group, 2003).

Appendix VIII. Costs Associated With Changes to the HUD-1 and the 
Closing Script

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

Appendix VIII.A. Data on Settlement Service Providers

    Section VII.A reproduced background data on the retail mortgage 
origination industries. Since the GFE affects settlement service 
providers as well as retail mortgage originators, this section 
recapitulates data from Chapter 5 of the RIA on the settlement 
services industries. Readers are referred to Section IV of Chapter 5 
for a more detailed treatment of the data.
    Table A-10 provides the total number of firms, the number of 
small employer firms, the number of nonemployer firms, and the 
percent of small firms (employer and nonemployer) in industries that 
provide settlement services (see Chapter 5 for details on the 
classification of small employer firms in these industries). These 
constitute all of the firms in these industries in 2004, according 
to the Census Bureau. As discussed below, for Offices of Lawyers, 
Other Activities Related to Real Estate (Escrow), Surveying & 
Mapping Services, Extermination & Pest Control Services, and Credit 
Bureaus, the figures in Table A-10 almost certainly overstate the 
number of firms actually participating in residential real estate 
settlements.\79\
---------------------------------------------------------------------------

    \79\ As shown by the fourth column, practically all firms 
qualify as small businesses. This is partially due to the large 
number of non-employer firms (which automatically qualify as a small 
business) included in the Bureau of Census data. See Chapter 5 for 
further discussion of this issue and for small business percentages 
for employer firms only. Also note that while the number of firms is 
drawn from year 2004 data, the small business percentages are based 
on 2002 data from the Bureau of Census; while they are estimates, 
they are probably highly accurate ones. Also see Chapter 5 for the 
source of the small business percentages and for alternative, year-
2002-based small business percentages based on firms with less than 
100 employees.

                         Table A-10.--Firms in Industries Providing Settlement Services
----------------------------------------------------------------------------------------------------------------
                                                                  Small employer    Nonemployer    Percent small
                    Industry                        Total firms        firms           firms           firms
----------------------------------------------------------------------------------------------------------------
Direct Title Insurance Carriers.................           2,094           1,865             135           95.5%
Title Abstract and Settlement Offices...........          14,211           7,889           6,203            99.2
Offices of Lawyers..............................         401,553         165,127         234,849            99.6
Other Activities Related to Real Estate (Escrow)         463,545          15,119         448,409          99.996
Offices of Real Estate Appraisers...............          65,491          15,656          49,802            99.9
Surveying & Mapping Services....................          18,224           8,990           9,196            99.8
Extermination & Pest Control Services...........          18,000          10,018           7,935            99.7
Credit Bureaus..................................           1,285             710             545            97.7
                                                 ---------------------------------------------------------------
    Total.......................................         984,403         225,374         757,074           99.8
----------------------------------------------------------------------------------------------------------------
Source: Census Bureau.

    Table A-11 provides the total number of employees in employer 
firms, and the number and percent of employees in small employer 
firms for each of the settlement services industries.\80\ The Census 
Bureau does not count owners of employer and non-employer firms as 
employees. The number of ``workers'' in these industries is 
understated by the number of employees as defined by the Census 
Bureau because in a nonemployer firm the owner is a production 
worker as is likely also true for the owner of a small employer 
firm. Using the Census Bureau's count of employees for computing the 
compliance burden of a rule may tend to understate the burden.\81\ 
Thus in computing the number of workers in these industries, one 
worker is added for each small employer firm and each nonemployer 
firm to the total number of employees (see Table A-13 below for 
these results).
---------------------------------------------------------------------------

    \80\ The ``Total Employees'' data in Table A-11 are for the year 
2004. The ``Employees in Small Employer Firms'' data are obtained by 
multiplying the total employee data for 2004 by the percentage of 
employees in SBA-defined small firms obtained from 2002 Bureau of 
Census data; thus, the small employee data are estimates but 
probably highly accurate ones. See Chapter 5 for discussion of the 
2002 small business percentages.
    \81\ For example, if worker training were required by the rule, 
and burden estimates were based on Census Bureau employee 
statistics, the compliance burden for nonemployer firms would be 
estimated at zero, while clearly at least one ``worker,'' the owner, 
would require the training.

                       Table A-11.--Employees In Industries Providing Settlement Services
----------------------------------------------------------------------------------------------------------------
                                                                       Total       Employees in       Percent
                            Industry                               employees in   small employer    employed by
                                                                  employer firms       firms        small firms
----------------------------------------------------------------------------------------------------------------
Direct Title Insurance Carriers.................................          75,702           7,144            9.4%
Title Abstract and Settlement Offices...........................          79,819          47,913            60.0
Offices of Lawyers..............................................       1,122,723         657,749            58.6
Other Activities Related to Real Estate (Escrow)................          67,274          40,074            59.6
Offices of Real Estate Appraisers...............................          45,021          37,300            82.8
Surveying & Mapping Services....................................          61,623          53,610            87.0
Extermination & Pest Control Services...........................          95,437          55,565            58.2
Credit Bureaus..................................................          25,555           5,135            20.1
                                                                 -----------------------------------------------

[[Page 14121]]

 
    Total.......................................................       1,573,154         904,490           57.5
----------------------------------------------------------------------------------------------------------------
Source: Census Bureau (note: non-employer firms not included).

    Table A-12 provides information on the volume of settlements for 
various industries that participate in the settlement process and 
the number and percent handled by small firms within each 
industry.\82\ Note that while the distribution among Direct Title 
Insurance Carriers, Title Abstract and Settlement Offices, Offices 
of Lawyers, Lawyers and Escrow, Offices of Real Estate Appraisers, 
and Credit Bureaus is based on all settlements, the numbers and 
percentages for the other industries (Surveying & Mapping Services 
and Extermination & Pest Control Services) represent the proportion 
of settlements in which they are involved.\83\ The allocation is 
based upon estimated dollar revenues from settlements for these 
industries.\84\ Totals are estimated based on the number of mortgage 
originations, 12,500,000 that would occur in a ``normal'' year of 
mortgage originations (i.e., not in a year with a refinancing boom).
---------------------------------------------------------------------------

    \82\ The small business percentages in Table A-12 are the shares 
of revenue accounted for by small business, as reported and 
explained in Chapter 5--in other words, the small business share of 
revenues is being used here as a proxy for the small business share 
of settlements (or mortgage loans). There are two other points that 
should be made about these data. (1) Figures for Offices of Lawyers 
and Other Activities Related to Real Estate (Escrow) are combined 
into the new ``Lawyers and Escrow'' category. This is because there 
is insufficient information to allocate volumes of settlements 
between these two industries (see Section IV.B.5 of Chapter 5 for 
further explanation). As explained in Chapter 5, the small business 
revenue share for the combined ``Lawyers and Escrow'' category is 
raised to 90% (versus 47.8% for all lawyers and 86.9% for escrow 
firms based on 2002 Census Bureau revenue data) under the assumption 
that lawyer and escrow firms engaged in real estate activity are 
likely to be the smaller firms operating in these industries. Note 
that in Table A-13 below, the 90% figure is also used for the share 
of employees in small firms in this combined industry. (2) As 
explained in Section IV.B.4 of Chapter 5, there are probably no 
small businesses in the Direct Title Insurance Carriers (DTIC) 
industry, which includes the large title insurance firms. The 4.8% 
figure in Table A-12 (as well as the 9.4% figure in Table A-11) is 
reported to remain consistent with the Bureau of Census data--
including it or excluding it does not affect the results in any 
significant way.
    \83\ See Step (9) in VII.E.1 of Chapter 3 for the calculation of 
the proportion of settlements for Surveying & Mapping Services and 
Extermination & Pest Control Services. Because of their relatively 
small shares of the overall mortgage business, different shares for 
these industries would not materially affect the overall small 
business shares of revenue. While it is recognized that the other 
industries may not be involved in every mortgage origination and 
settlement transactions (e.g., an appraisal may not be required for 
some mortgage originations), they are certainly involved in most 
such transactions and, therefore, it is assumed here that they are 
involved in all transactions.
    \84\ As explained in Chapter 5, there is also some uncertainty 
about the distribution of mortgage-related business and revenues 
among the various title-related industries. Table A-12 assumes the 
following distribution: Direct Title Insurance Carriers (43.0%), 
Title Abstract and Settlement Offices (38.0%), and Lawyer and Escrow 
(19.0%). Section IV.B.5 of Chapter 5 considers other distributions 
and suggests the following ranges for the specific industry shares: 
Direct Title Insurance Carriers (35%-50%), Title Abstract and 
Settlement Offices (29%-43%), and Lawyer and Escrow (17%-29%). Given 
limited available information, it is difficult to determine a 
precise estimate, which is why Chapter 5 includes several 
sensitivity analyses. But obviously, reducing the relative weight of 
the DTIC or increasing the relative weight of the lawyer-escrow 
industry would increase the small business share of settlements. 
Readers are referred to Section IV of Chapter 5 for a more complete 
analysis of the relative importance of each title-related industry, 
particularly as it affects the overall small business percentage for 
title- and settlement-related work.

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

    A larger volume of mortgage activity can also be examined, for 
example, to reflect a ``refinance environment''.\85\ In this case, 
the volume of settlement activity would be distributed as follows: 
6,665,000 for Direct Title Insurance Carriers, 5,889,941 for Title 
Abstract and Settlement Offices, 2,945,059 for Lawyers and Escrow, 
4,464,000 for Surveying & Mapping Services, 6,820,000 for 
Extermination & Pest Control Services, and 15,500,000 for both 
Offices of Real Estate Appraisers and Credit Bureaus.\86\
---------------------------------------------------------------------------

    \85\ In the projection given in the text, home purchase loans 
were assumed to stay the same (7.5 million, or 60% of the 12.5 
million in mortgages), while refinances increased from 5 million (or 
40% of the 12.5 million mortgages) to 8 million of the 15.5 million 
total (home purchases remain at 7.5 million).
    \86\ The settlement volume for small businesses during a high 
volume year can be obtained using the small business percentages 
from Table A-12, giving: 319,920 for Direct Title Insurance 
Carriers, 2,933,191 for Title Abstract and Settlement Offices, 
2,650,553 for Lawyers and Escrow, 3,629,232 for Surveying & Mapping 
Services, 3,675,980 for Extermination & Pest Control Services, 
12,880,500 for Offices of Real Estate Appraisers, and 1,627,500 for 
Credit Bureaus.
---------------------------------------------------------------------------

    The employee figures reported in Table A-11 misstate the number 
of workers actually participating in residential real estate 
settlements. This section offers some estimates of that figure, 
although it is recognized that they are subject to some uncertainty 
given the limited information that is available. Table A-13 provides 
one estimate of the total number of workers and the number and 
percent of workers in small firms engaged in performing settlements 
by industry. For Title Abstract and Settlement Offices and the 
combined Lawyers and Escrow industry, it is based on the volumes of 
settlement activity depicted in Table A-12

[[Page 14122]]

and the productivity level of Title Abstract and Settlement Offices 
(i.e., settlements per worker).
    The figure for total workers in Title Abstract and Settlement 
Offices is the sum of: all employees (79,819), small firms (7,889), 
and nonemployer firms (6,203), or 93,911. (Small firms and 
nonemployer firms are added to count the owners of those firms as 
production workers as discussed in the description of Table A-11 
above). The corresponding figure for workers in small firms is the 
sum of: Employees of small firms (47,913), small firms (7,889), and 
nonemployer firms (6,203), or 62,005 workers (representing 66% of 
all workers in Title Abstract and Settlement Offices). These figures 
are reported in Table A-13 below. In this industry, there are 50.6 
settlements per worker (obtained by dividing the 4,749,953 
settlements from Table A-12 by the 93,911 workers).\87\
---------------------------------------------------------------------------

    \87\ There are two caveats with this estimate. First, the 
estimate depends on the number of settlements in the Title Abstract 
and Settlement industry, which, as discussed in an earlier footnote, 
could differ from the number reported in Table A-12 (see Section 
IV.B.5 of Chapter 5 as well as the earlier footnote for possible 
ranges of estimates). Second, not all workers in the Title Abstract 
and Settlement industry are engaged in single-family real estate 
transactions, which means that the number of workers is overstated 
and therefore the number of settlements per worker is understated. 
(Unfortunately, there is no information on the proportion of Title 
and Abstract workers engaged in single-family mortgage activity, 
although it is likely that most are.) If the number of settlements 
per worker is too low, the projection will overstate the number of 
workers needed.
---------------------------------------------------------------------------

    In the combined Lawyers and Escrow industry group, worker 
productivity is assumed to be half of that in Title Abstract and 
Settlement Offices on the grounds that these workers may not do 
settlements full time and because of the general lack of information 
on the degree of settlement activity in these broadly defined 
industries. Thus, the number of workers in this category (93,914) is 
computed by dividing the number of settlements handled by the 
industry from Table A-12 divided by one-half the settlements per 
worker in the Title Abstract and Settlement Offices industry.
    For Direct Title Insurance Carriers, many workers are not 
engaged in actual settlements, but rather in the title insurance 
function itself. Direct Title Insurance Carriers provide title 
insurance through agents as well as both direct sales of title 
insurance and associated settlement services to consumers through 
branch offices. They also, of course, perform the title insurance 
function itself. HUD examined the annual reports of the large direct 
title insurance carrier companies to attempt to estimate the 
proportion of employees of these companies engaged in providing 
settlement services. It is estimated that approximately 70 percent 
of workers in this industry, or 54,391 workers, are engaged in 
providing settlement services. (See Table A-13).\88\
---------------------------------------------------------------------------

    \88\ In 2004, the DTIC industry employed 77,702 workers (based 
on the definition of worker used in the text). HUD estimates that 
approximately 70 percent, or 54,391, are engaged in providing 
settlement services. HUD computed an estimate of the proportion of 
salaries that large title insurance companies paid to workers 
engaged in settlement services as follows: (1) The amount of revenue 
required to carry out the insurance function for policies written by 
agents was computed as the difference between agent-generated 
revenue and agent commissions (or agent retention expenses); (2) two 
percentages were then calculated, (a) the percentage of agent-
generated revenue required for the insurance function in agent-
written policies as (1) divided by total agent-generated revenue, 
(b) the percent of all insurance revenue required for the insurance 
function for agent-written policies as (1) divided by total 
insurance revenue; (3) the salaries for employees providing the 
insurance function for agent-written policies was computed by 
multiplying (2)(b) by total salary expenses; (4) the total salaries 
for employees engaged in direct sales of insurance (including other 
settlement services) and providing the insurance function for 
direct-sales policies was computed by subtracting (3) from total 
salary expenses; (5) the salaries of employees providing the 
insurance function for direct-sales policies was computed by 
multiplying (2)(a) by (4); (6) the salaries of employees selling 
title insurance directly (and providing other settlement services) 
was computed by subtracting (5) from (4); finally (7) the percent of 
salaries paid to employees selling title insurance directly (and 
providing other settlement services) was computed by dividing (6) by 
total salary expenses. This analysis was carried out using 2005 data 
from the annual reports of four title insurance companies (First 
America, Land America, Fidelity National, and Stewart). The 
percentage computed in (7) ranged from 67.7 percent to 72.8 percent. 
Based on these results, HUD assumes that 70 percent of DTIC workers 
are engaged in providing direct title insurance sales and other 
settlement services.

                               Table A-13.--Workers Engaged Performing Settlements
----------------------------------------------------------------------------------------------------------------
                                                                                                    Percent of
                            Industry                               Total workers    Workers in      workers in
                                                                                    small firms     small firms
----------------------------------------------------------------------------------------------------------------
Direct Title Insurance Carriers.................................          54,391           6,401          11.77%
Title Abstract and Settlement Offices...........................          93,911          62,005           66.03
Lawyers and Escrow..............................................          93,914          84,523           90.00
                                                                 -----------------------------------------------
    Total.......................................................         242,217         152,929           63.14
----------------------------------------------------------------------------------------------------------------

    The estimated numbers of title and settlement workers would be 
larger under market conditions producing a larger volume of mortgage 
activity. The estimated distribution of settlements when overall 
mortgage volume is 115,500,000 was given earlier. To adjust the 
worker estimates in Table A-13 to reflect the higher mortgage volume 
requires information about the increase in productivity (i.e., loans 
per worker) during the higher volume (or heavy refinance) 
environment. It is not correct to simply adjust the number of 
workers up by the percentage increase in mortgage loans because the 
number of loans per worker increases during refinance booms. The 
earlier analysis of brokers and lenders provided estimates of 
additional workers in a higher volume market. That analysis was 
based heavily on trend data through 2002 for the number of workers 
in the broker industry, as reported by David Olson and his firm, 
Wholesale Access. The number of loans per broker increased between 
low and high volume years. Similar trend data do not exist showing 
the number of title and settlement workers during recent refinance 
booms. Thus, any adjustment would be somewhat speculative. But it is 
also important to emphasize that workers hired during high-volume 
years, for example, are more likely to be temporary or part-time 
workers. Temporary workers will likely rely on permanent workers for 
training or information about new rules and regulations. Thus, the 
numbers in Table A-13 providing estimates of workers in the title 
and settlement industry serve as a reasonable basis for analyzing 
the effects of the new regulation among the various settlement and 
title industries, recognizing that the numbers could vary somewhat 
depending on the volume of mortgages considered in the analysis.
    Estimates of the number of single-family-mortgage-related 
workers in Surveying & Mapping Services, Extermination & Pest 
Control Services, and Credit Bureaus are not included because there 
are insufficient data upon which to base an estimate. Mortgage-
related work accounts for a relatively small portion of the overall 
activity of these industries, and information is not available to 
separate single-family-mortgage-related business from other 
activity. In addition, data on workers for these industries are not 
needed for the analysis of cost savings below. While this 
information is also not needed below for the appraisal industry, it 
is possible to produce reasonable estimates of workers for this 
industry because single-family-mortgage-related work likely accounts 
for most of the activity in this industry. Using the methodology 
described above (adding employees of employer firms, non-employer 
firms, and owners of small firms to arrive at the number of 
workers), the appraisal industry in the projection year would 
include 110,479 workers, and 102,758 of these work

[[Page 14123]]

in small firms.\89\ While some of these appraisers focus on 
multifamily and commercial properties and/or conduct appraisals for 
local governments (e.g., estimating the value of properties for tax 
purposes), most are likely involved in single-family mortgage-
related activities.\90\
---------------------------------------------------------------------------

    \89\ The total number of workers is derived as follows: 45,021 
employees in employer firms (from Table A-11) plus 49,802 non-
employer firms (from Table A-10) plus 15,656 owners of small firms 
(from Table A-10), which yield 110,479 workers. The number of 
workers in small businesses is derived as follows: 37,300 employees 
in small employer firms (from Table A-11) plus 49,802 non-employer 
firms (from Table A-10) plus 15,656 owners of small firms (from 
Table A-10), which yields 102,758 workers in small businesses.
    \90\ One would think that practically all of the owners of the 
49,802 non-employed firms appraised single-family properties, as 
well as most of the 37,300 employees in small employer firms. One 
could argue that the number of workers for the entire industry in 
2004 is a upper bound since mortgage activity in that year was 
higher than in the projection year. Additionally, automated 
valuation models (AVMs) may have reduced the demand for appraisers; 
particularly on refinance loans (see Section V.A of Chapter 5 for a 
discussion of AVMs).
---------------------------------------------------------------------------

Appendix VIII.A. One-Time Costs of the New HUD-1 and Closing Script 
Addendum

Appendix VIII.A.1 Introduction

    The proposed HUD-1 is simpler than the existing HUD-1. 
Nevertheless, there will be change in the form, including the 
introduction of the closing script addendum, and the settlement 
industry will need to learn how the proposed form works. The primary 
focus will be on how to put the numbers in the right place. The 
service charge and the charge or credit for the interest rate chosen 
will be placed outside the columns in the HUD-1 while the adjusted 
origination charge will be in the columns, borrower or seller, or 
listed as POC. This is to avoid double counting that the settlement 
agent would certainly want to avoid in order that would lead to 
erroneous totals. For third-party fees selected by the lender 
located in section 3 of the proposed GFE, the individual entries 
rather than the subtotals will be entered in the columns or as POCs 
and the subtotals will not be reported as such. The same is true of 
the third-party fees selected by the borrower located in section 5 
of the proposed GFE. The individual entries are entered because they 
can wind up in different series of the HUD-1 and subtotals would be 
difficult to reconcile. The rest of the proposed GFE fees go in the 
columns or as POCs. The settlement agent must be aware for each GFE 
item listed on the HUD-1 that totals from the HUD-1 must include 
figures from both the borrower column and the seller column, as well 
as any figure listed as POC.
    The required script will represent a more significant change for 
the industry than the new HUD-1. Although some training may be 
required, it is not likely to be substantial since settlement agents 
are already very familiar with what information to provide at a 
closing. The script simply standardizes the explanation of the loan 
terms and any differences between the settlement charges on the GFE 
and HUD-1. The burden of the script is more likely to be felt on 
software developers.
    The costs can be categorized similarly as for the new GFE: 
Software costs (including training), legal consultation costs, and 
training costs. The total one-time compliance cost to the industry 
is $169 million, of which $110 million is borne by small business.

Appendix VIII.A.2 Software Costs

    Developers of settlement software and settlement agents will be 
subject to software costs. They will face the following two changes: 
A reorganization of the HUD-1 form and the requirement of a closing 
script explaining the crosswalk between the GFE and the final HUD-1. 
The changes to the HUD-1 form would not require much work from 
programmers. The only programming to be done is changing the manner 
in which information is displayed on the HUD-1 form. First, there 
will be fewer fees. Second, references to the corresponding figures 
in the GFE would need to be inserted by the software developers.
    Including the script would require more effort because it is a 
completely new form. The programming itself would not be challenging 
since the script only contrasts data from the HUD-1 and the GFE and 
shows whether the tolerances are met. The more complex calculations 
concerning the loan terms are not required to be done by the 
settlement agent but by the lender. Indeed, it is possible that some 
producers of loan origination software will begin to feature a 
crosswalk application that generates an almost complete script for 
the settlement agents to finish. Settlement agents may prefer to put 
together the script themselves. There would be a strong demand for 
settlement script software given the importance of the script as a 
means to double check the final figures. Software would perform the 
important task of calculating the difference between the figures on 
the initial GFE and the actual settlement costs and then check 
whether they are within the tolerances.
    We will assume that the costs of software updates and software 
training are the same as for the new GFE. Given the number of 
workers and the distribution by firm size, the total cost of new 
software is $62 million, of which $46 million is borne by small 
business. The cost of the changes to software is $14 million (of 
which $11 million is borne by small business) and the opportunity 
cost of the time spent learning the new software is $48 million (of 
which $34 million is borne by small business).

Appendix VIII.A.3. Legal Consultation Costs

    Legal consultation will be less involved for the HUD-1 form and 
the script than for the new GFE. The only issue that is important 
for the settlement industry to understand is that practicing 
discounting as well as volume-based discounting is permitted. 
However, settlement firms may require additional legal consultation 
to be on the safe side. We make the same assumptions as for the GFE: 
All firms purchase a minimum of two hours of legal consultation at a 
cost of $200 an hour and that additional legal service are demanded 
on the basis of the volume of business. We estimate that the total 
legal costs to the settlement industry will be $37 million of which 
$18 million is borne by small business. The cost of legal fees is 
lower for the HUD-1 form than for the GFE because there are less 
firms involved in settlement than in mortgage origination.

Appendix VIII.A.4. Training Costs

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

Appendix VIII.B. Recurring Costs of the New HUD-1 and the Closing 
Script Addendum

    There are no increased recurring costs associated with the 
proposed HUD-1. The proposed HUD-1 will very likely have fewer 
entries than the existing HUD-1 which will require fewer 
explanations of figures than is true with the existing forms. This 
is because of the combined subtotals presented in many sections in 
the proposed GFE in lieu of the frequently numerous broken out 
individual fees that we see on the GFE. The same is true when 
comparing the proposed HUD-1 to the existing HUD-1. Comparing the 
proposed GFE to the Proposed HUD-1 should be simpler than in the 
past because it will be much easier to find entries on the proposed 
HUD-1 that correspond to the proposed GFE because they have the 
exact same description. And, of course, there are fewer entries to 
deal with. It is hard to imagine how simpler forms could be more 
costly to explain to borrowers.
    There will be recurring costs from the HUD-1 addendum. The 
closing script will serve the purpose of a crosswalk between the 
HUD-1 form and page 2 of the GFE. Requiring the script would 
standardize the explanation of the HUD-1 form. One could reasonably 
assume that the script would impose no additional burden on the 
typical conscientious settlement agent. Although there is currently 
no standard procedure for a settlement, most settlement agents are 
conscientious so that reviewing the terms of the loan and settlement 
costs with the borrower is standard practice. In the occasional case 
of the hasty or careless settlement agent today, the borrower is 
likely to ask for an explanation of the correspondence between the 
GFE form (issued at the time of shopping) and the HUD-1 form (issued 
at closing). However, a detailed description of the loan and closing 
costs is not compulsory. Requiring that a script be read will impose 
a cost on those settlement agents who do not automatically explain 
all costs of the loan at closing. Thus, rather than assuming that a 
script would be neutral in its impact on the settlement industry, we 
will account for the possibility of positive compliance costs.

[[Page 14124]]

    A mandatory script could impose a cost on a settlement agent by 
increasing the time required to perform a settlement. A cost will 
arise only when a scripted settlement takes longer than the current 
unscripted one. First, agents would be obliged to complete the 
script, which would consist of collecting the data (approximately 
twenty on the loan terms, depending on the loan and a comparison of 
approximately fifteen settlement charges from both the GFE and HUD-
1), fill in the blanks on the script, determine the tolerances for 
the fees, and check that the figures on the HUD-1 are within the 
tolerances of those from the GFE. An experienced settlement agent 
who is organized might be able to do this work in fifteen minutes. 
Even inexperienced agents would not need to spend much time when 
assisted by software. There may be the occasional loan, which is 
especially difficult because the loan terms are complex and because 
the settlement agent would like to double-check the complicated 
calculations made by the lender. Such loans may require thirty 
minutes to complete the script. We will assume the worst case 
scenario and that preparing a script requires thirty more minutes on 
average than if there were no script. Second, reading the script 
would take five minutes longer on average than if there were no 
formal procedures for explaining the HUD-1 form. For the agent who 
currently reviews the HUD-1 form with the borrower requiring a 
review will not constitute an additional burden. Third, we assume 
that the net effect on time spent discussing borrowers' questions is 
an additional ten minutes for the average loan.\91\ The script may 
induce questions on some issues but it is also expected that a 
methodical explanation will obviate the need for others. For simple 
loans, the net effect is expected to be nil. In the case of more 
complex loans, clarifying the terms of the loan is expected to add 
from five to ten minutes. We use an average of ten minutes across 
all loans.
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    \91\ Although it is not appropriate to count this additional 
time answering questions as a burden for the Paperwork Reduction Act 
because conveying this information is a standard business practice, 
it is counted as a potential cost in the Economic Analysis because 
the additional time that settlement agents may need to spend 
answering questions generated by the script will reduce the time 
that settlement agents could spend doing something else.
---------------------------------------------------------------------------

    In total, the script could lead to an additional forty-five 
minutes spent on the average settlement. The opportunity cost of 
that time to the settlement firm would be $54 ($72 per hour, which 
is derived from a $150,000 fully loaded salary). The total cost of 
the script in a normal year (12.5 million originations) would be 
$676 million and $838 million in a high volume year (15.5 million 
originations).\92\ We assume that 38.1 percent of the closings are 
done by small business (see Table A-12) so that the recurring cost 
on small business would be $258 million in a normal year and $319 
million in a high volume year. It is possible that the time added by 
the script is an overestimate. If the required script led to an 
additional thirty minutes spent on a settlement (twenty minutes 
preparing the script, five minutes reading it, and five minutes 
answering questions), then it would cost the industry $36 per 
closing, totaling $451 million in a normal year and $559 million in 
a high volume year.
---------------------------------------------------------------------------

    \92\ As for the GFE, an alternative method could be used to 
generate an estimate of the opportunity cost of time spent on a 
script. Instead of assuming a $72.12 opportunity cost (from a 
$150,000 fully-loaded salary), one could construct a cost estimate 
from industry-specific data. For example in Tucson, Arizona, the 
cost of labor (compensation and benefits) of a Real Estate Clerk is 
$16.66 per hour and $74.61 per hour for a Real Estate Attorney. If 
the Real Estate Clerk spends an additional twenty-five minutes 
preparing for a settlement due to the script and the Real Estate 
Attorney spends an additional twenty minutes reading and reviewing 
the script; and if we include office rent at 34 cents a minute and 
computer equipment at 7 cents a minute both for forty-five minutes, 
then the burden of the script would be $32.12 per closing or a total 
$401 million in a normal year or $497 million in a high-volume year.
---------------------------------------------------------------------------

    We do not include the additional ten minutes spent by the 
borrower at the settlement as a cost to the borrower because it is 
expected that the script is more likely to reduce the time spent by 
the borrower trying to determine whether the fees of their HUD-1s 
(issued at time of shopping) were in accord with the fees on the GFE 
and the tolerances. In addition, a borrower may be less likely to 
ask to be accompanied by someone to help them translate the 
crosswalk. Indeed, it is possible that the extra time spent by 
settlement agents is more than outweighed by the time saved by 
borrowers.
    The benefits of the script are not estimated separately from the 
benefits of the new GFE ($6.48-$8.38 billion, see Section I.B of 
Chapter 3). It is assumed that the script reinforces the consumer 
savings of the new GFE by compelling settlement agents and borrower 
to check the compliance with the tolerances. The script is a vital 
part of the new GFE. Requiring is expected to increase the number of 
consumers who realize the full benefits of the proposed rule.\93\ 
The benefit of the script is to double-check the final figures.
---------------------------------------------------------------------------

    \93\ Given our estimated compliance cost, the benefits of the 
script ($518-$670 per loan) would outweigh the costs as long as the 
absence of a standardized script would decrease the probability of 
realizing those consumer benefits by a few percentage points (8.1 
for our higher estimate of the benefits and 10.4 for the more 
conservative estimate).
---------------------------------------------------------------------------

Appendix IX References

    America's Community Bankers. 2002. Comments from America's 
Community Bankers regarding ``Proposed Rule on Real Estate 
Settlement Procedures Act (RESPA); Simplifying and Improving the 
Process of Obtaining Mortgages to Reduce Settlement Costs to 
Consumers, Docket No. FR-4727-P-01; 67 FR 49134-49174 (July 29, 
2002),'' October 28, 2002.
    Consumer Mortgage Coalition to United States Senate. Hearing on 
the Impact of the Proposed Real Estate Settlement Procedures Act 
Rule on Small Business and Consumers. Committee on Banking. (18 
April 2003).
    Jackson, Howell E., and Jeremy Berry. 2002. ``Kickbacks or 
Compensation: The Case of Yield Spread Premiums.'' Unpublished 
Paper, pp. 1-52.
    Mortgage Bankers Association of America. 2003. ``RESPA Interest 
Rate Working Group Report.'' Comments regarding ``Proposed Rule on 
Real Estate Settlement Procedures Act (RESPA); Simplifying and 
Improving the Process of Obtaining Mortgages to Reduce Settlement 
Costs to Consumers, Docket No. FR-4727-P-01; 67 FR 49134-49174 (July 
29, 2002),'' October 28, 2002.
    Sadow, Eric S. 2002. Comments from the Associate General 
Counsel, Bank of America Corporation regarding ``Proposed Rule on 
Real Estate Settlement Procedures Act (RESPA); Simplifying and 
Improving the Process of Obtaining Mortgages to Reduce Settlement 
Costs to Consumers, Docket No. FR-4727-P-01; 67 FR 49134-49174 (July 
29, 2002),'' October 25, 2002.
    Urban Institute. Descriptive Analysis of FHA Loan Closing Costs, 
Prepared for Department of Housing and Urban Development for 
internal use only by Signe-Mary McKernan, Doug Wissoker, and William 
Margrabe. May 9, 2007a.
    Urban Institute. A Study of Closing Costs for FHA Mortgages, 
Prepared for Department of Housing and Urban Development Office of 
Policy Development and Research by Susan Woodward. November 29, 
2007b.

[FR Doc. 08-1015 Filed 3-13-08; 8:45 am]
BILLING CODE 4210-67-P