14030 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 

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. 

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 lowand 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 


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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. 

2The 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). 

3The 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). 

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

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)). 

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, 


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‘‘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 indepth 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 


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4See Section III of this preamble. 

5Title Insurance: Actions Needed to Improve 

Oversight of the Title Industry and Better Protect 

Consumers, Government Accountability Office, 

April 2007, GAO–07–401. 

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

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 


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14034 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 

6 24 CFR 3500.7(a). 

7HUD’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 

do not include misleading or deceptive 

representations; and (3) to require 

earlier mortgage disclosures for nonpurchase 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 higherpriced 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. 

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 


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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. 

8Unforeseeable 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. 

9HUD anticipates that in most cases a mortgage 

application will be the Uniform Residential Loan 

Application, Freddie Mac Form 65, or Fannie Mae 

Form 1003. 

10 24 CFR 3500.2. 

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. 

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). 

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

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. 

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 


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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 


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11The ‘‘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. 

12 24 CFR 3500.7(d). 

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. 

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. 

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 lenderrequired 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 


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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. 

14 64 FR 10080 (March 1, 1999), 66 FR 53052 

(October 18, 2001). 

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. 

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. 

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 


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Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 14039 

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. 

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 lenderselected, 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. 

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 


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14040 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 

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 § 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 


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Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 14041 

16Real 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. 

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. 

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’’


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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. 

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

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 upfront 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-tounderstand 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 


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22 66 FR 53056. 

23 66 FR 53053. 

24As 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.’’

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

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 loweducation and low-income groups. The 

testing of the GFE form was conducted 

in two phases. 

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 


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14044 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 

25The cities were Wilmington (Delaware), Tulsa, 

Minneapolis, and Los Angeles. 

26These results are consistent with the work of 

Jackson and Berry (2001) and Woodward (2003a). 

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 standalone 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. 

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. 

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 


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Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 14045 

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. 

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. 

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 bottomline. 

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. 


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28Participants 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. 

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. 

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, 


sroberts on PROD1PC70 with PROPOSALS
Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 14047 

29As 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. 

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 $ll for this interest rate 

of l%. This credit reduces your upfront 

charges.’’ The third check box indicates 

any ‘‘charge of $ll for the interest rate 

of l%. 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. 

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 


sroberts on PROD1PC70 with PROPOSALS
14048 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 

30Under 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).) 

31See Statement of Policy 1999–1, 64 FR 10080, 

March 1, 1999, and Statement of Policy 2001–1, 66 

FR 53052, October 18, 2001. 

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 upfront 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 upfront 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 

§ 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. 

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. 

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 


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Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 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 #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 #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 #8)’’; 

Line 902 lists ‘‘Mortgage insurance 

premium (from GFE #3 or #5);’’ and 

Line 903 lists ‘‘Homeowner’s insurance 

(from GFE #9).’’

For Section 1000, ‘‘Reserves 

Deposited with Lender,’’ the proposed 

HUD–1/1A inserts Line 1001 ‘‘Reserves 

or escrow (from GFE #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 

#4)’’ and then renumbers the current 

lines. Line 1110 lists ‘‘Optional owner’s 

title insurance (from GFE #10).’’

For Section 1200 ‘‘Government 

Recording and Transfer Charges,’’ the 

proposed HUD–1/1A inserts Line 1201, 

‘‘Government Recording and Transfer 

Charges (from GFE #6)’’ and renumbers 


sroberts on PROD1PC70 with PROPOSALS
14050 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 

current lines. For Section 1300 

‘‘Additional Settlement Charges,’’ Line 

1301 includes ‘‘Survey (from GFE 

#5)’’and Line 1302 ‘‘Pest inspection 

(from GFE #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 nontraditional 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 volumebased 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 


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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 pertransaction 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 consumerfriendly 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 


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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 § 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 § 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 


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32Section 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 * * *.’’

33Section 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.’’

continue to apply in two sections of the 

regulations: The affiliated business 

exemption in § 3500.15, and the 

prohibition on the seller requiring the 

buyer to purchase title insurance from a 

particular company in § 3500.16. 

However, as part of the proposed 

amendment of § 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 § 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 § 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 

§§ 3500.7(e), 3500.14(f), 3500.15(b)(2), 

and 3500.16 of HUD’s implementing 

regulations. 

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: 

• 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. 

• 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. 

• 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 § 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 § 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 


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rule would clarify this by eliminating 

provisions from § 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

Information collection Number of 

respondents 

Frequency of 

response 

Responses 

per annum 

Burden hour 

per response 

Annual burden 

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 


sroberts on PROD1PC70 with PROPOSALS
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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 § 203.27, paragraph (a)(2) is 

revised to read as follows: 

§ 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. 

* * * * * 


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14056 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 

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 § 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: 

§ 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 

§ 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. 


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§ 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 § 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: 

§ 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 ratedependent 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; 


sroberts on PROD1PC70 with PROPOSALS
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(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 § 3500.8, paragraphs (b) and (c) 

are revised; and new paragraphs (d) and 

(e) are added to read as follows: 

§ 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 § 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 

§ 3500.10(a). The closing script 

addendum must be delivered to the 

borrower with the HUD–1/1A at the 

closing in accordance with § 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. 

§ 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 § 3500.14, the text after the 

heading in paragraph (d) is redesignated 


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as paragraph (d)(1), and new paragraph 

(d)(2) is added, to read as follows: 

§ 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: 

§ 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 

§ 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: 

§ 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 § 3500.22 is added to read 

as follows: 

§ 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 § 3500.23 is added to read 

as follows: 

§ 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; 


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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 § 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 


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34Note the HUD–1A and its instructions will be 

conformed to changes to the HUD–1 and HUD–1 

instructions at the final rule stage. 

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 * * * 

* * * * * 

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 § 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 


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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 

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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, 


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35The term ‘‘Economic Analysis’’ will often be 

used to refer to both the Regulatory Flexibility 

Analysis as well as the Regulatory Impact Analysis. 

‘‘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 


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36One 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. 

37See Section IV.D of Chapter 2 for a discussion 

of these studies. 

38The 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 

represents the substantial savings that can be 

achieved with the proposed rule. 

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 thirdparty 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 pricereduction 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: 

• There are many barriers to effective 

shopping for mortgages in today’s market. 

The process can be complex and can involve 

rather complicated financial trade-offs, 

which are often not fully and clearly 

explained to borrowers. 

• Consumers often pay non-competitive 

fees for originating mortgages. Most observers 

believe that the market breakdown occurs in 

the relationship between the consumer and 

the loan originator—the ability of the loan 

originator to price discriminate among 

different types of consumers leads to some 

consumers paying more than other 

consumers.36

• 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

• Borrowers can be confused about the 

trade-off between interest rates and closing 

costs. It may be difficult for borrowers (even 

sophisticated ones but surely unsophisticated 

ones) to understand the financial trade-offs 

associated with discount points, yield spread 

premiums, and upfront settlement costs. 

While many originators explain this to their 

borrowers, giving them an array of choices to 

meet their needs, some originators may only 

show borrowers a limited number of options. 

• There is also evidence that 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 thirdparty 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 


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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. 

39See the proposed GFE in Exhibit 3–B of 

Chapter 3. 

40Throughout 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. 

43Readers 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. 

44This 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. 

45See Step (7) of Section VII.E.1 of Chapter 3 of 

the RIA for the derivation of the $24.738 billion. 

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. 

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. 

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. 

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. 

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 


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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 thirdparty savings, which total $2.5 billion if per 

loan savings are $200 and $1.88 billion if per 

loan savings are $150. 

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. 

• 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. 

• 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. 

• A GFE with a summary page will make 

it simpler for borrowers to shop. The higher 

reward for shopping, along with the 

increased ease with which borrowers can 

compare loans, should lead to more effective 

shopping, more competition, and lower 

prices for borrowers. 

• The 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. 

• 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. 

• 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. 

• 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. 

• 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 thirdparty 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 


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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 

incurred during the first year 

(in millions) 

Recurring compliance costs 

(in millions annually) 

$ 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: 

• 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 lenderrequired, 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. 

• 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. 

• 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. 

• 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. 

• 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). 

• 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 costreducing features that would supposedly be 

offered by packing. Finally, this is all 


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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. 

48Practically 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. 

49As 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. 

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

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 noncompetitive 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-a`-vis lenders. 

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. 

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 tradeoff 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 


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50While 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. 

51Section 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. 

52Section IV of Chapter 5 describes the 

component industries and estimates the share of 

overall industry revenue going to small businesses. 

53The 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. 

54For 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. 

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. 

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 noncompetitive 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 thirdparty 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. 

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. 

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

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. 


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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] 

Series 5th percentile 25th percentile 50th percentile 

(median) 75th percentile 95th 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) loan fee ............................ 250 1,249 2,041 3,016 4,658 

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 


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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] 

Series 5th percentile 25th percentile 50th percentile 

(median) 75th percentile 95th 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) loan fee ............................ 0.3 1.3 2.0 2.7 3.8 

Direct loan fees .................................................................... 0.0 0.8 1.3 1.8 3.3 

Total Title Charges .............................................................. 0.6 0.9 1.2 1.6 2.3 

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 faceto-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 AfricanAmericans (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 yieldspread 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 upfront 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 


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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 nonemployer 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 


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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). 

56See 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 

Continued 

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 phaseout 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: 

• 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 thirdparty 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. 

• 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. 

• 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. 

• Clarifying that only the ‘‘mortgage 

application’’ would be subject to Regulations 

B (ECOA) and C (HMDA), which is the 

current situation today. 

• 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). 

• 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. 

• 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. 

• 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. 

• Clarifying the ability to make cost 

adjustments as a result of information gained 

during the full underwriting process; and 

• 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—onetime 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. 

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


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the ones that report some mortgage origination 

activity. 

57See 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. 

58A 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. 

59As 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. 

Altogether, there are 13,937 lenders 

(including credit unions) affected by the 

RESPA rule, and 9,241 of these qualify as a 

small business. 

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

(See below for alternative origination 

volume and broker share estimates.) 

TABLE A–4.—VOLUME OF RETAIL MORTGAGE ORIGINATIONS

Industry All originations Percent of 

originations 

Originations by 

small firms 

Percent industry 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. 

TABLE A–5.—WORKERS ENGAGED IN RETAIL MORTGAGE LOAN ORIGINATION

Industry Total workers Workers in 

small firms 

Percent of 

workers in 

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. 

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 


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60This 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). 

61Examples 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. 

63Correctly 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. 

64Byte 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. 

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 thirdparty 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. 

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 onetime 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). 

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

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 


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65To 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. 

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. 

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. 

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 threequarters 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 

Industry 

Total software 

upgrade and 

training cost 

Small business cost Percentage 

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. 


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67Sensitivity 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–7.—ONE-TIME LEGAL CONSULTATION COSTS OF THE NEW GFE 

Industry 

Total legal 

consultation 

cost 

Small business cost 

Percentage 

cost to small 

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

TABLE A–8.—ONE-TIME WORKER TRAINING COSTS OF THE NEW GFE 

Industry Total training 

cost 

Small business 

cost 

Percentage 

small business 

cost 

Mortgage Brokers .................................................................................................................. $134,522,236 $119,387,019 88.7 

Commercial banks ................................................................................................................. 22,653,771 8,060,292 35.6 

Thrifts ..................................................................................................................................... 9,981,440 2,482,613 24.9 

Mortgage Banks ..................................................................................................................... 21,285,461 13,330,070 62.6 

Credit Unions ......................................................................................................................... 5,148,741 2,533,751 49.2 

Total ................................................................................................................................ 193,591,648 145,793,746 75.3 

As explained earlier, the costs of training 

are probably best estimated using the more 

normal mortgage environment, since many of 

the additional employees during a refinance 

wave are temporary employees who may 

either do only general office work that does 

not require any GFE-specific training or who 

may be trained on-the-job by existing 

permanent employees. Still, the higher 

figures are reported for those who believe 

they are the relevant figures. 

The data and table presented above depict 

what is likely to be an upper bound for 

training costs. There are other, less costly 

ways in which the knowledge necessary to 

comply with the provisions of the final 

RESPA rule can be imparted to workers. 

Small firms, in particular, are likely to take 

advantage of information on complying with 

the final rule provided by trade associations 

and their business partners (such as 

wholesale lenders), and these firms may find 

the time and expense of formal training 

unnecessary. To the extent that this is the 

case, the estimates reported above will over 

state the impact on small businesses. 

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) 


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68The 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. 

69Several 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. 

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: 

• 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. 

• 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. 

• 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. 

• 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. 

• 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

(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 


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70This calculation assumes a $150,000 fullyloaded 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. 

71We 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. 

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 redisclosure 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.70 71 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. 


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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 matchup 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-bycharge 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 


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72See Chapter 3 for a more detailed treatment of 

changes listed in this section. 

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 72

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 


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73Upfront 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. 

74Other originators may rely on vendor 

management companies (or vendor management 

departments within their own company) for pricing 

information about third-party services. 

75These 10 minutes would be beyond what the 

originator spends today to seek out good choices for 

his borrowers. 

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 thirdparty services has been changed in the 

proposed rule. An overall tolerance of ten 

percent now applies to the sum of (a) thirdparty 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. 

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. 

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 


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76Calculated 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. 

77Calculated 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. 

78Calculated 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). 

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. 

TABLE A–9.—INCREMENTAL COSTS OF THIRD-PARTY PRICING ARRANGEMENTS FOR THE NEW GFE 

Industry 

Total thirdparty pricing 

arrangement 

cost 

Small 

business 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. 

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’ followup 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. 

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 noncompetitive and abusive loans should lead to 

a reduction in this activity. If the decline in 


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79As 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. 

80The ‘‘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. 

81For 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. 

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

TABLE A–10.—FIRMS IN INDUSTRIES PROVIDING SETTLEMENT SERVICES

Industry Total firms Small 

employer firms 

Nonemployer 

firms 

Percent small 

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 nonemployer 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). 

TABLE A–11.—EMPLOYEES IN INDUSTRIES PROVIDING SETTLEMENT SERVICES

Industry 

Total 

employees in 

employer 

firms 

Employees in 

small 

employer firms 

Percent 

employed by 

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 


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82The 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. 

83See 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. 

84As explained in Chapter 5, there is also some 

uncertainty about the distribution of mortgagerelated 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 titlerelated industry, particularly as it affects the overall 

small business percentage for title- and settlementrelated work. 

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). 

86The 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. 

TABLE A–11.—EMPLOYEES IN INDUSTRIES PROVIDING SETTLEMENT SERVICES—Continued 

Industry 

Total 

employees in 

employer 

firms 

Employees in 

small 

employer firms 

Percent 

employed by 

small firms 

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). 

TABLE A–12.—VOLUME OF SETTLEMENT SERVICE ACTIVITY

Industry All settlements Percent of 

settlements 

Settlements by 

small firms 

Percent 

industry 

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

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 


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87There 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. 

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 directsales 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. 

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

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

TABLE A–13.—WORKERS ENGAGED PERFORMING SETTLEMENTS

Industry Total workers Workers in 

small firms 

Percent of 

workers in 

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 highvolume 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-familymortgage-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. Mortgagerelated 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 singlefamily-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 


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Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 14123 

89The 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 nonemployer firms (from Table A–10) plus 15,656 

owners of small firms (from Table A–10), which 

yields 102,758 workers in small businesses. 

90One 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). 

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 singlefamily mortgage-related activities.90

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 volumebased 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. 


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14124 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 

91Although 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. 

92As 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 fullyloaded 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 twentyfive 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. 

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). 

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. 

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. 

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. 

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 SigneMary 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 


sroberts on PROD1PC70 with PROPOSALS