Most Common RESPA Errors
by Marissa Aquila, Esq., Staff Attorney
January 1, 2010 came and went, and the industry, for the most part, successfully implemented new policies and procedures in order to comply with the revised Real Estate Settlement and Procedures Act (RESPA). As would be expected amidst such significant changes, there has been a temporary uptick in RESPA compliance-related errors. Although some unanticipated questions and conflicts have arisen for which we, in the compliance arena, can only await clarification from HUD, there are some errors being made quite frequently which can be corrected.
The purpose of this article is to highlight the most common errors and to provide explanations to help Brokers and Lenders avoid these pitfalls when issuing Good Faith Estimates and completing HUD Settlement Statements.
Misunderstanding of tolerance rules
Error: Lender interprets the phrase “no tolerance” incorrectly.
Explanation: There are several settlement charges that are not subject to any tolerance requirements. Often described as “no tolerance” items, Lenders have confused these charges with those subject to a “zero tolerance” requirement. Items that are not subject to tolerance requirements are: per diem interest, hazard insurance and initial escrow deposit.
Error: Lender interprets the phrase “zero tolerance” incorrectly.
Explanation: Block 1, 2 and 8 of the GFE contain items that are subject to zero tolerance. Items on the HUD-1 Settlement Statement that are subject to zero tolerances must be exactly the same, or less than the amount disclosed on the GFE.
The YSP and lender credits
Error: Lender does not properly reflect the YSP as the lender credit on the GFE.
Explanation: The proper way to disclose the YSP/Lender credit is to include the entire amount of the YSP in Block 1 of the GFE (total origination charge for the loan) and then issue the Borrower a credit for the interest rate chosen in Block 2 of the GFE resulting in an Adjusted Origination Charge (Block A) which reflects the lender credit.
Seller-paid settlement charges
Error: Seller-paid settlement charges which were disclosed on the GFE are incorrectly itemized on the HUD-1.
Explanation: If certain settlement charges disclosed on the GFE will be paid by the seller at closing, those charges must be shown in the Borrower’s column on page 2 of the HUD-1. In addition, the dollar credit from the Seller is itemized on the HUD-1 on Lines 204-209 and again on Lines 506-509.
Completing the HUD-1 Comparison Chart
Error: The figures included in the HUD-1 Comparison Chart do not match the figures listed on the GFE or the prior page of the settlement statement.
Explanation: The purpose of the comparison chart is to demonstrate to the borrower that the actual settlement charges increased, decreased or remained the same as the amounts listed on the GFE. Therefore, the chart should contain the exact amounts as listed on the GFE and the prior pages of the settlement statement.
GFE Re-disclosure without a documented change in circumstance
Error: Lender issues a new GFE because certain settlement charges have been reduced.
Explanation: Lenders are not permitted to issue a new GFE because the amount of a settlement charge has been reduced. The charges to a borrower listed on the HUD-1 Settlement Statement may always be less than the amount disclosed on the GFE.
Error: Lender accepts a brokered loan, disregards the GFE issued by the broker and issues a new GFE.
Explanation: Lenders are bound by the terms of the GFE issued by the Broker. Revised GFEs must be supported by a changed circumstance thereby permitting the lender to re-disclose.
Permissible changes on the re-disclosed GFE
Error: Lender issues a revised GFE due to a documented change in circumstance, such as locking in the rate. However, the lender makes other changes or adds charges which are unrelated to the rate-lock.
Explanation: When a new GFE is issued following a documented change in circumstance, revised charges must be directly attributable to the changed circumstance.
All individuals involved in the process of issuing GFEs and completing settlement statements should actively review HUD’s compilation of Frequently Asked Questions, which is revised intermittently and is available at http://www.hud.gov/offices/hsg/ramh/res/respa_hm.cfm..
Have a comment? E-mail marissa@bankersadvisory.com.
DISCLAIMER: The information presented in this article is not meant to be, nor should it be, construed as advice of legal counsel. Readers are strongly encouraged to consult with independent legal counsel in appropriate jurisdiction.
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