Phyllis Lauren Shuster is a Senior Counsel in our West Palm Beach office.
In November 2008, the U.S. Department of Housing and Urban Development (HUD) issued a Final Rule amending Regulation X (the Final Rule) relating to the Real Estate Settlement Procedures Act of 1974 (RESPA). It is important to examine how the requirements for the use of a new mandatory Good Faith Estimate (GFE) and modified HUD-1 Settlement Statement (HUD-1) will affect developers in their financing of timeshare or other branded residential unit sales covered under RESPA, as the January 1, 2010 implementation date approaches.
Background
The Final Rule follows HUD's proposed rule issued in March 2008 – which focused on the disclosure of loan terms and costs, and on assisting borrowers in shopping around for mortgages – and HUD's earlier attempts at RESPA reform dating back to 2002.
HUD has at various times identified its goals for RESPA reform as simplicity, clarity, transparency and greater certainty of costs for consumers, but at 341 pages, the Final Rule is complex.
The Final Rule requires "more timely and effective disclosures related to mortgage settlement costs for federally related mortgage loans to consumers." Some of HUD's reforms related to the new GFE and HUD-1 are designed to do the following: (1) improve and standardize the GFE to make it easier to use for shopping among settlement service providers; (2) ensure that page 1 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 identify a particular loan product and comparison shop among loan originators; (3) provide more accurate estimates of costs of settlement services shown on the GFE; (4) facilitate comparison of the GFE and the HUD-1/HUD-1A Settlement Statement; and (5) ensure at settlement that borrowers are aware of final costs as they relate to their particular mortgage loan and settlement transaction.
Role Of Congress
In issuing the Final Rule, HUD ignored requests by more than 50 percent of the members of the House of Representatives to block its issuance and rejected pleas by others to work with the Federal Reserve Board to coordinate consumer disclosure efforts. In recent months, Congress has again considered blocking implementation of the new GFE and HUD-1. In addition, it has been considering legislation to establish the Consumer Financial Protection Agency (CFPA), which apparently would provide for the new agency's oversight over RESPA, including the content and delivery of the GFE and HUD-1. There also has been discussion of a single integrated consumer disclosure under both RESPA and the Truth In Lending Act.
It is too early to determine what effect, if any, this proposed legislation and the creation of CFPA would have on implementation of the new GFE and HUD-1 required by HUD. As of this date, HUD is moving forward with its implementation of the new forms. Also, on August 13, 2009, in response to public questions, HUD issued the "New RESPA Rule FAQs" to "facilitate implementation of these new requirements."
January 1, 2010: An Important Date For Developers
Of particular importance to timeshare developers, and other developers within the hospitality industry who finance their RESPA covered residential unit sales, are the following timeframes for implementation:
- Effective January 1, 2010, a new three-page standardized GFE must be used in all RESPA transactions.
- Also effective January 1, 2010, a new-three page HUD-1 must be used in RESPA transactions (except for refinancing transactions, which may use a new HUD-1A).
New Mandatory GFE Format
According to HUD's press release regarding the new GFE, it "will consolidate closing costs into major categories to prevent junk fees and display total settlement costs prominently on the first page so the consumer can easily compare loan offers. HUD will specify the closing costs that can and cannot change at settlement. If a fee changes, HUD will limit the amount it can change." The provisions of the Final Rule include the types of charges that are permitted to change, those charges in total that cannot increase more than 10 percent, and those charges that cannot change.
Under the current applicable provisions of Regulation X, loan originators are required to deliver a GFE to borrowers in RESPA related transactions, but the specific language to be used in the GFE is not mandated. However, the new standardized GFE to be used as of January 1, 2010 is three pages long and must contain the language exactly as specified by HUD. As a result, developers providing financing for their timeshare sales cannot add language to the standardized form to increase clarity or delete language inapplicable to their particular financing. This will be a significant change from the current forms used by the industry.
New HUD-1
The most significant changes to the HUD-1 reflect HUD's desire to have consumers "crosswalk" from the GFE to the HUD-1 to compare the settlement charges stated in the GFE with those appearing at settlement in the HUD-1. To do so, the Final Rule modifies page 2 of the HUD-1 so that each designated line in Section L includes a reference to the relevant line from the GFE. In addition, the terminology on the HUD-1 has been modified to conform to the terminology of the GFE. By noting the appropriate block from the GFE on each designated line of the HUD-1, HUD's intent is that borrowers will be able to easily compare the charges listed on the HUD-1 with the charges listed on the GFE.
The new HUD-1 includes a third page that allows consumers to compare their final loan terms and closing costs with those listed on the GFE. The new forms are consistent with HUD's desire to help consumers shop around for the best available mortgage loan and improve disclosure of the key terms and costs of the selected loan.
Careful Review Recommended
The line-by-line provisions in the new GFE and HUD-1 should be carefully reviewed by all timeshare and other developers providing financing for their residential sales covered by RESPA. System changes will be necessary to accommodate the delivery of the new GFE and HUD-1 to consumers commencing on January 1, 2010. Affected members of the hospitality industry should provide training to their staffs regarding the completion of these new forms to ensure timely compliance with federal law.
Careful monitoring of the actions of Congress, HUD and the proposed CFPA is recommended. The hospitality industry may be in a slowdown; government regulators are not.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
