HUD's response to my question

Well, I got a response from HUD, but it wasn't the most helpful thing in the world. It looks like they haven't thought about, and don't intend to think about, the way their new rules interact with the existing rules of other federal agencies like the VA. This is unfortunate since these interactions are critical to the way things actually work in the real wold. Of course, the problem may be that the people making the rules don't actually work in the "real world" of mortgage finance.

Here is the exact quote in answer to my questions from my last post:

"It is recommended that you discuss the VA guidelines with their office, HUD cannot interpret regulations promulgated by another federal agency."

It's very frustrating when you have two federal agencies making rules that are in direct conflict with one another and that somehow both have to be applied in the same transaction. I wonder if I should take this question to VA... or will they just respond that they don't interpret HUD's regulations?

VA Loans under the New RESPA

If you've heard anything about the new RESPA rules going into effect in January 1, 2010, you've undoubtedly heard that there are issues. One issue that jumps out at me is the handling of the VA non-allowable closing costs. I was all over HUD's RESPA site and VA's website and could find no answers, so I wrote an e-mail to HUD's RESPA questions address. Since I know I'm not the only one with this question I'll be sure to post any reply I get as well. Here's what I wrote to HUD:

I'm wondering how to handle "non-allowable" borrower fees like the ones in a VA loan. Certain fees, such as underwriting, processing, and the buyers part of the escrow fee for example, are "non-allowable" borrower fees in a VA loan. Traditionally these are paid by the seller in a purchase and paid with rebate pricing by the lender in a refinance.

First, on a purchase do we still disclose those fees even though the borrower cannot by law pay them? The FAQs say we should include the owners title policy in the GFE even though the seller traditionally pays that, so is it the same with the non-allowable fees? Is there a way to show seller paid closing costs on the new GFE at all?

Second, on a refinance those non-allowable fees are typically paid by the broker/lender using SRP or rebate pricing because there is no seller to pay them and the borrower is not allowed to pay them. Since any rebate must now go directly to the borrower that option is no longer available. Consider the fact that VA limits the origination fee to 1% of the loan amount and the fact that VA non-allowable fees are usually between $1,000 and $1,300. If the loan amount is anywhere near $130,000 the originator would be doing the loan for nothing, which is obviously not going to happen. If I'm reading the new rules correctly, VA refinances will be a thing of the past as of January 1st.

Since I'm sure your intent was not to deprive veterans of the opportunity to refinance or purchase a home, I'm assuming there is some exception or workaround that I'm not aware of. For VA loans the new GFE is unclear and leaves the originator in a position where they may end up covering those non-allowable fees, which is not a risk I think any of us are willing to take.

Thank you in advance for your response.

RESPA Reform effective January 1, 2010

Here are highlights of the new RESPA rules:

Standardized Good Faith Estimate form that all lenders must use. You can view the new three page GFE at http://www.hud.gov/content/releases/goodfaithestimate.pdf. It will be worthwhile for you to familiarize yourself with this form since it is what all everyone will be using.

This new form groups fees into subtotals rather than itemizing each one. The idea is that buyers can compare the total of the fees rather than adding up the various individual fees and trying to determine which ones vary from lender to lender.

New HUD-1 Settlement Statement corresponds to the GFE allowing buyers to easily compare the quoted fees to the actual fees at closing.

Certain fees, including all lender fees, can not change (0% tolerance) once they are quoted unless there is a change in circumstances (loan amount, down payment, etc.) or a change requested by the borrower (loan term, etc.). Even in these cases, only the charges directly affected by the new circumstance can change.

Even third party fees that are required by the lender, like title and escrow, must be accurately disclosed to within a 10% tolerance. Ideally these tolerances will finally put an end to the “bait and switch” tactics employed by some lenders.

The new GFE also makes the loan terms very clear right on the first page. It includes “yes or no” checkboxes for things like variable rates or payments, negative amortization, balloon payments, and prepayment penalties.

We've been creating regulations like this for almost as long as lending has been around, and so far they still haven't come up with a way to keep dishonest lenders from cheating unsuspecting borrowers. I don't have much confidence that they've finally figured it out now either. These new rules certainly aren't perfect and certainly won't prevent all predatory and dishonest lending practices, but they are the reality we have to deal with for now.

For more information you can go to the 51 page FAQ section of HUD’s website at http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf