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Figuring out new RESPA Rules: Lenders Report Delays, Confusion

Many lenders haven’t yet fully implemented technology to comply with new rules that took effect this year under the Real Estate Settlement Procedures Act (RESPA), and most are taking longer to provide disclosures when borrowers submit loan applications, according to a survey by Equifax.

The Equifax survey of 105 lenders who use its employment and income verification service found 79 percent are taking longer to take an application and provide disclosures to borrowers since the RESPA rule change went into effect Jan. 1. About 72 percent of lenders said borrowers were confused about the multiple disclosure documents they receive.

Only 56 percent of respondents have completely implemented the technology necessary to comply with the new regulations, Equifax said in a press release.

Lenders and settlement service providers are now required to use a new standardized good faith estimate (GFE) and HUD-1 settlement statement form that are intended to help consumers comparison shop and restrict changes to quoted fees and settlement services.

The Equifax survey found lenders are incurring costs when fees quoted on the GFE increase by more than the allowed tolerances. Errors on disclosure forms are postponing closings because of the mandatory three-day waiting period if fees must be redisclosed, the survey found.

Most lenders (74 percent) said that they were not experiencing a backlog of applications, but mostly because loan applications have dropped with a slowdown in the refinancing boom.

The new RESPA rules were issued in November 2008, but during a transition period in effect during 2009, use of the new GFE, HUD-1 was optional, as were most provisions of the new rules.

But real estate industry groups complained that it was unclear how the rule changes would be applied in practice, citing a steady stream of revisions regulators have made to a RESPA “FAQ” — answers to “frequently asked questions” — first posted in August.

Lenders were given 14 months to prepare for the rule changes that went into effect on Jan. 1, the Department of Housing and Urban Development (HUD) said in rejecting calls for an extended transition period (see story).

But HUD promised to “exercise restraint” in enforcing the new regulations for the first four months of 2010, as long as lenders can show they are making a “good faith effort” to comply.

The latest update of HUD’s RESPA FAQ addresses issues that include loan preapprovals and internal worksheets that lenders have been providing to borrowers before issuing or in conjunction with a GFE. The April 2 update brought the FAQ document to 62 pages.

“To HUD’s credit, these updated FAQs suggest that the department is considering many of the practical problems that have resulted from the forms and takes to heart the issues raised by settlement service providers,” said K & L Gates LLP attorneys Phillip Schulman and Holly Spencer Bunting in an alert to clients.

“However, that means that HUD has changed its interpretation of certain requirements and issued new FAQs, which are sure to raise additional questions.”

Although preapprovals and worksheets are not governed by RESPA, the K & L Gates attorneys said, HUD is instructing lenders on both issues. If consumers have already chosen a specific property, lenders must issue a GFE, HUD officials said in the updated FAQ.

“A preapproval is never to be used as a substitute for a GFE,” the FAQ said. “If an applicant has chosen a property to purchase and the loan originator is willing to qualify the applicant for a specific loan amount, then a loan originator should issue the applicant a GFE that facilitates shopping for a loan, not just a preapproval used to shop for a property.”

Because HUD’s standardized GFE form does not include some information that consumers may find useful — including the cash needed to close, and credits from the seller or other parties — some lenders have developed internal worksheets to provide those details to borrowers.

That’s an acceptable practice, HUD ruled in the FAQ update, but a worksheet cannot be used in lieu of the GFE, and “should not look like a GFE and should not lead the customer to believe that it is a GFE.”

If lenders have received an application from a potential borrower — or information sufficient to complete an application — they must issue a GFE, HUD said.

HUD’s updated RESPA FAQ still addresses only in passing a potentially contentious issue for real estate brokerages — the reporting of percentage-based and flat-fee commissions on the HUD-1.

Real estate brokerages that collect flat fees — sometimes labeled “administrative brokerage commissions” (ABC fees — or “junk fees” by critics) — may face legal claims by consumers under RESPA if they are not reported correctly.

Because the new RESPA rule was not explicit in stating that real estate brokerages are permitted to charge flat fees along with percentage-based commissions, Jay Varon, an attorney who represents real estate brokerages, sought clarification from HUD last year on the proper way to disclose such fees.

HUD’s top lawyer issued a letter in January detailing the proper procedures, but warned that her advice did not “constitute a rule, regulation, or interpretation” of law, and that “no person may rely on it to provide protection from liability under RESPA.