Real Estate Settlement Procedures Act (RESPA): Proposed Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs, 14030-14124 [08-1015]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 73, Number 51 (Friday, March 14, 2008)]
[Proposed Rules]
[Pages 14030-14124]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 08-1015]



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Part III





Department of Housing and Urban Development





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24 CFR Parts 203 and 3500



 Real Estate Settlement Procedures Act (RESPA): Proposed Rule To 
Simplify and Improve the Process of Obtaining Mortgages and Reduce 
Consumer Settlement Costs; Proposed Rule

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

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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.

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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 low- and 
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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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\
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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.
    \2\ The 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).
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    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)).
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    \3\ The 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).
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    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 in-depth 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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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\
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    \4\ See Section III of this preamble.
    \5\ Title Insurance: Actions Needed to Improve Oversight of the 
Title Industry and Better Protect Consumers, Government 
Accountability Office, April 2007, GAO-07-401.
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    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

[[Page 14034]]

do not include misleading or deceptive representations; and (3) to 
require earlier mortgage disclosures for non-purchase 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 
higher-priced 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.
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    \6\ 24 CFR 3500.7(a).
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    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

[[Page 14035]]

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.
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    \7\ HUD'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 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.
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    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).
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    \8\ Unforeseeable 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \9\ HUD anticipates that in most cases a mortgage application 
will be the Uniform Residential Loan Application, Freddie Mac Form 
65, or Fannie Mae Form 1003.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \10\ 24 CFR 3500.2.
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    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

[[Page 14036]]

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

[[Page 14037]]

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.
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    \11\ The ``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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \12\ 24 CFR 3500.7(d).
---------------------------------------------------------------------------

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 lender-required 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

[[Page 14038]]

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.
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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.
---------------------------------------------------------------------------

    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