Day 3

RESPA – Real Estate Settlement Procedures Act (Regulation X)

• Regulatory Authority
– Enacted 1974; regulation X.
– Regulatory agency HUD; administered/enforced by CFPB.

• Core Purposes
– Educate borrowers on settlement costs.
– Enable comparison-shopping for services.
– Curb excessive/unearned fees.
– Cap amounts lenders may collect for escrow accounts.

RESPA Disclosures (Chronological Order)

• Good Faith Estimate (GFE)
– Due within 3 business days of application.
– Still used for reverse mortgages, HELOCs, & lenders making \le5 closed-end loans/yr.

• HUD-1 Uniform Settlement Statement
– Due at closing or 1 day prior on request.

• Home-Ownership Counseling List
– Due within 3 business days of application.

• Special Information Booklet (SCIB)
– “Mortgage 101” for purchase borrowers.
– Stand-alone; cannot be bundled.
– Not required for refis, closed-end seconds, reverse mortgages, or purchases of \ge5 units.

• Mortgage Servicing Disclosure Statement (MSDS / ISDS)
– Due within 3 business days of application; informs borrower whether servicing may be sold.

• Initial Escrow Statement
– Typically at closing; must be provided ≤45 days after.

• Annual Escrow Statement
– Delivered yearly; details prior & future escrow activity and surplus/deficiency handling.

• Servicing Transfer Statement
– “Good-bye” notice 15 days before transfer; “Hello” notice 15 days after.
– No late fees for 60 days if borrower pays old servicer.

• Affiliated Business Arrangement (ABA) Disclosure
– Triggered when lender/owner has \ge1\% interest in referred provider.
– Due at referral; records retained 5 yrs.

(Business day = any day creditor customarily open, excluding Sundays/Federal holidays).

Escrow Fundamentals (PITI)

• Mandatory for VA & FHA; cancels only via qualifying refi.
• Cushion cap = 2 months ( \tfrac16 annual amount ) ⇒ lender may collect 14 months max at setup.
• Excess >2-month cushion +\$50 refunded within 30 days.

Initial Escrow Statement Content

– Monthly payment amount.
– Escrow portion.
– Itemized charges in first 12 months & disbursement dates.
– Cushion amount.

Annual Escrow Statement Content

– Current & prior monthly PITI splits.
– Totals deposited & disbursed.
– Ending balance; treatment of surplus/shortage.

• Budget Mortgage = payment that includes PITI.

Example (picture described):
– Monthly escrow need \$200.
– Annual tax \$1600 due each March.
– Lender collects \$1600 up front + 2-month cushion =\$400.

Servicing & Error Resolution (RESPA §6)

• Servicer duties: collect payments, manage escrow, maintain records, handle delinquencies.
• Qualified Written Request (QWR) timeline:
– Acknowledge within 5 business days of receipt.
– Investigate/respond within 30\text{–}45 calendar days (runs concurrently).
• Must retain servicing docs 1 year after loan paid off or transferred (e.g., 31 yrs on 30-yr loan).

Key RESPA Sections & Penalties

• Section 6 – Servicing (MSDS, transfer statements).
• Section 8 – Prohibits kickbacks, fee-splitting, mark-ups, & unearned fees.
– Penalties: up to \$10{,}000 fine, 1 yr prison, or both.
• Section 9 – Seller cannot force buyer to use specific title company ⇒ buyer may sue for 3\times charges (treble damages).
• Section 10 – Escrow rules (max 2-month cushion, initial & annual statements).

RESPA – Definition of Application ("PENCIL")

• Property address
• Estimated value
• Name
• Credit/SSN
• Income
• Loan amount

→ Once all six obtained, disclosures due within 3 business days unless borrower withdraws or is denied within that window.

Application Channels

• Phone • Internet/email • Face-to-face • Mail/Fax

RESPA Coverage & Exemptions

• Applies to 1\text{–}4 unit residential property.
• Exempt:
– Loans for \ge25 acres.
– Agricultural, Business, Commercial ("ABC").
– Loans secured by vacant land.
– Temporary/bridge financing.
– Secondary-market sales.
– All-cash purchases.
– Seller financing (carry-back).

TILA – Truth in Lending Act (Regulation Z)

• Enacted 1968; sub-act of CCPA; enforced by CFPB & FTC.
• Purpose ("C-A-R")
– Cost of credit disclosed uniformly.
– Ads truthful/accurate.
– Rescission right for owner-occupied, non-purchase transactions.

• Applicability
– Businesses regularly extending credit (>5 real-estate loans/yr).
– Amount <\$57{,}200 unless secured by real property.

TILA Disclosures ("LOCNEC")

• Loan Estimate (LE) – within 3 business days of application.
• Open-End Credit Disclosure (“What You Should Know About HELOCs”) – 3 days.
• Closing Disclosure (CD) – 3 business days before consummation.
• Notice of Right to Rescind – at closing.
• Early ARM Disclosure – 3 days.
• CHARM Booklet – 3 days.

CHARM Booklet

• “ARMs 101”; only for adjustable-rate mortgages.

Early ARM Disclosure

• Must cover every ARM product discussed with borrower.

Open-End Credit Disclosure

• “HELOCs 101”.

Right of Rescission (Cooling-Off)

• Applies only to principal residence, non-purchase credit (refi, HEL/HELOC, construction).
• Period = 3 business days after signing (Sat counted, Sun/holidays not).
• Each owner (even if not on note) receives 2 copies; failure ⇒ right extends to 3 yrs.
• If rescinded, creditor returns funds within 20 calendar days.

(Sandwich mnemonic: Bread = signing & funding dates; BLT = business-day count).

Interest-Rate Adjustment Notice Requirements

• Initial ARM reset: notice 210\text{–}240 days before first payment at new rate.
• Subsequent resets: 60\text{–}120 days prior.

Advertising Rules & Trigger Terms

• Cannot advertise unavailable terms, tax benefits, or misleading claims.
• Interest rate may not be more prominent than APR.
• Trigger term (hard number) ⇒ ad must also state:
– APR,
– Down-payment amount/%,
– Repayment terms.
• APR may be advertised alone.

APR & Finance Charge Calculations

• APR = total cost of credit expressed as percentage.
• Finance charge = dollar cost of credit.

Fees INCLUDED in Finance Charge (affect APR)

– Origination/broker fees.
– Discount points.
– Processing, underwriting, commitment/lock fees.
– Per-diem interest.
– Mortgage insurance premium.

Fees EXCLUDED from Finance Charge

– Third-party appraisal, credit report (only fee collectible pre-LE), title insurance, inspections.
– Escrow/tax reserves.

HPML – High-Priced Mortgage Loans (TILA §35)

• Applies to primary-residence, closed-end purchase or refi.
• Thresholds versus APOR:
– First-lien: APR \ge APOR + 1.5\%.
– First-lien jumbo: APR \ge APOR + 2.5\%.
– Subordinate-lien: APR \ge APOR + 3.5\%.

• Requirements if HPML:
– Verify Ability-to-Repay (ATR).
– Escrow for \ge5 yrs (except condos/co-ops).
– Prepay penalty limited to first 2 yrs.

HOEPA – High-Cost Loans (TILA §32)

• Targets predatory lending; primary residence, closed-end purchase/refi.
• Special HOEPA disclosures due 3 business days before closing.

Any ONE trigger ⇒ HOEPA status

1. APR Threshold
   – First-lien: APR \ge APOR + 6.5\%.
   – Second-lien: APR \ge APOR + 8.5\%.

2. Points-and-Fees Threshold
   – Loan >\$21{,}549: fees \ge5\% of amount.
   – Loan <\$21{,}549: greater of \$1{,}077 or 8\%.

3. Prepayment Penalty Threshold
   – Penalty extends beyond 36 months, or
   – Penalty >2\% of loan amount.

HOEPA Prohibitions & Requirements

• No balloon payments, negative amortization, prepayment penalties, rate hikes on default, acceleration clauses, or refi within 1 yr (unless borrower benefit).
• No direct payment to home-improvement contractors.
• Must verify ATR; counseling required; secondary-market buyers must be warned.

HOEPA Exemptions

• Reverse mortgages, second homes, investment property, construction loans.

HOEPA Disclosures (due 3 days before closing)

• Amount borrowed.
• Notice of insurance inclusion.
• Variable-rate features.

TILA Penalties

• Individual civil: actual damages + attorney fees + 2\times finance charges.
• Class action: up to \$5{,}000 per member +/- 1 yr prison.

Forced-Place & Hazard Insurance (RESPA)

• Lender must be loss-payee on policy (mortgage clause).
• Forced-place coverage may not exceed replacement cost of structure/improvements.

Ethical / Practical Connections

• RESPA §8 kickback rules align with broader anti-steering/UDAP principles.
• Escrow transparency supports consumer budgeting, reducing default risk.
• HOEPA counseling echoes HUD-approved counseling for reverse mortgages, reinforcing informed consent.

Real-World Linkages

• Disclosures mirror TRID integrated forms (LE/CD) introduced 2015, except carve-outs (reverse, HELOC) still use GFE/HUD-1.
• HPML/HOEPA thresholds adjust annually; practitioners must reference current APOR tables.
• Servicing-error timeframes correspond with CFPB servicing rule amendments post-2008 crisis to curb robo-signing/mis-application of payments.