How to Avoid Loan Closing Delays Because Of Inaccurate GFE Charges Under the New RESPA

If you are worried that getting your borrower’s Good Faith Estimate may be a near impossibility when first starting the loan process and when you don’t know all the third-party service provider’s fees, HUD allows loan originators another method that may relieve some of the guessing. Loan originators may use average charges for those third party service charges that are not based on your borrower’s property value or loan amount. HUD cites the following list of nonexclusive service charges as permissible: appraisals, credit reports, flood certificates, tax service, and recording documents.  However, HUD specifically states the average charge method cannot be used for transfer taxes, interest charges, escrow reserves and insurances (including your Texas title company’s title insurance).

However, if you are going to use the average charge method, HUD requires the loan originator to document how you arrived at such average charge. A loan originator must keep documentation showing how it calculated an average charge for at least three years after any settlement for which that average charge was used.

In order to calculate an average charge, the loan originator must "define a specific class of transactions for a specific time period (not less than 30 calendar days, nor more than 6 months), for a specific geographical area, and for a specific loan type. The average charge is based on a calculation of the average amount paid for the settlement service for the particular class of transaction. HUD does not prescribe a particular method for calculating the average charge, but it must be determined in such a way that the total amounts paid by borrowers and sellers through use of an average charge will not exceed the total amounts paid to the applicable settlement service providers in the particular class of transactions." See New RESPA Rule FAQs at http://bit.ly/msSSY, p. 28-29.

What if the loan originator overcharges the borrower or seller too much when using the average charge method? Does the loan originator have to refund the borrower or seller the excess amount? The answer is no, but…the loan originator cannot retain the excess. Instead, the excess should be applied to the next average charge period, so that the next class of borrowers or sellers receive a discount on their charges that use the average charge method.

So the loan originator can use the average charge method to alleviate the guesswork in knowing the third-party service provider’s charges, so the loan originator may avoid hang-ups that would delay a closing. However, if the loan originator uses the average charge method, it best be ready to substantiate the average costs determined to their regulators.