HUD Dumps Limits On FHA Origination Fees
November 28th, 2008
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As a parting gift to the lending industry, HUD has published its final rule to “Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs.”
“Millions of families go to the settlement table each year without clearly understanding what they are paying for,” says HUD Secretary Steve Preston. “In many respects, it’s clear that the current way people buy and refinance their homes isn’t serving us very well at all and has contributed to the current housing crisis.”
But, oh my, buried on page 68227 what do we find but a decision to dump limits on loan origination fees.
Previously FHA mortgage borrowers were protected because HUD limited origination fees to 1 percent of the mortgage amount for most FHA loans. However, with the new final rule, the limitations are out and borrower beware is in.
Why? Because HUD says that its new good faith estimate (GFE) forms should protect borrowers.
What’s remarkable about HUD’s explanation of the matter is that its proposed ruling was opposed by the National Community Reinvestment Coalition. No one, apparently, agreed with HUD’s position otherwise another comment would surely have been cited.
No matter. HUD did what it was going to do in a last-minute ruling that the new Administration will have to undo. Meanwhile, borrowers have still-another complexity with which to deal.
HUD’s ruling and comment are below.
3. FHA Limitation on Origination Fees of Mortgagees
Under its codified regulations, HUD places specific limits on the amount a mortgagee may collect from a mortgagor to compensate the mortgagee for expenses incurred in originating and closing a FHA-insured mortgage loan (see 24 CFR 203.27).1 The March 2008 proposed rule would have removed the current specific limitations on the amounts mortgagees are presently allowed to charge borrowers directly for originating and closing an FHA loan. Under HUD’s proposal, the FHA Commissioner would have retained authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan. In addition, the proposed rule would have also permitted other government program charges to be disclosed on the blank lines in Section 800 of the HUD1/1A.
There was little comment on this issue. NCRC (the National Community Reinvestment Coalition) disagreed with the proposal to remove the specific limitations on the amount mortgagees are allowed to charge for originating and closing an FHA loan. NCRC stated that a government-guaranteed loan product should shield borrowers from excessive charges by establishing reasonable limits on fees. According to NCRC, while it may be acceptable to carefully raise origination fee limits, this should be done only in conjunction with establishing reasonable limits on YSPs. This commenter stated that by establishing standard limits on origination fees and YSPs, the FHA loan product can keep the nongovernment guaranteed products competing by constraining direct fee and YSP costs.
HUD believes that its RESPA policy statements on lender payments to mortgage brokers restrict the total origination charges for mortgages, including FHA mortgages, to reasonable compensation for goods, facilities, or services. (See Statement of Policy 1999-1, 64 FR 10080, March 1, 1999, and Statement of Policy 2001-1, 66 FR 53052, October 18, 2001.) Moreover, the improvements to the disclosure requirements for all loans sought to be achieved as a result of this rulemaking should make total loan charges more transparent and allow market forces to lower these charges for all borrowers, including FHA borrowers. Therefore, HUD has determined to finalize the proposed rule to remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan. The FHA Commissioner retains authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan.
Note 1: Under 24 CFR 203.27(a)(2)(i), origination fees are limited to one percent of the mortgage amount. For new construction involving construction advances, that charge may be increased to a maximum of 2.5 percent of the original principal amount of the mortgage to compensate the mortgagee for necessary inspections and administrative costs connected with making construction advances. For mortgages on properties requiring repair or rehabilitation, mortgagor charges may be assessed at a maximum of 2.5 percent of the mortgage attributable to the repair or rehabilitation, plus one percent on the balance of the mortgage. (See 24 CFR 203.27(a)(2)(ii), and (iii).)
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