Getting the HUD-1 Right

The best trial lawyers know never to ask a question unless they know what the answer will be and are certain the answer will be helpful to them. It’s difficult to imagine that anyone fully anticipated the answers HUD would give to a raft of questions posed by the Massachusetts Bankers Association regarding RESPA compliance. Two years after the answers were delivered, some bankers are still expressing disbelief.

Because errors are still cropping up in HUD-1 and HUD-1A completions, we take this opportunity to review the requirements, based upon HUD’s answers to the MBA.

The test for determining whether a fee needs to be listed on the settlement statement is simple. An item should be listed if a) it is required by the lender; or b) if it is to be paid for at closing or settlement. The HUD-1 should include an itemization of:

• all charges imposed upon the borrower and seller by the lender;

You’ll note that some of the fees to be listed are paid by the lender, some by the seller, and others by the borrower. In the interest of clarity, where on items other than those paid to and retained by the lender, the name of the entity or individual receiving the payment should be shown and HUD recommends that a notation be made on the HUD-1 to identify the payment source of a particular fee.

Examples of types of fees that must be listed on the HUD-1 or HUD-1A:

• Fee paid to the borrower’s own attorney, where the bank doesn’t require this attorney.
• Fees paid by the seller well in advance of the loan closing, which are required by the bank.
• Free service performed by a friend of the borrower for a required item. (Show it, but disclose zero in the appropriate line, along with an asterisk that leads to an explanation at the bottom of the form or on a separate page that the service was rendered gratuitously on behalf of the consumer.)
• Fee paid by the borrower well in advance of an application even being submitted for a normally required item, such as an appraisal, previously obtained by the borrower.
• Charges paid by the lender to either an affiliated or independent service provider on a no cost or no point loan (shown as P.O.C.).
• Costs associated with the sale of the loan by the bank after the closing, where services will not be performed until after the closing, but the borrower pays these costs at closing.
• A mortgage broker fee paid by the bank, rather than the borrower. (Show it as P.O.C. make sure the payment is not an unearned fee, and indicate who the recipient is.)
• The amount of a coupon given by the bank to the customer for money towards closing costs. (Show as items paid by or on behalf of the borrower on lines 204-209)
• An up-front application fee used for the appraisal and credit reports. (Mark it P.O.C. put it on line 808 or any other blank line in the 800 series, don’t use it in computing totals, break out the specific charges relating to the appraisal and credit report on lines 803 and 804, along with the person or firm who received the payments, and also mark them POC. Mark them in a way that makes clear that the fees in 803 or 804 are included in the application fee amount so there is no appearance of double charging.)
• Overnight delivery fees, listed on any of the blank lines in the series pertaining to the specific settlement service provider that requires the use of the service in question.
• Tax Service and Flood Determination fees.
• Fees for document preparation. (Separate out any portion of the fee that goes to a third-party, such as an attorney.)
• Fees collected after closing if they are required to be paid as a condition for settlement. (Example, inspection fees on a construction loan.)
• The amount of commission earned by the settlement agent for issuing a title insurance policy.
• Real estate taxes. If no payment of taxes is required at the time of closing, the annual tax liability would be disclosed as P.O.C. If the amount cannot be determined, it must be disclosed as an estimate. ***
• The annual premium for hazard insurance, even if paid for outside of closing, if the note (or other legal obligation) includes terms that require hazard insurance or that allow the creditor to force place the hazard insurance.

*** SPECIAL NOTE: When it comes to real estate taxes paid outside of closing, there is evidently a difference of opinion in some circles. The Chicago Fed has changed its tune over the years. First, its position was as outlined in this article I wrote. They had put out this bulletin. In February, 2003, however, the Chicago FRB abruptly changed its position and issued, without explanation, this bulletin. which was amended on May 15, 2003, here. However, the bottom line is that this is a RESPA matter and HUD is the final authority on RESPA. HUD has not published anything, to our knowledge, that contradicts what it said in its letter to the Massachusetts Bankers Association.

I called the Chicago Fed and asked why they had reversed their position. They said that it was an internal decision by the Federal Reserve. They confirmed that it was NOT due to any new change or policy from HUD. If you are a state-chartered, Fed member institution, you would be safe following their new guidance. If you are a nationally chartered bank, or a state-chartered non-Fed member (so FDIC is your primary federal regulator), you would not be.

The original version appeared in the November 2002 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 4/28/03. Links to Chicago Fed documents updated 12/27/07.

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