Question & Answer

Question: Our examiner told us that when we are making a mortgage loan that is in a second lien position, our Good Faith Estimate and the HUD-1A should include the cost of items such as hazard insurance that the customer already has in place. This seems like a really strange position to take. We don't even know what the customer is paying for the insurance. Is our examiner correct?

Answer: Whether your examiner is correct on this one is not the question you should be asking - unfortunately. This problem sits in a very ambiguous area of RESPA. Because the area is ambiguous, you pretty much have to do what your examiner says.

This falls into the "life isn't fair" category because RESPA by itself has no enforcement mechanism for errors in GFEs and HUD-1s. Congress didn't think that this disclosure process was important enough to provide for penalties for errors or even knowing violations. However, as banks, you are subject to your regulatory agency's plenary authority. Essentially, your regulator can throw the book at the bank for any violation of any federal law. Moreover, your regulator can use its general enforcement authority and is thus not inhibited by the minor fact that RESPA has no enforcement provision for this particular violation.

The interpretation your examiner is following is quite recent. In fact, HUD has given the informal opinion that GFEs and HUD-1As for refinances and second liens should include all of the costs of any settlement service that the lender requires as a condition of making the loan. The reasoning is that the lender would not make the loan without the hazard insurance. The cost of the insurance is therefore a required settlement service for which the customer pays. HUD (and these examiners) do not concern themselves with the fact that the hazard insurance is already in place and was already disclosed in connection to the first mortgage.

What is going on here is that HUD is attempting to convert RESPA from a law that requires disclosure of the costs a consumer will pay at settlement - to prevent "settlement shock" - into a law that discloses the cost of the transaction. This is actually the territory of Truth in Lending, but that doesn't seem to deter HUD or some examiners eager to become noticed for finding RESPA violations.

Now comes the "fun" part. The bank needs to find out what the consumer has already paid for insurance. How does the bank do this? Well, you could always ask the customer! Are we having fun yet?

Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 13 & 14, 11/99