In our recent blog post about FHA loans and borrower’s rights, there was a mention of the Real Estate Settlement Procedures Act or RESPA, which requires buyers to be more fully informed as to the costs of an FHA loan including how much they must pay for closing costs, and how much is refundable vs. non-refundable if the buyer has a change of mind and backs out of the loan.
These FHA requirements are designed to protect borrowers from “gotcha” charges, unexpected expenses and other problems; RESPA is also designed to help lenders and buyers work together knowing that all terms are understood and expected.
But even RESPA has some exceptions. When HUD Secretary Shaun Donovan approved the exceptions to the Good Faith Estimate requirement in October of 2010, he did so stating that, after careful review some transactions don’t actually benefit from this RESPA requirement; the buyer would be no better informed in these cases even with the additional paperwork and time invested by the lender.
This might sound a bit suspect at first to a newcomer to FHA loans–until it’s revealed that the exceptions to RESPA in this case include subordinate liens, downpayment assistance, foreclosure avoidance programs and property rehab loans where limited fees or no fees at all are assessed. The exempt programs must also carry an interest rate of zero percent, and the settlement cost of these exempt loans must be less than one percent.
In spite of the RESPA exemption for such programs, there is a requirement that a written description of loan terms, repayment conditions and associated costs be provided to the borrower at or before settlement.
In cases where FHA requirements include RESPA disclosure, the buyer is being given similar information as required by law; these exempt programs will do the same things but accomplish the disclosure in a different way. According to what’s described in the FHA’s “exemption letter”, the buyer does not miss out on being fully informed.