Tricky RESPA Question
I came across a somewhat tricky question today and thought it will be good to get your input as well on this.
Question: What happens if the lender’s GFE is missing a required service item (e.g. flood insurance) and how is it handled in HUD closing statement?
Answers: Hmmmmm. I don’t recall seeing specific guidance from HUD on this in their rulebook or FAQ. I can’t be 100% sure because my full time job is not to read tons of documents HUD has been publishing on RESPA rules.
However, based on the intent of the RESPA rules, here is what I think a missing service item should be handled:
- First, be sure that it is a required service. It may not be a required service from the lender’s perspective and in that case, it would be entered in section 1300 of HUD-1, with the “included” checkbox OFF. The optional service will then be not part of the GFE-HUD comparison sheet to begin with.
- If the item truly is a required service, can the GFE be revised, since the lender “missed it?” The answer would be a loud “NO,” unless it became required due to another “changed circumstance.” For example, if issues discovered while doing a preliminary title search required additional services to be obtained, that would be a case of “changed circumstance” resulting in new GFE. New GFE can then incorporate this additional charge resulted due to changed circumstances.
- If the above cases do not apply, below are steps to prepare your HUD.
List the service item charge in Section 1100 (if the provider is chosen by the lender) or section 1300 (if provider selection was optional) with the “included” checkbox ON. In the GFE-Comparison sheet, if the item was entered in 1100, it will automatically go to Bucket-2. If item was entered in 1300, you will need to select 10% limit as no provider was specified for the required service by the lender (remember, it is missing in GFE). On the comparison sheet, in either of these cases, the GFE amount would be entered as 0 and the charge will be compared in Bucket-2. Bucket-2 now has higher chances of exceeding the allowed 10% limit, but since the lender omitted a required service, thus providing “wrong” GFE, these steps should be an appropriate method consistent with new RESPA Rule intent.
I have outlined this and many other such tricky questions on our “own” RESPA FAQ.
Please let me know your thoughts in the comments section below.