Following is a question submitted by one of our members on proper disclosure of the service fee set-aside. The answer was provided by Dan Mooney, head underwriter at HUD’s Santa Ana Homeownership Center, in Santa Ana, CA.
Question: We are hearing from some of our customers, that no one else is charging the servicing fee set aside, which of course is a large upfront expense. We know this is not true, but in looking at the documents since this cost does not appear on the HUD-1 or good faith estimate, it would be possible to “sell” this program without the borrower fully understanding that fee. I believe it is only reflected on the comparison in the origination documents. Is there anything that can be done to add this to the GFE as a cost – so we all have a even playing field?
Answer: Modifications to the GFE would be a RESPA/TIL (Truth in Lending) issue and, as such, not an arena in which FHA, as a mortgage insurer would have oversight authority.
The HECM servicing set-aside is required in cases where the lender/servicer does not include the cost of servicing in the interest rate, which admittedly, is by far the most prevalent manner in which HECMs are closed.
That being said, since that set-aside account is not disbursed at closing, but rather incrementally over the life of the loan and, as such, is subject to principal limit growth, it could be seen as inappropriate to list it as a “closing cost” or “prepaid expense” on either a closing statement or a GFE. The HECM calculators all make allowance for the set-aside, based upon the monthly servicing fee charged by any specific servicing lender in any specific HECM transaction. As this information, as required by statute, must be disclosed to the borrower by originators/lenders and discussed with borrowers by both lenders and HECM counselors, a willful failure, on the part of an originator, to provide COMPLETE and ACCURATE information during the early stages of a HECM transaction, would be a violation not to be taken lightly.
Keep in mind, as well, that the underwriting lender must be provided with copies of all preliminary disclosures, including those providing HECM calculation and comparison information, and that most will be re-disclosing independently as well. In addition, the HECM Payment Plan, signed by the borrower(s) at closing, includes the servicing set-aside, indicated as a debit from the Principal Limit in the determination of the borrower’s Net Principal Limit. With these additional disclosures being made during the term of HECM processing & closing, it seems unlikely that an originator would misrepresent the situation at the beginning…Not to say that such an event would never occur, of course!!
As with any actions that might be seen as predatory and/or as a failure to meet disclosure requirements, those aware of such incidents are encouraged to report them to the RESPA office of HUD at (202) 708-0614.