Here's what Appendix A of Reg. X provides regarding "no cost" loans:
In the case of "no cost" loans where "no cost" encompasses third party fees as well as the upfront payment to the loan originator, the third party services covered by the "no cost" provisions must be itemized and listed in the borrower's column on the HUD-1/1A with the charge for the third party service. These itemized charges must be offset with a negative adjusted origination charge on Line 803 and recorded in the columns.
Appendix A further provides:
In the case of "no cost" loans, where "no cost" refers only to the loan originator's fees, the amounts shown in Lines 801 and 802 should offset, so that the charge shown on Line 803 is zero. Where "no cost" includes third party settlement services, the credit shown in Line 802 will more than offset the amount shown in Line 801. The amount shown in Line 803 will be a negative number to offset the settlement charges paid indirectly through the loan originator.
The New RESPA Rule FAQs, dated January 28, 2010 further provide the following regarding "no cost" loans:
GFE - Block 2 (p. 27):
1) Q: How does a loan originator show a "no cost" loan on the GFE?
A: Where a "no cost" loan encompasses the loan origination charge and some or all third party fees, a credit should be listed in Block 2 of the GFE to offset all fees encompassed in the "no cost" loan resulting in a negative number in Block A to cover the intended third party fees, listed in Blocks 3 thru 11 as appropriate.
GFE - Block 2 (p. 27):
4) Q: The regulation states that while the borrower‘s interest rate is locked, the credit or charge for the interest rate chosen and the adjusted origination charge may not increase from the amount shown on the GFE. On a "no-cost" loan that covers third-party costs where the rate has been locked, the GFE should show a credit for the interest rate chosen, in an amount sufficient to cover the estimated loan originator and third party fees. If the actual third party fees at closing are lower than stated on the GFE, may the loan originator reduce the amount of the credit to match what is needed to pay the actual third party and loan originator fees?
A: No, the amount of the credit may not be reduced. The loan originator may choose to: 1) have the amount of the credit remain the same as stated on the GFE to cover additional closing costs previously not anticipated to be included in the "no-cost" loan; 2) apply a principal reduction to the principal balance; 3) reduce the interest rate and the credit accordingly; or 4) have the credit remain the same, resulting in cash to the borrower.
HUD-1 - 800 series (p. 44):
3) Q: How does a settlement agent show a "no cost" loan on the HUD-1?
A: In the case of "no cost" loans where "no cost" refers only to the loan originator‘s fees, a credit equal to the amount shown in Line 801 on the HUD-1 must be given in Line 802 of the HUD-1 so that the adjusted origination charge in Line 803 of the HUD-1 equals zero. In the case of "no cost" loans where "no cost" encompasses some or all third party fees and the origination charge, a credit should be listed in Line 802 of the HUD-1 to offset all fees encompassed in the "no cost" loan, resulting in a negative number for the adjusted origination charge on Line 803 of the HUD-1. The third party services covered by this offset must be itemized and listed in the borrower‘s column.
"No Cost" Loans Referring to Both Loan Originator's Fees and All Third Party Settlement Services
Accordingly, for "no cost" loans, where "no cost" refers to both loan originator's fees and all third party settlement services, you should enter charges as you normally would, but as paid by the lender. Then, enter a Miscellaneous charge (you can write any description you want, such as "Lender Credit to Borrower"); enter the sum of all origination charges and settlement costs, plus prepaid interest and the starting balance for impounds, and less any premiums plus discount points, as a negative value (remember to select "Days Prepaid Interest" under DocMagic's "Terms" tab as being paid by the lender if the lender will be covering per diem interest); select the "Rate, Credit or Charge" category and designate this Miscellaneous charge as paid by the lender. See below screen shot and last fee on the list as an example:
If you enter the data in the manner described, the borrower column should equal zero in Line 1400. Note that if the borrower will be responsible for paying only per diem interest, then make sure to select "Days Prepaid Interest" under DocMagic's "Terms" tab as being paid by the borrower. In this case, the Rate, Credit or Charge amount entered would be reduced by the amount of per diem interest so that Line 1400 will equal the amount of per diem interest only. For example, in the above screen shot, per diem interest equals $616.67. Thus, the Miscellaneous charge of Lender Credit to Borrower should equal ($3630.94) so that the Borrower's Column in Line 1400 equals $616.67.
"No Cost" Loans Referring to Loan Originator's Fees Only
In the case of "no cost" loans, where "no cost" refers only to the loan originator's fees, the amounts shown in Lines 801 and 802 should offset, so that the charge shown on Line 803 is zero. There are two ways to reflect a credit in Line 802. (Check with your investor to determine whether one way is preferred over the other.) The first way would be to enter as a Miscellaneous charge (you can write any description you want, such as "Lender Credit to Borrower") an amount equal to the total of all origination fees and charges, expressed as a negative value, paid by the lender to the borrower, with the "Rate, Credit or Charge" category selected. See screen shot below:
The other way to enter the "Lender Credit to the Borrower" would be to enter a yield spread premium in the "Premiums" section of DocMagic's "Charges/Fees/Premiums" tab in an amount equal to the total of all origination fees and charges, designated as paid to the Borrower, like the below:
Lines 801, 802 and 803 will result in the same values under either method used above. Below is a screen shot of Lines 801, 802 and 803, using the values in each one of the above, two examples:
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