Among the many questions regarding the final RESPA Rules that DocMagic's Compliance and Customer Service Departments receive regularly is the question relating to the treatment of borrower credits from the seller, lender or other third party on the HUD-1 Statement. According to the HUD-1 instructions contained in Appendix A of Reg. X, these borrower credits should be displayed in Lines 204-209 of the HUD-1 Statement, as shown below:
This article provides instructions on how to enter borrower credits based on Appendix A of Reg. X and the RESPA FAQs, dated January 28, 2010 ("RESPA FAQs").
According to the HUD-1 instructions contained in Appendix A of Reg. X:
As a general rule, charges that are paid for by the seller must be shown in the seller's column on page 2 of the HUD-1 (unless paid outside closing), and charges that are paid for by the borrower must be shown in the borrower's column (unless paid outside closing). However, in order to promote comparability between the charges on the GFE and the charges on the HUD-1, if a seller pays for a charge that was included on the GFE, the charge should be listed in the borrower's column on page 2 of the HUD-1. That charge should also be offset by listing a credit in that amount to the borrower on lines 204-209 on page 1 of the HUD-1, and by a charge to the seller in lines 506-509 on page 1 of the HUD-1. If a loan originator (other than for no-cost loans), real estate agent, other settlement service provider, or other person pays for a charge that was included on the GFE, the charge should be listed in the borrower's column on page 2 of the HUD-1, with an offsetting credit reported on page 1 of the HUD-1, identifying the party paying the charge. (Emphasis added.)
Lines 204-209 are used for other items paid by or on behalf of the Borrower. Lines 204-209 should be used to indicate any financing arrangements or other new loan not listed in Line 202. For example, if the Borrower is using a second mortgage or note to finance part of the purchase price, whether from the same lender, another lender or the Seller, insert the principal amount of the loan with a brief explanation on Lines 204-209. Lines 204-209 should also be used where the Borrower receives a credit from the Seller for closing costs, including seller-paid GFE charges. They may also be used in cases in which a Seller (typically a builder) is making an "allowance" to the Borrower for items that the Borrower is to purchase separately. (Emphasis added.)
Therefore, based on Appendix A and the RESPA FAQs, Lines 204-209 may be used for any one or more of the following purposes (the below is not an exhaustive list):
Financing Arrangements or Other New Loan Not Listed in Line 202
Line 202 should reflect the principal amount of the loan that the HUD-1 Statement covers. However, if, for example, the Borrower takes a second loan to help finance the purchase of a home, the principal amount of the second loan must be listed outside the borrower‘s column with a brief explanation on Line 204-209. If the net proceeds of the second loan are less than the principal amount, the net proceeds may be listed on the same line in the borrower‘s column, like so:
Please refer to Question #1 under the "HUD-1 - 200 series" section of the RESPA FAQs, page 43.
Seller Credit to the Borrower for Closing Costs, Including Seller-Paid GFE Charges
If the Seller is paying for a settlement service that was disclosed on the GFE, such as the Owner's title insurance policy, the charge for that service must be listed in the Borrower-paid column on page 2 of the HUD-1. The amount charged to the Borrower must then be offset by a credit in that amount in Lines 204-209 and by a charge to the seller in that amount in Lines 506-509 on page 1 of the HUD-1. (RESPA FAQs, page 42, Questions 1 and 2 under "HUD-1 - Seller-paid items.") See below screen shots:
Seller-paid charges that were disclosed on the Borrower's GFE should be designated as "Paid By" the Seller so that any charges considered a finance charge if otherwise paid by the Borrower will not be factored into the APR calculation. If a charge is not designated as SR, the charge will appear in the GFE and will be listed in the "Borrower-paid" column on page 2 of the HUD-1. However, note an exception -- if a charge with the GFE category, Owners Title Insurance, is selected and designated as SR, such charge will nonetheless appear in Block 5 of the GFE and will be listed in the "Borrower-paid" column on page 2 of the HUD-1.
Page 2 of the HUD-1 shows the credit report as being paid by the Seller outside of closing.
Note that the Seller-paid closing fee, which is not designated as seller-responsible (SR), and Owner's title insurance, which is designated as SR, both appear in the "Borrower-Paid" column on page 2 of the HUD-1.
The amount of the credit report, closing fee and owner's title insurance must be entered manually in DocMagic in the screen under the HUD-1 tab to show an offset to the Borrower in Lines 205-207 and a corresponding charge to the Seller in Lines 507-509.
Other Third-Party Credits to the Borrower to Offset a Charge
Where the lender or other third party (other than the Seller) has agreed to pay for a charge/fee that must be disclosed on the GFE, because the charge/fee, other than owner's title insurance, is not seller-responsible, such charge/ fee must be listed in Lines 204-209 on page 1 of the HUD-1. (See RESPA FAQs, page 11, Question 32 under "GFE - General" section; page 40, Question 6 under "HUD-1 - General" section; page 41, Question 11 under "HUD-1 - General" section; page 43, Question 4 under HUD-1 - 200 series" section.) See screen shots below:
The appraisal fee is designated as paid by the lender.
The lender credit for the appraisal fee must be entered manually in DocMagic in the screen under the HUD-1 tab in Lines 204-209 to show an offset to the Borrower.
Credit for a Tolerance Cure
According to page 38 of the RESPA FAQs, Question 12 under the "Section 4 and 5 - Right to cure and tolerance violations" section:
The cure for a potential tolerance violation may be listed as a credit to the borrower on page 1 of the HUD-1 with a description of the service(s) the credit is applied to. If the tolerance cure is applied to the overall tolerance category "Charges That in Total Cannot Increase More Than 10%," the tolerance cure credit may be listed as a "lump sum" amount on a blank line in Lines 204 thru 209 with a description of the tolerance category cure. The comparison chart on page 3 of the HUD-1 should reflect the credit given for that service to cure the potential tolerance violation in the appropriate tolerance category.
This example illustrates a $180 tolerance cure for the 10% tolerance category:
Transferred Escrow Balance in a Refinance Transaction
Question 3 under the "HUD-1 - 200 series" section on page 43 of the RESPA FAQs provides that the transferred escrow balance should be listed as a credit in lines 204-209 of the HUD-1.
Borrower Payment of All or a Portion of Origination-Related Charges/Fees Outside Closing
According to Question 4 under the "HUD-1 - 800 series" section on page 44 of the RESPA FAQs, if a Borrower pays some of the origination charge prior to closing, the full charge for origination, except for any charge for the specific interest rate chosen (points), must be shown on Line 801 of the HUD-1 to the left of the borrower‘s column. If the borrower pays some of the origination charge before settlement, an offsetting credit in that amount is shown on the first page of the HUD-1 in Lines 204 - 209. Lines 801, 802, and 803 of the HUD-1 may not contain any "Paid Outside of Closing" (P.O.C.) items.
In the example below, the Borrower pays the underwriting fee outside closing.
Line 801 below consists of a document fee in the amount of $35.00, an underwriting fee in the amount of $350.00, a processing fee in the amount of $300.00 and an origination fee in the amount of $2,000.00.
The underwriting fee paid outside closing by the Borrower must be entered manually in DocMagic in the screen under the HUD-1 tab in Lines 204-209 to show an offset to the Borrower.
If you have any questions regarding the contents of this article, please contact DocMagic's Compliance Department.
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