Bulletin: TX000048

Date:
November 11, 1998
To:
All Issuing Offices in Texas
RE:
Purchase Money and Refinance Issues

Dear Associates:

Closing Costs on Purchase Money Loans

The constitutional amendment on Home Equity Mortgages (HJR 31) says that a mortgage refinancing on homestead may secure "reasonable costs necessary" to refinance the debt. We believe that the law also allows a purchase money mortgage to secure these costs. Based on our understanding of the law, the following are our guidelines for closing costs on purchase money loans on homestead.

We will insure a purchase money lien on homestead, if the closing costs (such as mortgage insurance, VA Funding Fee, or other costs of closing) financed by the mortgage and required by the lender to be paid do not exceed 5% of the purchase price. The closing costs financed by the loan may not include optional costs, such as credit card payments or credit life insurance premium. The buyer may not receive any money at closing.

We will insure two simultaneous purchase money liens on the homestead (such as 95/10 loans) which reflect 100% financing of the purchase price of the homestead and 5% closing costs. Each deed of trust must state that is secures purchase money advances. The second lien deed of trust must not expressly state that only is secures advances for closing costs. The closing costs financed by the loans may not include optional costs, such as credit card payments or credit life insurance premium. The buyer may not receive any money at closing. A refinance of multiple purchase money liens may refinance all of one lien and part of the other lien (so long as the remaining purchase money lien partially paid will be subordinated).

If the purchaser wishes to receive the earnest money back at closing, this may be accomplished by (1) amendment by the seller and buyer of the earnest money contract to eliminate the earnest money requirement and allow the return of the earnest money to the buyer, and (2) disclosure to and approval by the lender of the amendment to the contract. If the purchaser does receive the earnest money back, it should not be shown on the HUD-1 as a payment by the buyer on line 201 and it should not be shown on any other line of the HUD-1. The HUD-1 must not reflect any cash to the borrower on line 303 of the HUD-1.

If you close a sale and the buyer receives a "credit" from the new lender (as excess money to take out of closing) for prepaid credit report, appraisal or loan application fee (reflected as a POC item), you must do one of the following:

(1) You may apply the excess proceeds to pay down the new mortgage or to fund the escrow reserve for taxes and insurance. [If you do this, please inform the lender, for example, by sending a completed HUD-1 to the lender.] The lender may wish to revise its Truth-in-Lending disclosure (many do not) if the money is applied to pay down the loan or may wish to revise the documents to lower the loan amount.

(2) You may suggest to the lender that the loan amount be changed. We believe that this approach is not necessary with a "credit."

(3) You may:

(a) show the payment to the buyer on line 303 of the HUD-1 (or line 1604 of HUD-1A) as a "refund of [mention type of prepaid]" and

(b) issue your check to the buyer if the check states that it is a "refund of [mention type of prepaid]" and

(c) require the buyer to acknowledge in writing that "The check dated ____ in the amount of $_____ is being made as a refund for the following prepaid item [here mention type of prepaid item] and does not constitute proceeds of the loan from ______."

The amount disbursed to the buyer may not exceed the amount prepaid by the buyer for credit report, appraisal and/or loan application and any credit for tax prorations. Any excess over that amount must be applied to reduce the loan amount unless the papers are redrawn by the lender to reduce the loan.

On some purchase money loans, the lender also will advance costs for improvements. We do not require a mechanic's lien contract or compliance with the Constitutional Amendment relating to home improvement loans if (1) the buyer will make repairs, (2) the vendor's lien includes the amount of the repairs to be made, (3) the cost of the repairs does not exceed the lesser of 5% of the sales price or the amount of the down payment due by the buyer, and (4) you escrow the repair costs or verify that they have been paid and completed by the purchaser. The owner policy should include the P-8 exceptions (for mechanic's liens and limit of liability) if you escrow the repair costs.

Refinance on Urban Business, Urban Residence and Rural Homestead

The Regulatory Commentary (by the Office of Consumer Credit Commissioner and other lending regulators) on Home Equity Lending dated October 7, 1998 interprets the constitutional amendment on Home Equity lending. The amendment allows a refinance of a purchase money mortgage (deed of trust), ad valorem taxes, owelty lien, federal tax lien, or mechanic's lien contract, if the only additional funds (besides the payoffs) advanced are for "reasonable costs necessary to refinance such debt" or for taxes, owelty or new improvements (pursuant to a new mechanic's lien contract).

This new Commentary says that "reasonable costs are those costs which are lawful in light of other governing or applicable law. Reasonable and necessary costs may include reserves or impounds (escrow trust accounts) for taxes and insurance, if the reserves comply with applicable law."

Based on the Commentary, you may continue to insure a refinance on homestead, which includes closing costs in accordance with our Bulletin TX000038.

Do not insure if the borrower receives any money at the closing, except for "POC" item refunds in accordance with Bulletin TX000038.

Do not insure if the costs to be paid are not direct costs required by the lender. For example, allowable costs may not include payment of credit card debt or credit life insurance premium.

If the financed points or other closing costs, such as prepaids (impounds or escrow for taxes and insurance) exceed in the aggregate, 10% of the new loan, please call our underwriting personnel.

A refinance that includes a payoff of a prior Home Equity Mortgage is a Home Equity Mortgage EVEN IF NO NEW CASH IS RECEIVED BY THE BORROWER and is subject to our requirements for a Home Equity Mortgage. You may rely on recitals or apparent purpose of a prior deed of trust that is being refinanced.

Partial Invalidity Provision

We require that purchase money deeds of trust or refinance deeds of trust that include closing costs have the following or similar language:

"If any portion of the note cannot be lawfully secured by this deed of trust, payments shall be applied first to discharge that portion."[State Bar of Texas Deed of Trust]

or

"In the event any portion of the sums intended to be secured by this Security Instrument cannot be lawfully secured hereby, payments in reduction of such sums shall be applied first to those portions not secured hereby." [Fannie Mae/Freddie Mac Uniform Security Instrument]

THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.