Addressing concerns raised by providers of a common form of mortgage loan assistance, the Department of Housing and Urban Development (HUD) decided to exempt certain silent second lien mortgage loans from the requirements to provide a good faith estimate and HUD-1 under the Real Estate Settlement Procedures Act (RESPA).    

State housing agencies, nonprofit organizations and similar entities often provide mortgage assistance to home buyers by extending a second lien mortgage loan for down payment and/or closing cost purposes. The loans, commonly referred to as “silent seconds,” often provide for no interest rate or periodic payment, often are either forgiven or require repayment based on certain events, and often have no or minimal fees. The loans pose disclosure issues for purposes of the good faith estimate and HUD-1 under RESPA. For example, the documents require the disclosure of various loan terms, including the repayment terms.

Requests for an exemption from the good faith estimate and HUD-1 requirements were made to HUD by administrators of various silent second programs. The administrators advised that producing good faith estimates and HUD-1s is difficult for silent seconds, and that the disclosures provided for in the documents are of little benefit to borrowers given the nature of silent seconds.

HUD decided to use its exemption authority under RESPA to exempt silent seconds meeting certain conditions from the requirements to provide a good faith estimate and HUD-1. The conditions are as follows:

• The loan is a subordinate lien loan; and
• The purpose of the loan is:
  • Down payment, closing cost or other similar homebuyer assistance, such as principal or interest subsidies; or
  • Property rehabilitation assistance; or
  • Energy efficiency assistance; or
  • Foreclosure avoidance or prevention; and
• The loan carries a zero percent interest rate; and
• The repayment terms are as follows:
  • Repayment is forgiven, incrementally or at a date certain; or
  • Repayment is forgiven, incrementally or at a date certain, subject to certain ownership and occupancy conditions (e.g., the recipient must maintain the property as his or her primary residence for five years); or
  • Repayment is deferred for a minimum of 20 years; or
  • Repayment is deferred until sale of the property; or
  • Repayment is deferred until the property is no longer the primary residence of the recipient; and
• The total of the settlement costs assessed to the recipient for the subordinate loan is less than one percent of the amount of the subordinate loan and includes, at most, charges for the following items:
  • Recordation fee;
  • Application fee; and/or
  • Housing counseling fee; and
• At or before settlement the recipient/mortgagor receives a written disclosure that effectively describes the loan terms, repayment conditions and any costs associated with the loan.

The exemption for qualifying silent seconds applies only to RESPA sections 4 and 5 —the good faith estimate and HUD-1 Settlement Statement. The exemption does not apply to any other RESPA sections, including section 8.

Silent seconds also pose issues with regard to disclosures under the Truth in Lending Act (TILA). The Federal Reserve Board has not issued any similar exemption for silent seconds with regard to TILA disclosures.