Federal Title president Todd Ewing quoted in Washington Times article

By Michele Lerner 

Future homebuyers may not be aware of the major changes in the Real Estate Settlement Procedures Act (RESPA) rules that go into effect on Jan. 1, but industry professionals have been preparing for months for the new Good Faith Estimate (GFE) and HUD-1 forms. A GFE is a form provided to loan applicants that includes a summary of the loan terms and an estimate of anticipated closing costs. The HUD-1 form is the statement provided to both buyers and sellers at settlement with detailed information about the required payments from both sides of a transaction.

Lenders have three days after a borrower completes a loan application to provide a written GFE. Borrowers have 10 days to review the form and compare forms from other lenders or shop around for services such as a title company or title insurance. The GFE is tied to a loan application for a specific property under contract, although borrowers can ask for a general estimate of closing costs when they request a loan preapproval before shopping for a home.

The changes to the two forms are intended to make loan features and closing costs "clearer" to buyers, demonstrate the ability of consumers to shop for loans and some services, and make sure estimates of the cash needed at closing are more accurate.

The key elements of the new forms are that they hold lenders accountable for their closing-cost estimates and encourage consumers to compare fees and services from multiple providers. Consumers typically work with the title company, pest inspectors and homeowners insurance companies recommended by their Realtor or lender rather than compare rates for these services.

"In the past, the GFE was just a list of likely fees, a true estimate with no requirement of accountability for the lender," says Holly Spencer Bunting, an associate who practices in the areas of mortgage banking and consumer finance with K&L Gates LLP in the District. "That is substantially changing, with the biggest difference being that lenders are now accountable for the fees borrowers need to pay at settlement."

The Department of Housing and Urban Development (HUD) created the new RESPA rules in an attempt to answer consumer complaints about closing costs and create a better understanding of mortgage loan terms.

"The new RESPA rules will have a tremendous impact on the way consumers pick their service providers when they buy a home," said Todd Ewing, president of Federal Title & Escrow Co. in the District. "The impetus for the change was consumer complaints about surprises at the closing table."

Ms. Bunting says HUD officials have said consumers sometimes expect to pay $5,000 at closing and then have to pay as much as $8,000 because the GFEs are so wrong.

The fees paid at settlement are now divided into three "tolerance buckets," which refer to whether the fees can change from the GFE and how much they can change.

"The first bucket has no tolerance for errors, so if anything changes at the settlement table, it must be 'cured,' or paid for by the lender," says Barbara Roubo, vice president and mortgage branch manager for Chevy Chase Bank in Reston.

The first bucket includes the lenders' origination charge, the credit or charge (points) for the specific interest rate locked in by the borrower, the adjusted origination charges after the borrower locks in the loan, and transfer taxes.

The second bucket includes fees that can increase up to a limit of 10 percent, such as required services selected by the lender, title services and lender's title insurance (if the lender chooses them or the borrower selects a company recommended by the lender), owner's title insurance (if using the lender's recommended company), required services that the borrower can shop for (if using the lender's recommended company) and government recording charges.

"If we recommend a provider for any settlement services, lenders will have to pay the difference if the charge is more than 10 percent higher," says Ms. Roubo. "If the charges are increased because, for instance, a more in-depth property survey is required, that is considered changed circumstances, and a new GFE can be generated."

Changed circumstances also can include a recommendation for a pest inspection made by an appraiser or a change in the loan program from an FHA-insured loan to conventional financing.

The third bucket includes charges that can change at settlement. If borrowers choose their own providers for required services, title services and both lender's and owner's title insurance rather than the lender's recommended providers, the charges can increase. Other charges that can increase include homeowners insurance, daily interest charges and escrow deposits.

Ms. Roubo says, "The single greatest complaint that is being addressed by these new forms is the issue of surprise fees at settlement, fees that have not been disclosed to buyers until they get to the settlement table. The problem is that some of those undisclosed fees can still crop up. A good example would be when someone buys a condominium, they may have to pay into a capital contribution fee, but the lender won't necessarily know about that. I recently worked with someone who had to pay four months of condominium fees - a total of $1,600 - at settlement for the capital fund of the condominium association. That kind of surprise wouldn't be changed by the new forms."

In spite of the efforts to give consumers as clear a picture as possible of their cash needs for the closing, surprise fees are not the only place where confusion can occur.

"One thing about the forms that is tricky for consumers is that the 'total estimated settlement charges' on page two of the GFE still may not be accurate because some of the typical borrower costs may be paid by the seller if the contract has been negotiated that way," Ms. Bunting says. "That estimate may be closer to the worst-case scenario rather than an accurate indicator of the closing costs the buyer needs to pay."

Some closing costs are settlement-date-dependent and can change, such as the daily interest charges for the month in which the buyer is closing and insurance payments in the escrow account. If you close at the beginning of the month, you may have to pay as much as 26 days of interest compared to an end-of-the-month closing, when you can pay just a few days of interest.

Mr. Ewing says that sometimes a seller will have paid taxes for the whole year, so the buyer will need to reimburse the seller for those prorated taxes at settlement.

"A major flaw of the new forms is that nowhere on the form is the bottom line - a grand total of what is needed at closing," says Mr. Ewing. "There's a line that gives you total estimated settlement charges, but that leaves out the down payment and doesn't account for variables in interest payments or other escrow items."

In addition to focusing on settlement fees, the GFE provides mortgage loan information.

A loan summary, found on the first page of the GFE, includes information such as whether the interest rate can rise, whether the loan balance can rise, and whether the loan has a prepayment penalty or a balloon payment. Those loan features used to be hidden among the loan disclosures for consumers.

Not all of the changes are positive, however.

"One of the major flaws on the GFE is that it doesn't include a line for the total monthly payment, including principal, interest, taxes and insurance," Mr. Ewing says. "The monthly payment is expressed only as principal, interest and mortgage insurance premiums, which doesn't really clarify for borrowers how much they will need to pay each month. The first thing people want to know is what their entire monthly payment will be."

The property taxes and homeowners insurance are placed on a separate line with the question of whether these items will be paid through an escrow account with the mortgage lender or directly by the homeowners.

"The forms encourage consumers to shop and explain that the lender can select a service provider and also can shop for title companies," Mr. Ewing says. "Title companies put their fees and costs online now, so anyone can simply answer a few questions online and will get a quote within minutes. About 70 percent of the closing costs that are variable are title-related, so people should be shopping for those services. People don't realize that by shopping online for title services they can sometimes save as much as $1,500 on a $500,000 transaction."

Mr. Ewing also says that consumers can save 40 percent or more on their title insurance by requesting a reissue rate on the policy.

"People can ask for this when they are refinancing, but a buyer can also request the reissue rate on a purchase if the seller has owned the property for less than 10 years and they use the same title insurance company," Mr. Ewing says.

In addition to comparison shopping, consumers should be sure they completely understand every line of the GFE and their loan program, particularly if they have opted for an adjustable-rate mortgage that could result in higher future mortgage payments. Homebuyers should ask questions of their lender as soon as they receive the GFE because they have 10 days to make any changes to their loan program and to choose service providers.

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