Significant changes to federal rules under the Real Estate Settlement Procedures Act (RESPA) took effect Jan. 1. Although the Good Faith Estimate (GFE) and HUD-1 forms were redesigned to make it easier for home buyers to understand settlement costs, the changes have made closings more difficult for lenders.
According to the National Association of Realtors, the new rules require mortgage originators to lump the origination costs — including the interest rate and loan processing fees — under one bundled fee on the Good Faith Estimate (GFE). Once lenders receive GFEs from mortgage brokers, they have to accept the charges.
Not all GFE costs are locked in: Charges affected by “changed circumstance” can be modified as needed. However, modifications now require the loan originator to issue a new GFE, and only the fee subject to the “changed circumstance” can be altered.
“We think it’s a very consumer-friendly change,” said John Phillips, vice president of professional development for the Mississippi Association of Realtors. “If the numbers change, the consumer has a way out of the transaction,” he said.
But changes are not more bank-friendly, said Ferol Hettick, senior vice president and director of compliance for Trustmark Bank in Jackson. Under the new rules, Trustmark has had difficulty obtaining information and has found that the GFE is confusing to borrowers. Trustmark has also experienced delays in closings caused by closing attorneys completing forms incorrectly.
“The new GFE has, in all reality, now become a pre-settlement statement. Obtaining the fee or cost information from both borrowers and third-party service providers has been very difficult. Service providers are reluctant to provide us with fee information when they do not know the amount of work that will be involved on their part in providing the service,” Hettick said.
“The GFE is also confusing to borrowers, as the lender can no longer indicate who will pay what fees. As a result, the revised form does not provide the borrower with an estimated amount that will be needed at closing as it previously did,” he said.
Additionally, “the lender is also required to disclose fees that they rarely charge, which in essence is inflating the costs. We are also experiencing closing agents and attorneys not completing the HUD Settlement statements correctly which results in delayed closings,” Hettick said.
Under RESPA changes another class of charges is now subject to a 10 percent tolerance, which gives those fees a little room to vary from the original estimates. This class comprises fees for third-party services required by the lender where the lender selects the provider. It includes appraisals, title services, title policies and government recording fees.
If the buyer, instead of the bank, chooses his own company, charge changes are unrestricted. The new rules’ unlimited tolerance category covers services such as initial escrow deposits, daily interest charges and homeowners insurance for hazard, flood, wind or other circumstances.
Trustmark’s Hettick said that if the actual charge for these services varies from the amounts indicated on the GFE by more than the allowed tolerance level, the lender has to credit the borrower for the excess amount or refund it to the borrower after closing.
RESPA was passed by Congress in 1974 to clarify prices for services so as to allow competition. Prior to that time, parties such as lenders, Realtors, construction companies and title insurance companies sometimes engaged in providing kickbacks to each other, inflating the costs of real estate transactions and obscuring competition. RESPA protects consumers from interest rate changes at closing.
In light of the new regulations, Hettick advises buyers to “be patient and understanding with your lender, as these new rules are just as challenging to the lender as they are to the homebuyer and/or appraiser. By providing the requested information to your lender in an expeditious manner, it will assist all in moving the loan to closing as soon as possible.”
Jackson independent closing attorney Jay Cooke said he finds the 10 percent “wiggle room” provision for attorney fees to be reasonable. Cooke has worked with title insurance companies since 1986, and has closed more than 20,000 transactions. Cooke calls the new RESPA rules an “unfortunate change” that were inspired by predatory lending practices that caused the housing bubble to burst. His office updated software in the fall and was prepared for the changes.
The rules are supposed to make the buying process simpler for the buyer and make it harder for them to get hit with charges for which they are not prepared, but that’s not necessarily how it is working out, Cooke said. The new pressures fall mainly on the banks, he said, but the regulations encourage all parties involved to make sure they’re ready on the front end so there are no last-minute delays.
The zero tolerance category includes discretionary fees charged by the lender. Cooke said a common example would be a $350 bank processing fee that showed up on a closing statement unannounced.
Another change for the real estate industry that could likely delay closings is the Mortgage Disclosure Improvement Act (MDIA), which will go into effect July 30.
This act requires a seven business day waiting period once an initial disclosure is provided before closing a home loan. A borrower must receive the initial GFE and initial Truth in Lending (TIL) statement disclosing the final Annual Percentage Rate (APR) seven days prior to closing.
If the final annual percentage rate APR is off by more than .125 percent from the initial GFE disclosure, the lender must re-disclose and wait another three business days before closing. The consumer has the right to cancel the transaction.