New Federal Real Estate Settlement Rules Save Consumers Money

For years, borrowers applying for residential real estate mortgages have received an estimate of closing costs when they applied for financing, only to be surprised to later learn that the actual costs were much greater.  Often the additional charges were abusive, unfair and unnecessary, but the common explanation was that the initial charges were "just an estimate".  Purchasers would have to somehow come up with the additional costs or risk loss of their deposits and loss of the home.  These additional costs added hundreds, sometimes thousands of dollars to routine real estate mortgage loans.  Those good faith estimates sometimes lacked "good faith".

Not anymore.  Amendments to the Real Estate Settlement Procedures Act (RESPA) were implemented January 1, 2010 and have dramatically increased protection for consumers to avoid overcharges and predatory lending.  However, the changes have not been widely publicized and, therefore, most consumers are unaware of  the power they now have to control their costs and to shop for the most affordable loan programs.

The new rules apply both to all federally related residential mortgage loans to consumers–– to new purchasers as well as refinance transactions.  They apply to first mortgages as well as second mortgages and home equity lines of credit (HELOC), as well as to reverse mortgages.  They apply whether you are dealing directly with a bank or with a mortgage broker.

RESPA now requires that consumers be provided with a new three page Good Faith Estimate (GFE) which is designed to encourage consumers to shop for the best loan terms available.  Until the consumer receives the GFE, lenders are permitted to charge consumers only for the cost of a credit report.  By eliminating unnecessary and often inflated upfront charges, this new limitation is intended to encourage a consumer to shop for the best loan product.  Once each lender approves your credit, it is required to provide you with a GFE within three business days.   At that time, the lender must also provide you with a booklet issued by the U.S. Government that explains settlement costs and procedures.

With one or more Good Faith Estimates in hand, the consumer can make an informed choice.  The importance of the estimate is that once it has been received by the consumer, the actual charges at closing for loan fees, points, and transfer taxes are not permitted to increase by one cent from the estimate.  The total charges for title insurance, recording charges, and required services such as an appraisal, survey, and inspection fees, cannot increase by more than ten percent.

Some charges can still change.  For example, your lender has no control over the costs of homeowners insurance or property taxes, so these may vary from the GFE.  Likewise, prepaid interest charges will vary, depending on what day of the month your loan closes, so those estimates will be based on assumptions but will be subject to change.

Once the consumer has shopped for and selected the best loan program, the closing statement must match the GFE.  In fact, the new regulations add a third page to the traditional HUD–1 Settlement Statement.  That third page must show the charges that were listed on the GFE and compare them to the actual charges that the consumer is being asked to pay.  This is where the consumer should carefully review exactly what is being charged and should not and cannot be bullied into closing with inappropriate increases in the expenses.

The new Settlement Statement must also summarize the consumer’s loan terms, including the amount of the loan, the number of years before the loan comes due, whether the interest rate or payments can rise, whether there is a prepayment penalty or balloon payment, and the total amount of the monthly payment.

What happens if there are increases in what is being charged?  Certain changes are permitted when there are "changed circumstances".   For example, a change in the credit quality of the borrower occasioned by such things as loss of employment, previously unknown credit matters, or an increase in the amount of the requested loan, could constitute "changed circumstances".  If that happens, then the lender is required to issue a revised GFE within three business days after learning of the changed circumstances, but even then, only the specific line item charges attributable to the changed circumstances may be revised.   All other charges must remain as originally estimated.  Significantly, market fluctuations are not considered to be changed circumstances, so once a lender and consumer have agreed on a rate, it is locked in until the expiration date shown on the GFE, regardless of how rates may have increased since the estimate was given.

If there are no changed circumstances but the charges are more than was disclosed, then the lender must pay the increased charges.  Let’s say that again:  the lender must pay any increases in the charges, and they must do so within thirty days after closing.  Failure of the lender to cure any disclosure violations within thirty days following closing is a violation of law.  Complaints should be made to the lender and if not cured, to the Office of Housing and Urban Development.

The new rules also prohibit kickbacks, limit the amount of advance deposits in escrow accounts, and prohibit "junk fees" that have plagued consumers for years.  For example, consumers have often been required at closing to pay for expenses which had not been previously disclosed on the GFE, such as processing and application fees, document preparation, courier and notary fees, wiring, postage, photocopying and other costly expenses.  Sometimes, these "junk fees" were charged by the lenders and sometimes by the settlement agents.  Now, all of the lender’s charges are to be totaled as "Origination Charges" which cannot vary at all from the estimate, while other settlement service charges are to be totaled as "Settlement Services" which can increase only within a tolerance of ten percent.

Further information, including sample forms, FAQ’s and instructions on how and where to file complaints for RESPA violations can be obtained at www.hud.gov/respa.
With the new RESPA rules, there will no longer be any last–minute surprises.  Consumers will save a great deal of money, but the rules are rather complicated, so it is more important than ever to have competent real estate professionals involved in any real estate transaction.

Robert P. Summers is a Florida Board Certified Real Estate Attorney with the Stuart law firm of McCarthy, Summers, Bobko, Wood, Norman, Bass & Taylor, P.A.  www.McCarthySummers.com