Change in rules could bring about an end to closing cost surprises
WASHINGTON — Did you ever get hit with a closing cost shock? The "good-faith estimate" from your lender said closing costs would be about $2,000, but somehow they ballooned to $3,500 when it came time to sign the papers for your mortgage.
Worse yet, you had to come up with the extra money to handle the surprise costs or the home purchase or refinancing could not proceed. No one likes that kind of a surprise, and in about eight weeks, they should become a rarity.
Federal rules adopted by the Department of Housing and Urban Development have a blunt message for lenders and others who lowball estimates or add on junk fees at settlement: Play games like that, and you — not your customers — will have to pay the difference. The rules are scheduled to take effect Jan. 1, though banks and mortgage lobbies are pushing hard for a delay.
Here's what's about to happen: Starting Jan. 1, loan charges and settlement fees will be spelled out on a more consumer-friendly version of the good-faith estimates (GFE) form that borrowers receive within three days of their mortgage applications. Charges will fall into three categories on the form:
• Fees that cannot increase from upfront estimates to final closing.
• Fee estimates that come with wiggle room and can increase by as much as 10 percent in the aggregate from upfront estimates.
• Fees that can increase without limit, mainly because the lender has no control over them or the amount is difficult to predict weeks in advance.
Charges in the zero-increase category include the lender's or broker's mortgage origination, processing and underwriting charges, where junk fees sometimes sprout out of nowhere or increase significantly. Also in this category are the lender's or broker's loan discount charge or "points" based on the interest rate quoted to the borrower and local transfer taxes.
Charges subject to a 10 percent aggregate increase include services required by the lender but where the lender chooses the providers, such as appraisals; expenses such as lender's title insurance and settlement services where the borrower chooses a firm on a list approved by the lender; owner's title insurance when the borrower chooses a company on the lender's approved list; and recordation charges by local governments.
Though any one of these items can increase more than 10 percent from the upfront estimate to closing, the combined total of all the fees in this category cannot jump by more than 10 percent. This is crucial, especially in title insurance and settlement charges, where some of the biggest surprises pop up at closing.
Charges that can increase without limit include lender-required services where the borrowers choose a title insurance, escrow or other settlement company that is not on the lender's list; the cost of homeowners' hazard insurance; daily interest charges on the loan; and the amount of the initial deposit by the borrower into an escrow account.
The new good-faith estimate also encourages loan applicants to shop around. The form includes space for comparing up to four competing lenders' GFEs on interest rates, rate locks, prepayment penalties or balloon payments, among other factors. The cost estimates you receive from each competitor are required to remain available for 10 business days. Interest rates can change unless locked by the lender and borrower.
Paired with the new GFE rules will be a new standard closing cost statement, the "HUD-1." Unlike the statements in use today, the revised HUD-1 is wired into the GFEs to let consumers directly compare what they were told by the lender with what they're being asked to pay at closing. The final page of the new form itemizes the three categories of fees from the GFE and compares them line by line with the actual fees at closing.
Still another pro-consumer feature of the new HUD-1: For the first time, it requires disclosure of the fee splits of title insurance premiums between the insurance underwriter — the company actually insuring the title — and the title agent, who is often the settlement agent. Consumers may be surprised to learn that in some markets, 80 to 90 percent or more of the premium they pay at closing goes to the agent, not to pay for the insurance.
Ken Harney can be reached at email@example.com.