Thoughts in the wake of RESPA reform
Within three months after my youngest son was hatched, he effectively communicated that he was to be a bit “different” than my first son. Let’s just say my hopes for a simplified version of my first son were dashed early.
Similarly, since the January 1, 2010 hatching of HUD’s RESPA regulations, and after conducting about 350 real estate closings, my hope for simplification and more transparency in the real estate settlement process has waned.
The new RESPA regulations require, among other things, a newly designed HUD-1 Settlement Statement and force lenders to provide a tolerance-limited Good Faith Estimate (GFE). The intent of the changes was to simplify the process by delivering more transparency and consistency.
This, according to HUD, would allow homebuyers to more effectively and comparatively shop for services. Additionally, as a result of delivering more transparency and consistency, the new rules would help to avoid closing cost surprises on the day of settlement.
Let me start with the good. The new rules have marginally achieved more transparency.
Homebuyers are now armed with more knowledge about such things as how much the mortgage broker is earning and how much the title agent is receiving as a title insurance commission.
The new rules have also, by forcing lenders to use the same GFE form, provided consistency for apples-to-apples comparison shopping of mortgage products. Before, each lender offered its own version of a GFE that made it more difficult to effectively shop.
Another plus with the new rules is more of a by-product. While settlement service providers were largely left unscathed by the new disclosure requirements, they have been forced to be more transparent by the lenders.
Since the lenders are subject to penalties for not providing inaccurate transfer taxes and, in some cases, for inaccurate settlement fees and title insurance premiums, the lenders have demanded accurate quotes for title charges from title companies.
In other words, in order to incorporate accurate title charges for the GFE, lenders are demanding more immediate and accurate costs from title companies.
Naturally, most title companies wish to remain in good graces with a potential referral source. As a result, this has motivated many title companies to make available online guaranteed quotes for both lenders and homebuyers.
Now, I offer the not-so-good stuff. The new rules have not achieved the intended result of avoiding settlement day closing costs surprises.
In my 15 years of experience at the closing table, the most common cost surprise is the result of under – estimated real estate taxes – in the form of pro-rated amounts between the buyer/seller, escrow reserves held by lender and tax bill due-dates coinciding with the date of closing.
Unfortunately, the new rules did not address this most common closing cost surprise culprit. While the new rules do apply a no-tolerance standard in the GFE for transfer taxes, they do not address real estate taxes.
A similar limited tolerance standard for required real estate taxes would have gone a long way in avoiding the infamous settlement surprise.
The new GFE does not provide a “funds required at closing” line item for the homebuyer. In other words, after adding up all closing costs and pre-paid items, it would have been very simple and helpful to factor in the sales price and loan amount to the equation.
The calculation would have informed the homebuyer of the amount he or she needed to bring to the closing table.
Finally, in the not-so-good-stuff category, I have to say that not much has been simplified with the new rules. Yes, a few extra line items from the old HUD-1 have disappeared and combined into one line item on the new version.
Weigh that single simplification against the added paperwork produced by the new rules, and we’ll call it what it is: a minor improvement at best.
The next time HUD hatches new rules in an attempt to simplify this process, I hope real estate taxes weigh in during the incubation stage.