In this post, I’ll discuss a very important issue to lenders, closing attorneys and borrowers alike: how the new RESPA rules handle the disclosure of closing attorney fees/costs and title insurance.
The new RESPA rules significantly change the way lenders must disclose settlement services, in particular closing attorneys’ fees, and title insurance. Generally, under the new rules, closing costs are divided into one of three “buckets”:
(1) those that cannot change from initial Good Faith Estimate (GFE) disclosure
(2) those subject to a 10% tolerance–that is, those which cannot increase by more than 10% from the GFE to the closing, and
(3) those that can change, i.e., increase without limitation.
Here is how the GFE (page 3) shows the 3 buckets:
For closing attorney fees (which HUD now calls “title services”) and title insurance, bucket #1 does not apply, and whether the cost belongs in bucket #2 or #3 will depend on whether the lender recommended the service provider on a written list of preferred providers. If the borrower selects a provider from the list, such as a closing attorney, their charges cannot increase by more than 10% from the GFE to the closing.
Thus, lenders have an incentive to recommend trusted providers whose charges are standard and predictable. If the borrower wants a particular attorney or title insurance provider not on the preferred list, he/she is free to select one, but their charges are not subject to the 10% tolerance and can go up (or down) by any amount.
Also remember that lender’s title insurance is universally required by every public mortgage lender, and in Massachusetts the borrower pays that premium at closing (except for no closing cost loans). A lender’s title insurance policy, however, does not protect the homeowner. As HUD and I always advise, borrowers should always get their own owner’s title insurance policy. (See HUD’s Shopping For Your Home Loan Booklet and my post, Title Insurance Demystified for some horror stories about what happens when you don’t purchase an owner’s title insurance policy).
Here is how the new GFE (page 2) discloses closing attorney fees/title services and title insurance:
Note that lines 3 and 4 represent a huge change from prior practice for closing attorneys. Now closing attorney fees must be disclosed as a single, lump sum charge, plus the cost of the required lender’s title insurance policy. The old GFE itemized such closing costs as courier fees, discharge tracking fees, and the like, but the new GFE is intended to simplify the disclosure of attorney closing costs in favor of one standard charge that consumers can compare across the board.
From the GFE, these fees and costs are ultimately carried over on the new HUD-1 Settlement Statement, with reference to the new GFE lines:
At the closing, the borrower can now simply compare the GFE with the new HUD to ensure that the quoted charges have carried over to the closing table. Remember though that selected costs from a “preferred provider” may deviate up to 10% under the tolerance rules. Also, for the first time the new HUD mandates disclosure of the closing attorney’s share, or split, of the title insurance premium.
This is my second post in a series on the new Real Estate Settlement Practices Act (RESPA) rules which went into effect on January 1. My first post was Are You Ready For Some RESPA Reform? An Overview Of The New Regulations. Click here for a listing of the entire RESPA series.
As always, please contact Attorney Richard Vetstein with any questions.