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Despite rules, many home buyers still overcharged at closing

Lenders are required by law to give borrowers a good faith estimate of closing costs that is supposed to be within 10% of the final figures. But lenders often find ways to skirt the rules.

June 03, 2012|By Lew Sichelman

There's little more irritating for a home buyer than to be told during escrow that he needs more cash — sometimes a lot more cash — than he thought to close the deal.

The good faith estimate of closing costs that lenders are required by law to give borrowers within three days of their mortgage application is supposed to put a stop to that sort of thing. But a survey taken this year shows the rules don't always work as they should.

Lawmakers already recognize that, which is why regulators were directed under the Dodd-Frank Wall Street Reform and Consumer Protection Act to revamp the good faith estimate, as well as the HUD-1 settlement sheet that borrowers receive at closing.

Accuracy is higher than it used to be, but it still leaves a lot to be desired, according to a survey of 205 closing agents by the American Land Title Assn.

Although the poll is too small to be statistically valid, title professionals are in a position to address on the topic because of their involvement in closings. And it shines a light on several practices that violate Section 5 of the Real Estate Settlement Procedures Act.

Under that law, lenders' estimates for services rendered by third parties such as appraisers and surveyors are supposed to be within 10% of the final figures. If the charges listed on the HUD-1 exceed that, lenders are required to eat the difference.

But nearly 3 of 4 closing agents who responded to the survey said lenders sometimes pad their initial estimates so they can be certain that they are within the 10% limit at closing.

A quarter of the respondents said they never see items on the good faith estimate that are not charged at closing. But another 25% said they see the ruse more often than not. The remaining half also see the practice, but not that often.

"Over quoting" violates the spirit of the law, if not the law itself, which is intended to empower consumers to protect themselves from being gouged at closing, said Michelle Korsmo, chief executive of the American Land Title Assn. Even if borrowers are never charged for things like document preparation and warehouse fees, giving false information prevents consumers from making accurate comparisons when they shop for closing services.

Another troubling finding: More than half of the respondents said they've been pressured to cut their fees to help lenders avoid tolerance violations at closing.

Just as real estate agents don't like being forced to cut their commissions to make deals work, title agents don't like being told to slice their fees. But they don't have a lot of power to push back against the companies that help them find clients, Korsmo says.

The survey also found that despite the government's and consumer advocates' best efforts, people still don't shop for closing service providers. A whopping 75% of the respondents said they don't think people look for the best or least-expensive title and escrow services.

Does that mean borrowers are lazy, or they just don't care about saving a few bucks on what may be the largest investment they will ever make?

"No" to both questions, said Korsmo, who believes that by the time buyers pick a house, haggle over the price and secure financing, they are too emotionally drained to do any more legwork.

"When people get to the process of managing the transaction, they tend to disengage and rely on the advice of their agent or lender," she said. "Besides, they don't really have an idea of what goes on; it's all back-office work."

Lenders often don't make it easier on borrowers. Besides high-balling their estimates, according to the survey, some flood their clients with a raft of good faith estimates.

Only 1 in 4 borrowers receives just one estimate, according to the title association survey. The rest get two or more. Nearly 12% have four or five, and a handful sometimes have as many as seven.

Lenders are allowed to revise an estimate if there is a change in the borrower's circumstances. If, for example, your income is significantly less than stated on the application, you may be switched into a different loan program, which can lead to changes in the ancillary closing charges.

In some states, whether the borrower opts for owner's title insurance can throw off the estimate. If the borrower declines to buy his own policy, the rate on the lender's policy, which the borrower is required to purchase, can rise.

But still, multiple good faith estimates only obfuscate the situation. The intent of the law "is to give the GFE only once," Korsmo said. Multiple estimates "is not at all what the law intended."

Another thing: Two-thirds of the closing agents in the survey said the list of closing service providers that lenders are supposed to attach to the estimate so borrowers can shop around is missing in action.

Then again, more than half the borrowers don't bring their estimates with them to the closing table so they can be sure they are not paying more than what they were told initially. And 45% of survey participants said they see the document less than half the time.

So what's the point of the good faith estimate anyway, if consumers aren't going to use it?

Hopefully, new forms being developed by the Consumer Financial Protection Bureau will put an end once and for all to these kinds of lender shenanigans and make it simpler for borrowers to comparison-shop.

Stay tuned. Under Dodd-Frank, the consumer protection bureau must release its draft forms and regulations for public comment by July 21.

lsichelman@aol.com

Distributed by Universal Uclick for United Feature Syndicate.

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