General Practice, Solo & Small Firm DivisionMagazine
Real Estate Law
Proposed RESPA/TILA Changes
The Lawyer’s Role in Residential Real Estate Closings
By Ann vom Eigen
The Department of Housing and Urban Development (HUD) and the Federal Reserve System (Federal Reserve) have proposed changes in the Real Estate Settlement Procedures Act (RESPA), and the Truth in Lending Act (TILA) that are intended to improve the certainty of information given consumers on residential real estate settlement services, promote consumer shopping, and lower the cost of settlement services. These proposals could decrease the quality and availability of lawyers’ services in residential real estate closings.
HUD and the Federal Reserve have recommended alternative federal mortgage disclosures and a new exemption from Section 8, the antikickback provisions, of RESPA. The proposed exemption is designed to encourage the "packaging" of settlement services by lenders that can put together a bundle of services needed to close a mortgage loan. HUD and the Federal Reserve assume that competitive advertising of this "bundle" or "package" of settlement costs will bring pressure to lower charges for settlement services and that the proposed Section 8 exemption would allow lenders and others who package these services to seek volume discounts from service providers.
Key Provisions of the Report. HUD and the Federal Reserve make four key policy recommendations for RESPA and TILA: revising the Annual Percentage Rate disclosure required under TILA to better reflect the overall cost of credit by defining the finance charge to include costs the consumer must pay to obtain the loan; requiring more firm settlement cost disclosures under RESPA through either guaranteed closing costs or a revised good faith estimate and penalties to be imposed if estimates exceed a tolerance; revising and streamlining the timing requirements under TILA and RESPA to provide consumers with cost information earlier in the mortgage process; and adding protections for consumers against abusive lending practices.
Two agency proposals directly affect lawyers. First, attorneys’ fees would be reflected differently under the finance charge in the TILA disclosure. Under current disclosures, fees that lawyers receive from borrowers, and often lenders, are excluded from the finance charge. Under the report, attorneys’ fees either for work required by a lender or for consumer representation would shift to the finance charge. This disclosure provision has a significant practical implication. Presently, if material TILA disclosures are not delivered or are deemed to be inaccurate, the consumer can exercise a right to rescind for up to three years. A lender may well see its lien on the property disappear. The loss of security was an extreme remedy for failure to comply with a disclosure. This enormous potential liability is driving lenders’ interest in the proposed changes.
The report recommends that the finance charge be defined to include the costs the consumer is required to pay to get the credit. All legal and other "ancillary" services and closing fees could be reflected in the finance charge. Additional services that can vary substantially based on the transaction, such as pest and home warranty inspections, might be included. This disclosure provision could cause creditors to pressure closing lawyers to find a way to limit settlement costs to stay within the tolerance.
A second major change would require that settlement costs, now reflected in the "good faith estimate," be disclosed in two alternative ways to ensure accuracy; either as part of a guaranteed loan closing cost that would be exempt from Section 8, or under a revised good faith estimate that would be subject to an accuracy standard and penalties.
Under the proposed new guaranteed loan closing cost approach, creditors or others packaging settlement services would be entitled to an exemption from the antikickback provisions of RESPA if they guaranteed specific lender required settlement costs. To obtain the exemption, the "packager" must: offer the consumer a comprehensive package of the settlement services needed to close a loan; provide the consumer with a simple, prescribed disclosure that gives the guaranteed maximum price for the package of services through closing; and disclose the rate and points the lender offers to the consumer for the loan, with a guarantee that the rate and points will not increase, subject to prescribed conditions.
The Federal Reserve and HUD have not addressed the possibility that the services required by different lenders could vary, so that the guaranteed package of services could contain quite different services. According to the agencies, creditors would enter into volume-based contracts with affiliated and other settlement providers for services, such as appraisals, title insurance, credit reports or lender required legal fees, and package all of the necessary services. The lenders could then obtain volume discounts to pass on to consumers.
The agencies envision a package of settlement services that would include all charges for lender required services and third party fees for items such as surveys, appraisals, credit reports, legal fees and mortgage broker services. Mortgage filing and recording fees might be included. Points, per diem interest and other services that vary might be excluded. The report notes that a "guaranteed closing cost" scheme raises two significant concerns. Should closing costs be itemized? Should consumers be allowed to substitute service providers?
A Revised Good Faith Estimate. The second alternative to increase consumer certainty involves a less drastic change to current disclosures, a "federal disclosure statement for home secured loans." Currently, the good faith estimate cost disclosures must show a reasonable relationship to the actual charges that are incurred. There is no liability if a creditor is inaccurate, and estimates can significantly differ from actual settlement costs. The agencies propose that a more accurate GFE could be required for certain categories of costs within the lender’s control. The report discusses alternative tolerance levels and notes that a potential penalty could be set as a flat fee or a percentage difference between the initially estimated and actual costs. There would be no relief from Section 8 liability, a strong disincentive to using this approach.
Potential Consequences. The guaranteed loan closing cost proposal has three major potential effects that would alter the service delivery system: the price and quality of legal services; real estate lawyers’ access to the customer; and the entire service delivery system. A nationally advertised guaranteed loan closing cost package could precipitate an evolution to a few national service providers of both credit and settlement services. If they obtain an exemption from the antikickback provision, lenders that package guaranteed loan closing costs will seek "volume discounts" in fees and services, which will result in less revenue to the closing lawyer and lead to pressures to decrease service.
Lawyers’ access to consumers may be effectively denied. Con-sumers shopping for mortgage credit will purchase settlement services in the loan product. They will not seek and obtain outside counsel. Packaging of loan settlement services will also limit consumer choice when a consumer believes that mortgage credit would be unavailable if the consumer does not use the provider’s package. Further, under the HUD scenario, substitution is effectively prohibited.
A national delivery system would be more likely to evolve and exacerbate present consolidation in the lending industry, if the more reliable good faith estimate option is not attractive to creditors. Because these national lenders are likely to negotiate national contracts, lawyers may need to have a connection to a national network to get into the package at all.
Ann vom Eigen is legislative counsel with American Land Title Association in Washington, D.C.
- This article is an abridged and edited version of one that originally appeared page on 32 in Probate and Property, January/February 1999 (13:1).