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June 01, 2016

Federal Laws Affecting Closings, Part 1

Kathleen J. Hopkins and Evan L. Loeffler

Preface

Two members of the GP Solo Division wrote a wonderful book about real estate. We are very fortunate to have permission to re-print a portion of it, and I am sending it to you. One-half of the material will be printed this month and the other half next month. This is truly a wonderful book and I recommend it to you very highly.

Best regards,
Jim Schwartz

Several federal laws affect real estate closings. This chapter briefly addresses the most frequently encountered and the most significant of those laws.

 

RESPA and Regulation X

The Real Estate Settlement Procedures Act (RESPA) was enacted by Congress to enable consumers to understand better the process of purchasing and financing a home. It is a disclosure act administered by the Secretary of Housing and Urban Development (HUD) through guidelines known as Regulation X. The Dodd-Frank Wall Street Reform Act of 2010 shifted responsibility for oversight of RESPA to the Consumer Financial Protection Bureau (CFPB) as of July 21, 2011. The following sections cover the portions of RESPA and Regulation X that directly involve the closing lawyer.

As a practical matter, whenever an individual buys a house and an institutional lender finances the purchase, the transaction is subject to RESPA. There can also be transactions involving individual lenders and sellers who finance purchases and who come under the act. In any event, the closing lawyer’s responsibilities for compliance with RESPA are normally the same as long as the transaction is subject to the act.1

 

Responsibilities of Examiner and Closing Lawyer

The title examination process is one of the services involved in a closing subject to RESPA. The examiner, however, has no particular responsibilities under the act or Regulation X. He or she performs the examination exactly the same as for a transaction not subject to the act. However, the examiner does have two concerns related to RESPA. First, the examiner must be concerned about the restrictions on fees, such as referral fees and commissions. Second, the examiner cannot tell from the deed records whether past closing lawyers and lenders have always complied with RESPA and Regulation X. The examiner cannot certify that the current closing lawyer and lender will comply. Thus, the examiner may want to insert an exception in his or her title report for matters related to RESPA and Regulation X.

The closing process is also one of the services involved in transactions subject to RESPA, and the closing lawyer does have related responsibilities, primarily in connection with the HUD-1 form. The lawyer is responsible for proper completion of the form and for the one-day advance disclosure. The closing lawyer should follow any instructions given by the lender.2

 

Prohibited Fees and Kickbacks; Controlled Business Arrangements

A lender cannot charge any fees for preparation of the HUD-1 form or any related documents pertaining to RESPA.

A closing involves numerous services to be provided and numerous persons who must provide them. Real estate agents, lenders, surveyors, title examiners, title insurance companies, appraisers, lawyers, pest control companies, and others are necessary providers of various services for closing. Such parties should be aware that accepting fees or kickbacks for business referrals regarding federally related mortgages is prohibited.3 Certain fees are not considered prohibited kickbacks, such as attorney and broker fees as defined in the statute.4

Further, the act does restrict referrals when there is an “affiliated business arrangement”; that is, when the referral to a provider of services is made by someone with an ownership interest in the provider.5 In such cases, disclosure of the business arrangement must be made to the party paying for the service and their approval obtained. Even in an affiliated business arrangement allowed under the statute, the consumer cannot be required to use a particular provider of services.

A return on the ownership interest or franchise relationship is the only allowable transfer of value between the affiliated parties.6

 

Title Insurance Companies

A seller cannot require a purchaser to buy title insurance from a particular title insurance company, unless the seller pays for the policy.7 The prohibition does not apply to a lender unless the lender is also the seller. However, certain state laws do limit or prohibit a lender’s right to choose a title insurer, and they give the consumer as the party paying for the service the right to select the title insurance provider.8

 

One-Day Inspection Right

The borrower can request from the closing lawyer the right to review the HUD-1 settlement statement one day before the date of closing. The lawyer needs to disclose only information that is available as of that date. No other party has the right to review the statement in advance, and the borrower’s failure to review does not affect the closing.9

 

HUD-1 Form

The HUD-1 uniform settlement statement form should be used for all closings subject to RESPA and Regulation X. In fact, some lenders require the form even if the transaction is not subject to RESPA, and some lawyers use the form for all transactions. The form was devised by HUD and allows the itemization of all charges made by the lender and other closing costs of the sale.10

HUD totally revised the Good Faith Estimate (GFE), and the HUD-1 and HUD-1A Settlement Statement Forms (HUD-1) for mortgage loans originated after January 1, 2010.

The Good Faith Estimate

The major change in the GFE relates to the organization and standardization of the form. The new form is meant to enhance customer understanding of the loan terms, rather than represent a laundry list of fees, and to provide a standardized form for critical information. Particularly, HUD has attempted to group the fees in a more logical manner.

At the start of the loan process, the loan originator creates a GFE using the information provided by the prospective borrower. This GFE must be provided to the prospective borrower within three days of the completed application. Upfront application fees are no longer permitted. The only fee that may be charged to the borrower before the issuance of a GFE is a limited fee for the procurement of a credit report. If there is any change in circumstance that would alter the charges listed on the GFE, the lender must provide the borrower with a new, revised GFE.

Page 1 of the GFE contains the basic loan information such as the amount of the loan, interest rate, term, monthly payments, etc. Studies found, and the recent foreclosure explosion highlighted, that many borrowers did not understand that their interest rate and monthly payments could change in the future. So, page 1 discloses any increases that could occur to any one of the following:

  • interest rate,
  • monthly payment amount, or
  • loan balance (negative amortization).

It also sets forth whether this loan has a balloon payment, prepayment penalty, or escrow account.

Page 2 of the GFE sets forth the origination charges, points, or credits for the interest rate selected and various settlement service charges, including title and closing services, transfer taxes, recording charges, daily interest charges, initial escrow deposit, and homeowner insurance.

Page 3 contains the tolerance table, describing which charges can increase, cannot increase, or can increase by no more than 10 percent. There is also a “trade off” table showing how the loan will change if a different interest rate or initial settlement charge (points) is selected. Finally, page 3 has a “shopping cart” allowing the borrower to compare this lender’s charges with those of up to three other lenders.

The New HUD-1 Settlement Statement

The revised HUD-1 is now three pages long with pages 1 and 2 organized similarly to the present form. The third page compares the charges from the GFE with those on the HUD-1.

The items on the lines numbered 100 through 704 on the HUD-1 remain unchanged from the previous version. Items 801 through 904 have been altered and now match the new GFE. The required services for which a service provider was identified and required by the lender were aggregated on the GFE form (GFE 3) but are itemized as 804 through 808 as well as 902 on the HUD-1. The required services that the borrower can shop for (GFE 6) are now listed under the revised section 1300.

Section 1000 continues to deal with the escrow account and contains largely the same selection of charges. A few changes do exist, including the combination of city and county property taxes, previously entries 1003 and 1004 on the HUD-1, into the single “1004. Property Taxes” entry on the new form.

Section 1100, which deals with title charges, has seen significant changes. Several specialized charges, including title search fees, title examination fees, closing services, and third-party charges such as wire fees, have been collapsed into the single “1101. Title Services and Lender’s Title Insurance.” Therefore, 1101 includes all the title services fees (which also appeared on line 4 of the GFE). Two new entries, 1107 and 1108, appear requiring disclosure of the split of the title insurance premium between the agent and the underwriter. Furthermore, 1107 includes the title insurance premium plus all endorsements retained by the agent, while 1108 includes the title insurance premium plus all endorsements retained by the underwriter.

The “Government Charges” section remains largely the same, though the organization of the section has changed slightly in the revision of the form.

The most obvious change to the HUD-1 Settlement Statements is the addition of the comparison table, which requires a comparison of the GFE charges to the actual charges appearing on the HUD-1. This back page further includes a “Loan Terms” section that is analogous to the “Loan Summary” section found on the new GFE. Unlike the GFE, however, the HUD-1 Loan Terms section further includes all monthly amounts owed, including escrow account payments, and it may account for insurance. This section serves to inform the borrower of the exact monthly amount owed with relative simplicity.

Tolerances

The HUD-1 now contains provisions known as tolerances. These are maximum percentage increases in fees allowed between the GFE and the HUD-1/1A. Certain fees cannot increase, others are capped at 10 percent, and some have no cap.

Origination fees, credits or charges for the interest rate (also known as points), and transfer taxes cannot increase.

Any service required by the lender where the provider is selected from a list provided by the lender or selected by the lender is subject to a 10 percent tolerance. The HUD-1/1A aggregate amounts for these services cannot exceed the GFE amounts by more than 10 percent. These include title services, and owner and lender’s title insurance when the provider is selected by the lender. If the borrower selects a title insurer/closing agent not on the lender’s list, there is no cap to the title and closing charges. Government recording charges, because they are relatively predictable but not fully so, are also subject to 10 percent tolerance.

Finally, any service provider the borrower selects that is not identified by the lender as well as the initial escrow deposit, daily interest charges, and homeowner’s insurance is not subject to any cap or tolerance and may increase by any amount between the GFE and the HUD-1/1A.

Right to Cure and Violations

As a result of the tolerances provided for the different types of charges, a new ability to remedy errors has been created. While an overage above any of the tolerances is considered a violation of section 5 of RESPA, the lender has the right to cure the defects. It is the duty of the lender to both discover and remedy such overages within 30 days of the closing.

Lenders have 30 days from the settlement to discover and cure any violation. If notified by the lender, the settlement agent has a duty to issue a corrected HUD-1 within 30 days of closing. Inadvertent or technical errors are not considered violations of section 4 of RESPA if the closing agent provides the borrower and/or seller a revised HUD-1/1A within those 30 days.

 

Notes

1. See generally Comer Woodward Padrick, Jr., Padrick on RESPA, Truth-in-Lending and ECOA in Real Estate Transactions (3d ed. 1994).

2. Id.

3. 12 U.S.C. § 2607.

4. See id. § 2607(c).

5. Id. § 2607(c)(4).

6. Id. § 2607(c)(4)(B) and (C).

7. See 24 C.F.R. 3500.15(b)(2).

8. See Padrick, supra note 1, §§ 1-19, 1-30.

9. Id. §§ 1-15, 1-42.

10. Id. § 1-10.

 

Reprinted with permission from Kathleen J. Hopkins and Evan L. Loeffler, Real Estate Closing Deskbook (3d Ed. 2012), at 73-77. © 2012 American Bar Association. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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Kathleen J. Hopkins and Evan L. Loeffler

Kathleen J. Hopkins is a founding member of the Seattle firm: Real Property Law Group PLLC. She limits her practice to complex commercial real and personal property transactions, financing and leasing. She is a co-editor of Real Estate Closings Deskbook (3d Edition).

Evan L. Loeffler is the principal of the Loeffler Law Group PLLC has practiced law in Washington since 1994, and is the author of multiple landlord-tenant law sections in the Washington Lawyers Practice Manual. He received his law degree from Gonzaga University School of Law in 1994. He is a co-editor of Real Estate Closings Deskbook (3d Edition).