Rules Limit Fee Increases at Home Closing

Home loan customers receiving a good faith estimate

Thanks to new RESPA rules, lenders and mortgage brokers have to give borrowers a good faith estimate that outlines key loan terms and fees. Image: Purestock/Getty Images

Homeowners in the market to refinance a mortgage or take out an equity loan, as well as homebuyers looking for purchase financing, should benefit from improved RESPA disclosure rules.

Lenders are required to use a redesigned good faith estimate, or GFE, form and HUD-1 settlement statement that clearly spell out loan terms and closing costs. RESPA also limits how much some fees listed on a GFE can increase at settlement, decreasing the likelihood of last-minute surprises.

RESPA could save borrowers time, money

Residential loans, including mortgages and equity loans, are subject to the Real Estate Settlement Procedures Act, or RESPA for short. That means its requirements will come into play any time you try to refinance a first mortgage, take out a second mortgage, or buy a house. Home equity lines of credit, or HELOCs, are excluded because they’re covered by other disclosure guidelines. The U.S. Department of Housing and Urban Development’s RESPA rule took full effect Jan. 1, 2010.

At the core of RESPA is a new three-page GFE form that highlights proposed loan terms and breaks out projected settlement fees, from title services to origination charges. There’s also the revamped HUD-1 settlement statement, which is issued just before closing and provides an accounting of the final loan and settlement service costs. The redesigned forms are cross-referenced, allowing the borrower to easily compare the fees provided up front on the GFE, to the actual fees presented at closing.

HUD, in its impact analysis of RESPA, claims that a typical borrower should save $668—12.5% of the average total loan charges. The savings are projected to be derived primarily from the reduced cost of many fees as a result of upfront disclosure, limits on fee increases, and competition. Borrowers also should be able to reduce the typical 12 to 15 hours spent obtaining a loan by at least an hour, says HUD.

Some in the industry, including the National Association of REALTORS®, dispute HUD’s savings estimate, claiming any savings would be less than projected or not materialize because of increased compliance costs for lenders and title companies.

GFE form spells out loan terms, fees

Fees typically add up to between 3% and 6% of a loan amount, according to the U.S. Federal Reserve, so it’s important for borrowers to keep tabs on these charges. That’s often easier said than done. But because the revised GFE and HUD-1 forms group like fees, use consistent terminology, and cross-reference fees by line number, the task is much simpler. The only fee that can be collected at the time of a loan application is a charge to pull a credit report (U.S. average: $37).

Loan originators have three business days to give a borrower, who submits a loan application, a good faith estimate that discloses key loan terms and fees.

Certain fees listed on the GFE, such as transfer taxes, can’t change at settlement. Loan-origination fees can’t change once an interest rate is locked in. The total cost of fees for such things as title services and title insurance can only increase by up to 10%, if you use a provider recommended by the lender. The 10% cap doesn’t apply if you pick your own providers. What can also change by any amount at settlement includes reserves for escrow and premiums for homeowners insurance.

For some services, such as appraisals or credit reports, lenders can require you to use a specific provider or choose from a list of selected providers. RESPA prohibits lenders from receiving any type of kickback from these providers. Borrowers can shop around for providers of some services, such as pest inspections and surveys.

Which amounts can and can’t change are clearly labeled in a table in the instructions on page 3 of the GFE form. The instructions also provide a handy table for comparing terms from various GFEs, and a tradeoff table that outlines such things as how the purchase of discount points will affect your monthly payment and settlement charges. (Buying points—the cost of each point is equal to 1% of the loan amount—will lower the interest rate you pay on a loan in exchange for a higher upfront payment.)

Be a smart consumer

HUD’s settlement cost booklet, “Shopping for Your Home Loan,” provides useful information about the new GFE and HUD-1 forms. Lenders must, at the time of application, provide you with a copy. Read it.

  • The transparency of the new GFE makes comparison shopping easier. Settlement service terms not related to the lender’s loan origination charges are required to be available for a minimum of 10 business days.

  • Review the good faith estimates with a real estate attorney. If you have any questions about the number or size of fees, contact the lender immediately. Once you express an intention to proceed with a loan, a lender can collect additional fees related to origination.

  • Don’t toss the GFE in the trash after you pick a lender. Take the paperwork to your closing. You’ll be able to compare, line by line, the GFE with the three-page HUD-1 settlement statement.

  • If questionable charges turn up at settlement yet you decide to close on the loan anyway, or if you don’t spot the charges until after the closing, there’s still recourse. Lenders have 30 days from the date of closing to correct errors and violations, and repay consumers any overcharges. Borrowers can file RESPA complaints with HUD by calling 202/708-0502.

Jerry DeMuth has written about mortgages and other financial issues for more than two decades for trade publications, major newspapers, and consumer magazines. His writing has received four awards and has been included in eight non-fiction books