HUD Making Consumers a Priority

WASHINGTON--When the borrower questioned a closing fee that wasn’t on the good-faith estimate he received when he applied for financing, it was quickly removed. But when he received a copy of the amended settlement sheet in the mail a few days after closing, the charge had been reinstated.

And when another borrower took exception to a $500 charge that was levied because he refused to use the title insurance company that was affiliated with the real estate broker, it, too, was eliminated. At the same time, though, a new $500 charge was added, this one a processing fee.

These are two of Ivy Jackson’s “favorite” complaints to the Department of Housing and Urban Development. Jackson is the government’s top cop when it comes to the Real Estate Settlement Procedures Act, or RESPA, the consumer protection statute that, among other things, is intended to help consumers shop for settlement services and eliminate kickbacks and referral fees that unnecessarily increase closing costs.

Under previous HUD regimes, these complaints and thousands of others like them wouldn’t have received much attention from Jackson’s understaffed, two-person RESPA enforcement division. But things are different under current Secretary Mel Martinez, who has vowed to enforce the law with renewed energy.

Since November, the department has taken action against nearly 50 companies for various RESPA violations, and collected some $2.5 million in fines. Monetary settlements aren’t the worst part, though. These firms also have suffered from the negative publicity that goes along with such charges.

And it won’t stop there. HUD recently signed a $1.5-million contract for investigative services with a Virginia firm that is staffed for the most part by former agents from the Secret Service, FBI, U.S. Customs Office and the criminal division of the Internal Revenue Service.

“RESPA is a secretarial priority,” said Jackson, whose office also has received a significant infusion of manpower in the past few months. “Secretary Martinez is serious about RESPA enforcement, and we will be vigorously investigating illegal practices that come to our attention.”

It’s a good thing, because the complaints just keep rolling in. Known in mortgage circles as “the RESPA Ranger,” Jackson recently took a look at the last 2,500 grievances received by her office. One in four was not applicable, meaning it either wasn’t valid or it wasn’t covered under this law. But the rest were. Here’s how they broke down under different sections of RESPA:

* Sections 4 and 5 of RESPA prohibit lenders from increasing charges at closing that were said to cost less on the good-faith estimate of settlement fees the borrower was supposed to receive within three days of applying for the mortgage.

Complaints about lenders who violate this part of the law “seem to be increasing,” according to Jackson, who says they account for 8% of the gripes her office receives. So be sure to compare the two documents. Borrowers can’t expect the estimate to be exact. The lender may be off on the exact amount that must be collected for an escrow account for taxes and insurance, which depends on the closing day.

The lender also can’t underestimate other known charges. In other words, if the lender tells you up front that the credit report will cost $15 and the appraisal will run $200, that’s what should be reflected on the HUD-1 closing statement. The processing fee or the fee paid to the mortgage broker can’t be higher, either.

* Section 6: Under this part of the law, lenders are required to make escrow disbursements on time. Apparently many don’t; about 26% of the complaints fall under this section. In one case, the lender failed to pay the borrower’s insurance premium. And when the policy lapsed, the lender tried to require the owner to pay a higher rate through its own carrier.

As long as you are not more than a month behind on your house payments, insurance premiums, property taxes and other charges must be paid by the lender on or before the deadline to avoid a penalty. Lenders don’t have to take advantage of discounts for paying early, but they can’t be late. Be sure to review your annual escrow statement to be certain the lender paid on time and did not charge late fees to your account.

* Section 8: Most complaints (34%) involve this part of the law, which prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referring business his or her way. It also prohibits someone from giving or taking any part of a charge for services that weren’t performed.

There are many schemes to try to skirt Section 8. They range from free dinners to under-the-table cash bonuses. Most are too elaborate to be detected by unwary borrowers. But they aren’t missed by other lenders or settlement service providers, who will squeal on rivals lest they gain an unfair competitive advantage.

The rule of thumb, said Washington attorney Philip Schulman, is that if the benefit goes to the consumer, it is not a violation of the law. It’s perfectly fine for a builder to offer a buyer a free appliance package in exchange for going through an affiliated mortgage company. But it’s not OK for a real estate agent to accept a trip to Vegas for sending a dozen clients to a certain closing agent.

* Section 9 prevents a seller from requiring a buyer to use a particular title insurance company as a condition of the sale. Though only 2% of the complaints involve Section 9, they, too, are on the increase, Jackson reported.

Typically, violations involve a builder who charges an additional fee if the buyer opts against using an affiliated title company. Last fall, HUD required a major Florida firm to reimburse 168 buyers who were hit not only with an extra fee for using an independent title firm but also were forced to pay 1.5% of the price of their homes as closing costs without regard to whether the company’s actual costs equaled that amount.

* Section 10: About 5% of complaints involve escrow amounts collected by the lender for taxes, insurance and other charges related to the property. Despite what some lenders may tell you, RESPA does not require lenders to impose escrow accounts on borrowers. “It’s a lender requirement, not a legal one,” Jackson said.

But certain government loan programs and lenders insist on them as a loan condition. If that’s the case, the law says they cannot collect excessive amounts.

Each month, the lender may require you to pay no more than one-twelfth of the total of all disbursements payable during the year plus an amount necessary to pay for any shortage in the account. In addition, the lender can require a cushion not to exceed an amount equal to one-sixth of the total disbursements for the year.

But just because your escrow payment jumps up when your loan is transferred from one lender to another doesn’t mean there’s a violation. Typically, the new owner requires a full one-sixth cushion, whereas the old one required only one-twelfth or perhaps none at all. If the mortgage documents or law in a state set a more limited cushion--for example, one month’s escrow payments instead of two--RESPA defers to the loan papers or state law.

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Lew Sichelman is a syndicated real estate columnist. He can be contacted via e-mail at LSichelman @aol.com. Distributed by United Feature Syndicate.