Demand Honesty in Good-Faith Estimates of Fees
When a Maryland couple applied for a mortgage this summer, they received a federally mandated good-faith estimate of closing costs from their lender.
When they later went to settlement, they could scarcely believe their eyes. The official “HUD-1” settlement sheet contained hundreds of dollars in charges above those on the estimate at application. Among these were $927.85 in unexpected loan origination and discount fees, a $175 “commitment fee” that had been listed at $100, a $200 survey charge that had been $150, $479 in surprise title-related fees, plus a $95 charge for “copies/judgment” and $65 for “courier.”
Was this couple’s experience something unique or unusual in the home buying and mortgage marketplace of 2001? To the contrary, it may well have been closer to the norm. The easiest way to gouge American consumers on what is often the biggest--and most confusing--financial transaction of their lives is to play bait-and-switch on settlement fees. That means to estimate low on the federal disclosure, and then to settle high weeks later.
Even the lending industry admits this is scandalous. The president of the largest trade group representing mortgage brokers said “horror stories abound of borrowers arriving at closing to find that [the] actual costs of various services are hundreds of dollars above what was disclosed on the good-faith estimate.”
Joe Falk of the National Assn. of Mortgage Brokers said some of the worst abuses occur where borrowers’ credit profiles are marginal. That’s when “the bait-and-switch operators” frequently “disclose a prime loan and deliver a sub-prime” mortgage package at settlement, loaded with extra fees and unexpected line items.
The reason unscrupulous title agents, lawyers and loan officers can play this game so brazenly may well be the real scandal: The federal agency empowered by Congress to oversee the real estate settlement market has no statutory power to enforce even minimal honesty in good-faith estimates. The Department of Housing and Urban Development has regulatory authority over many of the practices of settlement-services companies--and under the Bush administration has begun cracking the whip on kickback schemes and unearned fees.
But HUD can’t tell your lender to stop low-balling settlement fees. There are no federal standards that govern how far off good-faith estimates must be from the actual charges on the settlement sheet before they are considered abusive.
When a loan officer hoping to pull in your application hands you a good-faith estimate listing an appraisal at $250, should it be a violation of the law when that number balloons to $400 on your final settlement sheet? Falk thinks it should be, and favors an amendment to federal law to give HUD the power to protect consumers from low-ballers. Falk also wants the government to come up with a range of “tolerances,” beyond which good-faith estimates could not depart without triggering an automatic redisclosure prior to settlement.
Since Falk’s proposal isn’t law, how can consumers guard against low-balling? For starters, be aware of some telltale signs. When a loan officer pulls out a sheet of paper and casually jots down estimates on the spot, the risk of last-minute additions at settlement rises sharply. The loan officer could tell you later, when you complain about the higher charges, that he was just trying to give you a rough idea.
Watch out, too, for dubious line items that never existed on the estimates. Some are well-established “junk” fees that routinely get sprinkled through settlement sheets, such as “processing,” “commitment” and “administration,” and often represent double charges for services theoretically covered by the “origination” fee. Others are pure fictions. A California broker reportedly included fees carrying the names of lending industry executives--an “RJSmith fee $300,” for example--that he pocketed directly from the proceeds.
A recent Washington, D.C., settlement sheet with heavily larded fees of $8,137 included the desperate-sounding line item--”additional fee(s) $265”--suggesting the settlement company had run out of specific names for junk charges and had to revert to a generic. Title agencies sometimes increase their slice of the pie by listing bogus “processing” fees up to $395--a practice identified and documented for me by a title industry executive unhappy with his colleagues.
Creativity in layering icing on the settlement cake is almost boundless. But what can be done besides the obvious remedies from Congress?
Consumers themselves have to demand honesty in good-faith disclosures. They need to demand copies of settlement documents at least one day in advance to spot and challenge the junk.
And sometimes, even at the risk of possible financial penalty, they may have to consider taking the ultimate step against 11th-hour surprises: to walk from the deal.
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Distributed by the Washington Post Writers Group.
