Sunday, March 28, 2010

The New RESPA Rule – The rest of the 1100-series

In the last few issues we’ve covered the meat of the 1100-series of the new HUD-1 – mainly lines 1101, 1102, 1103, and 1104 – and how each ties in with Blocks 4 and 5 of the GFE. To summarize, line 1101 and Block 4 cover title services and lender’s title insurance; line 1102 addresses settlement or closing fees (and is rolled up into line 1101 and included in Block 4); and line 1103 and Block 5 pertain to owner’s title insurance. Line 1104 isolates the lender’s title insurance premium outside the columns, the charge being rolled up into line 1101 and included in Block 4.

While these four HUD-1 lines and two GFE blocks constitute the meat of the charges having to do with title insurance and closing/settlement services, the remaining lines in the 1100-series provide useful information for sellers and borrowers, some of which hasn’t been seen before in the world of residential real estate transactions. Having said that, the numbers on lines following 1104 are shown outside the column because they don’t figure in to the totals that either the seller or borrower has to pay. In short, the numbers seen on lines 1105 through 1108 are for information only and may be a HUD effort in transparency.

So, let’s see what these lines are all about.

Line 1105 sets out the dollar amount of coverage of the lender’s title insurance policy being issued to the borrower’s lender. Policy specifics (long-form or short-form ALTA 2006 policies) aren’t detailed here, only the level of coverage. Usually, the face amount of the lender’s policy is the same as the loan amount. In most cases, the loan amount is less than the purchase price, although some loans may be the same as or exceed the purchase price. Given the sub-prime and other high-risk loan program issues from past years, however, and the consequent financial meltdown, we’ll probably see fewer loans equal to or higher than the presumed value (sale price) of the property.

Similarly, line 1106 confirms the dollar amount of coverage of the owner’s title insurance policy being issued to the borrower/buyer. And, as you might expect, neither the type of policy (usually, ALTA 2006 or ALTA 2008 Homeowner’s – the latter sometimes referred to as an enhanced policy) nor the name of the title insurance company (underwriter) is revealed here either, only the policy limits. Normally, the coverage amount equals the purchase price.

Taken together, lines 1105 and 1106 don’t add much value to the HUD-1 because the title insurance commitment previously issued and circulated to the parties, including the lender, have already dished out that information. So, about the best that can be said for repeating the information is that the HUD-1 is validating the policy coverage stated earlier.

Now, on to lines 1107 and 1108.

For some reason, HUD decided it was pertinent for the settlement statement to reveal the compensation details between the title insurance underwriter and its agent. This is what appears to be HUD’s effort toward transparency. What the parties are supposed to do with this information is unclear. In most cases, though, these lines will show that the agent keeps the lion’s share of the premiums collected. Several conclusions could be drawn from that, the most obvious being the agent does all the work. A second might be that the risk being undertaken by the underwriter is comparatively small, given that the premium being paid is small as well, especially when it’s digested that, unlike homeowner’s and car insurance, the premium is paid only once. And, for those who see HUD-1s over and over, a third might be that not all splits are the same, meaning not all title agents’ contracts with underwriters have the same terms. For what it’s worth, Indiana’s Department of Insurance is looking into some of these issues, but that’s a discussion for another day.

So, the splits. Line 1107 shows how much of the total premium (owner’s, lender’s, enhanced coverage, endorsements, etc.) goes to the title insurance agent. And, as you would expect, line 1108 shows the amount going to the underwriter. Interesting to some, I suspect, but probably not a real attention-getter.

What about lines after 1108? Often, none will be needed. The basic HUD-1 form stops with line 1108, although HUD-1 software programs are designed to expand to line 1199 if necessary. (Let’s hope it isn’t.)

But, when might additional lines be used? If either the seller or buyer/borrower hires an attorney to represent them during the transaction and the attorney is paid at closing, an additional line would be used to collect for these charges. Or, if the buyer/borrower wanted a land survey (which wasn’t required by either the lender or the title agent), an additional line would be used. These charges themselves would be shown inside the column of whichever party is incurring the charge with the name of the payee service provider shown outside the column.

To make a point, though, let’s tweak the land survey charge. Suppose the borrower didn’t want a survey, but the title agent required one to issue the title insurance. What happens then? The survey bill would be shown outside the borrower’s column in, say, 1109 along with the surveyor’s name, while the amount of the bill would be rolled up into line 1101 (because by the title agent requiring it, the survey bill becomes part of “title services and lender’s title insurance”). To take this a step further, if the lender knew of the title agent’s survey requirement, that amount should be included in Block 4 of the GFE. On the other hand, if the lender didn’t know and didn’t disclose accordingly, there may be a tolerance issue, depending on the cost of the survey. Most likely, though, the lender can claim a change of circumstance and issue a revised GFE, eliminating the tolerance issue.

For now, that’s it for the 1100-series of the HUD-1. See you next week, if not sooner.

- Morrie Erickson

Sunday, March 21, 2010

The New RESPA Rule – Owner’s title insurance

Now that we know what Block 4 of the GFE and line 1101 of the HUD-1 are all about – HUD labels these “title services and lender’s title insurance” – let’s move on to GFE Block 5 and HUD-1 line 1103. HUD calls these “owner’s title insurance”.

The first question most people ask is: Why does HUD insist that lenders disclose to borrowers what owner’s title insurance costs? Lender’s title insurance, fine. But, owner’s? If, after all, HUD’s goal is to make sure lenders inform borrowers as accurately as possible what getting the loan will cost, what does the cost of owner’s title insurance have to do with that? The answer is, of course, nothing.

So, why has HUD included Block 5 on the GFE? Only HUD knows for sure, but if you look at Block 5 carefully you’ll see that buying owner’s title insurance is completely optional. So, it’s conceivable that Block 5 is there simply for full disclosure – as though the lender is saying, hey borrower, the lender’s title insurance you’re paying for protects us, not you, so if you want your title protected you’ll have to buy owner’s title insurance.

In many markets (like most of Indiana), sellers pay for owner’s title insurance anyway. But not everywhere. Take Evansville, for example. Or across the border in Cincinnati. There, sellers seldom buy owner’s title insurance for buyers. If buyers want owner’s coverage, they’re on their own. So, to make sure all buyer/borrowers are fully informed, HUD requires lenders to let buyer/borrowers know they can buy owner’s title insurance and how much it will cost. The FAQs make it clear that, regardless of whether in a given region the seller typically pays for owner’s title insurance, the lender still must disclose to the borrower how much it costs. The only exception is in non-purchase transactions, such as a refinance.

As for the HUD-1, the cost of owner’s title insurance goes on line 1103, inside the column. But which column? Seller’s or buyer’s? At this point, not everyone agrees, even if the purchase agreement makes it clear the seller is paying. Some lenders are instructing title agents to put the owner’s title insurance fee inside the seller’s column. Presumably, that’s because the seller is paying for it. Typically, those lenders have not disclosed the cost of owner’s title insurance to the borrower in Block 5 of the GFE. But, according to the FAQs and Appendix C, they should have.

But most lenders we’ve dealt with are instructing us to put the owner’s title insurance fee inside the borrower’s column. And, as you might expect, these lenders have (correctly, I believe) disclosed its cost in Block 5 of the GFE. The FAQs and Appendix C are especially clear on this point, even going so far as saying that’s the way it’s supposed to be even in areas where sellers typically pay.

By the way, the fee for owner’s title insurance HUD is taking about in the FAQs and Appendix C is the owner’s title insurance premium. Nothing else. Just premium.

But, back to disclosure vs. who pays. If the seller really is paying for the owner’s title insurance, how is that going to happen if the actual fee is put inside the borrower’s column on line 1103? The answer: by using a debit-credit. The seller will be debited and the borrower credited the cost of the owner’s title insurance on page 1 of the HUD-1. Doing it that way allows the lender uniformly to disclose the cost of owner’s title insurance in Block 5 of the GFE (and be in compliance with HUD) without having to see a purchase agreement to find out who pays. All things considered, HUD’s procedure makes sense.

Now, let’s take this a step further by taking a step backward. In an earlier blog I noted that all costs having anything to do with issuing title insurance are bundled (remember the “kitchen sink” approach?) into the category called “title services and lender’s title insurance” from Block 4 of the GFE and line 1101 of the HUD-1. But at the end of that discussion, I dodged the question of into whose column (borrower’s or seller’s) “title services and lender’s title insurance” goes. The answer turns out to be (drum roll here): the borrower’s.

I’ll be the first to point out that not everyone agrees. But based on Appendix C, the FAQs, and experts’ presentations, it’s apparent that’s the way HUD wants it. For me, the clincher is consistency of disclosure: lenders can disclose the same way to all borrowers without waiting to find out which services each party has agreed to pay. But let’s wrestle with it for awhile, anyway.

Start with the proposition that various services need to be performed for both sellers and borrowers that fall into the bundled category of “title services and lender’s title insurance”. Who pays for some of these services varies from region to region by custom or tradition. Or by what’s negotiated in the purchase agreement. Hypothetically, either the seller or the borrower could pay for all “title services and lender’s title insurance”. Hypothetically, yes; typically, no. The norm is for the seller to pay for certain items, the borrower for others. For example, the settlement or closing fee is often split; the seller pays for the title search and exam; the borrower pays for a judgment and lien search; the seller pays for prep of the deed, non-foreign certificate, and vendor’s affidavit; the borrower pays for prep of the mortgagor’s affidavit and sales disclosure form; both pay courier fees; both may be charged for photocopying and scanning; the borrower most always pays for the lender’s title insurance premium. Suffice it to say, both parties incur expenses that are classified “title services”.

That being the case, it’s unrealistic to expect a lender issuing a GFE to know how the various “title services and lender’s title insurance” fee components are to be allocated. So the simplest solution for lenders is to put all fees for “title services and lender’s title insurance” into Block 4 of the GFE and for the settlement agent to put the same gross fee inside the borrower’s column on line 1101 of the HUD-1. By the time the HUD-1 is prepared, of course, the settlement agent knows who’s paying for what between the borrower and seller, but handled this way, the GFE and the HUD-1 are consistent. The debit-credit procedure is then used on the HUD-1 to allocate payment of the “title services and lender’s title insurance” fee as agreed in the purchase agreement.

Consistency between the GFE and HUD-1 also keeps lenders on the straight and narrow by holding them to the HUD-mandated tolerances. I haven’t gotten to page 3 of the HUD-1 yet, but that’s the page where the numbers in the various blocks of the GFE are matched up with the numbers in the various lines of the HUD-1. Like “High Noon”, page 3 is the showdown page. Page 3 is brand new and exists to make sure the fees actually charged at closing haven’t strayed beyond the tolerances allowed by HUD and specified in the GFE. But more about that later.

Next time out, we’ll explore the rest of the 1100-series of the HUD-1 and other blocks of the GFE that have HUD-1 counterparts.

- Morrie Erickson

Sunday, March 14, 2010

The New RESPA Rule – Title services and lender’s title insurance

If you like learning new terminology, the New RESPA Rule is for you.

Let’s start with “title services” which is actually part of a longer term called “title services and lender’s title insurance”. The dollar amount for “title services and lender’s title insurance” is to be disclosed by the lender in Block 4 of the GFE and entered by the closing or settlement agent in line 1101 of the HUD-1.

But, first things first: what does “title services” mean?

According to RESPA’s Appendix C (the instructions for completing the GFE, which are rather skimpy), the term “title services” includes title searches and exams, and all closing services by third party settlement service providers, regardless of whether the services are paid for by the borrower, seller, or loan originator. Remember that last part about it not mattering who pays.

But because Appendix C doesn’t really tell us much, let’s look at HUD’s FAQs, the latest version as of this writing being January 28, 2010.

From the part of the FAQs discussing Block 4, we learn that “title services” includes title searches and examinations, “…and all charges associated with title services and settlement (closing) agent services.” Charges for delivery and notary services and the actual settlement (closing) fee are also part of “title services”. So is the charge for issuing the title commitment.

Now we know more but could use a little more flesh on “title services’” bones. For instance, what about document preparation fees and costs associated with clearing up title problems? What about photocopying? Or printing 100+-page loan documents? Then printing 100+-page revisions? The FAQs for Block 4 of the GFE don’t get into that. But the FAQs for the 1100-series of the HUD-1 do.

According to the 1100-series FAQs, “title services” includes “[A]ny service in the provision of title insurance, including but not limited to: title examination and evaluation, preparation and issuance of commitment, clearance of underwriting objections, preparation and issuance of policies, all processing and administrative services required to perform these functions (e.g. document delivery, preparation and copying, wiring, endorsements, and notary); and the service of conducting a settlement.” Grammatically strained, perhaps, but clear enough to understand the bottom line: HUD is throwing every imaginable fee having anything to do with issuing title insurance and conducting a closing into the “title services” pot, including the proverbial kitchen sink. (Caveat: FAQs discussing Block 4 of the GFE confuse the issue by saying, “Charges that the seller pays as a matter of common practice and experience are not disclosed on the GFE.” Whether that comment is intended to override the kitchen sink approach to “title services” isn’t clear. Yet, when mentioning the settlement fee, the HUD-1 FAQs say line 1101 “…must include any amount for conducting the settlement that was paid by another person on behalf of the borrower.” So, if sellers typically pay part of the settlement fee, we’re left to wonder which sellers’ fees the GFE FAQs are talking about, especially since Appendix C expressly states the total for “title services” must be disclosed to the borrower on the GFE regardless of who pays for any portion of the services.)

Arguably then, the kitchen sink approach means required services such as overnighting by FedEx and UPS, wiring in and out, preparing deeds and affidavits, title searching and examining, copying and scanning, dropping documents off to everyone who needs them, uploading and downloading, printing and reprinting, archiving on the server and storing in the cloud, fixing title problems, getting an easement from the neighbor, knocking out a road maintenance agreement, closing, notarizing, hiring remote signing services, and on and on. In other words, everything – if done as part of the process of issuing title insurance and conducting the closing. We’re getting a little ahead of ourselves here, but if fees customarily paid by sellers aren’t bundled as borrowers’ fees on the GFE but are on the HUD-1, lenders may be out of tolerance in transactions in which sellers don’t pay.

In any event, lumping all possible “title services” charges in line 1101 is bundling at its best. But isn’t there a limit? Yes, there is.

If the borrower wants to hire an attorney to represent him or her at closing or to look over the title insurance, the fee for that is not part of “title services” because it has nothing to do with the title agent’s requirements to issue the title insurance and conduct the closing. In such a case, the borrower’s attorney fee would be shown inside the borrower’s column on a blank line in the 1100-series. (Software allows extra lines to be created on the HUD-1.) Same goes for a land survey. But if the title agent required a land survey to issue the title insurance, the surveyor’s fee would be part of “title services”, meaning it would be bundled in line 1101. Clear as mud, right?

Let’s move on to the “lender’s title insurance” portion of the term “title services and lender’s title insurance” as used in GFE Block 4 and line 1101 of the HUD-1. This one’s pretty straightforward, at least for now. (In a later blog, I’ll go into how HUD really wants lenders to disclose fees for “lender’s title insurance”, but let’s not complicate the issue yet.)

So, “lender’s title insurance”. According to HUD’s Appendix C, the lender must disclose in Block 4 of the GFE “…any lender’s title insurance premiums, when required, regardless of…” who selects the provider or who pays. As for the “when required” bit, let’s face it, lender’s title insurance will always be required. Lenders simply don’t make loans without being covered by title insurance. And clearly, the amount of the lender’s title insurance premiums must be included in Block 4, along with the cost (if any) of endorsements for extra coverage (environmental, adjustable rate, condominium, planned unit development, etc.).

Remember that Block 4 already includes the kitchen sink category of “title services”. So now we’re adding “lender’s title insurance” to it. Whatever that super-bundled number turns out to be goes on line 1101 of the HUD-1, although the cost of the “lender’s title insurance” is shown all by itself outside the columns in line 1104. But, does “lender’s title insurance” mean the premium and endorsements only, or the total the title agent charges to issue the lender’s policy when it’s issued alongside an owner’s policy?

The HUD-1 FAQs conflict.

Keep in mind that issuing two policies at the same time means the loan policy (in Indiana, anyway) is discounted to a flat rate. The procedure itself is commonly referred to as “simultaneous issue”. One FAQ answer says the charge for the lender’s title policy must be shown on line 1104 but doesn’t define whether charge means premium and endorsements alone. But another FAQ suggests the sum in line 1104 may be something else entirely, namely the undiscounted lender’s policy premium even though the borrower is actually getting a discount. That’s probably not right, though, for the FAQ goes on to point out that line 1104 of the HUD-1 should show outside the columns the “…actual charge the borrower will pay for the lender’s title insurance premium and related endorsements.”

(I’ve been using the term “outside the columns”. To clarify, “outside the columns” means the space to the left of the two right-hand columns on page 2 of the HUD-1. The left of the two columns is the borrower’s, while the right is the seller’s. Numbers inside these columns add to the total expenses for each party which are tallied in line 1400, while numbers “outside the columns” detail one or more specific fees that have been rolled into a bundled charge in that series [such as the 1100-series] and are for information purposes only.)

But back to the bundled charge for “title services and lender’s title insurance” which goes on line 1101 of the HUD-1. Into whose column does it go? Seller’s? Borrower’s? Or is it split somehow between both? We’ve cracked the door on that topic and it’s coming up, but we’re not quite ready for it yet.

On tap next is GFE Block 5, “Owner’s title insurance”, whose companion on the HUD-1 is line 1103.

- Morrie Erickson

Sunday, March 7, 2010

The New RESPA Rule – The Starting Point

If you work in residential lending or closings, during the past several months the mention of the new Good Faith Estimate and HUD-1 Settlement Statement may have made you want to check yourself into the asylum. Not that real estate brokers and sales agents are immune from the upheaval in procedures, but at least they don’t have to figure out what goes where on the two Federally mandated forms.

As lenders, title agents, and most real estate professionals know by now (although a surprising number of real estate practitioners still seem to be in the dark), revised versions of the GFE and HUD-1 went into effect January 1, 2010. Which means loan applications made on or after that date require use of the new GFE and new HUD-1, although the old HUD-1 is the proper settlement statement if the loan app was made prior to 2010 with borrower’s fees disclosed on the old GFE.

This so-called “New RESPA Rule” (“RESPA” meaning Real Estate Settlement Procedures Act originally passed by Congress in 1974 and administered by the Department of Housing and Urban Development) covers federally related mortgage loans on 1- to 4-family dwellings. In other words, it covers most mortgage loans in the U.S. That’s because practically all are made by federally regulated banks, credit unions, and other institutional lenders (including loans arranged by mortgage brokers) for the purchase or refinance of people’s houses.

As anyone who has waded through the applicable material knows, the New RESPA Rule is short on clarity. Nothing is more obvious to those of us in the title business, for we scratch our heads as Lender A instructs us to show Fee X in one place, while Lender B and Lender C instruct us to show Fee X somewhere else, none of the three being consistent. Still, as seminars are given, FAQ answers are tweaked, and HUD puts out more guidance, specific requirements will emerge from the haze. At least, those of us in the title business hope so. In the meantime, though, based on what seem to be the underpinnings of the New Rule, I’ll give you my view of how the title and closing portions of the new GFE and HUD-1 should be filled out.

As a preface, we at TitlePlus! have been attending presentations on the new forms since the Spring of 2009, gearing up for the 1/1/10 changeover which, back then, seemed a long way off. We’ve poured over FAQs, logged on to webinars by ALTA (American Land Title Association), and listened to guidance from our underwriters. As you might expect, an underlying theme of how to show Fee X, Fee Y, and Fee Z on the GFE and HUD-1 has emerged over the past few months. Interestingly, that theme is on target with what we first learned last Spring from attorney Ruth Dillingham, underwriting counsel for First American Title Insurance Company, an insider with first-hand knowledge of HUD’s intentions and expectations. Still, because Ms. Dillingham hails from Massachusetts, we were tempted to write off her comments, thinking that’s not how we do it here.

But as months passed, the theme from the Spring of 2009 became a pattern, as evidenced by other speakers – Philadelphia title agent and ALTA liaison with HUD, Ann Anastasi, and Washington, D.C. attorney Phil Schulman, both of whom have interfaced with HUD during the New RESPA Rule creation process. Those experts and others have transformed the pattern into a litany: this is the way HUD wants it done.

Which is not to suggest HUD is trying to alter local custom of who pays for what, for HUD doesn’t really care about that. Instead, because one of HUD’s missions is to regulate lenders’ dealings with borrowers, HUD’s rules – including the New RESPA Rule – are aimed at lenders (restrictions) and borrowers (protections). Sellers don’t really figure in. In other words, it’s all about the borrower. HUD’s goal is for borrowers to be informed as accurately as possible about how much getting a loan will cost. Therefore, the New RESPA Rule mandates lenders to disclose fees within certain margins of error – HUD calls this wiggle-room tolerances. So, when lenders tell borrowers in writing on the new GFE how much getting a loan will cost, tolerances dictate how much lenders can be off without having to eat the fees themselves.

This, then, is the starting point. The new GFE and HUD-1 unfold from here. In this series, I’ll take you through the parts of both forms (Blocks 4 and 5 of the GFE and the 1100-series of the HUD-1) which pertain to title and closings. I hope you’ll come along for the ride.