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