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