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