The good faith estimate of closing costs that lenders are required by law to give borrowers within three days of their mortgage application is supposed to put a stop to growing closing costs. But a survey taken this year shows the rules don’t always work as they should.
Lawmakers already recognize that, which is why regulators were directed under the Dodd-Frank Wall Street Reform and Consumer Protection Act to revamp the good faith estimate, as well as the HUD-1 settlement sheet that borrowers receive at closing.
Accuracy is higher than it used to be, but it still leaves a lot to be desired, according to a survey of 205 closing agents by the American Land Title Assn.
Although the poll is too small to be statistically valid, title professionals are in a position to address on the topic because of their involvement in closings. And it shines a light on several practices that violate Section 5 of the Real Estate Settlement Procedures Act.
Under that law, lenders’ estimates for services rendered by third parties such as appraisers and surveyors are supposed to be within 10% of the final figures. If the charges listed on the HUD-1 exceed that, lenders are required to eat the difference.
But nearly 3 of 4 closing agents who responded to the survey said lenders sometimes pad their initial estimates so they can be certain that they are within the 10% limit at closing.
“Over quoting” violates the spirit of the law, if not the law itself, which is intended to empower consumers to protect themselves from being gouged at closing, said Michelle Korsmo, chief executive of the American Land Title Assn. Even if borrowers are never charged for things like document preparation and warehouse fees, giving false information prevents consumers from making accurate comparisons when they shop for closing services.
Another troubling finding: More than half of the respondents said they’ve been pressured to cut their fees to help lenders avoid tolerance violations at closing.
Just as real estate agents don’t like being forced to cut their commissions to make deals work, title agents don’t like being told to slice their fees. But they don’t have a lot of power to push back against the companies that help them find clients, Korsmo says.
So what’s the point of the good faith estimate anyway, if consumers aren’t going to use it?