Pending rules aim to hold lenders to their word

A form that everyone in the real estate world knows as a HUD-1 details every cost to the seller and buyer at settlement.

The law requires that the lender furnish the form at least a day prior to closing, but there is no penalty for their failure to comply.

In most jurisdictions, lenders struggle to provide the form in time and almost invariably do so.  In Manhattan, however, the law is overwhelmingly more honored in the breach than in the observance of its requirements.

Around a closing table last week, when my buyer saw and received her HUD-1 for the first time, none of the three lawyers present seemed even to know about the deadline.  Moreover, the HUD-1 that my client signed left out the brokerage fee paid by the seller.

To us, the breach was of no consequence.  Nor will it harm the seller.  But flouting the law in such a way continues to astound me; when I sold real estate in Washington, D.C., Virginia and Maryland, both sorts of omission never ever occurred.

After all, the HUD-1 is the government attempt to help the parties in a real estate transaction avoid nasty surprises.  And it’s essential for those individuals to determine the costs of the transaction when preparing their income tax returns.

At least, ignoring the law about good-faith estimates is about to cost lenders plenty.

As Kenneth R. Harney notes in the Washington Post, though banks and mortgage lobbies are pushing hard for a delay, new federal rules adopted by the Department of Housing and Urban Development are scheduled to take effect on Jan. 1

The rules have a blunt message for lenders and others who lowball estimates or lard on junk fees at settlement: Play games like that, and you — not your hapless customers — will have to eat the difference.

Loan charges and settlement fees will have to be spelled out on a revised, more consumer-friendly version of the good-faith-estimate form that borrowers are supposed to receive within three days of their mortgage applications. Charges will fall into three broad categories on the form, Harney points out:

— Fees that cannot increase from upfront estimates to final closing.

— Fee estimates that come with wiggle room, and can increase by as much as 10 percent in the aggregate from upfront estimates.

— Fees that can increase without limit, mainly because the lender has no control over them or because they are difficult to predict weeks in advance.

Harney’s excellent piece goes delves deeply into the changes–for example, a revised HUD-1 that is hard-wired into good-faith estimates, allowing consumers to compare what they were told upfront by the lender with what they’re being asked to pay at closing, plus disclosure of the widely misunderstood fee splits of title insurance premiums between the insurance underwriter and the settlement agent. Says Harney:

Consumers may be stunned to learn that in some markets, 80 percent to 90 percent or more of the premium they pay at closing actually goes to the agent – not to pay for the insurance itself.

Of course, the numerous purchasers of co-ops in New York City do not acquire title insurance; only condo owners do so.  As most people know, the chief difference between buying a co-op and a condo is that the purchaser of the former obtains shares in a business and the purchaser of a condo, actual real estate.

(To keep track of developments such as the foregoing in the law, housing market, mortgage business, celebrity sales and purchases, the Big Apple, and home improvements, consider subscribing free to the e-newsletter I write every two weeks.  Realty Digest is something I dubbed six years as a “quirky collection of news and information,” and I’m happy to report that it has been a labor of love.)

In any case, I sincerely hope that the new rules will have substantial impact, that Shakespeare will prove to be wrong.  But I’m not holding my breath.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

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