(The attached is a reprint from my article published on February 23, 2010 in a newsletter for the NYSBA Real Property Law Section)
As most of us are aware, as of January 1, 2010, the new Real Estate Settlement and Procedures Act (“New RESPA”) went into effect. As it only affects loans that are originated after said date, and closings normally take 6-8 weeks in New York (and often 12 or more for coops and condos in Manhattan), few if any transactions have closed under the New RESPA.
This is fortunate since the major changes detailed below will have the affect of changing the timing and, in many cases, the occurrence of closings. As a result, to mitigate this on residential real estate transactions, I strongly recommend that we make some changes to our practices on these transactions and specifically modify our closing procedures with respect to the HUD-1 Settlement Statement (“HUD-1”).
The intent of the New RESPA was to improve consumer protection. To effectuate this, lenders and mortgage brokers are required to provide more accurate Good Faith Estimates (“GFEs”) to buyers. The effect on closings is that the charges listed on the HUD-1 will now be required to track those disclosed on the GFE..
Certain charges will not be permitted to change at all on the HUD-1 from those disclosed on the GFE. These are broker and lender charges such as origination fees, application/processing fees and underwriting fees. In addition, inexplicably (as many of these have nothing to do with a loan and, even those that do are set by state and local statute), government transfer fees are included as well. In New York, the mortgage tax is included as it should be. However, so I believe, are the Mansion Tax and the Peconic Bay Tax. Both of these are sizable amounts and might not be known to an out-of-state broker or lender causing a closing issue if they are not disclosed on the GFE!
The second class of charges is those that may vary in the aggregate by no more than 10% over the amounts disclosed on the GFE. These charges are lender required settlement services such as bank attorney fees, title insurance and government recording charges. This limit does not apply if the borrower or, presumably, borrower’s attorney selects its own provider for any of these services.
The final class of charges is those that may vary (without limit or tolerance levels) from the GFE and are for escrow reserves (i.e. homeowner’s insurance and real estate taxes); daily interest charges and homeowners insurance itself. In addition, if the interest rate is not locked at the time of application, the origination fees can vary until such time as the rate is locked when a new GFE will need to be delivered.
To make sure that we are best serving our clients and also to provide for quick and smooth closings, I suggest that all we do the following on all new transactions:
1. Review the GFE: Have the client send this to you and check to make sure that all usual loan charges are listed (and that unusual ones are not). Confirm that the mortgage tax and appropriate transfer taxes are listed properly. If not, let the client and mortgage broker/lender know this as soon as possible so this can be corrected.
2. Title Charges: Once a contract is signed and prior to ordering a title insurance report (unless your practice is to order it at that time as opposed to when the mortgage commitment is issued as many attorneys do), request a written, binding list of all title charges (including recording fees). The title companies are all aware of New RESPA and most of them are willing to do this. Once you receive these charges, forward them to the client’s mortgage broker or lender to include in the GFE.
3. HUD-1: The most important change is with respect to the HUD-1 which has been traditionally an after-thought and completed at the closing. This can no longer be the case since a lender will refuse to fund a loan if these charges don’t match those on the GFE. At a minimum this will cause a delay in the closing if the lender’s in-house closer (i.e not bank attorney) is unfamiliar with NY practices. In the extreme, it can cause an adjournment of the closing if the issues cannot be satisfactorily reconciled quickly.
To avoid this, the HUD-1 needs to be completed, reviewed and finalized by all parties 1-2 days prior to the closing. To accomplish this, attorneys will need to provide the bank attorney with all charges including managing agent fees, real estate agent commissions, title costs (which they should have from the beginning of the transaction), adjustments, etc. once the closing is scheduled. They must also insist that a final HUD-1 be provided to them at least 1 day prior to the closing for review. My recent experience has been that bank attorneys understand this and are willing to comply.
If this occurs, the bank attorney will be able to obtain approval on the HUD-1 prior to the closing. This will not only avoid delays, but speed up the timing of closings. In the case of a problem, it will get resolved prior to the closing. If it does not, then the closing will get adjourned prior to its occurrence saving all parties time and aggravation.
I believe if we adopt these few, relatively minor changes, we will be able to easily adapt to the New RESPA and continue to protect our clients’ best interests.