The good faith estimate (GFE) 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 that sort of thing. But a survey taken earlier 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 GFE, as well as the HUD-1 settlement sheet borrowers receive at closing.
That's a good thing, because the survey of 205 closing agents by the American Land Title Association found that although GFE accuracy is higher than it used to be, it still leaves a lot to be desired.
The poll isn't statistically valid. Nevertheless, title professionals are in a unique position to testify on the topic, because they're the ones who orchestrate 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 percent of the final figures. If the charges listed on the HUD-1 exceed the tolerance, lenders are required to eat the difference.
But nearly three out of every four closing agents who responded to the survey said lenders sometimes pad their initial estimates so they can be certain they are within the 10 percent limit at closing.
Only a quarter of the respondents said they never see items on the GFE that are not charged at closing. But another 25 percent said they see the ruse more often than not. The other half also sees the practice, but not that often.
According to Michelle Korsmo, ALTA chief executive officer, "overquoting" violates the letter of the law, if not the law itself, which is intended to empower consumers to protect themselves from being gouged at the closing table. 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 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, closing 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.
Unfortunately, the survey also found, despite the government's and consumer advocates' best efforts, people still don't shop. A whopping 75 percent of the respondents said they don't think people look for the best or least-expensive title and escrow services.
Does that mean borrowers are lazy, or just don't care about saving a few bucks on what may be the largest investment they will ever make?
"No" to both questions, says Korsmo, who believes that by the time buyers pick a house, haggle over the price and secure financing, they are too emotionally drained to do any more legwork.
"When people get to the process of managing the transaction, they tend to disengage and rely on the advice of their agent or lender," the title industry executive says. "Besides, they don't really have an idea of what goes on; it's all back-office work."
Lenders often don't make it easier on borrowers. Besides high-balling their estimates, according to the survey, some flood their clients with a raft of GFEs.
Only one in four borrowers receives just one good faith estimate, according to the ALTA survey. The rest get two or more. Nearly 12 percent have four or five, and a handful sometimes have as many as seven.
Lenders are allowed to revise an estimate if there is a change in the borrower's circumstances. If, for example, your income is significantly less than stated on the application, you may be switched into a different loan program, which can lead to changes in the ancillary closing charges.
In some states, whether or not the borrower opts for owner's title insurance can throw off the GFE. If the borrower declines to buy his own policy, the rate on the lender's policy, which the borrower is required to purchase, can rise.
But still, multiple GFEs only obfuscate the situation. "The intent (of the law) is to give the GFE only once," Korsmo says. Multiple estimates "is not at all what the law intended."
Another thing: Two-thirds of the closing agents in the ALTA survey said the list of settlement service providers that lenders are supposed to attach to the GFE so borrowers can shop around is missing in action.
Then again, more than half the borrowers don't bring their GFEs with them to the closing table so they can be sure they are not paying more than what they were told initially. And 45 percent said they see the document less than half the time.
So what's the point of the GFE anyway, if consumers aren't going to use it?
Hopefully, new forms being developed by the Consumer Financial Protection Bureau -- an "initial loan estimate" will replace the GFE, and a "settlement disclosure" will replace the HUD-1, according to my colleague Brian Collins at SourceMedia -- will put an end once and for all to these kinds of lender shenanigans and make it simpler for borrowers to comparison-shop.
Stay tuned. Under Dodd-Frank, the consumer protection board must release its draft forms and regulations for public comment by July 21.