New federal regulations designed to protect homebuyers from nasty surprises at loan closing time could slow the recovery of the real estate market, some industry insiders say.
The regulations require early disclosure of expected loan costs for residential mortgages, with potential penalties if the actual costs exceed the early estimates.
One real estate attorney said the new rules can hamstring lawyers by forcing them to accept only their basic fee, even if they have to spend extra hours on a real estate deal. Another industry lawyer said the rules will discourage use of local professionals in favor of big national banks and their affiliates.
The new rules are revisions to regulations under RESPA, the 1974 Real Estate Settlement Procedures Act. The law is aimed at exposing hidden kickbacks and referral fees to consumers.
“Everybody has been going to school for the last three months trying to figure out what to do, and they will continue to try to figure it out,” said one title insurance executive.
New rules approved in November went into effect Jan. 1. They require new forms to give homebuyers advance notice of the costs involved in loan settlement and an easy way to compare actual costs with the estimated costs. If the actual costs are significantly higher than the estimated costs, the lender has to pay the difference.
The minutiae of the new rules are available through a FAQ page maintained by the Department of Housing and Urban Development.
With new forms to learn and looming penalties for mistakes, real estate professionals have been studying for several months to get ready for the changes, said Lisa K. Tully of Richmond, vice president-underwriting counsel with Lawyers Title Insurance Corp.
“There is a significant impact on the settlement industry, especially residential real estate attorneys,” Tully said.
Lenders are required to be extremely accurate in their early estimates of closing costs, Tully explained. If the actual costs exceed the estimate by a certain tolerance amount, the lender has to pay the difference.
“The lenders and the settlement agents have to be in really close contact throughout the settlement process, so there’s going to be a lot of up-front discussion,” she said.
Tully described a situation where a lender estimates the recordation tax based on the sale price – only to learn later that, due to the depressed real estate market, the assessed value of the home is higher than the sale price. Since the tax is based on the higher of the two figures, the lender is out the extra tax the borrower has to pay. “It’s very tricky,” Tully said.
As of last week, we couldn’t find anyone who had actually closed on a loan under the new regulations. Settlements still were being done on loans originated before the new year.
“Just judging by the workload this week, I’m thinking lenders are delaying some loan closings,” Tully said. “I think they are being very, very careful”
At a recent gathering of Charlottesville-area real estate lawyers, no one reported any closings yet with the new rules were in effect. Larry J. McElwain said about 15 lawyers met for a brown bag lunch on Jan. 11, but no one had any experience yet with a settlement under the revised RESPA.
“At this point, we’re still going – such as it is – business as usual,” McElwain said. He said it will be interesting to hear reports at this week’s winter meeting of the Virginia Bar Association, where McElwain is vice chair of the real estate section council.
In Virginia Beach, the story was the same, according to Howard R. Sykes Jr., whose practice focuses on residential real estate closings. “At this time, we haven’t seen any effect, positive or negative.”
Sykes expects a slowdown, at least at first. “It adds another page to the settlement statement,” he said. “There’s a whole lot more numbers.”
Sykes said there are other new regulations coming into play, including new rules under the Truth in Lending Act.
Sykes said lawyers can get in a bind with the new RESPA regulations if a complication arises between the early estimate of costs and the actual closing. If there’s a dispute over the contract, a title question pops up or repairs are required, the lawyer might spend two to three extra hours on the file.
Under the new regulations, the attorney would be hard pressed to charge for that time at closing without the lender paying a penalty.
Sykes said there is no way to increase fees to account for the unexpected complicated case. “It’s just a cost of doing business, I’m afraid,” Sykes said.
Tully acknowledges concern that the new rules could clog the real estate recovery. She said there are three potential problems. First, lenders will be going slow to make sure they don’t end up paying substantial penalties for unforeseen cost increases. Second, the new forms allow lenders to lump fees together for title services, making it easy to hide excessive charges.
Third, Tully said RESPA allows lenders to direct borrowers to affiliates through required lists of settlement service providers. Although the rules are designed to avoid insider deals such as kickbacks, Tully said the requirement to provide the consumer with names of professionals creates an opportunity for favoritism.
“They are really allowing the lenders to direct settlement business,” Tully said.
Tully said the long range effect may be to take business away from local “Main Street” providers and send it to national banks and their controlled entities. “I truly do not believe HUD saw this. They should have, but I don’t believe they did,” she said.
Those affected by the new rules have a four-month reprieve if they goof up while trying to comply with the new rules. HUD officials made it clear, however, that the 120-day restraint in enforcement is not a delay in the effective date of the regulations. The grace period is only a period of forgiveness for those who unintentionally run afoul of the rules while trying to comply. Failure to use the new forms is not excused.