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New real estate settlement procurement act regs stir confusion, frustration

Christina Pazzanese

Nearly six months after sweeping changes to the federal Real Estate Settlement Procurement Act went into effect, attorneys say the new regulations have caused confusion and headaches for conveyancers and lenders as they struggle to adjust to the new landscape.

After more than two decades under the U.S. Department of Housing and Urban Development’s previous system, critics say complicated new disclosure requirements for providing Good Faith Estimates and filing HUD-1 settlement forms that went into effect Jan. 1 are resulting in a huge drain on time and energy for what was once an easy and familiar routine.

“People are using words like ‘chaos,'” said Richard A. Hogan, regulatory and legislative counsel for CATIC, a Connecticut-based title insurance underwriter that issues policies across New England. “What used to take 45 minutes is now taking two hours.”
Chief among the challenges for many is simply figuring out how to fill out the forms to HUD’s murky specifications.

“There are so many interpretation issues out there. There doesn’t seem to be consensus on which line items where dollar amounts go,” said Hogan, noting that the regulations’ Frequently Asked Questions document is now more than 60 pages. “To me, that’s an indication that the regulation is not clear.”

Springfield attorney Douglas J. Brunner agrees.

“It is daunting,” Brunner said of the FAQ document. “You really have to sit down and go through them, and they keep changing so you have to go through them again. It all takes time.”

According to Alan B. Sharaf, of Sharaf, Kelley & Maloney Title & Closing Services in Brookline, the new system makes little sense. “It’s such a major change in a short period of time,” he said. “Things are more confusing than ever before. It seems to be missing a logic to it.”

Greater transparency
The regulations purport to provide greater transparency and consumer protection to borrowers about the true costs associated with closings, said Sami S. Baghdady, a lawyer in Arlington and former president of the Real Estate Bar Association.

Under the old system, borrowers often saw artificially low estimates that spiked suddenly at closing, when they had little recourse short of walking away from a deal.

Now, lenders are largely bound to the good-faith estimates they provide for most fees associated with mortgages, such as points, origination costs and appraisals, Baghdady said. If certain costs rise above 10 percent of the original estimate, the lender must absorb the difference. Borrowers are not protected by the new cost caps, however, if they choose to use a vendor beyond the control of the lender.

“It forces lenders early in the process to take a hard look at their costs,” Baghdady said.
But not everyone believes the RESPA overhaul is having the intended – or desired – effects.

“It isn’t doing what they wanted it to do,” said Douglas J. Brunner, a Springfield attorney.

While the regulations appear to have cut down on “bait-and-switch” closing costs, they have not prompted consumers to shop around more, he said.

Brunner said because the forms require attorneys’ fees to be lumped in with other charges, it has made it more difficult, not less, for borrowers to discern what they are being charged. In order to make sure his own clients are clear, Brunner has begun attaching a separate page at the back of the form that itemizes legal fees, in defiance of HUD’s call for less paperwork.

Hogan said one key challenge of the overhaul is that instead of breaking out charges, the new regulations require them to be mixed together, adding extra work for banks and other lenders since that directive is in stark opposition to the federal Truth in Lending Act, which requires all lump sums be delineated.

Hogan said that “it would be almost impossible” for lenders to comply with banking regulators by simply following the new regulations.

Attorneys say some lenders will deliberately over-disclose estimates to establish a buffer between the initial quote and the estimate at closing so they are not forced to absorb any overruns later if the figures change, or they will be presented with a bill from lenders who want to pass along settlement cost to attorneys.

It is unclear, lawyers say, whether either practice is permitted under the regulations.
Lenders do it their way

For those attorneys who have gotten up to speed on the regulations, there is still the frustration of working with lenders who lag behind.

“The biggest problem is the lack of consistency between lenders,” said Sharaf. “It’s not that the banks don’t know what they’re doing; it’s this is such a big change.”

Many lenders are either not complying or “haven’t geared up for it yet,” said Norwell attorney Joel A. Stein, who co-hosted two seminars earlier this month at the Real Estate Bar Association’s spring conference advising attorneys on how to navigate the RESPA changes. Some lenders are not doing initial estimates, while others are failing to revise them if the figures change, he said.

Susan B. LaRose, of Doucette & LaRose in Worcester, said lenders “vary widely” in their knowledge of the regulations.

“I did a closing for a giant lender, and their instructions for completing the HUD [form] were just wrong. I read to them from the FAQ and they still said to do it their way – they acknowledged that they were probably not in compliance, but said that would be determined during their first audit,” LaRose said in an e-mail.

And smaller lenders are not necessarily doing much better.

“I have received closing packages where I was told I had to figure out where to put in figures, because lenders software couldn’t do it,” she said.

Arlington lawyer Donald Bruce Fitzsimmons Jr. said overall his experience with lenders has been “pretty good,” but confusion still remains over whether the fee for representing the buyer can be shown on the HUD form.
“Some lenders refuse to allow the buyer’s personal representation fee to be shown at all. I contend that this is a mistaken interpretation of the new rule since this is a fee for the buyer’s personal work that is independent of the lender’s settlement fee,” Fitzsimmons said in an e-mail.

“Often, we will choose the path of least resistance and prepare a separate invoice for the buyer’s representation fee instead of attempting to convince the lender that this is a permissible line item in the 1300 section,” he said.

In the event of a difference of opinion over the forms, Hogan said, HUD has advised that lawyers and other settlement agents should follow the lender’s interpretation. It is a situation Hogan calls “very problematic” since virtually every bank has its own take on how the form should be completed, leaving lawyers and firms scrambling to tailor their responses to meet the individual notions of sometimes dozens of mortgage lenders.

Such disputes over interpretation and disclosure present a potential minefield for lawyers.
“That’s absolutely an issue and an area attorneys should be careful about,” said Jennifer L. Markowski of Peabody & Arnold in Boston. Though her firm has yet to see any cases related to the RESPA overhaul, it is “keeping an eye on it,” she added.

Aside from lenders and attorneys getting more comfortable with the changes, some legislative relief may be on the horizon, Hogan said. A banking reform bill now being debated in Congress to establish a federal consumer protection agency contains a small provision that would require HUD and the Federal Reserve Board to coordinate RESPA with the Truth in Lending law.

“Hopefully, that will happen,” Hogan said.

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