By: Cheri Hipenbecker and Craig Haskins
The topic at hand is perhaps one of the least understood and confusing issues surrounding the implementation of the 2010 GFE and HUD1 – “written lists”. Why is it so confusing to lenders and loan originators? Because you can’t find a reference to “written lists” anywhere in the revised Real Estate Settlement Procedures Act (found at Title 24, Part 3500 of the Code of Federal Regulations) except in “Appendix C to Part 3500—Instructions for Completing Good Faith Estimate (GFE) Form” stating in its entirety:
Where a loan originator permits a borrower to shop for third party settlement services, the loan originator must provide the borrower with a written list of settlement services providers at the time of the GFE, on a separate sheet of paper. (Emphasis added).
Knight-Barry believes this paragraph means that a loan originator must provide a written list of title service providers only if the borrower is permitted to shop for title services. If the borrower is not permitted to shop for these services then there is no need for the loan originator to provide a list. This brief paragraph brings three questions to mind in reference to title services: (i) Can a loan originator prohibit a borrower from shopping for title services? (ii) If the loan originator permits a borrower to shop for title services and submits to the borrower a written list of title service providers, how many title service providers must the loan originator identify on the written list? And (iii) if the loan originator identifies two or more title service providers on its written list, can the loan originator recommend one of the providers to the borrower?
Typically the answers to our RESPA questions have been found in the “New RESPA Rule FAQs” issued by HUD; unfortunately no such luck this time. The FAQ includes a few pages on written lists, addressed below, but does not answer the questions posed above and asked of Knight-Barry by some of its customers. So in response Knight-Barry hired a leading RESPA attorney practicing in Washington D.C. to help address the three scenarios we’ve seen so far in the Wisconsin market:
1. MAY THE LOAN ORIGINATOR PROVIDE NO WRITTEN LIST AND SELECT THE TITLE/CLOSING AGENT?
Yes - A loan originator may require that a borrower use one title service provider (Knight-Barry perhaps), and thus not permit the borrower to shop for title services, as a condition of issuance of the loan. If the loan originator so requires, title services must be included in Block 3 of the GFE and title services then go into the “10% tolerance” bucket, meaning that the charges cannot increase at settlement more than 10%. Therefore, if a loan originator says “no loan unless you use Knight-Barry” then the loan originator should have the title/closing costs rate guide handy from the local Knight-Barry office, which will assure the lender that there will not be a tolerance violation due to title/closing services. Otherwise, the HUD will likely be out of tolerance and the loan originator or the lender will have to credit back some money to the borrower.
2. MAY A LOAN ORIGINATOR PROVIDE A WRITTEN LIST OF ONE SINGLE TITLE/CLOSING AGENT?
Yes – A “written list” can consist of one or more title/closing agents. Thus if the loan originator wants to show only Knight-Barry on its written list, the loan originator can do so without violating the rule. The “Title services and lender’s title insurance” would be shown in Block 4 of the GFE and title services would remain in the “10%” bucket. Again, just as in example 1 above, the loan originator should have a title/closing cost rate guide from the local Knight-Barry office.
3. MAY A LOAN ORIGINATOR RECOMMEND A TITLE/CLOSING AGENT IF ITS WRITTEN LIST HAS MORE THAN ONE PROVIDER LISTED?
Yes – if the loan originator identifies more than one title/closing agent on its written list, the loan originator may recommend one of the providers to the borrower; we prefer Knight-Barry. If there is no affiliated relationship between the loan originator and the title/closing agent, and if the title/closing agent does not give the loan originator a portion, split, or percentage of any charge made or received for the rendering of the title insurance, then the loan originator may make the recommendation and no further disclosure or documentation is required to be made or given to the borrower. This means that if the loan originator would like to show three title/closing agents on the list and would like to suggest to the borrower that Knight-Barry has historically provided the best service for the best price, the loan originator can do so without violating the rule.
Several other important issues have arisen recently by Wisconsin loan originators. What if the borrower selects a subpar title company? What does the loan originator do to make sure the proper disclosure is made of the owner’s title insurance policy? And should a loan originator feel obligated to purchase title/closing services from the seller’s title company. Let’s take one at a time.
WHEN A BORROWER SELECTS A SUBPAR TITLE/CLOSING AGENT
Let’s face it, not all title companies are created equal. However, since the new RESPA rule is focused on consumer choice, should a loan originator feel “stuck” with a subpar selection from their borrower? The answer is simple, NO. The loan originator could simply refuse to make the loan to the borrower unless an acceptable title/closing agent is chosen.
HOW SHOULD A LOAN ORIGINATOR DISCLOSE THE OWNERS POLICY PREMIUM?
Keep in mind that the loan originator is required to disclose the title insurance owner’s policy premium, even though that premium is typically paid by the seller in Wisconsin. If the seller’s title company charges a premium that is higher than was disclosed on the GFE, the loan originator may be faced with paying a credit to the borrower even though the actual premium is paid by the seller. However, if the seller chooses a title agent not on the loan originator’s provider list, then there can be no tolerance violation on the HUD. For this reason, the loan originator should consider limiting the number of title/closing agent on its list to one or two and the owner’s policy premium rate guide from those companies on the list should be kept handy by the loan originator.
CAN THE LOAN ORIGINATOR USE KNIGHT-BARRY FOR THE LOAN POLICY AND CLOSING RATHER THAN THE SELLER’S TITLE COMPANY?
YES, there is nothing in the rule that prohibits the loan originator or lender from using Knight-Barry rather than the title company selected by the seller. In fact, this may be a safer option since calculating an accurate loan policy premium and closing fee from a title/closing agent selected by the seller may be impossible if the loan originator does not have a rate guide from each title company in Wisconsin. Therefore, why not simply use Knight-Barry for all of the purchase loan policies and minimize your exposure to tolerance violations? |
