Mortgage estimate errors may prove costly for bankers

“Our members have expressed significant concern about RESPA,” said James Silkensen, co-chief executive officer of the New Jersey Bankers Association, in Cranford, referring to changes to the Real Estate Settlement Procedures Act, which are effective Jan. 1. The new rules will be the subject of a Dec. 3 association conference.

Designed to “simplify and improve the process of obtaining home mortgages and to reduce settlement costs for consumers,” the modifications include many arcane back-office and reporting requirements, according to HUD’s 517-page regulatory impact analysis. But at a time when banks are coping with a slow economy, bankers said they’re particularly chilled by two issues: the cost of compliance, and a rule that can make them ante up cash if a mortgage’s actual closing costs exceed the good faith estimate, or GFE, a bank is required to provide before a closing.

“If we’re off by more than 10 percent on certain GFEs, we may have to refund the difference to the homebuyer,” said Diane Scriveri, chief lending officer at Bogota Savings Bank. GFEs typically lay out items like the lender’s origination fee, points, escrow and other charges.

In its analysis, HUD argued that more transparency and accountability in the estimates will let consumers more easily compare the total cost of mortgages offered by different banks, and will likely spur title search and other mortgage service providers to reduce their prices, for an estimated $8.35 billion a year in consumer savings.

But financial institutions are likely to have to shell out a total of $978 million in initial training, legal and software development costs, according to HUD’s estimates. Small banks and other firms are expected to pick up $407 million of that tab.

Recurring costs are expected to reach $918 million a year, with smaller institutions running up a $417 million annual tab, HUD said.

“The problem is that we’re dealing with outside providers, and even though we can’t guarantee their charges, we may be responsible for them,” Scriveri said. “One option might be to increase our estimates to cover a possible provider overage, but that could drive consumers to banks that don’t hike their fee estimates.”

But there are some safe harbors that may exempt banks from being responsible for a third-party provider’s error, said Francis X. Riley III, a partner at Saul Ewing LLP’s Princeton office.

“If there’s a change in circumstances, or information that the lender did not have at the time it produced the good faith estimate, the institution may be able to reissue the GFE,” said Riley, who counsels real estate brokerage, title, mortgage and other settlement service industry clients. “Say a bank issues a quote for title insurance, but then it turns out that there are 15 tax and other liens outstanding that the lender had no reason to suspect existed. In that case, the bank could cure [or correct] the situation by issuing an adjusted good faith estimate within three business days.”

Under the new rules, a lender generally has to list at least three providers for each buyer-paid service that it requires. The estimate variance penalty generally only applies to those required services — and even then, only if the buyer uses one of the providers suggested by the lender.

But that aspect also worries Scriveri.

“If we have to list service providers, some consumers may think that we’re endorsing these companies,” she said. “Then, if something goes wrong, we may be sued by the consumer. I’m all for transparency, but does this really help anyone?”

E-mail to mdaks@njbiz.com