Over the last few weeks, there have been a few posts here on RCG discussing the means by which loan originators enhance their income by “harvesting” seller paid closing costs that otherwise would have been retained by the seller. In a nutshell, the process works like this: In the purchase and sale agreement, seller agrees to pay “up to” a certain sum in buyer’s closing costs. Immediately prior to closing, when all costs are known, the loan originator determines that the closing costs are less than the maximum amount to be paid by the seller. The loan originator then increases the loan origination or related fees to “soak up” the difference between the “actual” costs of providing the service to buyer and the amount that can be charged based on seller’s obligation to pay up to a certain amount.
As I (and many others) noted in comments on the above posts, this conduct is dishonest and reprehensible. Why should the loan originator (or other service provider, such as escrow) be paid an amount beyond that quoted in the Good Faith Estimate or elsewhere? The service provider agreed to provide a service for a set fee, but then increases that fee at the last minute not because of additional work, but because there is additional money “available.” Clearly, this constitutes a windfall to the loan originator at the seller’s expense.
In Washington, there is a law, the Consumer Protection Act (CPA), that prohibits any unfair or deceptive acts or practices in the conduct of commerce. If a person is the victim of conduct that violates the CPA, that person has a legal claim against the wrongdoer. If the plaintiff prevails on such a claim, the plaintiff is entitled to an award equal to the amount they lost as a result of the wrongful conduct, plus an addition sum equal to three times that amount (up to $10,000), plus their attorney fees and costs incurred in pursuing the claim. The legislature specifically enacted this law to create “private Attorney Generals,” private citizens who would have the incentive to seek out and punish unfair or deceptive business practices.
If you are a recent seller, you may have been victimized by the conduct described above, and you may have a claim under the CPA. To find out, first determine whether you agreed in the purchase and sale agreement to pay “up to” a certain sum in closing costs. Presumably, the more you agreed to pay, the more likely it is that some of those funds were “harvested” by the loan originator or other service provider related to the transaction.
If you agreed to pay “up to” a certain amount, then you need to research further. Ask your Closing Agent to provide you with a copy of the buyer’s HUD-1 Settlement Statement, which will show the amount paid by you (on buyer’s behalf) in closing costs. If your Closing Agent will not provide you with a copy, contact your agent (if you used one), as the purchase and sale agreement requires the Closing Agent to share documents with the agents. Once you obtain a copy, have it reviewed by someone knowledgable about typical closing costs to determine whether any are obviously excessive. Alternatively, contact the buyers and see if they will share a copy of their Good Faith Estimate. Comparing the GFE to the HUD-1 should indicate whether there were any significant (and presumably last minute) increases in the buyer’s closing costs.
If it appears that you were the victim of this scam, contact an attorney who is knowledgable about consumer law and/or real estate law. The attorney may be willing to take the case on a contingency basis (meaning the attorney gets paid only if you recover funds) given the attorney’s fees provision in the CPA. If it appears that you paid an additional $2000 in closing costs, then you could recover that $2000 plus an additional $6000, for a toal recovery of $8000. Of course, I would be happy to discuss the matter and would very probably be interested in taking the case. Regardless, though, sellers need to step up and enforce the protections of the CPA if we are to discourage this conduct in the future.