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.
Craig, this really got under your skin (as it does mine)! The trick with this situation though is knowing how the loan was originally priced. For example, if a buyer contacted me for a 30 year fixed and wanted a rate that was below par (zero points), I would need to charge discount points.
And, as a Loan Originator, if there are closing costs “on the table” that are not being used with the standard closing costs or based on what was originally quoted, then I would use the “left overs” to buy down the rate. If there are not enough “left overs” to buy down the rate, then I leave the money untouched and it’s up to escrow to distribute the funds. When I see “up to” x dollars, I try to use x dollars FOR THE BUYER. NEVER for me as the originator. I might buy down the rate further days before closing takes place if I notice we have enough funds and the pricing is working in our favor to do that.
Again, how can a seller or agent or even the buyer find out what the original estimate was? You may actually need a copy of the original lock agreement.
BUYERS need to bring their original GFE to closing to make sure they’re getting their entire credit due. If the HUD shows an increased origination and everything else is the same when compared to the Good Faith Estimate…YOU’VE PROBABLY JUST CAUGHT THE LENDER WITH THEIR HAND IN THE COOKIE JAR.
I’ll be honest, Rhonda: it not only got under my skin, but it strikes me as a good claim (fun, interesting, lucrative) to pursue. I just need to find the client…
Unfortunately, while the buyer is in the best position to catch the lender with a hand in the cookie jar, it is the seller’s cookies, as the buyer has basically relinquished an interest in the money (since the seller is paying the costs, not the buyer). That said, if buyer catches it before closing, buyer can use that knowledge to get a benefit from the funds at issue (further buy down, etc. — although that could delay closing) rather than letting the lender enjoy the cookies (mmmmm, coookies…). If nobody notices until after closing, hopefully the buyer will cooperate in the investigation and pursuit of the claim so that this lender, at least, does not get over on future buyers and sellers.
Rhonda,
You say “original GFE”, but if the buyer or agent switched to a lower rate than originally intended, if they made the decision to buy down the rate late in the process, wouldn’t that be a “revised GFE”?
We all hear that the lender is obligated to provide a GFE early in the process. What are the rules when the buyer is asking about different loan products continually through the escrow process and picking the loan product late in the game? If the buyer asks for info on 15 different types of loans, do you need to provide a GFE for every one brought up in the conversation?
And what if a buyer pursues a claim based on the “first” GFE, when in fact that GFE did not apply to the loan details actually selected just prior to loan docs being prepared?
I recently had a client who decided to buy down the rate with 4 points, three days before closing. What is the timeframe for supplying the new GFE under current laws? In that case the relevant GFE could not have been supplied early in the process, as the buyer did not decide to buy down the rate (no seller paid costs here BTW) until just before it was ready to close.
Rhonda is correct programs change during the escrow period..
LO’s are supposed to provide a new gfe if the program changes..many do not..It is noble to pursue Craig but the challenge would be the fact that it is an “estimate” not a rock solid guarantee…of course LO’s could provide a guarantee on closing costs but not pre-paids..the reason it is allowed as an estimate is that the closing date is not always known for certain- esp a re-fi which takes a backseat to purchases at lenders and escrow cos..and can be pushed to the following month..pre-paid interest and taxes could increase by several thousand dollars depending on closing date..borrowers tend to view pre-paids as closing costs..technically they are NOT they are pre-paid taxes and interest the borrower would be required to pay even if they were not doing the re-fi…unless they are waiving escrows…
a new thread request:
how many BILLIONS of dollars are sitting in escrow accounts of banks on mortgages and how much interest are they earning on these accounts??…(on the borrowers $$!)
if everyone in the US decided to waive escrows and get the refund of the cushion would how much $$ would this be???
My theory is -This is why they typically hit brokers for .25 if you choose to waive escrows!
Hey Cap Fsbo,
Yes, banks and loan servicing companies earn interest off the money they collect from homeowners and keep in reserves to pay property taxes and hazard insurance premiums, and rightly so.
A bank/servicer has a vested interest in making sure 1) taxes are paid and; 2) the home is insured.
Looking at the increase in defaults lately, thank goodness they do. In the case of a financially challenged homeowner facing default, why should our local city/county jurisdictions go without tax revenue? You and I would have to make up that shortfall in….higher taxes. Same with hazard insurance. You and I would pay for that burned down mortgaged house in the form of higher rates and fees.
I’m all for banks/servicers collecting impounds for taxes and insurance, provided the company makes the payments on time. This is all spelled out in Section 10 of RESPA.
http://www.hud.gov/offices/hsg/sfh/res/rightsmtgesrvcr.cfm
Surprisingly, there’s nothing in RESPA that makes the collection if impounds (for T&I) mandatory.
Craig says: “Once you obtain a copy, have it reviewed by someone knowledgable about typical closing costs to determine whether any (fees) are obviously excessive”
We do this kind of work. If anyone needs help, click on my contact info.
Ardell, you’re correct the lender is required to provide an updated GFE but if this happens “at closing”, then it would probably be included with the loan docs that go to escrow.
This is why I’m afraid the only true way to know how much a LO is raking in beyond their share is by the lock confirmation and if the buyer knows.
I would also be on the look out for if the origination is an odd fee. For example, not 1% or 1.25%, but 1% plus $418 (leftever seller closing cost credit).
I just had lunch with a Realtor who on his transactions as the listing agent, he will have his lender review the buyer’s lenders information to confirm the approval is “real” and the fees acceptable BEFORE accepting the offer. I’ve worked with other agents who do this as well and I’m always happy to help agents that I work with. That’s how I wound up with this post…I wish she would have come to me sooner!
CaptainFSBO
“My theory is -This is why they typically hit brokers for .25 if you choose to waive escrows!”
Not to mention that real estate taxes take precedence over a mortgage in the event of a foreclosure.
I give clients an option of whether or not they want to pay to have their reserves waived. Unless they are investing the difference and making enough gain to justify the 0.25% fee, they’re better off having the taxes and insurance collected in the payment.
Answering Ardell’s comment #3
From the WA state Mortgage Broker Practices Act
http://apps.leg.wa.gov/rcw/default.aspx?Cite=19.146&full=true
RCW 19.146.030
(4) A mortgage broker shall not charge any fee that inures to the benefit of the mortgage broker if it exceeds the fee disclosed on the written disclosure pursuant to this section, unless (a) the need to charge the fee was not reasonably foreseeable at the time the written disclosure was provided AND (b) the mortgage broker has provided to the borrower, no less than THREE BUSINESS DAYS PRIOR TO THE SIGNING of the loan closing documents, a clear written explanation of the fee and the reason for charging a fee exceeding that which was previously disclosed. However, if the borrower’s closing costs, excluding prepaid escrowed costs of ownership as defined by rule, does not exceed the total closing costs in the most recent good faith estimate, no other disclosures shall be required by this subsection.
Ardell,
You’ve got a lot of questions! 😉
“If the buyer asks for info on 15 different types of loans, do you need to provide a GFE for every one brought up in the conversation?”
My answer to that is: most likely (15 is kind of extreme!). If I’m quoting a rate or payment, then I provide a GFE along with the TIL to disclose the APR to correspond with each program we discuss.
Here’s a link for your reading enjoyment: http://apps.leg.wa.gov/RCW/default.aspx?cite=19.146.030
Jillayne…we were thinking the same thoughts at the same time! 😉
What if the terms change (rate IS actually bought down) 2 days before signing? This happens….
Jillayne, this is the Mortgage Broker Practice’s Act…does this law apply to LOs who are employed by mortgage banks (like WaMu, Countrywide, Wells, Chase…etc)?
What are their guidelines (if they are different) regarding disclosing changes in the fees to the consumer?
When it happened, I just confirmed with my buyer client that he asked to pay 4 points to buy down the rate at the least minute. He said yes, I just wanted the lower payment.
So as long as he initiated the change of his own volition, without prompting of any kind, I thought that was OK even though it was very close to closing.
Didn’t matter whether or not I agreed with him. He was sure of what he wanted, and directed the lender to accommodate his request.
Wondering if some Escrow Person would see that and think the LO was charging too much? Sometimes the person at the end doesn’t have the whole story and can jump to conclusions as to how and why things happen as they do.
Every once in a blue moon, I’ll have a borrower who absolutely wants something like 5.5 when the going rate is 6.00. Once you explain how long it will take to break even on the 4 points, and if they refinance before the “break even” period is reached; they’ve lost te benefit…they change their minds. It is funny what people believe they “want”.
I’m wondering, Ardell, with your escrow question, if the Escrow Officer can even say anything if they suspect a LO is charging too much. They’re suppose to be a “neutral 3rd party”. Plus, when I did my presentation on LO Licensing to the Greater Eastside Escrow Assoc., the last thing this group wanted was to be the “mortgage police”. Altough, I bet there’s a few LOs they’d love to cuff and rough up! 😉
Most escrow instructions permit the escrow officer to suggest legal counsel if, in escrow’s opinion, the party could benefit from such counsel. The exact language would need to be consulted in a particular situation, but I would think that this would permit escrow to identify the issue and suggest legal counsel. If escrow cannot identify the issue, but can only recommend counsel, that would be of not much use.
Maybe they could just pick up the darned phone and call the one person who ALREADY REPRESENTS the party in the transaction. I always look at closing statements in advance or AT if I can’t get one in advance (rare, but happens).
Maybe if escrow sent the pre closing statement and said “let me know when you APPROVE this”. If the agent isn’t used to getting the closing statement, it would be a “heads up” to someone who SHOULD be looking at it. Anyone with half a brain would pick up that there is something wrong that escrow needs them to notice, without escrow having to “blow the whistle” so to speak.
Many ways to effect good supervision within the law, I suspect. Clearly laws are there to protect people, and not to hurt them. Easier to just gripe and look away, when a simple call saying something doesn’t look right here, can you have your Broker approve this, in the even the agent isn’t trained to do so, seems appropriate.
Can’t escrow just ask the buyer to bring the GFE and TIL with them to closing as a standard practice? It’s amazing that they do not. Seems simply asking for the buyer’s money and proof of who they are can be expanded to include the GFE and TIL. Escrow could then just say, please check your GFE against these costs and your TIL against these loan provisions. Seems within the law and simple enough.
I know in advance what the costs are 98% of the time, so I don’t need the GFE or TIL at closing most of the time. Agents don’t have to know everything, but they at least need to look and recognize when something doesn’t look right. They can then call in “experts” as needed. But not looking at all, and not knowing when it is not “right”, should not be an option.
How can we get those 90% who don’t review the HUD 1 to look at it? Maybe every broker can hire one person to review closing statements for all agents instead of saying “don’t look; don’t tell”. That would give consumers the protection, and give some protection to the broker for liability, given that one person would be trained to pick up problems.
I’m sure every buyer expects someone to have their back, and doesn’t realize that people at escrow are seeing problems, and not able to warn them.
“If escrow cannot identify the issue, but can only recommend counsel, that would be of not much use.” – Craig B.
That is is crux of the problem Craig. Craig, you should do escrow and you’ll have no problem on the one hand of identifying potential cases, but then, in very short order, you’ll have no business coming to you on the other hand.
This is what sucks about being a neutral third party (deserves it’s own post). We cannot be the mortgage police or transaction police. But we can blog about issues that opens the doors to discussing what goes on within transactions so that consumers are as informed as possible, including agents and loan officers. Craig, my understanding is that escrow cannot suggest a specific attorney. Isn’t that just great?
It’s like, hypothetically speaking, we run into an issue where a Quit Claim is requested or in need of being provided and escrow suggests that the party needs to have one submitted to escrow because our office will not draft it for one transactional reason or another, but we cannot suggest a specific attorney. So, the borrower sits across the table from me and says, “okay, fine, so who do I go to?”—all the while getting more ticked off by the minute. Um, we’ll, I guess you could hit the Yellow Pages or InfoSpace some attorneys in the area.
Or, hypothetically speaking, if we see a borrower is being absolutely screwed financially (as in some cases where elderly are being taken advantage of) and we can only give them the facts of what they are about to sign, whereas, as soon as the borrower is done signing, I have to basically get in my car and turn on some classical music to calm my nerves.
For the 96% of real estate agents who do not review the HUD I with their homebuyers prior to the homebuyers entering the signing room, my company offers a service for a fee, in which we will review the closing documents including the HUD I with the client, and match it up with his or her Good Faith Estimate. We also determine if the consumer is receiving a fair loan.
That way, when they get into Tim’s office, any surprises have already been dealt with. This will have the added effect of lengthening the lives of our fine men and women in escrow uniforms. Their HDL and LDL cholesterol levels are already so high due to prolonged stress that I’m surprised that the leading cause of death among escrow workers (repeated exposure to predatory lenders) hasn’t been reported to the National CDC for an official study.
Jillayne,
how do you determine what is a “fair loan”?
Rhonda, regarding comment 11, if rates and fees go down, no other disclosure is needed, unless the LO is switching the consumer to another loan product with different terms.
Regarding comment 12, here are some general guidelines
If the LO is working for a consumer finance company, then the state consumer protection act applies.
If the LO is working for a state regulated bank or CU same same.
If the LO is working for a federally chartered bank or CU, then they are operating under federal laws (and of course state laws as well). We have a federal consumer protection act.
WA State laws for re-disclosure in regards to mortgage BROKERS are stronger than federal laws.
Thanks, Jillayne. What does the Federal Consumer Protection Act mandate for LOs when closing cost or rates change for a consumer? And (sorry for the follow up question) how does a consumer know what type of lender and what their regulations are?
(You know my goal is to have all LOs operate under the same rules).
Hi Rhonda,
Well, we could start by defining “unfair.”
That would be any lending practice labeled predatory.
The hardest to spot “predatory” aspect I have seen is artificially pushing a buyer into subprime territory by stretching their ratios without the buyer knowing it. For instance, they could hand someone a pre-qual letter saying they can go out and buy a house for $550,000, when they only qualify at $550,000 via sub-prime. The non-subprime price might be $475,000.
The buyer has no idea and just assumes they can go look at and make offers on property priced up to $550,000. Once they make an offer and are in contract, hard to correct the situtation when they start applying for their loan and realize it is subprime.
I know GFE’s are required shortly after “application”, but what about before they purchase and go to a lender for a prequal letter? What if they don’t see a GFE until after they follow “the lender’s” house price cap”? Another factor that could push into subprime is the taxes and HOA dues on the property. That could throw the ratios off after the fact.
That’s why it’s good for an agent to do reverse qualifying saying “at that price your should be making about X and your debts should be no more than X. Say someone comes in with a letter up to $450,000 and the buyer ends up selecting a townhome with a $350 a month condo fee and taxes of $4,200 a year. If the lender assumed “single family” and didn’t allow for condo fees, that could push the “back end” out.
There’s a vague description in the predatory lending pamphlet regarding qualifying the buyer at more payment than they can readily afford.
There is one good reason to “harvest” those costs; if it directly benefits the borrower (Buyer) by lowering his/her rate.
Ardell,
“I know GFE’s are required shortly after “application
Brian, I think in that instance (a direct benefit to the borrower by lowering the rate) it would not be considered “harvesting,” at least not by my definition. Rather, the funds are harvested when the loan originator (or any other professional) increases his/her/its own fee at the last second to insure that the full amount of seller paid closing costs are in fact paid and not retained by seller.
Craig,
How about retained by BUYER vs. retained by SELLER, by reducing the sale price, as long as the original agreement contained that method of dealing with the excess? Isn’t that the REAL answer here?
Why are you trying to get this money to the SELLER, if the original understanding was the sale price reflected the FULL seller credit TO BUYER?
Isn’t it better to effect the original meeting of the minds understanding that the buyer WOULD in fact GET the benefit of the credit? I thought lawyers tried to effect the original meeting of the minds? No?
Ardell — yes, the PSA should reflect the intention of the parties, which is that the buyer get the full benefit for the additional funds paid by buyer, presumably through payment of necessary and appropriate closing costs, but by some other means if necessary (such as a reduction in the purchase price). As you know, however, a last minute reduction in the purchase price can cause problems for the lender and may need re-review by the underwriters, thus delaying closing, etc. Hence, the MLS form uses the “up to” language so that there are no last minute problems: the purchase price does not change, and seller, per the terms of standard PSA language, pays up to a certain amount, thus retaining any unused portion.
My post and subsequent comments are based on this standard PSA language. Per those terms, the buyer has relinquished a legal right to the funds. Under those facts, it is the seller who is defrauded by the loan originator by the “harvest.” The claim would become much more convoluted and complicated if the buyer asserted ownership over the funds based on the parties’ intent in entering the contract.
Ideally, the contract would in fact be written to reflect the intent of the parties. Indeed, when my office writes an offer for a buyer, we include language that prevents such a “harvest.” From the buyer’s perspective, that is the ideal solution — address the problem up front. The problem is that it usually is NOT so addressed. I don’t think that should allow an LO to harvest the money, though. The seller has the contractual right to the money, and the LO acts in an unfair and deceptive manner when he/she harvests it.
My original post on this was the subject of the words “up to” for the credit. Just say they get $x dollars and confirm it’s the proper amount needed from the Mortgage Professional.
Then it doesn’t go back to the seller. 🙂