Legal Requirements For Disclosing Settlement Charges

The mortgage lending industry is strictly regulated for the protection of consumers entering into mortgage loans for the purchase or refinance of their home. The regulations are promulgated by the department of Housing and Urban Development (“HUD”) who has dictated the form for financial disclosures for residential closing (the “HUD-1 Settlement Statement.” The regulations are set forth in the Real Estate Settlement Protection Act (“RESPA”), the purpose of which is to provide full disclosure of all entities that are being paid for services in connection with each transaction. Emphasis is placed on making sure the borrower knows what items they are paying for out of pocket, and what items the lender is paying.

RESPA Requirements for Lender Paid Closing Costs   

24 CFR 3500.2 (Definitions) reads in part:

Lender means, generally, the secured creditor or creditors named in the debt obligation and document creating the lien. For loans originated by a mortgage broker that closes a federally related mortgage loan in its own name in a table funding transaction, the lender is the person to whom the obligation is initially assigned at or after settlement. A lender, in connection with dealer loans, is the lender to whom the loan is assigned, unless the dealer meets the definition of creditor as defined under “federally related mortgage loan” in this section. See also 3500.5(b)(7), secondary market transactions.

Appendix A to 24 CFR 3500.8 reads in part:

Section L. Settlement Charges.

For all items except for those paid to and retained by the Lender, the name of the person or firm ultimately receiving the payment should be shown. In the case of “no cost” or “no point” loans, the charge to be paid by the lender to an affiliated or independent service provider should be shown as P.O.C. (Paid Outside of Closing) and should not be used in computing totals. Such charges also include indirect payments or back-funded payments to mortgage brokers that arise from the settlement transaction. When used, “P.O.C.” should be placed in the appropriate lines next to the identified item, not in the columns themselves.

Many loans are originated by a mortgage broker, who acts to bring a borrower and lender together based on the borrower’s needs. Disclosure of the broker’s financial relationship with the lender is a critical concern of RESPA. Therefore, the definition of “lender” specifically distinguishes brokers from lenders in broker-originated transactions.

To determine whether a settlement agent (in Massachusetts, a real estate attorney representing the bank and broker and handling the settlement funds) has adequately disclosed the necessary parties on the settlement statement, the principal considerations are (1) that the identities of the service providers were disclosed, (2) that a person of reasonable intelligence could identify the source of funds based on the HUD-1 disclosures; and (3) that the actual charges at closing not exceed the charges disclosed to the borrower on the Good Faith Estimate of closing costs, typically provided to the borrower at the time the loan commitment issues.

Consumers with questions about their Good Faith Estimate or the purpose of the HUD-1 Settlement Statement are encouraged to contact Parker|Scheer LLP to speak to a real estate attorney.

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