DAVID HADLOCK
Practice becoming typical

Now that proposed changes to the Real Estate Settlement Procedures Act have been withdrawn by the U.S. Department of Housing and Urban Development for the time being, the mortgage industry is taking its own approach when it comes to bundling services and fees for mortgage closings.

The changes, proposed almost two years ago and withdrawn in March, sparked opposition from groups in the real estate industry. The Massachusetts Mortgage Association and the Massachusetts Mortgage Bankers Association were two of the groups that submitted comments to HUD in 2002.

David Hadlock, legal counsel to the MMA and principal of Hadlock Law in Natick, said without the RESPA rule change – which proposed one lender-fed, federally regulated fixed-fee package of interest rates and settlement charges for each homebuying transaction – national lenders have still been packaging fees, but smaller companies have not.

Hadlock said the national companies, like Ditech.com and E-Loan.com, have done well bundling fees because they base their prices on many years of experience. Those companies have been most well known for committing to a one-fee structure and building forms around it.

Bundling will become a typical practice in the industry, Hadlock predicts, because the market will demand it.

Hadlock predicted that it will still be possible to list fees, but the market will slow for those who do.

In Good Faith

Stephen R. Tomaselli, president of Loansnap.com, said bundling will continue to become popular.

“I believe that the industry is going to proceed forward with bundling of fees, but they will move with caution until they see what the next move out of Washington will be,” said Tomaselli. “Nobody wants to venture too far out into the road without knowing what the future holds from HUD. I don’t see anything coming out from HUD until we know who the next [U.S.] president is going to be.”

But without any change in the law, most mortgage companies already have been guaranteeing fees, Hadlock said.

The good-faith estimate, which was once just that – an estimate – has since become a guarantee of fees, said Hadlock.

If the fee is not guaranteed, industry insiders say that the good-faith estimate should not be too far off from the final closing costs.

“A good-faith estimate should be very accurate to the final closing costs. If there are any substantive changes to the closing costs, you are obligated to redisclose the new [good-faith estimate] to the consumer,” Tomaselli said. “The only time that closing costs should substantively change is if there are unforeseen costs. Some examples we have recently seen would include a $250 fee from a lender to re-subordinate an existing home equity loan, or $150 for condominium documents. The [good-faith estimate] would also vary from the final closing costs is if the borrower decided to pay discount points. At this point, a new [good-faith estimate] should be issued to the consumer.”

Loansnap.com finds that bundling fees offers consumers simplicity and a guarantee, he added.

“We have been charging a flat fee for about three years in order to simplify things for the consumer and more accurately predict the final closing costs the first time,” said Tomaselli.

Hadlock said today’s consumers are looking for the easiest approach to closing and is less concerned with the breakdown of fees. Consumers are also less concerned with whether the fee is the lowest, but want the security of knowing it is guaranteed, he said.

Critics have said bundling services and prices would make it difficult for consumers to understand what they are paying for.

According to Hadlock, under current law, a consumer must be given a breakdown of fees, even if they are offered a price for bundling.

“For informational purposes, [the fees are] listed,” said Hadlock

But bundling fees doesn’t appear to be as important as guaranteeing fees, said Hadlock. Because there is protection under RESPA, many lenders are forming affiliations with title and insurance companies.

In order to control fees and subsequently guarantee them for consumers, affiliations have become the method of choice, Hadlock said.

Tomaselli said that the larger companies will be able to take advantage of bundling and based on their volume, they will be able to negotiate discounts from service providers and offer consumers a lower bundled price. However, affiliations aren’t necessary.

“Lenders do not have to form affiliations to guarantee a price,” said Tomaselli. “They will do so for a competitive advantage. I believe that affiliations will best serve the larger players in the industry. I believe that you will see opposition to some of this movement coming from the broker organizations.”

While he stressed that he doesn’t speak for all brokers, Tomaselli explained that a large mortgage company may own 100 percent of another company that provides credit, appraisal, flood and title services.

“If [a mortgage company] wanted to bundle services at a loss to corner the market in an area, they could easily do so, at the expense of local brokers,” said Tomaselli. “Once they had gained market share, their bundled price would theoretically rise because they would have no reason to provide the bundled services at a loss anymore. In this scenario … where is the long-term benefit to local brokers and consumers?”

First American Title Insurance Co., which has a Boston office, offers a series of fixed bundles to accommodate refinance, purchase and equity loans. But as First American noted in an internal newsletter regarding bundling, each bundle is subject to customization.

First American touts its bundle as a “unique product composed entirely of our own industry-leading products and services.”

The company notes that other companies offer services for a single price, but describe it as “packaging” their own products with several other service providers.

Louis Chinappi, assistant vice president of First American in Boston, said right now most large companies are exploring the idea of bundling, while smaller companies are finding it is not working to their benefit.

Jennifer Jope may be reached at jjope@thewarrengroup.com.