- The Washington Times - Wednesday, July 30, 2003

I recently shared with you some very interesting marketing strategies mortgage companies (and non-mortgage companies) were offering to consumers to entice them to refinance their houses.

American Express has partnered with a firm in New Jersey to tack on bonus reward points for mortgage dollars. Airlines are offering frequent-flier points for taking out a mortgage with their selected lender, and the marketing dance goes on. Some even offer cash back at the settlement table in the form of a credit against closing costs.

All of these arrangements are legal. Nevertheless, over the years, the federal government has limited some mortgage company activities to protect consumers from unnecessary rising costs. When mortgage companies start giving things away to lure consumers and when they pay for leads, the costs to consumers, it would seem, would move upward. Thus, federal regulators require much disclosure so you know what’s happening with your money.

The Real Estate Settlement Procedures Act (RESPA) is one of the laws regulating lenders’ activities. Primarily, it requires lenders to disclose estimated costs of settlement, cash you’ll need to withhold for expenses, even certain business arrangements. (For detailed information, visit www.hud.gov and search there for RESPA.)

There’s been a lot of confusion in the industry about what mortgage providers can and cannot do as they conduct business to comply with RESPA. Specifically, Realtors have to be careful in their relationships with loan officers to ensure they are not receiving some sort of “payback” for simply referring a buyer to them for a mortgage.

Can a business professional pay for leads? Sure, but not in the world of mortgages. What may be considered good marketing in one industry can break the law in a relationship between lenders and people with whom they conduct business. The feds want to make sure that if someone receives money through the mortgage process, it’s because that person actually worked on the mortgage.

Four elements of the loan application process come under RESPA regulations.

The Good Faith Estimate of Settlement Costs is the first disclosure you’ll receive. The U.S. Department of Housing and Urban Development lists this document as the first part of the disclosure process. When consumers apply for a loan, the Good Faith Estimate provides a rough estimate of how much the loan will cost. It’s not a guarantee, mind you, but at least it will let you know how much some of the fees are to allow comparisons with other lenders. Once you make an application, the lender or broker has to deliver it to you within the next three business days.

Something many consumers fail to do is to bring the Good Faith Estimate to the settlement table to compare what they were told to the actual cost. The last time I refinanced, comparing those notes saved me $2,000.

The Servicing Disclosure Statement is another disclosure that lets you know whether the lender expects the loan to be serviced by someone other than the company that sold you the loan. Affiliated Business Arrangements also must be disclosed. Some mortgage companies are part of a larger company that may also own a settlement service, and all their settlements may go through that company.

The day before settlement, under RESPA, the borrower has the right to view the HUD-1 Settlement Statement, which lays out exactly what you’ll be required to pay for the whole settlement process.

If you have to fund an escrow account for taxes and insurance expenses, the lender must disclose to you how this will work and then you will receive an accounting of that fund within 45 days of settlement.

These are all good requirements, but they protect the consumer only if the consumer looks over the disclosures throughout the transaction. A lot of paper slides across the table during a settlement, and a good settlement agent will help you understand the disclosures as you move along. However, it’s imperative that you get to know these documents more intimately than just by glancing at them and then filing them away.

M. Anthony Carr has written about the real estate industry for more than 15 years. He can be contacted at [email protected]

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