You have put your finger on
one of the needless complexities and irritations of our home loan
marketplace. To illustrate the point, here are some of the individual
charges I have extracted from various loan settlement sheets: affiliate
consulting fee, amortization fee, appraisal fee, credit report,
underwriting fee, bank inspection fee, processing fee, lender's inspection
fee, settlement fee, signup fee, funding fee, lender's attorney fee,
endorsement fee, express mail fee, document preparation fee, notary fee,
messenger fee, photograph fee, assumption fee, administrative fee,
document review fee, and translation fee.
In other markets consumers
wouldn't stand for this. Suppose, for example, when you went to the movies
the ticket clerk said "the access charge will be $3, the usher's
service is $1.50, your share of our rent is $.75�and we won't be
completely certain of these charges until you come out so you will have to
line up again for a final reckoning." You probably would go home to
watch television! Yet in the home loan market consumers tolerate this
nonsense.
The absurd practice of
charging for specific itemized services involved in making a loan rather
than for the total service goes back to the days when state usury laws
restricted the interest rate and fees lenders were allowed to charge. If
the maximum allowable interest rate was 6%, for example, but some loans
were more costly to administer than others, law makers found it reasonable
to allow lenders to recover their higher costs without viewing it as a
violation.
Not surprisingly, lenders
became imaginative in finding ways to categorize their expenses such that
the law would allow them to collect fees from the borrower. And since the
acceptable categories varied from state to state, the result was a crazy
quilt patch of rules across the nation that still exists, even though the
usury laws no longer limit the rates that lenders can charge on home
loans.
Some lenders today have
indeed adopted the practice of charging a single dollar fee at closing
rather than a myriad of separate charges, and they should get medals. But
most lenders continue to itemize charges because they believe that they
can extract more in total from the borrower that way. This reflects both
their dim view of the shopping acumen of the typical borrower, and the
role of the Federal Government which unwittingly supports this view.
While state government
regulation provided the original impetus for itemized pricing, Federal
Government regulation perpetuates it. The Real Estate Settlement
Procedures Act of 1974 ("RESPA") sanctions itemized pricing by
providing space on the required Good Faith Estimate of Settlement ("GFE")
for any expense category a lender wishes to use. Further, the GSE
intermixes lender charges with charges of third parties (for insurance,
taxes and the like) and total lender charges are not shown anywhere. In
other words, the GFE provides borrowers with all the detail for which they
have no use, but no total, which is the only number they really need.
But it gets worse. Because
some third party charges are not known with certainty until late in the
process, the entire GFE is viewed as an "estimate", although
lenders obviously know their own charges with certainty. Viewing lender
charges as estimates encourages the practice of some less scrupulous loan
officers and mortgage brokers of "overlooking" certain charges
at the outset, only to discover them later when it is too late for the
borrower to back out.
If RESPA were scrapped, the
practice of quoting a single dollar fee would evolve quickly. In the
meantime, you must navigate as best you can on your own. I'll
explain how in How to Shop
Settlement Costs.]
Copyright Jack Guttentag
