04.14.08
HUD-1 and Mark-ups
I am reading through HUD’s proposed changes to the settlement statement. If one of the goals is to make the charges more transparent so that consumers can better understand the costs associated with their mortgage loans, why not include the “true” abstracting fees? I think some consumers, and probably even some of the regulators, would be surprised to know exactly what the title searches cost compared to what is charged on the settlement statement.
This is what HUD has to say about itemizing the title services fees:
In general, the HUD-1 must separately identify each service provider that is performing title services, along with the total amount received. If a party other than the title company listed on line 1101 of the HUD-1 provides services that are separate from providing title insurance, such as attorney and settlement or escrow agent services, the title company should separately itemize those services with the total amount paid to that provider, to the left of the columns. However, charges for services defined as “primary title services” such as abstract, binder, copying, document handling, or notary fees, should not be separately itemized on the HUD-1, even if a party other than the title company listed on line 1101 of the HUD-1 provides those services.
I routinely see settlement statements that have an “exam fee” of $150 to $350, with no mention of the actual cost of the title search. Granted the “exam fee” encompasses more than just the search, the title company has to review the search and make determinations as to the insurability of the title, and it may also have to include updating and filing the documents post-closing. However, some of these fees strike me as excessive when the search is a $45 current owner.
When the title company uses their own employee abstractors, or examiners, it may be quite proper to include the cost of producing the search. But, when the search is completed by a third party and the fee is readily ascertainable, I think it makes sense to show it as a separate line item.
Of course, there is another aspect to the abstracting fee… not only does the title company have to charge enough to cover the search, but they also have to charge enough to cover the searches for the orders that do not close. Because the abstractors charge regardless of whether or not the deal closes, and the title company only gets paid when they close, there must be room for some losses in this fee.
Unlike some other fees, abstracting fees can vary with the complexity of the search. You don’t always know how difficult a search will be until you are in the thick of it. It could be multiple parcels, subject to litigation, or have latent defects which take more time to thoroughly research. Title companies like to be able to provide their clients with set prices. In order to do this, they must charge enough to be sure that they don’t wind up with a big loss on a closing with a messy search.
So, if the abstracting fee was itemized, there would likely have to be some other changes to the arrangement between abstractors and their clients. First, abstractors might have to agree to take the hit when a deal falls through. That would require the abstractors to increase their fees to compensate for the losses that would occur on those transactions. Second, abstractors would have to offer “set fees” regardless of the extra work that might be incurred on some of the more difficult searches. Again, that would necessitate a fee increase.
Alternatively, the industry could change its perception of the abstracting fee and make it an actual cost for the consumer. Those customers who’s searches take longer and require more work would just have to pay more. But, that doesn’t seem to be fitting with providing the consumer with up-front comparable costs. It would be vary difficult to accurately estimate the cost when the consumer is required to get their Good Faith Estimate and explaining an unexpected, higher fee.
For most people, however, I think that the transparency of itemizing the abstracting fee on the settlement statement would be beneficial. If people could see how much little the search actually costs, they may begin to question the mark-up that usually accompanies the search.
This also brings in to question the concept of affiliated business arrangements when the title companies owns the company providing the search. Whether it is a traditional abstract company, or an online title plant, when the title company owns the entity providing the search, should it be a violation of RESPA to “require the use” of the affiliated company? The argument can be made that the search is an integral part of issuing title insurance and the insurer should be able to choose the provider before relying their work to insure the title. However, couldn’t the same argument be made in the case of a title company owned, in part, by the lender? If the lender is going to require title insurance, shouldn’t they be able to decide who issues the policy?
This has all been complicated by the fact that few title companies do their own searches anymore. Now that independent abstracting has become much more common, maybe it deserves to be recognized as a separate category of settlement service provider. Perhaps it should be included as such in the proposed RESPA reform… if not this time, the next time the issue surfaces.
Robert A. Franco