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Real Estate: A Few Thoughts about HUD’s New Settlement Sheets

Posted By Cliff Tuttle | January 12, 2009

Posted by Cliff Tuttle

HUD has expressed a goal of reducing settlement costs by holding the settlement officer’s feet to the fire, forcing him/her to demonstrate in absolute terms that the charges at settlement do not exceed those set forth in the Good Faith Estimate (GFE). The link to the new HUD1 is here and the HUD1A, here.

There is no choice. The new HUD1 and HUD1A will become mandatory in a year. Some lenders may choose to use them early — but based on experience with the last change, over a decade ago, that won’t happen. Almost everyone will wait until the mandatory period begins. Last time, lenders and settlement agencies were so unready after one year that the mandatory use date had to be extended.

The first page looks exactly like the old version. The second page at first blush looks nearly identical. The primary difference is the references on most lines to the the corresponding line on the GFE.

However, every line in Section 1100 has been used — leaving no room for deed preparation charges, tax and lien letter charges, zoning certificates, attorneys fees — all items previously entered in this section. Instead, by default, those items will probably need to be moved to Section 1300, Additional Settlement Charges.

But Section 1300 only has five lines, the first being used up by a new reference to “required services that you can shop for.” If this includes a termite inspection on line 1302 and a survey on line 1303, there are only three lines left. So you use line 1303 for deed preparation, line 1304 for municipal lien and tax letters, zoning certificates, etc. Then use line 1304 for attorneys fees. Now there is one line left to pay everyone else, including tax collectors. This means you can either steal unused lines from other sections or add an additional page.

But don’t try stealing the one empty line from Section 700, involving real estate commissions. Agencies collect “record retention fees” or “administration fees” on that line and you will need to find extra lines for the other realtor’s special charges and for the increasingly popular Home Warranty Insurance charges. With a shortage of available lines, you will need to use line 1305 to bring forward the charges from the absolutely essential additional page.

However, the biggest change is the addition of page 3. At the top, you are required to list “Changes that Cannot Increase More than 10%”, with line-by-line comparisons of the GFE and the HUD-1. At the bottom of the column, the net dollar increase is calculated, together with the percentage increase. This of course will guarantee that the increase of settlement charges over the GFE will never be more than 10%.

It is not hard to figure out what will happen in practice. There will be a cushion added to certain GFE estimated charges, with the final total coming in less than the estimate — gratifying everyone.

The bottom of page 3 is a recap of the loan terms. It is an expansion of the bottom part of the existing Truth in Lending Disclosure. It is a nice, clear summary of what every settlement agent should disclose at closing, with the added advantage that it is in writing and can be used later for reference. The HUD1A form uses the same document as its second page.

This will also relieve part of the problem that too many closings are being conducted by notaries who cannot explain much more than where to sign. Some lenders have gone so far as to prohibit these undereducated settlement officers from explaining anything — for protection of the lender.

But, of course, the answers at the bottom of page three only raise additional questions. This was no problem at all when the lawyer who regularly represented the lender conducted the closing. He or she could give accurate and complete answers, since he or she was quite familiar with the documents, the terms of the loan and pretty much anything likely to arise during a closing.

Whenever change occurs, something is lost and something is gained. And some lost things are never regained.



CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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