Legal Thievery at the Closing Table

July 8, 2002, Revised November 13, 2006

"I paid $2240 in lender fees when my loan closed, compared to the $880 I was quoted at the time my rate was locked. It was a total surprise that hit me at the closing table. With my house purchase at stake, there was nothing I could do. This is outrageous…why doesn’t the government do something about it?"

I share your outrage. Unfortunately, the Federal Government is largely responsible for creating the problem in the first place.

The "price" of a home loan has three major components: the interest rate; points, which are an upfront charge expressed as a percent of the loan; and lender fees which are dollar charges for each of a number of lender services, such as processing, document preparation, inspection, and so on.

Lender fees should be the least troublesome component of the price. They are designed to cover the costs of lending, which do not change much in the short term. Hence, there is no legitimate reason why lenders can’t guarantee them when they quote a price to the borrower. The guarantee could, and should, be a single dollar figure. Borrowers don’t give a fig what the separate items are.

Rates and points, in contrast, are market-driven, fluctuating from day to day in line with changes in capital markets. Lenders can’t be expected to guarantee rates and points unless they know that the borrower is committed as well. Otherwise, borrowers would close with the lender from whom they have a price quote only when prices rise following the quote; when prices decline, they would get a new quote from another lender.

Yet the reality is exactly the reverse. Lenders will lock the rate and points as soon as they have some reasonable assurance that the borrowers will close with them. The lock usually occurs from 30 to 60 days before closing, unless the borrower elects to "float" the terms in hope that prices will decline. But lender fees can change anytime, including the day of closing.

How can that be? Thank the Real Estate Settlement Procedures Act (RESPA), and the Good Faith Estimate (GFE) of settlement costs, developed by HUD in administering that law. The GFE is supposed to help borrowers shop knowledgeably for settlement cost services. In practice, it provides legal sanction for lenders to cheat borrowers at the closing table. It could not do this more effectively if it were deliberately designed for that purpose.

The GFE sanctifies itemized pricing of lender fees by providing space for any expense category a lender wishes to use, while total lender charges are not shown anywhere. Further, as if to discourage borrowers from calculating their own total, the GFE intermixes lender charges with charges of third parties. Since the names of the various items mean little or nothing to the typical borrower, only the most astute and determined can figure out the total of lender charges.

The result is that the borrower is encouraged to focus on the details of lender charges rather than the total, which is the only number they really need. I tire of the many letters I receive from borrowers who ask "What is an endorsement fee (or a document review fee, or a funding fee, etc)", and "Is this a reasonable charge?" These are questions that should never be asked.

But it gets worse. All the numbers on the GFE are "estimates", subject to change right through to closing. And there are no penalties for under-estimates or omissions that are corrected at the closing table.

The rationale for viewing the numbers on the GFE as estimates is that lenders can’t be certain about some third-party charges until late in the process. But the GFE gives them the right to change not only third-partner charges, but also their own charges, which they do know with certainty. This is a Government-sponsored invitation to abuse.

While most lenders don’t accept the invitation, the GFE protects lender fees from competition. Lenders quote rates and points, which is what borrowers shop for, but not fees. An exception is some internet lenders, including Upfront Mortgage Lenders, who publish their fees and guarantee them.

HUD could fix this problem by redesigning the GFE to show lender fees as a separate category, with a total that is guaranteed by the lender. They could not do better than copy the format used by

Meanwhile, request a written list of lender charges before submitting an application, and inform the broker or lender that you expect it to be honored. In most cases, it will.

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