‘Settlement Costs’ Booklet Is Borrower Friendly

WASHINGTON — If you’re looking for the most concise, consumer-friendly guidance through the complicated process of borrowing home mortgage money intelligently, forget the how-to shelf at your local bookseller. Check out the World Wide Web instead. Or ask a lender for a free copy of the 1997 “settlement costs” shopping booklet.

After a 10-year hiatus since the last edition, the federal government recently unveiled an extensively updated plain-language “everything-you-really-need-to-know” guide on how to be a smart shopper for home loan money and settlement services.

The 35-page publication--available on the Web at https://www.hud.gov--boils down complex topics like mortgage fees and your legal rights as a housing consumer into readily understandable nuggets of advice.

Lenders are required to provide the printed form of the booklet to home loan borrowers three business days after application. In its electronic form, it is a smart first stop for anyone thinking of buying a home or applying for a mortgage.

The new edition, published by the federal Department of Housing and Urban Development from a draft prepared by the Pittsburgh-based national law firm of Reed Smith Shaw & McClay, covers consumer protection issues that barely existed 10 years ago.

For example, the new version takes pains to alert shoppers to the often-misunderstood legal relationships they may encounter when dealing with mortgage brokers, real estate agents and settlement attorneys. Regarding mortgage brokers, the guide explains that although they can help consumers find a lender “willing to make you a loan,” brokers typically are independent businesses--not lenders themselves--with no fiduciary duty to get you the best possible rates or fees on a loan.

“A mortgage broker . . . may not be operating as your ‘agent’ or representative, may be paid by the lender, you as the borrower, or both,” notes the guide.

The Biggest Issues

Broker representation and compensation have probably been the most contentious mortgage issues of the 1990s, triggering dozens of class-action lawsuits during the last three years by consumers who have discovered that brokers were paid undisclosed or poorly disclosed fees by lenders for delivering customers at higher-than-prevailing interest rates and settlement charges.

The new HUD publication urges consumers to discuss representation and fees not only with mortgage brokers but with realty agents and settlement lawyers as well. The booklet alerts home buyers to the potential risks of dual representation in situations when lawyers are involved in the transaction. An attorney who acts as a settlement agent or closing agent “may not solely represent your interests,” the new guide says, because “as settlement-closing agent, he or she may also be representing the [home] seller, the lender and others as well.”

As standard operating procedure, the guide suggests consumers ask any lawyer in the deal: Will you represent anyone but [the consumer] in the transaction? Will you be paid by anyone else?

Regarding realty agents’ recommendations on mortgage lenders, title companies and settlement agents, the guide emphasizes that “you are not required to follow the [agent’s] recommendations. You should compare the costs and services offered by other providers with those recommended by [your agent].”

Kickbacks and undisclosed sweetheart connections between realty agents and mortgage brokers, title companies and settlement agents continue to be the source of litigation and widespread consumer misunderstanding.

Other housing issues the new guide covers in capsule form:

* The new federal lead-based paint disclosure rules, in three pithy paragraphs.

* The keys to understanding the “annual percentage rate” compared to the mortgage interest rate, in just two paragraphs.

* How to compare one lender’s rate-and-fees quote against another’s, including consideration of how your likely length of residence in the house affects your choice.

* The ins and outs of mortgage insurance, including what can be canceled and what can’t.

* How to get through the blizzard of disclosures you’ll receive, including truth-in-lending, “affiliated business” tie-ins and your ongoing rights vis-a-vis your mortgage servicer.

* Escrow accounts, escrow “cushions” and what your mortgage servicer has to tell you about them.

* Your federal legal rights in a nutshell: the Equal Credit Opportunity Act, Fair Credit Reporting Act and Fair Housing Act.

The new guide even covers that most sensitive of subjects for the industry: Your rights to file complaints and lawsuits, including where to file them.

Whether online or in paperback, the new settlement services guide should be required reading for anyone who is checking out mortgage financing.

Update

The nation’s largest source of home mortgage money--Fannie Mae--has indefinitely postponed its controversial plan to offer borrowers life and disability insurance coverage.

Dubbed the “Mortgage Protection Plan,” Fannie Mae’s program would have provided thousands of new home buyers with insurance policies designed to pay off their mortgage balance in the event of the borrower’s death, or to contribute to the borrower’s monthly loan payments in the event of extended unemployment or disability. Fannie Mae would pay for, and be the beneficiary of, all policies written under the program.

Critics on Capitol Hill and in the insurance industry charged that although appealing on the surface, Fannie Mae’s plan was in reality a money-making machine, fed by federal tax subsidies. They pointed to the corporation’s own internal estimates in 1996 that projected that the program would add $600 million after-tax to Fannie Mae’s bottom line in the 20th year of the plan, and nearly $1 billion by the 30th year.

A spokesman for Fannie Mae, David Jeffers, said in late July, “If the question is, ‘Are we going forward with the Mortgage Protection Plan?’ then the answer is no.”

However, Jeffers added, Fannie Mae is not necessarily dropping the overall concept of “providing some form of service that fills the same need” as borrower life insurance. “We think it’s a good idea, and we’re looking to see how we might be able to make it work.”

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Distributed by the Washington Post Writers Group.