By law, lenders are required to give an estimate of closing costs to borrowers within three days of their mortgage application to prevent homebuyers finding out at the last minute that they need more cash to seal the deal. However, a recent survey by the American Land Title Association (ALTA), found that 25 percent of responding closing agents often see the ruse of "over-quoting" borrowers, so that lenders' final figures are within 10 percent of estimated charges on the HUD-1 document, a settlement sheet that borrowers receive at closing.
The survey was given to 205 closing agents, so while it is too small to be statistically valid, it shines a light on several practices that violate Section 5 of the Real Estate Settlement Procedures Act.
Michelle Korsmo, chief executive of ALTA, said in a Los Angeles Times article that giving false information on things such as document preparation and warehouse fees – even if the borrower never gets charged for them – prevents consumers from making accurate comparisons when they are shopping around.
More than half of the respondents said they've been pressured to cut fees to keep lenders from avoiding tolerance violations at closing. Also, many home buyers don't bring estimates to closing tables with them, to see what they were told initially. Of the closing agents interviewed, 45 percent said they see the document less than half the time.
In order for both lenders and borrowers to avoid any confusion when it comes to buying a home, it would be wise for lenders to invest in loan management software as well as an amortization calculator to keep proper tabs on the volume of borrowers and the details of each specific loan to avoid any penalties to either party and ensure that the loan is properly repaid.