BUNDLING
Bundling - the combining of discrete fees into a single charge - applies to both title policies and escrow (closing) services. For title, bundling combines the loan policy fee, the cost of common policy endorsements and a tax certificate. For escrow, it combines the closing fee and other ancillary items (e.g., courier service and release processing).
Bundling is limited to transactions involving 1-4 family residential property. In addition, there is no bundling of premium and endorsement fees related to owner policies. Finally, with regard to title, it is a discounted rate and like other discounted rates, there is a qualifying condition; namely, that the homeowner is replacing existing secured debt
(i.e., refinancing) and not merely cashing out equity.
Some underwriters, including Westcor, offer a bundled rate for a loan policy that is issued as part of a sale transaction. In a sale transaction, the qualifying condition is that the loan policy will be issued simultaneously with an owner's policy.
The rationale for, and appeal of bundling involves a combination of factors. Lenders must comply with federal laws that regulate disclosure of loan costs and terms and title companies vie for lender business by offering competitive, easy to determine rates that are also reasonably related to the insured risks.
Consider a typical scenario. A homeowner contacts three different lenders (Banks A, B and C) and requests an interest rate quote and estimate of charges for refinancing his home. He provides the required preliminaries to each lender allowing them to put together the requested information. Under federal law (the Truth-In-Lending and Real Estate Settlement Procedures Acts), each of the three lenders must deliver a Truth-in-Lending disclosure and Good Faith Estimate (“GFE”) that accurately reflect their respective loan terms and transaction costs. The GFE must account for both the bank and title company charges.
Focus on one lender - say, Bank A. Because the homeowner has not yet committed to refinancing through Bank A, the loan officer would not want to incur the costof opening an order with a title company. Instead, to estimate the title company portion of the total costs, she will rely on a rate card or rate calculator. Mindful of RESPA tolerance violations,she does not want her estimate to be too low. Of course she could hedge against tolerance violations by over-estimating total transaction costs. However, she wants to be competitive and the homeowner may choose Bank B or C if their costs are significantly lower. Federal laws create an accuracy floor (a penalty for under-estimating). Competition places lenders under an accuracy ceiling and also forces them to distribute the various required disclosures quickly.
If Bank A orders a title commitment and the transaction never closes (e.g., the homeowner decides not to refinance, or he chooses a different lender), Bank A could be responsible for the cost of the commitment. Moreover, even though ordering a title commitment would provide Bank A with valuable information about the status of title (e.g., it may uncover title defects that would affect closing) as well as information about title costs, the loan officer may not want to wait for a commitment (24-48 hours) before getting information to the homeowner.
Pursuant to the Real Estate Settlement Procedures Act (“RESPA”), a lender can be liable for some or all of the difference between under-estimated closing costs set forth on a GFE and actual closing costs.
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