Marta D., escrow officer for one of our sister branches, knows the importance of adhering to the RESPA Rules. When the third party negotiator asked her to prepare two different HUD–1 statements for the same transaction she refused. Read on for all the details.
Short sale transactions can be quite challenging. Settlement agents act as a neutral third party working diligently to ensure all the terms of the transaction match up and the instructions of the parties are mutual. This is even more complicated in a short sale where there are multiple lien holders agreeing to take a shortage.
All Lienholders Must Agree…
In a short sale, the first lienholder regularly specifies the terms of their approval. The letter often includes the minimum amount due to them, approved closing costs, buyer’s name, commission and the amount which may be applied to subordinate lien holders. If the second or third lien holder requires more than the approved amount, the settlement agent must ensure the terms of the first lien holder’s approval letter are not violated.
In some cases, depending on the loan program, the buyer or real estate agents may contribute towards the short fall amount due the subordinate lender. In other instances the seller or their representative must negotiate with the second lender to settle for the amount permitted by the first lien holder. Regardless, everyone has to agree before the file can close and it all must be properly disclosed on the HUD–1 Settlement Statement.
Section 4 of RESPA dictates proper HUD–1 preparation. Appendix A to Part 3500 of RESPA states:
“This form is to be used as a statement of actual charges and adjustments paid by the borrower and the seller, to be given to the parties in connection with the settlement.”
A Request for Two HUDs
When closing a RESPA Regulated transaction, whether it is a sale or refinance, the HUD–1 must be a true reflection of all receipts and disbursements made as a part of the transaction. Marta knew the RESPA Regulations quite well, which is why she was shocked by the request she received. This transaction was being negotiated by a third party negotiator, who sent her an email which read:
“This HUD is to 1st mortgage for now. That is all 1st mortgage is going to pay to 2nd: $4,649.91. We will need another separate HUD to 2nd, which the buyer will contribute the difference for payoff to 2nd total: $12,000.”
Marta was shocked and offended. The negotiator even went as far as to tell her other settlement agents have done it for her. This is when Marta decided to report the incident to her manager who reported it to firstname.lastname@example.org. She refused to accommodate the request, forcing the negotiator to do her job and negotiate with the second lender. The file successfully closed, without deceiving anyone by using only one HUD–1 settlement statement which properly disclosed all charges and adjustments.
The Moral of the Story
When an escrow and title company closes and insures a new buyer, in some cases a new lender as a part of a short sale, they must ensure all terms and conditions of the short pay lender are met so they will release their lien. If the terms are not met, the short payoff may be rejected, resulting in the insured buyer and lender filing a claim on their title policy.
In some instances the title insurer ends up having to pay the difference between the loan balance and shortfall in order to obtain a release of lien from the short pay lender and protect their insured. Marta knew of this risk and her obligation to ensure her HUD–1 settlement statement was correct and accurate.