"Bundling" has caused problems for many homeowners when their closing costs are grouped into a flat fee without itemization. Supporters of the practice claim it saves consumers money. Officials, however, are investigating it in the interest of consumer protection.

By charging a flat fee for such things as credit checks, tax and insurance payment escrow services, document preparation, wire transfers, and courier fees, lenders argue that they save consumers money. The costs of various services, like title companies doing title searches prior to closing, are purchased in bulk by lenders. Because they buy in volume, they get wholesale discounts, and the savings are passed on to borrowers. Or at least that's what mortgage companies who promote these discount packages claim.

Not necessarily saving a bundle

If bundling works the way it's supposed to, it seems to favor homeowners, while also providing a clear enough picture of total closing costs. However, problems related to bundling are now widespread. Growing numbers of homeowners say that bundling provides a slick disguise for unfair costs to be added to their loans, and that sometimes lenders tack on fees just to make more money. Because everything is lumped together, it's difficult for the average consumer to figure out which fees are legitimate and which ones are not. As more homeowners start to examine mortgage documents with their lawyers, more discrepancies come to light.

Nobody knows for sure how many borrowers have been overcharged, but studies indicate that the phenomenon may have reached epidemic proportions. A study by a University of Iowa law professor concluded that lenders overcharged homeowners in nearly 50 percent of the cases reviewed. With millions of foreclosures across the U.S., and an unprecedented number of complaints, the situation has prompted regulatory agency investigations into the practice of bundling.

History of a problem

The flat fee program came into existence in 2002, when the Department of Housing and Urban Development (HUD) agreed to let lenders bundle services together without itemizing costs, as long as the lender charged one guaranteed set fee that was all-inclusive. Some lenders saw an opportunity to create a unique marketing strategy, and they advertised these new bundled closing cost packages as cheaper and less complicated.

Ironically, the HUD change came while the government agency was revamping regulations to ensure that lenders were prompt and forthcoming about estimating closing costs. Now it seems that the bundling concept may have backfired, and HUD has reversed its policy and gone back to the old rules that require itemization.

Meanwhile, if you have a mortgage, you may want to request an updated and itemized accounting- in writing-for any and all fees related to the loan. Regardless of whether or not your loan fees were bundled at closing, the calculations may still have been bundled. By double-checking the inventory of charges, you could potentially avoid being double-billed by your lender.

Published on August 10, 2010