RESPA Fallout: Lenders Combat Deficiencies With New Good Faith Estimate Through “Loan Worksheets”

by Rich Vetstein on January 20, 2010 · 5 comments

in HUD, Massachusetts Real Estate Law, Mortgages, RESPA

The Los Angeles Times and other media outlets are claiming that lenders’ use of loan cost worksheets and estimates are a “sidestep” of the new RESPA mandated Good Faith Estimate which went into effect on January 1. HUD officials say they plan to conduct a review of the growing use of “worksheets” and “fee estimate” forms by mortgage lenders providing quotes to home buyers and refinancers. Lenders vehemently deny that they are doing anything wrong; in fact, they argue, cost worksheets are necessary because of several glaring deficiencies with the new Good Faith Estimate. This is all part of the shake-out during the first 30 days of the new RESPA reform which went into effect on January 1.

The new closing cost rules under the Real Estate Settlement Practices Act (RESPA) significantly changed the manner in which lenders are required to estimate loan and closing costs. Many charges cannot deviate at all, or at most by a 10%, from the Good Faith Estimate to the closing. That’s in stark contrast to earlier rules, which essentially allowed some lenders to quote low estimates of total costs, with no responsibility for the final dollar charges at closing, HUD contended.

Lenders — many of whom are feel the new GFE is the single worst government form ever to hit the real estate industry — respond that since the new GFE has a number of major deficiencies, such as not providing a total monthly cost payment, seller paid items and most importantly cash-to-close, it justifies the worksheets/estimates. (And if you can believe this, there’s no place on the GFE for the borrower to sign!).

Lenders, what are your complaints with the new GFE? (Try to keep them under 10!). Do you think providing these worksheets will ultimately help consumers? Are the criticisms about the worksheets unfair? Did HUD get it wrong with the new GFE? (I think I know the answer to that!). What can HUD do to improve it?

There is nothing explicit in the new RESPA rules prohibiting the use of these cost worksheets/estimate. Since this practice is on HUD’s radar, my recommendation to lenders is to explain clearly to the customer, preferably with a written disclosure right on the estimate, that this is not binding and not a substitute for the new GFE. That way, if HUD comes knocking on the door, you’ve covered yourself.

My goal with this post is to get the conversation going on the new GFE, not to rail against the mortgage industry. I’m on your side! As Jerry Maguire said, “Help me, help you…help me, help you!”

On a related note, as buyer’s counsel I now insert a rider provision into the P&S providing that the seller agrees to an extension (up to 7 days) of the closing date due to any RESPA/GFE related delays.

  • Steve

    Grrr…. Long story. I applied for a loan online with my credit union after trying to talk to a loan officer in person. The CU told me to apply online so, I did, and I got a rate quote with no GFE or any mention of rate lock fees or that the loan was floating etc. and it was way over a week before I got any paperwork, but still no GFE.
    But, the paperwork had rate lock fees etc. in it. And said the rate was floating! This was never disclosed to me when I filled out the paperwork! And I had another offer in hand for a locked rate for no fee at another bank that of course by the time I realized the sleaziness of my own credit union, the offer was gone. I called and complained to the bank and explain that because they didn’t disclose to me the fees and the fact that the rate was floating that I lost out on the chance to use another bank. To be honest, at the time I knew they hadn’t disclosed things to me, but I didn’t know the name of the GFE, it just didn’t feel right the way the process was going. I have never had a worse process and I have closed on 3 mortgages and 3 refinances.
    I decide to lock at a worse rate, and they waived the fee for me. Two weeks later, I receive in the mail a GFE. The first one ever to be sent to me and my husband and on it are all the terms that I had expected to receive when I filled out the online application. So, we initialed and signed the paperwork and sent it back to the bank. I called to make sure they had everything was good. They said yes and that the paperwork was almost complete.
    A week later, they call me and say they are issuing a new GFE with a higher rate. I am ready to pull all my money from this credit union because I have felt jerked around by them. Because I have had good experiences with them in the past (I have been a member since 2000) I let my guard down and thought wow, they have a great rate and I can do all my banking with them. I totally feel jerked around.

  • Kevin Heaphy

    I am a loan officer and do not have a problem with the zero tolerance provision for the origination charges, but I have a BIG problem with the tolerance on title, recording, and transfer taxes. While a lender should do their best in Good Faith to accurately estimate these fees, it does not benefit the lender if they end up being higher. Yes, a lender could understate them to make their total costs look lower, but the new GFE shows pretty clearly where the fees are coming from.
    The problem we’re seeing now is that we’re accountable for the GFE’s accuracy, but title companies still have zero accountability. We’re getting incorrect invoices and then getting hit with surprise fees at closing because of title company changes. I think that title agents should be held to the same standard as we are, forced to stand behind their estimates to us. Our only recourse is to limit the title companies that we will work with, but we’re a national lender and in many states cannot control the choice of settlement agent. The narrowing of title company options is hurting smaller title agents and reducing competition in the market, which could lead to higher overall costs to the consumers. We’re now considering a national provider that I know is usually one of the higher priced, but they’ll stand by their estimates. Guess what management will decide to do?

    • Kevin, you make some excellent points. Thanks for participating in the discussion. Here in Mass., the new rules force closing attorneys and lenders to coordinate what the fee structure is from the outset–which is long overdue!

      Richard D. Vetstein, Esq.

  • Pingback: The New GFE: Some Glaring Omissions | The Massachusetts Real Estate Law Blog()

  • Eric Wiley

    Interesting take on the new RESPA/GFE requirements, but not entirely all encompassing. The attempt to describe more information to a consumer is noble (which page one of the new GFE in fact does somewhat effectively), but overall it sadly misses the mark.

    For a first time buyer, or even a repeat borrower, the GFE no longer serves its real world purpose – to show a consumer a statement of cash requirements associated with the financing of a property and to demonstrate an estimated monthly payment. The new GFE lacks a purchase price, cash-to-close, a monthly payment other than just the principal, interest and any applicable mortgage insurance (what about taxes, HOA dues and insurance?), the applicability of any seller concessions that may reduce cash-to-close, etc. In other words, it is entirely useless for a potential home buyer that is looking at a $250K, $275K and $300K overall cost and cash-flow analysis while deciding what different prices will mean in terms of their obligations as a borrower. It is maybe more relevant to a refinance applicant, though it still doesn’t show a cash/credit to close summary.

    HUD now requires that GFEs be provided as you have described, with very little tolerance for fee changes, etc. It is not really the charges of the lender or broker that are causing the need for additional forms of loan summarization. Rather, the lack of the items in the paragraph above as well as the lack of knowledge of some third party fees until fee quotes have been obtained from various service providers (out of the area appraisals, title and escrow fees that vary even by neighborhood, transfer taxes, etc.) as well as a lack of knowledge of the entire creditworthiness of the applicant (i.e. credit score, which affects pricing directly). Credit reports aren’t free nor are the tracking and disclosure requirements under various state and federal regulations, which is why lenders don’t want to willy-nilly clog their systems with transactions that have no chance of going anywhere.

    There is no such thing as a free lunch and this issue is more complicated than a quick “this is how it should be” statement.

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