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.
I’m pleased to welcome another guest blogger, David M. Gaffin, a licensed Loan Officer with Greenpark Mortgage Corp. of Needham MA. Dave is licensed to originate in MA, NH and FL. You can visit him at Greenpark Mortgage or through his LinkedIn profile.
The new 2010 RESPA rules are all the rage right now. So I’m especially pleased to have a mortgage industry veteran like Dave to offer his views on the new rules, especially the new Good Faith Estimate (GFE).
So, you thought getting a home loan for purchase or refinance before was confusing? Well, I’ve got GREAT NEWS for you. Your government has heard you and has come to help! (Insert Sarcastic Mental Voice.) The federal Housing and Urban Development agency (HUD) has dismantled the previous 1 page Good Faith Estimate that itemized most of the settlement charges for your loan and created a new 3 page “simplified” GFE to “help borrowers understand and compare the costs associated with obtaining a mortgage.”
In my opinion, HUD is trying to do at least 2 things for consumers:
1. Protect the consumer from dealing with shady mortgage companies that will disclose certain fees on the GFE, and then charge higher or additional fees at the closing table and
2. Encourage consumers to use the GFE as a shopping tool to ensure a fair deal.
An informed consumer will typically make better choices than an ill-informed one, so the premise behind the changes to the new GFE is a worthwhile one. However, there are several areas where a consumer may not be able to compare the costs of loan programs on an equal basis and thus make the most appropriate loan choice.
Page 1 of the new GFE groups together all of the “Adjusted Origination Charges” (e.g. processing and underwriting fees, points, doc prep, etc.) as one figure and the Charges for All Other Settlement Services (e.g. closing attorney fees, title insurance, recording fees, etc.) associated with closing your loan as another figure and adds them together to come up with the Total Estimate Settlement Charges.
The new GFE also spells out your loan amount, loan term, interest rate and the initial monthly payment for principal interest and any mortgage insurance.
However the new GFE does not include expected expenses for monthly real estate taxes, homeowners insurance, or home owner’s association dues. Nor does it inform the borrower about expected funds needed to close the loan. Because all the origination charges are lumped together, the new GFE is not specific in disclosing the number of points required to close the loan. It also does not include the Annual Percentage Rate, or APR.
Escrow funding for reserves of real estate taxes, home owner’s insurance and mortgage insurance are included on page 1.
However, despite the fact that this total sum should be uniform across lenders, the new GFE allows the lender to quote whatever number of months of reserves they choose, resulting in a variance of hundreds or thousands of dollars when comparing GFEs. This is not a borrower savings from lender to lender. At settlement these charges will be the same for all lenders. This could result in the borrower unexpectedly bringing additional funds to the closing. Some mortgage companies will try to gain a competitive advantage by initially disclosing lower escrow totals. This would be an unfair and deceptive trade practice to the consumer.
Page 2 breaks into sections the charges for All Other Settlement Services which will include such newly disclosed charges as Owner’s Title Insurance, (which is an optional, but recommended purchase) and Transfer Taxes. In many states, the Transfer Taxes are disclosed as a borrower–related cost, even though the borrower may not be responsible for this cost, thereby inflating the Total Charge Estimate.
Page 3 gives the consumer information about which expense items on the GFE cannot increase at settlement, which one’s can have a total increase of a 10% increase and which ones can change without limit. The origination charges cannot change at settlement.
Lenders who allow borrowers to choose settlement service providers will receive a Page 4 to the new GFE which will list those providers.
Analysis: Does the new GFE Help Consumers Or Is It Just Another Complicated Form?
I have been in the mortgage industry for many years and have advanced educational degrees. I have passed my required national and state licensing exams and even I find this form to be confusing and not very helpful when comparing loans. My job as a loan consultant is to inform and educate my clients so that we arrive at the best loan program for them with the least costs based on their needs. I use different tools to compare programs, including cost/benefit analysis, total interest paid comparisons, length of loan term reviews, etc., but, with the new GFE rules, I must disclose 1 loan program within 3 business days of collecting 6 points of entry for an application. If I fail to do so, even if the borrower and I have not determined the best program for them yet, I am in violation of the law. I do not see how this helps the borrower determine the best loan program.
I will give HUD credit for trying, and as this is now the law of the land it is what we must all work with, however, given the vast departure from the look and feel of the previous form, it is going to take a lot of education on the part of loan officers, realtors and attorneys to establish a comfort level with the borrower’s understanding of the form.
When a borrower chooses a lender, they should be referred by someone they trust, should check out the lender’s and loan officer’s reputation by reviewing its website or other public information and feel comfortable that the loan officer is knowledgeable, understands their needs and has the borrower’s best interests in mind. Then a GFE received from that company can be viewed as a Good Faith Accurate, and not just a Good Faith Estimate.
Dave, thanks so much for your insightful analysis! This is a great post and a boon for our readers. This underscores why borrowers must have an experienced and knowledgeable loan officer such as David Gaffin on their team.
I have certainly spend a fair amount of time digesting the new changes, but perhaps that is because I am so used to the old forms. The irony may well be that many consumers will be seeing the new GFE for the first time and may not be as confused as some of us industry veterans. Adjusting to major changes to long standing practices is always difficult.
For my entire series on the new 2010 RESPA rules, look to the right under “Spotlight On: RESPA Reform” or click here.
The U.S. Department of Housing and Urban Development (HUD) announced on Friday that it will not enforce for a 120 day period new, sweeping regulatory changes to the Real Estate Settlement Procedures Act (RESPA) set to go into effect January 1, 2010. The new regulations will still go into effect on January 1, 2010, but the board overseeing enforcement of these new rules will “exercise restraint in enforcing” them. HUD wants all lenders to make a good faith effort to comply with the new regulations beginning on January 1.
The major components of the new RESPA reform are the new and substantially revised HUD-1 Settlement Statement and Good Faith Estimate (GFE) of closing costs issued by lenders, settlement agents, and closing attorneys. HUD will require that lenders and mortgage brokers provide consumers with a newly revised Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. Closing agents will also be required to provide borrowers a new HUD-1 Settlement Statement that clearly compares consumers’ final and estimated costs.
The new RESPA rule became effective on January 16, 2009, but provided a one-year transition period for the mortgage industry to incorporate these changes. HUD will continue to work with the mortgage industry during this period, including providing a comprehensive set of frequently asked questions (FAQs) on its website.
This is very good news for lenders and closing attorneys so they can take advantage of some well needed additional time to digest the new forms and procedures. I recently attended a seminar on the new RESPA changes, and they are quite a substantial change to the current GFE and HUD-1. Lenders must provide borrowers with a firm “origination charge” which must include all the various loan origination fees now separately itemized on the HUD-1 Settlement Statement, including points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees. This origination fee cannot increase. Lenders also have to provide borrowers with a “firm” quote for typical closings costs, including attorneys’ fees, title insurance and recording fees, and select up to 1 preferred provider for such services. The firm quote cannot increase by more than 10% at closing. If the lender allows, borrowers can use their own providers who will not be subject at all to the firm quote requirement. The new changes will require quite a bit of coordination between lenders and closing attorneys.
Most lenders who I have spoken to are not ready for these changes. The likely impact is that for the first 4 months of 2010, borrowers could see either the current or the revised GFE and HUD-1 form, depending on whether the lender/closing attorney has implemented the changes.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
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.
