Concise Disclosures Aimed At Reducing Borrower Confusion and Helping Comparison Shopping
As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau on Monday issued proposed rules to bolster fairness and clarity in residential lending, including requiring a new good-faith estimate of costs for homebuyers and a new closing settlement statement.
My understanding is that the new “loan estimate” would replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). The new closing disclosure would replace the current HUD-1 Settlement Statement. The new disclosures are open to industry and public comment for 120 days, after which they will be finalized and codified as law. For more details on the new disclosures, go to the CFPB site here.
Lenders have been using the new Good Faith Estimate for a little over one month now. Gauging from the vociferous complaining in the lender blogosphere, it is an understatement to say that many lenders believe HUD really blew it with this new form. One would think that the new 3 page GFE would provide everything a borrower needs to know about what she’ll pay at closing, yet the new GFE inexplicably fails to provide at least 5 critical pieces of information for home buyers:
the total monthly mortgage payment (including escrows, taxes and insurance)
total cash needed to close
escrow amounts for real estate taxes, hazard insurance, and PMI
seller paid closing costs
Loan-to-value ratio/down payment
The GFE’s failure to provide this essential data about the loan is why one mortgage lender called the new GFE “the single worst government form dumped on the real estate industry.”
Surely, every borrower wants to know their total monthly mortgage payment month and how much cash they’ll need to bring at closing. Borrowers also want to know ahead of time how much the tax and insurance escrows will be since they have to pay several months in advance at the closing. Since the new GFE doesn’t provide this important information, lenders are filling in the gaps with their own custom made loan worksheets.
Some have complained that these worksheets are a work-around the new rules, but lenders have an obligation to provide borrowers with the full financial picture of the loan. The criticism is unfair, in my opinion, if the intent is to fill in the informational gap of what the GFE fails to provide.
The new GFE may be an overall improvement to the hodge-podge of good faith estimates previously used by lenders, but it’s certainly not the Messiah that HUD billed it out to be.
My post on lenders using loan cost worksheets and estimates was the featured post on ActiveRain yesterday, spawning over 140 comments by last count. It turned into quite a lively discussion by mortgage lenders about how frustrated they are with the new Good Faith Estimate and RESPA rules. After digesting all the comments, I have to say that I completely understand mortgage lenders’ frustration, and that worksheets are a necessary evil, if you will, due to HUD’s failure to get the new GFE right.
As my mortgage lender friends point out, the new GFE inexplicably fails to provide some of the most important information for homebuyers: (1) the total monthly mortgage payment (including escrows, taxes and insurance), (2) total cash needed to close, and (3) seller paid closing costs. Every borrower wants to know how much they are paying a month and how much they’ll need to bring at closing. Since the new GFE doesn’t provide this important information, lenders are filling in the gaps with loan worksheets. This why one mortgage lender called the new GFE “the single worst government form dumped on the real estate industry.”
Here are a few of the comments from mortgage lenders:
We are a company that does provide a worksheet/ summary of the costs but that is before the triggers take effect (Quoting stage). Our worksheet is actually based off all the costs that we input into the file and we are in compliance to the new rules. Once the triggers are set we immediately send them the new GFE.
The problem with the new GFE is that it doesn’t provide any uniformity to the quoting stage of the conversation between lender and client. This causes almost all lenders to create their own idea of what constitutes a quote or a GFE. I have seen a bunch of them and I can say that many of them are deceitful as they do not come close to disclosing the actual costs that the client, ultimately, will have to pay.
Richard, Nice post. I can’t figure out if I 100% agree or disagree with you.
I 100% agree with your position against the homemade comparison charts. I saw a mock excel worksheet yesterday from one of the two big bailout recipient banks yesterday. It had costs that did not pass through on the =sum() function and the rates were .5% higher than market. It was deceptive at best.
I am not going to contend that the new rules are not without fault. I agree that, if it was issued, the new GFE would be a fantastic apples-to-apples comparison. As a lawyer, if XYZ Bank was your client, would you advise them to issue a GFE when they don’t have to and can’t reasonably measure their exposure?
Personally, I think they missed an opportunity to create a standardized preliminary document. I think the best part of the GFE is that it won’t vary in form or function between lenders. Yet the preliminary estimate sheets will vary infinitely and that defeats the entire spirit of the changes.
As for the complaints about cash-to-close and monthly payment, that is simply not the purpose of the document. I’d argue that information should not be on the GFE. It is a GFE “of settlement costs” not “of everything you’d want estimated all rolled up onto one page.”
An overpriced lender can no longer redirect the consumer’s attention by talking about the monthly payment or cash-to-close. I don’t see how that is bad.
I agree with most of the comments about the new GFE. While the intentions were good and warranted, it does fall short of simplifying all the fees to the borrowers. It seems like it’s even more confusing for borrowers, lenders and realtors. I had lunch with a very experienced, extremely intelligent broker friend of mine last week and he said that some lenders aren’t even allowing them to send out GFE’s because they are completely confused on the correct way to have them completed correctly and they are also afraid of the potential liability.
At Bank of America our Closing Cost Worksheet (CCW) DOES DISCLOSE the total closing costs broken down individually, the seller credit (if any), the cash to close and the total PITI mortgage payment. This is what we send to the borrowers when they are qualified to buy a home prior to the disclosures being mailed out by our processing staff. You can be completely confident that working with a B of A loan officer that your client will get a great loan! We have low rates, we never, ever charge origination fees, low lender fees and we can’t get overage/rebate at all. (you can’t selll the borrower a higher rate and get paid on this overage/rebate- if there’s any at all, it goes back to the borrower to pay closing costs).
It does no one any good to just gripe about the new form. It’s here in it’s present form and the best policy is to do what we can to live with it and to understand what it is and what it isn’t all about.
Lenders, what are your thoughts about the new GFE? How has it changed the manner in which you assist borrowers with pre-approvals, if at all? What should HUD fix next go-around with the new forms?
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.
I received a link to a pretty good webinar on the new HUD RESPA rules. HUD’s Assistant Secretary for Residential Homes, Vicki Bott, participated in it along with mortgage industry veterans. It’s about an hour long.
With 11 days and counting until all lenders and closing attorneys must be in compliance with the new RESPA requirements and the new Good Faith Estimate (GFE) and HUD-1 Settlement Statement, HUD has released two helpful documents:
The booklet encourages retaining a competent real estate attorney in the transaction:
Before you sign a sales agreement, you might consider asking an attorney to review it and tell you if it protects your interests. If you have already signed your sales agreement, you might still consider having an attorney review it. (Ed. You definitely want an attorney to review and mark up the purchase and sale agreement, or else you’ll wind up signing the standard form and getting burnt).
If choosing an attorney, you should shop around and ask what services will be performed and whether the attorney is experienced in representing homebuyers. You may also wish to ask the attorney whether the attorney will represent anyone other than you in the transaction. (Ed.: You definitely want to choose an attorney who specializes in real estate, as opposed to an attorney who dabbles in it. Residential real estate practice, once considered fairly basic, has rapidly changed into a complex maze of regulations, disclosures and standards. You need someone who does this every day.)
In some areas, an attorney will act as a settlement agent to handle your settlement. (Ed.: In Massachusetts, it is fairly common that the same attorney will represent a buyer and close the loan for the lender. This is called a dual representation and often saves the home buyer money on closing costs. The buyer’s and lender’s interests are aligned as both parties must have clear and marketable (and insurable) title to the property).
The booklet also provides very helpful encouragement for buyer’s to purchase title insurance, which I always recommend:
Title Services and Settlement Agent
When you purchase your home, you receive “title” to the home. Certain title services will be required by your lender to protect against liens or claims on the property. Title services include the title search, examination of the title, preparation of a commitment to insure, conducting the settlement, and all administration and processing services that are involved within these services. Many lenders require a lender‟s title insurance policy to protect against loss resulting from claims by others against your new home. A lender‟s title insurance policy does not protect you.
If a title claim occurs, it can be financially devastating to an owner who is uninsured. If you want to protect yourself from claims by others against your new home, you will need an owner’s policy.
Kudos to HUD for finally advocating the benefits of title insurance!
New, sweeping changes regulating how lenders, closing attorneys and title companies disclose loan and closing costs are set to go into effect January 1, 2010. The new regulations are part of a long awaited reform to the 30 year old Real Estate Settlement Practices Act known as RESPA aimed at providing greater transparency and fostering better consumer choice in loan and closing costs. The changes are so significant that HUD recently took the unusual step of giving lenders a 120 day reprieve in enforcing the new regulations.
The major components of the new RESPA reform are the new and substantially revised Good Faith Estimate (GFE), in which lenders disclose loan and closing costs to borrowers, and the HUD-1 Settlement Statement, which is a detailed financial breakdown of the entire real estate transaction signed at closing.
Highlights of the new changes include:
Borrowers must receive a standard GFE disclosing key loan terms, including the loan’s terms; whether the interest rate is fixed or otherwise; any prepayment penalties and/or balloon payments; and total closing costs.
Lenders must provide borrowers with a standard origination charge for the loan which must include all points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees
Lenders have the option of providing borrowers with a list of approved service providers such as closing attorneys and title insurance companies.
A tolerance range has been specified for various categories of loan/closing costs to prevent unnecessary escalation of promised vs. actual charges.
Fees quoted for lender origination charge cannot change.
Fees for title and closing costs where the lender selects the provider or where the borrower selects the provider from the lender’s approved list cannot change by more than 10%.
Fees that borrowers can shop for themselves can increase (or decrease) by any amount.
The final page of the GFE contains worksheet-like charges to compare different loans and terms that the borrower can use to shop pricing.
Controversial lender payments to mortgage brokers, known as yield-spread premiums, must be disclosed in a standard manner.
The charges quoted on the GFE are then carried over to the HUD-1 Settlement Statement to ensure that the prescribed tolerances are met.
I think that overall the changes will provide consumers with greater disclosure and transparency of the myriad loan closing fees and costs in a typical real estate purchase. It also creates an incentive for lenders to assemble a competitively priced team of preferred settlement service providers, so it can guarantee to its customers that the price of the preferred vendors’ settlement services will never increase by more than 10% at closing. If borrowers aren’t happy with that, they are free to shop and find a better deal themselves.
I plan to do a series of upcoming posts on this important RESPA reform, highlighting the salient sections of the new GFE and HUD-1. As always, contact Richard Vetstein with any questions.
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.
Concise Disclosures Aimed At Reducing Borrower Confusion and Helping Comparison Shopping
Richard D. Vetstein, Esq. is an experienced Massachusetts real estate closing attorney who has closed thousands of purchase and refinance transactions. Please contact him if you need legal assistance purchasing residential or commercial real estate.
