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:

Ted Canto of Academy Mortgage writes:

Hi Richard,

Timely and important post. Thank you!

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.

Chris Richter, Chicago Mortgage Loan writes:

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.

Gerard Ladalardo, Bank of America

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).

And to sum up, as Mark Aalto of First Pacific Mortgage so succinctly does:

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?

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.

Here is a link to the new Good Faith Estimate (GFE) form and a link to the new HUD-1 Settlement Statement form.  The most recent FAQ from HUD (last updated 1.28.10) can be found here.

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.

Please read my second post in this series, New RESPA Rules 2010: Disclosure of Settlement Services, Attorneys Fees and Title Insurance.

For all the posts in the RESPA series, click here.