Under Fire: Lender “Work Arounds” for New 2010 Good Faith Estimates

by Alex Stenback on January 18, 2010

Kenneth Harney starts the flap over the mortgage industry “exploiting loopholes” and working around the new (and supposedly improved) Good Faith estimate thusly:

“The federal government’s efforts to eliminate settlement cost surprises for home mortgage applicants may have opened the door to a new — and potentially costly — set of consumer problems.

Starting Jan. 1, mortgage lenders nationwide were required to begin issuing new “good faith estimates” to applicants covering loan fees and settlement charges.

Under the regulations issued by the Department of Housing and Urban Development, the estimates that lenders provide upfront must be accurate — the same or nearly the same as the fees that are later charged at closing.”
“Many loan officers and lending institutions are sidestepping the new, price-bound GFE by giving shoppers “work sheets” and “loan scenario” forms that come with no legal requirements for accuracy, and were not even contemplated under the reforms.”

And Ken is exactly right - lenders are preparing worksheets and other forms prior to issuing a formal Good Faith Estimate.  But he’s missing the point as to why. 

Here’s a hint – it’s not about “exploiting loopholes” or sidestepping regulations in order to set the customer up for a fleecing – To the contrary.  These ”worksheets” are entirely about filling the massive informational void for consumers that the new Good Faith Estimate has left. 

Yes, the new Good Faith Estimate guarantees some fees, and sets rigid tolerances for variation in others, fully discloses prepayment penalties, and tells you in plain engliish whether and how the terms on a particular loan may change.  Which is all fine, and qualifies as progress and I fully support it’s intent.

Problem is, that is ALL that it does, and it turns out, consumers need quite a bit more information to make a decision on the best way to finance their home.

For instance:

  • The new good faith estimate does not provide an estimate for total cash the consumer needs at the actual closing itself.  All you have is the total estimate of closing costs. Down payment, seller, or lender paid closing costs are never accounted for, cannot be accounted for, and no estimate or articulation of options is provided.
  • The new good faith estimate, which runs three pages, provides no useful or meaningful context with which a consumer can make an understandable comparison between different loan scenarios based on any other factor than costs.

So.  Want to know the bottom line difference in monthly payment and the amount of cash you will need at closing between a 5% down conventional mortgage with up front mortgage insurance and an FHA insured loan with 3.5% down and seller paid closing costs?  Good luck! 

Want to know the total cost of each of those scenarios over a 3, 5, 10 year period? Better luck!

Or if you are not an analytical-type/numbers person:

Want to know the total cash needed at closing?  Important info, right?  Sorry!  Not on the GFE.  See for yourself here: 2010 GFE form [PDF!]

[One wonders, should lenders just be scribbling this info on a Post-itTM?  Does that count as a worksheet? Are Post-ItsTM exploitive?  I digress.]

As a result, this new Good Faith Estimate (which was supposed to eliminate surprises and enable smarter shopping) will just make it harder. 

Here’s why: 

Most consumers are seeking both information AND price when they transact with a lender. For reasons I cannot fathom, the new GFE is almost entirely ignorant of this fact.

It is a truly rare consumer that springs fully-formed through a lenders door knowing how much they qualify for, exactly what type of loan they want, how they want the closing costs to be structured, how large a down payment they will make, what property they are purchasing, and when it is closing, and how changes to those variables will impact their monthly budget and their savings.  

These, in fact, are The Big Questions in mortgage banking, and until they are considered, price is of secondary concern. 

Put simply, whether they have never purchased a home or own ten, most people want advice on how to finance their purchase, as well as to know how much it will cost.  The new GFE answers the how much, but offers little useful information on the how

To invoke on old loan officers cliche: The wrong loan at the best price is a far costlier than paying $700 “too much”  for the right advice (read: loan.) 

So, we’re now left with a landscape where lenders, seeking to advise their clients and fill the informational voids on the new Good Faith Estimate, will create worksheets, loan comparison spreadsheets, cash-to-close summaries, and who-knows-what other cleverly named form. 

Each, of course, with their own format and layout, rendering comparison harder, not easier.

· Mortgage Lenders Exploit a Loophaole in HUD’s new Good Faith Estimate Rules [Harney]

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