This article will help homeowners:
Understand the purpose of the good faith estimate (GFE);
Understand the mortgage broker’s role in explaining to a
borrower how to use the GFE; and
Review the changes made with the proposed integrated
GFE/Reg Z disclosures.
The good faith estimate is designed for
shopping around
Within three days after a borrower’s loan application is
first submitted to a mortgage lender, the lender must prepare and hand the
borrower an accurate good faith estimate
(GFE) of closing costs. The estimates are required by the Real Estate
Settlement and Procedures Act (RESPA). [12 CFR §1024.7(a)(1)]
RESPA regulations on use of the GFE are designed
primarily to eliminate increases in lender fees at the time of closing, not at
the time of the estimate. The binding GFE is meant to give borrowers an
accurate portrait of what they will be obligated to pay to obtain a mortgage.
HUD created more rigorous standards for the GFE in order to allow borrowers the
opportunity to choose a loan fully knowing what they are getting into and what
the competition has to offer, which will hopefully reduce the amount of
homeowners who are trapped paying costs they claim were never disclosed.
The continued effort of the industry, and regulators, is
to craft a better GFE. Their goal is two-fold:
make it easier for borrowers to shop around and be able
to readily compare several loan offers before committing to any single loan;
and give borrowers a tool they can use to compare the costs initially disclosed
by the lender with the final settlement charges reflected on the HUD-1
statement to ensure the borrower is not surprised with a disadvantageous loan
term at closing.
But how is the GFE being used in practice?
Lenders still bending rules, borrowers
still not shopping
The GFE, given to
borrowers within three days of submitting their home loan application, is
prohibited from exceeding 10% of the final closing costs, otherwise lenders pay
the difference. However, some lenders purposefully over quote their estimates to ensure the final
number is within the required 10% range.
After meeting with CFPB staff in 2011, the American Land
Title Association (ALTA), one of the nation’s largest title insurance trade
associations, performed a survey in April of 2012 regarding the accuracy of the
GFEs their members observed.
Of the 205 closing agents who responded, nearly 75% have
observed lenders over quote their GFEs and pad them with estimates for general
services like “document preparation” and “warehouse fees” which don’t make it
to the final statement. More than half of the agents surveyed reported being
pressured to cut their own fees in order for the lender to make it within the
10% buffer.
Further, 75% of respondents indicated borrowers receive
more than one GFE from a single lender, thereby
confusing borrowers.
Two thirds of agents surveyed claimed lenders do not
attach the list of closing service providers, which would encourage borrowers
to shop around for the most competitive rates. Likewise, 75% of agents observed
borrowers do not shop around for title and escrow services.
And it’s not just a one-sided failure: borrowers aren’t
doing everything they can to protect their own interests. More than half do not
even use the GFE they received to compare it to the HUD-1 Settlement Statement.
While ALTA’s informal survey was not statistically large, its findings indicate that continued effort is required to both make these forms more visible to the inexperienced borrowing public, and more restrictive on lenders. [ALTA Comment Letter to CFPB’s Ben Olson Summarizing Results of the GFE Survey, April 12, 2012.]
