It’s easy to complain about government paperwork, but sometimes something as seemingly simple as a new form can be worth much more than the paper it’s printed on. Such is the new standardized and borrower-friendly Good Faith Estimate that has been proposed by the U.S. Department of Housing and Urban Development.
The new form is long overdue, especially in comparison with the forms currently in use, which have created a state of confusion that could be cited as a contributor, if perhaps not a chief cause, of the nation’s subprime mortgage crisis.
The new form is four pages long, but contains many significant improvements over the forms borrowers have received in recent years. The two-column, four-color design is both attractive and easy to read, which should make the form more likely to be read, especially if it’s reproduced as designed.
The form discloses basic loan terms in plain English that’s free from unnecessary jargon. Six of the most important disclosures are stated on the first page in simple yes-or-no questions that aren’t likely to be overlooked or misunderstood. A separate section outlines the costs of the loan along with helpful descriptions that explain the purpose of each cost, and again, are written in plain language.
HUD’s announcement made much of the new form as a helpful tool for borrowers to comparison shop and save money on this major financial decision. Those would be benefits indeed, but even comparison shopping and hundreds of dollars in savings may pale beside the advantages of a better opportunity for borrowers to understand the terms of their loan. The form might rightly be considered a success even if that were all it achieved.
Another excellent improvement is the ban or limitation on some cost increases, which should rein in a market that’s notorious for added and wildly inflated costs at closing. In the best of all possible worlds, it would be ideal to have a required GFE that wasn’t an estimate, but rather a fixed commitment of all the terms of the loan and the closing costs. Since that may be impossible, given the time lag of the transaction and fluctuations in interest rates and interest rate-related costs, the division of costs into three categories that (1) may not change, (2) may not change by more than 10 percent and (3) may change prior to closing is a significant and helpful step forward.
Perhaps the weakest section of the form is the chart that compares the quoted loan to two other loans, one with a lower interest rate and the other with a higher interest rate. The trouble here is that the chart doesn’t include all the terms of the comparison loans, which may differ significantly. This omission, and thus the chart itself, is apt to cause more confusion than clarity, unless the borrower requests a separate GFE for each loan. The separate "shopping chart" is also too simplistic. Yet both charts may encourage comparisons and thereby increase comprehension of loan terms and options. That’s not all bad.
HUD’s new form comes with a package of required scripts that recap the terms of the loan and the variances between the GFE and HUD-1 closing costs and that are to be read to the borrower before the loan closes.
The concept of a script may seem rather corny, but the scripts are well done and if they are properly prepared and dutifully recited, should afford borrowers another opportunity to ask questions and make sure they understand the loan they’ve obtained. The potential benefit seems worth the effort since the scripts could be helpful at best or harmless at worst. Lenders may be keen on the idea, despite the additional paperwork, since the verbal recitation of terms may give them additional grounds to argue borrowers were fully informed.
A new form won’t solve all of the serious problems that plague mortgage lending. No GFE can eliminate willful noncompliance, incompetent sloppiness or outright fraud, all of which still require a major enforcement effort and more meaningful penalties to address. HUD also needs to educate lenders and borrowers about the new form to make sure its disclosures won’t be taken casually or treated cavalierly.
Not incidentally, borrowers also should have access to an equally simple complaint form, perhaps through HUD’s Web site, to report excessive variances in closing costs. Recourse in the courts for nontrivial or malicious errors would be a plus as well.
But the bottom line, for now, is that HUD’s new GFE is both welcome and timely.
Marcie Geffner is a freelance real estate reporter in Los Angeles.
Copyright 2008 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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