For years, people have complained that there wasn’t a lot of "good faith" in some of the so-called Good Faith Estimates that lenders supplied in order to give borrowers an advance idea of the costs attached to their mortgages.
All too often, consumer activists have charged, homebuyers would show up for their closings and find laid before them a vastly different set of figures than they’d expected — with little more than a "sorry, that’s just the way it worked out" from the lenders.
Sometimes that would be unfortunate, but true. Sometimes, the changed figures would be the result of sloppiness. And sometimes, they represented malfeasance by the lender or loan originator.
"People would go to closing 60 days (after getting the estimate) and get a settlement statement that didn’t even remotely resemble what their loan offer was (giving them)," said Brian Sullivan, a spokesman for the federal Department of Housing and Urban Development. "Terms of the loan could change or the total settlement costs would increase."
Often, consumers grumbled at the surprises but just went along with it, thinking it was just another homebuying headache, Sullivan said.
"Mostly, people would hope for the best and at settlement they would close their eyes, hold their nose and sign on the dotted line," Sullivan said.
But new documentation from HUD aims to reduce some of that uncertainty. As of Jan. 1, 2010, all lenders are required to use a newly designed, three-page Good Faith Estimate that’s intended to clarify costs and eliminate surprises.
Five things to know about the new GFEs:
1. The new form (a sample can be found at www.hud.gov/offices/hsg/ramh/res/gfestimate) is the first time that GFEs will be standardized, Sullivan said. Prior to Jan. 1, lenders have been free to design their own.
"They’ve been all over the map," he said.
One possible, though unlikely, variation might be seen by homebuyers who applied for their loans (and got GFEs) in late 2009 and went to closing in 2010, he said. …CONTINUED
2. The form is designed to spell out the closing costs, insofar as what the lender can know in advance.
Sullivan said some things shouldn’t change between the issuance of the GFE and the closing, such as the loan originator’s own fees, transfer taxes, and the points (a form of prepaid interest that results in a lower interest rate for the loan).
But some costs may be hard to pin down in advance, he said. For instance, the lender can’t control the costs if a borrower obtains his own title insurance or homeowners insurance.
If you’re getting such variable-cost services from the lender, the new GFE requires the lender to spell out on the form that such charges can increase from the estimate by no more than 10 percent, in aggregate.
3. A widely voiced consumer complaint during the subprime mortgage debacle was that many homebuyers just didn’t understand the rules that applied to the particular loans they were getting.
The new GFE spells out simply whether the interest rate could rise and by how much; whether the loan has a prepayment penalty (and how much it is); and whether there’s a so-called balloon payment and when it would be due.
4. One of the goals in designing the new form is to enable consumers to shop around for loans and compare the terms.
The new GFE has a "shopping cart" feature with spaces for side-by-side comparisons of such things as initial interest rate, loan term, rate-lock periods, prepayment penalties, the possibility of the rate rising, and grand total costs for each loan under consideration.
5. Sullivan said HUD has allowed leeway for human error in preparing cost estimates.
"RESPA (the Real Estate Settlement Procedures Act) allows an opportunity for the loan originator to ‘cure’ their mistake," he said. Lenders have 30 days to make good on overcharges, he said.
"If 30 days go by and this doesn’t happen, you can reach out to HUD," he said. He said in those cases, consumers should send complaints in writing to HUD’s Office of RESPA, 451 7th St. S.W., Room 9154, Washington, D.C. 20140.
Mary Umberger is a freelance writer in Chicago.
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