The Good Faith Estimate has been replaced by the Loan Estimate and Closing Disclosure Forms (see “Loan Estimate and Closing Disclosure Forms” in this tip sheet section). Reading this article will provide insight into the evolution of how the industry has attempted to provide appropriate and understandable disclosure to real estate buyers.
One of the initial questions of most borrowers is “what will be my costs”? In an effort to curb what was viewed as consumer abuse in quoting rates and fees, a new Good Faith Estimate form was introduced as of January 1, 2010. Touted as a way for borrowers to become more aware of the “actual” costs that accompany their loan, the form has so far proven to be very confusing and ineffective. Complications occurred immediately when 51 pages of instructions were necessary to prepare loan officers to complete the new three page form. As part of the new GFE enforcement policy, loan officers were warned that if they under-quoted anticipated closing costs, the loan officer would be held accountable for paying any additional undisclosed fees. The result is that everyone over-quotes the anticipated fees so that the borrower has little idea of what the real closing costs will be. (see further explanation below) Loan officers are compelled to provide a more sensible estimate of closing costs and ask that the borrower “trust” that the bottom line on the GFE form is over-inflated and does not represent the final closing cost estimate. Sound confusing?
One of the main reasons for the introduction of the new GFE was to better disclose the Yield Spread Premium (YSP) being obtained by the loan officer. YSP is best described as additional fee income obtained by a loan officer when the interest rate accepted by the borrower is higher than the current market rate. Obviously, there were cases in the past during the height of the sub-prime loan frenzy, when this deceptive practice was abused. As borrowers have become more savvy and home loans are now mostly fixed rate and fully documented, the opportunities for the “rascals” of the industry to continue these deceptive practices diminished. Unfortunately, the new GFE is not responsible for this change in behavior but, by its design, actually allows those who wish to deceive to do so more easily.
The rules make the loan originator responsible for paying any fee(s) not disclosed on the original GFE. As noted above, the result has been the over-inflation of disclosed fees. As an example, we may not expect that a pest control report will be required in the loan request, but should the appraiser “call for” a pest control report and it had not been identified that this “might” be a cost, the loan originator could be responsible for paying the pest inspection fee. To avoid these unexpected fees, the loan originator is most likely to now over-exaggerate the costs by including a pest control report, roof report, etc. even though they are unlikely to be required.
So, not only does the GFE form encourage exaggeration of costs, but it does not adequately account for the legitimate use of YSP to pay for borrower closing costs for cash-strapped buyers. YSP has long been used by honest loan officers to pay for some or all of the borrowers closing costs. The GFE and accompanying legislation now makes this a much more difficult practice to disclose and actually perform. This is only one of the negative “unintended consequences” of the legislation.
A Good Faith Estimate, under the rules, may not be provided until several things occur, including the loan officer receiving a copy of the intended purchase transaction. When initiating a loan transaction, the borrower is more apt to receive an estimated fees sheet. This form is a more easily understood accounting of expected closing costs but also comes with some limitations. It is only an estimate based upon “what a borrower might do regarding a purchase”. By definition, it will have some changes. Reviewing the costs, a borrower must make certain that s/he understands them. Ask which of the costs are likely to change depending upon the actual terms of your eventual purchase contract. Ask your mortgage lender about any YSP and how it will be applied in your loan . . . used to defray borrower expenses or paid to the lender for services rendered?
The good news is that there has been a renewed emphasis on full disclosure and loan transparency. Many of the rascals have departed the industry. Ultimately, however, you are going to have to trust your instincts when selecting your mortgage originator. Be careful in your selection but not paranoid. See the link below when selecting a lender.
In view of the concerns noted above, a new disclosure form has been devised, called the Loan Estimate. For information regarding this current form see