As the Federal Government continues its efforts to "assist" the American consumer and mortgage applicants, borrowers beginning January 1, 2010 are going to see a new Good Faith Estimate.

The current Good Faith which has been in use for decades looks like this:

While hard to see real clearly on the site it is one page.  It lists all the loan charges on the top, then title and escrow (settlement) charges, then government charges, then calculations for impounds for taxes and insurance, finally a nice summary of charges, prepaid items, etc giving a total of cash to close on the left and a summary of the monthly payment on the right.

This Good Faith Estimate (GFE) is a great tool we use upfront to show borrowers a break down of costs, the total cash they will need to close and a break down of their PITI (Principal, Interest, Taxes and Insurance) all on one easy to read page.  For comparing different loans or sales prices we can quickly deliver multiple GFE's for comparison.

Not good enough for the Feds, so HUD has issued Real Estate Settlem Procedures Act (RESPA): Rule To Simplify and Improve the Processof Obtaining Mortgages and Reduce Consumer Settlement Costs

The Register on this is 86 pages, here is a sample page (page 40 chosen at random):

As you can see it is laid out for easy reading.  In fairness the current RESPA rules are laid out very similarly, but after several decades of use we all know the rules. 

Here is the new form:

PAGE 1:

Page 1 actually has some good information, it informs the borrower if their interest rate is locked and until when, if it has a balloon payment, if it is interest only, if there is a pre-payment penalty (except the lock confirmation the other items are covered in California's Mortgage Loan Disclosure Statement which is required only of mortgage brokers but not lenders).  On the bottom are two boxes, one for "Adjusted Origination Charges" and one for "All Other Settlement Charges", taken from page 2.

Page 2:

Now we see the light hand of the Federal Regulator at work.  The top box is a confusing set of boxes and checks where the originator is to put in the rate and whether there are any credits or charges for this rate.  Fair enough if borrower wants a higher interest rate to receive a credit for any other closing costs it would appear in this box.

In the next section (section 3) the originator, me, lists "Required Services that we select" and has 3 lines.  If we choose the appraiser, which we can't because of HVCC but we have to order it so I guess we select it, suggest the escrow company on a refinance those companies and their charges are entered here.  And they have to be exact with no changes from my estimate of their charges to closing--if I miss the estimate the lender can cancel the loan for RESPA violations.  Therefore these companies will have to charge what I estimate or the transaction does not close.

Section 4 and5 list the charges for title insurance.

Section 6 presents an interesting challenge.  These are services that the borrower can shop for, such as escrow, but I must provide the borrower a list of local services to assist you in shopping.  If the borrower selects a company on the list then I must have exactly estimated the charges.  If the borrower selects a service provider off the list then there is no restriction on charges in relation to the Good Faith Estimate.

Sections 7 and 8 are recording and transfer tax fees from government agencies.  Section 9 covers all deposits to establish and impound or escrow account for taxes and insurance, but does not break down the fees for each nor how many months are being collected.  Section 10 is the daily pro-ration for pre-paid interest on the new loan.  Section 11 is an estimate for the homeowner's insurance policy.

Page 3:

The section across the top of page 3 of the new Good Faith Estimate explains the changes that may or may not occur in the future to any charges.  The borrower is expected to bring their original copy of the GFE to escrow and compare it with the HUD-1 form provided by escrow to see if there have been changes or not to fees that are allowed to change or not.

The second section is the "trade-off" table in which an originator may compare other rate and fee options for the borrower, such as a higher rate and payment for lower costs at closing or a lower rate and payment for higher costs at closing.  Since the originator is bound by what ever they put in this section it is doubtful originators will complete this optional area.

The final section is left blank and is for the borrower to complete themselves after receiving GFE's from other lenders so the can compare the quotes they have received.  In order to have four GFEs the borrower must speak to four different lenders and provide to them six different pieces of information that once provided requires the originator to provide the GFE.

Once the GFE is provided the originator and lender must follow the charges as long as a formal application is submitted within 10 days.  If an originator provides a GFE without all the information s/he is still bound by the charges unless there is material change.  Upon receiving these six pieces of information an originator must provide a Good Faith Estimate.

(1) Borrower's name

(2) Borrower's monthly income

(3) Borrower's social security number to obtain credit report

(4) Property address

(5) Estimate of property value

(6) Loan Amount

Because of the penal aspect of not providing a GFE at the appropriate time, or having changes to the transaction at a later time the general feeling in the industry is that originators will delay as long as possible completing a pre-approval for clients so as not to get binded to a miscalculation on the GFE for fees for the mortgage or from another service that they are not providing.  Whereas today I can quickly provide a Good Faith Estimate based upon "what-ifs" and a pre-approval letter for a borrower, starting January 1, 2010 I, and most originators, will be less willing to provide the detailed breakdown due to changing markets during offer negotiations and other variables.

Lenders are at odds how to handle the new RESPA rules as they are bound by the charges and rates put into the new GFE by originators.  Including estimates for processing, underwriting, tax service, documents, etc.  Many of the lenders I have spoken to are leaning towards eliminating these line item fees and adjusting the costs of mortgages through the discount points, thereby raising the cost of borrowing for the borrowers.

How esrow companies will respond to the new regulations will be very interesting.  Since they must match their HUD-1 form with the originators Good Faith, and since originators must provide accurate cost for service--not estimates mind you but actual costs--that bind the escrow companies, many escrow companies may no longer accept orders directly from listing agents as is now customary but rather require all escrows be opened by originators so they know they are working with originators who accurately quote the fees for their service.

Finally, since July our industry has been operating under the Mortgage Disclosure Information Act requiring certain benchmark time frames for providing a Good Faith Estimate and Truth In Lending Disclosure (explained here) the form that gave us Annual Percentage Rate (APR).  The APR is taken directly off the current Good Faith Estimate.  With the new Good Faith Estimate it appears the Truth In Lending Disclosure will no longer be required--or if it is the industry has not been provided how to complete the form based on the new required Good Faith Estimate.

There is the summary of the "Rule to simplify and improve the process of obtaining mortgages and reduce consumer settlement costs."  In reality consumers will find the process is not simplified, will not improve the process and most certainly will not reduce settlement costs--as usual the result of government regulation is the exact opposite of the intention.