On January 1, 2010, the Department of Housing and Urban Development (HUD) began requiring all lenders to issue a standardized Good Faith Estimate (GFE) to all potential borrowers. The release of the new GFE is an exciting development for all consumers, this time there would be enforcement and standardization. The new GFE not only encourages consumers to shop for settlement services, it also brings transparency to the previously confusing real estate settlement process. The following is a consumer guide to the new GFE.
In 1974, Congress passed the Real Estate Settlement Procedures Act (RESPA) with the intent of protecting consumers by requiring the disclosure of all costs associated with a real estate purchase and/or loan transaction. In 1992, HUD went a step further by issuing Regulation X, which required a more detailed disclosure about any Affiliated Business Arrangements that might exist between parties involved with a real estate purchase. The new GFE is the latest step taken by HUD to protect and assist consumers, and it for the first time will be uniform for all loans.
Under previous laws, lenders had provided potential borrowers with Good Faith Estimates (GFE). However, there are major differences between what borrowers have historically received and what they will receive going forward under the new HUD regulation for the GFE. Four major improvements stand out:
1. Lenders are now required to issue the GFE Quickly
If a loan originator does not provide a GFE within 3 business days of receiving a completed loan application, they are in violation of Section 5 of RESPA.
2. The new GFE is standardized
All lenders must provide consumers with the exact same document. Loan charges, third-party fees, and other costs must be displayed exactly the same. Previously, lenders were not at all uniform in what they called fees or of what fees should be included on the GFE and where these fees should be disclosed on the GFE.
TIP: Having your credit pulled multiple times over several weeks may indicate to credit bureaus that you are being repeatedly denied and your credit score may be negatively affected. To avoid this, keep mortgage shopping to 15 to 30 days of your first credit pull. Let your lenders know you are shopping and with whom from the start, this helps all parties offer their best loans.
3. The new GFE encourages consumers to shop
Since lenders are now required to issue a standardized GFE in a specific time frame, consumers are provided an opportunity to compare lenders and their products. Further, HUD states that prior to the issuance of a GFE, lenders can only charge potential borrowers a fee to cover the expense of a credit report. The relative low cost of credit reports ($15 – $30) results in consumers’ ability to comparison shop many lenders at a minimal cost.
TIP: Having 2-3 completed GFE comparisons will always result in a savings and help identify which lender is offering the best loan, and which to complete the loan through.
4. Lenders are accountable for their quotes
Each section in the GFE now directly corresponds to a section of the HUD-1. The HUD-1 is a finalized version of the GFE, and a standardized document that lists every expense involved in a real estate or refinance transaction and is presented to the borrower during the closing process. Each section in the new GFE is now designated a tolerance level. There are three different tolerance levels:
1. 0% Tolerance – If at the closing, any item in the “0% Tolerance” category is higher on the corresponding section of the HUD-1 compared to the original GFE, the lender is responsible to cover the difference.
2. 10% Tolerance – Unlike the “0% Tolerance” category, these items are not compared individually to their corresponding section in the HUD-1. Instead, all items in the “10% Tolerance” are aggregated on the GFE and compared to the aggregated corresponding items on the HUD-1. In the event that the HUD-1 has a total more than 10% higher than the total on the GFE, the lender is responsible for any expense in excess of the 10% increase. This means that any one item in the 10% tolerance category can increase more than 10% from the GFE to the HUD-1 without a penalty to the lender, as long as the sum of all the items does not increase more than 10%.
3. No Tolerance – A few sections of the new GFE fall into the “No Tolerance” section. These quotes can change with no penalty to the lender.
TIP: The HUD-I is the final version of a GFE that consumers now receive at the beginning of the loan process.
Most mortgage experts agree that one of the major contributing factors to the rapid growth of the real estate bubble was that lenders relaxed their credit requirements for borrowers. Loans became increasingly complex for consumers to compare, apples to apples.
A variety of mortgage loans that were previously used only in rare cases became commonplace. From no document loans to 100% financing, getting a mortgage had never been easier. The abundance of easy money that was available to borrowers created an environment ripe for predatory practices. Consumers were paying exorbitant fees in loan origination, title insurance, and closing fees, and not understanding they had the ability to shop.
To top it off, consumers were usually presented with a wide variety of documents at the settlement of a real estate transaction. The HUD-1, deeds, promissory notes, homeowner’s insurance, and many other documents must be signed and notarized. Often a homebuyer is seeing these documents for the first time at closing, and is asked to sign them without the opportunity to read them in their entirety.
The new GFE was created to aid borrowers in the process of comparison shopping for lenders and services involved in real estate transactions, and to bring consistency and plain language to the settlement process that creates a level playing field that borrowers may compare.
Prior to initiating the search for a new home, most potential buyers receive a pre-qualification letter from a lender. A pre-qualification letter stipulates the amount a potential purchaser is likely able to borrow based upon information provided to the lender, including estimated home value, monthly income, and other factors. Although the issuance of pre-qualification letters is common practice, the letters are in no way legally binding.
Once an offer to purchase is accepted, the contract generally stipulates a deadline for the purchaser to receive a mortgage commitment. The mortgage commitment states that the lender is willing to loan the purchaser a set amount of money by a specific expiration date. Prior to a lender issuing a mortgage commitment to any buyer (or homeowner hoping to refinance), the lender must receive a completed loan application.
TIP: The lender’s receipt of the entire loan application triggers the 3 business day period in which the lender is required to furnish the potential borrower with a GFE.
HUD has done consumers a great service in creating the new GFE. Not only are lenders required to issue a standardized form, but they are held responsible for price variations within their quote. However, this has created unintended consequences that need consideration.
Lenders are liable for any costs that exceed the acceptable tolerance levels of the new GFE. In the event the costs go down, there are no penalties. Wary of paying penalties, some lenders may quote the most expensive services available. This may make their settlement charges look high to the consumer who shops around, thus creating an uncompetitive GFE. It will also reduce the chance of the lender paying penalties because the actual final costs are likely to be lower.
TIP: Many lenders are padding some of their costs, ask the lender if they added any cushion on their GFE, and why.
Relating specifically to the fees, HUD has mandated many of the fees on the GFE to be bundled. In the past, consumers could more easily see the itemized aspects of lender’s services as well as title services. Now, borrowers are left with just this total number without a detailed breakdown of the charges.
TIP: The term “single pay” is a term that moves to consolidate all costs for consumers into one lump sum. While it may not include breakdowns, the single pay method is much easier to compare multiple lenders cost totals.
Also, in purchase transactions, lenders may not know upfront whether the borrower intends to ultimately purchase an Owner’s Policy of title insurance. As a result, lenders may sometimes quote the full price of a Lender’s Policy on the GFE, absent any discount that may exist due to a simultaneous purchase of Lender’s and Owner’s Policy (discussed above). If a lender quotes the discounted price, they could be liable for the difference between the discounted price and the full price were the borrower to only purchase the Lender’s Policy.
TIP: By completing the “Shopping Chart,” consumers will be able to spot lenders who overestimate closing costs in order to reduce the chance of being charged a penalty for exceeding tolerance levels.
There are circumstances in which a lender may issue a revised GFE, altering the original costs they quoted a consumer. Some of the circumstances are acts of God, acts of war, or other emergencies. Directly related to consumers, any information that a potential borrower provided to a lender, which the lender then relied upon to create the GFE must be completely accurate. Providing inaccurate or false information to the lender constitutes a change in circumstance, and creates an opportunity for the lender to issue a revised GFE. When submitting information on a loan application, consumers should take extra precautions to insure accuracy.
TIP: Most times a GFE is reissued it is due to a simple misunderstanding early in the process between borrower and lender. Part of this is choosing the loan type which a borrower may end up qualifying for, which can sometimes be difficult at first.
TIP: In the event a lender misses one of the tolerances in the GFE, they are responsible to pay for the difference. If tolerances were missed, the settlement can proceed, and the lender has 30 days to compensate the purchaser for the missed tolerance.
The closing of a real estate transaction involves coordination among many different parties, most of whom a purchaser never meets or even knows about. Buyer, seller, real estate agents from both sides of the deal, title abstractor, insurance underwriters, mortgage underwriters, mortgage broker, lending institution, and closing agent all must cooperate so that at a specific time, on a specific date, all parties are prepared for the transaction to be finalized.
The best practice a consumer can follow is to take control of his or her own transaction. Consumers should know all of the parties involved and keep an open line of communication with each of them as to what part of the process they play and that they did their job correctly.
Consumers should actively shop for the best loan by comparing all of the active vendors within the process including the lenders, title and settlement companies, home inspectors and appraisers. Being prepared will make for a smooth process and a less costly transaction. Consumers have never before had the opportunity to shop and save money for service providers like settlement services that they do today.