Power to the People: RESPA Rules Change on January 1, 2010

The Dawn of a New Decade brings the Dawn of Consumer Rights When Shopping for a Mortgage

January First is typically a day when many new laws across the land become effective...and this year is no different.  The Department of Housing & Urban Development made one very important change to the Real Estate Settlement Procedures Act of 1974 law that is known as RESPA in the industry is now mandating that ALL mortgage lenders provide the consumer with the same information in the same format.

There is no doubt that this is too little too late for the homeowners who are currently at risk of losing their homes, but had these new rules been in effect 5 years ago, there is a good chance we would not be experiencing the meltdown of the American economy that we are.  I have no doubt this will definitely protect the consumer from this point forward.

Shopping for a mortgage has always been complicated and very few every really understood their options to determine if they got the best deal or not.  The challenge has been deciphering the differences between those lenders who advertised the lowest rates, which did not always mean the best deal.  Many low interest loans have high fees attached that can wipe out any benefit of the lower interest rate.  There are also the near-hidden features of loans that sit dormant waiting to blow up in the face of the borrower, such as pre-payment penalties.  Of course, borrowers have had the opportunity to pay ‘points' to bring the interest rate down lower...this has been known to confuse members of MENSA.  Another tactic of mortgage lenders has been to pepper the loan with numerous ‘garbage fees' designed to pad the loan officers margins and act as a diversion to the bigger picture, allowing the borrower to negotiate away some of these garbage fees.

Well, as of today, every lender in the United States of America is obligated to provide the borrower with a good faith estimate, within 3 days of loan application.  Yes the Good Faith Estimate has been around since RESPA first went on the books in 1974 - the difference today is that every lender no longer can play hide the cheese with their own form and now ARE REQUIRED to use the 3 page government form, which can be found here.

The new Good Faith Estimate form requires that the lenders wrap all of the fees they control into one "origination charge" so that the borrower can compare one set of lender fees with another.  I'll recommend to my real estate buyers in the Hemet - San Jacinto CA marketplace to focus on two points when shopping for a home loan:  the interest rate and the origination charge which includes all of the lenders points and garbage fees.

This new easy to read form clearly states what fees the lender can increase, by no more than 10% (such as Title & Escrow); which fees are locked in and cannot be increased (such as Origination Charges, points, etc.); and which fees (such as home owner insurance) the lender has no control over.

THE NEWS GETS BETTER

To keep things as simple as possible for the consumer the new RESPA rules take it a step further and include a new HUD-1.  The HUD1 has been and remains the form that escrow (Settlement Service outside of California) prepares to show where all of the money comes from and where it goes in a real estate transaction.

Once escrow opens it has been customary for escrow agents to prepare a preliminary HUD-1 or sometimes its called an Estimated HUD-1 that will give everyone an idea of what the deal really looks like on paper.

The new RESPA rules now call for a comparison between the estimate prepared at the beginning of escrow and the final closing statement. 

In addition, the new HUD-1 will also include a summary of the loan terms.

WILL THIS WORK?

HUD has estimated that the average savings to the borrower will be to the tune of $700 in closing costs, for the typical consumer, in large part due to the ability of the consumer to shop intelligently.  I believe that the new rules will indeed go a long way to leveling the playing field for the borrower, but it is hard to believe that the mortgage industry will not come up with some method to leverage the new rules to their advantage.

The home loan borrower needs to keep in mind that although the paperwork is now more universal to avoid confusion there will be many biases that the borrower will have to filter through.  The real estate agent may have a lender that has an affiliate agreement with the agents company or recommend one that will get a loan closed quickly and not necessarily for the best terms.  A builder will always want you to use their in-house lender and realize that mortgage brokers and loan officers are always working for themselves to earn a commission and not for you.

The consumer should realize that they have choices and that they now have an easy way of comparing the cost and terms of a loan.  It may make shopping for a loan easier that shopping for a new car - but remember, you would never rely on an auto manufacturer to provide you with an impartial review of the competition in the auto park, now would you?

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UPDATE

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Make sure to check out the follow-up article on this important topic:  RESPA - New ActiveRain Group

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