HUD Changes RESPA requiring different GFE disclosure for more informed consumers

Call me slow if you want to, but I have been trying to digest the "long-anticipated mortgage reforms that will help consumers to shop for the lowest cost mortgage and avoid costly and potentially harmful loan offers" announced by HUD on Nov. 12. It has taken some time, but I think I understand what has been done so far and how it will affect lenders and consumers after implementation.

According to HUD Secretary Steve Preston, ".... the mortgage crisis was fueled in part by people agreeing to mortgages that they ultimately could not afford. In some cases, people didn't understand or know that their mortgages could result in large payment increasesafter just two or three years. Others did not recognize the total costs that come with home ownership. And others paid higher loan origination and closing costs simply because they did not know about other affordable options." (emphasis added)

Because of this HUD unveiled new regulations under the Real Estate Settlement Procedures Act, or RESPA. According to Preston, HUD will require that mortgage brokers and mortgage lenders to provide consumers with a standardized description of terms called the Good Faith Estimate. (And here I thought we already did...silly me.) The GFE will be given to borrowers at the time an estimate is provided and will more clearly answer key questions consumers have when applying for a mortgage:

• What's the term of the loan?
• Is the interest rate fixed or can it change?
• Is there a pre-payment penalty should the borrower choose to refinance at a later date?
• Is there a potentially crippling balloon payment? (their words, not mine)
• What are total closing costs?

The new Good Faith Estimate is supposed to offer more certainty about the loan they're agreeing to and to shop more effectively for the lowest cost loan. Changes to the HUD-1 settlement statement will include a reference to the relevant line from the GFE, allowing borrowers to easily compare their final loan terms and closing costs with those listed on their Good Faith Estimate.

There were 12,000 comments received during the comment period. According to HUD, significant modifications were made from the proposed rule issued in March. The new, final RESPA rule will take effect 60 days after publication, probably mid January. The new standard GFE and revised HUD-1 will be required on January 1, 2010.

"Millions of Americans go to the closing table each year," According to Preston, "most have little idea what's expected of them. Our goal all along has been to allow consumers to do what consumers do best - to shop for the more appropriate loan to meet their family's needs. HUD's new Good Faith Estimate treats everyone fairly - real estate agents, brokers, lenders, title companies and other settlement service providers. But it also extends that fairness to the very people we must all focus on - the consumer."

HUD estimates its new regulation will save each consumer an average of nearly $700 at the closing table.

Most industry commenters said HUD's proposed four-page GFE was too long. HUD shortened the GFE form to three pages including an instructional page to help borrowers understand their loan offer. HUD continues to believe that consumers need to be aware of the key aspects of their loan as well as associated settlement costs. Check out the new GFE.

Here are some excepts from the new GFE.

Only you can shop for the best loan for you. Compare this GFE with other loan offers, so you can find the best loan. Use the shopping chart on page 3 to compare all the offers you receive.

Shopping for your loan:

• Your initial loan amount is $_________

• Your loan term is _______ months

• Your initial interest rate is _______%

• Your initial monthly amount owed for principal,interest, and any mortgage insurance is $_______

• Can your interest rate rise? Y or N

• Even if you make payments on time, can your loan balance rise? Y or N

• Even if you make payments on time, can your monthly amount owed for principal, interest, and any mortgage insurance rise? Y or N

• Does your loan have a prepayment penalty? Y or N

• Does your loan have a balloon payment? Y or N

• The interest rate for this GFE is available through  ______ After this time, the interest rate, some of your loan Origination Charges, and the monthly payment shown below can change until you lock your interest rate.

• This estimate for all other settlement charges is available through _____

• After you lock your interest rate, you must go to settlement within _____ days (your rate lock period) to receive the locked interest rate.

• You must lock the interest rate at least ____ days before settlement.

• Our origination charge $______. This charge is for getting this loan for you.

• Your credit or charge (points) $______ for the specific interest rate chosen

• You receive a credit of $______ for this interest rate of ____%.

• This credit reduces your settlement charges.

• This charge (points) increases your total settlement charges.

• The tradeoff table on page 3 shows that you can change your total settlement charges by choosing a different interest rate for this loan.

I have only highlighted a portion of the new GFE, please reveiw the entire form and don't rely on this for your decision making process. I am just trying to show the new things to expect in 2010. Of course, since we are dealing with a government agency, this can and may change prior to it becoming effective.

Personally, I like the new form and would like to see it in use sooner, rather than later. I believe that easy to follow, frank discussion of fees and rates are paramount to good mortgage lending. Real Estate loans should not be a mistery to those taking them out. Loan officers should be willing and able to explain and defend their costs to a client.

Authored by Fred Chamberlin, senior loan consultant, Eugene/Springfield Oregon, 541-342-7576