HUD's Proposed Revisions To The GFE

HUD has published a proposal to make significant changes to the Good Faith Estimate that lenders issue within three days of taking an application. HUD calls this a "simplification" of the GFE. It is anything but.

The Act
Let's start with what the act itself requires. RESPA has several loan disclosure requirements. Paragraph 4 of RESPA requires lenders to provide a uniform settlement statement, which was developed as the HUD-1.

Paragraph 5 requires lenders to provide the special information booklet describing the settlement process and specific settlement services. This booklet is intended to help customers understand their home purchase transaction and the settlement process. Paragraph 5(c) of RESPA reads: "Each lender shall include with the booklet a good faith estimate of the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the settlement as prescribed by the Secretary." This is all the act says about a good faith estimate. Note that the paragraph uses the terms "amount or range" and "likely to incur."

The other significant fact to notice in RESPA is that the act itself does not provide any enforcement powers or sanctions for violations of the settlement cost disclosures in paragraphs 4 and 5. In short, a settlement service provider who "violates" the requirements for the HUD-1 or the Good Faith Estimate cannot be sued in court and cannot be subject to enforcement actions by HUD. Unfortunately for financial institutions, their regulatory agency can take enforcement action under FIRREA.

The Proposal
The proposed simplification of the GFE is pretty close to a compliance managers worst nightmare. The proposed new "simplified" GFE would require disclosure of information within three days of the application that is presently only required at settlement. In fact, it is often not available until settlement. The proposed GFE includes specific loan terms that are often determined only after underwriting is complete.

HUD's stated reason for this redesign of the GFE is that "the process of financing or refinancing a home...remains too complicated, too costly, and too opaque for many borrowers." So the goal is to make the process less complicated, less costly, and less opaque. The proposal fails to meet these goals.

The proposal shamelessly borrows from Truth in Lending and Regulation Z. It would make similar disclosures - sometimes using the same terminology and sometimes substituting other terms. Much of the second page of the proposed GFE is simply borrowed from the Truth in Lending mortgage loan disclosure and ARM program disclosure and then simply rearranged.

The proposal even incorporates the concept of rescission. HUD would allow customers to cancel the deal and get all their fees refunded if anything changed from the GFE to the final loan.

The proposal sets forth a new form, the use of which would be mandatory. It also allows package discount closings and provides a special form for disclosing those. Neither form is simple.

>Timing
The GFE timing would remain intact, but the proposal contains a clarification on when an application is received. Timing for the GFE is three days from the application. The GFE would be delivered or placed in the mail within three days after an application "is received or prepared." There is no definition of what "prepared" means or when that occurs.

Application would be defined as the submission of specific information in anticipation of a credit decision. The information includes Social Security Number, property address and sales price or property value, income information, and mortgage amount needed. This is slightly more specific than the current concept. However, it is different from HMDA's new definition of application and remains different from the application definition in Regulation B.

The proposal specifically excludes prequalifications. These are defined as not having a specific property or address. Without an address, the application would not be an application for a federally related mortgage loan. RESPA coverage would be triggered when the applicant provides a property address. Beginning in 2004, however, these prequalifications will be reportable under HMDA.The existing rule that the GFE is not required if a denial occurs before the three days are up would be preserved.

Fees and "Rescission"
The proposal introduces several concepts that are new to the GFE. First, the lender would have to issue the GFE before charging any fees. It appears from the proposal that the only fee a lender could charge before issuing the GFE is a fee for a credit report. The normal application fee, which usually covers the credit report, appraisal, and other basic services, would be postponed until after the consumer had accepted the GFE offer. The HUD goal seems to be cost-free credit shopping with concepts borrowed from HOEPA and Regulation Z's Section 226.32.

The only fee that a lender could charge before issuing the GFE would be a fee "necessary" for providing the estimate. This is remains undefined although the explanatory document makes reference to the credit report fee. Since RESPA prohibits charging a fee for preparation of RESPA and TIL disclosure documents, this clearly cannot be a disclosure preparation fee.

The GFE would have to include all fees, including fees for third party settlement services, governmental fees and charges, and "any other loan related expenses that are not paid to and retained by the originator." These fees must be reported "in their entirety" and correctly categorized on the GFE.

Fees disclosed would include an estimate of "the maximum mortgage insurance premium to be charged up-front to the borrower based upon the borrower's assertion of the value of the property and loan amount needed..." The proposal does not accommodate subsequent discoveries that could affect the cost of title insurance such as a flaw in the title or an unrecorded easement.

This standard obviously requires a higher level of skill and accuracy than the current GFE. There are manifold opportunities for mistakes. The result is that mistakes become a pre-loan form of rescission with the customer able to cancel the application and have all fees, even for services performed, refunded.

TIL Anyone?
Not only is HUD staff clearly unfamiliar with the workings of Truth in Lending, they have introduced ways to make both TIL and RESPA more complex than ever. The new required GFE disclosures would include the APR, calculated according to Truth in Lending. This calculation would have to be accurately performed within three days of taking the application. The proposal does not provide, as does Truth in Lending, for re-disclosure at closing if the APR or other material disclosures change.

The GFE would also disclose the interest rate and the principal loan amount. There is no reference to the amount financed. The principle loan amount, the amount on the face of the note, would probably add to customer confusion when that differs from the amount financed.

The proposal confuses the concepts of RESPA (disclosing the costs of settlement) and Truth in Lending (disclosing the costs of credit.) In designing the proposed GFE, HUD staff looked for ways to highlight the major costs. HUD states that the current requirements allow a loan originator to charge several fees under different names for the same service. For example, one entity could charge a fee for loan origination, document preparation, and document review. HUD believes that by totaling these fees the consumer will be made aware of the practice. HUD ignores the finance charge rules of Truth in Lending which already accomplish this goal.

The proposal uses terms that are inconsistent with truth in lending that should add significant confusion to the lending disclosure process. Terms such as "par value" "par interest" and "above par loan" are used without definition and without any cross reference to Truth in Lending.

Accuracy Requirements
HUD introduces the concept of tolerances in this proposal. The idea of tolerances appears to come from Truth in Lending, however, there is no reference to TIL and the proposal ignores the tolerances provided by TIL.

The GFE issued by the lender or by the loan broker would be held to accuracy for a period of 30 days. The lender must honor those terms for that period of time.

Here's the catch. Thirty days is actually longer than it sounds. The 30-day period doesn't end after 30 days. Instead, 30 days is the time for the applicant to accept the terms offered on the GFE. Once accepted, the lender is locked in and can change very little. The GFE effectively becomes the offer and then the contract. The GFE would function as a rate and term lock-in.

Accuracy requirements are stringent. Fees for all lender-provided services must be accurate. These fees could not change from disclosure of the GFE to settlement.

Disclosures of fees for borrower-selected services would have to be within a 10% tolerance. Borrower-selected fees would be grouped into categories and each category would be measured against a 10% tolerance. This would make it difficult for changes in a number of fees to average out to an overall change of less than 10%.

The tolerance for shoppable services would only apply if the borrower asked the lender where the services could be obtained within the tolerance and actually used the recommended settlement service provider. This provision does not over-ride the affiliated business arrangement prohibitions on referrals and required use.

Only per diem interest, hazard insurance purchased by the borrower, and optional owners title insurance would be exempt from the tolerance. These disclosures would be subject to a "carefully prepared" standard.

The GFE would have to include the lenders "estimate" of the maximum mortgage insurance premium to be charged up front.

Packaged Loans
As an alternative to the itemized GFEs and the tolerance limits that go with them, HUD also proposes to allow lenders to present settlement packages at a fixed and guaranteed cost. Presumably based on ideas put forward by mortgage brokers, this idea ironically would make legal the very practice that RESPA was intended to prevent. HUD describes this permission as a "carefully circumscribed safe harbor." In reality, it is an invitation to consumer abuse.

Format
Much of the information that would be added to the present GFE format to produce the new GFE is information that is disclosed under Truth in Lending. However, HUD would not allow the TIL disclosure to suffice for the RESPA disclosure. The proposed GFE format would be a required form, unlike the present form which is merely recommended.

In writing Regulation Z, the Federal Reserve Board has given close attention to ways to make compliance feasible and to ways to minimize regulatory burden. One important example of this is the provision in Regulation Z that allows the GFE and/or the HUD-1 to serve as the itemization of the amount financed. The Federal Reserve Board has also allowed creditors as much flexibility as possible in designing disclosures. Only the "Schumer box" for credit card disclosures and the "federal box" for closed end disclosures are a mandatory format. Both of these boxes are required by law so the Federal Reserve has no choice here.

HUD has a choice in the design of the GFE. RESPA, after all, only contains a vague requirement for providing a good faith estimate of settlement costs. However, the proposal states that the new GFE may be provided together with disclosures required by the Truth in Lending Act "so long as all required material for the good faith estimate is grouped together." Since the Truth in Lending Act itself requires that the TIL disclosures be grouped together and separated from other information, this mandates two disclosures. Any creditor presently using a combined TIL and GFE form would have to prepare two disclosures.

Further complexity is added to the form by the fact that major pieces of Truth in Lending disclosures have been lifted from Z and placed throughout the proposed GFE. The proposed GFE is 3 pages long. Most of the second page duplicates TIL disclosures. The proposed form would re-organize fees into categories based on what settlement service provider charges them. Each category would have a sub-total so that consumers could easily see the total cost paid to settlement service providers such as the lender and the mortgage broker.

Compensation Disclosures
A primary goal in the new disclosure format is to reveal to the consumer the compensation being paid to any settlement service provider. This is a particular HUD concern with regard to mortgage brokers and lenders.

HUD wants consumers to know how the lenders and loan brokers are compensated. Thus, a key consideration in the new GFE design was to pull out the fees flowing to these service providers and showing customers the total and how the fees affect the pricing of the loan.

Any yield spread premium, which HUD alternately refers to as an "above par rate" would be disclosed on the GFE and HUD-1 as a payment to the borrower.

Points paid by the borrower to lower the interest rate must equal the discount points paid to the lender and disclosed as a borrower payment to the lender. HUD believes that with these disclosures, mortgage brokers would not be able to increase their fees without the borrower knowing it.

Required Service Providers
The proposed rule contains the familiar language about disclosing required service providers on the GFE. The proposal carries forward the permission to select a service provider from a list. New, however, to this proposal would be the requirement to provide the list to the applicant. Section 8 prohibitions against requiring the services of an affiliate would remain in place.

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