Good Faith Estimates: HUD's Latest Attempt

Several years ago, HUD published a proposal to revise the Good Faith Estimate required by RESPA. The proposed changes were significant. They included the use of mandatory forms, placing limitations on pricing and fee changes, and the choice of offering a guaranteed mortgage package. In short, the proposal involved converting the GFE from an estimate to a fairly firm offer.

HUD received a record number of comments on its proposal. Almost all real estate settlement industry members opposed the proposal - for excellent reasons. Only the largest mortgage lenders supported the proposal, primarily because the Guaranteed Mortgage Package would provide them with an easy way of providing fixed-price disclosures across multiple markets rather than determining the actual cost of each service for each settlement at each location. The Guaranteed Mortgage Package would also exempt their transactions from Section 8 problems.

HUD is now starting to move again on the GFE proposal. The first step was to hold meetings with selected interest groups comprised of lenders and other settlement service providers, their trade associations, and some private contractors. The meetings are an organized discussion of HUD's current draft GFE and GMP. And here is where it gets interesting.

In spite of the overwhelming opposition to the proposal, HUD continues to work on the same basic model with very few substantive changes. The two draft disclosure forms are published on HUD's website in a special new section dedicated to RESPA.

Most of the problems that commenters originally identified remain in place. The form is lengthy, taking up 4 pages, three of which must be completed by the lender and one of which the applicant may use for comparative shopping. The rate lock-ins and price increase limitations remain in place even when the lender may not have control over the actual cost of the service. The form presents much of the information that is presented in Truth in Lending disclosures but in a different format and using different terminology.

Probably the most overwhelming concern that lenders should have in considering these proposed changes is that the new approach does not respond to customer concerns and frustrations but may actually add to them. And, the proposal for the GMP actually undoes most of what Congress attempted to put into place with RESPA by creating a black box with a single number rather than identifying where the costs are actually allocated. The only beneficiaries of the new approach would be the large national mortgage lenders - and they would benefit hugely.

The GFE Draft Form
The latest draft is still 4 pages long. The draft disclosure would be based on transaction-specific information and thus would be generated specifically for each loan application. This is in spite of the fact that much of the information is actually generic and could be part of a single piece of information provided to the consumer in the form of the HUD Booklet.

Generic information in the new form includes an explanation of what a good faith estimate is and how the customer can use it, an explanation of what charges can change at settlement and by what amount, a comparison of the different cost structure resulting from points and interest rate choices, and a full-page chart for comparing different loans for which the consumer is applying. These generic items of information take up the better part of 3 pages on HUD's draft.

The next waste of paper comes from what HUD calls "Summary of Your Loan Terms for This Estimate." What this amounts to is a distorted and therefore confusing presentation of information that is disclosed under Truth in Lending. Admittedly, HUD has made some improvements here. The presentation is less different from TIL than was the original proposal. However, it is still duplicative and different enough to be confusing.

If it was HUD's intent to have the GFE replace the early TIL disclosure, HUD has missed the mark because the disclosure ignores a number of TIL requirements that could apply. And the disclosure would not suffice for the final or corrected TIL disclosure at loan closing.

Page 2 of the draft disclosure contains the actual material that RESPA actually requires for the GFE, divided into two sections. The first section includes fees that would be placed by the lender such as the service charge and points or any credits for the interest rate selected.

The second section contains the details of other settlement costs. There are some changes to the familiar approach. For example, all services selected by the creditor would be grouped together and identified as creditor- selected. Services that the customer could shop for would be grouped together with cost estimates provided. The disclosure would also include escrow account payments, taxes and fees, per diem interest, homeowner's insurance and optional owner's title insurance. Interestingly enough, the new draft still doesn't include space for flood hazard insurance.

The GMP Draft Form
The draft GMP also contains a great deal of information that could be presented in the HUD booklet. It includes an explanation of a mortgage package offer, a page for comparing GMP offers, and a presentation to show the impact of point and interest rate choices.

The GMP draft also contains a variation on Truth in Lending presented in the same way as on the draft GFE.

The rest of the form - a single page - is dedicated to the terms of the mortgage package on offer. There would be a single cost disclosure for settlement services, including lender's title insurance and taxes and fees. There would be a specific disclosure for the terms of the loan, including rate and points. Items such as escrow payments, per diem interest, homeowner's insurance and owner's title insurance would be estimated separately.

The one significant change of this draft from the original proposal is that the disclosure would identify the specific services included in the package. In theory, this would enable the customer to compare the total cost of a mortgage package offer with a loan that is not packaged.

Saving Paper
If there were such a thing as an environmental impact study done before issuing new federal disclosure forms, both of HUD's drafts would fail spectacularly. They run the risk of simply becoming a new way of dumping pages of paper on hapless applicants without placing the controls or providing the benefits that HUD claims.

Instead of a short, single page GFE that may contain other information as well as the GFE items, there would be four pages dedicated to the GFE alone. Three of these pages would be individually prepared by the lender.

If a consumer shopped at three lenders, which is what the GFE is supposed to encourage, the consumer would receive 12 pages of disclosures, 9 completed by the lender and 3 identical pages that the consumer could use to compare the three loans. Clearly two of these three pages would be wasted.

Much of the information in each individually-prepared GFE would duplicate information provided by other lenders because it is not loan-specific. For example, the form includes instructions on how to read it and an explanation of the difference between variable rate loans and fixed rate loans. This information could go into a single booklet - or a fact sheet on HUD's website.

What Customers Need
The real question that should be asked and answered is what do customers need and want? And here is where the experience of lenders is valuable. The lending staff knows what questions customers actually ask. They know what information customers want. And, they also know what information customers should have to make a good choice of loan.

Because HUD appears to remain committed to making significant changes to the GFE process, lenders should compile information about what customers really want and need. This will be essential information to provide in any future comment process.

ACTION STEPS

Advise your lenders that the GFE proposals are still alive. Ask them to think about the most effective way to present information to consumers.
Don't limit your thinking to RESPA. Truth in Lending information is so closely related that it should be taken into account in this process.
Ask your systems people to take a look at the proposed format and identify changes that would be required and systems problems would be encountered.
Comment whenever the opportunity arises. Send copies of your comments to your trade associations.