KnowYourPro

I'm sure that everyone's heard about the new Real Estate Settlement Procedures (RESPA) law that's come into effect, specifically, the new Good Faith Estimate (GFE) form that's now required as of January 1.  Upon first blush, the new GFE, which is now 3 pages compared to 1 page of the prior version, is fairly simple and clear to read; many complained of the prior version's esoteric layout and confusing brevity.  For instance, the new form states specifically whether the new mortgage will have escrows required and what the exact charges of the transaction will be, not simply estimates; that's where the title of the new form is deceiving.  It's not really a good faith estimate as it is a good faith GUARANTEE.

Where the form really deviates from the prior iteration is in its enforcement or effect.  Specifically, the new form does not tolerate upward deviation from the disclosed fees to the actual fees at the time of closing, except in certain circumstances where services can be shopped by the borrower, such as attorneys fees, it can tolerate a 10% deviation.   Again, this appears to be a consumer protection mechanism of the new law; now a loan cannot close unless the original GFE matches the settlement statement, or HUD-1, pretty much to the T.  

Again, no one can impugn the intention behind this new law; borrowers have been taken advantage of in the past and they need additional protections in the future.  However, there is a fairly significant oversight in the end result of the document, i.e., a loan CANNOT close if the documents differ.  This means that for certain fields if there is any difference between the documents, no matter how small or unintended those deviations may be, a closing can be put in jeopardy.  

For instance, in the state of Illinois, it is customary that the seller pay for the owner's title policy at the closing.  Now since it is only customary, and not codified or statutory, then according to RESPA this title charge needs to be entered on the GFE under Box #5, which will also be added to the bottom line, Box B, of the borrower's total closing charges.  Now you may ask yourself, why would a charge that is customarily a seller's fee, need to be disclosed as a buyer's charge?  Logic aside, this is the new law and everyone, including the buyer, must accept it because if it is not disclosed as such, then the loan will not be permitted to close.  So in essence, the borrower will not be able to close a loan because a fee that they customarily are not charged, and were in fact never going to be charged, was not disclosed to them at the inception of the loan process.  

Now, there is a simple and required fix to this: disclose a owner's title charge.  However, there is a fairly obvious problem with having an originator quote title charges to a consumer, i.e., the originator is not a title agent and frankly would have no idea of the owner's title until the policy is issued by the title company.  So the originator is left with guestimating those charges based on past experience.  Again, in Illinois, the owner's title can vary quite a bit depending the title company used by the seller.  I've seen owner's policy range from $1200 all the way to $2500.  Based on that alone, an originator would have to assume worst case, again because of the 10% tolerance, so $2500.  Remember, this fee will show as a borrower charge and be added to the bottom closing charges on the GFE.  

Obviously, a seasoned originator will be able to explain this particular quirk to a disgruntled borrower, and hope that another originator who is willing to bend the rules doesn't offer them a GFE without those attendance and required charges.  But what does this do to the state of mortgage lending?  Aren't we back to square one again in terms of confusing or misleading loan disclosures?  Shouldn't the mortgage process be clearer and more approachable for borrowers, rather than more opaque or confusing?  Is there anything more confusing that being offered a document stating one thing, and having your mortgage professional tell you the complete opposite in terms of actual costs at a closing?  Clearly, there must be a better way!  Perhaps it would have helped our lawmakers to solicit feedback from actual lending practitioners before implementing such dramatic changes to such long used processes.  It would appear from both a consumer's and originator's perspectives that the process remains broken, perhaps even more so.