New Rules Force Full Disclosure of Mortgage Costs

January 6th, 2010 admin No Comments »

The first piece of mountain of paperwork a mortgage borrower will deal with other than the loan application is the Good Faith Estimate. A good faith estimate is required by the Real Estate Settlement Procedures Act (RESPA) and must include an itemized list of fees and costs associated with a loan. By law, it must be provided within three business days of applying for a loan. Until now, Good Faith Estimate could be a work of fiction occasionally resembling real life.

New rules took effect on Jan 1, 2010 standardizing the form of the Good Faith Estimates issued to mortgage borrowers and to make the process more transparent to consumers. These rules also forbid the increase in fees first disclosed to consumers in the RESPA estimate. The new Good Faith Estimate is extremely detailed and three pages long.

Past Problems Back in the days when dinosaurs roamed the earth and I was a mortgage broker (and before credit scores were used), in the time it took to close a loan, a borrower could be taken out of the loan program for which he or she “pre-qualified”, and placed into a more expensive program. Sometimes the changes were necessary due to credit or income problems discovered during the processing of the loan.

Unfortunately, though, sometimes the only reason for the move was because an unethical loan officer wanted to make more money by selling the customer a loan at an interest rate above prime. Increasing the interest rate or switching from a fixed rate to an adjustable rate mortgage (ARM) can increase the commission to the loan officer. Although the Good Faith Estimate was was issued as required by law at the beginning of the loan process, there was never a requirement to notify a customer if their loan program, interest rate or even fees changed.

I heard this story many times back in the day: a customer at the closing table calling their loan officer in rage and often tears because the loan documents they were signing bore no resemblance to the loan their officer told them about. The interest rate and terms were often much higher than the customer thought or the loan was an ARM. Oftentimes, the moving van was waiting outside and the customer essentially was bullied into a agreeing to a loan they did not want.

Prohibition on Increases in Initially Disclosed Costs Under the new rules, lenders won’t be allowed to increase the origination fee from the estimate. Some other charges not included in the origination fee, such as title services and recording charges, will only be allowed to can increase by as much as a combined 10% from the estimate.

Full Disclosure of Fees It’s often difficult for consumers to compare costs, as lenders can call their fees by a variety of names, like “origination fee”, “processing fee”, “points” when in reality they’re basically all the same thing. Lenders will be forced to call all such mortgage fees origination fees, including commissions they receive for selling loans at higher interest rate than prime. Armed with this information, it is hoped that consumers to shop around for the best loan and helps them compare lenders’ offerings.

Explanation of Payments for Adjustable Rate Mortgages The housing crisis in part was fueled by consumers who could not afford their payments after the first adjustment in interest rates occurred. You could argue that these payments took them by surprise, though some consumers knew they wouldn’t be able afford payments once the initial adjustments occurred. Maybe they would have thought twice if they saw it in black and white on the first Good Faith Estimate. The new Good Faith Estimate explains in detail when and how much a payment will increase if the loan is adjustable.

Have you been the victim of an unethical loan officer? Are you a mortgage professional who has to adjust to the new rules? What are your thoughts? Tell us about it by leaving a comment!

Source: WSJ.

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