Government wants to simplify mortgage quotesby Peter Miller
The newly-formed Consumer Finance Protection Bureau wants to revise the good faith estimate (GFE) form that lenders use to explain your mortgage terms. It’s asking consumers to choose one of two forms, neither of which is likely to please lenders.
Telling the public how much mortgages actually cost has been the subject of an epic battle between the lending industry and federal officials. The latest GFE went into service in January 2010–after 14 years of development! Of course, once the new form was released the first step taken by lenders was to haul the government into court in an effort to stop it, an effort that was thrown out.
The new GFEs are important and here’s why:
Writing in the New York Law Journal in 2009, attorneys Adam Leitman Bailey and Dov Treiman explained the value of the new form this way:
GFEs and HUD-1s already existed, although they bore almost no resemblance to the new forms. Yesterday’s toothless, incomprehensible and relatively useless GFE has been replaced with this three-page compressive GRE form–one adopted by HUD only after the kinds of market studies one would normally expect from a major corporation looking to launch a new product line.
By means of the lender’s completion of the new GFE form, the consumer can now accurately understand the loan product offered and make an easy comparison to other loan products offered by competing lenders. The new GFE includes the loan amount, term, the interest rate, terms under which the loan’s interest rate may increase, payment penalties, and balloon payments.
So, if we have a vastly improved GFE now in place, why do we need a new one?
The January 2010 form–the form we now use–has two very important values. First, it obligates a lender to deliver a loan which has been precisely described. No fuzzy mortgage quotes, strange refinancing rates or rough estimates. You get what you were promised. Second, data from the new GFE is entered directly into a new HUD-1, the form used at settlement.
Wall Street reform
However, there’s no reason the January 2010 form cannot be made even better, especially after passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Wall Street reform changes the mortgage industry. It says lenders can make any loans they like–but if they make loans which meet certain standards they have far less liability and they do not have to set aside big money in a reserve fund for each non-standard loan they make.
Wall Street reform also does something else: it says lenders cannot be paid “yield spread premiums” or YSPs for increasing mortgage rates. That is, if you qualify for 5 percent financing, there is no longer a cash incentive to sell you a mortgage at 6 percent.
So, given a different compensation system we can also have a different GFE form. We no longer have to worry about accounting for the YSP–or hiding it.
CFPB on why the forms had to change
Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on the CFPB, explains that, “The current forms can be complicated and difficult for consumers to use. They are also redundant and can be costly for lenders to fill out. With a clear, simple form, consumers will be in a better position to answer two basic questions: Can I afford this mortgage and can I get a better deal somewhere else?”
The CFPB is now looking at two options, Prototype 1 or Prototype 2. Take a look at both forms–they are each just two pages long–and then consider the last mortgage you took out. You’ll be stunned by the simplicity and clarity of the two new forms.
Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site, OurBroker.com.