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June 2nd, 2011

Government wants to simplify mortgage quotes

by Peter Miller

 

Capitol Building 2The 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?

Today’s form

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

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3 Responses to “Government wants to simplify mortgage quotes”

  1. Steve Says: June 3rd, 2011 at 8:06 am

    So that your readers get a fuller, more accurate picture, here are some facts they need to know.

    Fact: The current GFE and TIL (Truth in Lending) forms are in the formats mandated by two government agencies, HUD and the Federal Reserve Board, respectively. Lenders who are forced to complete these forms are no happier than consumers who are forced to read the forms.

    Fact: Because the rules for completion of the forms are so complicated, and the opinions and “guidance” of the regulators are constantly changing, lenders are more frustrated about these forms than consumers are. Since even a relatively minor technical exception to the completion of either the GFE or the TIL—an exception that could or would cause no financial harm to the consumer—could mean a financial penalty to the lender, lenders are very cautious with their estimates on the GFE in particular, and may well be overestimating closing costs as a result.

    Fact: Lenders are actually glad to see that one agency will have oversight of both forms. One of the biggest frustrations has been that, when confronted with areas where the two forms intersected or overlapped, neither regulatory agency would opine on how to handle the disclosure. This puts lenders in a position where you might satisfy one agency, and run afoul of the other, with no ombudsman to intervene.

    Fact: Lenders have also been given access to copies of the two suggested formats put out by the CFPB, and asked to comment. From what I have seen, the reaction has been overwhelmingly positive, on three fronts. First, that one agency would have sole jurisdiction. Second, that the forms seem to be clearer. Third, that our input was even solicited.

    Fact: The January 2010 revisions to the GFE are arguably not a vast improvement over the previous forms. They do not necessarily give the consumer a truer picture of closing costs in toto. For example, on the new form, if the consumer will be paying real estate taxes as part of the closing transaction, the HUD instructions are NOT to put that anywhere on the GFE. On the previous incarnations of the GFE, that information would have appeared. Many lenders, in response to this, have been preparing and giving to consumers an additional sheet of information, listing tax figures for example, so that the consumer will indeed have a truer picture of what his or her closing costs will be.

    I think that these talking heads need to understand that the government is not always the consumer’s friend, and the lender is not always the consumer’s enemy, to put it mildly.

  2. Idiots work as writers for Wall Street Journal giving the WRONG advise on todays mortgage crisis « bonju blog Says: June 5th, 2011 at 11:54 am

    [...] Government wants to simplify mortgage quotes (hsh.com) [...]

  3. Dennis C Smith Says: June 6th, 2011 at 1:18 pm

    It is evident the author of this post writes about mortgages and does not participate in them as an originator, or as a borrower in the past year. The GFE 2010 does very little to fulfill its stated intention, to make the loan process and fees easier to understand. Furthermore in typical government fashion the form that is supposed to expose over-charges and originator greed does not even require a signature from the borrower indicating they have received the form, so the liars and cheats can still do what they do.

    As for the two new forms they are both inadequate to convey in clear terms to the borrowers what is being charged and who is getting the fees. As for compariso between originators they forms bulk pre-paid interest, taxes and insurance and funding of impound accounts as origination fees. A lender can look several thousand dollars “cheaper” just by eliminating those fees from the initial GFE.

    For decades the industry had a very good GFE that was signed by the borrowers that detailed all the costs of the mortgage and services provided by the lender and other companies such as title and settlement. Now the government is trying to recreate what already existed and failing miserably, but the author wants them to carry on!

    Originators that are honest and committed to helping our clients purchase their new homes or save significantly with mortgage refinances want a clear cost breakdown to show clients, unfortunately the government mandates are not providing this for us or the consumers.

    HSH.com would be better served having commentary from those who “do” instead of those who write about what it is we do.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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