Good-Faith Changes From HUD

Washington post
By Jack Guttentag


Ever since its last effort to reform mortgage market practices was defeated by the lending industry in 2002, the Department of Housing and Urban Development has been promising to come back with some less ambitious, but possibly more acceptable, proposals.
This spring, it finally did.
The latest proposals have three major thrusts. The first is to convert the required good-faith estimate of fees and charges into a document that borrowers can use to shop among loan providers. I'll discuss that this week.
The second thrust is to protect borrowers against various types of opportunistic pricing that the current good-faith estimate facilitates. The third is to make mortgage brokers' pricing transparent, which the current system does not. I'll discuss those in future articles.
The good-faith estimate provides borrowers with an estimate of costs associated with a mortgage, but it is not binding. The form does not have the critical summary information on loan features that borrowers need to shop effectively. In addition, the fees and charges shown are not totaled in meaningful ways. Even if the information were complete and dependable, furthermore, the borrower doesn't get it until after submitting a loan application, which is too late for it to be useful in shopping.
For the good-faith estimate to be an effective shopping tool, it must 1) provide borrowers with critical information about the features and prices of the borrower's desired loan; 2) limit the right of loan providers to change the fees and charges; and 3) require loan providers to view issuance of the good-faith estimate as a loan approval, subject only to verification of the information provided by the borrower. The proposed good-faith estimate does all of this.
The information on the proposed good-faith estimate includes the interest rate, total lender charges and total third-party charges. That's enough to allow a borrower to shop effectively for fixed-rate mortgages. On adjustable-rate mortgages, HUD plans to require additional information on the factors that affect future rate adjustments and is seeking comments on how best to do this.
The fees and charges laid out in the proposed good-faith estimate would no longer depend entirely on the "good faith" of the loan provider. Changes between the numbers shown on the estimate and those contained in the HUD-1 final closing document will be limited.
The new good-faith estimate would also be a conditional loan approval -- my term, not HUD's -- based on six pieces of information provided by the borrower: name, Social Security number, property address, gross monthly income, loan amount and house value. HUD envisions borrowers seeking estimates from multiple loan providers, making a selection from among them and then submitting a loan application. The application provides the much more detailed information required by lenders, but it cannot be rejected unless the new information is materially different from that submitted in applying for the good-faith estimate. The burden of proof is on the loan provider.
One loose end I see is verification of the borrower's income. If the borrower cannot verify the income stated on the good-faith-estimate application, the lender must be allowed to reject the application without becoming vulnerable to legal challenge. The best way to deal with this is to add an item to the list required for the good-faith estimate: "Will you verify income?" If the borrower says no, the loan provider can set the higher price of a "stated income" loan. If the borrower says yes, it is clear that the burden of proof shifts to the borrower.
The proposed good-faith estimate would not protect the borrower against lowballing -- when a loan provider offers a low quote to get the business, then raises it when the borrower locks the price. The first item on the new estimate reads, "The interest rate for this GFE is available until . . . " followed by a blank space where the loan provider will place a date. In practice, that date will always be the current day, because in a volatile market no loan provider would ever commit to tomorrow's price.
HUD's unsuccessful 2002 proposals included a rate-indexing provision for dealing with this problem, but this time it has been ignored. While price volatility is not a problem that can be solved by regulation, borrowers should be placed on notice that the problem exists. HUD views the new good-faith estimate partly as an educational document, yet leaves the borrower wholly in the dark on this critical issue.
In addition to warning borrowers about this problem, HUD should encourage them to ask the loan provider how a new price will be determined after the borrower submits a loan application and wants to lock the price. When loan providers realize that their answer to this question may well affect whether they get the loan, they will come up with solutions. One would be to index price quotes to wholesale prices.