New Rules for Loan Oficers and Good Faiths

Sunday’s paper had an article on the new Good Faith Estimate, (GFE) that went in effect on January 1, 2010. Everyone, including the author of Sunday’s article, seems to be confused by it. To be honest, I am still sorting out all the new changes as well. Although, I can appreciate, and agree with HUD’s effort to try to protect the borrower, the new GFE and rules regarding it will probably confuse more than help; at least initially. (Refinances are a whole other story, and since this is directed to buyers, and their Realtors, I will keep this information towards the purchase side of home lending.)

In the past, after meeting with a client and pre-approving them, I could fire off a GFE to simply show them how much money they would need to come in with or how much they should ask the seller to credit back for closing costs. My practice has always been to estimate high and it will continue to be so….especially when the file is in the beginning stages, (also called an “Address To Be Determined” or “TBD”). Certain fees like the sellers choice of title and escrow and days of prepaid interest or taxes due have to be estimated at this “TBD” stage. It seems more often than not fees, by vendors like the (REO) seller’s escrow are always higher than if I had selected my escrow company. And so, I estimate high.

However, we can no longer give a client the new GFE when the borrower is still in the “TBD” status. We must wait until we have a sales price, loan amount and most importantly an address. The reason is because once the GFE is given, were responsible for those fees. (There will be a lot of re-disclosing during escrow as we put together and learn about any changes in fees.) So unlike before where we could estimate high then and there, our estimate now has to be nearly exact and if its not (and not properly disclosed) that difference comes out of our paycheck. So, you can see why it is impossible to write out a binding estimate of costs to someone who may be 6 months out from getting into escrow. We cannot verify the 3rd party fees, (title, escrow, even the appraiser has not been officially selected yet) nor can commit to rates/points. I can’t tell someone today your rate is 4.875% and you will have to pay 1 point and then hope that, that same rate and point combination is still available six months later once they’ve found a home, (or after the short sale negotiator has finally gotten an answer back).

What I can do, and have always done, is tell the borrower you will have choices when it comes to rates and points. I will explain that they can do a “one point” loan and the rate will be lower than a “no point” loan – but the closing costs will be more (or vice - versa). And I can explain the pro/cons to both and advise which way I think is best for them. I can give them current examples that apply to that day’s market and answer their questions. I just can’t put it on an “official” GFE form until we’re in escrow.

In an effort to comply with these new rules and still be able to advise my client (and their Realtor) of approximate closing costs in the early stages of their home shopping, I will be giving them an estimate – that is not on an official GFE form. And despite the outcry by the author of Sunday’s article in the Union Tribune, this is what we will have to do.

Then, once an offer has been accepted and we have a sales price, a loan amount, an address, a title/escrow company to call and verify fees, and rates that are current for that time frame I will be happy to complete that official Good Faith Estimate and deliver it to the borrower. I will be happy that I can do that estimate with confidence.

I will also be happy to keep my borrower current with changes in rates, points or changes in lending while they are shopping for a home. It’s going to be crucial to keep our potential buyers current and to be available to them to answer questions and provide updates or changes. This has always been my practice and will continue to be so.

What’s good about this new process is that it should weed out, hopefully, all those shady loan officers, (and 3rd party vendors) that right before close of escrow try to surprise the borrower with an extra point or fee into the closing costs. After all, it is because of those individuals that were recreating the Good Faith Estimate wheel now anyways.