A good faith issue: New form confuses borrowers
For anyone buying a home this spring, beware: There could be some kinks with the paperwork.
In January, the Department of Housing and Urban Development rolled out sweeping changes to the Good Faith Estimate, a key consumer protection document. The agency has given the real estate industry four months to change over to the new form, and the questions and complaints are widespread.
"Borrowers are looking at this form and saying, 'This doesn't make any sense for us, why can't we have something that's more simple?'" said Pava Leyrer, president of Heritage National Mortgage in Grandville, Mich.
One of her clients, Chad Veldkamp, wasn't even sure exactly how much money he needed to complete the deal until he sat down to sign the final documents.
When a homebuyer applies for a loan, the lender is required by law to provide a disclosure form called a Good Faith Estimate. It provides a breakdown of the costs to complete the transaction, such as taxes, the interest rate and appraisal and recording fees.
The goal is to eliminate kickbacks and referral fees that increase the cost of buying a home. Consumers have complained for years about hidden fees in homebuying transactions.
The new form is designed to make lenders and brokers more accountable for mistakes or misstatements of charges tied to the mortgage. The new form was expanded from one page to three.
New disclosures on the expanded Good Faith Estimate Form include the loan term, the initial interest rate, possible prepayment penalties and balloon payments, as well as the initial deposit for an escrow account.
HUD says the new rules allow consumers to more easily compare one lender to another as they shop for a mortgage. But the Good Faith Estimate form is just one document in a thick stack encountered during the homebuying process.
"The (Good Faith Estimate) is not an all purpose document," said Vicki Bott, a deputy assistant secretary at HUD. "The intention of the (document) is not to be the comprehensive, cash-to-close document."
But brokers and title companies have struggled to understand the form and explain it to clients. Deals have been delayed as all parties make sure all the disclosures are correct. Big banks have spent millions to change their computer systems to accommodate the document. And, lenders have created forms of their own to better explain exactly what is reflected in the Good Faith Estimate.
In Veldkamp's case, the estimate form said his total estimated closing charges were around $10,000. When time came to seal the deal, his charges were closer to $4,400.
The reason? The estimate form requires that all potential charges must be disclosed, including those paid by the seller. For Veldkamp, more than half of the costs on the Good Faith Estimate were to be paid by the seller.
It was one of many hiccups for Veldkamp, who also was frustrated with requests from his lender for bank statements and even information about his past schooling he felt were unnecessary.
"The whole process has deterred me from saying anything pleasant about buying your dream home," said Veldkamp.
The form affects consumers, and also hangs lenders on the hook.
A main issue for lenders is knowing which fees belong in which block on the form. Each block has, in government-speak, a level of "tolerance," or the maximum amount by which a final charge can exceed an estimate.
For example, lender origination charges can't increase. But costs of services that borrowers can shop for themselves, like homeowners insurance, can change by any amount.
If a charge at closing is found to be too high compared with the estimate on the Good Faith Estimate form, a lender may have to pay the difference to the borrower. Violations rules can bring civil or criminal penalties.
Consumers and mortgage pros say the form isn't practical. For example, some borrower costs that once were itemized are now bundled together, leading consumers to question the origin of each charge.
Also, HUD requires that some seller-paid costs such as title insurance charges be included on the form, resulting in estimates that are thousands of dollars higher than what borrowers would actually pay at closing. And, borrowers aren't told their total monthly payment on the estimate, forcing them to refer to other documents and make their own calculations.
"We still have this hodgepodge, this patchwork quilt of disclosures, that is confusing to the consumer," said Pam Perdue, director of compliance services for Respatraining.com.