Two Flaws with the new Good Faith Estimate

Let me begin by saying I think that uniform Good Faith Estimates are a huge step in the right direction. However, I’m quickly reviewing the newly revised Good Faith Estimate and HUD-1 Settlement Statement (beginning on page 46; link below) to see if any changes were made since they were unveiled. The two biggest issues that I see are:

  1. No clearly marked monthly mortgage payment.
  2. No funds due for closing.

HUD boasts that consumers will save an average of $700 by using these new forms, yet consumers won’t have the tools to compare without these two factors. It seems like HUD was so focused on YSP (which seems less clear to me on the new form) and controlling closing costs, they skipped a few important details.

Am I missing something right under my nose? Click here to read the final rule. I’ll go through this again and perhaps dig into the entire document over the weekend…I’m just wondering if any of you have more insight into this.

HUD Passes RESPA Reform, New GFE Coming in 2010

Now I know that true miracles happen. We have all been waiting for RESPA reform for as long as I’ve been in the industry, which has been over 25 years.  Here’s what the new Good Faith Estimate will look like.  Everyone has all of 2009 to get their systems ready because the new form won’t go into effect until Jan of 2010.  The winds of change are blowing in favor of more consumer protection and more duties owed to the consumer by retail mortgage lenders.  Didn’t I just say this was going to happen? From HUD:

Brian Montgomery, HUD’s Assistant Secretary of Housing, Federal Housing Commissioner, said, “We have carefully considered the concerns expressed from every corner of the mortgage market in developing this rule. I am convinced that we successfully balanced the needs of consumers with those in the business of homeownership. None of us can lose sight of the fact that millions of Americans simply don’t understand all the fine print of their mortgages and this, in many respects, is at the heart of today’s mortgage crisis.”

Since 1974, little has changed about the process Americans endure when they buy and refinance their homes. Now, HUD’s final reform will improve disclosure of the key loan terms and closing costs consumers pay when they buy or refinance their home.

What I like about the new three page Good Faith Estimate (GFE):

Page 1:
Important Dates: “your interest rate may change” notice
Loan Summmary: Easy, plain language, Yes or No explanations
Page 2:
Understanding Estimate Charges: explains credits better than most verbal explanations I’ve heard over the past year.
Breaks down other charges that the homeowner can shop for, in order to receive a lower fee
Page 3:
Further explains pages one and two and makes it crystal clear what charges can and cannot change at closing. 

What I do not like about the new GFE:

Where’s the Yield Spread Premium (YSP)? 

Some state laws may not comport with this new federal law and will have to be revised, hence the year waiting period before we begin using the new form.

Housing Wire HUD Revises RESPA Rules
HUD Press Release

I went to a mortgage whore, he said my life's a bore

Dear Jillayne,

I have two residential loans that have been referred to me, one from a mortgage broker in Colorado and another from a credit union. Both LOs have already taken the loan application, gathered all the supporting documents, and sent the loans through the lender’s automated underwriting system. The credit union is unable to make the loan because the dollar amount is too large for their institution. The mortgage broker in Colorado is not licensed to do business in WA State. Both of these LOs would like their client taken care of but because of the amount of work they’ve done already, they would like to get paid on these files. Of course I would disclose all fees to the consumer, but is this even possible to do?


Dear John,

Because of the subprime and now prime mortgage market meltdown, we are going to see some incredible changes taking place in state and federal law during the next decade. One of the main problems with the mortgage lending laws today is that mortgage brokers can only earn a fee if a loan is made. This sets up an external motivator for an LO to make lots of loans, whether or not the consumer needs a loan. This should and will change. Someday you will be able to earn a fee for, let’s say, giving a borrower valuable financial advice relating to their mortgage loan, similar to how you might hire a CPA to advise you on matters within their scope of knowledge.

Let’s first take the example of if YOU were in the position of referring a loan to another broker. Let’s say you didn’t have FHA approval, your cousin Vinnie over at XYZ brokerage did, and you wanted to earn a fee of X for sending the loan to Vinnie. This is not allowable under many state laws governing mortgage lending (and for WA state, see the MBPA.) You can only earn a fee when a loan is made and the loan originator as presented to the lender on this transaction was Vinnie. If Vinnie hands you some cash outside of escrow, this is called an “unearned fee.

Title Insurance Affiliated Business Arrangements Under Scrutiny

I teach a class called “RESPA” which is about the federal Real Estate Settlement and Procedures Act. This act has been around since the mid-1970s and the industry sometimes refers to it as the anti-kickback legislation although RESPA does much more than that. Sections 8 and 9 of RESPA prohibit exchanging something of value for a referral of a federally related loan. The industry went through a wave of federal consumer protection legislation during the 1970s when we received the Truth-in-Lending Act, RESPA, ECOA, and the Fair Credit Reporting Act. It is my opinion that the mortgage lending industry should not be surprised to receive no less than four new federal laws during the next 7 years.

In order to truly understand the spirit of RESPA, let’s take a trip in the way-back machine and visit the 1970s. We had an oil embargo, inflation, rising unemployment rates, a recession, and other events I was too little to recall, but I’m sure our readers will help us remember. I DO remember sitting in line at the gas station with my dad. Times were economically tough for American families. Politicians like it when homeownership rates are increasing because homeownership supports the economy in many ways (and boy are we ever going to learn that lesson during the next decade) and economic growth is good for re-electing politicians. I know I’m grossly oversimplifying here but back in the 1970s, it was important to promote homeownership. Since costs were rising for families, this included the cost of buying a home. One of the main reasons we have RESPA is to help keep the cost of buying a home affordable by eliminating “unearned” fees such as kickbacks.

Sections 8 and 9 of RESPA say we are not to give or receive an item of value in exchange for a referral of a federally related loan. We = any person that earns a fee on the sale or refinance of a one-to-4 family, owner occupied, federally-related loan. Realtors and mortgage lending workers have tremendous power to influence the direction of business for third-party vendors to companies such as title insurance, escrow, home inspectors, home warranty, hazard insurance, private mortgage insurance, appraisers, attorneys, and so forth. For example, title insurance companies do not chose to spend their advertising dollars on general public promotions because a title company can have a much stronger effect on market share by focusing on the people who are in a direct position to refer lots of business: Mortgage lenders and Realtors.

Handing out normal promotional marketing material is considered acceptable under RESPA. What’s not acceptable is to promise something of value in exchange for a transaction. So let’s see, what season is it? Baseball. Here is an easy example: A third party vendor offers opening day box seats to a Realtor or mortgage lender in exchange for a referral of a federally related loan. Just say no. Both the giving and the receiving party would be violating Section 8 of RESPA.

HUD asks us to consider who is paying for the box seats. The answer is the consumer pays, in the form of higher fees from your vendors. The true spirit of RESPA is to keep settlement costs down in order to help make homeownership affordable.

Title insurance companies in Washington State were given a major public spanking at the end of 2006 and then again in 2007. Title companies were violating a not-well-regulated “Only spend $25 per customer per year” rule. Some of these insurance commissioner cases are still pending. The $25 per year rule is a state Insurance Commissioner rule but it also bumps up against the provisions of RESPA.

In their defense, title companies pointed the finger at affiliated business arrangements (AfBAs), legal under RESPA. AfBAs, also known as Controlled Business Arrangements (CBAs) say that a mortgage lender or a real estate broker can open up affiliated businesses in order to continue to grow profits. Examples in WA state are: Windermere Real Estate and Windermere Mortgage. John L Scott Real Estate and Response Mortgage.

Along with the affiliated mortgage companies, a group of Windermere broker/owners owns Commonwealth Title and Escrow. John L Scott and Coldwell Banker Bain own Rainier Title and Escrow as part of a joint venture. AfBAs and CBAs exist all over the United States.

Affiliated Business Arrangements are perfectly legal under RESPA, provided the companies all follow a long list of requirements. AfBAs/CBAs have come under scrutiny in several states during the bubble years and title companies nationwide have paid out millions of dollars in fines to settle these suits while “admitting no wrongdoing.”

AfBAs/CBAs are under scrutiny in Washington state now because of the title insurance commissioner smack down. The other title companies are trying very hard to help the insurance commissioner understand that it is difficult to compete on a fair and equal playing field when your competition is being handed title and escrow business by real estate offices.

letsmakeadealHere’s how this goes down. A real estate broker/owner owns a percentage of interest in an affiliated title insurance company. That broker/owner has power over the real estate agents when it comes time to negotiate annual contracts. An agent may be offered a better commission split with his or her broker when that agent refers more business to the broker/owner’s affiliated mortgage, title, or escrow companies. This offer is done behind closed doors, sometimes only verbally. The “better commission split” equates to an “item of value.”

Top producing Realtors and Realtors with a set of balls or ovaries call their own shots with their brokers. So this problem mainly affects medium to low end producing real estate agents, which, let’s face it are the bulk of the real estate agents out there.

An obvious solution, if I were a title insurance company sales manager, would be to send my sales force out to work with only top producing Realtors. However, this will require that the title insurance company have a very, very high quality title and escrow interal staff. This is easier said than done. Title companies that put their money into recruiting exceptionally top-notch internal staff tend to grow market share slowly and steadily. Yet even these companies have had a difficult time competing with real estate broker owners who strong-arm their agents into directing title, escrow, and mortage business to the real estate broker’s affiliated companies.

Many have tried to reform RESPA. Many have failed. That’s where the states have taken over. State Senate Bill 6847 passed the state house and senate and has been delivered to Governor Gregoire for her signature. From the bill:

A real estate licensee or person who has a controlling interest in a real estate business shall not, directly or indirectly, give any fee, kickback, payment, or other thing of value to any other real estate licensee as an inducement, reward for placing title insurance business, referring title insurance business, or causing title insurance business to be given to a title insurance agent in which the real estate licensee or person having a controlling interest in a real estate business also has a financial interest.

Apparently the Deparment of Licensing is going to help the Office of the Insurance Commissioner scrutinize the relationship between the real estate broker/owners and their affiliated title insurance companies. Broker/owners with nothing to fear would surely welcome any increased scrutiny.

Consumers reading this blog, a red flag for you to watch for is if a real estate agent or mortgage lender strongly insists on using a specific third party vendor. Ask the following question: “Can you please tell me exactly what you are receiving in exchange for me selecting this vendor?” If the answer is “Nothing,” ask to have that put into writing.

Reputable lenders and Realtors select third party vendors because their rates are low and the service is consistently exceptional.

Not only does strong-arming raise red flags when it comes to RESPA violations, it’s also a red flag for possible mortgage fraud.

I would like to return title insurance to the days where Realtors and lenders selected title and escrow companies because the companies offer great rates, awesome service, and maybe a pen or a notepad. Title companies reading this: That means the money you’re saving by only spending $25 per year per client can be re-allocated towards hiring exceptionally high quality internal staff and less on beautiful hotties to distract the Realtors and lenders from the fact that your internal service is subprime.

Well, unless the title rep is really hot. Exceptions must be made in some circumstances.