by Calculated Risk on 1/17/2010 09:43:00 AM

From Kenneth Harney at the LA Times: Mortgage lenders exploit a loophole in HUD's new 'good faith estimate' rules

Starting Jan. 1, mortgage lenders nationwide were required to begin issuing new "good faith estimates" [GFE] to applicants covering loan fees and settlement charges.

Under the regulations issued by the Department of Housing and Urban Development, the estimates that lenders provide upfront must be accurate -- the same or nearly the same as the fees that are later charged at closing.
...
So how have the first two weeks of the reforms been going? Not exactly as planned. Many loan officers and lending institutions are sidestepping the new, price-bound GFE by giving shoppers "work sheets" and "loan scenario" forms that come with no legal requirements for accuracy, and were not even contemplated under the reforms.

In effect they are substitutes for the new GFEs but, in the wrong hands, they are open to lowballing and bait-and-switch games.

The work sheets purport to contain much of the information provided by a GFE. Typically they are issued only when shoppers do not provide -- or are asked not to provide -- key information that constitutes an "application" under HUD's definition in the rules.

In certain circumstances this makes sense, although it is open to abuse. As Harney notes, some lenders used to low ball the estimate of fees, and then surprise the borrowers with higher costs at closing. The GFE was intended to eliminate this practice.

Perhaps HUD could add an additional rule that says "worksheets" must require: 1) a description of what a GFE is, and 2) a clear statement that the worksheet is not a GFE, and 3) what additional information the borrower needs to provide to get a GFE. Who could object to that?