January 7, 2002

"I am working with a mortgage broker who gave me a document called “Good Faith Estimate”. It shows the interest rate, term, loan amount and a listing of all the charges I will pay at closing: loan-related charges, title charges, everything. It looks to me as if I could use this document to shop different brokers/lenders to find the best deal. Am I missing something?”

The purpose of the Good Faith Estimate (GFE) is exactly what you say: to provide the borrower with the information needed to shop for a loan effectively. Unfortunately, it doesn’t serve this purpose, either with or without the companion disclosure called Truth in Lending Disclosure Statement (TIL).

Borrowers should be mainly concerned with the mortgage price: the interest rate, points -- an upfront charge expressed as a percent of the loan, and other lender fees expressed in dollars. The GFE shows the interest rate. The TIL shows the APR, which is the interest rate adjusted for points and some lender fees. However, the rate and APR are as of the day the documents were generated, and since the market is volatile, they might not apply one day later.

I can’t repeat often enough a critical rule of mortgage shopping: shoppers can depend on quoted rates and points only when they have written confirmation from the lender that the terms have been “locked”.

Settlement costs other than points are not volatile. However, discovering what they will be in a particular transaction, on a basis timely enough to help in shopping, is very difficult. Lenders and brokers need not provide a GFE until three business days following receipt of an application, by which time most borrowers are already out of shopping mode and have committed themselves. Furthermore, the settlement costs shown in the GFE are estimates, and the earlier the GFE is received, the less accurate it is.

Borrowers who submit an application through a mortgage broker will receive a GFE from the broker. After the application is sent to the lender, the borrower will receive another GFE from the lender. The lender’s GFE supercedes the broker’s. Shortly before closing, the borrower may receive a preliminary HUD1, which is a closing document similar to the GFE except that the fees are closer to being final. (A borrower has a legal right to see a preliminary HUD1 the day before closing, but it may not be complete or accurate). Settlement costs are not known with certainty until the closing when the borrower receives the final HUD1.

The narrowing of errors as a transaction moves toward closing would be less disturbing if during the process costs were as likely to decline as to increase, but that is not the case. Not all estimates are provided in good faith. A recent HUD/Federal Reserve study notes that “Consumers report many instances in which the costs disclosed on the GFE were significantly lower than those actually charged at closing. They also report cases in which some fees charged at closing were completely left off the GFE.” There is no legal liability for errors on the GFE.

HUD could substantially improve the usefulness of the GFE by recognizing that lenders know exactly what their own charges are. The loan officer employed by a lender who quotes a rate and points to a shopper can also quote that lender’s charges for appraisal, credit report, underwriting, inspection, wire transfer, and the like. The same information is available to mortgage brokers. Viewing these charges as estimates subject to change is a needless invitation to abuse.

Lender charges should be placed in a separate section of the GFE as part of the lender’s quoted price, with the total of such charges clearly shown. If this were done, lenders would quickly begin quoting their price in terms of three numbers instead of two: interest rate, points, and total dollar charge for all other lender services. Indeed, many lenders already do this on their internet sites.

Services provided by third parties, such as title or closing-related services, present a different problem. Mortgage brokers and lenders may not know the exact charges for these services. Some major lenders have proposed that they be permitted to assume full responsibility for all such services, negotiating prices with service providers and offering a guaranteed price to borrowers. HUD and the Federal Reserve have endorsed this idea, and would extend the privilege to entities other than lenders. To date, however, Congress has not been prepared to move on it.