The Real Estate Settlement and Procedures Act (RESPA) requires lenders to hand an accurate Good Faith Estimate (GFE) to any potential homebuyer within three days of receiving the homebuyer’s loan application. To prevent the bait-and-switch routine that has become an all-too-common practice, the lender’s GFE received by the homebuyer at the start of a loan transaction is required to state the loan costs within 10 percentage points of the costs actually incurred at closing. Unsurprisingly, lenders have been reluctant to provide this transparency. To circumvent the requirements of the new GFE form issued by the Department of Housing and Urban Development (HUD), released at the beginning of 2010, lenders have begun using “loan scenario” and “worksheet” forms that provide much of the same information as a GFE, but without the GFE’s legal protection for borrowing homebuyers. Thus, in spite of increased protection, both the homebuyer and the sales transaction agent reviewing the buyer’s loan options must remain doubly vigilant to avoid lowball offers from lenders upfront; offers which will be followed by an unpleasant surprise when the homebuyer later receives his Settlement Statement (See Form HUD-1, first tuesday Form 402).

first tuesday take: The only thing that lenders hate more than competition is anybody, especially the government, telling them how to do their job. If this financial crisis has taught us anything, it is that lenders, as the handlers of the artificial FIAT commodity called currency, must be regulated to ensure they do not hurt the society for which that currency is created.

The GFE must be given to the homebuyer within three days following the lender’s receipt of a loan application for a RESPA loan (which includes all homebuyer loans). The purpose: to allow the homebuyer to compare the actual terms offered by one lender to the terms offered by others. This, of course, requires the homebuyer to submit multiple loan applications, an activity first tuesday has advised loudly and constantly for over 30 years, in spite of nasty opposition from lenders and their representatives. Transaction agents, commonly called selling agents, must be wary of low figures presented to their homebuyers unless those figures arrive on a HUD GFE form. In February’s edition of first tuesday’s Online Journal, we will provide a downloadable version of these new HUD forms, enhanced to allow digital entry and saving. The new series of forms is as follows:

  • first tuesday Form 204, Mortgage Loan Disclosure Statement (DRE 882) – This form is given to borrowers who take out traditional loans. The borrower must also receive the HUD-GFE (first tuesday Form 204-5).
  • first tuesday Form 204-2, Mortgage Loan Disclosure Statement/Good Faith Estimate (DRE 885) – This form is given to borrowers who take out nontraditional loans. The borrower must also receive the HUD-GFE (first tuesday Form 204-5).
  • first tuesday Form 204-5, Good Faith Estimate (HUD-GFE) – This form is given to borrowers in conjunction with either 204 and 204-2.

Re. “Mortgage lenders exploit a loophole in HUD’s new ‘good faith estimate’ rules” from the Los Angeles Times