Better(?) Disclosure for Mortgage Consumers

The federal Real Estate Settlement Procedures Act (RESPA) is a consumer protection law for homebuyers that is enforced by the Department of Housing and Urban Development (HUD). The thrust of the law is to require that loan originators make certain disclosures to borrowers so that they can be more informed consumers, entering into more transparent transactions. HUD recently wrote new regulations requiring that borrowers receive both a standard Good Faith Estimate (GFE) that discloses key loan terms and closing costs and a new “HUD‑1″ settlement statement.

The format of the new GFE is supposed to simplify the process of originating mortgages by consolidating costs into a few major cost categories. The former GFE had a long list of individual charges. The new version includes this list, but also has a summary page containing the key information for comparison shopping by the consumer.

The new GFE also has a set of tolerances on originator and third‑party costs. Originators must adhere to their own origination fees and give estimates subject to a 10% upper limit on the sum of certain third‑party fees. The idea is to encourage loan originators to seek out lower costs for third‑party services, to the benefit of borrowers.

The main changes in the HUD‑1 settlement statement involve new language and the organization of charges that should make it easier to compare the GFE and the settlement statement, in order to confirm whether the tolerances in the new GFE have been exceeded. It will also be easier for the consumer to verify that the loan terms summarized on the GFE match those in the loan documents, including the mortgage note.

Mixed Reaction to Mortgage Regulations

Reaction to the new regulations has been mixed, with some consumers complaining about their complexity and vagueness and other consumers wondering if the regulations will, in fact, serve to enhance protection for consumers. Since the forms provide for lumping lenders’ fees together rather than detailed itemization, some consumers think that lumping the fees together could make it harder to detect questionable charges.

In any event, the “bait and switch” tactic in which artificially low estimates of costs mysteriously balloon at closing has been addressed by HUD. Now a lender is largely tied to its good‑faith estimates provided for such mortgage fees as points, origination costs, and appraisals.

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