A new mortgage disclosure rule may initially do the opposite of what the Department of Housing and Urban Development (HUD) intended.
Starting Jan. 1, lenders, for the first time, will be held to the good-faith estimate of closing costs they provide loan applicants. Lenders will be forbidden from increasing some charges at the closing table and limited to a 10% increase on other fees.
If the costs of services such as title insurance or credit reports turn out to be much higher than estimated, the lender will have to eat the difference.
HUD has estimated that borrowers will save an average of $700 in origination costs because the strengthened good-faith estimate will help them to compare offers and shop for the best price. But some experts say that, at least to start, lenders may raise their own fees to cover the additional risk, and overestimate third-party costs in the good-faith estimates to avoid running afoul of the regulation.
"The rule was adopted on the principle of lowering cost, but that may or may not be the case," said Richard Andreano, a partner at the law firm Patton Boggs. "If there are so many restrictions and the lenders also have to pay third-party expenses, then lenders would have to increase their own fees on the loan to make up for where they are losing money."
Though HUD finalized the Real Estate Settlement Procedures Act rule a year ago, it gave lenders a year to prepare for compliance. In addition, HUD has offered a reprieve from enforcement actions for violations in the first four months of 2010.
Still, lenders are concerned because once the good-faith estimate has been given to a borrower, it cannot be revised except under a very narrow set of circumstances, which the agency has defined as "acts of God, war, disaster or other emergency."
The good-faith estimate "is no longer an estimate but a firm document," said Melissa Richards, a compliance attorney at Buchalter Nemer in San Francisco.
As a result, "the cost of doing business as a mortgage lender will go up exponentially in the coming years," she said.
Gary Lacefield, the president of Risk Mitigation Group, a mortgage consulting firm in Arlington, Texas, said he has been flying around the country training mortgage bankers to understand how they will be affected by the new good-faith estimate.
"There's going to be lots of confusion, particularly for those issues where there is no tolerance on the good-faith estimate and the amount listed on the form has to be exact," Lacefield said. "There are going to be additional costs involved because lenders have to make sure they have the exact amounts listed."
Fred Gooch, the vice president of compliance at DocuTech Corp., an Idaho Falls provider of compliance services and documentation technology, said that because lenders are bound by the tolerance levels on the good-faith estimate, they are searching for ways to control third-party settlement charges.
"The real issue is how do lenders control costs that they really can't control but are on the hook for if they are out of tolerance," Gooch said.
One way, he said, would be to negotiate contracts with third-party vendors putting them on the hook if any of the charges exceed estimates.
Another part of the new rule that is vexing lenders: they will have to give the borrower the good-faith estimate within three days of receiving a credit application. What constitutes an "application"?
According to HUD, once a lender receives six pieces of information from the borrower — name, Social Security number, monthly income, property address, estimate of the property's value and the proposed loan amount — the clock starts.
Andreano said that in writing that provision, HUD did not take into account how consumers typically shop for homes, particularly if they have not yet identified a specific property they want to buy.
"Very little information now triggers the need to provide the good-faith estimate when many borrowers are really just looking for a ballpark figure of what they qualify for," Andreano said. "Because of the binding nature of the good-faith estimate, the Respa rules create the need for a lender to make a decision on a borrower very early on in the process."
To get around this problem, many lenders are intentionally not asking borrowers to provide specific property addresses, a move that can enable them to avoid having to provide the binding good-faith estimate, according to Andreano and several other mortgage experts.
"Some lenders are saying if they have a borrower who doesn't appear to want to apply for a loan, they won't take the property address, because the borrower just wants preliminary information," Andreano said. "There are occasions where lenders are appropriately not requesting information because the borrower is in the preliminary stage."
Richards at Buchalter Nemer said another unintended consequence of lenders trying to avoid being bound by the good-faith estimate is that they may start denying more credit applications, especially if they must make decisions "on the spot," thus avoiding having to offer an estimate altogether.
That, however, risks inviting scrutiny from federal regulators if the rate of denials in certain geographic areas exceeds that of their peers.
One way to avoid an outright denial is by overestimating the charges in the good-faith estimate. "If the fees end up coming in lower, then they charge the lower amount at closing," Andreano said.
In theory, if just one lender gives a conservatively high estimate of fees, it could potentially begin to lose business to rivals.
However, "if a lot of lenders estimate high, then it doesn't make any one lender look uncompetitive, because that's what the entire industry is doing," he said.