Know Your Loan Ingredients! Truth In Labeling For Borrowers

Part I of a Three Part Series

When the FDA required food manufacturers to reveal the ingredients, nutritional value, calorie count and net weight on their product labeling, the big winner was the consumer.  The consumer wins again now that Department of Housing and Urban Development (HUD) has set a standard for loan transparency.  As of January 2010, all loan originators are required to give borrowers a loan “ingredient” list called a Good Faith Estimate (GFE).   This three page “label”  is structured within the Real Estate Settlement Procedures Act (RESPA) and clearly discloses key loan terms and closing costs to the borrower.   Actually the Good Faith Estimate is more than a guesstimate, because once presented to the borrower,  it is a binding statement of costs with few exceptions.  A loan originator must issue a GFE no later than 3 business days after the loan originator receives either an application or information sufficient to complete an application and failure to provide a GFE to a borrower is a violation of Section 5 of RESPA.     However, if the loan originator denies the loan before the end of the three business day period, or if the applicant withdraws the application, then the GFE does not need to be provided nor does the Special Information Booklet.   HUD’s new settlement cost booklet (pdf version – updated 1/6/2010 with corrections of minor detail)

The only fee that a loan originator can charge before issuing a GFE is the cost of a credit report.    However, it is important to note that a GFE is not a loan commitment—it is simply an estimate of settlement charges a borrower is likely to incur to obtain a specific loan.  So just because you receive an acknowledgement of receipt of your GFE, the lender cannot automatically conclude that this is an expression of your intention to proceed with the loan or a promise by the lender that they are able to provide you with the loan.  Generally speaking if a borrower does not express an intent to continue with an application within ten business days after the GFE  is provided, the loan originator is no longer bound by the GFE.  Also worthy of note is if a GFE was provide but the interest rate has not been locked, if there are changes to the interest rate dependent charges or loan terms a revised GFE must be issued.

So who exactly is a loan originator?  A loan originator is either a lender or a mortgage broker.

And, what constitutes “sufficient” information?:

  1. borrower’s name
  2. borrower’s monthly income
  3. borrower’s social security number to obtain a credit report
  4. property address
  5. estimate of value of the property
  6. loan amount and
  7. any other information deemed necessary by the loan originator.

After  a loan applicant both receives a GFE and indicates an intention to proceed with the loan covered by the GFE, the loan originator may collect fees beyond the cost of a credit report for origination-related services.   Some of the fees included in the loan will typically be categorized under processing and administrative services which encompass functions involved in title and origination service. Processing and administrative services include, but are not limited to the following: document delivery, document preparation, copying, wiring, preparing endorsements, document handling and notarization.

In a real estate sales transaction where there is a contract between borrower and seller, the GFE only impacts the borrower.  So let’s say there are other charges in a loan transaction that are customarily charged to the seller, they do not need to be included on the GFE.   However, if the seller has agreed to pay charges that are normally borrower responsibility (i.e owner’s title insurance), then those charges should be disclosed.  The Good Faith Estimate offers the borrower a chance to make a more informed decision and weigh and balance the cost ramifications before him.