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Mortgage lenders can sidestep new rules to prevent lowball estimates

Kenneth R. Harney
Saturday, January 16, 2010; E01

The federal government's efforts to eliminate settlement-cost surprises for home mortgage applicants may have opened the door to a new, and potentially costly, set of consumer problems.

Starting this year, mortgage lenders nationwide must issue new good-faith estimates to applicants, covering loan fees and settlement charges. Under the regulations set by the Department of Housing and Urban Development, the estimates that lenders provide upfront must be accurate -- the same or nearly the same as the fees charged at closing.

The idea is to eliminate some of the most controversial practices in mortgage lending -- the intentional or inadvertent underestimation of fees. Under the old system, some lenders lowballed their estimates to lure applicants away from competitors. In the end, unwary consumers were hit with eleventh-hour surprises at closings -- fees sometimes thousands of dollars higher than the initial estimates.

In the past, no federal rule penalized lowballing. Loan officers and others who provided the estimates were not held responsible.

As of this year, all that was supposed to change. The reformed good-faith estimate, or GFE, requires lender-related fees to remain unchanged from application to closing and allows only up to a 10 percent difference for estimates in other areas such as title insurance and closing fees. Now when the charges at settlement exceed the estimates, the lender -- not the customer -- must eat the difference.

The GFE also is designed to facilitate rational comparison-shopping on fees and other loan terms. It contains boxes allowing consumers to compare up to four lenders' quotes and estimates, each essentially guaranteed to be accurate at closing.

Consumer groups applauded the new rules. Banking and mortgage industry groups grudgingly accepted them and complained that the Jan. 1 start date did not allow much time to master all the complexities.

So how have the first two weeks of the reforms been going? Not exactly as planned. Many loan officers and lending institutions are sidestepping the new, price-bound GFE by giving shoppers "worksheets" and "loan scenario" forms that come with no legal requirements for accuracy; these documents were not even contemplated under the reforms. In effect, they are substitutes for the new GFEs, wide open to lowballing and bait-and-switch games under the wrong hands.

The worksheets purport to contain much of the information provided by a GFE. Typically, they are issued only when shoppers do not provide -- or are asked not to provide -- key information that constitutes an "application" under HUD's definition in the rules. For example, if a consumer does not provide the address of the property to be financed, technically there is no application and therefore no requirement to issue a GFE.

Loan officers defend the worksheets -- which they get blank from several national software suppliers -- as necessary adaptations to HUD's get-tough regulations. They argue that HUD is forcing them to provide hard and fast estimates on services or charges that they cannot always lay down with accuracy -- especially those involving title and settlement services.

"We can't be 100 percent certain on every cost that HUD is asking us to be certain about," said Steve Stamets, a loan officer for Union Mortgage Group in Rockville. "So when there is no full application, or you've got people just shopping around, we can help them" with the worksheet estimate.

Tom Balk, a senior loan consultant for Mortgage California, said the worksheets allow him to give clients "an accurate sense of the fees they'd pay if they move ahead to a full application," at which point he'd be able to issue an official GFE, he said.

Asked for HUD's position on all this, Vicki Bott, the agency's deputy assistant secretary for single-family housing, said that although the rules are silent on the subject, worksheets "can be a useful tool when the consumer doesn't want to give enough information" for a formal application.

However, Bott said, if worksheets become commonplace and threaten to water down the consumer protections on settlement fees provided by the GFE reforms, her agency will need to take a thorough look at the situation and possibly issue "updated guidelines."

In the meantime, if you want hard and fast guarantees on fee estimates and you're serious about comparing competing loan costs, demand a GFE. If loan officers will provide you only worksheet estimates, be on alert: The lowest quotes you get may not be for real.

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