Wait, wait, don't turn the guard dogs loose! Your personal property is not at risk. The type of protection I am referring to is consumer protection provided by the Federal Government using its regulatory powers. Bah! We don't need no stinkin' regulation you might say. Maybe yes, maybe no. Today we are talking about a huge regulatory ruling with regard to lending, RESPA. Perhaps you might want to rethink the regulation stinks position once you are aware of what RESPA does.
To begin with, RESPA is alphabet soup for the Real Estate Settlement and Procedures Act. What it does is:
1) Provide consumers better and more consistent information about the costs of their mortgage so they can better shop for settlement services
and
2) Eliminates kick backs and referral fees that increase the cost of settlement services.
So let's talk about consistent information first. Every borrower is entitled to a Good Faith Estimate when they are shopping for a loan. Lenders are free to offer a worksheet of estimated closing costs but are not necessarily held to the worksheet. That gives the consumer a basic idea of what the loan will cost but it does not necessarily pertain to a specific loan. Lenders are required to give the borrower a specific Good Faith Estimate when it is determined there is information enough to constitute a loan application. What information constitutes a loan application? Does this mean that in order to get a true idea of what my loan will cost I have to actually have turned in all the documents for a loan file? What if I want to shop around?
Well no, you don't have to give your documentation to every lender you are considering. And actually the worksheet that each lender can submit is a pretty good tool to compare costs. However, to get to the specifics you will need:
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That's right- a pencil. Or more accurately the acronym:
Property address
Estimated value
Name of borrower
Credit
Income
Loan amount
Get it? PENCIL?? Okay, okay, but it is a handy acronym that a lender can use to determine whether or not they have an actual loan application. Once these six things have been collected, the Federal Government says there is a loan application and the official Good Faith Estimate must be issued.
What is so special about the Good Faith Estimate? When a GFE is issued, the lender is locked into the stated costs of services for 10 days from the issuance of the GFE. So whatever fee is charged for underwriting for instance, is what the borrower will pay should they do the loan application within ten days of the time the GFE is issued. The interest rate too is fixed as a promise for a particular amount of time on the GFE. I normally express my time frame on the interest rate for one business day as the rate can change daily so to promise the rate for more is probably not a smart idea as it might not be available the following day, depending on the volatility of the market place. If the borrower wants to lock the interest rate at the time, then the locked rate will be disclosed for a period of 30, 45 or 60 days typically. The expiration date is also shown.
The exception to the lock-in of these fees are third party fees as the lender doesn't control those, but the borrower needs to have a fairly accurate estimate of what they may be. So the Federal Government allows a 10% tolerance on fees such as appraisal, credit report, or any fee that is not a specific lender fee, but that the borrower is not allowed to shop for themselves. There are also fees that the borrower may shop for themselves such as pest inspection, survey, and title fees. These fees have no tolerance built in so that the lender is not responsible for fees they don't control. An example of this type of fee would be the cost of home owner's insurance. The lender has to disclose a charge for it as it is a requirement of the loan, but lenders aren't in the insurance business so they have no control over the policy you ultimately select.
The lender has three business days to disclose the information on the GFE and have the borrower sign off on the disclosure. Once the borrower commits to a specific lender, the lender is held to the disclosed fees or the tolerance level of third party fees.
So that covers point one - - the borrower can obtain information upfront on the cost of their loan prior to making a commitment to a specific lender if they choose.
Let's talk about point 2. The purpose of point 2 is to prevent fees and interest rates to be tied to the use of third party companies such as insurance companies, title companies, or any other ancillary service in the lending process. It used to be that a lender could do this and the borrower might end up paying a higher fee. It is also illegal for me or my company to pay an insurance company a referral fee for sending me a borrower. Nor can I pay a real estate agent a referral fee, nor can either of these entities pay me for referring business to them. I am also unable to offer a "special interest rate or discount" by encouraging my borrower to use a specific ancillary service. So while I may make suggestions for outside real estate services, it is because I know those entities will do a good job, not because there is financial gain in it for me or my company.
The other thing I can't do is pay for any fee on behalf of the borrower with regard to the mortgage loan. Sometimes the ability to do that would be handy. Such as in the case of a property that requires two appraisals for one reason or another. It would be a nice gesture to be able to offset the cost of that somewhat for the borrower, but it is illegal. Which is why if someone is unhappy with our service for any reason we cannot buy ourselves back into their good graces. Every once in while I run into a borrower who feels that for whatever reason, if I or my company paid for some fees on their behalf, that would make everything better in their loan process. Whether it might make it better or not, it is illegal. Fortunately, this is a rare occurrence so it doesn't come up often.
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The last thing we can no longer do is offer inducements, such as the lovely television pictured above if you choose us to work on your mortgage loan. I can't offer to buy you dinner, pay for your appraisal, give you a gift certificate towards landscaping-none of it. I can't offer you anything of value that might make you choose me and my company over another company - other than I think we do a pretty darn good job and offer great rates and closing costs. That's it.
So there you go, a crash course in what the Federal Government is doing to keep you from being overcharged or pushed into using companies you would prefer not to use. Not a bad thing, really.
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