Is A Good Faith Estimate Good?

The U.S. Department of Housing and Urban Development (HUD) states in “More Information About RESPA” that at the time of loan application (or mailed within three days) the lender or broker must provide the borrowers “a Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ”. 

(double-take)

“This is only an estimate and the actual charges may differ” – outrageous! 

OK, let’s say I bring my car in the morning to an auto repair shop and the mechanic quotes $300 for the repair.  Later that day, I return to find my car has been fixed and the mechanic hands me a bill for $2,400.  Does this sound absurd to you?  Yes, it’s absurd.  Now let’s say I apply for a mortgage loan and am expecting to receive $32,000 cash at closing.  I get to the closing table to discover that my proceeds check is only $31,700 $29,900 $14,000.  This latter event certainly surpasses absurdity – it’s absurdity on steroids, it’s outrageous!  But it gets worse; not only is it outrageous – it’s unfortunately for some, a reality.  Today we’ll discuss this ugly side of lending in the hopes of preventing this outrageous event from ever happening to you.

The only acceptable (and legitimate) reason for the GFE not matching your closing numbers or HUD1 (also called a “HUD” – industry slang for closing statement) is if the information supplied to the loan officer at application could not subsequently be verified.  The integrity of this information is predominantly within the borrower’s control and therefore, whether or not this becomes a reason for your final numbers being out of whack is entirely up to you, the borrower.  With the sole exception of adverse changes in your circumstances that occurred after application (loss of job, change in credit score, etc.) you have ascendancy.  In other words, tell the truth and there should be no surprises.         

Returning to the question posed in the title of this article: Is A Good Faith Estimate Good?  The answer is: Yes, but your loan officer might not be.  In fifteen years in this business, having lent over a billion dollars; my eyes have seen and my ears have heard what type of loan officer fails their client at the closing table.  It can be broken down into one of two reasons: character or ability –the loan officer is lacking in one or the other, or both. 

What is common sense?  I have found that definition will vary depending on whom you ask.  Ultimately, there is one standard of right and wrong and committing to a Good Faith Estimate up front and changing it later is wrong.  A loan officer with poor character will quote you a lower GFE than an honest loan officer.  The consumer can’t be blamed for choosing the lower of two estimates – although that consumer has unwittingly chosen the path that leads to a closing table disappointment.  It’s difficult for the untrained eye to spot a loan officer whose lack of character considers this activity ‘good business’.  In many cases, poor character can actually permeate a company’s corporate culture.  While this author is not implying innocence or guilt (I am not the judge), it is a fact that Bank Rate, Inc. has a lawsuit going to trial this fall alleging they allowed their website to become a haven for “bait and switch” loan pitches.  It’s also a fact that Ameriquest Mortgage Co. paid a $325M settlement this year, as a result of allegations that the company overcharged and defrauded consumers.  Excuse me while I take a shower…

…Ok, I’m back.

The final reason why a closing table HUD falls miserably short of GFE expectations has to do with a loan officer’s inability.  This is largely a function of inexperience.  Several years ago something called “net-branches” exploded in popularity.  Without getting into the dynamics of the net-branch concept, I’ll liken the phenomenon to Pandora’s Box.  The mortgage business is flooded with ‘net-branches’ who strongly encourage the hiring of anyone and everyone that may or may not know how many g’s there are in the word ‘mortgage’.  As if this wasn’t bad enough, training in the mortgage industry is next to non-existent.  This grievous concoction of inexperience and poor training has left many consumers sitting at a closing table in tears.

Therefore, in applying for a loan, prepare and protect yourself in the most obvious ways.  Be up front, be honest and be aware of whom you are dealing with.  Following these simple suggestions will make the loan process, perhaps not enjoyable, but at least, a less stressful experience.