Getting to Know the Good Faith Estimate

By Fredric J. Gooch, General Counsel

DocuTech Corporation

On January 1, 2010 mortgage originators will be required to use a new Good Faith Estimate for all mortgage transactions subject to RESPA.  The rule that the GFE must be delivered to the borrower not later than 3 business days after a lender receives an application has not changed.  Mortgage brokers may provide the GFE, but the lender is ultimately responsible for making sure that the GFE was provided to the applicant.   What has changed is the form and contents of the document itself.  This article will focus on the first page of the revised GFE.  It may be helpful to look at a copy of the new GFE while reviewing the content of this article.  You can download a copy of the new GFE form here:  http://www.hud.gov/content/releases/goodfaithestimate.pdf

While the current GFE form is primarily concerned with disclosure of settlement costs to the borrower, the new GFE also summarizes the loan terms and is geared toward aiding the borrower in shopping for settlement services and for a loan in general.  The rule states that the standardized GFE form provided in the rule must be provided exactly as specified.  The top of the form is to be used for identifying the originator, borrower and the date the GFE was prepared.  Loan Originator is defined to mean a lender or mortgage broker.  The next two sections of the document identify the purpose of the GFE and there is a section that encourages the borrower to shop for the best loan they can receive.

The next section discloses “Important Dates” to the borrower.  There are four dates that are disclosed in this section.  The first date disclosed is the date for which the interest rate disclosed in the GFE will be available.  The second date is the date until the estimate of all other settlement charges disclosed in the GFE will be available.  This date must be at least 10 days from the date of the GFE.  The third date is the number of days within which the borrower must go to settlement once the interest rate is locked.  The final date is for the loan originator to state how many days prior to settlement the loan must be locked.

The “Summary of your loan” is the next section on the first page of the GFE.  The first block is for the initial loan amount.  The initial loan amount is the amount of the principal loan balance on the date of the closing.  HUD has clarified that it used the term “initial loan amount” to account for the possibility of negative amortization on certain loans.  The second block discloses the term of the loan in years.  Third, the initial interest rate is disclosed.   The originator must disclose the initial monthly amount owed for principal, interest and any mortgage insurance in the fourth block.  This amount must be the greater of (1) The required monthly payment for principal and interest for the first regularly scheduled payment, plus any monthly mortgage insurance payment; or (2) the accrued interest for the first regularly scheduled payment, plus any monthly mortgage insurance payment.  Next, the originator must disclose whether the interest rate can rise, and if it can rise, it must disclose the maximum to which it can rise over the life of the loan.  The fifth block also includes a place to indicate when the first change in rate will take place.  The sixth block discloses whether the loan balance can rise even if the borrower makes his or her payments on time; and it also must disclose the maximum amount to which the loan balance can rise over the life of the loan.  If the loan balance will increase only due to escrow items then this box does not need to be marked yes.  The seventh box indicates whether the loan has a prepayment penalty and the maximum amount of such penalty.  The last box is for disclosing whether the loan has a balloon payment.  If there is a balloon payment the originator must disclose the amount of the payment and when it is due.

The next section of the document is for disclosing escrow account information.  In the first box the originator must disclose the amount for the principal, interest and mortgage insurance again.  Then they must indicate whether the loan includes an escrow account for property taxes and other obligations in addition to that amount.  The “summary of your settlement charges section” summarizes the origination and settlement service charges disclosed on page 2 of the GFE.  The final disclosure of total estimated settlement charges is the sum of the amounts disclosed for origination and settlement services.

As you can see from the content in the first page of the new Good Faith Estimate, the purpose of the document goes far beyond the disclosure of settlement charges currently being disclosed.  This new document is intended to give the borrowers a disclosure of many of the terms of the loan in addition to the settlement service charges.  Ultimately the document is designed to give the borrowers a tool to use in shopping for a loan.  Whether or not this new GFE accomplishes this purpose will be open to interpretation, but what we do know is that the implementation of this form will cause lenders to change the way they do business.  We will continue to examine the other portions of this document and the settlement statement in future articles.