Home Lenders Still Falling into the Good-Faith Estimate Trap

It's been nearly two years since the Department of Housing and Urban Development implemented new policies for the Real Estate Settlement Procedures Act, including new versions of the Good Faith Estimate and HUD-1 disclosure documents.

While the technology and automation exists to help mortgage lenders avoid GFE/HUD-1-related RESPA violations, industry participants say that even now, many lenders are still relying on manual processes — or no process at all — and end up having to pay the difference between underestimated and actual closing costs.

Meanwhile, technologists realize there is still work to be done to optimize the software and processes to help lenders maintain compliance.

After the RESPA changes were announced, instead of working to implement them, industry groups spent months fighting them, ultimately with little effect. When the new policies took effect Jan. 1, HUD went easy on lenders in the opening months, with lax enforcement during the adjustment period.

The effort to resist change is symptomatic of a deeper attitude that exists among lenders, says Brenda Clem, a mortgage technology consultant who previously held positions at Fifth Third Bank and Equifax.

Historically, many lenders felt they needed to underestimate settlement costs to stay competitive.

The attitude was that everyone was doing it, and if a lender didn't, it would lose business.

"It was prevalent because everyone was comparing closing costs. You could have a borrower leave you and walk across the street because your competitor's costs are $250 and yours are $450," Clem says. "And then the poor guy got to the closing table and the costs aren't $250 at all, he winds up paying $780. Is he going to walk then?

"Most people, if you can get them to the closing table, are not going to walk," she adds. "They'll mumble and grumble and moan and write you hate mail, but they'll probably still go through with the transaction if they've got the money."

The new GFE is intended to help borrowers comparison shop for settlement services and get the best deal on their loans. The new HUD-1 is designed so a borrower can compare the final loan costs to the estimates on the GFE. The estimate of some costs, like credit reports and appraisal costs, must remain within a 10% tolerance of the actual cost on the HUD-1. Others, like transfer taxes and origination charges, are zero tolerance fees and can't vary. At all.

"What they were really worried about was the bait and switch, where lenders come in with really low numbers to dissuade a borrower from shopping and then at closing, all these charges are added on," says Jeff Schurman, former executive director of the Title and Appraisal Vendor Management Association, a trade group for real estate settlement services transaction and vendor management industries based in Wexford, Pa.

But between changing old sentiments toward settlement cost estimates and implementing new processes that put a premium on accuracy, it's been a difficult shift.

"This is a bigger challenge than anybody actually realized," says Jan Clark, a vice president at Ernst Information Services, an Albany, N.Y.-based aggregator of land recording fees, taxes and settlement costs. "Some of the larger lenders we saw jumped on the bandwagon quickly and have amazing solutions in place. Others are just now getting started."

Andy Crisenbery, vice president of professional services at Cincinnati-based eLynx, agrees.

"It doesn't seem like it would be rocket science, but the operational processes that lenders have baked into the way they do business have been around forever, both from an operational and supporting technical standpoint," he says. "It's a pretty big deal for many of them to change the way they're doing business."

Crisenbery's company provides a number of origination and secondary market document management and data collaboration technologies, including a settlement agent management platform and an electronic document tool for completing HUD-1 disclosures.

Each time a fee on the HUD-1 exceeds the RESPA tolerance, or if a lender fails to disclose it on the GFE, the borrower has to pay more than expected at closing. To discourge lenders from allowing this to happen, RESPA regulations require them to reimburse the borrower for those excesses.

The magnitude of the problem can vary by the lender's origination volume and the variance in the GFE and HUD-1 disclosures. Crisenbery says he knows of one lender that paid more than $100,000 to cure an entire month's worth of HUD-1 violations.

"Suffice to say, it's enough for lenders to take notice because that comes off their bottom line. It's a liability that they were not subject to before the rules and regulations," he says. "It could be tens of thousands of dollars on an individual loan depending on how severe the penalty is."

Editor's note: a longer version of this story appears in the August issue of Mortgage Technology magazine.