The New Good Faith Estimate Form

It seems as if the government cannot do anything simple. It tries, like the euphemistically named “Paperwork Reduction Act.” The latest entry in paperwork reduction is the new Good Faith Estimate that borrowers get when applying for a mortgage. The new 3-page form replaces the 1-page form that has been used for decades.

There are some good things for consumers here, although I am waiting to try it out on some of my customers. I’m going to give them the new form and the old form and ask them to compare the two, and if they feel more knowledgeable and in control having read the new one. We’ll see.

Here’s the biggest improvement: Yield Spread Premiums are now out in the open and are paid to escrow for the direct benefit of the customer. Assuming it is part of the compensation agreement with the mortgage broker, it could end up in the broker’s pocket. But it has to be shown. Let me give you an example.

Say you come to me for a loan and we agree my compensation is 1 point. The best pricing that day is that which pays a ½ point rebate (YSP), so you and I agree that I will get the ½ point plus you will pay a loan origination fee of ½ point for a total of 1 point. That ½ point goes to escrow out in the open so you can see it.

That is not the way many, many people in the industry have worked for the last 15 years or so. What they used to do was to “quote” the customer 1 point as a Loan Origination Fee, but they knew at the price they quoted that they would also get a 1 point YSP for a total compensation of 2 points, sometimes more. That may not have been disclosed.

When final documents were drawn, they were supposed to show this YSP, but often lenders just didn’t do it because no regulatory agency ever looks at single transaction misbehavior. On the final HUD-1 settlement form given after closing, there might be verbiage in very small print that would say something like the following:

POC to broker                                $5,000

This was the amount the lender paid to the broker in addition to the loan origination fee paid by the borrowers. Most lenders “cap” compensation at 4 points, meaning they would earn $12,000 to arrange a $300,000 loan (something I would do for $3,000). That is, frankly, outrageous, but it was COMMON practice. Otherwise why have a limit?

Additionally, it became all too common in a volatile market for the rate to drop, say 1/8th percent, from what was originally quoted. If the borrower didn’t know how to check the market, the loan officer could tell him it didn’t change, since the borrowers would not notice anyway. But when that loan was sold, it had a yield that was1/8th percent higher than the market rate. That spread made the loan worth ½ point more. That would be another $1,500 to the broker in the case of a $300,000 loan. 

You can see that the broker had a choice. He could get the borrower a loan at a 1/8th percent lower rate or put that $1,500 in his own pocket. Guess what the broker decided to do? In fact, the entire subprime and Alt-A segments of the loan industry operated like this, and many A-paper lenders still do to this day.

You may remember that I was one of the original members of the Upfront Mortgage Brokers Association. Our goal was to promote honest and fair dealing by requiring members to fully disclose their compensation when the customer applied for his loan and then, most importantly, not change it when he wasn’t looking.

This new form theoretically – but do not count on it – makes all mortgage brokers upfront brokers because the compensation, including both loan origination fee and YSP, have to be set forth in the initial Good Faith Estimate. And they are not allowed to change.

In addition, the YSP is now paid directly to the settlement agent as opposed to being paid by the lender to the broker after escrow closes. This increase in transparency will benefit consumers.

There is one loophole that, frankly, does need to be there and that is the “change in circumstance.” It is entirely possible that the borrower, for whatever reason, didn’t qualify for the loan that was initially applied for or changed his mind. In effect, if that were to happen, it would allow the lender to start over again, and if the borrower isn’t on his toes, there is an opportunity for some hanky-panky. So it that’s your situation, check to see that the compensation stays the same the second time around.

Finally, this is not as simple as I have made it sound, as one look at the new form would confirm. As a writer who has spent 30 years educating consumers, this new form and the procedures that go with it still require that a borrower be alert and reasonably well-informed about the process. It is hard to protect the ignorant, however, so new forms or old, the dummies who fail to take advantage of educational opportunities will continue be fodder for unethical lenders who are still out there.