MBA Proposal to Eliminate Bad Faith Estimates

November 20, 2006

One (of many) unsavory features of the home loan market is that borrowers, when they close on their loans, sometimes find their settlement costs substantially higher than the earlier estimates given them in the Good Faith Estimate of Settlement (GFE). Lenders are required by law to provide the GFE to borrowers within three days of receipt of a loan application, but the GFE is sometimes used in bad faith.

Some lenders as a matter of course raise their fees or add new ones as a loan moves toward closing. This is especially easy to do on purchase transactions when borrowers pass a point where there isn’t time to begin again with another loan provider. Some lenders low-ball third party fees as an inducement to borrowers who believe they can shop total fees, then raise them at closing.

HUD tried to deal with this (and many other) problems a few years ago with a proposal that allowed lenders to package a mortgage and all related services, which would be offered to borrowers at a single price. The proposal was very complicated, different parts offended different groups, and as a result it died. Reportedly, HUD has since been working on a less ambitious agenda, but nothing has emerged as yet.

Meanwhile, the Mortgage Bankers Association (MBA), which is the major trade group of mortgage lenders, has come out with its own proposals, part of which are directed to GFE abuse. The entire proposal is contained on their web site,

The MBA proposes that deviations between the lender and mortgage broker charges contained in the GFE, and those paid by the borrower at closing, be limited to 2%, provided there are no substantive changes in the transaction. Penalties would be imposed for violations of the 2% threshold.

In my view, the threshold should be zero, since lenders and brokers know their own charges. But, hey, 2% is not much, it means an estimated charge of $3,000 could increase only to $3060. Considering the source of the proposal – mortgage bankers proposing that discipline be imposed on themselves – HUD ought to jump at it. Since no other interest group is likely to object, it should have clear political sailing.

Third party charges are another matter. The MBA also proposes a limit on deviations between the third party charges including title costs contained in the GFE, and those paid by the borrower at closing. They would cap the deviation on the total of such charges at 10%. This would curb some of the worst low-balling, but it would not do anything to reduce third party charges, which are far higher than they would be if they were sold in competitive markets. See How to Reduce Third Party Settlement Costs.

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