A "Bad Faith Estimate": Any Recourse?

19 April 2004, Revised December 2, 2006, May 27, 2009

"At our closing last year, I was shocked to find that the title insurance cost was $800 higher than the estimate shown on a revised Good Faith Estimate (GFE) we had received several days before the closing. At the closing, held at the title company, I asked the title company representative what had changed in the two days that would cause such an increase. He said that nothing had changed, that the title company had faxed the correct figure to my lender several weeks before the date of the GFE, and he gave me a copy of the fax. The lender had simply disregarded the fax. I understand that the GFE shows estimates, but isn’t the lender obligated to provide the best estimates possible? Is there a regulatory agency to which I can complain…?"

You have been victimized by the practice of low-balling third-party charges on the GFE, which is not unusual. Lenders know that many borrowers look at settlement cost figures in shopping lenders, so they want to make their figures as low as possible. Furthermore, they can almost always get away with it because it is very difficult to prove that an estimate was given in bad faith. You have them dead to rights, however, because you can prove that the lender had the correct information in time to give it to you.

In response to an early version of this article, a lender wrote me to point out that lenders are not obliged under the law to send another GFE from the one required at the start of the process unless the lender's own fees change. If third party fees change, there is no obligation to correct the GFE, though many lenders will.

This assumes, however, that the original estimate was given in good faith. I am not a lawyer, but it appears to me that the fact that the original estimate was off by $800, and that the lender had a corrected number and did not disclose it, suggests strongly that the original estimate was not given in good faith.

I would register a complaint with the HUD Office of Consumer and Regulatory Affairs, US Department of Housing and Urban Development, 451 7th Street, SW, Washington, D.C. 20410. In addition, you should file a complaint with the government agency that regulates the lender. Here are web sites you can use to contact these agencies:

For national banks, http://www.occ.treas.gov/customer.htm

For Federally chartered savings and loan associations, http://www.ots.treas.gov/contact.html

For state-chartered banks and savings and loans, http://www.lendingprofessional.com/licensing.html

For mortgage banking firms, http://www.aarmr.org/lists/members-IE.html

In most cases, borrowers given an erroneous estimate of third party charges have no recourse because there is no evidence of bad faith. This is one of the abuses HUD hoped to eliminate in its proposed package of reforms of the Real Estate Settlement Procedures Act (RESPA), which is the Federal law that governs the GFE. Because of the intense political pressure against it, however, HUD withdrew the proposal in 2004 and nothing has been done since.

So borrowers have to take care of themselves, and one way to do it is to shop on-line, where the risk of GFE abuse is small. On-line lenders who post their settlement cost estimates on their web sites, don't low-ball. It is too easy to hold them to account, and borrowers can easily compare the costs shown on different sites. Sites with honest estimates include 7 Upfront Mortgage Lenders.

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