The United States Department of Housing and Urban Development (“HUD”)  today announced new regulations intended to make the mortgage shopping experience more transparent.  Whew.  And not a moment too soon!

The centerpiece of the new regulation is the requirement that mortgage lenders and brokers provide borrowers with a “Good Faith Estimate” of the anticipated closing costs of the proposed home loan.  Here’s a .pdf of the currently proposed form that will be required.  In its November 12, 2008 press release HUD states that it believes that use of the GFE will save borrowers up to $700 of the cost of a loan.  I’m not sure how that works.   It’s just more information and disclosure, and as is shown below, it’s information that is already required to be disclosed by Reg Z and the Truth in Lending Act.

In a remarkably candid characterization of the home loan process, HUD notes that “since 1974, little has changed about the process Americans endure when they buy and refinance their homes. Now, HUD’s final reform will improve disclosure of the key loan terms and closing costs consumers pay when they buy or refinance their home.”

Like its brethren, the “HUD-1,” the new Good Faith Estimate will be known by its acronym, “GFE,” so we should all start looking for that catchy new phrase to start creeping into the mortgage lexicon sometime in late 2009. The new regulation also modified the HUD-1 for the first time in decades. Use of the new forms isn’t required until January, 2010.

After a prolonged comment period, HUD apparently rejected a proposal that the broker/lender read a canned script of disclosures and other information to borrowers.  I can’t begin to imagine what the comments to such a clever idea might have been….but my mind conjures images of harassed borrowers running screaming from the room while an automaton mortgage broker drone reads an endless list of mandatory disclosures.

Will this new rule do anything helpful?  Maybe.  Maybe it will help people get a better idea of the deal that they’re actually getting themselves into.  The new form requires disclosure of:

  • What’s the term of the loan?
  • Is the interest rate fixed or can it change?
  • Is there a pre-payment penalty should the borrower choose to refinance at a later date?
  • Is there a balloon payment?
  • What are total closing costs?

What I’m not sure I’m getting is what this adds to the already existing requirements of the Truth In Lending Act Disclosures. True, TILA is an FDIC consumer protection statute, not a HUD lending regulation.  And that is relevant to what?  (For an exhaustive and tedious recitation of the requirements of TILA, check out the Office of the Comptroller’s TILA Handbook.)

So what does this mean?  What’s the upshot to the consumer?  Sorry to sound cynical, but it seems to just be the same required information in a different format.  Same wine, new bottle.  Different versions of the same information that is already required to be disclosed.  I’m not sure what is gained here.

I can tell you that, as a real estate lawyer who has analyzed and litigated many failed loan transactions, the HUD-1 has always been a useful tool.  But when I ask clients to send it to me? They rarely know what I’m talking about.  To most borrowers it’s just another layer in an endless pile of already mostly meaningless paper.  More stuff to sign.

What HUD and the FDIC need to do is simplify the loan application and documentation process so that anyone smart enough to fill out a loan application can also understand what is happening to him or her after that application is done and the deal is in escrow.  It is inconceivable that anyone smart enough to get to the close of escrow should be so uniformly and broadly baffled by a process which its governmental sponsors will jump and down claiming is intended to be simple.


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