Mortgage lenders can sidestep new rules to prevent lowball estimates

Kenneth R. Harney
Saturday, January 16, 2010
Washington Post

The federal government’s efforts to eliminate settlement-cost surprises for the loan process involving home mortgage applications, may have opened the door to a new, and potentially costly, set of consumer problems.

Starting this year, mortgage lenders nationwide must issue new good-faith estimates to applicants, covering loan fees and settlement charges. Under the regulations set by the Department of Housing and Urban Development, the estimates that lenders provide upfront must be accurate — the same or nearly the same as the fees charged at closing.

The idea is to eliminate some of the most controversial practices in mortgage lending — the intentional or inadvertent underestimation of fees. Under the old system, some lenders lowballed their estimates to lure applicants away from competitors. In the end, unwary consumers were hit with eleventh-hour surprises at closings — fees sometimes thousands of dollars higher than the initial estimates.

In the past, no federal rule penalized lowballing. Loan officers and others who provided the estimates were not held responsible.

As of this year, all that was supposed to change. The reformed good-faith estimate, or GFE, requires lender-related fees to remain unchanged from application to closing and allows only up to a 10 percent difference for estimates in other areas such as title insurance and closing fees. Now when the charges at settlement exceed the estimates, the lender — not the customer — must eat the difference.

The GFE also is designed to facilitate rational comparison-shopping on fees and other loan terms. It contains boxes allowing consumers to compare up to four lenders’ quotes and estimates, each essentially guaranteed to be accurate at closing.