I'm Sorry, Did You Think Your Good Faith Estimate (Or Mortgage Loan Disclosure Statement) Meant Anything?

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Somebody asked, "What are my legal options when there's a change on a good faith estimate."

Short answer: Sign the documents or don't. Same thing with a Mortgage Loan Disclosure Statement here in California. Neither one means anything binding; that's why they call the one an estimate. Nonetheless, because there is a perception that they mean something, that people think the lenders are trying to disclose everything fully. The fact is that some are while others aren't, and there is no correlation with size of the lender, how well known they are, or even what the loan officer at the next desk over is doing.

The fact is that if the loan officer cannot persuade you to sign up, there is a guarantee that neither they nor their company will make anything. This creates an incentive to tell you whatever it takes to get you to sign up. Once signed up, most folks consider themselves committed or bound to that lender, and stop looking around.

But the only documents that mean anything, legally, all come at the end of the loan process. Note, Trust Deed, HUD-1. So you can see the motivation exists to pull a bait and switch, or more often just not to tell the whole truth. Nor will they point out the differences at closing from what you signed up for. That would get you upset to no good purpose, from their point of view. The fact is that a majority doesn't take the time to spot the difference, and of those who do, some just don't understand how to spot the difference. Of those who do take the time, and do spot the difference, most will cave in and sign just to be done with the process, and of course there are those who are trying to purchase who won't get it and will lose the deposit if they don't sign.

The fact is that these forms are estimates. They may or may not be accurate estimates. In some cases, the loan provider tells you about every single dollar you're going to need up front, in others they might as well be telling you the loan is going to be done for free at a rate two percent below any real loan out there. If they can't get you to sign up, they don't make anything, so the incentives are for them to over-promise and under-deliver. In other words, tell you about something better than what you'll end up with. Now the loan officers know what it's going to take to get the loan done - or they should know, anyway. But they often tell you a fairy tale that might as well begin "Once upon a time..." to make it seem like their loan is better than the competition, because if they can't get you to sign up, they don't make anything.

Now, the fact is that the vast majority of people out there go out shopping for loans in the wrong fashion. They find someone they think they can trust, because they are family, because they are the scoutmaster, or because they go to church with them. Exactly what type of loan will they deliver, and at what rate? With what costs? It is always a trade-off between rate and cost on any given loan type.

Even less likely to get a good rate at a decent cost are the people who do shop around, but won't give loan officers a chance to figure out what's really the best loan for them. The first group of people might stumble onto someone trustworthy who gives them a good loan at a reasonable rate for a reasonable cost; these people are going to fall for the biggest lie, because a loan officer can always tell you about a better loan than really exists and they are motivated to get you to sign up. They call around asking about the lowest rate or the lowest payment, and don't want to hear anything else out of the loan officer.

The fact is that it's going to take a good, in depth conversation about your situation for a loan officer to figure out the best loan for you, and you want to have that conversation with at least three or four loan officers. Why? Because the first one could have told you exactly what they thought you wanted to hear. Ditto the second. Keep going until you hear a couple of different suggestions. Furthermore, once they've given you their suggestions, ask about the other suggestions you heard in the past. Don't shop by lowest payment; that's a good way to get stuck with an abomination like the so-called Option ARM or another loan type that you don't want. Don't shop by interest rate alone, because you'll get stuck with a loan that has six points and you'll never save enough money on the payments to recover those sunk costs. Shop by the trade-off between rate and cost, because there always is one.

Now at the end of the process, the lender has all the power. You need or want this loan, and they're the ones with it ready to go. In the case of a purchase, you've got a deposit you're going to lose and a home you wanted that you won't get if you don't sign the loan documents. If you sign the documents, you are stuck with the loan, that probably isn't on the terms you were originally told about. I pointedly did not say "promised" because the earlier forms are not promises unless somehow guaranteed, and very few loan providers guarantee their quotes. Chances are, if they won't guarantee their quotes, they are not telling the entire truth about the loan they are telling you about.

The most important question on this page of Questions You Should Ask Prospective Loan Providers is "If I say I want this right now, will you personally guarantee this rate with those closing costs, and will you cover the difference (if any) between the quote and the actual final cost?" You won't get a flat "Yes." If you do get a flat "yes", they're making a promise on something that is not under their control, and I wouldn't trust it as far as I can throw an aircraft carrier. What you're hoping for is something like "Subject to full underwriting approval, yes we will guarantee this quote as to rate, type of loan, and total cost." This is a simple sentence that makes a specific guarantee subject to a reasonable condition, as loan officers never know if a prospective borrower is intentionally hiding or shading something at loan sign up. If you get a response full of nonsense about how long they have been in business, how they honor their commitments, or any such equivalent claptrap, then they are trying to buffalo you. None of the stuff when you initially inquire about the loan is a loan commitment in any way, shape or form. I'd rather have a higher quote that was guaranteed than a lower one that wasn't, and I strongly suggest you adopt that attitude as well. For an illustration as to why: If the quote is guaranteed, there's no incentive to stick you with a rate an eighth of a percent higher so they can make a little more money - they're going to have to make it good. There's no incentive to pad the closing costs with junk, because they've got to turn right around and give it back to you. If I offered you a choice between two envelopes, one transparent where you can see the $100 bill (guaranteed), and the other one opaque where I told you there might be anywere up to $110 in it (not guaranteed), which envelope would you choose? The same thing applies to whether the loan is at 6.5 percent with no points and no more than $3400 of closing costs guaranteed, or 6.375% with no points and no more than $3000 of closing cost, but not guaranteed. From my experience, the first quote intends to deliver a better loan than the second quote.

So (if you can't find someone who guarantees their quotes) how do you force the loan provider to deliver the loan they told you about in the first place? You can't. But you can give them a better reason to do so, if you have more than one loan ready to go. This gives you a third option. Your options are not limited to signing the first set of loan documents they put in front of you. You can sign the others. More to the point, because there is another loan ready to go, you can use that fact to negotiate a better deal - one that more closely adheres to what you were told about in the first place. If provider A won't do it, provider B will. If one of the two providers won't move, then the other one is likely to get your business. If the other provider gets your business, the first provider makes nothing. If they will give you the better loan, that's what you want, right? Keep in mind that if either provider actually provides the loan they talked about in the first place, you are miles ahead of the game. But this puts the power to control the transaction where it belongs, with you.

Now the loan provider is going to make money, or they won't do your loan. Judge loans by the benefits and costs to you, not by how much they loan provider is making, or whether they even have to disclose it (brokers do, direct lenders do not). The important thing to you is that you were delivered a thirty year fixed rate loan at 6.5 percent without paying any points, as opposed to 6.625% with one point and higher costs, not that loan provider A had to tell you they made $4000 by doing it while loan provider B doesn't have to tell you anything. Sounds obvious, but I have seen people who chose the higher rate at more cost for the same loan, even stuck themselves with a prepayment penalty where my loan had none, because they thought I was making too much. In point of fact, I would have made a fraction of what the other guy did make, and by the only universal measure - delivering a loan with a lower rate, lower cost, or both - I performed work considerably more valuable to my client. So don't shoot yourself in the foot like that.

Now expect to spend a little bit extra (about a $100 retyping fee, if you're the one who orders the appraisal and therefore controls it) on the second loan. That $100, together with the extra time you spend getting the other loan through, is the best, cheapest, most cost-effective insurance policy you can buy anywhere for any financial purpose. It will not indemnify you for your losses, but the odds are overwhelming that it will certainly keep you from losing several times as much, by giving the loan providers a concrete incentive to deliver the best loan they really can deliver. From my experience, and that of my clients who have brought me more horror stories than most folks believe, I would judge it unlikely that either loan quote will be as good as the loan the loan provider originally talked about, unless one company or the other guaranteed their quote, but with another loan ready to go, chances are you'll get something a lot closer to what they talked about in the first place. Even if you can find a loan provider who will guarantee their quote, a backup loan is a really good idea, because going to court to force them to deliver is costly and time consuming, and you need that loan now. The existence of the other loan is an excellent reason to actually produce that loan they talked about way back on day one, with the initial Good Faith Estimate or Mortgage Loan Disclosure Statement. Because no matter how little they make with the loan they told you about, if they don't produce it they will make nothing.

Caveat Emptor

Original here


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This page contains a single entry by Dan Melson published on July 13, 2007 10:00 AM.

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