California Mortgage Loan Disclosure Statement

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California has replaced the one page federal Good Faith Estimate with a two page Mortgage Loan Disclosure Statement. When I originally wrote this, I haven't seen a lot of abuses of this yet, mostly no doubt because it is so new. I didn't even know if there were solid regulations and implementation policies and standards on it yet. I hadn't seen anything from the Department of Real Estate in the mail, and all web searches (including with the Department of Real Estate) come up with is a link to various lenders online forms, not the regulations for filling it out. So I'm presuming that said regulations are similar to the federal Good Faith Estimate, especially as the only thing a recent seminar we paid for on changes in the business had to say was, "If you give the client a Good Faith Estimate, you will be held to have complied with federal regulations but not state of California regulations." All of which combined with subsequent developments to indicate that California didn't alter the existing federal standards so much as add a few more requirements, the effects of which are to leave all of the games loan providers play with the federal Good Faith Estimate intact, as well as adding a couple more. (See my two part essay on the Good Faith Estimate for a list of the most common of those games). This essay is going to concentrate on differences between the new California form and the Federal Form.

The first page of this new form is similar to the Federal Good Faith Estimate, and indeed you should refer to that article for the limitations of this page, and how little the quotes mean. The first major difference is that there is no explicit loan or rate quoted at the top, and the broker or lender must disclose whether each given cost of the loan is paid to the broker or to someone else. There is no explicit line item (as there is on the Good Faith Estimate) for "Estimated Closing Costs" to explicitly sum all of the things that are actual fees or costs of the loan, as opposed to reserve requirements or things that are your fees paid in advance, such as property taxes. Your property taxes are the same whether you have lender A, lender B, or no loan at all. Ditto your homeowner's insurance, school taxes (if any) and flood insurance (if any). Setting a form where they are part of a total to be compared, rather than apart from that total, is just offering the loan provider one more opportunity to play games or distract you from the really important information.

There is a sum of all the things the client is paying to the broker versus paid to others. I wonder if this might not backfire on the lending and packaging houses that got this part added. They're going to show a line of fees paid almost entirely to them, whereas the only things paid to or from an actual broker are origination fees (if any), processing fee (my processor works for me or for the brokerage, not the lender), and broker's rebate to client (if any, and which if it exists is something paid by me the broker to you the client - a good thing in most clients' opinion). Psychologically a telling advantage, even if it doesn't really mean anything.

At the bottom of page one, there are subtotals for fees paid to others and fees paid to brokers, and then an overall total. Then there's a section which says "Compensation to Broker," explicitly adding "(Not Paid Out of Loan Proceeds)". In other words, this isn't coming out of your pocket, although they could certainly give you better terms by reducing their compensation in the vast majority of cases. But the fact that one broker is making more than another (or is required to state explicitly what they make, whereas a direct lender or "packaging house" originating their own loans is not) does not mean you're not getting a better loan from them. Some brokers get discounts others do not. Some brokers disclose honestly and completely, others do not. Examine the loan you are getting - all of the terms, rates and conditions, and decide based upon those which loan is better. That's what makes a difference to you. The rest is a matador's red cape - a distraction from what is important. For instance, I have both correspondent lines (where my company funds the loan and immediately sells it to the lender who underwrote it) and broker lines (where we originate, but the lender funds it themselves). The major difference between the two is that with the correspondent lines, not only do we make more, but what we make is undisclosed because it isn't yield spread, but rather income from selling that loan on the secondary market. But if the client pays attention to what is important to their own bottom line, which is to say type of loan, interest rate, and total cost, disclosure of additional compensation is just unimportant to them.

Once again, this isn't important to you, the client, but it has in passing performed a service to many workers in the loan industry. Many lenders give bigger brokers a volume rebate, over and above the basic per loan rebate, and the brokers were keeping this a secret from even their own workers lest they have to increase compensation. Now these brokers have to disclose it to the clients. This means the brokers have to tell the loan officers about it so they can disclose it. Now that all loan officers know about it instead of only a few, those who are high producers and have leverage can say, "I'm helping you make all this money. I want part of it."

Page two of this two-page form starts with section I, which is a short accounting of the money. My advice is not to trust this any more than anything on the Good Faith Estimate. In other words, whether this is accurate is likely to be a function of your particular loan officer's good will more than anything else. Once again, the only form where there are real penalties for being inaccurate is the HUD-1, which comes at the end of the loan, not the beginning. But it's a good intention, nonetheless, and perhaps one of these years it'll actually mean something even if your loan officer is Simon LeGreedy or has a nose fourteen miles long. Proposed loan amount less costs, less other stuff of yours that's getting paid off, less the purchase price of the home or payoff of existing loan. The idea is to give you an explicit "you're going to get this much cash" or "you must pay this much cash to make this balance"

Section II is something I want to draw your attention to: Proposed interest rate is a good thing to have, although there is no more guarantee that this is the rate you're going to get than a federal Good Faith Estimate. But it has a choice of two things to check off "Fixed Rate" or "Initial Variable Rate". Just because Fixed Rate is checked does not mean the loan they are discussing is fixed rate for the full duration of the loan. Let me repeat that: Just because Fixed Rate is checked does not mean the loan they are discussing is fixed rate for the full duration of the loan. It might be fixed for thirty years - or it might be fixed for three months. This is a good place for unscrupulous loan officers to offer misleading information verbally, while checking the correct box doesn't usually mean a whole lot.

Section III is proposed term of the loan. If something less than 360 months is written here (or whatever the amortization of the loan is in years), it's telling you there's a balloon at the end. Once again, there is no way to verify that if 360 months is what is written, it's real.

Section IV is proposed loan payment. Ideally it's computed based upon the amounts given in the previous three sections. Verify that it at least makes mathematical sense by running these numbers through an amortization calculator, or doing the calculation yourself. Many loan officers will play games with the payment because most people shop loans based upon payment. Never choose a loan based upon payment. It's too easy to promise an unrealistically low one, or bait a really nasty trap that doesn't spring for a couple of years with low payment.

Section V: does the loan have a prepayment penalty, and on what basis? I'm glad to see this section here. I'll be even gladder if and when I see evidence the answers mean anything in the sense of legal penalties for lying. Lying about prepayment penalties has been rampant for a long time. Lying about prepayment penalties is a good way to make an absolutely awful loan look pretty good. Lying about prepayment penalties gets someone to sign up with the loan provider who lies because of this. And when you find out at the end of the loan process, when they present the loan documents, that they were lying (if you even notice, which many are expert at making sure you don't!), you may not have any good alternatives to signing those documents anyway.

Section VI basically tells you the lender cannot require credit life insurance or disability insurance. Many lenders would if they could. Not that disability insurance is a bad idea - quite the opposite in fact (I'm of two minds on credit life insurance, and this is not the place for that essay).

Section VII requires you the client to tell them, the lender about all the other liens on the property and hints at penalties for dishonesty. Not that the lender or broker is going to take your word for it, of course. But the gall this amazes me: requiring a consumer to be accurate on this or face penalties, pay for the loan, etcetera when many brokers and lenders could submit the form to the Pulitzer committee for consideration in the category for best short fiction.

Section VIII is about Article 7, which covers loan amounts so small as to be irrelevant for all practical purposes in California. There's also a bit about whether or not a broker is lending their own money. This is potentially both confusing and interesting, but beyond the scope of this essay. It's good that they are requiring license numbers now. In California, you can easily look them up for past violations online at http://www2.dre.ca.gov/PublicASP/pplinfo.asp (many other states have similar registries). Not that someone without past violations is pure, and not that someone with them necessarily intends to do anything dirty to you. But it's good information to know. Another good place to check them out is with the Better Business Bureau, which compiles information on every business, members or not, at http://www.bbb.org/ You'll need a business name and address, phone number, or web site. Now, if they've got one strike against them, they could easily have been caught in circumstances beyond their control. But a pattern of abuses is a clear warning. When I originally wrote this, I had just decided to risk $50 for a business card order with a company that has a truly awful rating BBB rating. The cards arrived two days later and I couldn't be happier with any aspect of the transaction. But my next order from them won't be any bigger until they have established a track record with me (and also I with them so they can see a long history of orders they want to keep coming, and which will stop if their service isn't satisfactory).

Section IX explicitly tells you, the client, that this is not a loan commitment. This is good, so far as it goes. I've spoken to many otherwise intelligent people who somehow had acquired the idea that because a loan provider filled out a Good Faith Estimate, it meant the loan was a Done Deal. It most certainly does not mean anything of the sort. No real estate loan officer EVER writes a loan commitment, and it's been that way for at least a couple of decades. Loan commitments are the exclusive province of the underwriter, who is intentionally and for anti-fraud reasons isolated from the client (i.e. the underwriter is not allowed to communicate with you directly). The most an ethical loan officer will say is "my experience does not show me anything that should cause you to have a problem"

Now, here's the rub, and an indication of what this section really should say. Does it not stand to reason that if the loan is not a Done Deal at all, it most particularly is not a done deal on the exact stated terms? This form is supposed to be an estimate. It may be a good estimate, given on a loan that has already been locked. Or it might be just a convenient fiction that gets you to sign up with that provider. There is no way to be sure it's good until you get the HUD-1 at the end.

Caveat Emptor

Original here


(Amalgamated with my article on the Good Faith Estimate at Dan Melson's San Diego Real Estate and Mortgage Website)

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About this Entry

This page contains a single entry by Dan Melson published on November 5, 2008 7:00 AM.

How Much Down Payment Do I Need and How Do I Get It? was the previous entry in this blog.

Understanding Loans: When There Is A Problem, It's Good If They Tell You Right Away is the next entry in this blog.

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