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Making Good on the Good Faith Estimate
Problems on the Good Faith Estimate are common. In fact, the GFE is high on the list of the top ten violations. Why is something that is an estimate made in good faith such a problem? Many loan officers believe that the real problem is nothing more than nitpicking. But in our business, nitpicking can be very real.
There is no way to solve the GFE problem without training. There are simply too many little tricks in what it takes to get the GFE right. An estimate ought to be simple, but where RESPA is concerned, nothing is simple.
Use a training session with your lending staff to cover the key points of the GFE, as outlined below. Use your bank's forms as handouts. Send staff back to their jobs with an example of a correctly-completed GFE.
GFE Training Tips
- The GFE is just what it says. It is an estimate of settlement costs and the estimate is made in good faith. Estimates are not necessarily exact. Things can change between application and settlement. That is where the good faith part comes in.
- Making an estimate in good faith means that the estimator tries very hard to get the estimate as close as possible. This does not mean dead-on accurate; it means close.
- Good faith also means close based on what is known or reasonably assumed when the GFE is prepared. Things can change. Every now and then there is a surprise. But any accuracy measurement of the GFE should be based on what was known or reasonably assumed at the time the GFE was prepared.
- The GFE should include everything that will appear in Section L of the final HUD-1 or HUD-1A. Basically, this means all of the settlement service costs and not costs related to the sale. Financing and sales costs will appear on the final HUD-1 and be taken into account in the Truth in Lending disclosures. But for the GFE, we are concerned about the costs of settlement rather than the costs of credit.
- Items in Section L of the HUD-1 are everything on the second side of the HUD-1. This includes broker fees, points and other fees based on the loan, odd-days interest, insurance premiums, escrow payments, and fees for title and lien perfection.
- The GFE should include the borrower's hazard insurance, even when the borrower already has the insurance, as in the case of a refinancing.
- RESPA assumes there are settlement costs even when there are "none" as in a no-closing-cost loan. The GFE and the HUD-1 should show all settlement costs, regardless of who pays them and when they are paid.
- Costs that are based on the loan amount may be shown as a percentage, such as "1% of loan." You are free to assume that the borrower can calculate 1% of the loan amount.
- Costs may also be shown as ranges when precise amounts are not yet known. But the ranges should be reasonable and realistic. For example, estimating hazard insurance as "$400 to $600" is reasonable. Estimating insurance to be "$250 to $1,000" is too big a range.
- Base all costs on costs that are typical in your market.
- Fees paid by the lender should be identified as "paid outside of closing." Go ahead and take credit for it and say "paid outside of closing by bank."
- The lender should prepare the GFE. Yes, if there is a broker involved, the broker was supposed to give the applicant a GFE, but it isn't a good idea to rely on that.
- The GFE is due to the customer either when you take the application or within three days of taking the application. You meet this timing requirement if you get the GFE in the mail within three days of taking the application.
- There is no signature requirement for the GFE. Many banks have procedures which call for the applicants' signatures on the GFEs. This is a precaution but not a regulatory requirement.
Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 2, 2/01
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