The biggest changes to home loan disclosures since the 1970s are around the corner and many in the industry are warning that misunderstandings will create a logjam of confusion just as housing tries to recover. A complete overhaul of the "good faith estimate" - a standard disclosure document sent to borrowers - under the Real Estate Settlement Procedures Act, known as RESPA, will take effect on January 1, potentially disrupting home sale closings.
The new procedures developed by the US Department of Housing and Urban Development come after years of attempts to improve transparency on costs associated with closing a loan, including broker fees, and prevent the kind of surprising jumps in payments that made the housing crisis worse. While the thrust of the rules is understood, there is widespread trepidation about how to put them into practice.
Changes that expand a one-page form to three have been the subject of countless hours of debate for banker and broker groups that question the benefits to consumers. Disputes aside, the rules must now be implemented. Much of the industry is still trying to understand what must be disclosed - and how and when.
Bob Rice, president of First Secure Financial in San Bernardino, California, was astounded by what he heard at a brokers' meeting last week. "The confusion and misunderstandings over RESPA is worse than I thought," said Rice, who sought more education. "Of the 20 or so in attendance, each had a different interpretation of at least one item."
The new estimate details and defines loan terms and costs, versus undefined line items in the old one. It specifies rate, whether the rate can change, and encourages the borrower to shop around. For the first time, good faith estimates must match, with few exceptions, costs on closing statements. This means more work and liability for lenders since inputs of lawyers, title companies and brokers increase chances for error.
Lenders are looking for more precision than ever from HUD on the guidelines since the estimate puts them on the hook if closing costs vary. Reflecting the uncertainty of lenders and settlement agents, frequently asked questions on HUD's website have soared to 253.
"It's a document that just keeps growing, and we're in the final hours of people getting ready," said Jonathan Corr, chief strategy officer at Ellie Mae in Pleasanton, California. The company's loan software, which is used to originate 20 percent of US mortgages, has been updated for the changes, he said.