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 Jan. 1, potentially disrupting home sale closings.
The new procedures developed by the U.S. 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 U.S. mortgages, has been updated for the changes, he said.
"This is a mess," said Bill Dallas, chief executive officer of Skyline Financial Corp. in Calabasas, California. As an industry, "it's like we've read about this earthquake thing and are thinking, 'We ought to do something.' That's where we are."
To get ready, Fairway Independent Mortgage spent tens of thousands of dollars in technology, legal and other costs, said Dan Cutaia, president of the Frisco, Texas-based lender. Cutaia has set "audit checkpoints" as checks on business partners and to prevent problems with disclosures that could taint his ability to sell the loans he makes.
Common questions from loan officers include whether a good faith estimate must be generated with a loan prequalification and what information is required from the borrower before the document can be generated, First Secure's Rice said.
Brokers have the additional challenge of explaining their fees, which are singled out in the new estimate, even though final origination costs may be identical under a bank-led origination, said Fred Arnold, a broker with America Family Funding in Stevenson Ranch, California.
Big lenders with more resources may be in better position to handle the changes, adding to advantages that have helped their retail channels gain market share, analysts said.
Wells Fargo, the largest U.S. lender, said it is ready after making "a real commitment" to adapt its systems and speak with real estate and settlement agents who will help inform customers about possible impacts on loan-processing timelines.
The new forms "should help borrowers avoid surprise charges at settlement, give them the ability to competitively shop for the loan, and, ultimately, help them feel more comfortable with their final decisions," a spokesman said.
This month, HUD stepped up its efforts to educate the industry about the changes with online presentations. It is making headway, though communication between lenders and settlement agents could cause problems initially, said Vicki Bott, HUD's deputy assistant secretary for single-family housing.
RESPA reform is part of a larger movement to boost mortgage regulation. Also this year, all mortgage loan originators must be tested and registered in 2010 under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008.
"Everyone is trying to do the right thing for the consumer, and I'm all for that, but this is overkill," said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York. "I think some new disclosures will confuse people."
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