Can a new form make a bad lender good?

SmartMoney.com published New Rules Help Borrowers at Closing today.   The gist of the article is that as of January 1, 2010 mortgage lenders are required to use a new form when providing their prospective borrowers a Good Faith Estimate of transaction costs, and that that form will prevent surprise changes in closing costs late in the process.  I disagree.

First, the GFE is not a new disclosure.  It has been required for years when lenders made loan commitments.  Yes, a new GFE form is required this year, but the most common comment I hear from real estate and mortgage professionals is, “It would have been nice if they asked somebody in the business to help create this form.”  Yes, the new form makes it easier for consumers to compare the total cost of credit among several competing lenders.  It does not outlaw incompetence or lack of attention to detail, however.  Lenders who were committed to professional service never had any problem with disclosing costs accurately anyway.  Those that failed to do so in the past will not be taken under control by the existence of a new form.

Instead, the Housing and Economic Recovery Act of 2008 established the framework under which lender disclosures are now regulated.  Lenders are required to issue GFEs with loan commitments, along with the Truth In Lending disclosure which has also been around for many years.   Then, if transaction costs change more than HERA allows before closing, those costs must be re-disclosed and closing must be delayed.  HERA doesn’t do anything to force inattentive or unprofessional lenders to improve the quality of their disclosures, and it doesn’t necessarily create an “out” for buyers who find in re-disclosure that their closing costs are higher than expected.  In Texas, anyway, the sale contract imposes on the buyer a deadline for giving written notice if the promised loan cannot be obtained, and calls for forfeiture of earnest money if the buyer fails to complete the transaction as contracted.   A re-disclosure of costs the day before closing makes it impossible for the buyer to say “okay” and proceed.  HERA requires that closing is rescheduled, imposing hardships — and potentially contractual liabilities — on buyers with expiring leases and sellers who are relying on the scheduled proceeds to complete their own obligations in other transactions.

The new GFE form may well squeeze many or most mortgage brokers out of the business because yield spread premiums and transaction/processing fees will be presented more consistently and transparently.   (Under the heading of “you get what you pay for,” some brokers are worth every penny of their fees.)  Just requiring a new form, however, will not create professionalism where it did not exist before.    The market — i.e., informed consumers — will still determine which lenders survive over time, exactly as it should.