Overview of the Good Faith Estimate (GFE) (§3500.7)
MetFund notes: This whole section will change once the Consumer Financial Protection Bureau revises and combines the GFE and Truth-in-Lending forms.
Loan originators must provide the Good Faith Estimate (GFE) at the time of application or they must mail it within three business days after receipt of a loan application. If the applicant agrees, the loan originator may provide the GFE by facsimile, e-mail or other electronic means. If before the end of the three-business-day period the application is denied by the lender or the application is withdrawn by the loan applicant, the mortgage loan originator is not required to deliver the GFE. Estimated charges and terms must remain available for at least ten business days from the time the GFE is provided to give the borrower a chance to compare other programs. It is important to remember that business days do not include federal holidays, Sundays, or Saturdays (unless Saturday is a regular business day).
The GFE includes a reasonable, and as accurate as possible, estimate of the charges that are due at the time of closing. The estimated fees listed on the GFE include charges to the borrower for loan origination, property appraisal, credit reporting, title insurance and recording the mortgage. The only fee a loan originator may charge prior to issuing a GFE is for a credit report. Once the loan applicant has verified receipt and review of the GFE, the loan originator is permitted to charge fees beyond the cost of the credit report for origination-related services. It is important to remember that the GFE is not a loan commitment. A loan originator is not required to make a loan to any particular borrower, nor provide a GFE, if a loan is not available for which the borrower is eligible.
The Binding GFE (§3500.7(f))
A separate GFE is required for each loan transaction. Unless a revised GFE is provided prior to settlement, the loan originator is obligated to the terms listed on the GFE. If a revised GFE is provided, documentation of the reason for the new form must be supplied to the borrower and retained by the loan originator for at least three years after settlement. If ten business days have passed since the issuance of the GFE and the borrower has not expressed interest in continuing with the application, the loan originator is no longer bound by the GFE.
Interest Rate (§3500.7(f)(5))
If the borrower has not locked the interest rate, or a locked interest rate has expired, the charge for the selected interest rate, adjusted origination charges, per diem interest, and interest rate-related loan terms may change. If the interest rate is locked at a later time, a new GFE showing the revised interest rate-related charges must be provided.
New Home Purchases (§3500.7(f)(6))
In the case of a new home purchase in which settlement is anticipated later than 60 calendar days from the time the original GFE is provided, the loan originator may provide the borrower with a clear disclosure that a revised GFE may be issued before the 60 days prior to closing has expired. If the loan originator fails to issue this disclosure, a revised GFE may not be issued.
Under RESPA, disclosure requirements are triggered by receipt of a completed application. It is important to note what constitutes an application for the purposes of disclosing the Good Faith Estimate within three business days of application.
The term “application” is defined as the time when a borrower submits a specific set of financial and personal information in anticipation of a credit decision for the purposes of obtaining a federally related mortgage loan. The specific information referred to in the definition includes six pieces of data:
- The borrower’s name
- The borrower’s monthly income
- The borrower’s social security number (for the purposes of obtaining a credit report)
- The subject property address
- An estimated value of the property
- The loan amount
Once a loan originator is in possession of these six pieces of information, the loan application is considered received. It is possible to provide a GFE even if the loan originator is not in possession of all six pieces of information, although according to the RESPA Frequently Asked Questions, “If a loan originator issues a GFE, the loan originator is presumed to have received all six pieces of information.” Regardless of how these provisions are observed, loan originators are required to apply their policies consistently when issuing GFEs.
The RESPA FAQs provides an example of issuing the GFE even though the property address has not been identified. This is considered acceptable, but it should be noted that receiving the property address after issuing a GFE is not considered a changed circumstance that would allow a revised GFE to be issued. Changed circumstances will be addressed in a subsequent section of the course.
Completing the Good Faith Estimate (GFE)
The Federal Code of Regulations contains within its Appendix C specific instructions on completing the GFE for the benefit of the loan originator. The information on the GFE may be completed by hand, typewriter, computer, or any other means as long as the form can be legibly read. We will review the document each section at a time.
The top of page one of the GFE contains basic information including the business name, business address, phone number, and email of the loan originator, as well as the borrower’s name, the property address and the date.
Purpose, Shopping For Your Loan, and Important Dates
Below the basic information, the purpose of the form is briefly described as well as a statement on “Shopping For Your Loan.”
The section of the GFE entitled “Important Dates” outlines deadlines after which the loan terms may not be available to the applicant and is discussed in more detail in the section of this course entitled Important Dates. Line 1 requires the loan originator to state the date until which the interest rate on the GFE will remain available and a statement that the rate may change after this date if not locked by the applicant. The date in which all other settlement charges will be available through must be at least ten business days from the GFE date and is found on Line 2. Line 3 lists the number of calendar days the applicant has to settle from the time the interest rate is locked. The loan originator must note how many calendar days the interest rate will be locked prior to settlement in Line 4.
Summary of Your Loan
The first three lines of the section “Summary of Your Loan” require the initial loan amount, the loan term, and the initial interest rate.
The next line asks for the initial monthly amount owed for principal, interest, and mortgage insurance, which must be the greater of the required monthly payment for principal and interest for the first scheduled payment plus monthly mortgage insurance, or the accumulated interest for the first scheduled payment plus any monthly mortgage insurance.
On the following line, the loan originator must indicate whether the interest rate may rise, include the maximum rate to which it may increase, and when the first change may occur.
Line 6 asks, Even if you make payments on time, can your loan balance rise? If the answer is yes, the loan originator must list the maximum amount possible that the balance may rise to over the life of the loan, unless the reason for the increase is solely due to escrow items being paid through the loan balance.
Loan originators must answer on Line 7 whether the monthly amount owed for principal, interest, and mortgage insurance may increase if payments are made on time. Again, there is a box to check yes, with an explanation including when the first increase could occur, how much the new monthly payment could increase to at the time of the first change, and the maximum amount the payment could potentially cost over the life of the loan. When determining the monthly amount owed, the greater of the required monthly payment for principal and interest for that month plus monthly mortgage insurance, or the accrued interest for that month plus monthly mortgage insurance must be used.
The next line asks if there is a prepayment penalty, and if so, the maximum it could be.
The last line of this section asks whether the loan requires a balloon payment, and if so, the payment amount and the number of years it will be due.
Escrow Account Information
In this section, the loan originator must include whether an escrow account is being used. There is also a space to include the monthly amount determined in the “Summary of Your Loan” section.
Summary of Your Settlement Charges
Loan originators determine the adjusted origination charges from subtotal A (page two) and the charges for all other settlement services from subtotal B (page two). The total estimated settlement charges are determined by adding subtotals A and B together.
Understanding Your Estimated Settlement Charges
Within this section, 11 settlement cost categories are outlined. In order to determine compliance with tolerances, the GFE amounts should be compared with any total amounts on the HUD-1 in the borrower’s column and amounts paid outside of closing by the borrower.
Your Adjusted Origination Charges
Block 1 of this section requires the loan originator to list all charges any loan originators involved in the transaction will receive, excluding any charge for the specific interest rate chosen. There is zero tolerance for this amount. Origination charges should not be itemized on either the GFE or the HUD-1. The exception would be instances where a state or government program requires itemization.
Block 2 is required for transactions involving a mortgage broker. This is an area of zero tolerance in which the broker must indicate his/her credit or charge for the specific interest rate chosen, or in other words, the net payment to the broker from the lender. Only one box can be checked:
- Box 1: There are no additional charges or credits for the specified interest rate
- Box 2: The lender is providing a credit to cover origination or other fees, or the broker is receiving a credit or other payment from the lender
- Box 3: There are loan origination fees or points for the specified interest rate
Positive net payment indicates a credit to the borrower and is entered as a negative amount, while negative net payment means a charge to the borrower and is entered as a positive amount. If there is no net payment, the broker must fill in “0” and has the option to check the box for credit of “0” or charge of “0.”
If a broker is not involved in the transaction, the lender is not required to separately disclose any credit or charge for the chosen interest rate, however, if there is not a negative or a positive figure, the lender must check the first box, insert the interest rate, and “0.”
Line A is determined by adding together the figures for Blocks 1 and 2. Again, this figure is subject to zero tolerance while the interest rate is locked.
Your Charges for All Other Settlement Services
The amounts listed in Blocks 3, 4, 5, 6, and 7 of this section are subject to the 10% tolerance rule when the loan originator requires the use of a specific provider or when the borrower uses a provider chosen by the loan originator. If the borrower chooses his/her own provider for the services from Blocks 4, 5, or 6, they are not subject to tolerance.
This section asks the loan originator to list each third party settlement service required, not including title services, in addition to the estimated fee to be paid to each provider. Some examples of third party settlement services include:
- Provision of credit reports
- Flood checks
- Tax services
- Upfront mortgage insurance premium
The loan originator must indicate each of the required services with a corresponding estimated fee and total the charges for this block.
The estimated total charge for all closing services performed by third party providers must be listed in this block, regardless of who selects the providers. Lender’s title insurance premiums and fees for title searches, examinations, and endorsements are included in this total.
An estimate of the charge for owner’s title insurance and related endorsements is required in this block, regardless of who chose the provider. “N/A” may be entered for non-purchase transactions.
This block outlines all third party settlement services and charges in which the borrower is permitted to select the provider. All charges should be added together with the total placed in the corresponding column.
The expected charges for state and local government fees for recording the loan and title documents are found in this block.
The “Transfer Taxes” block includes the total estimated state and local government fees on mortgages and home sales based on the proposed loan amount or sale price.
Block 9 contains the estimated total that the borrower will be required to place into escrow to be applied to property taxes, insurance, and other charges. Boxes must be checked to indicate what charges the escrow will cover. If only a portion of the property taxes or only one type of insurance, for example, is covered, the loan originator should check “other” and provide an explanation.
This block outlines the expected daily interest charges beginning with the settlement date until the first day of the first period covered by scheduled mortgage payments. The amount of interest charges per day and the number of days based on the projected closing date are used for this calculation.
The last block in this section contains information regarding homeowner’s insurance. Any type of required insurance, such as fire or flood, should be listed in this section along with the charge.
The total of all charges listed in Blocks 3 through 11 are added together and listed in Line B. This number is the estimated total for all other settlement charges.
The totals for Line A and Line B should be added together to give the total estimated settlement charges.
Page Three: Instructions
Understanding Which Charges Can Change at Settlement
This section does not require any information to be filled in and describes which charges can and cannot change at settlement.
Using the Tradeoff Table
The purpose of this section is to provide a borrower with information regarding the relationship between the total settlement charges and the interest rate and resulting monthly payment. The left-hand column includes totals from page one: the loan amount, interest rate, monthly payment, and total estimated settlement charges. There is an option for the loan originator to provide the same information for two loans- one with a higher interest rate and one with a lower interest rate. The alternative loans must use otherwise identical information such as number of payment periods and loan amount. The loan originator must review the alternative amounts with the borrower including the changes in monthly payment resulting from the changed interest rate. If the borrower decides that the alternative loan is a better fit, a new GFE may be requested and must be provided by the loan originator.
Using the Shopping Chart
This section, unlike others on the GFE, is available for the borrower to complete. The “Shopping Chart” allows a comparison of terms from multiple loan originators in order to help the borrower find the best loan available. There is also a statement in this section that says, “Some lenders may sell your loan after settlement. Any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement.”
Responsibility for Issuing the GFE
Prior to the most recent amendments to the RESPA Final Rule, the mortgage broker was ultimately responsible for issuing the GFE when the broker originated a loan. However, under the amendments which became effective in 2010, lenders are ultimately responsible for ensuring the borrower receives the GFE. This does not mean that brokers are prohibited from issuing the GFE.
HUD’s stance on the GFE is that the initial GFE provided by any loan originator in a particular transaction is the binding GFE. The RESPA Final Rule defines the term loan originator to mean “a lender or mortgage broker.” (24 CFR 3500.2(b)) If the lender allows a broker to issue the GFE, then the lender is accountable for that version of the GFE. However, if the lender does not allow the broker to issue the GFE, then the lender is responsible for generating the GFE within three business days of the date the application is made to the broker.