Disclaimer... this may seem a bit long, but its well worth the read if you are not totally familiar with the new changes that take effect January 1, 2010.
I will tell you that I do not cover all of the changes, but I did want to touch on some important things that effect how a Loan Officer / Mortgage Broker receives compensation. The changes that are occurring January 1st due to the new RESPA/REG X guidelines are not just changes to the physical GFE Form. This post is not a RANT. I wanted to clarify something because it MAY effect your relationship with your Loan Officer.
There have been many posts recently that discuss the changes to the Good Faith Estimate itself. Yes, that is very important because the form itself is completely different. I understand the purpose of trying to make the changes, although I do not see how its easier for the consumer. Again, this is not a rant, so I will move on to my point. I did not see many of these posts address some other important changes that will effect how a Loan Officer provides a standard quote.
- The borrower will need to know prior to loan submission whether they want to pay Discount Points (lower rate), Standard Fees (flat rate), or No Fees (higher rate). Once the GFE has been accepted, fees can not change (very little tolerance) unless there is some sort of act from God that causes the change.
Let me explain further by first providing you with an example:
A borrower calls in and wants a quote for a purchase. The quote is for a $300,000 loan for 30 years. The loan officer provides a few quotes, all on GFEs so the borrower can clearly see the fees, rate, and payment. The below quotes are based on the customers credit, DTI, and down payment. Here are the examples the LO uses:
- 4.5% with 1% origination and 1% discount
- 4.75% with 1% origination and no discount
- 5% with no origination and no discount
- 5.125% with no lenders fees (no orig, no discount, no processing, no underwriting, etc)
In today's environment, the Loan Officer can lock in the rate and move forward with one scenario. Let's say the borrower originally wanted to go with the 5% option (no orig, no discount). All paperwork provided to the lender would be focused on the fees and rate for a 5% rate. Two weeks later, the customer realized that he would receive a decent bonus check at the end of the year. So, he wants to go ahead and switch the rate to 4.5% and pay the 1% orig and 1% discount. No problem! This is an easy change. New GFE signed by borrower, new TIL, updated 1003 and 1008, and send it off to the lender for revisions. ** Please note that I am talking about going with the original fees the customer was aware one day one, not adding any additional 'non-sense' fees that were not originally discussed.
Now let's move this ahead and say the borrower calls on January 2, 2010, after the new regulation changes...
Same loan scenario, same options provided above. The customer is provided QUOTES instead of a written GFE. Once a GFE is issued, this is the GFE that is used moving forward. Knowing this, the customer has to know now which loan scenario he/she wants to move forward with. Let's again say that the borrower chooses the 5% option (no orig and no discount). Again, they call and change their mind. They want to move forward with the 4.5% and pay the discount point.
UH OH!! This is now a problem. Why? Well, I can no longer add the 1% origination fee, or a broker fee. I can however add the discount fee with no problems because the borrower changed his/her mind about the product. But any fees that go back to the broker can NOT be adjusted. Not even a little. With no origination fee, how is the broker going to get paid on the loan? Oh, thats right... he/she wont get paid.
Before I tell you how the LO may handle it, let me give you the reverse scenario... Let's say the borrower originally wanted the 4.5% rate. Within that quote, the broker would disclose the YSP (Yield Spread Premium... aka 'the money the lender pays us based on rate quoted' minus any scenario deductions (LTV/FICO)). On this deal, there is not YSP because the customer is paying a Discount Point to lower the rate. When the customer calls in and wants the 5% rate with no origination and no discount point, the Loan Officer/Broker is left with ZERO YSP and ZERO Origination. So, no income for this loan.
So, how would this be handled? First, let me clarify that I am not telling you to provide inaccurate quotes. I'm also not telling you to mislead the borrower. My first suggestion is make sure the customer has agreed to the original scenario. Don't allow the changes to take place after the file has been submitted. In most cases, the customer knows which direction they want to go. Either they pay less fees and higher rate or higher fees with the lower rate. Make the choice and then move forward.
But if you happen to have a borrower that WANTS the option to change their minds, then you will need to over quote them. With that being said, this means that all scenarios above would quote a 1% origination and a 3% YSP. Your customer may not appreciate seeing these fees, but its the only way that the Loan Officer / Mortgage Broker will be able to ensure they get paid no matter what loan scenario the customer chooses. You may also need to use this scenario if you are FLOATING the rate. ** Just a suggestion for this specific scenario and should not be the 'norm' **
- As for the other changes according to RESPA / REG X, they are specific to fees associated to the loan. For example, all service provider quotes only have a 10% tolerance. This includes Title, Appraisal, Survey, Inspection, etc. Anything over 10% will be paid by the broker.
Personally, I see this change as a huge benefit. This eliminates all of the erroneous quote that I have been competing against in the past. Too often a competitor will under estimate fees to look cheaper. If that happens moving forward, the broker will have to pay the difference so the borrower is not penalized. I do feel that this change eliminates the borrower being surprised at the closing table with any/all new fees that suddenly appeared.
If you have any questions about any of the changes above, or other changes you have heard about, feel free to contact me. The above examples are just some of the changes taking place on 1/1/2010. I felt they were important to mention as it may change how Loan Officers provide quotes moving forward.
I'll help you get pre-approved for your Texas home loan and even suggest some very knowledgeable and professional Real Estate Agents in your area of choice. If you are available to talk, I am available to listen. Give me a call or visit my website for more details.
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John R Cannata P#214.728.0449
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The views expressed on this site are mine alone and do not reflect the views of my employer.