More fall-out from the sub-prime mortgage mess: HUD has issued new Real Estate Settlement Procedure Act (RESPA) rules. In recognition of the fact that at times consumers didn't understand the consequences or just simply didn't realize that their mortgages could result in large payment increases after just two or three years, or that other borrowers weren't informed that more affordable options were available for their high loan origination fees and closing costs, the new rules were designed to help consumers shop for the lowest cost mortgage they qualify for and to avoid unprofessional and/or unscrupulous loan officers. In a nutshell, the new RESPA rules are designed to bring to borrowers a simpler and better understanding of their loan costs so that they are able to shop more effectively for a mortgage.
The new rules will require mortgage lenders and brokers to provide borrowers with an easy-to-read Good Faith Estimate (GFE.) The GFE must clearly answer such key questions as:
- What is the term of the loan?
- Is the interest rate fixed or can it change?
- Is there a balloon payment?
- Is there a pre-payment penalty if the borrower pays off the loan early?
- What are the total closing costs?
See http://www.hud.gov/content/releases/goodfaithestimate.pdf for an example GFE.
The new rules will apply to residential mortgages, home equity loans and lines of credit, farmland that includes a home, and business loans secured by a residence. Temporary financings, such as construction loans, are exempt. Use of the GFE and a revised HUD-1 Settlement Statement is required by January 1, 2010.
The new rules are certainly a positive step forward, but unfortunately no rule can protect against sheer stupidity nor eliminate greed. People just have to be smarter about these things.