US Banker  |  March, 2010

By Kate Berry

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The new mortgage disclosure rule is upending the first step in the process of lending to homebuyers.

Before shopping for a property, a prospective buyer typically gets a preapproval letter from a lender indicating how big a loan the person qualifies for. Real estate agents often ask for these letters so they can make sure the customer can afford the property before showing it.

Before writing the letters, lenders like to see proof of income, such as a pay stub or tax return. But under the Real Estate Settlement Procedures Act rule that took effect Jan. 1, lenders may not require such documents before giving the borrower a good-faith estimate of closing costs.

Since lenders are now being held to those estimates, they want to hold off on issuing them as long as possible. So some lenders are reconsidering or backing away from preapprovals. Without them lenders could end up wasting time on loan applications that fall out.

"If you don't have preapproval letters, then Realtors are going to have to show people houses whether they can afford them or not," said David Dickinson, president of Bankers Compliance Consulting Inc. in Central City, Neb.

Vicki Bott, the deputy assistant secretary for single family housing at the Department of Housing and Urban Development, said in an interview Tuesday that lenders are not barred from accepting documents, only from requiring them prior to issuing a GFE.

"If a consumer wants to receive a preapproval they can choose to have their information verified," she said, and HUD will clarify this in future updates to its "frequently asked questions" about the Respa rule.

HUD designed the rule to prevent lowballing on fees for services required to get a mortgage, such as appraisals and title insurance. The rule forbids lenders from increasing some charges at the closing table from the numbers in the good-faith estimate and limits them to a 10 percent increase on other charges. If charges rise more than allowed, the lender must eat the difference.

"Originators are fearful of being bound to fees which are sure to change," said Kevin Marconi, the chief operating officer of United Fidelity Funding, a wholesale and retail lender in Kansas City, Mo.

A lender can run into trouble if it issues "a binding good-faith estimate with a list of charges on an unknown property," he said.

This explains lenders' reluctance to issue good-faith estimates any earlier than is necessary.

HUD, in an update last month to the frequently asked questions, said it wants to prevent "overburdensome documentation demands on mortgage applicants." That is why it won't let lenders require documents from borrowers as a condition of providing a good-faith estimate. Likewise, HUD said, lenders may not charge consumers anything more than the cost of a credit report before supplying the good-faith estimate.

Chris Thomas, owner of Mortgage Support Services, a Westminster, Colo., correspondent lender, said he understood HUD's rationale.

"The spirit of the law is to prevent borrowers from being locked in to using unscrupulous lenders who demand original copies of income and asset documentation," Thomas said.

Last week HUD held a workshop with more than a dozen mortgage lenders to answer questions about the Respa rule.

Though HUD has offered a reprieve from enforcement actions for Respa violations in the first four months of this year, lenders still must make an honest effort to implement the new rule.

A HUD spokesman said that lenders adhering to the "spirit of the law" are those that are issuing good-faith estimates.