New rules for Good Faith Estimate could help reduce closing costs

01/13/2010
In the past, reviewing and signing documents at the closing table when buying a home or refinancing a mortgage could leave some consumers with a number of surprises, including how much they might have to pay for title insurance or other closing costs.

However, a recent article in the Wall Street Journal notes that new federal regulations, as part of changes recently made to the Real Estate Settlement Procedures Act (RESPA), are designed to help prospective homebuyers and homeowners as they belly up to the table in order to close on one of the most important transactions of their lives. This help from the government comes through a new Good Faith Estimate (GFE) and HUD-1 Settlement Statement, which are both meant to be easier to understand for consumers.

"Fees were communicated in multiple ways, which adds to the confusion when comparing costs," Keith Gumbinger, an HSH Associates vice president, told the paper.

According to the Journal, the GFE has really only been an estimate of the fees, which could increase as the homeowner gets closer to closing on the property. But, since January 1, 2010, lenders have had to use the new forms, which are standardized for those who offer loans and allow for very little change in fees from the time the consumer receives their GFE to when they arrive at the closing table. Limits on cost increases can now be no more than 10% between the GFE and the HUD-1 for some items and no increases at all are allowed for others.

A number of experts have noted that there are still flaws with the new GFE. For example, Jack Guttentag, emeritus finance professor at the Wharton School, told the Journal that it still leaves open the possibility of lenders taking advantage of those who are less savvy. "There's no ready way a disclosure statement can prevent that," Guttentag said.

And though the new landscape could lead to a reduction in the amount consumers pay in closing costs, this could be short-lived. Lenders are experiencing increased costs of their own as a result of the new regulations, which require them getting new software, documents and retraining employees. These costs may eventually be passed along through increases in the fees consumers pay at closing.