bank error in your favor, collect $200 [$17,000] / the new Good Faith Estimate for mortgages

one happy surprise at closing (for buyer)
Let’s go into the weeds a bit, into the minutia of mortgage lending, a trip occasioned by a note I received from a Manhattan mortgage broker about a client whose lender had to pay the borrower $17,000 at a closing.

Long story, short: the lender forgot to include the "mansion tax" on the Good Faith Estimate of closing costs and fees provided by the lender to the borrower so the lender wrote a check to the borrower to pay this tax.

long story, long
The Good Faith Estimate is a HUD form that is intended to permit borrowers to compare total costs when they shop for a mortgage (click here for the official form). Lenders are to provide it within 3 days of a loan application and are bound to this estimate for many of the closing costs that a buyer will pay at closing.

The GFE must be 100% accurate for bank fees and transfer taxes, there is a variance of 10% permitted for "required services" (such as title expenses) if the borrower uses the company the lender recommends, and the lender is not responsible at all if certain other closing costs change (see page 3 of 3 of the HUD GFE).

So, if the lender’s "estimate" of transfer taxes is low by a dollar (or more), the lender pays the borrower the difference, 100 cents on the dollar. Once issued, the GFE is in effect until it expires, unless there are certain "changed circumstances".

In the case addressed, the lender’s mistake in omitting the "mansion tax" from the GFE cost the lender $17,000 at a closing last week. OUCH

Whether or not the lender figured this out before closing, there is a 99.99% likelihood that the buyer and buyer’s counsel knew, as everyone knows about the "mansion tax" (except for the gremlin (human) or machine (wrong spreadsheet?) that generated that particular GFE).

I imagine (100% certainty) that this lender has already implemented procedures to prevent a category error like this from happening again. That buyer is happy about the windfall.

unintended consequences?
The new GFE rules are intended to make it easier for borrowers to compare the real dollar differences between loan and fee quotes from bank to bank. My mortgage broker source makes the argument that these rules will — in fact — cause banks to be so conservative about the GFEs that they will not be very useful. (I.e., that banks will over-estimate costs to avoid liability at closing.) In the case of an omiited cost (as with the "mansion tax" in this April closing) this motivation simply isn’t there, but I get his point.

If this mortgage broker is right about likely bank behavior, everyone will present high-side estimates (there is no rule-based penalty if closing costs are lower than predicted), will use "worksheets" for categories of closing costs (with no guarantee about accuracy on "worksheets" under the rules), and will charge higher fees to offset the risk that they will get slammed for mistakes. If so, ultimate costs will be higher and GFEs will all be ’rounded up’ comfortably, so will be less useful for comparison shoppers.

It will be interesting to see if he is right. Certainly, banks should compete on their fees (which must be "estimated" accurately). In addition, banks that estimate other costs artificially high might (should) be punished in the marketplace if (only if) other banks try to get closer to ‘real’ estimates.

Of course, HUD (and the Justice Department) might not be happy if banks appear to collude by universally presenting squishy GFEs. That is an even weedier thicket.

credit where credit is due
My thanks to Bruce Maasbach of Luxury Mortgage for the anecdote and for his analysis.

© Sandy Mattingly 2010