The national trade organization representing mortgage brokers has come out in favor of reforms that could help large numbers of home buyers and refinancers through the often-confusing loan closing process.

The National Association of Mortgage Brokers wants federal regulators to impose new, stringent rules on the accuracy of real estate settlement "Good Faith Estimates" (GFEs). Anyone who applies for a refinancing or a new mortgage is entitled under federal law to the lender's "good faith" projections of the settlement costs anticipated in the transaction.

The GFE is required to be delivered to borrowers within three business days of their application. Typically the disclosures cover all the major costs: Loan origination fees (application, loan discount "points,"processing, credit, appraisal), title search and insurance charges, plus property tax and hazard insurance reserves.

The purpose of the congressionally-mandated GFEs is to prevent last-minute surprises on the types and total costs the borrower will be expected to pay at settlement. But there has long been a consumer problem with these disclosures: Lenders and brokers know that no federal agency has legal enforcement authority to police the accuracy of the estimates. In a competitive market, unscrupulous loan officers can "lowball" their closing estimates to pull in applicants, and then present them with a take-it-or-leave it proposition at settlement: Pay our higher fees or blow up the whole financing.

For example, a California home buyer complained to a large national lender that the estimated closing costs he received from a broker were $2,200 below the actual charges at settlement. The consumer threatened to complain financial regulators about the "bait and switch" until the lender agreed to make up the difference.

Industry experts agree that most low-balling on GFEs goes unchallenged. The federal government agency that oversees real estate settlements, the Department of Housing and Urban Development (HUD) cannot sue or prosecute even the most flagrant low-ballers.

"There's a loophole (in the law) about a mile wide here," says a prominent Washington real estate and mortgage attorney. "It's almost a case of anything goes that you can get away with."

Now the 12,000-member National Association of Mortgage Brokers wants HUD to close that loophole by asking Congress for an amendment to the law, and by mandating limits beyond which settlement cost estimates could not change without a new disclosure.

The mortgage brokers' proposal is part of a package of recommendations to HUD Secretary Mel Martinez, who is currently studying ways to improve settlement-cost disclosures.

Joe Falk, president of the mortgage brokers' association, told Realty Times that "there are horror stores all over the place," where borrowers find themselves saddled with shockingly higher closing charges than the original estimates.

"We do not think (a borrower) should face hundreds or thousands of dollars" of unexpected, undisclosed settlement charges, he said in an interview. If the loan officer encounters higher costs than originally envisioned -- for example, when a borrower's credit risk profile is worse than originally thought -- then the loan officer needs to issue a re-disclosure, a second GFE, to alert the borrower and provide a way out of the deal.

"There need to be tolerance levels, set by HUD," said Falk. Anything beyond the tolerance limit would trigger the legal requirement for a re-disclosure. For instance, a $250 estimate for an appraisal that ballooned into a $400 charge on the settlement sheet would not be permitted without a re-disclosure. Ditto for large, unexpected points and loan fees in connection with the borrower's credit risk. Smaller variances -- below the item by item tolerance limits to be set by HUD -- would not require a new GFE.

Not only is there a need for greater clarity in GFE disclosures, said Falk, "but let's face it, we need to be fair to the consumer. There shouldn't be big surprises on the settlement sheet."

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