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Getting a good faith estimate

Dear Dr. Don,
My mother received a solicitation from her mortgage company asking her if she would like to refinance her loan. But in order for her to have the application processed, she must send in a nonrefundable $400 fee. She was refused a Good Faith Estimate prior to the payment of this fee. Is this legal? Many thanks for your time.
Jim Jurisdiction

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Dear Jim,
Lenders have to comply with the Real Estate Settlement Procedures Act (RESPA) when it comes to providing a Good Faith Estimate (GFE) of closing costs on a mortgage. The following is excerpted from the Department of Housing and Urban Development's Web site:

RESPA REQUIRED DISCLOSURES:

At the time of loan application
When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers:

  • A Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only).
  • A Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use a particular settlement provider, then the lender must disclose this requirement on the GFE.
  • A Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution.

If the borrowers don't get these documents at the time of application, the lender must mail them within three business days of receiving the loan application.

If the lender turns down the loan within three days, however, then RESPA does not require the lender to provide these documents.

The RESPA statute does not provide an explicit penalty for the failure to provide the Special Information Booklet, Good Faith Estimate or Mortgage Servicing Disclosure Statement. However, bank regulators may choose to impose penalties on lenders who fail to comply with federal law. Please read the section on RESPA enforcement for more information.

What's key here is whether your mother is applying for a loan. It's reasonable for the lender to require a nonrefundable loan application fee at the time your mother applies for the mortgage loan. Applying for the loan would start the clock ticking on the lender's obligation to provide your mother with a Good Faith Estimate for settlement costs.

On the other hand, the lender should be able to give your mother a ballpark figure for closing costs on the loan without your mother applying for a loan. Neither the ballpark estimate nor the Good Faith Estimate are binding on the lender although HUD is working on changes to RESPA that will make the GFE more reliable and restrict lenders' ability to low-ball the closing costs on a loan. Ask the lender to provide her with a ballpark estimate of closing costs. If they won't, then shop their competition using Bankrate.

-- Posted: Sept. 23, 2003

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See Also
When good faith estimates go bad
What is a good a faith estimate?
Mortgage glossary
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