Wednesday, March 3, 2010

"American Banker" Asks The Mortgage Experts

American Banker needed some insight into the new Real Estate Settlement Procedures Act (RESPA) and how it affects loan pre-approvals, so they gave us a call.

There is a RESPA requirement prohibiting lenders from withholding a Good Faith Estimate from their clients simply because the borrowers have not provided supporting documentation (pay stubs, for example) for the financial information they have given the lender. Many lenders are confused because they haven't actually read the law they are so quick to criticize. Imagine that!

The end result is that some lenders are either hesitant to provide or refuse to provide borrowers and real estate agents with pre-approval letters, which tell everyone that they are not wasting their time by looking at houses that are out of the borrower's price range.

Of course, this is nonsense. Nothing in the new RESPA law prohibits pre-approvals.

Here are some excerpts from the article that was published on Feb. 24:

HUD (Department of Housing and Urban Development), in an update last month to the (RESPA) 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. "If I tell a borrower that I need their original W-2's and pay stubs before I can give them a Good Faith Estimate, the less-educated borrower will then believe they must buy their loan from me."

"We cannot force the borrower to provide documentation before issuing a Good Faith Estimate," he said, "but it doesn't say we can't ask them for their income, assets or anything else" and then run that information through underwriting software. (A person is considered to be "preapproved" if the lender runs a borrower's information through Fannie Mae's or Freddie Mac's automated underwriting system.)

Moreover, Thomas said, if it turns out the customer misstated their income, that is considered a "changed circumstance" and the lender is allowed to change the good-faith estimate once it gets documentation.

Preapprovals are not to be confused with prequalification letters. These are nonbinding, back-of-the-envelope calculations of what a borrower might be approved for based on verbal information, and they have fallen out of favor because of market changes.

During the housing bubble, Thomas said, lenders got into the habit of giving out pre-qualification letters to anyone, "because everything got approved anyway."

"A preapproval letter means something, because you have to put in accurate information," he said. "A 'pre-qual' letter is almost useless these days, because the underwriting guidelines change so frequently."

This article is one more example of how the national publications rely on us for accurate mortgage information. There is a reason we are known as The Mortgage Experts. We are very good at what we do!

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