There seems to be the thought, in some circles, that the new Good Faith Estimate required on all residential lending transactions as of January 1st, has somehow infused the mortgage industry with instant integrity across the board.

Nothing could be further from the truth.

There seems to be little argument that mortgage professionals could use a bolstering of their reputation and integrity, but the new GFE is not to vehicle to accomplish the task.   As the days of December clicked by and implementation of the new GFE came closer and closer, my inbox was regularly filled with lender invitations to attend training sessions on using the new form.

These invitations contained descriptions like, “we will teach you how to keep charging YSP”, and “the new rule does not mean we can’t keep charging YSP.” Some went even further by stating, “you can still charge YSP and we will show you how to get around the new rules.”

Just as the new GFE was mistakenly concocted by those without a thorough understanding of the lending process and sensitivity to the needs of the borrower, it seemed those charged with championing the implemetation of the misdirected form were also void of borrower understanding, and what’s more, didn’t seem to care about their integrity in the arena of public opinion.   The central place where borrowering customers are found and retained.

This attitude of mortgage professionals, centered around “saving our precious YSP and the ability to control the borrower”, just reinforced the untrustworthy label conveniently stamped on the industry professionals by the bureacrats and main stream media as the lending environment has deteriorated over the past couple of years.

This has been a huge lost opportunity for loan officers and originators everywhere. What should have been a huge opportunity to bring integrity and transparency to the lending process has simply been squandered.

For decades, Realtors have been totally transparent with their fees.    Sellers understand that there is a cost associated with having someone market, show and sell your property.   Borrowers would understand if mortgage professionals transparently disclosed their fees up front as well.   No one expects others to work on their behalf for free.   Hiding broker or loan officer compensation in line 2, page 2 of the new GFE is no improvement in disclosure and certainly no feather in the cap of transparency in lending.

The new mortgage disclosure form required to be used as of January 1, 2010 commonly known as a GFE (Good Faith Estimate) in my opinion doesn’t adequately accomplish Washington’s goal of complete transparency.

In a recent blog post I put on Active Rain I identified all of the fees that are charged to a borrower are lumped into one number. If all the costs that a mortgage loan originator can charge are in one number it will open up opportunities for a borrower to be confused as to what the charges amount to. Since these charges for completing a mortgage are for the most part not changeable a loan officer is going to charge as much as possible. The reason for this is, if the borrower completes the loan as quoted in the GFE it is locked in with very little variance. As an originator if the charges exceed the costs that he quoted it could cost him (the loan officer) money. Most loan originators are not going to be willing to pay to provide a mortgage for someone and have it cost him money.

Having all the charges lumped into the one line could also be confusing to the borrower. Transparancy should allow a borrower to identify all the costs in a line item format so an educated decision can be made.

With the recent Real Estate Settlement Procedures Act (RESPA) changes to the good faith estimate (GFE) effective January 1, 2010, it’s seems time for mortgage loan officers to let go of the Yield Spread Premium (YSP) dependence. For decades, real estate agents have been making their living charging a flat fee that is always disclosed up front when the real estate contract is signed by the seller. There is no mystery surrounding the fee, and the Realtor has no opportunity to manipulate or hide anything from the seller. Some loan officers have depended far too long on their ability to direct borrowers into interest rate commitments that may not have been in the optimal interest of the borrower, but certainly may have lined the pockets of the loan officer.   This is not to say that all loan officers have been lining their pockets, but the time seems to have come where full, upfront disclosure and transparency of the loan transaction details is overdue.

Loan officers can easily charge a flat fee, a fixed percentage of the loan amount, or a fee on some sliding scale based on the strength of the borrower, disclose this fee structure up front, and then allow the borrower to see the best rates the loan officer has to offer, and allow the borrower to make their own choice.   In addition, with the YSP now required to be given back to the borrower as a credit toward closing costs, if the borrower sees all interest rate alternatives side by side with the available YSP and payment information, they can make an informed and balanced choice that works best for their particular situation.   If the borrower wants a little higher interest rate that throws back a higher YSP credit to cover closing costs, let that be their decision and not left in the hands of the loan officer.   In this way, the loan officer is assured of getting paid a fair and reasonable fee for the loan, and can help the borrower make judgments that are focused away from how much the loan officer will make on the deal.

It’s seems time to release the death grip on YSP and transition to a flat fee or percentage of the loan amount fee for the loan officer that is disclosed on the front end of the transaction, not only for the benefit of the borrower, but for the reputation and credibility of the loan professional.