Matters of Interest

The good news is that the system fundamentally works. The bad news is that most of the news that is printed isn't about that aspect, it's about the sensational breakdowns that are "newsworthy".

The fact is that there are adequate protections in place to inform the consumer. Likely, the protections have been over-developed and complicated as to compound the problem.

There are dusty stacks of pamphlets at offices across the country, and in peoples homes. They are produced by the writers at the FTC, HUD, and Treasury. When they are handed actually handed out, they land on top of a stack of no less than 18 other documents written in a language that most loan officers don't even understand.

The current Good Faith Estimate (GFE), contains suffcient information (when it is complete and accurate) for a consumer to make a comparative decision. The flaws are not in the formulas, but in the explanations.

Since 2000, at least, many inexperienced, sales-driven loan originators have flooded the market. Relaxed guidelines and complicated loan programs made disclosure to the lay person a real challenge, even for those equipped with the knowledge to explain.

And, yes- those consumers who really didn't want to be left out. If one lender wouldn't, another would. The consumer could be coached, or unintentionally taught how to work the system. Without guilt or remorse, but with a sense of entitlement- that for many became outrage when they ended up in default.

Wall Street and their appetite for securitizations are culpable; there are those whose practices are driven by greed; there are those who naively believed what they were told. Some in each category didn't know what they didn't know (and still probably don't). Some did.

Integrity isn't required in any profession unfortunately, because society has made this too difficult to assess and 'too expensive' to pursue. Too bad, considering the long run costs.

Consumers should demand that they understand, and should not lack the discipline to stop a process they do not understand.

If a lender simply points to the lines on the page and explains the cost the problem is less.

Realistically, the time and effort to provide a $100,000 loan is not much different than a $1,000,000 loan. This, as a result of automation & operational efficiencies and low overhead allow my company to have a set revenue ($2,500 or 1% of the loan, whichever is less). To do this also requires a reasonable profit motivation, considering most companies seek 1.5-2.5% of the loan amount as there target revenue, unless they can get more.

The current GFE allows me to disclose this as an upfront fee, or as a "rebate" from the servicing lender to whom I sell the loan. This "rebate" is referred to as Yield Spread Premium (YSP), and appears as a non-cash item in the 800 Section of the GFE. It is non-cash, because the client doesn't pay it in cash, it is paid out of the premium paid because the client takes a slightly higher interest rate, effectively financing the fee.

This isn't complicated, but it is foreign to the typical consumer. It just requires that someone explain it in plain English when pointing to the page.

Oh, and telling the Truth.

Michael Noel is principal of American Home Financial, a licensed Florida Lender. Mr. Noel is one of only a few Certified Mortgage Consultants & Certified Mortgage Planners in the country, and has been helping clients make smart decisions about debt and equity for over 20 years.