The New 2010 GFE
I had an awesome Geometry teacher in high school, Pete Hayes at Westwood High School in Mesa, AZ. He was the kind of teacher that earned your respect and inspired you to do as your very best.
One of lessons that he taught has stuck with me for the past 20 years. During his class he described a scenario where a man from Boston flew into Phoenix for one day. It was raining the day that he was in Phoenix. When he flew back to Boston and told everybody that he knew that it rains everyday in Phoenix.
As he predicted, we let him know that the man’s conclusion was laughable. At that point, he taught us that the man had used inductive reasoning and went on to teach us about the two basic kinds of reasoning — inductive and deductive.
Inductive reasoning involves moving from a specific to a general. Many times the person applying inductive reasoning in drawing their general conclusion based on a specific observation.
Deductive reasoning begins with the general and ends with a specific. Arguments using deductive reasoning are typically based on laws, rules or other widely accepted principles.
In the example given by my Geometry teacher, the man used inductive reasoning and draws upon his specific observation (rained in Phoenix while he was there) to reach a general conclusion (it rains everyday in Phoenix).
If the man has used deductive reasoning, he probably would have come to a different conclusion. If he had noted the predominant desert vegetation in Phoenix he could have reasoned that they result from an arid climate. Therefore, even though it was raining the day that he was there, by rule an arid climate typically experience less than 10 inches of rainfall a year and as such, it does not rain everyday in Phoenix.
Although inductive reasoning can allow a person to reach a probably outcome, it does not require it to be right. In fact, as in the example above, conclusions drawn by use of inductive reasoning can result in overgeneralizations.
Inductive Reasoning in Mortgage Lending
I’ve found that a great number of the problems that exist in the mortgage industry are a result of the use of inductive reasoning. These problems have often resulting in harm to the public. HUD, through the enforcement of RESPA and the new GFE, looks to reduce this public exposure as much as possible.
Sometimes HUD needs to protect the public from itself. Consider the following conclusions that a homebuyer might make as a result of using inductive reasoning:
- Since that is the mortgage loan officer that my real estate agent referred to me, she must be experienced and trustworthy.
- My loan officer told me that based on my loan application I qualify for an FHA loan at 5.25%. That must be the best program and rate that I can obtain.
- The listing agent on the house that I want to submit an offer on recommends that I use XYZ Title Company. I guess they’re as good as any.
- I’ve signed the GFE so now I’m bound to it.
- At closing: My closing costs are $600 higher than what my loan officer quoted me. This must be typical … I’m stuck.
So, What’s the Point of the New 2010 GFE?
At the beginning of 2010, the new GFE was put into effect. This was done to help RESPA fulfill one of its main purposes – to help consumers become better shoppers for settlement services. The new GFE goes a long way to help “protect the public from itself” by forcing them to NOT draw general conclusions from their observations (inductive reasoning) and actually apply rules and regulations (deductive reasoning).
At the top of page 1 it has a section that says Shopping for Your Loan and says:
“Only you can shop for the best loan for you. Compare this GFE with other loan offers, so you can find the best loan.”
It goes on to provide an entire related section on page 3 called the Shopping Chart. The shopping cart instructs the borrower to
“Use this chart to compare GFEs from different loan originators … By comparing loan offers, you can shop for the best loan.
Further, the new GFE provides detailed information that attempts to ensure that the borrower has a clear understanding of rules and regulations guiding the lending process. Here are some examples:
“The interest rate for this GFE is available through _____.”
“This estimate for all other settlement charges is available through _____.”
“Can your interest rate rise? Y or N”
“These charges are for other services that are required to complete your settlement. We can identify providers of these services or you can shop for them yourself.”
“These charges cannot increase at settlement”
“The total of these charges can increase up to 10% at settlement
Title services and lender’s title insurance (if we select them or you use companies we identify)”
Finally, notice that the new GFE does not have a signature line for the borrower. HUD doesn’t want the borrower to sign it so that they don’t think they are bound to it.
I have heard a number of loan officers complaining that “the new GFE is too confusing” or saying things like “leave it to HUD to make a one-page disclosure into a three-page document … that sure helps”. Get over it! The new GFE was not designed for you, it was designed for the borrower.
Note that all of the language in the new GFE is written in a form that is directly speaking to the consumer.
The new GFE is attempting to help protect the consumer from the dishonest loan officers that are still out there …
and from themselves.
By providing clear explanations of the guiding rules and regulations as well as precise instructions that counsel borrowers to compare loan programs, the new 2010 GFE makes a strong attempt to guide the borrower to use deductive reasoning as opposed to inductive reasoning when obtaining financing.