What Is a Good Faith Estimate?
A good faith estimate (GFE) is a document that provides an itemized list of estimated costs associated with a specific financial transaction, typically in real estate finance and, more recently, healthcare. The purpose of a good faith estimate is to give consumers a clear understanding of the potential expenses they will incur, promoting transparency and allowing for comparison shopping before committing to a service or loan. This concept falls under the broader category of consumer protection within financial services and healthcare.
In the context of mortgage lending, a good faith estimate was historically a standardized form lenders provided to borrowers, detailing projected closing costs and loan terms. While the term "good faith estimate" is still sometimes used informally, its official role in mortgage transactions has largely been superseded by the Loan Estimate form, mandated by federal regulations. In healthcare, under the No Surprises Act, a good faith estimate is now a critical tool for uninsured or self-pay patients to understand the expected costs of medical services.
History and Origin
The concept of a good faith estimate has evolved significantly, particularly in the realm of real estate finance. Historically, in the United States, the Real Estate Settlement Procedures Act (RESPA), enacted in 1974, aimed to protect consumers from unnecessarily high settlement charges and abusive practices in real estate transactions. RESPA required lenders to provide disclosures, including a Good Faith Estimate, to borrowers applying for a mortgage. This document was designed to provide an estimate of all the charges a borrower would likely have to pay at closing.13
However, due to complexities and sometimes inconsistent disclosures, the Consumer Financial Protection Bureau (CFPB) introduced the TILA-RESPA Integrated Disclosure (TRID) Rule, which became effective in October 2015. This rule integrated disclosures required under RESPA and the Truth in Lending Act (TILA). As a result, the Good Faith Estimate form for most mortgage loans was replaced by the Loan Estimate.11, 12 The TRID Rule sought to provide clearer and more consistent information to consumers, making it easier to understand their mortgage terms and closing costs.
More recently, the "good faith estimate" has gained prominence in healthcare. Effective January 1, 2022, the No Surprises Act began requiring healthcare providers to give uninsured or self-pay patients a good faith estimate of expected charges for scheduled or requested healthcare services. This initiative aims to increase price transparency and prevent unexpected medical bills.10
Key Takeaways
- A good faith estimate provides a forward-looking itemization of expected costs for a service or transaction.
- In mortgage lending, the original Good Faith Estimate form was largely replaced by the Loan Estimate under the TRID Rule in 2015.
- The term "good faith" implies that the estimate is based on the best information reasonably available at the time it is provided.
- Under the No Surprises Act, healthcare providers must issue a good faith estimate to uninsured or self-pay patients for medical services.
- The goal of a good faith estimate is to enhance consumer protection by providing transparency and enabling informed financial decisions.
Interpreting the Good Faith Estimate
Interpreting a good faith estimate involves understanding that it is an estimate, not a final bill. While lenders and providers are required to make a good faith effort to provide accurate projections, certain fees may change. For instance, in a mortgage context, some fees, like the interest rate (if not locked), or certain third-party settlement services not chosen by the borrower, could fluctuate. However, many costs disclosed on a Loan Estimate are subject to strict tolerance limits, meaning they cannot increase by more than a certain percentage or at all.
In healthcare, a good faith estimate for uninsured or self-pay patients should include expected charges for the primary service and any reasonably foreseeable related services, such as those from co-providers. Consumers should compare the estimated costs with other providers if possible and ask questions about any items that seem unclear or excessive. Understanding what expenses are included, such as facility fees or physician charges, is crucial. If the final bill significantly exceeds the good faith estimate without a valid reason (e.g., unforeseen complications), consumers may have grounds to dispute the charges.
Hypothetical Example
Consider Sarah, who is planning to undergo a minor surgical procedure and does not have health insurance. When she schedules her appointment, the clinic provides her with a good faith estimate.
The estimate details the following projected costs:
- Surgeon's Fee: $1,500
- Anesthesiologist's Fee: $500
- Facility Fee (Operating Room, Supplies): $1,200
- Pathology/Lab Work: $300
- Medications (Administered during procedure): $100
Total Estimated Good Faith Estimate: $3,600
This good faith estimate allows Sarah to understand the various components of her medical bill and budget accordingly. If, after the procedure, she receives a bill for $5,000 without any additional, unforeseen services being performed, she would have a basis to question the discrepancy, as the original good faith estimate indicated a lower cost.
Practical Applications
The good faith estimate serves a vital function in various sectors by promoting cost transparency and consumer awareness.
- Mortgage Lending (via Loan Estimate): Though the original GFE form is no longer used for most mortgages, its successor, the Loan Estimate, remains critical. It details expected closing costs, such as appraisal fees, title insurance premiums, property taxes, and prepaid expenses like homeowners insurance. This helps prospective homeowners understand the total financial commitment beyond just the mortgage principal and interest, aiding in budgeting and comparing loan offers from different lenders. The Consumer Financial Protection Bureau (CFPB) closely monitors these disclosures, recently launching inquiries into rising closing costs to understand who benefits and how costs for borrowers could be lowered.8, 9
- Healthcare Services: Under the No Surprises Act, healthcare providers must issue a good faith estimate to uninsured or self-pay patients for scheduled services. This helps patients avoid unexpected "surprise" medical bills and better plan for out-of-pocket expenses.7 The estimate must be provided promptly, both orally and in writing, at the point of scheduling or when the patient inquires about costs.
- Home Equity Loans and Refinancing: While the specific GFE form has changed, the underlying principle of providing an accurate, upfront estimate of costs applies to other federally related mortgage loans, including home equity lines of credit (HELOCs) and refinancing transactions.6 These estimates ensure consumers are aware of all fees involved in accessing their home equity or restructuring their existing mortgage debt.
Limitations and Criticisms
While the good faith estimate concept aims for transparency, it does have limitations and has faced criticisms.
In mortgage lending, even with the shift from the GFE to the Loan Estimate, challenges remain. Lenders are held to a "good faith" standard for certain fees, meaning they cannot charge significantly more than estimated. However, some fees have "0% tolerance" (cannot increase), while others have a "10% tolerance" (can increase by up to 10%), and some have "no tolerance" (can increase by any amount). This tiered system can still lead to unexpected increases for consumers.5 Furthermore, concerns persist about the accuracy and completeness of estimated costs, prompting the Consumer Financial Protection Bureau (CFPB) to continue to evaluate the effectiveness of mortgage disclosure rules.4
In healthcare, implementing the good faith estimate requirement under the No Surprises Act has presented operational challenges for providers. Medical groups have reported workflow disruptions and staffing shortages as significant concerns in generating these estimates.3 Issues also arise when unforeseen services become necessary during a course of treatment, or when co-providers (e.g., an anesthesiologist for a surgeon) are involved, making comprehensive and truly accurate upfront estimates difficult. The Government Accountability Office (GAO) has also noted that verifying the accuracy and completeness of hospital pricing data, which informs these estimates, remains a challenge.1, 2 This highlights that while the intent is to protect consumers from practices like balance billing, the practical execution can be complex and imperfect.
Good Faith Estimate vs. Loan Estimate
The terms "Good Faith Estimate" (GFE) and "Loan Estimate" are often confused, primarily because the Loan Estimate superseded the GFE for most residential mortgage transactions in the United States.
The Good Faith Estimate was a disclosure form previously used in the mortgage industry under the Real Estate Settlement Procedures Act (RESPA). It provided an estimate of the various closing costs and loan terms a borrower would encounter. Lenders were required to provide this form within three business days of receiving a loan application.
The Loan Estimate is the standardized disclosure form that replaced the GFE and the initial Truth-in-Lending disclosure for most closed-end residential mortgage loans as of October 3, 2015, under the Truth in Lending Act (TILA) and RESPA, integrated by the Consumer Financial Protection Bureau's TRID Rule. It serves the same fundamental purpose as the GFE—to provide an estimate of loan terms and costs—but it is designed to be clearer, easier to understand, and to facilitate comparison shopping across lenders. The Loan Estimate also introduced specific "tolerance" levels for how much estimated costs can change between the estimate and the final Closing Disclosure.
While the underlying principle of providing a "good faith" projection of costs remains, the Loan Estimate is the legally mandated form in current mortgage lending for covered transactions. The term "good faith estimate" is now predominantly used in other contexts, such as healthcare, or informally when referring to general cost projections.
FAQs
What is the purpose of a good faith estimate?
The primary purpose is to provide consumers with an accurate and transparent projection of the costs they will incur for a specific financial product or service, such as a mortgage or healthcare procedure. It helps consumers understand potential expenses upfront and make informed decisions.
Is a good faith estimate legally binding?
A good faith estimate is not a final bill, but the estimates provided are generally subject to certain legal requirements for accuracy. In mortgage lending, the successor Loan Estimate has strict tolerance limits on how much certain fees can increase from the estimate to the final closing. In healthcare, while an estimate, providers are expected to make a "good faith effort" to capture all foreseeable charges, and significant deviations may be disputable under the No Surprises Act.
How long is a good faith estimate valid?
The validity period for a good faith estimate depends on the context. For mortgage loans, the Loan Estimate generally locks in the estimated interest rate and certain fees for a specified period (e.g., 10 business days for the interest rate, 3 business days for other terms, if the rate is not locked). In healthcare, the No Surprises Act requires a good faith estimate to be provided within specific timeframes depending on when the service is scheduled (e.g., within 3 business days for services scheduled at least 10 business days in advance).
Who provides a good faith estimate?
In mortgage lending, a lender or mortgage broker provides the Loan Estimate. In healthcare, the convening healthcare provider or facility (the one responsible for scheduling the primary service) is responsible for providing the good faith estimate to uninsured or self-pay patients, including estimates for services provided by co-providers.
What should I do if my final costs significantly exceed the good faith estimate?
If your final costs significantly exceed the good faith estimate without a valid explanation (such as a documented change in circumstances or unforeseen complications), you should first contact the provider or lender to understand the discrepancy. For mortgages, you may have grounds to dispute charges that exceed the allowed tolerances. For healthcare, the No Surprises Act includes provisions for disputing charges that substantially exceed the good faith estimate for uninsured or self-pay patients.