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Soon the federal department of Housing and Urban Development plans to unveil major proposed changes to the American mortgage application process and real estate settlement system.  The rule changes are the end-product of HUD's five-year effort to streamline mortgage disclosures, promote comparison shopping by loan applicants, and to stamp out eleventh-hour surprises at closings.  Among the key changes in the 250-page HUD proposal:

1. Transformation of the Good Faith Estimate into a consumer education and shopping tool. The GFE will now explain in detail to an applicant how a particular loan works, how high monthly payments could rise, disclose any potential fees such as prepayment penalties, and provide information about escrow items.
2. New, strict limits on how much settlement charges can depart from the Good Faith Estimate stage to the HUD-1 closing stage. Total settlement charges could not be more than 10 percent above the initial estimates, absent tightly-defined "unforeseen circumstances" limited to acts of God, war and disasters, among others.
3. The Good Faith Estimate and the HUD-1 forms are aligned for easy comparison, with similar categories and graphic displays of loan origination charges and settlement cost items on both.
4. All fees paid to mortgage brokers by a lender in connection with the interest rate charged to the consumer must now be disclosed and listed on the Good Faith Estimate as a "credit to the borrower." Brokers are likely to oppose this strenuously.
5. All settlement agents will now be required to "read aloud" a new "closing script" to mortgage borrowers. The script walks consumers through the various charges on the revised HUD-1, and whether and why they differ from earlier estimates. Finally, the script requires the settlement agent to explain the loan terms and mechanics as stated in the mortgage note itself.

The proposals will have a 60 day period for industry and consumer comment, after which HUD is expected to issue them in final form with a period of months set aside to allow lenders, title companies and attorneys to gear up for implementation.