THE HUD-1 IS CHANGING TO THE CLOSING DISCLOSURE
In accordance with the Reform and Consumer Protection Act (the Dodd-Frank Act) the Consumer Financial Protection Bureau (CFPB) was created. The CFPB has now written rules and regulations which will govern, among other things, the issuance of consumer residential mortgages. The CFPB will govern settlement service providers through regulations which affect banks and their vendors. Settlement agents are considered vendors of the banks.
As a general outline, in order for settlement agents to remain as authorized vendors of the mortgage lenders, they must comply with seven controls which are (1) proper licensing; (2) trust account controls; (3) background and credit checks for employees; (4) protection of customer’s non-public personal information; (5) specific closing practices; (6) insurance coverages; and (7) consumer complaint resolution procedures. In order to remain as a settlement agent on residential mortgage loan purchases, attorneys must comply with all of the rules and regulations governing bank vendors.
There will be a new application disclosure form which will be called the “Loan Estimate”. There will also be a new closing document which will be called the “Closing Disclosure” which is a five-page form consolidating information previously obtained on the Truth-in-Lending Disclosure and the RESPA (Hud-1) forms plus other disclosures.
Beginning October 3, 2015, for all residential purchase loan applications, the CFPB will require all lenders to replace existing GFE, TILA and RESPA disclosure forms with two new integrated closing disclosures. The new disclosures are a combination of the existing Good Faith Estimate (GFE), Truth-in-Lending (TIL) disclosure and the HUD-1 Settlement Statement. The requirement places more of a burden the settlement agent, the attorney or title company, as the case may be, who must work with a lender to ensure that the documents are property executed and returned to allow for a compliant transaction. Some lenders such as Wells Fargo, J.P. Morgan Chase and Bank of America, have decided to manage the process directly by preparing the Closing Disclosure themselves to avoid compliance lapses. The Bank will deliver the forms to the Borrower.
Regulation X of the Real Estate Settlement Procedures Act, (RESPA) sets forth the requirements for the GFE, TILA and closing disclosure (HUD-1). The CFPB has determined that existing disclosures are too confusing for consumers and have developed the integrated disclosure form to provide more transparency and a clearer description of closing costs and fees so that borrowers better understand the total cost of mortgage financing.
The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail by a lender no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer (and properly completed by the lender and/or the settlement agent) at least three business days prior to Consummation (previously called the Closing). Certain changes made to the loan terms may cause the three day period to restart. If the creditor makes certain significant changes between the time the Closing Disclosure form is given and the closing – specifically, if the creditor makes changes to the APR above 1/8 of a percent for most loans (and ¼ of a percent for loans with irregular payments or periods), changes the loan product, or adds a prepayment penalty to the loan – the consumer must be provided a new form and an additional three-business day waiting period after receipt of the new form. Less significant changes can be disclosed on a revised Closing Disclosure form provided to the consumer at or before closing, without delaying the closing. This requirement will provide the important protection to consumers of an additional three-day waiting period for the three significant changes, but will not cause closing delays for less significant costs that may frequently change.
The TILA-RESPA rule applies to most closed-end consumer credit transactions secured by real property, but does NOT apply to: (a) home equity lines of credit (HELOCs); (b) reverse mortgages; or (c) chattel-dwelling loans, such as loans secured by a mobile home or by a dwelling not attached to real property. The rule also does not apply to loans made by a person or entity that makes five or fewer mortgages in a calendar year.
At this time you should familiarize yourself with the new Closing Disclosure form, (b) train your operations staff on the format and proper completion of the new form, (c) reach out to your lender clients and title company and work in collaboration with them to develop a process to meet the timely requirement to deliver a complete and accurate disclosure within the new regulatory notice time frame.
This fall will produce significant changes for Attorneys and Settlement Agents. It is time to prepare.
JOEL G. COHEN, ESQ.
FLANZBAUM & COHEN, LLC
Real Property/Zoning/Land Use Committee