New Era in Closings: Say Goodbye to the HUD-1
|October 15, 2013
For more than 30 years, federal law generally required consumers receive the HUD-1 and Truth-In-Lending disclosures when closing a mortgage. The closing process will make a dramatic change with the Consumer Financial Protection Bureau (CFPB) expected to release its final rules for new integrated mortgage disclosures in the next few weeks.
Gone will be the current GFE, HUD-1 and TIL disclosures. Replacing them will be a new Loan Estimate that will integrate the GFE and early TIL and a Closing Disclosure that will replace the HUD-1 and revised TIL disclosure.
During a general session at ALTA’s 2013 Annual Convention, Rich Horn of the Consumer Financial Protection Bureau, Ben Olson of the law firm Buckley Sandler and Leslie Wyatt of SoftPro reviewed the proposal and explained how it could impact title and settlement company operations, and relationships with lender clients and consumers.
- Click here to view this presentation, which starts at the 1:16 mark.
Horn is senior counsel in the CFPB’s Office of Regulations and leads the development of the integrated disclosure forms and rules. Before joining the CFPB in January 2011, he was a senior attorney at the Federal Deposit Insurance Corporation in the New York Regional Office. Since the final rule has not yet been released, Horn was limited on what he could say, including when the final rule would be released and how long of an implementation period would be provided. Horn said the Bureau is eager to work with industry to help with implementation and compliance after the final rule is released.
Prior to joining Buckley Sander, Olson served as deputy assistant director for the CFPB’s Office of Regulations. He oversaw eight Dodd-Frank Act mortgage rulemakings, including the CFPB’s Ability-to-Repay/Qualified Mortgage rule, Mortgage Servicing rules and Loan Originator Compensation rule. He also was involved in the beginning stages of the CFPB’s proposed regulations.
Wyatt has 15 years of industry experience and is the director of industry relations for SoftPro. She’s held various positions in Training, Consulting, Research and Development, Compliance and Business Integrations since joining the company. She served on ALTA’s RESPA Implementation Taskforce and is involved in ALTA’s newly formed Combined Mortgage Disclosures Work Group, which if focused on helping the industry develop an implementation plan for the integrated mortgage disclosures.
Horn opened the conversation saying that the Dodd-Frank Act mandated the CFPB to combine the overlapping federal disclosure forms required by RESPA and TILA to help consumers make informed decisions when shopping for a mortgage and avoid costly surprises at the closing table.
The proposed rule applies to most consumer mortgages, but does not apply to home-equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to land. The proposed rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year.
The proposed rule says the lender must provide the Closing Disclosure to consumers at least three business days before the closing. Generally, if changes occur between the time the Closing Disclosure form is given and the closing, the consumer must be provided a new form. When that happens, the consumer must be given three additional business days to review that form before closing. However, thanks to the efforts of ALTA, the Bureau is proposing a number of exceptions to the three-day requirement for some common changes.
The Bureau has proposed these exemptions that will not trigger a new three-day waiting period:
- Seller – Buyer negotiation
- Minor cost increase
- Post Closing change to government fee
- Correct non numerical clerical error
- Tolerance refund
There is an exception for minor changes that result in less than $100 in increased costs.
ALTA believes that more exceptions are needed to protect consumers from the unnecessary harms caused by delayed closings. ALTA has suggested the following exceptions:
- Closing costs paid by or on behalf of the buyer, but unrelated to the loan costs (such as changes to or decisions to purchase property insurance coverages, flood insurance and owner’s title insurance)
- Payment to discharge any defects, liens, encumbrances or other matters requiring curative action which are discovered in a title search or examination
- All prorations as long as the underlying per-day rate does not change or they are paid to a state or local government instrumentality or authority
- Recording costs and other fees incurred due to additional documentation used for the consumer’s convenience (such as a power of attorney)
- Any increase in the borrowers’ costs due to a change to the sales contract, mutually agreeable to the buyer and seller and not objected to by the lender, or as a result of local custom or practice regardless of when the change is made or the amount of the change
Of importance to ALTA members is who will complete the Closing Disclosure. Currently, settlement agents are required to provide the HUD-1 to consumers, while lenders provide the revised TIL disclosure. The Bureau proposes two alternatives for which party is required to provide consumers with the new Closing Disclosure form. Under the first option, the lender would be responsible for delivering the Closing Disclosure form to the consumer. Under the second option, the lender may rely on the settlement agent to provide the form. However, under the second option, the lender would also remain responsible for the accuracy of the form. The costs to creditors and settlement agents under this alternative would depend on how creditors and settlement agents go about fulfilling the joint requirement, according Horn.
Horn also addressed the requirement to retain data in a machine readable format. This could foster innovation in the market and speed up the examination process, according to Horn.
“If data is in a standard format, the Bureau can use it when examining entities and get examiners in and out quicker,” he added. The Bureau did not propose a standard data set for this and have received criticism for being vague.
Instead of issuing many FAQs similar to how HUD handled the previous RESPA reform, Horn said the Bureau will provide many examples with the rule when it’s released. Because the proposed rule was made under Regulation X, there’s a structural framework that allows the Bureau to place examples in the rule.
Other changes relevant to the title insurance industry is that the proposed Closing Disclosure uses itemization instead of lump sum title charges, the removal of the title insurance premium split and the elimination of the current three and four-digit line numbering system on the HUD-1. The proposed Closing Disclosure form only sets specific line numbers for a small number of fees.
“We found during consumer testing was when we used prototypes with a lot of numbers, consumers were overwhelmed,” Horn said. “They had trouble finding fees between the estimate and the HUD-1. The prototype of the integrated forms fared better in testing.”
On the Loan Estimate, the Bureau will require lenders to list owner’s title insurance as “optional” when it will be paid by the buyer, however it has abandoned the more prejudicial phrase of “not required.” For transactions in which the seller will pay for owner’s title insurance, the line will not have to include the phrase “optional.”
According to the proposal, any owner’s title insurance premium in a jurisdiction that permits simultaneous issuance title insurance rates is calculated by using the full owner’s title insurance premium, adding any simultaneous issuance premium for issuance of lender’s coverage, and then deducting the full premium for lender’s coverage. Cost of an owner’s title insurance policy will be labeled with “Title –” at the beginning, and labeled “(optional)” at the end when designated borrower-paid at or before closing.
Olson said the CFPB understands the fact that by stepping in and changing how the industry interacts with consumers is a heady task. He lauded the Bureau for going into the field, conducting 10 rounds of testing and modifying the prototypes.
“The CFPB has recruited lenders and settlement agents, received feedback and incorporated the advice into the next round of prototypes,” Olson said.
ALTA outlined six principles to help ensure that the disclosures are fair for consumers and the industry. The principles that will help ALTA evaluate the impact on the industry include whether the rule:
- Prevents disruptive and costly delays to closing for consumers
- Provides industry with clear guidance
- Promotes fair competition
- Avoids unnecessarily high costs for small business
- Requires the CFPB tests the disclosures on actual closings instead of isolated interviews with consumers
- Encourages consumers to make informed decisions
Olson said it’s likely the final forms will look similar to the proposed forms, and encouraged title and settlement agents to begin working with lenders and software vendors to prepare for the final rule. He added that after the final rule is released, there will be an implementation period similar to other rules promulgated by the Bureau.
“While a final rule provides answers, the discussion will not be done and the Bureau will provide additional clarification and guidance on how to comply,” Horn said.
He said the industry can expect the CFPB to issue guidance similar to what the Bureau did as it issued other rules related to residential mortgages (Ability-to-Repay and QM standards, mortgage servicing rules, loan originator compensation requirements, appraisals for higher-priced mortgages and escrow requirements).
“We are trying to make ourselves available to questions,” Horn said. “When the rule comes out we will be accessible to aid implementation and field questions. We recognize this is a large rile and impacts the industry broadly. We are thinking of ways to have all parts of the industry get the same information at the same time.”