“Know Before You Owe” The end of the HUD1 – Settlement Statement

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This new law required the Consumer Financial Protection Bureau (CFPB) to combine the Truth in Lending (TIL) and the Real Estate Settlement Procedures Act disclosures into one concise form for consumers.

 On August 1, 2015, the existing Good Faith Estimate and TIL disclosures will be replaced with and combined into the new Loan Estimate disclosure. This is great news for both consumers and real estate professionals. The CFPB issued the final rule on this on November 20, 2013; and it is going to affect all mortgage loans with application dates beginning August 1, 2015.

This new Loan Estimate disclosure will combine the existing Good Faith Estimate and TIL disclosures into one easy-to-understand form. Current forms can be very confusing to borrowers; and they are lacking important information like cash needed to close and total principal, interest, taxes, and insurance (PITI) payment. There is not even a place for a signature on the existing form.

We can put this rule in the category of one action that the CFPB got right. With this new form borrowers will be better informed and better prepared to make wise decisions when purchasing a home.

The second part of the “Know Before You Owe” rule pertains to the Settlement Statement, or the HUD1 closing statement. This form has been used in conjunction with closing on a house because the Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, which was first passed in 1974. On August 1, 2015, this form is being retired and replaced with the new Closing Disclosure form as mandated by the CFPB.

This new form combines the HUD1 and current TIL disclosure into one form and puts the responsibility for this document in the hands of the lender, not the title company, where it currently resides. One of the major changes to the closing process is that there is now a three-business-day waiting period once the Closing Disclosure is received by the consumer. During this time period no APR changes, program changes, interest rate, loan amount, lender charges, and affiliate charges are allowed to change. If changes do occur, the three-day waiting period starts anew.

Currently, it is very common for documents to be sent to the title company one to two days in advance and the loan to close immediately afterward. This new waiting period will force borrowers, lenders, and real estate agents to alter their timelines and rework their processes to ensure a smooth and stress-free closing.

Both the new Loan Disclosure and Closing Disclosure forms to be instituted in August 2015 will force some major changes in the way closed-end mortgage loans close. Most mortgage companies and title companies are already preparing for this coming deadline, hoping to make this an easy transition.

If you are a consumer and are thinking about buying or selling your home in the next 12 months, be sure your real estate agent and your lender are educated and prepared for these upcoming dynamic changes.