Farewell, HUD-1, we hardly knew ye. As of October 3rd, 2015, lenders will provide two integrated forms at specified intervals surrounding the closing date to comply with the provisions of both the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act of 1974 (“RESPA”). The new forms are the result of provisions from Sections 1098 and 1100A of the Dodd-Frank Act meant to combine and simplify existing documents to make them easier for mortgagors to understand.
TILA (implemented through Regulation Z) and RESPA (implemented through Regulation X) both require specific disclosures to be made at the closing of a mortgage loan. RESPA requires that consumers receive a Good Faith Estimate (“GFE”) within three business days of applying for a mortgage loan. Within one business day before the settlement of the loan, the consumer has the right to request the Settlement Statement (HUD-1), with the document provided at closing. TILA also requires that mortgage lenders provide a disclosure of lending terms within three business days of receiving a mortgage loan application. These requirements have been fulfilled through separate disclosure forms created by two different agencies, thus leading to confusion between lenders and consumers at closing time, as the forms used inconsistent language. The HUD-1 is a settlement statement created by the Department of Housing and Urban Development to satisfy the requirements of RESPA when it was administered by that agency. The Federal Reserve Board enforced TILA.
Dodd-Frank changed these requirements by creating the Consumer Financial Protection Bureau (“CFPB”) and charging it with enforcing the provisions of both TILA and RESPA as well as creating integrated disclosures that effectuate the disclosure provisions of both laws through one set of forms, rather than two. To that end, the CFPB issued the Final Rule for the integrated disclosure requirements on November 20, 2013 and amendments to the Final Rule on February 19, 2015. This new TILA-RESPA Integrated Disclosure rule, otherwise also known as “Know Before You Owe,” created two required documents to replace the TILA and RESPA disclosures – a Loan Estimate that replaces the GFE and TILA disclosures at the time of application, and a Closing Disclosure that supplants the HUD-1 Settlement Statement.
As with the GFE and TILA disclosures, the Loan Estimate must be provided to consumers no later than three business days after they submit an application for a loan. The Loan Estimate form requires the loan amount and terms, projected payments, closing costs, the estimated cash needed to close and other considerations, such as whether the lender intends to transfer the servicing of the loan. The Closing Disclosure includes similar provisions, although it also includes details of the escrow account, a summary of the transaction and the contact information of the lender, the settlement agent, the mortgage broker, and the real estate brokers for both buyer and seller.
Possibly the biggest change for lenders and mortgage brokers is that the Closing Disclosure must be provided to the consumer at least three business days prior to the consummation of the transaction – the point where the consumer becomes contractually obligated to the creditor on the loan. This may be different than the actual closing date. This is a much more stringent requirement than the one-day prior to closing on consumer request requirement of the HUD-1, and can potentially delay closing, as last-minute changes the transaction may trigger a need for a revised Closing Disclosure with a new three-day waiting period. This can happen when there are increases in the APR, any additions of a prepayment penalty or the change of a loan product will trigger the need for a revised closing disclosure