Toward the end of a mortgage transaction, borrowers receive different federal disclosure forms that often contain complicated and duplicated information. In an effort to simply this process, Congress directed the Consumer Finance Protection Bureau (CFPB) to create new disclosures that would affect most closed-end consumer mortgage loans.
Combining the HUD-1 Settlement Statement and the final Truth in Lending disclosure, the CFPB has introduced the Closing Disclosure form, which will be required to give consumers on applications submitted on or after August 1, 2015. According to the CFPB:
- “The creditor must give the Closing Disclosure form to consumers so that they receive it at least three business days before the consumer closes on the loan. 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 of 1/8 of a percent or greater for most loans (and 1/4 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.”
- “… The creditor is responsible for delivering the Closing Disclosure form to the consumer, but creditors may use settlement agents to provide the Closing Disclosure, provided that the settlement agents comply with the final rule’s requirements for the Closing Disclosure. The final rule acknowledges settlement agents’ longstanding involvement in the closing of real estate and mortgage loan transactions, as well as their preparation and delivery of the HUD-1. The final rule avoids creating uncertainty regarding the role of settlement agents and also leaves sufficient flexibility for creditors and settlement agents to arrive at the most efficient means of preparation and delivery of the Closing Disclosure to consumers.”
There are several anticipated benefits of the Closing Disclosure form. First, it reduces paperwork for all parties involved in the transaction. More importantly, however, it is designed to be understood better by the consumer. It’s language is more clear and the most important information, such as the interest rate, monthly payments and the total closing costs, is highlighted on the first page. Providing a single point of reference, the form also includes the contact information of the lender, mortgage broker, real estate brokers and closing agent.
Although changes do not take affect until later this year, many institutions are worried about compliance and fear the new rules may make the closing process more difficult. The rule puts more responsibility on lenders during closing and introduces substantial operational processes that require real estate agents, mortgage lenders and closing agents to coordinate tasks closely during a transaction. Under the current system, title lenders provide borrowers with the HUD-1 settlement document while the lenders provide Truth-in-Lending Act financial disclosures. The new form combines these two, requiring lenders and title companies to finalize the merged form ahead of time.
Are You Prepared for August?
It’s clear: the new format will be very different. Automated systems and loan origination systems will need to be updated, substantial operational policies will need to be implemented, and compliance teams will need to become keenly aware of the rules themselves. In our new eBook “All in Good Faith: How ‘Know Before You Owe’ Changes Everything,” author Jorge Sauri elaborates more on the Closing Disclosure form and the rest of “Know Before You Owe.” Download free and discover just how you and your customers will be affected: