The Closing Disclosure Was Replaced By the HUD-1

The Transition from HUD-1 to the Closing Disclosure: Enhancing Transparency in Home Buying

Understanding the intricate details of your mortgage loan is crucial in real estate transactions. To simplify and enhance the transparency of this process, the Consumer Financial Protection Bureau (CFPB) introduced significant changes in 2015. One of the most notable changes was replacing the HUD-1 Settlement Statement with the Closing Disclosure. This shift aimed to provide borrowers with clearer, more understandable information about their mortgage loans. Here’s a detailed look at what this change entails and its implications for homebuyers.

What is the Closing Disclosure?

It’s a comprehensive five-page document outlining a mortgage loan’s final terms and costs. It is designed to be user-friendly and provides borrowers with essential information about their loan, including the loan amount, interest rate, monthly payments, and a detailed breakdown of closing costs. The Closing Disclosure aims to ensure borrowers clearly understand their financial responsibilities before finalizing their home purchase.

Why was the HUD-1 Replaced?

The HUD-1 Settlement Statement was used in most real estate transactions for decades. However, it was often criticized for being confusing and difficult to understand. In response to these concerns, the CFPB implemented the TILA-RESPA Integrated Disclosure (TRID) rule, which mandated the use of the Closing Disclosure. The new form is more straightforward and gives borrowers a clearer picture of their loan terms and costs, making it easier to make informed decisions.

Key Features of the Closing Disclosure

1. Loan Terms: The first page of the Closing Disclosure outlines the loan amount, interest rate, and monthly payments. It also includes information about any prepayment penalties or balloon payments.
2. Projected Payments: This section provides a detailed breakdown of the monthly payments, including principal, interest, taxes, and insurance. It helps borrowers understand how their payments may change over time.
3. Closing Costs: The Closing Disclosure includes a comprehensive list of closing costs, such as loan fees, title charges, and government taxes. This section also shows the total cash needed to close the transaction.
4. Cash to Close: This part summarizes the money the borrower needs to provide to the closing table, accounting for any deposits or credits.
5. Loan Calculations and Comparisons: The form includes the total payments, finance charges, and the annual percentage rate (APR). Additionally, it provides comparisons to the Loan Estimate, allowing borrowers to see any changes since they applied for the loan.

The Three-Day Review Period

One of the most significant benefits of the Closing Disclosure is the mandatory three-business-day review period. This requirement ensures that borrowers have ample time to review the final loan terms and costs, compare them with the initial Loan Estimate, and ask questions or address discrepancies before closing. This period is critical for preventing last-minute surprises and ensuring borrowers fully understand their financial commitments.

Exceptions to the Rule

While the Closing Disclosure is now the standard form for most closed-end consumer mortgages, there are exceptions. The HUD-1 Settlement Statement is still used for certain loans, such as reverse mortgages and home equity lines of credit (HELOC) transactions. These exceptions acknowledge these loan products’ unique nature and their specific requirements.

Benefits for Homebuyers

The introduction of the Closing Disclosure has several benefits for homebuyers:

• Enhanced Clarity: The straightforward design and detailed information make it simpler for borrowers to understand their loan terms and costs.
• Improved Transparency: Borrowers can see how their loan terms have changed from the Loan Estimate to the Closing Disclosure, promoting transparency in the lending process.
• Better Decision-Making: With a clear understanding of their financial obligations, borrowers can make more informed decisions about their mortgage loans.
• Reduced Surprises: The three-day review period helps prevent last-minute surprises and ensures borrowers are fully prepared for closing.

The transition from the HUD-1 Settlement Statement to the Closing Disclosure represents a significant improvement in the home buying process. By providing borrowers with clear, concise, and comprehensive information about their mortgage loans, the CFPB has enhanced transparency and helped consumers make better-informed decisions. As homebuyers navigate the complexities of real estate transactions, the Closing Disclosure is a valuable tool in ensuring they understand and are comfortable with their financial commitments.

Some lobbyists, one of which may be running in next year’s elections, felt that home buyers, like current homeowners, should have a three-day rescission or free look opportunity that their refinance owner-occupied counterparts currently enjoy. So as part of the Dodd/Frank financial overhaul, certain measures were given dates of enforcement, so as to ease the changes into a market already reeling from the biggest mortgage meltdown in decades.

RESPA, the current regulating body that enforces the HUD or final bottom line statement to buyers and sellers, will now be replaced by TILA. TILA is much more punitive, as some industry experts are saying as evident by the current fines being pushed by the CFPB.

The changes, in a nutshell, will require the 3-day free look provision. Once the loan is cleared to close, the buyer, and or refinance borrower, will be required to receive a closing disclosure form replacing HUD which is a five-page document that shows all costs and even discloses services that one can shop(ex. buyers policy title). At the beginning of the process, they will be required to receive a loan estimator, which has some unique features, including the percentage of payment going towards an interest in the first few years(50-70%). This document will replace the Truth in Lending and Good Faith Estimate. The closing disclosure form must be in the hands of the borrower no later than 3 business days before closing.

Some factors to consider are if the borrower can receive correspondence through email, and if so, should it have a time stamp? What if the borrower does not use email? If you mail it to them, then you must give them a 3-day delivery period on top of a 3-day free look period according to the Bill. That is another 6 days added to a closing potentially. Then you have the consideration of the loan is a refinance, they already have a 3-day right of rescission. That means all refinances will take 6 days from the time of CTC (clear to close), and not a day less.

Most loans have a rate lock expiration date, so will there be any extensions granted in the short term? If not, what does that mean for deals that expire because a third party (attorney, appraiser, surveyor city inspection, could not get figures or services rendered before this rate expired?

Another factor to consider is who will provide the form, and what will it do to their turn times and to the cost for the borrower? Using a settlement agent, like any other outside party keeps two things from happening, generally speaking:  costs stay competitive, and speed is not compromised. In a low-margin environment where housing inventory is low for bankers and buyers alike, the volume is the name of the game. Very few are able to close 10 purchases a month as it is, even though they have the contracts to do it. If lenders have to hire more staff just to handle this form, that will add extra cost to them, hence passed onto Mr. and Mrs borrower. What will this do to volume for the next few months?

A saving grace is that TILA has said there is a high likelihood they will delay any punitive measures until the end of the year. This is speculation on my part. If a delay in punishment does occur, this will allow lenders on all fronts to adapt and make their mistakes early and often, so as to ensure a smoother process down the road.

Frequently Asked Questions (FAQs)

1. What is the Closing Disclosure?

It’s a five-page form that provides final details about your selected mortgage loan. It includes loan terms, projected monthly payments, and a breakdown of closing costs. It replaced the HUD-1 Settlement Statement for most types of mortgage loans.

2. Why was the HUD-1 replaced by the Closing Disclosure?

The Consumer Financial Protection Bureau (CFPB) introduced the Closing Disclosure to simplify and improve the transparency of the loan closing process. The new form is easier to understand and designed to help consumers better comprehend their loan terms and closing costs.

3. When did the Closing Disclosure replace the HUD-1?

The Closing Disclosure replaced the HUD-1 on October 3, 2015, as part of implementing the TILA-RESPA Integrated Disclosure (TRID) rule.

4. Who receives the Closing Disclosure?

The borrower receives the Closing Disclosure. It must be provided to the borrower at least three business days before the loan closing. This gives the borrower time to review the terms and costs and address any issues before closing.

5. What information is included in the Closing Disclosure?

The Closing Disclosure includes:

• Loan terms (amount, interest rate, monthly payment)
• Projected payments (including principal, interest, taxes, and insurance)
• Closing costs (loan fees, title charges, taxes, etc.)
• Cash needed to close
• Details on how the loan amount was calculated
• Contact information for the lender, mortgage broker, and settlement agent

6. Can the Closing Disclosure be corrected if there are errors?

If there are errors or changes to the loan terms, a corrected Closing Disclosure must be provided. If significant changes occur (e.g., changes in APR, loan product, or the addition of a prepayment penalty), a new three-business-day review period may be required.

7. How does the Closing Disclosure benefit consumers?

The Closing Disclosure benefits consumers by providing a clear and concise summary of their loan terms and closing costs, making it easier to understand and compare with their Loan Estimate. The mandatory three-day review period helps ensure consumers have enough time to review and understand their mortgage terms before closing.

8. What should I do if I notice discrepancies in my Closing Disclosure?

If you notice discrepancies or errors in your Closing Disclosure, contact your lender or settlement agent immediately to address the issues. It’s crucial to resolve any discrepancies before the closing date to avoid delays.

9. Are there any exceptions where the HUD-1 is still used?

The HUD-1 is still utilized for specific loans, including reverse mortgages and home equity lines of credit (HELOC) transactions. However, the Closing Disclosure is the standard form for most closed-end consumer mortgages.

10. What is the difference between the Loan Estimate and the Closing Disclosure?

The Loan Estimate is provided within three business days of applying for a loan and estimates loan terms and closing costs. The Closing Disclosure is given at least three business days before closing and contains the final loan terms and costs. The Loan Estimate helps consumers shop for loans. At the same time, the Closing Disclosure confirms the final details before the loan is finalized.

Many real estate associations are already telling their members to add 15 days to the estimated closing date. What we hope does not happen is that more lenders either exit the business or consolidate, as costs of compliance continue to go up as lower-margin products like Fannie and Freddie (non-FHA) are the bulk of the volume right now. Banks are not making money like they used to, and so either the originators. More to come as I get the info, good luck in June!