By Alex Clark, ATG Law Clerk

Introduction

In the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), passed in 2010, Congress created the Consumer Financial Protection Bureau (CFPB) and transferred powers and responsibilities from other regulatory bodies to the CFPB. Public Law 111-203. Among the responsibilities transferred was control over regulating the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). The Dodd-Frank Act authorized the CFPB to issue rules, and required the CFPB to combine the disclosure forms required by RESPA and TILA. In July 2012, the CFPB issued a proposed integrated mortgage disclosure that combines the disclosure requirements of RESPA and TILA. The CFPB has proposed alternative requirements within the disclosure and requested comments and suggestions for assistance in deciding which alternative to pick and how to improve the Closing Disclosure form.

Scope

The proposed Closing Disclosure will be required where creditors are involved in closed-end transactions secured by real property, other than reverse mortgages. A creditor is “a person who both (1) regularly extends . . . consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement.” Because the Closing Disclosure combines the TILA and RESPA disclosures, and because TILA and RESPA did not perfectly overlap in scope, the Closing Disclosure would require information to be disclosed in situations not previously required. This would include disclosures for construction-only loans and loans secured by vacant land of 25 or more acres, which were previously exempt from RESPA but required by TILA. 

However, in certain instances, loans would still be governed by their previous required disclosures. This includes mortgage loans for mobile homes and homes secured by a dwelling but not real property. These types of loans would be subject only to the existing Regulation Z (12 CFR part 226, which implemented TILA) requirements. Likewise, reverse mortgages are not covered by the integrated disclosures, and would therefore be subject to the old disclosures. 

The new Closing Disclosure form will work in coordination with the proposed new Loan Estimate, which will replace the 2010 Good Faith Estimate (GFE). 

Increased Communication between Lender and Settlement Agent

The CFPB has proposed two alternatives for who is required to provide the Closing Disclosure form. The final choice will affect the closer’s role, and the amount of communication between the settlement agent and the lender. The first option will make the lender responsible for delivering the Closing Disclosure form to the consumer. This takes a large amount of responsibility from closers, but also encourages, if not mandates, that the lender conduct the closing. The second option would allow for the closer to provide the form, but the lender would be responsible for its accuracy, which is similar to the current model for closers and lenders.

Differences between what is required on the Loan Estimate and the Closing Disclosure form will also cause an increase in communication between the settlement agent and the lender. The Loan Estimate must state what services the consumer may or may not shop for, while the Closing Disclosure must state what services were actually shopped for by the consumer. This means that if the closer completes the Closing Disclosure form, the lender must provide the closer with the documentation about where the consumer shopped.    

Timing Requirements

The consumer must receive the Closing Disclosure form at least three business days before the closing, except in the case of timeshare mortgages. Business days are all days except Sunday and federal legal public holidays. The Closing Disclosure may be delivered in person, by US mail/courier, or by email. To deliver the Closing Disclosure form using electronic means, the closer must get permission from the consumer. If the Closing Disclosure form is delivered by a means other than in person, there is a rebuttable presumption that the person received the form three business days after it was sent.  

If a change occurs between the time the Closing Disclosure was provided and the closing, a new form must be provided again at least three days before closing unless it falls under one of six exceptions:

1. Changes due to consumer and seller negotiations.
2. Changes that result in less than a $100 aggregate increase in cost.
3. Changes caused by the government that cannot be known until after closing. An example of this type of change is where a county changes the cost of a recording fee without issuing notice. If this exception applies, a revised Closing Disclosure form must be provided no later than the third day after discovering the fees, and no later than 30 days after the closing.
4. Technical, clerical errors that do not affect a numerical disclosure. If this is the case, the new Closing Disclosure form must be provided as soon as reasonably practical and no later than 30 days after the closing.
5. The amount paid by the lender to cure a tolerance violation.
6. Waiver from the consumer that is needed to meet a bona fide financial emergency. For this exception to apply, the consumer must provide a dated, written statement describing the emergency and waiving the timing requirements. The statement must be signed by all consumers, and the lender must provide the disclosure at or before the time of the waiver or modification. 

Format Changes

The Closing Disclosure mirrors the Loan Estimate, which means the Closing Disclosure form does not follow the line numbering of the old HUD-1.While the top section on the first page of the Closing Disclosure contains essentially the same information as the HUD-1, the rest of the information has moved. The first page of the Closing Disclosure also contains the loan terms, the projected payments, and the cash to close information, which was primarily located at the end of the third page of the HUD-1. 

The second page of the Closing Disclosure contains Loan Costs and Other Costs. The breakdown of the second page in comparison to the HUD-1 is as follows:

1. Loan Costs: 

(A) Origination Charges: Comparable to the 800 line on the HUD-1

(B) Services Borrower Did Not Shop For: Comparable to the 800 line of the HUD-1

(C) Services Borrower Did Shop For: Comparable to the 1100 and 1300 lines of the HUD-1

(D) Total Loan Costs 

2. Other Costs: 

(E) Taxes and Other Government Fees: Comparable to the 1200 line of the HUD-1

(F) Prepaids: Comparable to the 900 line of the HUD-1

(G) Initial Escrow Payment at Closing: Comparable to the 1000 line of the HUD-1

(H) Other Costs: Comparable to the 700, 1100, and 1300 lines of the HUD-1 

The third page of the Closing Disclosure form contains the Calculating Cash to Close and Summaries of Transactions sections. Calculating Cash to Close mimics the GFE and HUD-1 comparable on page 3 of the HUD-1. Summaries of Transaction imitates page 1 of current HUD-1. The fourth page is similar to the TILA disclosure. The final page of the Closing Disclosure form contains sections for Loan Calculations, Contact Information, and other disclosures.

Crucial Concerns

These are the two most crucial areas of concern, in our view:

1. No line numbers for common charges The Closing Disclosure does not contain specific line numbers for repeated charges common in all transactions and in no way parallels the organized sections of the old HUD-1 Settlement Statement form. Without a specified structure and line numbering system, software developers will be hard-pressed to come up with ways to meaningfully assign these charges for other tasks, such as check-writing, invoicing, reconciliation, etc. Preparers will need significant retraining for the new form. Furthermore, with the exception of the item for points that the consumer will pay, all items must be listed under the subheading in alphabetical order. The proposed configuration, lender liability, and three-day delivery rule will require, at a minimum, that the Closing Disclosure form or its data be transmitted back and forth between the lender and settlement agent several times before delivery to the borrower/buyer.
2. Privacy concerns The Closing Disclosure requires disclosure of personal and loan information about the borrower. This raises potential privacy issues of the buyer’s personal information being transmitted to the seller. The CFPB has recognized this and proposed that in instances required by state law, or if it would be good practice not to exchange the information, allowing the Closing Disclosure form to be filled individual for both the buyer and the seller. This means that while the form is mandatory, there are multiple variations on how it can be used based upon the parties and the type of transaction. 

Conclusion

The new Closing Disclosure form will dramatically impact long-standing practices in the sale of real estate, especially in the timing and conduct of the closing.  The most prominent changes are the three-day requirement and the change of the order of information from the HUD-1. ATG encourages you to submit your comments and specific examples of the importance of independent title agents preparing the Settlement Statement and conducting the closing as well as any concerns over the form itself: 

As always, we appreciate your support on this important issue. Continue to watch your email and check www.atgf.com for updates.

View our previous articles on this topic, from September 2012, and July 2012.