We're about to see some big changes regarding the delivery of HUD-1 Settlement Statements and Truth-in-Lending Disclosures, which could result in added cost and closing delays for homebuyers, if the Consumer Financial Protection Bureau's new rules go into effect as proposed.
The CFPB rule would merge the HUD-1 and TILA forms, which together total five pages, into a single five-page document known as a Closing Disclosure form. One of the options under the proposed rule would require lenders to prepare and deliver the Closing Disclosure to consumers instead of settlement companies.
Allowing this rule to go into effect will likely wind up costing the consumer more while upping the chances for settlement delays, which is why I'm encouraging you to take a minute by November 6 to voice your comments to the CFPB.
How will the new CFPB requirements effect the settlement transaction?
Compared to the current HUD-1, the proposed Closing Disclosure re-categorizes and re-numbers all closing costs and prepaid items, rendering current settlement software, merge documents and disbursement coding useless while delivering very little (if any) benefit to the consumer.
Lenders and settlement service providers already invested substantially in upgrades for software and re-training of staff about three years ago and are now being asked to do so again.
We were told then such changes would make homebuying more transparent and efficient for the consumer, but the reality is they only caused more delays, more confusion, and made homebuying more expensive for the consumer. But perhaps the biggest change – with potential negative consequences to the consumer — is CFPB’s proposal that the Closing Disclosure be prepared and delivered by the lender instead of the settlement company, which will leave the closing process more vulnerable to delays.
Currently, the lender sends its instructions to the settlement company and it is then the settlement company’s responsibility to prepare the final HUD-1 and deliver it to the homebuyer and all other parties to the transaction. Under CFPB’s option for preparation and delivery of the Closing Disclosure, here is the drill:
1. At least 3 days prior to closing, the settlement company prepares and sends a draft Closing Disclosure to the lender.
2. The lender manually transcribes (since there is no universal sharing of software between lenders and settlement companies) various line items from the settlement company’s draft Closing Disclosure. This will lead to the potential for numerous errors.
3. Lender then sends transcribed Closing Disclosure to the homebuyer (not to the real estate agent or any other party) and the settlement company.
4. The settlement company then has to transcribe the final lender numbers into its disbursement software production, check for accuracy, and check for proper escrow/disbursement balancing.
5. On the day of closing, even the slightest change in numbers (i.e., addition of home warranty, seller credit, termite report, etc.) would require notification of the lender to re-prepare the Closing Disclosure and return to the settlement company in order to commence with the settlement. In our experience, closings will be delayed up to 1 hour for even the slightest of change to the Closing Disclosure.
The proposed rule change will likely result in a more costly and potentially more frustrating homebuying experience for your client, which is why I strongly encourage you to submit a comment to the CFPB by November 6.
Tell them we want to make real estate closings easier — not harder!