It's time to say goodbye to real estate closings as we've known them for the last several years. The infamous HUD-1 Settlement statement, which is used by title companies and closing attorneys in nearly every real estate transaction, is officially being retired. The much-maligned and often criticized Consumer Financial Protection Bureau (birthed out of the chaos from the mortgage and real estate meltdown of the Great Recession) has implemented a new rule, set to go into effect October 3rd, 2015, that will significantly change the closing process.
The new CFPB law is set to outline new rules for integrated mortgage disclosures, and involves forms required under both the Truth-in-Lending Act (TILA) and the Real Estate Settlement and Procedures Act (RESPA). Instead of the current “Good Faith Estimate”, a new “Loan Estimate” will take its place. Additionally, the long trusted HUD-1 Settlement Statement will be replaced with a new form referred to as the “Closing Disclosure”.
For those of you who are new to the real estate business, The HUD-1 Settlement form, is used to itemize fees and services charged to the borrower, by the lender or broker, when they apply for a real estate loan. It is usually delivered to the buyer one day prior to the closing, and is an important form to review, as it accounts for all charges and credits (your MONEY!). The HUD-1 Settlement statement includes both credits and deductions taken from each party and helps determine the total amount the buyer is required to bring to closing, and how much the seller will receive as a result of the sale.
While I know HUD-1’s aren't exactly the sexiest topic for a blog post (unless you're a real estate nerd like me), but since they are used in nearly every real estate closing, it's definitely a form you should familiarize yourself with, and you should also understand the changes that are coming in the next couple of months.
Starting this summer, creditors must now provide a new final disclosure, which reflects the actual terms of the transaction. This is known as a Closing Disclosure. The form, the H-5 form (pg. 55) integrates and replaces the final TIL disclosure and the existing HUD-1 for these transactions. Unlike the HUD-1, the new form is longer, and must be delivered three-business-days before consummation of the loan. So don’t forget the date!
General Requirements (Good Terms to Know!)
- The Closing Disclosure must contain the actual terms and costs. Creditors may estimate when these are not readily available, but are expected to provide corrected disclosures, containing the actual terms, at or before consummation.
- The disclosure must be in writing, with the information prescribed in § 1026.38 of the CFPB.
- A three-day waiting period may be allowed if the creditor provides a corrected disclosure. This in turn, may also allow a three-day grace period for the consumer, prior to consummation.
Consummation not Closing – There’s a Difference Now!
Although consummation seems similar to settlement or closing, as it commonly occurs at the same time, you should be aware that the two events are considered legally distinct. Consummation begins at the point in time when the consumer becomes contractually obligated to the creditor on the loan. When this may occur, generally depends on your State law. You should always verify your State laws to ensure a timely delivery of the Closing Disclosure.
Change can be Good
Ushering in a new system, into what had become a well-oiled machine, can be an incredibly daunting task. This is why the original date to implement these changes of August 1st has already been pushed back twice, and also includes a “grace period” that is expected to last until the end of the year. However, this change might come as a breath of fresh air, as not only are consumers better protected, but it puts more transparency on a market that has been roundly criticized since the market crash of 2007/2008.
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