Coming Changes in Loan Forms
As a result of the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), loan disclosure forms and closing statements will soon be changing. In an effort to comply with the Act and allow for consumers to be better informed of loan options, the Consumer Financial Protection Bureau issued a final rule on November 21, 2013 which will establish new procedures and forms for the loan process. For loan applications received after August 1, 2015, lenders will now be using a Loan Estimate Form and Closing Disclosure Form in an effort to keep consumers better informed of loan options and requirements.
The new Loan Estimate Form will be replacing the Initial Truth in Lending Form and Good Faith Estimate Form issued by the Lender during the application process of the loan. The form is supposed to provide borrowers with a clearer breakdown of their loan expenses and closing costs and allow the borrower to compare multiple loans and lenders more easily. The purpose of this form is to make the loan package easier to understand so that borrowers will be better informed. The form must be issued to borrowers three business days after the borrower has submitted a loan application. As with the Good Faith Estimate Form, this new form will be subject to tolerances. Therefore, there will be certain costs estimated on this new form that may not increase at closing. Previously, those zero tolerance items included origination charges, adjusted origination charges, the charge or credit for the chosen interest rate and transfer taxes. The new law has expanded to include additional zero tolerance items such as lender or mortgage broker charges, fees for services performed by providers selected by the Lender and fees for services performed by providers on the lender’s preferred provider list (a list from which the borrower must select a provider).
The new Closing Disclosure Form will be combining and replacing the Final Truth in Lending Form and the HUD-1 (Settlement Statement) form. The use of these new forms will generally be required on all settlements except on those for home equity lines of credit, reverse mortgages or mortgages secured by mobile homes or other dwellings not attached to the land. The form changes the format of the existing HUD-1 by eliminating the section numbering and alphabetizing the fees under each section of the form. The new disclosure form also requires the terminology of the costs on the form to exactly match the terminology of the costs on the Loan Estimate Form in order to make comparing the forms easier for borrowers. This form must be provided to borrowers three business days prior to settlement. For the purposes of this timing requirement, if forms are mailed to borrowers, it is assumed that the borrower receives the form three days after mailing (effectively requiring a six day disclosure period from the date of mailing). If the annual percentage rate increases by more than one-eighth (1/8th) of a percent, if the loan product changes or if a prepayment penalty is added to a loan product, the form must be amended and re-disclosed three days prior to settlement.
This disclosure period is supposed to allow the borrower to review the closing costs, cash required to close and loan terms prior to settlement in order to allow the consumer to be better informed of their responsibilities at closing. As there is no current timing requirement, many borrowers may not have the ability to view the final HUD-1 until they are attending settlement. Therefore this new timing requirement is intended to help to eliminate any surprises at the closing table and allow any changes to be made prior to closing. The three day disclosure period may only be waived in writing and only due to a financial emergency of the borrower.
For any additional questions regarding the new rule or loan products, you may visit www.consumerfinance.gov/knowbeforeyouowe.
This is intended as a general overview of the new mortgage requirements. This is not intended to provide legal advice. If you have any further questions regarding the new estimate and disclosure forms, please feel free to contact our office by telephone or by E-mail.