What's the difference? HUD-1 Settlement Statement vs. Closing Disclosure
It’s at least three days before your scheduled closing date, and you just received a Closing Disclosure, but what on Earth is it? And how is it different from an HUD-1 Settlement Statement? We will get into that, but first let’s look back a bit to understand how real estate settlement procedures got to where they are today.
The History of Real Estate Settlement Procedures
1968: The Truth in Lending Act (TILA) was established by the Federal Reserve Board for consumers in regards to lenders and creditors. It afforded a consumer the right to know the annual percentage rate (APR) and the cost of the loan for the borrower. TILA prevented steering, and prevented a lender from receiving compensation for certain terms or conditions. It also gave a buyer a time period to get out of a loan without penalty.
1974: The Real Estate Settlement Procedures Act (RESPA) was created to help protect consumers from foul practices, forcing lending institutions to disclose settlement costs upfront. This act is enforced by the Consumer Financial Protection Bureau (CFPB) and includes all types of mortgages. RESPA requires different disclosures during different parts of the home closing process and also offers protection to consumers in areas including:
- Limiting the amount put into escrow for real estate charges
- Allowing buyers to use their own title company and title insurance
- Prohibiting lenders from receiving a fee in exchange for a referral
2010: The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed, providing new rules for banks and other financial institutions to aid in more transparent lending and funding. We will tell you more about this in a minute.
RESPA has been amended several times, with the Reform Rule being the biggest. The Reform Rule said that the Good Faith Estimate and a revised HUD-1 Settlement Statement were required as of 2010. The reason behind all of these amendments and changes was to create more transparency and progress in consumer protection, which leads us into the 1986 HUD-1 Form.
HUD-1 Settlement Statement
1986-2015: Prior to October 2015, the Settlement Statement was known as the HUD-1, which is a standard government form issued by the Closing Agent that lists all credits, charges and home loan terms for both the buyer and the seller in all real estate transactions that required a mortgage. The charges for both the borrower and seller were listed on the same form, with borrower charges on one side of the form and seller charges on the other.
When reviewing this form, you want to look for errors in any of the following details: address, price, down payment amount, proration calculations, required insurances, fees and commissions, items that require advance payment, your earnest money, your payoff, any cash you must bring to the closing table and more. While this form is no longer used for typical loan settlements, it is still used with Reverse Mortgages and Mortgage Refinances, so you just might see one of these at some point in your life.
The Current Closing Disclosure
2015-today: Now let’s get down to the nitty gritty on what is expected in the here and now. The Consumer Financial Protection Bureau (CFPB) took over administration from HUD and replaced the HUD-1 with the Closing Disclosure in October of 2015. It is similar to the HUD-1 in that it details the loan terms and costs, including the interest rates, closing costs, taxes, monthly payments, and more.
The new rule is called the TILA-RESPA Integrated Disclosures rule, or TRID for short. The Dodd-Frank Act directed the CFPB to combine the previous Truth in Lending Act with the Real Estate Settlement Procedures Act disclosures. These are now called the Loan Estimate and the Closing Disclosure, which are a part of the TRID rule.
What's changed?
TRID is designed to help borrowers understand their loan prior to closing by providing less paperwork and a more clear, easy way to understand the costs involved in a mortgage through the Loan Estimate and the Closing Disclosure. These two documents must be in the hands of the buyer at least 3 days prior to the closing date in order to find any errors or issues before closing. If certain changes are made to the disclosure, the 3-day waiting period starts over. This is one big change with the new TRID rules.
Another big distinction between the Closing Disclosure and the HUD-1 is where the HUD-1 listed all terms, charges and credits for both the buyer and the seller, the Closing Disclosure has a separate form for the buyer as it does for the seller. This provides for more consumer protection at the closing table.
Another change that came up with the new TRID laws was for consumer protection. Realtors were having a hard time receiving a copy of the Closing Disclosure because it lists NPI (Non-public Personal Information) of the consumer. Because of this, the American Land Title Association (ALTA) created the ALTA Settlement Statement, which is a standard settlement statement form that doesn’t include NPI and can be used with the new TRID Closing Disclosure form (not in place of). This makes it easier to share financial transaction information between parties involved, allowing Realtors to obtain the data necessary to close out the MLS listing as well as allow them the chance to offer guidance to their client. The Alta Settlement Statement has both the buyer and seller information on it with all credits and charges listed, more like the HUD-1 form.
With the new TRID rules you will receive the Loan Estimate at the start of the process, then three days prior to closing you will receive the 5-page Closing Disclosure which you can compare to the Loan Estimate. The Closing Disclosure will include the loan terms and payments, closing cost details, fees and other costs, a transaction history, how much is needed at closing, and more. It contains similar information to the HUD-1.
A Couple Tips
Take the time to read through these documents to look for mistakes, and ask your lender and Real Estate Agent to help you what you don't understand. Don’t assume that the Closing Disclosure is correct. Mistakes happen, so don’t be afraid to ask questions or seek clarification before you sign the paperwork at closing. If it is a major mistake, the buyer can obtain an explanation, and even negotiate a deal or walk away from the loan.
The progress of settlement procedures and laws for consumer protections in real estate transactions have come a long way, making it safer now than ever to go through the process of closing on a home.
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