HUD-1 replacement: Where do we stand, what's next?

The process of replacing the current HUD-1 with a brand new disclosure form is now in round three. Let's take a look at the latest draft prototypes, what the Consumer Financial Protection Bureau (CFPB) is asking from you and what the national association has said regarding this stage of the process.

For those unaware, the CFPB is required to draft new mortgage disclosures and are currently in the process of combining the HUD-1 Settlement Statement and final Truth in Lending (TIL) disclosure in an attempt to provide consumers with a clear and concise settlement disclosure form. 

The bureau has been moving quickly to get these forms out. Its recent announcement, however, seemed a bit confusing. When referring to its integrated GFE and TIL form, the announcement interchanged the words "application disclosure prototype" and "initial disclosure prototype." It then interchanged the words "closing disclosure prototype" and "settlement disclosure" when referring to the integration of the HUD-1 and TIL final disclosures. The CFPB then explained that there were three prototypes to review, one initial disclosure and two settlement disclosures. A reader can make sense of it, but it might take a little work.

In this round, the bureau would like responders to compare the initial disclosure prototype to the two newest settlement disclosure prototypes to see how well they complement one another:

Initial disclosure prototype — Honeylocust
Settlement form prototype 1 — Butternut
Settlement form prototype 2 — Hemlock

The CFPB is asking people to think of the following questions as they review the forms:

• Can you easily find key loan terms?
• Are you able to identify changes to the loan terms or costs?
• Do you know who to contact to discuss your loan or changes to your loan?
• Do you have the information you would need to feel comfortable closing on the loan?
• Are the disclosures easy for lenders and settlement agents to use and explain to consumers?

"We've spent the past few months asking you to compare two prototypes for the disclosure consumers get soon after applying for a mortgage loan or the disclosure they receive when they close the loan," the bureau wrote. "This month, we are asking people to look specifically at how the new closing disclosure prototypes work with our current application disclosure prototype. We will begin testing today in the City of Brotherly Love — Philadelphia, Pa. It's a lot to look through, but we've also posted them online for you to look at."

The American Land Title Association is asking its members to also consider the following questions in their comments:

• Do you like the way these forms deal with line numbers?
• Do you use line numbers to help explain costs to customers? 
• Do you prefer these forms to the current HUD-1? Why?
• Will these forms create any problems any problems for you when explaining information to consumers?

"As we begin our third round of testing the closing disclosures today, we want to talk about what we learned last time," the CFPB said. "We asked you to tell us which of two settlement disclosures, Mimosa or Sassafras, you found easier for consumers to use and understand. Many of you found the Sassafras form more consumer-friendly because the closing costs were organized in a format similar to our prototype application disclosure. However, some of you told us that we shouldn't eliminate line numbers. You've told us, among other things, that line numbers may help industry software systems that deal with the current HUD-1 settlement statement."

Some people have already commented on the newest prototypes, and not everyone is happy with the new forms.

"Let's confuse the borrowers even more!" one consumer wrote. "They are not consumer-friendly documents!" 

Others are content just to have their opinion heard.

"I feel like the Butternut Bank disclosure is clearer," one commenter wrote. "[The information is] better organized, in a clearer and more hierarchical way. I can't tell exactly why in those long documents, but it's how it seemed when I was reading the disclosures and looking for information. By the way, it's great that you are willing to take normal people's input into consideration." 

Another commenter questioned if the CFPB and its director, Richard Cordray, will help community banks.

"Between the two I prefer the Hemlock," one commenter said. "That being said the form is of concern but not as much concern as the instructions and procedures and tolerances for completing the form. In addition I question the implication in the forms that escrow can be made voluntary or is otherwise optional in some way. Unless CFPB is going to rewrite this part of the regulation as well this is simply not the case for the majority of these loans. After I see these details then I will decide if the community banks are considered by Cordray to be one of the 'honest businesses' he mentions as being benefited by the CFPB or if we are to be punished because we are on the wrong side of the vague and unspecified 'fairness' test this administration seems so fond of throwing around in speeches and press releases. I hope for the best but I fear we will get more of the same, more intolerant demands that make no sense except to those who impose them."

Final round coming up

The bureau will hold one final round of Know Before You Owe testing. It said that over the next couple of weeks it will explain the process of creating the federal rule that will update the forms.

ALTA and other industry associations are getting itchy to know more about the rulemaking process and implementation. In a letter addressed to Cordray, ALTA and the other organizations expressed interest in commenting on that next phase of the process.

"It is becoming clear that the accompanying rules that will govern the use and application of these forms are every bit as important as the content of the forms themselves. Among other things, the rules will govern the timing and reliability of the forms and provide remedies for misdisclosure," the groups wrote. "Notwithstanding, no input on these rules has been invited. For this reason and to ensure a more workable proposal, we encourage you to use a similarly open and interactive process to arrive at the accompanying rules."

The groups would like to see an iterative rulemaking process in advance of the July 21 statutory deadline for a proposed rule that has an outline of underlying rules to accompany the disclosures.

"Through this iterative process, the bureau can develop its proposed regulation ahead of time and prevent unforeseen vagaries that will require extensive guidance after the rule is proposed," the groups continued. "While we are cognizant of the July 21, 2012 statutory deadline for the proposed rule, we believe it is more important to get this right rather than simply getting it done. We do not believe the rule should be bifurcated in any manner resulting in unnecessary costs. Housing and mortgage markets remain under stress and considerable costs have been borne by consumers as a result of past reform efforts. The effort to harmonize RESPA and TILA must not add confusion or contribute unnecessary friction or costs. An iterative rulemaking process will help avoid both outcomes while giving the Bureau appropriate feedback from industry and the public as it moves toward a proposed rule."