Subtle yet fundamental changes have come to some of the most important forms involved in the mortgage loan process. The Good Faith Estimate (GFE), the Truth-In-Lending (TIL) form, and the HUD-1 document have all been combined into two new forms: the Loan Estimate and the Closing Disclosure. The new forms were supposed to become effective in August, but were pushed back until October.
The Loan Estimate form replaces the GFE and the initial TIL form that you receive on or before the third business day after submitting your loan application. It contains a summary of the terms of your requested loan (GFE components) and the expected costs over the life of your loan (TIL components) based on the best estimate at the time.
The Closing Disclosure replaces the HUD-1 form and updated TIL form. You receive it three business days before the closing settlement meeting when all of the legal documents are signed. It summarizes the final loan terms, financial information, and cash flows at closing.
The extra time to review the closing disclosure is an important change. Previously, this paperwork was supplied either the day before closing or at the closing settlement meeting. The forms have been revised to make them easier for consumers to read and compare the initial estimate to the final terms and closing costs. In the past, this was difficult to do because, while the information was included in the GFE, TIL, and HUD-1 forms, the difference in formats made it difficult for novices to see differences and spot questionable changes.
The TILA-RESPA page on the Consumer Financial Protection Bureau (CFPB) website has many useful links on the origin, purpose, and use of the new forms, as well as copies of the forms for review. The most insightful way to use this information is to download the sample loan estimate and sample Closing Disclosure forms that cover the same fictional loan. Comparing them side-by-side, you can see that the categories align directly between the two forms and how information about changes are noted, highlighted, and explained.
The sections in both forms follow this format:
- Basic Information – Contains the issue date, property, listed sale price, loan term and type, purpose (purchase/refinance), rate lock information, and borrower/buyer name as well as address. The closing disclosure includes the seller and lender information.
- Loan Terms – The loan amount, interest rate, and monthly principal and interest (P&I), combined with information on prepayment penalties and balloon payments. Allowable changes are noted.
- Projected Payments – Your estimated monthly payments including P&I, private mortgage insurance (PMI), along with any escrow payments (for taxes, homeowner's insurance, and any other necessary escrowed amount).
- Closing Costs – The estimated/final closing costs plus the amount of cash that the buyer needs to provide at closing.
- Closing Cost Details – This breaks down all the closing costs into categories such as origination charges, services that you can shop for and services that you cannot shop for, taxes, prepaid amounts, and any other costs. For the loan estimate form, these are ballpark figures. For the closing disclosure, they represent accurate values and are categorized by who paid the expense. It is a complete snapshot of all closing costs and who paid them.
The distinction of services that can and cannot be shopped for is important. Lenders are not responsible for bad estimates on services that homebuyers can shop for, but they have to stay within the defined limits on estimates for services that they cannot shop for (unless they use vendors that are not lender-approved).
At the end of this section, a cash summary is put together. It shows how the amount of cash to bring to closing was calculated. Then, the closing disclosure includes a summary of transactions including all monetary transactions involving the seller and the buyer — in short, a sort of balance sheet for both sides.
- Additional Loan Information – This is the only section where the forms vary significantly.
In the loan estimate, this section contains lender details and information used to directly compare loan offers such as the annual percentage rate (APR) and the total interest paid over the life of the loan. The remainder of the form outlines terms on appraisals, insurance, late payments, and transfers (whether or not there is a mortgage assumption when you sell the property or if the bank can then sell your loan to another servicer).
The closing disclosure includes more detailed information on terms, escrow accounts, liabilities after closure, and more information on total payments over the life of the loan. Contact information for the lender, each broker, and the settlement agent are included.
The new forms are still a lot to digest, but they are easier to understand for consumers to shop around with and compare, as well as to understand the terms fully before signing. The only real question is whether lenders, settlement agents, and others with automated forms can smoothly adapt to these new procedures. Expect some difficulties in the beginning and look over your forms extremely closely to see if they match the corresponding CFPB template.