Real Estate Settlement Procedures Act (RESPA)
One of the purposes of RESPA is to help consumers become better shoppers for settlement services. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.
Closing Disclosure (“CD”) Replaces Good Faith Estimate & HUD-1 Settlement Statement
Effective October 3rd, 2015 buyers applying for a mortgage loan will receive a Loan Estimate from the lender instead of a Good Faith Estimate (GFE). Buyers will generally receive the CD three days after applying for their loan.
The Closing Disclosure (“CD”), will include all of the information currently found on the previously used HUD-1 settlement statement (HUD-1). The CD will also include an additional three pages of financial disclosures currently found on other forms. Lender fees and closing costs information will be found on pages two and three of the new five-page CD.
The CD must be received by the borrower three business days before closing. (“Business day” means every day except Sundays and federal legal holidays.) If the Lender mails the CD, then the loan cannot close until the sixth Business day following mailing. That means six Business Days must elapse from the time the Closing Disclosure is sent to the borrower and closing. Since it is difficult to determine if a borrower actually received the new form, most Lenders will rely on the additional three business days required when the form is mailed, couriered or emailed.
Servicing Disclosure Statement
RESPA requires the lender or mortgage broker to tell you in writing, when you apply for a loan or within the next three business days, whether it expects that someone else will be servicing your loan (collecting your payments).
Affiliated Business Arrangements
Sometimes, several businesses that offer settlement services are owned or controlled by a common corporate parent. These businesses are known as “affiliates.” When a lender, real estate broker, or other participant in your settlement refers you to an affiliate for a settlement service (such as when a real estate broker refers you to a mortgage broker affiliate), RESPA requires the referring party to give you an Affiliated Business Arrangement Disclosure. This form will remind you that you are generally not required, with certain exceptions, to use the affiliate and are free to shop for other providers.
HUD-1 Settlement Statement
For most residential transactions, this form of settlement statement will no longer be used. You can expect to see a HUD-1 Settlement Statement in commercial transactions and in cash transactions. One business day before the settlement, you have the right to inspect the HUD-1 Settlement Statement. This statement itemizes the services provided to you and the fees charged to you. This form is filled out by the settlement agent who will conduct the settlement. Be sure you have the name, address, and telephone number of the settlement agent if you wish to inspect this form. The fully completed HUD-1 Settlement Statement generally must be delivered or mailed to you at or before the settlement. In cases where there is no settlement meeting, the escrow agent will mail you the HUD-1 after settlement, and you have no right to inspect it one day before settlement.
Escrow Account Operation & Disclosures
Your lender may require you to establish an escrow or impound account to insure that your taxes and insurance premiums are paid on time. If so, you will probably have to pay an initial amount at the settlement to start the account and an additional amount with each month’s regular payment. Your escrow account payments may include a “cushion” or an extra amount to ensure that the lender has enough money to make the payments when due. RESPA limits the amount of the cushion to a maximum of two months of escrow payments. At the settlement or within the next 45 days, the person servicing your loan must give you an initial escrow account statement. That form will show all of the payments which are expected to be deposited into the escrow account and all of the disbursements which are expected to be made from the escrow account during the year ahead. Your lender or servicer will review the escrow account annually and send you a disclosure each year which shows the prior year’s activity and any adjustments necessary in the escrow payments that you will make in the forthcoming year.