The Strange Appearance of Title Insurance Rates on the New Closing Disclosure

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calculator paperIs this what the CFPB intended?

South Carolina closing attorneys are in the throes of their first closings under the new CFPB rules. Title insurance company offices are fielding all kinds of unusual questions as everyone works through their first few sets of documents. And our collective eyes are having difficulty adjusting to the appearance of title insurance rates on the new Closing Disclosure.

Under the filed rates of the title companies in South Carolina, we have a simultaneous issue rate of $100 for a second policy in a transaction. Typically, the owner’s liability amount and premium are higher, so the simultaneous issue rate of $100 is the charge for the loan policy.

The South Carolina Department of Insurance (SCDOI) requires us to disclose the true cost of an owner’s policy over the cost of the loan policy. We have been accustomed to referring to this charge as the “difference plus $100” because we take the difference in the full cost of both policies and add the $100 simultaneous issue fee to arrive at the number the SCDOI requires.

Let’s look at an example:

In a purchase transaction, the sales price is $455,000, and the loan amount is $409,500.  The full premium for the ALTA Homeowner’s policy is $1,290.60, and the full premium for the loan policy is $981.00. In the past, the title and software companies’ rate calculators would have shown:

ALTA Homeowner’s policy rate: $1,290.60 (full premium)
Loan Policy (standard rate): 100.00 (simultaneous issue fee)
$1390.60 (total)

For the SCDOI required disclosure, we would have shown:

ALTA Homeowner’s policy rate: $409.60 (difference plus $100)
Loan Policy (standard rate): 981.00 (full premium amount)
$1390.60 (total)

The total of the two calculations was always consistent.

Now, the CFPB requires that the total cost of the loan policy be disclosed and any simultaneous issue discounts must be shown against the owner’s policy. That’s ok with our South Carolina eyes because we can use our “difference plus $100” calculation to reach the same result.

The problem occurs where there is a reissue credit. While the CFPB never specifically addressed how to handle a reissue credit, the agency was clear that the loan policy premium had to be reflected in full. So most of the title and software companies have decided to take the reissue credit from the owner’s policy premium as well.

In our example, let’s assume that there was a prior ALTA Homeowner’s policy in the amount of $315,000. The reissue credit would be $468.90 (half the full premium for $315,000), so the new total cost would be $921.70 ($1,390.60 – $468.20), and this is where the problem becomes more challenging:

ALTA Homeowner’s policy rate: $ -59.30 ($409.60 minus the credit of $468.90)
Loan Policy (standard rate): 981.00 (simultaneous issue fee)
$921.70 (total)

The total is the same (and correct in our collective view), but notice the negative number as the cost of the owner’s policy.

We have decided in our office to think about it this way. The Closing Disclosure is not a replacement for the HUD-1, and it is not a closing statement. It is simply what it is entitled, a closing disclosure that the CFPB requires for the consumer borrower.

We are going to have to prepare other documents (closing statements, disbursement analyses) that will allow us to properly disburse and to completely disclose each disbursement as required by the SCDOI, not to mention the South Carolina Supreme Court! And our eyes are just going to have to adjust to those negative numbers!

Thanks to Cris Garrick, the IT guru in our office who figured this out and convinced me it’s correct!

Five Things Dirt Lawyers Need to Know Before August 1

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Prepare now for a smooth transition to the new CFPB regulations and forms

Our company has put together some general information about the CFPB regulations that become effective on August 1. I’m sharing a few tips with the letstalkdirtsc.com audience in an effort to assist with a smooth transition.

1 HandWhat transaction types are affected and exempt? The new rules and forms apply to most closed-end consumer credit transactions secured by real property. The following types of loans are affected:

  • Purchase money mortgages;
  • Refinances;
  • Mortgages on 25 acres or less;
  • Mortgages on vacant land;
  • Mortgages for construction purposes only; and
  • Mortgages on timeshares.

Consumer loans exempted from the new rules and forms are:

  • Reverse mortgages;
  • Home equity lines of credit (HELOCs);
  • Loans on chattel-dwelling/mobile homes only; and
  • Loans by creditors who originate less than five loans in a calendar year.

Creditors will be required to use a TILA disclosure and Good Faith Estimate (GFE), and closing attorneys will be required to use a 2010 HUD-1 Settlement Statement on the exempt loans.

Loans in progress (applications submitted prior to August 1, 2015) are not subject to the new rules or the new forms.

2 HandWhat are the new rules and forms? On November 20, 2013, the CFPB announced the completion of the new integrated mortgage disclosure forms along with their regulations (RESPA Regulation X and TILA Regulation Z) for the proper completion and timely delivery to the consumer.

The Loan Estimate – Currently, borrowers receive two forms from their lender at the beginning of the transaction: the GFE and initial TILA disclosure. For loan applications taken on or after August 1, the creditor will instead use a combined Loan Estimate form.

The Closing Disclosure – The HUD-1 Settlement Statement and the final TILA disclosure form have been combined into a single Closing Disclosure form. This new five-page form contains many loan terms and provisions in addition to the closing figures. Several earlier letstalkdirtsc.com blogs discussed which lenders that have announced they will prepare and deliver the Closing Disclosure. It appears that in all cases, closing attorneys will prepare the seller’s Closing Disclosure and a separate closing or disbursement statement to facilitate disbursement.

forms in out

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How will the timing of a closing be impacted by Closing Disclosure delivery? The new rule requires borrowers to have three business days after receipt of the Closing Disclosure for review. The three-day review starts on the receipt of the form by the borrower. Absent some positive confirmation of receipt such as hand delivery, the form is “deemed received” three days after the delivery process is started (i.e., mailing). As a result, the combination of the delivery time period and the review time period results in six business days from mailing to closing.

After delivery of the initial Closing Disclosure, the following changes would require a re-disclosure and a new waiting period:

  • Increase of the APR by more than 1/8%;
  • Change in the loan program, for example, fixed rate to ARM; and
  • Addition of a pre-payment penalty.

Closing Disclosure Delivery Timeline Chart4 Hand

 

How will the communication of title and closing figures be handled? Lenders will continue to need accurate estimates of title and closing figures. Preparation of the Closing Disclosure will require a collaborative effort between lenders, closing attorneys and other vendors and may require fees to be submitted as early as two weeks prior to closing. Several lenders have announced that they will use electronic portals to send and receive information, eliminating the use of mail, e-mail and faxes between lenders and closing attorneys.

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How are title charges reflected on the new forms? The list of charges involving title insurance and closing activities must be grouped together and preceded by the word “Title”.

The CFPB requires that the full premium, not the discounted simultaneous issue premium, must be disclosed for the loan policy. The owner’s policy premium will be shown as “optional” and will be the total cost of the owner’s policy discounted by the cost of the loan policy and adding the simultaneous issue premium. Confusing?  Yes!

The line numbers have been removed from the HUD-1 form, and there are now seven fee areas:

  • Origination charges;
  • Services borrower did not shop for;
  • Services borrower did shop for;
  • Taxes and other government fees;
  • Pre-paids;
  • Initial escrow payment at closing; and
  • Other

Charges within each of these major groupings are listed alphabetically. Columns are provided to separate charges of the buyer, the seller, and others, as well as columns for payments both before and at closing.

Software and title insurance companies are doing extensive training in the form of seminars, webinars and written communications. If you intend to be a residential dirt lawyer after August 1, get yourself and your staff trained!