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Title Agents Face Major Closing Changes, ATG and ALTA Offer Solutions

by Jerry T. Gorman, ATG Senior Vice President - Downstate Operations

A perfect storm of federal and self regulation is about to hit the title and settlement services industry, largely the result of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The first waves are starting to hit shore, but there is still a good deal of uncertainty as to what the final rules will be. However, ATG and our agents need to start bracing for the inevitable changes that will occur in 2013 and later.

ATG reported on this topic earlier this summer in a Call to Action - CFPB Releases Closing Disclosure Form Special Bulletin, July 24, 2012. The following article reiterates that information, and provides additional detail as well as insight from ATG leadership.

The starting point is the 1,099-page proposed rule by the Consumer Financial Protection Bureau (CFPB) that will, among other things, replace the HUD-1 with a five-page Closing Disclosure and dramatically change how closings will be conducted.

Under the Dodd-Frank Act, the CFPB is required to combine the former Truth-in-Lending Act (TILA) disclosure and the HUD-1 Settlement Statement into one document. To accomplish this, the CFPB has devised several new forms, including the Loan Estimate that will replace the current GFE document lenders started using in 2010. Of greater concern to ATG agents is the proposed Closing Disclosure. This is the document that actually replaces the HUD-1 and TILA. It is strikingly different from the current HUD-1 in how it is formatted, prepared, and delivered.

Closing Disclosure

The Closing Disclosure pulls together information from the Loan Estimate, the TILA disclosures, and the settlement costs for the borrower/buyer in a different structure than the current HUD-1. A separate, Seller Disclosure form is also available. The Closing Disclosure would be delivered only to the buyer/borrower. The form does not retain the numbering system from the current HUD-1. Instead, the form is divided into Loan Costs and Other Costs with letter designated areas such as "A. Origination Charges," with no assigned order to the information under that category. Title industry software developers have indicated serious concern about how to design such a free-flowing form into meaningful formats that will allow the financial information to coordinate between this form, check-writing, reconciliation, and other functions. These developers indicate it could take up to 18 months to structure software in this form and have encouraged the CFPB to go back to set lines for specified, reoccurring expenses

Pages 2 and 3 of the form contain the basic financial information for the transaction akin to pages 1 and 2 of the old HUD-1, but the format is dramatically different. Charges are divided into three columns:

• Borrower-Paid;
• Seller-Paid; and
• Paid by Others.

Those columns are then subdivided into - Paid:

• At Closing; and
• Before Closing.

On a positive note, the form goes back to full disclosure of all fees and eliminates the roll-up concept of the 2010 HUD-1. The title agent/underwriter split is also gone. It also appears that the form anticipates dealing with seller charges as seller charges, rather than all charges to the buyer (such as the owner’s title insurance policy) and then a credit back to the buyer if the seller actually pays for that item. On page 3, the form does retain the concept of cash from/to the borrower needed to close along with cash to/from the seller. However, the concept is to deliver this document only to the buyer/borrower and use the separate seller form for the seller in buy-sell transactions.

Pages 4 and 5 contain the loan and TILA disclosures. Confusingly, some up-front charges are now considered part of the cost of the loan, including closing costs and the loan title policy, and are, therefore, added to the annual percentage rate (APR). In comparing the Closing Disclosure with the Loan Estimate, now only two tolerance levels will be permitted:

• Items for which the borrower could not shop will have zero tolerance.
• Services for which the borrower could shop will have a 10% aggregate tolerance.

If the borrower is allowed to shop for service items, such as title insurance, the lender must provide a list of service providers to the borrower.

The Closing Disclosure must be delivered to the borrower three business days prior to closing. If tolerance levels are not met or if changes are made, a new Closing Disclosure must be delivered and the three-day period begins anew. There are certain exceptions to this three-day rule:

• Last-minute negotiations between the parties;
• Changes less than $100;
• Technical mistakes;
• Post-closing changes such as a change in a government fee; and
• Amounts paid by the lender to cure a tolerance violation.

As noted in our July Call to Action - CFPB Releases Closing Disclosure Form, the CFPB is taking public comments on this proposed rule until November 6, 2012. They especially want to hear from small business owners describing real case problems you foresee. Send your comments to ATG; we will submit them to the CFPB on behalf of the membership:

cfpbcomments@atgf.com

You have until November 6, 2012, to review and provide comments on most of the proposal.

Lender Requirements for Third-Party Vendors

Another area that will change the closing landscape significantly is new requirements coming out of both the CFPB and Office of the Comptroller of the Currency (OCC); these are part of settlement agreements and negotiations with lenders growing out of the mortgage foreclosure crisis. Wells Fargo and other lenders are at the forefront of establishing significant vetting and financial management requirements on third-party providers in the mortgage loan and foreclosure processes. Included in these requirements will be very strict standards on escrow accounts in mortgage loan closings as well as the employees who handle those accounts for third-party vendors, a.k.a. title agents. Among the standards being considered and that have been submitted to ATG as future requirements to handle escrow closings, include such things as:

• Annual vetting of closing staff through a third-party provider to conduct credit, criminal, and other background checks;
• Daily, three-way reconciliation of escrow accounts;
• Positive pay;
• Segregation of duties;
• Double signature of checks;
• Minimum levels of E&O coverage;
• Fidelity bond coverage; and
• Annual escrow agent audit by its underwriter.

To avoid inconsistent, duplicative, or unrealistic requirements, the American Land Title Association (ALTA) is working with the federal agencies and the lending industry to attempt to come up with uniform guidelines for escrow management and review. ATG is working very closely with ALTA and the lending community to keep our agents in the closing process under manageable guidelines.

Solutions for ATG Agents

Despite the above efforts to seek manageable guidelines, we are concerned that the additional requirements and costs will be overbearing for our smaller agents and possibly force you out of the title business. Therefore, ATG has started to explore ways that we could remove much of the cost and liability for escrow account management from our agents.

One option under consideration is to establish an ATG-managed escrow account that in coordination with ATG REsource software would both accept incoming checks and disburse checks in the member’s office. All wired funds would be handled through the same account. We currently employ that disbursement capability in our Chicago area closings and have started to do so for construction escrow disbursements in downstate Illinois.

In the upcoming months as the requirements become clearer, ATG will continue to inform our members on these changes and how we might best accommodate them. Continue to watch your email for our newsletters and updates, and check our website regularly for further developments and solutions.

Don’t forget to submit your comments, and if you have any specific questions about this topic, please contact me at jgorman@atgf.com. As always, we thank you for your loyalty and continued interest in ATG.

[Last update: 9-19-12]

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