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Th e M Rep o RT | 27 Feature Th e M Rep o RT | 27 T hough the TILA-RESPA Integrated Disclosure (TRID) regulation is only a few months away, there are still many aspects of the new regulation to unpack before the August 1 deadline—such as what will be lost by moving away from the HUD-1. Loan origination systems, title and closing production systems, and loan document preparation systems have all been scrambling to create the new Closing Disclosure form provided by the Consumer Financial Protection Bureau (CFPB), which is designed to improve the borrower's understanding of the financial terms before and at closing. However, few would argue that the Closing Disclosure form (CD) is in fact a significant improvement over today's HUD-1. Unintended consequences of TRID have the potential to hold up your business, and need to be accounted for before the August deadline. Look in the Rearview Mirror: HUD-1 T he HUD-1 has been in place for more than 40 years and is arguably the most recognized and consistent real estate form, if not the most recognizable form of all financial documents. HUD-1 was developed before the mortgage and title industry was computerized, therefore the HUD-1 became the de facto standard for capturing and documenting the real estate financial transactions. The single form was: • The disclosure to the borrower and seller • The required escrow disbursement document per state escrow regulations • The final "source of truth" for documenting fees paid by all parties • The reporting of the revenue to lenders, title companies, and lawyers • Tax reporting document for IRS purposes for the borrowers • Signed HUD-1 is proof of transaction consummation • Signed HUD-1 is required as proof for lenders to fund loans In short it was THE one consis- tent and universal documentation in every residential real estate file that documented all the funds paid and disbursed. Many homeowners were recently reminded of the HUD-1 when they went to do their taxes last month and programs like TurboTax prompted them to enter their data from the HUD-1. Shifting Gears: Moving from HUD-1 to TRID W hile the new CD has reconstructed and re- envisioned the first bullet above, the bureau has not addressed the pervasive uses of the HUD-1 throughout the process, nor does it support the value the industry has placed upon having a highly consistent format for fee data in each and every closed loan file. The CD isn't required to be signed at closing and will not be the single form documenting borrower, seller, real estate agent, title company, lender, lawyer, and other fees that is executed by the borrower, seller and escrow agent. In the new TRID world, what form is the new source of truth? To my knowledge, there is none. Since many state escrow laws or regulations require the escrow agent to have a single document outlining all of the flow of funds and fees that are executed by the borrower, seller and escrow agent, the escrow companies have no choice but to develop a new form. The CD is not able to satisfy escrow laws or regulatory requirements and the HUD-1 can no longer be utilized, per the CFPB. The escrow agents are left developing new "settlement statements" that need to fill the gap left by the HUD-1. Unfortunately, this means there is no industry standard, no promulgated form, and no guidance from the regula- tors on what should replace the HUD-1 for this purpose. So each escrow agent is left to develop their own forms that the industry will use and with tens of thousands of independent agents, we can expect thousands of variations. Five Potential Potholes; Or, the Unintended Consequences of Adopting TRID P otentially, the one and only true standard the mortgage industry had (HUD-1) will be lost as of August 1st. As the industry transitions from HUD-1 to TRID, it's important to recognize the unintended consequences that the move away from what is arguably the most utilized and important document in the mortgage loan package will produce. 1. Interest and Points Reporting: Since interest and points paid at closing are often tax deductible, the HUD-1 document is used as a substitute 1098 for tax reporting. Borrowers typically provide a copy of this document to their accountant or use it as proof for filing their income taxes. 2. Funding Approval: It is still a common practice for lenders to request signed copies of the HUD-1 to be delivered to the lender immediately after closing in order to release funds to the escrow agents. Presumably in the new TRID world the lender will require a signed settlement statement in one of the thousands of new formats. Without consistency, this could cause more manual work, more room for errors, and create more expense within the process. 3. New Loan Set Up: Servicers have always relied on the HUD-1 to verify amounts collected at closing for prorations of property taxes, property insurance (flood, windstorm, homeowners), and monthly MIP. While alternative documentation exists, these prorations provide document consistency and uniformity to ensure the amount of the mortgage payment, including the impounds, is easily communicated and understood by the borrower. It also allows for easy determination of initial impounds and how they were determined at closing. 4. Quality Control and Compliance Testing: Whether loans are held for investment, retained for servicing, or sold through the secondary market to another lender, the HUD- 1 is the common document utilized for quality control and compliance testing. The line item breakdowns allow a lender to review all fees and costs collected at closing to determine federal, state and local high-cost compliance tests. This information is used by internal quality control departments, third party review firms, warehouse banks, and investors to ensure the loan was closed in accordance with high-cost provisions that vary from state to state, as well as investor and guarantor limitations for contributions to closing costs. It is imperative that uniformity is maintained to ensure there is no fundamental breakdown in the overall length of time to complete secondary market transactions and consummate loan sales. This uniformity is lost without the HUD-1. Furthermore, many lenders and compliance vendors have effectively utilized OCR tools to scrape data from the HUD-1, which was only possible with the consistency of format. 5. Capital Market and Treasury Considerations: Removing HUD-1 doesn't just impact the origination of the loan. It is common for whole loans to be sold to third parties, sometimes multiple times. Additionally, loans are often securitized and sold on the market as Mortgage Backed Securities. Due diligence processes will be complicated and expensive given the difference in federal and state regulations, various underwriting guidelines and the