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Monday, August 5, 2013

Brace for Impact: GSEs Announce Uniform Closing Dataset (UCD) for New Closing Disclosure

For over a year, title agents and loan originators have been closely following efforts by the Consumer Financial Protection Bureau (CFPB) to create new rules and disclosure forms for real estate settlements. Under the proposed rule, expected to be finalized this fall, a new Closing Disclosure form will replace the existing HUD1 settlement statement, while another new form, the Loan Estimate, will replace the Truth in Lending (TIL) and Good Faith Estimate (GFE) forms.

The new Closing Disclosure, in particular, will require significant changes to software and office procedures. Gone are the familiar line numbers of previous HUD1 forms - replaced by a new format that alphabetically organizes loan costs into new groups, such as "Origination Charges", "Services Borrower Did Not Shop For", and "Services Borrower Did Shop For". (This of course, assumes that the final disclosures will resemble the earlier drafts - and all indications are that they will.)

New rules also require that the Closing Disclosure be provided to the consumer three days before closing, with any significant changes to costs triggering a new waiting period. This rule will require loan originators and settlement agents to share information much more closely in order to be compliant.

Although the draft CFPB disclosure rules put ultimate responsibility for the accuracy of the Closing Disclosure on the lender, most industry insiders fully expect title and settlement agents to maintain their role in preparing this statement. In order to stay compliant with the three-day rule, lenders and settlement providers, each of whom provide some of the cost information for settlement statements, will need to make sure their software systems can exchange closing costs electronically.

In an effort to standardize the underlying data required by the new disclosure, Fannie Mae and Freddie Mac have jointly created a new standard dataset called the Uniform Closing Dataset, or UCD. This dataset will be a new component in the Uniform Mortgage Data Program (UMDP), which is an ongoing endeavor by the GSEs, under the direction of the Federal Housing Finance Agency (FHFA), to improve the quality and accuracy of loan data.

Similar to other UMDP standards, such as ULDD (Uniform Loan Delivery Dataset) and UAD (Uniform Appraisal Dataset) which are already widely used, the UCD will be based upon XML standards produced by the Mortgage Industry Standards Maintenance Organization (MISMO).

Although full details on the UCD will not be released until after the CFPB releases its final disclosure rules later this year, this is a very significant development for several reasons and offers organizations and vendors a real opportunity to reduce implementation costs and risks associated with the new disclosures.

For software providers who must update systems to support the new Closing Disclosure, the UCD will take much of the guesswork out of determining which pieces of data go into which spots on the form. The MISMO Origination Workgroup, with feedback from the CFPB, has documented how to populate the new disclosures using the MISMO data points which underlie the upcoming UCD.

In addition to providing a blueprint to populating the disclosures, the UCD will also serve as a standard data format for settlement software and loan origination systems (LOS) to exchange information about loan costs. By embracing these standards, software providers have the opportunity not only to comply more easily with the CFPB's three-day rule, but also to increase the pool of trading partners with which they can easily integrate.

The most important thing to note about the UCD is that, like the ULDD and UAD before it, the dataset is likely to become a required format for all loans acquired by the GSEs. This is not something settlement service providers are going to be able to ignore.

With these new requirements coming, title agents and lenders should take time now to verify that their respective systems can accept electronic information from the other. Lenders, in particular, will likely demand this capability from settlement providers in order to ensure compliance with the three-day rule. Rekeying of data from one system to the other is not going to be an acceptable practice under the new rules.

Rather than waiting and "bracing for impact" later on, settlement providers and lenders would be well-advised to stay informed as more information comes out about the UCD and incorporate it into their plans to implement the new disclosures. Hopefully, adhering to and using the guidance inherent in the UCD will make the transition easier and less costly rather than simply being an added burden.