What Is a Settlement Statement?

A settlement statement is a document that summarizes the terms and conditions of a settlement, most commonly a loan agreement. A loan settlement statement provides full disclosure of a loan’s terms, but most importantly it details all of the fees and charges that a borrower must pay extraneously from a loan’s interest. Different types of loans can have varying requirements for settlement statement documentation. Generally, loan settlement statements can also be referred to as closing statements.

Beyond just loans, settlement statements may also be used whenever a large settlement has taken place. Thus, settlement statements can be used in large business transactions or potentially in the legal, insurance, banking, and trading industries.

Key Takeaways

  • A settlement statement is a document that summarizes the terms and conditions of a settlement, most commonly a loan agreement.
  • A loan settlement statement provides full disclosure of all of a loan’s terms and conditions as well as all extraneous fees.
  • Beyond just loans, settlement statements can also be created whenever a large settlement has taken place, such as with a large business transaction or potentially in the legal, insurance, banking, and trading industries.

Settlement Statement Explained

In its most common form, a settlement statement is part of a loan closing package provided to a borrower, usually from a loan officer at a lending institution. Comprehensive settlement statement documentation is required for mortgage loan products. It is also usually required for other types of loans as well. Commercial and personal loan borrowers will usually work with a loan officer who presents them with the closing, settlement statement. Some online lending and credit card agreements may provide different iterations of settlement statements that a borrower receives electronically. Borrowers are usually required to review and sign a closing, settlement statement in order to fully complete the lending process and receive their loan. The signing of the settlement statement also usually binds all of the terms associated with a loan, which typically cannot be easily amended.

In mortgage lending, there are two main types of settlement statements a borrower may encounter: closing disclosures and HUD-1 settlement statements. A mortgage closing disclosure is a type of standard settlement statement that is formulated and regulated for the mortgage lending market. The HUD-1 settlement statement is a type of closing statement used in reverse mortgages.

Mortgage Settlement Statements

The Real Estate Settlement Procedures Act (RESPA) governs the formulation of both closing disclosures and HUD-1 statements for the mortgage lending market. RESPA has been revised and updated throughout history to help manage mortgage lending disclosures and protect borrowers. RESPA requires a HUD-1 settlement statement for borrowers involved in a reverse mortgage. For all other types of mortgage loans, RESPA requires the mortgage closing disclosure.

Both the HUD-1 and mortgage closing disclosure are standardized forms. The HUD-1 is a three-page form generally required to be provided to a borrower one day before closing. The mortgage closing disclosure is a five-page form generally required to be provided to a borrower three days before closing.

Both the HUD-1 and mortgage closing disclosure provide information on all aspects of a loan, including terms as well as personal or entity information about the borrower. These forms also include comprehensive information about the borrower’s loan, detailing the principal and interest as well as all of the upfront costs, commission charges, service costs, and any deductions associated with the loan. Loan terms are also included, such as details on principal, interest, variable rates, prepayment penalties, and any special clauses associated with a loan such as escrow requirements.

Loan Fees

Loan settlement statements come with a package of disclosures that help a borrower to fully understand all of the terms and conditions of their loan. Besides providing comprehensive details, one of the most important reasons for a settlement statement is the disclosure of all of a borrower’s miscellaneous fees. All loans come with interest, but some loans have a variety of added charges as well. Some of these added charges may include:

  • Origination charges
  • Appraisal fees
  • Title administration costs
  • Home inspection costs
  • Background checking fees
  • Underwriting fees
  • Closing fees
  • Loan insurance charges

A settlement statement provides a clear summary of all of the fees associated with a loan.

Other Special Considerations

The term settlement statement is most often associated with the closing of a loan. However, other types of settlements can occur, which create the need for a unique type of settlement statement.

Debt settlement: A debt settlement statement can provide a summary of debts written off, reduced, or otherwise amended after a debt settlement has completed. Lawyers and debt settlement companies work on behalf of borrowers with overwhelming amounts of debt, in order to help them reduce some or all of their obligations.

Legal settlement: A legal settlement is typically written documentation detailing the terms and conditions under which a legal matter has been settled. Legal settlement statements may include a summary of payments required to a plaintiff or ongoing conditions required in a family custody settlement.

Insurance settlement: An insurance settlement is most commonly documentation of the amount an insurer agrees to pay after reviewing an insurance claim.

Banking: In the banking industry, settlement statements are produced on a regular basis for internal banking operations. Settlement statements detail daily settlement of funds comprehensively. Settlement statements can also be provided to individuals when funds have settled in an account and are available for access.

Trading: In financial market trading, settlement statements provide proof of a security’s ownership transfer. Typically, stocks are transferred with a T+2 settlement date meaning ownership is achieved two days after the transaction is made. Brokerages may also have their own settlement procedures when it comes to funding accounts and making funds available for trading.

Business transactions: Large business transactions, such as mergers and acquisitions, are usually consummated with some type of closing or settlement statement. Similar to loan closing statements, these settlement statements provide a comprehensive package covering the full details of the transaction, with the settlement statement usually serving as a summary sheet.