Amendments to Regulation X, the Real Estate Settlement Procedures Act Regulation (Subordinate Liens)

SUMMARY: The Department of Housing and Urban Development is

implementing the amendments to the Real Estate Settlement Procedures

Act of 1974 (RESPA) contained in sections 908 and 951 of the Housing

and Community Development Act of 1992, by amending HUD's RESPA

regulation at 24 CFR part 3500, Regulation X. That Act expanded the

coverage of RESPA to include refinancing transactions and mortgages

secured by subordinate liens. This rule adopts certain definitions and

disclosure requirements of the Truth in Lending Act (TILA) and its

implementing regulation, Regulation Z, to minimize the burden on

lenders and others in complying with different or conflicting

definitions and disclosure requirements for transactions also covered

by the TILA.

DATES: Effective date: August 9, 1994, except that exemptions set forth

in Sec. 3500.5(b) are effective March 14, 1994.

FOR FURTHER INFORMATION CONTACT: David Williamson, Director, RESPA

Enforcement, room 5241, (202) 708-4560 or, for legal questions, Grant

E. Mitchell, Senior Attorney for RESPA, Office of General Counsel, room

10252 (202) 708-1550, Department of Housing and Urban Development, 451

Seventh Street, SW., Washington, DC 20410-0500. The TDD number is (202)

708-4594. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Statement

The information collection requirements contained in this final

rule have been approved by the Office of Management and Budget, under

section 3504(h) of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-

3520), and assigned OMB control number 2502-0491.

I. Background

The Department of Housing and Urban Development published on May

13, 1993, a proposed rule to amend Regulation X, HUD's Real Estate

Settlement Procedures Act (RESPA) regulation (58 FR 28477). HUD

initiated rulemaking primarily because of section 908 of the Housing

and Community Development Act of 1992 (the 1992 Act), which amended

RESPA to extend coverage to refinancing and subordinate lien

transactions. Section 951 of the Act amended RESPA to provide that

certain information need not be disclosed to a potential borrower if

the loan application was turned down within three business days. This

provision is also included in the rule. The Department also proposed

certain exemptions from RESPA coverage and certain technical changes to

the November 2, 1992, RESPA rule. HUD requested comments on this rule,

and 540 comments were received within the July 12, 1993, deadline.

II. Discussion of the Comments Received

Exemptions

In the May 13, 1993, proposed rule, HUD proposed several exemptions

from RESPA coverage, not only for subordinate lien transactions, but

for first lien transactions covered by the November 2, 1992, rule. The

following is a discussion of the exemptions proposed, the comments

received, and HUD's treatment of these exemptions in this final rule.

1. Reinstitution of the Exemption in the Previous Regulation X for

Farms of 25 or More Acres

One hundred thirty-four commenters supported the exemption as HUD

proposed it. Three commenters suggested reverting to the pre-1992

language, while three others wanted the 25-acre threshold lowered or

removed. One proposed rewording the exemption. Two Federal regulatory

agencies and several others suggested that the business purpose

Regulation Z standard be adopted for all transactions under 25 acres.

After review of various alternatives, the Department determined that it

would adopt the 25-acre exemption for all properties, whether the

property was vacant, the property was used for agricultural purposes,

or a 1- to 4-family residential real property was involved. This

provides an absolute exemption for property consisting of 25 or more

acres in a single transaction. The Department is also adopting the

Regulation Z business purpose test, which will apply, among other

purposes, to agricultural purpose loans under 25 acres.

2. Refinancing Transactions

The Department proposed an exemption to the general coverage of

refinancing transactions under RESPA for ``any transaction whose

purpose is to change the interest rate, term, or periodic payment

amount of an existing federally related mortgage loan, including

extension of the terms of a balloon note, so long as the transaction

involves no charge, or nominal charges (less than \1/4\ of 1% of the

outstanding loan amount) and does not involve a transfer of title.''

Ninety-one commenters favored this exemption; one opposed it.

Forty-five of these commenters addressed the \1/4\ of 1% limitation.

They suggested various modifications, including increases in the

percentage threshold for exemption from \1/2\ of 1% to 3%, fixed dollar

thresholds, and a total elimination of the cap. Eight commenters noted

the absence of a definition of a ``refinancing'' in the rule and

suggested that the Regulation Z definition be adopted. Under Regulation

Z, a refinancing occurs when ``an existing obligation * * * is

satisfied and replaced by a new obligation undertaken by the same

consumer.'' (12 CFR 226.20(a).) Two commenters wanted refinancings to

be totally exempt, while one felt they should be exempt if no new funds

were involved.

Upon review of all the comments, the Department concluded that its

proposed exemption would be an ineffective modality for differentiating

between classes of transactions. It was determined that a more

straightforward exemption should be utilized that incorporates and

expands upon the Regulation Z standards. Like Regulation Z, the final

rule provides that a refinancing is a covered transaction if a new

obligation is created to satisfy an existing obligation with the same

lender. Regulation X, however, also includes transactions with a new

lender to replace an existing obligation when no transfer of title is

involved.

A new loan for an increased amount with the same lender is also a

covered transaction. For any covered transaction, the borrower would

receive RESPA disclosures (including the Good Faith Estimate, but not

currently a HUD Settlement Booklet), and the HUD-1 or new HUD-1A would

be used.1 If the transaction only involves a modification of an

existing obligation with the same borrower (except for converting a

fixed-term obligation to a variable rate obligation, see

Sec. 226.19(b), Regulation Z), the transaction is not covered and no

additional good faith estimate or HUD settlement statement is needed.

If the terms of the original mortgage loan provide for conversion of

the loan to a different rate or term at the borrower's option with the

same lender, this is not a refinancing transaction (unless a new note

is written), even if an additional fee is required for conversion.

---------------------------------------------------------------------------

\1\ While section 5 of RESPA authorizes the Booklet and Good

Faith Estimate only in purchase money transactions, the Secretary

has exercised his authority under section 19(a) of RESPA (12 U.S.C.

2617(a)) to extend the requirement for a good faith estimate to all

covered transactions.

---------------------------------------------------------------------------

3. Exemptions for Home Equity Line of Credit (Open-End Credit Plan)

Transactions in Accordance With TILA (Regulation Z)

Two hundred fifty-eight commenters made comments regarding the

relationship of Regulation Z and RESPA requirements. Most commenters

maintained that the proposed RESPA disclosures under Regulation X would

be duplicative of TILA's Regulation Z disclosures. One commenter

opposed the use of Regulation Z as a standard for Regulation X

exemptions. Many commenters advocated adoption of Regulation Z

treatment for home equity lines of credit, citing extensive disclosure

materials already issued under Regulation Z. The Federal Reserve Board

materials were revised within recent years at Congress' direction.

Since these disclosure materials were extensive and there had been

recent thorough congressional oversight and action (Home Equity Loan

Consumer Protection Act of 1988, 15 U.S.C. 1647, Pub. L. 100-709),

commenters urged the appropriateness of deferral to the Regulation Z

structure.

This final rule defers to the Regulation Z requirements for home

equity lines of credit (open-end credit plans) for purposes of

disclosure only; lenders must follow the requirements under Regulation

Z for home equity lines of credit.

4. Exemption for Loans on Vacant Land or Unimproved Property, Unless It

Will Be Improved by a Residential Structure Purchased Using the Loan

Proceeds Within Two Years From the Date of the Loan

This exemption in the proposed rule was favored by 90 commenters,

opposed by 1. Six commenters spoke to the difficulty of lenders

monitoring the two-year period. One commenter urged that all vacant

lots including post-construction activities be exempt.

In this final rule, HUD adopts the proposed exemption. Lenders must

assure themselves that the purpose of the loan on vacant or unimproved

property is not to add or construct a 1- to 4-family residential

structure out of loan proceeds on the property within two years from

settlement of the loan. However, HUD has also included an absolute 25-

acre exemption for any real property. (See discussion regarding the

farm loan exemption in item l, above.)

5. Temporary Financing Such as a Construction Loan

Temporary financing is exempt from coverage under RESPA. The

exemption does not apply to a loan for construction or rehabilitation

of a 1- to 4-family structure that is used or may be converted to

permanent financing by the same lender. If a lender has issued a

commitment to provide permanent funding, with or without conditions,

the transaction is not exempt from RESPA. Any construction loan for a

new or rehabilitated 1- to 4-family residential structure, other than a

loan to a bona fide builder (a person who regularly engages in the

construction of residential properties for sale or lease), is a RESPA-

covered loan if its term is for two or more years. This clarifying

exemption was supported by 70 commenters; one opposed it. Five

commenters were uncertain about the application of the exemption to

bridge or swing loans. Commenters sought several clarifications

including: (i) The conversion to permanent loans provision; (ii) the

coverage of convertible/refinancable construction loans; and (iii) the

definition of the term ``bona fide builder''. Two commenters advocated

substituting the Regulation Z disclosures.

The final rule clarifies that so-called ``bridge'' or ``swing''

loans, which are short-term loans to facilitate a person who is selling

a property and buying another to cover interim obligations, are not

covered RESPA transactions. The rule also makes minor clarifying

language changes in response to comments received.

6. Secondary Market Transactions

A bona fide transfer of a loan obligation in the secondary market

is not covered by Section 8 of RESPA. The proposed rule included a

provision that stated that the assignment and transfer of ``dealer

loans'' was not a secondary market transaction, which would remove such

loans from RESPA's coverage. The Department did not seek comments

regarding other portions of the secondary market exception.

Nonetheless, 15 commenters maintained that ``table funding'' should be

considered a secondary market transaction. Other commenters sought

clarification concerning: (i) The ``real source of funding''; and (ii)

the scope of the exemption. Five comments were received on the proposed

language regarding dealer loans, including one from a trade

association, which argued that such loans were not federally related

mortgage loans within the purview of RESPA.

In the final rule, a dealer loan or dealer consumer credit contract

originated with the intent of subsequent assignment of the dealer's

interest is defined as a ``federally related mortgage loan.'' (See

definition in Sec. 3500.2 of ``federally related mortgage loan''.) The

dealer advances credit to the borrower based upon the lender's prior

agreement to fund the loan upon completion or delivery of goods and

services, with the net proceeds to be paid to the dealer. The lender to

whom the advance of credit is initially assigned is defined as a lender

for purposes of this rule. The initial assignment of a dealer loan is

not exempt from RESPA as a secondary market transaction, and the

funding lender is responsible for: (i) Assuring that the necessary

disclosures, such as the good faith estimate, are made in a timely

manner, by either the funding lender or the dealer; and (ii) the use of

the HUD-1 or HUD 1-A settlement statements.

A ``dealer loan'' or ``dealer consumer credit contract'' describes,

generally, any arrangement in which a dealer assists a borrower in

obtaining a loan from the funding lender, the dealer's interests are

assigned to the funding lender, and the dealer receives the net

proceeds of the loan. A loan or advance by a dealer in which the dealer

does not assign its interest and receives the loan payments directly

would not be a covered RESPA transaction, unless the dealer qualifies

as a creditor as defined under the definition of a ``federally related

mortgage loan''.

The Department was guided in these determinations by the Committee

Report language regarding the amendments in the 1992 Act. The report

stated in relevant part:

The Committee included second mortgages within RESPA because of

the unfortunate potential for fraud and abuse among the elderly and

inner-city homeowners. The Committee heard disturbing testimony at a

May, 1991, hearing in Boston that indicated some secondary [sic]

mortgage lenders, home-repair specialists and banks had allegedly

taken advantage of elderly and minority homeowners * * *. The

Committee believes that some homeowners might have been spared

foreclosure and bankruptcy if comprehensive RESPA disclosures had

been required during the negotiation process and if the anti-

kickback provisions had been in place. (Report 102-760, of the

Committee on Banking, Finance and Urban Affairs, House of

Representatives to accompany H.R. 5334, July 30, 1992.)

A new Illustration 13 of appendix B further discusses a dealer loan

transaction.

The final rule also adds a definition of the term ``table

funding,'' and HUD restates its position that table-funding

transactions are not secondary market transactions exempt from RESPA's

coverage. If a mortgage broker funds a loan with its own money, or from

a warehouse line for which the mortgage broker is liable, this is not a

table-funding transaction, and the mortgage broker is a lender for

purposes of this part. Section 3500.7(b) has been revised to provide

that the mortgage broker's good faith estimate is sufficient and the

funding lender is not required to provide additional disclosures.

However, the funding lender is responsible for ascertaining that the

good faith estimate has been delivered.

7. Exemptions for Business Purpose Transactions Similar to TILA

(Regulation Z)

Two-hundred sixty-six comments were received regarding the

possibility of making the business purpose test of Regulation Z

applicable to RESPA. Commenters requested the following exemptions from

Regulation X: (a) Loans to unnatural persons; (b) loans that are not

for personal residences; (c) loans securing guarantees for general

business purposes; and (d) loans that were indirect collateral, such as

those taken out of an abundance of caution, as backup collateral.

The Department decided generally to adopt the ``business purpose''

exemptions and test of Regulation Z, but does not include in the

business purpose exemption the placing of a first or subordinate lien

on 1- to 4-family residential properties by individuals (natural

persons). RESPA is oriented towards assuring that individual consumers

are able to make meaningful choices in shopping for settlement

services. The Department concluded that the disclosure and anti-

kickback provisions of RESPA should apply to all individual consumer

transactions.

Under this rule, loans regarding 1- to 4-family residential

property made to corporations, associations, partnerships, and trusts

(the other entities falling under the definition of ``person'' in

section 3 of RESPA) are not covered. The Department was informed that

certain loans are made where both an individual and a living trust, or

a corporation, association, or partnership is named on the note and/or

deed. As long as any individual is named, the transaction is covered by

RESPA.

8. Assumptions

Several commenters suggested that assumptions be exempt, while

others recommended use of the Regulation Z test. The November 2, 1992,

RESPA rule deleted the previous exemption of coverage for assumptions.

HUD adopted the following test for coverage: Assumptions are covered if

lender approval of the assumption is required by the mortgage

instruments and is obtained, whether or not a fee is charged for the

assumption. If lender approval is not required, the transaction is

exempt from RESPA.

9. Commenter Proposed Exemptions

Commenters suggested several other exemptions from RESPA's

coverage. Four commenters wished to exempt home improvement loans.

Other exemptions suggested included: (a) All subordinate loans; (b)

loans under $10,000; (c) loans under $30-50,000; (d) Small Business

Administration guaranteed loans; (e) loans not involving a transfer of

title and loans involving only modifications, balloons, or workouts;

(f) cross-collateral ``dragnet'' loans; (g) loans with a term of two

years or less; (h) ``no fee'' loans; (i) improved land loans; (j)

transactions by mortgage bankers subject to state regulation limiting

compensation; and (k) transactions by mortgage bankers or mortgage

brokers subject to ``pervasive'' State regulation, such as in

California. Some of the proposed exemptions are implicitly or

explicitly covered by the Department's adoption of exemptions similar

to the Regulation Z business purpose test. Otherwise, HUD has not added

additional exemptions in this rule except those discussed elsewhere in

this preamble.

Statutory Changes

1. Special Information Booklet (Sec. 3500.6)

A number of commenters took the position that because Congress had

not provided for separate booklets containing information for borrowers

other than those purchasing 1- to 4-family residential real property,

none could be required. Eighty-six opposed a new booklet, and three

supported it. Several commenters questioned whether each applicant must

be presented with a copy of the booklet if the applicant is not present

at the time of application. One commenter urged that the booklet be

freely available in foreign languages. Forty-one commenters advocated

exempting all but purchase money transactions from a new booklet

requirement. Five sought the merger of the booklet with the Regulation

Z disclosure documents. Three commenters raised questions about the

appropriateness of requiring a booklet if the loan is a home equity

first lien. Three others advocated a combined booklet for refinance and

junior loans. Two sought a single new booklet for first and second

liens.

The provisions in the existing RESPA rule have been continued in

this final rule; that is, a HUD Special Information Booklet is only

required to be given to persons purchasing a 1- to 4-family residential

structure. HUD anticipates updating as soon as possible the HUD Special

Information Booklet, which contains several outdated or inaccurate

statements (e.g., it states that RESPA does not cover refinancings).

This rule includes a provision giving HUD the discretion to issue other

booklets on refinancings and other liens in the future, after

appropriate review, which could include congressional review, and other

publication requirements have been met.

2. Good Faith Estimate (Sec. 3500.7)

Seven commenters maintained that RESPA ties the requirement for a

Good Faith Estimate (GFE) to the requirement that HUD be furnished the

Booklet, so that furnishing the GFE is not required whenever furnishing

a Booklet is not required, e.g., refinancings. A commenter suggested

that the GFE be furnished only at the borrower's request so as to avoid

needless paperwork. Another commenter suggested that the GFE should not

be required if the total settlement cost does not exceed $750. One

commenter considered the second GFE backing up a mortgage broker's GFE

as an unnecessary additive, and another suggested exempting brokered

loans from the second GFE requirement for the same reason. One

commenter maintained the GFE was not necessary for a home equity loan

because of the Regulation Z disclosures.

Two commenters strongly opposed disclosure of the mortgage broker

fee, maintaining that because it sometimes is included in the gross

interest rate, the borrower would believe the fee was being paid twice;

therefore, this double disclosure is misleading.

This final rule provides, using the Secretary's discretion under

section 19 of RESPA, that a GFE is required for every covered

transaction, except for the deferral to the Regulation Z's provisions

for disclosure for home equity plans (open-end lines of credit).

Miscellaneous Matters

This rule, as did the proposed rule, addresses several

miscellaneous matters contained in the revised RESPA rule of November

2, 1992.

1. Required provider disclosures (Sec. 3500.7(e)(3))

With respect to this provision, which requires the listing of

providers required by a lender, 17 commenters advocated that the

regulations be abolished or relaxed. Twenty-three commenters maintained

that these requirements interfere with the lender's performance of its

obligations under the Community Reinvestment Act. Some suggested that

lenders' attempts to develop relationships with low-income community

institutions, including making contributions for mortgage loans

generated (currently a prohibited practice under RESPA), would be

adversely impacted. One commenter suggested an exemption for payments

to charitable entities qualifying as such under section 501(c)(3) of

the Internal Revenue Code.

While five commenters were in favor of the list of ``five or more''

providers as suggested in the proposed rule, nine were opposed to the

concept. One advocated providing the list to the borrower only on

request, to avoid needless paperwork. Four commenters suggested the

threshold (of five providers) be lowered, because in certain areas it

would be impractically high. Five suggested requiring less detailed

information, such as permitting a range of costs. Two commenters

maintained that the reality of settlement transactions dictated that,

due to conflicts and the press of work, one never really knew who would

be providing the service until the settlement.

Ten commenters asserted a conflict between the ``required

provider'' rule and the non-RESPA (FIRREA) requirement to use approved

appraisers. It was suggested that the use of appraisers not be deemed a

``required use'' under such circumstances. One of these commenters

pointed out that the borrower had a right under the Equal Credit

Opportunity Act, upon request and payment, to obtain the appraisal.

Another commenter maintained that an even greater problem was presented

by obtaining construction engineering inspectors, because of the

limited number of inspectors deemed competent by bank staff that are

available to perform construction inspections.

Ten commenters sought exemptions from the required provider

provisions for all non-purchase money loans, for all ``No Fee'' loans,

and for all loans that close within 3 days of application. In this

final rule, HUD adopts the proposed modification to the required

provider disclosures, with the listing of five or more required

providers. (See further discussion regarding controlled business

disclosures in item 8, of this section.) Instructions for completing

the Good Faith Estimate and HUD-1 or HUD-1A for ``no point'' or ``no

cost'' loans are included in Sec. 3500.7 and in the Appendix B

instructions.

2. Definition of ``Table Funding''

One commenter suggested that the table-funded loan provision,

Sec. 3500.5, be clarified. The commenter believed that ``lender'' is

intended to refer to funder, and that a change to ``wholesale lender''

would better identify the real parties in interest. In this final rule,

HUD clarifies the definition of lender and defines ``table funding.''

3. Three-day Denial of Credit Period

Several commenters suggested that the three-day denial-of-credit

period in the proposed rule, which provided that if credit is denied

the booklet and good faith estimate would not be required, is

impractically short and should be closer to ten days to two weeks.

Another commenter suggested that the three-day denial period be

expanded to include a withdrawal of an application by a borrower within

three days. A third urged that the GFE time clock run from approval

rather than application. Another inquiry was received about the

effective date of section 951 of the Housing and Community Development

Act of 1992, which establishes the denial of credit provision.

The three-day period is a statutory requirement contained in

section 951 of the Housing and Community Development Act of 1992 (1992

Act), and HUD does not believe it has the regulatory discretion to

extend it. The provision does not, on its face, require rulemaking and

was included in a subtitle of the 1992 Act entitled ``Bank Regulatory

Clarification Provisions.'' While HUD is including the provision in

this rulemaking, HUD takes the position that the provision has been in

effect since the effective date of the 1992 Act (October 28, 1992).

4. Escrow Account Requirements and Mortgage Servicing Transfer

Requirements

Eighteen commenters advocated exempting subordinate liens from

escrow requirements, because lenders would not establish an escrow

account unless they were holding a first lien. A commenter maintained

that escrow fees were reasonable charges because the funds were held

for the borrower's account and benefit.

Nine commenters questioned whether the section 6 provisions of

RESPA, regarding disclosures when mortgage servicing is transferred,

extended to secondary liens. Two commenters suggested that servicing

transfer disclosures should only be required in the event of an actual

transfer.

HUD will implement separately a final rule regarding mortgage

servicing requirements of section 6 of RESPA (currently set forth in an

interim rule of April 26, 1991, which continues in effect until

supplanted by a final rule). That interim rule will continue to apply

only to first mortgage liens, including first mortgage refinancing

transactions, unless the final mortgage servicing rule changes this

position. A new Sec. 3500.17, relating to escrow accounts, is being

developed concurrently, which will state HUD's position regarding

escrow accounts and accounting procedures. (See the proposed rule

published at 58 FR 64065 (December 3, 1993).)

5. Form of HUD Settlement Statement for Refinancings and Subordinate

Lien Transactions

Forty-three commenters supported the proposed form set out as

Appendix F for use in one-party transactions, while 10 opposed the form

and 2 advocated that it be optional. Another commenter suggested that

no Appendix F be required if the total settlement cost does not exceed

$750. A significant number of commenters (56), while supporting the

form as effective, advocated combining Appendix F and the HUD-1, so as

to be able to cut back on the stock of paper as well as the paperwork.

Three commenters suggested that permission be granted to modify the

HUD-1, arguing that this would be particularly beneficial for those

lenders making few subordinate loans in the course of a year.

Seventeen commenters wished to follow only Regulation Z and sought

an exemption from use of appendix F for all subordinate liens. Seven

sought an exemption from all subordinate lien loans without reliance on

Regulation Z.

Twenty-four commenters sought specific instructions for using the

form. Clarifications were requested for when the form is used: (i) For

assumptions; (ii) in non-purchase money, non-refinance situations; and

(iii) in modifying a first lien.

Three commenters wished an exemption for ``no fee'' transactions,

and three sought an exemption for fixed-fee transactions. A commenter

suggested that the disclosure form be used only on request of the

borrower. Another commenter suggested that secondary (vacation or

rental) homes be exempt from disclosure. One commenter requested

guidance on how to reconcile the Appendix F form with the specific

State law requirements.

In the final rule, appendix F has been adopted, basically as

proposed. The form is denominated as HUD-1A and is included in appendix

A of this rule. HUD has provided instructions for filling out this form

at the end of appendix A. The final rule makes clear that settlement

agents may use this form for refinancing or any other one-party

transactions, but may also use the borrower's side of a HUD-1

settlement statement to convey the same information.

6. Compliance Burden

Fifty-three comments addressed the burden of compliance. They

generally indicated that first lien disclosures and the disclosures

under the proposed rule constituted a substantial paperwork burden on

lenders. The commenters believed that few borrowers read any disclosure

material, except, perhaps, the HUD-1. Seventeen commenters estimated

the additional cost per loan as being from $25-32; two commenters

alleged $1,000,000 each in compliance costs. HUD's own estimate of the

costs of complying with this regulation was substantially less than

these amounts. Commenters maintained that the compliance burden caused

a chilling effect on the making of loans. Commenters also noted a

training burden, because the lender staff making the loans in question

normally would not have dealt with RESPA.

In developing the final rule, and consistent with the

Administration's directives to ease the burden of regulations insofar

as possible, the Department has expended substantial effort in

interagency consultation to reduce the compliance and regulatory

burdens. As a result of this consultation, the interrelated

regulations, Regulation X and Regulation Z, function in harmony, as far

as possible. This, of course, was done within the various statutory

constraints placed upon HUD and the Federal Reserve Board.

7. Multiple Liens

The Department was advised that there are certain circumstances

when a first mortgage and a subordinate lien may be created at the same

settlement (such as when a residential property is purchased through an

affordable housing program with an advance of funds for down-payment or

closing costs under a subordinate lien). If the subordinate lien meets

the definition of a federally related mortgage loan, the related

charges for settlement services must be documented on a HUD-1 or HUD-

1A, as appropriate for the circumstances, but a single HUD-1 can be

used for both the first mortgage and the subordinate lien. If the

subordinate lien does not meet the definition of federally related

mortgage loan (e.g., it is held by a governmental entity), the related

charges may still be shown on the HUD-1 for the first mortgage or on a

separate HUD-1 or HUD-1A.

8. Controlled Business Disclosures

As noted previously, in this final rule the modification to the

required provider disclosures, with the list of five or more required

providers, has been adopted. The rule is also clarified to indicate

that it does not apply to in-house settlement service providers. A

related question is: what is the extent of effort that is needed by a

person in a position to refer business (such as a bank with a related

mortgage lending company) to warrant a controlled business disclosure?

This question has been deferred to future rulemaking, which may deal

further with controlled business disclosures. However, the Department

wishes to make clear that incidental and uncompensated referrals, such

as brochures in the bank lobby or street directions given by a bank

employee, are not perceived as rising to the level necessary to require

a controlled business disclosure.

9. Effective Date

Twenty-five commenters suggested that HUD allow sufficient time for

implementation of this rule, so that the form, software, and technical

compliance materials could be created by affected parties. A range of

two months to one year was suggested to be adequate. The commenters

suggested that the exemptions should be made effective as soon as

possible or within 30 days after publication.

The final rule is effective 180 days after publication, while

exemptions contained in this rule are effective 30 days after the

publication date. Persons covered by this rule also may comply with

this rule before the effective date.

III. Other Matters

Executive Order 12866

This rule was reviewed by the Office of Management and Budget under

Executive Order 12866, Regulatory Planning and Review. Any changes made

to the rule as a result of that review are clearly identified in the

docket file, which is available for public inspection in the office of

the Department's Rules Docket Clerk, room 10276, 451 Seventh Street,

SW., Washington, DC 20410-0500.

Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this rule before publication and by

approving it certifies that this rule does not have a significant

economic impact on a substantial number of small entities, other than

those impacts specifically required to be applied universally by the

RESPA statute.

Environmental Impact

At the time of publication of the proposed rule, a finding of no

significant impact with respect to the environment was made in

accordance with HUD regulations in 24 CFR part 50 that implement

section 102(2)(C) of the National Environmental Policy Act of 1969 (42

U.S.C. 4332). The proposed rule is adopted by this final rule without

significant change. Accordingly, the initial finding of no significant

impact remains applicable, and is available for public inspection

between 7:30 a.m. and 5:30 p.m. weekdays in the office of the Rules

Docket Clerk, Office of General Counsel, room 10276, Department of

Housing and Urban Development, 451 Seventh Street, SW., Washington, DC

20410-0500.

Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

contained in this rule will not have substantial direct effects on

States or their political subdivisions, or the relationship between the

federal government and the States, or on the distribution of power and

responsibilities among the various levels of government. As a result,

the rule is not subject to review under the Order. Promulgation of this

rule expands coverage of the applicable regulatory requirements

pursuant to statutory direction.

Executive Order 12606, the Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this rule does not have

potential for significant impact on family formation, maintenance, and

general well-being, and, thus, is not subject to review under the

order. No significant change in existing HUD policies or programs will

result from promulgation of this rule, as those policies and programs

relate to family concerns.

Regulatory Agenda

This rule was listed as item 1552 in the Department's Semiannual

Agenda of Regulations published on October 25, 1993 (58 FR 56402,

56433), in accordance with Executive Order 12866 and the Regulatory

Flexibility Act.

List of Subjects in 24 CFR Part 3500

Consumer protection, Housing, Mortgages, Real property acquisition,

Reporting and recordkeeping requirements.

For the reasons set out in the preamble, part 3500 of title 24 of

the Code of Federal Regulations is amended as set forth below.

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

1. The authority citation for part 3500 continues to read as

follows:

Authority: 12 U.S.C. 2601 et seq.

2. Section 3500.2 is revised to read as follows:

Sec. 3500.2 Definitions.

As used in this part:

Application means the submission of a borrower's financial

information in anticipation of a credit decision, whether written or

computer-generated, relating to a federally related mortgage loan. If

the submission does not state or identify a specific property, the

submission is an application for a pre-qualification and not an

application for a federally related mortgage loan under this part. The

subsequent addition of an identified property to the submission

converts the submission to an application for a federally related

mortgage loan.

Business day means a day on which the offices of the business

entity are open to the public for carrying on substantially all of its

business functions. ``Business day'' for purposes of compliance with

section 6 of RESPA (12 U.S.C. 2605) is defined in Sec. 3500.21.

Dealer means, in the case of property improvement loans, a seller,

contractor, or supplier of goods or services. In the case of

manufactured home loans, ``dealer'' means one who engages in the

business of manufactured home retail sales.

Dealer loan or dealer consumer credit contract means, generally,

any arrangement in which a dealer assists the borrower in obtaining a

federally related mortgage loan from the funding lender and then

assigns the dealer's legal interests to the funding lender and receives

the net proceeds of the loan. The funding lender is the lender for the

purposes of the disclosure requirements of this part. If a dealer is a

``creditor'' as defined under the definition of ``federally related

mortgage loan'' in this part, the dealer is the lender for purposes of

this part.

Federally related mortgage loan means as follows:

(1) Any loan (other than temporary financing, such as a

construction loan):

(i) That is secured by a first or subordinate lien on residential

real property, including a refinancing of any secured loan on

residential real property upon which there is either:

(A) Located or, following settlement, will be constructed using

proceeds of the loan, a structure or structures designed principally

for occupancy of from one to four families (including individual units

of condominiums and cooperatives and including any related interests,

such as a share in the cooperative or right to occupancy of the unit);

or

(B) Located or, following settlement, will be placed using proceeds

of the loan, a manufactured home; and

(ii) For which one of the following paragraphs applies. The loan:

(A) Is made in whole or in part by any lender that is either

regulated by or whose deposits or accounts are insured by any agency of

the Federal Government;

(B) Is made in whole or in part, or is insured, guaranteed,

supplemented, or assisted in any way:

(1) By the Secretary or any other officer or agency of the Federal

Government; or

(2) Under or in connection with a housing or urban development

program administered by the Secretary or a housing or related program

administered by any other officer or agency of the Federal Government;

(C) Is intended to be sold by the originating lender to the Federal

National Mortgage Association, the Government National Mortgage

Association, the Federal Home Loan Mortgage Corporation (or its

successors), or a financial institution from which the loan is to be

purchased by the Federal Home Loan Mortgage Corporation (or its

successors);

(D) Is made in whole or in part by a ``creditor,'' as defined in

section 103(f) of the Consumer Credit Protection Act (15 U.S.C.

1602(f)), that makes or invests in residential real estate loans

aggregating more than $1,000,000 per year. For purposes of this

definition, the term ``creditor'' does not include any agency or

instrumentality of any State, and the term ``residential real estate

loan'' means any loan secured by residential property, including

single-family and multifamily residential property;

(E) Is originated either by a dealer or, if the obligation is to be

assigned to any maker of mortgage loans specified in paragraphs

(1)(ii)(A) through (D) of this definition, by a mortgage broker; or

(F) Is the subject of a home equity conversion mortgage, also

frequently called a ``reverse mortgage,'' issued by any maker of

mortgage loans specified in paragraphs (1)(ii)(A) through (D) of this

definition.

(2) Any installment sales contract, land contract, or contract for

deed on otherwise qualifying residential property is a federally

related mortgage loan if the contract is funded in whole or in part by

proceeds of a loan made by any maker of mortgage loans specified in

paragraphs (1)(ii)(A) through (D) of this definition. If the

residential property securing a mortgage loan is not located in a

State, it is not a federally related mortgage loan.

Good faith estimate means an estimate, prepared in accordance with

section 5 of RESPA (12 U.S.C. 2604), of charges that a borrower is

likely to incur in connection with a settlement.

HUD-1 or HUD-1A settlement statement (also HUD-1 or HUD-1A) means

the statement that is prescribed by the Secretary in this part for

setting forth settlement charges in connection with either the purchase

or the refinancing (or other subordinate lien transaction) of 1- to 4-

family residential property.

Lender means, generally, the secured creditor or creditors named in

the debt obligation and document creating the lien. For loans

originated by a mortgage broker that closes a federally related

mortgage loan in its own name in a table funding transaction, the

lender is the person to whom the obligation is initially assigned at or

after settlement. A lender, in connection with dealer loans, is the

lender to whom the loan is assigned, unless the dealer meets the

definition of creditor as defined under ``federally related mortgage

loan'' in this section. See also Sec. 3500.5(b)(5), secondary market

transactions.

Manufactured home means the same as the term is defined in

Sec. 3280.2 of this chapter.

Mortgage broker means a person (not an employee or exclusive agent

of a lender) who brings a borrower and lender together to obtain a

federally related mortgage loan, and who renders services as described

in the definition of ``settlement services'' in this section. A loan

correspondent meeting the requirements of the Federal Housing

Administration under Sec. 202.2(b) or 202.15(a) of this title is a

mortgage broker for purposes of this part.

Mortgaged property means the real property that is security for the

federally related mortgage loan.

Person means any individual, corporation, partnership, trust,

association, or other entity.

Refinancing means a transaction in which an existing obligation

that was subject to a secured lien on residential real property is

satisfied and replaced by a new obligation undertaken by the same

borrower and with the same or a new lender. The following shall not be

treated as a refinancing, even when the existing obligation is

satisfied and replaced by a new obligation with the same lender (this

definition of ``refinancing'' as to transactions with the same lender

is similar to Regulation Z, 12 CFR 226.20(a)):

(1) A renewal of a single payment obligation with no change in the

original terms;

(2) A reduction in the annual percentage rate as computed under the

Truth in Lending Act with a corresponding change in the payment

schedule;

(3) An agreement involving a court proceeding;

(4) A workout agreement, in which a change in the payment schedule

or change in collateral requirements is agreed to as a result of the

consumer's default or delinquency, unless the rate is increased or the

new amount financed exceeds the unpaid balance plus earned finance

charges and premiums for continuation of allowable insurance; and

(5) The renewal of optional insurance purchased by the consumer

that is added to an existing transaction, if disclosures relating to

the initial purchase were provided.

Regulation Z means the regulations issued by the Board of Governors

of the Federal Reserve System (12 CFR part 226) to implement the

Federal Truth in Lending Act (15 U.S.C. 1601 et seq.), and includes the

Commentary on Regulation Z.

Required use means a situation in which a person must use a

particular provider of a settlement service in order to have access to

some distinct service or property, and the person will pay for the

settlement service of the particular provider or will pay a charge

attributable, in whole or in part, to the settlement service. However,

the offering of a package (or combination of settlement services) or

the offering of discounts or rebates to consumers for the purchase of

multiple settlement services does not constitute a required use. Any

package or discount must be optional to the purchaser. The discount

must be a true discount below the prices that are otherwise generally

available, and must not be made up by higher costs elsewhere in the

settlement process.

RESPA means the Real Estate Settlement Procedures Act of 1974, 12

U.S.C. 2601 et seq.

Secretary means the Secretary of Housing and Urban Development or

any official who is designated the authority of the Secretary with

respect to RESPA.

Settlement means the process of executing legally binding documents

regarding a lien on property that is subject to a federally related

mortgage loan. This process may also be called ``closing'' or

``escrow'' in different jurisdictions.

Settlement service means any service provided in connection with a

prospective or actual settlement, including any one or more of the

following:

(1) Origination of a federally related mortgage loan (including,

but not limited to, the taking of loan applications, loan processing,

and the underwriting and funding of such loans);

(2) Rendering of services by a mortgage broker (including

counseling, taking of applications, obtaining verifications and

appraisals, and other loan processing and origination services, and

communicating with the borrower and lender);

(3) Provision of any services related to the origination,

processing or funding of a federally related mortgage loan;

(4) Provision of title services, including title searches, title

examinations, abstract preparation, insurability determinations, and

the issuance of title commitments and title insurance policies;

(5) Rendering of services by an attorney;

(6) Preparation of documents, including notarization, delivery, and

recordation;

(7) Rendering of credit reports and appraisals;

(8) Rendering of inspections, including inspections required by

applicable law or any inspections required by the sales contract or

mortgage documents prior to transfer of title;

(9) Conducting of settlement by a settlement agent and any related

services;

(10) Provision of services involving mortgage insurance;

(11) Provision of services involving hazard, flood, or other

casualty insurance or homeowner's warranties;

(12) Provision of services involving mortgage life, disability, or

similar insurance designed to pay a mortgage loan upon disability or

death of a borrower, but only if such insurance is required by the

lender as a condition of the loan;

(13) Provision of services involving real property taxes or any

other assessments or charges on the real property;

(14) Rendering of services by a real estate agent or real estate

broker; and

(15) Provision of any other services for which a settlement service

provider requires a borrower or seller to pay.

Special information booklet means the booklet prepared by the

Secretary pursuant to section 5 of RESPA (12 U.S.C. 2604) to help

persons understand the nature and costs of settlement services. The

Secretary publishes the form of the special information booklet in the

Federal Register. The Secretary may issue or approve additional

booklets or alternative booklets by publication of a Notice in the

Federal Register.

State means any State of the United States, the District of

Columbia, the Commonwealth of Puerto Rico, and any territory or

possession of the United States.

Table funding means a settlement at which a loan is funded by a

contemporaneous advance of loan funds and an assignment of the loan to

the person advancing the funds. A table-funded transaction is not a

secondary market transaction (see Sec. 3500.5(b)(7)).

Title company means any institution, or its duly authorized agent,

that is qualified to issue title insurance.

Section 3500.5 is revised to read as follows:

Sec. 3500.5 Coverage of RESPA.

(a) Applicability. RESPA and this part apply to all federally

related mortgage loans, except for the exemptions provided in paragraph

(b) of this section.

(b) Exemptions. (1) A loan on property of 25 acres or more. Any

loan on property constituting 25 or more acres, regardless of:

(i) Whether the land is vacant;

(ii) Whether the land contains a residential structure; and

(iii) The purpose of the loan.

(2) Business purpose loans. An extension of credit primarily for a

business, commercial, or agricultural purpose. The definition of such

an extension of credit for purposes of this exemption generally

parallels Regulation Z, 12 CFR 226.3(a)(1). However, the definition of

business purpose loans does not include any transaction in which one or

more persons, acting in an individual capacity (natural persons), place

a lien on a 1- to 4-family residential property, whether used for

occupancy or investment.

(3) Temporary financing. Temporary financing, such as a

construction loan. The exemption for temporary financing does not apply

to a loan made to finance construction of 1- to 4-family residential

property if the loan is used as, or may be converted to, permanent

financing by the same lender or is used to finance transfer of title to

the first user. If a lender issues a commitment for permanent

financing, with or without conditions, the loan is covered by this

part. Any construction loan for new or rehabilitated 1- to 4-family

residential property, other than a loan to a bona fide builder (a

person who regularly constructs 1- to 4-family residential structures

for sale or lease), is subject to this part if its term is for two

years or more. A ``bridge loan'' or ``swing loan'' in which a lender

takes a security interest in otherwise covered 1- to 4-family

residential property is not covered by RESPA and this part.

(4) Vacant land. Any loan secured by vacant or unimproved property,

unless within two years from the date of the settlement of the loan, a

structure or a manufactured home will be constructed or placed on the

real property using the loan proceeds. If a loan for a structure or

manufactured home to be placed on vacant or unimproved property will be

secured by a lien on that property, the transaction is covered by this

part.

(5) Assumption without lender approval. Any assumption in which the

lender does not have the right expressly to approve a subsequent person

as the borrower on an existing federally related mortgage loan. Any

assumption in which the lender's permission is both required and

obtained is covered by RESPA and this part, whether or not the lender

charges a fee for the assumption.

(6) Loan conversions. Any conversion of a federally related

mortgage loan to different terms that are consistent with provisions of

the original mortgage instrument, as long as a new note is not

required, even if the lender charges an additional fee for the

conversion.

(7) Secondary market transactions. A bona fide transfer of a loan

obligation in the secondary market is not covered by RESPA and this

part, except as set forth in section 6 of RESPA and Sec. 3500.21. In

determining what constitutes a bona fide transfer, HUD will consider

the real source of funding and the real interest of the funding lender.

Mortgage broker transactions that are table-funded are not secondary

market transactions. Neither the creation of a dealer loan or dealer

consumer credit contract, nor the first assignment of such loan or

contract to a lender, is a secondary market transaction (see

Sec. 3500.2.)

4. Section 3500.6 is amended by revising paragraph (a) to read as

follows:

Sec. 3500.6 Special information booklet at time of loan application.

(a) Lender to provide special information booklet. Subject to the

exceptions set forth in this paragraph, the lender shall provide a copy

of the special information booklet to a person from whom the lender

receives, or for whom the lender prepares, a written application for a

federally related mortgage loan. When two or more persons apply

together for a loan, the lender is in compliance if the lender provides

a copy of the booklet to one of the persons applying, but the lender

may provide additional booklets to other applicants and to guarantors.

(1) The lender shall provide the special information booklet by

delivering it or placing it in the mail to the applicant not later than

three business days (as that term is defined in Sec. 3500.2) after the

application is received or prepared. However, if the lender denies the

borrower's application for credit before the end of the three-business-

day period, then the lender need not provide the booklet to the

borrower. If a borrower uses a mortgage broker, the mortgage broker

shall distribute the special information booklet and the lender need

not do so. The intent of this provision is that the applicant receive

the special information booklet at the earliest possible date.

(2) In the case of a federally related mortgage loan involving an

open-ended credit plan, as defined in Sec. 226.2(a)(20) of Regulation

Z, a lender or mortgage broker that provides the borrower with a copy

of the brochure entitled ``When Your Home is On the Line: What You

Should Know About Home Equity Lines of Credit'', or any successor

brochure issued by the Board of Governors of the Federal Reserve

System, is deemed to be in compliance with this section.

(3) In the categories of transactions set forth at the end of this

paragraph, the lender or mortgage broker does not have to provide the

booklet to the borrower. Under the authority of section 19(a) of RESPA,

the Secretary may issue a revised or separate special information

booklet that deals with these transactions, or the Secretary may chose

to endorse the forms or booklets of other Federal agencies. In such an

event, the requirements for delivery by lenders and the availability of

the booklet or alternate materials for these transactions will be set

forth in a Notice in the Federal Register. This paragraph shall apply

to the following transactions:

(i) Refinancing transactions;

(ii) Closed-end loans, as defined in Sec. 226.2(a)(10) of

Regulation Z, when the lender takes a subordinate lien; and

(iii) Reverse mortgages.

* * * * *

5. Section 3500.7 is amended by revising paragraphs (a), (c)(1),

and (e); adding two sentences at the end of paragraph (b); by removing

the undesignated paragraph following paragraph (e); and adding a new

paragraph (f), to read as follows:

Sec. 3500.7 Good faith estimate.

(a) Lender to provide. Except as provided in this paragraph or

paragraph (f) of this section, the lender shall provide all applicants

for a federally related mortgage loan with a good faith estimate of the

amount of or range of charges for the specific settlement services the

borrower is likely to incur in connection with the settlement. The

lender shall provide the good faith estimate required under this

section (a suggested format is set forth in appendix C of this part)

either by delivering the good faith estimate or by placing it in the

mail to the loan applicant, not later than three business days after

the application is received or prepared.

(1) If the lender denies the application for a federally related

mortgage loan before the end of the three-business-day period, the

lender need not provide the denied borrower with a good faith estimate.

(2) For ``no cost'' or ``no point'' loans, the charges to be shown

on the good faith estimate include any payments to be made to

affiliated or independent settlement service providers. These payments

should be shown as P.O.C. (Paid Outside of Closing) on the Good Faith

Estimate and the HUD-1 or HUD-1A.

(3) In the case of dealer loans, the lender is responsible for

provision of the good faith estimate, either directly or by the dealer.

(4) If a mortgage broker is the exclusive agent of the lender,

either the lender or the mortgage broker shall provide the good faith

estimate within three business days after the mortgage broker receives

or prepares the application.

(b) * * * As long as the mortgage broker has provided the good

faith estimate, the funding lender is not required to provide an

additional good faith estimate, but the funding lender is responsible

for ascertaining that the good faith estimate has been delivered. If

the application for mortgage credit is denied before the end of the

three-business-day period, the mortgage broker need not provide the

denied borrower with a good faith estimate.

(c) * * *

(1) Will be listed in section L of the HUD-1 or HUD-1A in

accordance with the instructions set forth in appendix A to this part;

and

* * * * *

(e) Particular providers required by lender. (1) If the lender

requires the use (see Sec. 3500.2, ``required use'') of a particular

provider of a settlement service, other than the lender's own

employees, and also requires the borrower to pay any portion of the

cost of such service, then the good faith estimate must:

(i) Clearly state that use of the particular provider is required

and that the estimate is based on the charges of the designated

provider;

(ii) Give the name, address, and telephone number of each provider;

and

(iii) Describe the nature of any relationship between each such

provider and the lender. Plain English references to the relationship

should be utilized, e.g., ``X is a depositor of the lender,'' ``X is a

borrower from the lender,'' ``X has performed 60% of the lender's

settlements in the past year.'' In the event that more than one

relationship exists, each should be disclosed.

(2) For purposes of paragraph (e)(1) of this section, a

``relationship'' exists if:

(i) The provider is an associate of the lender, as that term is

defined in Sec. 3500.15(c)(1));

(ii) Within the last 12 months, the provider has maintained an

account with the lender or had an outstanding loan or credit

arrangement with the lender; or

(iii) The lender has repeatedly used or required borrowers to use

the services of the provider within the last 12 months.

(3) Except for a provider that is the lender's chosen attorney,

credit reporting agency, or appraiser, if the lender is in a controlled

business relationship (see Sec. 3500.15) with a provider, the lender

may not require the use of that provider.

(4) If the lender maintains a controlled list of required providers

(five or more for each discrete service) or relies on a list maintained

by others, and at the time of application the lender has not yet

decided which provider will be selected from that list, then the lender

may satisfy the requirements of this section if the lender:

(i) Provides the borrower with a written statement that the lender

will require a particular provider from a lender-controlled or -

approved list; and

(ii) Provides the borrower in the Good Faith Estimate the range of

costs for the required provider(s), and provides the name of the

specific provider and the actual cost on the HUD-1 or HUD-1A.

(f) Open-end lines of credit (home-equity plans) under Truth in

Lending Act. In the case of a federally related mortgage loan involving

an open-end line of credit (home-equity plan) covered under the Truth

in Lending Act and Regulation Z, a lender or mortgage broker that

provides the borrower with the disclosures required by 12 CFR 226.5(b)

of Regulation Z at the time the borrower applies for such loan shall be

deemed to satisfy the requirements of this section.

6. Section 3500.8 is revised to read as follows:

Sec. 3500.8 Use of HUD-1 or HUD-1A settlement statements.

(a) Use by settlement agent. The settlement agent shall use the

HUD-1 settlement statement in every settlement involving a federally

related mortgage loan in which there is a borrower and a seller. For

transactions in which there is a borrower and no seller, such as

refinancing loans or subordinate lien loans, the HUD-1 may be utilized

by using the borrower's side of the HUD-1 statement. Alternatively, the

form HUD-1A may be used for these transactions. Either the HUD-1 or the

HUD-1A, as appropriate, shall be used for every RESPA-covered

transaction, but may be modified as permitted under this part.

(b) Charges to be stated. The settlement agent shall complete the

HUD-1 or HUD-1A in accordance with the instructions set forth in

appendix A to this part.

(Approved by the Office of Management and Budget under control

numbers 2502-0265 and 2502-0491)

7. Section 3500.9 is revised to read as follows:

Sec. 3500.9 Reproduction of settlement statements.

(a) Permissible changes--HUD-1. The following changes and

insertions are permitted when the HUD-1 settlement statement is

reproduced:

(1) The person reproducing the HUD-1 may insert its business name

and logotype in Section A and may rearrange, but not delete, the other

information that appears in Section A.

(2) The name, address, and other information regarding the lender

and settlement agent may be printed in Sections F and H, respectively.

(3) Reproduction of the HUD-1 must conform to the terminology,

sequence, and numbering of line items as presented in lines 100-1400.

However, blank lines or items listed in lines 100-1400 that are not

used locally or in connection with mortgages by the lender may be

deleted, except for the following: Lines 100, 120, 200, 220, 300, 301,

302, 303, 400, 420, 500, 520, 600, 601, 602, 603, 700, 800, 900, 1000,

1100, 1200, 1300, and 1400. The form may be shortened correspondingly.

The number of a deleted item shall not be used for a substitute or new

item, but the number of a blank space on the HUD-1 may be used for a

substitute or new item.

(4) Charges not listed on the HUD-1, but that are customary locally

or pursuant to the lender's practice, may be inserted in blank spaces.

Where existing blank spaces on the HUD-1 are insufficient, additional

lines and spaces may be added and numbered in sequence with spaces on

the HUD-1.

(5) The following variations in layout and format are within the

discretion of persons reproducing the HUD-1 and do not require prior

HUD approval: size of pages; tint or color of pages; size and style of

type or print; vertical spacing between lines or provision for

additional horizontal space on lines (for example, to provide

sufficient space for recording time periods used in prorations);

printing of the HUD-1 contents on separate pages, on the front and back

of a single page, or on one continuous page; use of multicopy tear-out

sets; printing on rolls for computer purposes; reorganization of

Sections B through I, when necessary to accommodate computer printing;

and manner of placement of the HUD number, but not the OMB approval

number, neither of which may be deleted. The designation of the

expiration date of the OMB number may be deleted. Any changes in the

HUD number or OMB approval number may be announced by notice in the

Federal Register, rather than by amendment of this part.

(6) The borrower's information and the seller's information may be

provided on separate pages.

(7) Signature lines may be added.

(8) The HUD-1 may be translated into languages other than English.

(9) An additional page may be attached to the HUD-1 for the purpose

of including customary recitals and information used locally in real

estate settlements; for example, breakdown of payoff figures, a

breakdown of the borrower's total monthly mortgage payments, check

disbursements, a statement indicating receipt of funds, applicable

special stipulations between buyer and seller, and the date funds are

transferred. If space permits, such information may be added at the end

of the HUD-1.

(10) As required by HUD/FHA in FHA-insured loans.

(11) As allowed by Sec. 3500.17, relating to an initial escrow

account statement.

(b) Permissible changes--HUD-1A. The changes and insertions on the

HUD-1 permitted under paragraph (a) of this section are also permitted

when the HUD-1A settlement statement is reproduced, except the changes

described in paragraphs (a) (3), (6), and (11).

(c) Written approval. Any other deviation in the HUD-1 or HUD-1A

forms is permissible only upon receipt of written approval of the

Secretary. A request to the Secretary for approval shall be submitted

in writing to the address indicated in Sec. 3500.3 and shall state the

reasons why the applicant believes such deviation is needed. The

prescribed form(s) must be used until approval is received.

(Approved by the Office of Management and Budget under control

numbers 2502-0265 and 2502-0491)

8. Section 3500.10 is revised to read as follows:

Sec. 3500.10 One-day advance inspection of HUD-1 or HUD-1A settlement

statement; delivery; recordkeeping.

(a) Inspection one day prior to settlement upon request by the

borrower. The settlement agent shall permit the borrower to inspect the

HUD-1 or HUD-1A settlement statement, completed to set forth those

items that are known to the settlement agent at the time of inspection,

during the business day immediately preceding settlement. Items related

only to the seller's transaction may be omitted from the HUD-1.

(b) Delivery. The settlement agent shall provide a completed HUD-1

or HUD-1A to the borrower, the seller (if there is one), the lender (if

the lender is not the settlement agent), and/or their agents. When the

borrower's and seller's copies of the HUD-1 or HUD-1A differ as

permitted by the instructions in Appendix A to this part, both copies

shall be provided to the lender (if the lender is not the settlement

agent). The settlement agent shall deliver the completed HUD-1 or HUD-

1A at or before the settlement, except as provided in paragraphs (c)

and (d) of this section.

(c) Waiver. The borrower may waive the right to delivery of the

completed HUD-1 or HUD-1A no later than at settlement by executing a

written waiver at or before settlement. In such case, the completed

HUD-1 or HUD-1A shall be mailed or delivered to the borrower, seller,

and lender (if the lender is not the settlement agent) as soon as

practicable after settlement.

(d) Exempt transactions. When the borrower or the borrower's agent

does not attend the settlement, or when the settlement agent does not

conduct a meeting of the parties for that purpose, the transaction

shall be exempt from the requirements of paragraphs (a) and (b) of this

section, except that the HUD-1 or HUD-1A shall be mailed or delivered

as soon as practicable after settlement.

(e) Recordkeeping. The lender shall retain each completed HUD-1 or

HUD-1A and related documents for five years after settlement, unless

the lender disposes of its interest in the mortgage and does not

service the mortgage. In that case, the lender shall provide its copy

of the HUD-1 or HUD-1A to the owner or servicer of the mortgage as a

part of the transfer of the loan file. Such owner or servicer shall

retain the HUD-1 or HUD-1A for the remainder of the five-year period.

The Secretary shall have the right to inspect or require copies of

records covered by this paragraph (e).

(Approved by the Office of Management and Budget under control

numbers 2502-0265 and 2502-0491)

9. Section 3500.12 is revised to read as follows:

Sec. 3500.12 No fee.

No fee shall be imposed or charge made upon any other person, as a

part of settlement costs or otherwise, by a lender in connection with a

federally related mortgage loan made by it (or a loan for the purchase

of a manufactured home), or by a servicer (as that term is defined

under 12 U.S.C. 2605(1)) for or on account of the preparation and

distribution of the HUD-1 or HUD-1A settlement statement, escrow

account statements required pursuant to section 10 of RESPA, or

statements required by the Truth in Lending Act, 15 U.S.C. 1601 et seq.

10. Section 3500.14 is amended by revising paragraphs (f)(2) and

(g)(1)(v), to read as follows:

Sec. 3500.14 Prohibition against kickbacks and unearned fees.

* * * * *

(f) * * *

(2) A referral also occurs whenever a person paying for a

settlement service or business incident thereto is required to use (see

Sec. 3500.2, ``required use'') a particular provider of a settlement

service or business incident thereto.

(g) * * *

(1) * * *

(v) Pursuant to cooperative brokerage and referral arrangements or

agreements between real estate agents and real estate brokers. (The

statutory exemption restated in this paragraph refers only to fee

divisions within real estate brokerage arrangements when all parties

are acting in a real estate brokerage capacity, and has no

applicability to any fee arrangements between real estate brokers and

mortgage brokers or between mortgage brokers.)

* * * * *

Sec. 3500.15 [Amended]

Section 3500.15 is amended by revising the phrase ``(as defined in

Sec. 3500.2(a)(11)'' in paragraph (b)(2) to read ``(as defined in

Sec. 3500.2, `required use')''.

12. Section 3500.16 is amended by revising the second sentence, to

read as follows:

Sec. 3500.16 Title companies.

* * * Section 3500.2 defines ``required use'' of a provider of a

settlement service. * * *

13. Appendix A to part 3500 is amended by revising the title of the

appendix; by revising the introductory text and the paragraph beginning

with ``Line 902'' in Section L under the text heading ``Line Item

Instructions''; and by adding additional text, a HUD-1 settlement

statement form, and a HUD-1A settlement statement form at the end of

the appendix, to read as follows:

Appendix A to Part 3500--Instructions for Completing HUD-1 and HUD-1A

Settlement Statements

* * * * *

Line Item Instructions

* * * * *

Section L. Settlement Charges

For all items except for those paid to and retained by the

Lender, the name of the person or firm ultimately receiving the

payment should be shown. In the case of ``no cost'' or ``no point''

loans, the charge to be paid by the lender to an affiliated or

independent service provider should be shown as P.O.C. (Paid Outside

of Closing) and should not be used in computing totals. Such charges

also include indirect payments or back-funded payments to mortgage

brokers that arise from the settlement transaction. When used,

``P.O.C.'' should be placed in the appropriate lines next to the

identified item, not in the columns themselves.

* * * * *

Line 902 is used for mortgage insurance premiums due and payable

at settlement, except reserves collected by the Lender and recorded

in the 1000 series. A lump sum mortgage insurance premium paid at

settlement should be inserted on Line 902, with a note that

indicates that the premium is for the life of the loan.

* * * * *

Line Item Instructions for Completing HUD-1A

Note: HUD-1A is an optional form that may be used for

refinancing and subordinate lien federally related mortgage loans,

as well as for any other one-party transaction that does not involve

the transfer of title to residential real property. The HUD-1 form

may also be used for such transactions, by utilizing the borrower's

side of the HUD-1 and following the relevant parts of the

instructions as set forth above. The use of either the HUD-1 or HUD-

1A is not mandatory for open-end lines of credit (home-equity

plans), as long as the provisions of Regulation Z are followed.

Background

The HUD-1A settlement statement is to be used as a statement of

actual charges and adjustments to be given to the borrower at

settlement, as defined in this part. The instructions for completion

of the HUD-1A are for the benefit of the settlement agent who

prepares the statement; the instructions are not a part of the

statement and need not be transmitted to the borrower. There is no

objection to using the HUD-1A in transactions in which it is not

required, and its use in open-end lines of credit transactions

(home-equity plans) is encouraged. It may not be used as a

substitute for a HUD-1 in any transaction in which there is a

transfer of title and a first lien is taken as security.

Refer to the ``definitions'' section of Regulation X for

specific definitions of terms used in these instructions.

General Instructions

Information and amounts may be filled in by typewriter, hand

printing, computer printing, or any other method producing clear and

legible results. Refer to Sec. 3500.9 regarding rules for

reproduction of the HUD-1A. Additional pages may be attached to the

HUD-1A for the inclusion of customary recitals and information used

locally for settlements or if there are insufficient lines on the

HUD-1A.

The settlement agent shall complete the HUD-1A to itemize all

charges imposed upon the borrower by the lender, whether to be paid

at settlement or outside of settlement, and any other charges that

the borrower will pay for at settlement. In the case of ``no cost''

or ``no point'' loans, these charges include any payments the lender

will make to affiliated or independent settlement service providers

relating to this settlement. These charges shall be included on the

HUD-1A, but marked ``P.O.C.'' for ``paid outside of closing,'' and

shall not be used in computing totals. Such charges also include

indirect payments or back-funded payments to mortgage brokers that

arise from the settlement transaction. When used, ``P.O.C.'' should

be placed in the appropriate lines next to the identified item, not

in the columns themselves.

Blank lines are provided in Section L for any additional

settlement charges. Blank lines are also provided in Section M for

recipients of all or portions of the loan proceeds. The names of the

recipients of the settlement charges in Section L and the names of

the recipients of the loan proceeds in Section M should be set forth

on the blank lines.

Line Item Instructions

The identification information at the top of the HUD-1A should

be completed as follows:

The borrower's name and address is entered in the space

provided. If the property securing the loan is different from the

borrower's address, the address or other location information on the

property should be entered in the space provided. The loan number is

the lender's identification number for the loan. The settlement date

is the date of settlement in accordance with Sec. 3500.2, not the

end of any applicable rescission period. The name and address of the

lender should be entered in the space provided.

Section L. Settlement Charges. This section of the HUD-1A is

similar to Section L of the HUD-1, with minor changes or omissions,

including deletion of lines 700 through 704, relating to real estate

broker commissions. The instructions for Section L in the HUD-1,

should be followed insofar as possible. Inapplicable charges should

be ignored, as should any instructions regarding seller items.

Line 1400 in the HUD-1A is for the total settlement charges

charged to the borrower. Enter this total on line 1602 as well. This

total should include Section L amounts from additional pages, if any

are attached to this HUD-1A.

Section M. Disbursement to Others. This section is used to list

payees, other than the borrower, of all or portions of the loan

proceeds (including the lender, if the loan is paying off a prior

loan made by the same lender), when the payee will be paid directly

out of the settlement proceeds. It is not used to list payees of

settlement charges, nor to list funds disbursed directly to the

borrower, even if the lender knows the borrower's intended use of

the funds.

For example, in a refinancing transaction, the loan proceeds are

used to pay off an existing loan. The name of the lender for the

loan being paid off and the pay-off balance would be entered in

Section M. In a home improvement transaction when the proceeds are

to be paid to the home improvement contractor, the name of the

contractor and the amount paid to the contractor would be entered in

Section M. In a consolidation loan, or when part of the loan

proceeds is used to pay off other creditors, the name of each

creditor and the amount paid to that creditor would be entered in

Section M. If the proceeds are to be given directly to the borrower

and the borrower will use the proceeds to pay off existing

obligations, this would not be reflected in Section M.

Section N. Net Settlement. Line 1600 normally sets forth the

principal amount of the loan as it appears on the related note for

this loan. In the event this form is used for an open-ended home

equity line whose approved amount is greater than the initial amount

advanced at settlement, the amount shown on Line 1600 will be the

loan amount advanced at settlement. Line 1601 is used for all

settlement charges that are both included in the totals for lines

1400 and 1602 and are not financed as part of the principal amount

of the loan. This is the amount normally received by the lender from

the borrower at settlement, which would occur when some or all of

the settlement charges were paid in cash by the borrower at

settlement, instead of being financed as part of the principal

amount of the loan. Failure to include any such amount in line 1601

will result in an error in the amount calculated on line 1604.

P.O.C. amounts should not be included in line 1601.

Line 1602 is the total amount from line 1400.

Line 1603 is the total amount from line 1520.

Line 1604 is the amount disbursed to the borrower. This is

determined by adding together the amounts for lines 1600 and 1601,

and then subtracting any amounts listed on lines 1602 and 1603.

BILLING CODE 4210-27-P

TR10FE94.007

TR10FE94.008

TR10FE94.009

TR10FE94.010

BILLING CODE 4210-27-C

14. Appendix B to part 3500 is amended by adding illustration 13 at

the end of the appendix, to read as follows:

Appendix B to Part 3500--Illustration of Requirements of RESPA

* * * * *

13. Facts. A is a dealer in home improvements who has

established funding arrangements with several lenders. Customers for

home improvements receive a proposed contract from A. The proposal

requires that customers both execute forms authorizing a credit

check and employment verification, and, frequently, execute a dealer

consumer credit contract secured by a lien on the customer's

(borrower's) 1- to 4-family residential property. Simultaneously

with the completion and certification of the home improvement work,

the note is assigned by the dealer to a funding lender.

Comments. The loan that is assigned to the funding lender is a

loan covered by RESPA, when a lien is placed on the borrower's 1- to

4-family residential structure. The dealer loan or consumer credit

contract originated by a dealer is also a RESPA-covered transaction,

except when the dealer is not a ``creditor'' under the definition of

``federally related mortgage loan'' in Sec. 3500.2. The lender to

whom the loan will be assigned is responsible for assuring that the

lender or the dealer delivers to the borrower a Good Faith Estimate

of closing costs consistent with Regulation X, and that the HUD-1 or

HUD-1A Settlement Statement is used in conjunction with the

settlement of the loan to be assigned. A dealer who, under

Sec. 3500.2, is covered by RESPA as a creditor is responsible for

the Good Faith Estimate of Closing Costs and the use of the

appropriate settlement statement in connection with the loan.

15. Appendix C to part 3500 is amended by revising the second

paragraph and the last paragraph before the footnotes; by revising the

heading in the second column of the chart to read ``HUD-1 or HUD-1A'';

and by removing the last sentence, beginning with ``A lender will

provide you'', in footnote 1, to read as follows:

Appendix C to Part 3500--Sample Form of Good Faith Estimate

* * * * *

The numbers listed beside the estimates generally correspond to

the numbered lines contained in the HUD-1 or HUD-1A settlement

statement that you will be receiving at settlement. The HUD-1 or

HUD-1A settlement statement will show you the actual cost for items

paid at settlement.

* * * * *

These estimates are provided pursuant to the Real Estate

Settlement Procedures Act of 1974, as amended (RESPA). Additional

information can be found in the HUD Special Information Booklet,

which is to be provided to you by your mortgage broker or lender, if

your application is to purchase residential real property and the

Lender will take a first lien on the property.

* * * * *

Dated: February 4, 1994.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 94-3035 Filed 2-9-94; 8:45 am]

BILLING CODE 4210-27-P