Amendments to Regulation X, the Real Estate Settlement Procedures Act Regulation (Withdrawal of Employer-Employee and Computer Loan Origination Systems (CLOs) Exemptions); Final Rule

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR 4148-F-01]

Amendments to Regulation X, the Real Estate Settlement Procedures

Act Regulation (Withdrawal of Employer-Employee and Computer Loan

Origination Systems (CLOs) Exemptions); Final Rule

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing

Commissioner, HUD.

[[Page 58473]]

ACTION: Final rule.

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SUMMARY: In this final rule, the Department is implementing portions of

a final rule revising Regulation X that was published June 7, 1996, and

corrected and revised on August 12, 1996. The Department had delayed

the effectiveness of that rule based on the requirements of recent

legislation. After carefully reviewing the legislation, however, the

Department has determined that several portions of that rule are not

affected by the legislative delay. Therefore, this final rule

implements those portions of the previous rule. This rule also makes

several technical revisions to Regulations X, some of which implement

various provisions in the recent legislation.

EFFECTIVE DATE: January 14, 1997.

FOR FURTHER INFORMATION CONTACT: David Williamson, Director, Office of

Consumer and Regulatory Affairs, Room 9146, telephone (202) 708-4560;

or, for legal questions, Kenneth A. Markison, Assistant General Counsel

for GSE/RESPA, Grant E. Mitchell, Senior Attorney for RESPA, or Richard

S. Bennett, Attorney, Office of General Counsel, Room 9262, telephone

(202) 708-1550. (The telephone numbers are not toll-free.) For hearing-

or speech-impaired persons, these numbers may be accessed via TTY (text

telephone) by calling the Federal Information Relay Service at 1-800-

877-8339. The address for the above-listed persons is: Department of

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

20410.

SUPPLEMENTARY INFORMATION:

Background

In the final rule published on June 7, 1996 (61 FR 29238) entitled

``Amendments to Regulation X, the Real Estate Settlement Procedures

Act: Withdrawal of Employer-Employee and Computer Loan Origination

Systems (CLOs) Exemptions,'' the Department established an effective

date for the rule of 120 days from publication: October 7, 1996.

Subsequently, on August 12, 1996 (61 FR 41944), the Department

published a revision to a document associated with that rule--Appendix

D, the Controlled Business Arrangement (CBA) Disclosure Statement

Format--in order to clarify the directions on completing the format.

Section 2103 of the Economic Growth and Regulatory Paperwork

Reduction Act of 1996 (Title II of the Omnibus Consolidated

Appropriations Act, 1997, Pub. L. 104-208; approved September 30, 1996)

(the Act) was signed by the President on September 30, 1996. The Act

delays the effective date of the provisions of the June 7, 1996 final

rule under the Real Estate Settlement Procedures Act (RESPA) (Pub. L.

92-533; 12 U.S.C. 2601 et seq.) concerning payments to employees by

their employers. One such provision of the June 7 rule would have

eliminated 24 CFR 3500.14(g)(1)(vii), which permits ``[a]n employer's

payment to its own employees for any referral activities.'' Section

2103 of the Act provides that this provision of the June 7 rule shall

not take effect before July 31, 1997. The Act provides that the

following provisions also shall not take effect before July 31, 1997:

(1) The exemption for employer payments to managerial employees

(Sec. 3500.14(g)(1)(viii) of the June 7 rule); (2) The exemption for

employer payments to employees who do not perform settlement services

in any transaction (Sec. 3500.14(g)(1)(ix) of the June 7 rule); and (3)

The provision clarifying that ``[a] payment by an employer to its own

bona fide employee for generating business for that employer'' is

permissible (Sec. 3500.14(g)(1)(vii) of the June 7 rule).

Although not required by the Act, on October 4, 1996 (61 FR 51782),

the Department announced its determination to delay temporarily the

effective date of the entire June 7 final rule, as corrected and

revised on August 12, and to continue the prior provisions relating to

employer-employee payments (as in effect on May 1, 1996, as required by

the Act). The reason for the delay was to provide the Department with

an opportunity to analyze the Act and develop an appropriate time

schedule for establishing the effective dates of the various provisions

of the June 7 rule, as revised August 12. The October 4 notice stated

that within 30 days of publication of that notice, the Department would

publish further information on this time schedule. That notice was

published in the Federal Register on November 4, 1996 (61 FR 56624).

The Department has reviewed the Act and has determined that certain

portions of the June 7 final rule and the August 12 technical revisions

to Appendix D that are not delayed by the Act should be made effective,

subject to further technical revisions. The Department is issuing this

final rule to make these provisions effective on January 14, 1997, for

the reasons stated in the preambles to the June 7 final rule and August

12 technical revision, to the extent applicable. With respect to the

other provisions of the June 7 final rule, the Department intends to

act in accordance with the notice published November 4, 1996.

Provisions Made Effective by This Final Rule

One portion of the June 7 final rule that this rule puts into

effect deals with Computer Loan Origination (CLO) Systems.

Specifically, this rule makes effective the withdrawal of the CLO

exemption at 24 CFR 3500.14(g)(1)(viii). It also makes effective the

elimination of the CLO Fee Disclosure form, which previously was

codified as Appendix E to 24 CFR part 3500. By making these provisions

of the June 7 rule effective, the guidance contained in ``Statement of

Policy 1996-1, Computer Loan Origination Systems (CLOs),'' concerning

the applicability of RESPA to CLOs, that was also published June 7,

1996 (61 FR 29255), is more fully effective. The guidance in that

statement of policy is effective except to the limited extent that it

interprets provisions that are not yet effective, such as those

provisions in the June 7 final rule changing the employer-employee

exemption.

Today's rule also puts into effect the revised Appendix D to part

3500 as published August 12, 1996. Appendix D contains what was

formerly known as the ``Controlled Business Arrangement Disclosure

Statement Format,'' and which, for the reasons explained below, is

redesignated by this rule as the ``Affiliated Business Arrangement

Disclosure Statement Format.'' Persons should refer to the preamble of

the August 12 technical revision for general guidance and background

information. Finally, today's rule will make effective conforming

changes to Sec. 3500.17 that are necessary because of the redesignation

of Appendix F as Appendix E.

Technical Revisions and Corrections

This final rule also makes several technical revisions and

corrections to Regulation X. The first revision is required by an

amendment to RESPA in section 2103(c) of the Act. Section 2103(c)

redesignated ``Controlled Business Arrangements'' as ``Affiliated

Business Arrangements'' or ``AfBAs.'' This rule makes conforming

revisions throughout the RESPA regulations and appendices in part 3500,

wherever the term ``Controlled Business Arrangement'' appears,

including in Appendix D, which is redesignated by this rule as the

``Affiliated Business Arrangement Disclosure Statement Format.''

The second revision also conforms the regulation to the Act.

Section 2103(b) of the Act requires the Department, in

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prescribing regulations under RESPA, to conform the exemption of

business, commercial, or agricultural loans under RESPA to the

exemption of such loans under the Truth In Lending Act (TILA) (15

U.S.C. 1601 et seq.). The primary effect of this legislative

requirement is to eliminate RESPA coverage for 1- to 4-family

residential properties used by individuals for rental purposes.

Accordingly, this final rule amends Sec. 3500.5(b) to delete the

sentence providing that the exemption to RESPA for business purpose

loans ``does not include any loan to one or more persons acting in an

individual capacity (natural persons) to acquire, refinance, improve,

or maintain 1- to 4-family residential property used, or to be used, to

rent to other persons.'' By deleting this sentence, Regulation X, with

respect to the coverage of business, commercial, or agricultural loans

under RESPA now conforms to the coverage of such loans under TILA, as

required. Section 3500.5(b), as revised by this rule, defers to TILA

for interpretation of the coverage of business purpose loans.

This final rule also withdraws RESPA Interpretive Rule 1995-1,

published in the Federal Register on February 27, 1995 (60 FR 10762).

That interpretive rule had reaffirmed the determination set forth in

the Department's RESPA rule, published on February 10, 1994 (59 FR

6505), and amended on March 30, 1994 (59 FR 14748), that transactions

by individuals involving 1- to 4-family residential rental properties

are covered by RESPA. This interpretation does not survive the

statutory amendment and no longer represents the Department's position.

The third revision also relates to the Act. It revises

Sec. 3500.15(b)(1) to make reference to section 8(c)(4)(A) of RESPA,

which was amended by section 2103(d) of the Act. Section 2103(d) of the

Act amends section 8(c)(4)(A) to establish special procedures for

disclosures of affiliated business arrangements in conjunction with

referrals where the telephone or electronic media are used in

marketing. This rule makes clear that the provisions of

Sec. 3500.15(b)(1) shall not apply to the extent they are inconsistent

with the legislative amendment. The Department will conduct further

rulemaking to implement section 2103(d) of the Act.

This rule also makes two technical revisions and corrections that

are unrelated to the June 7 rule and the new Act. This rule revises the

definition of ``Federally related mortgage loan'' in Sec. 3500.2. In

the March 26, 1996 streamlining rule (61 FR 29238), the Department

promulgated a streamlined definition of this term that incorporated the

statutory language in section 3(1) of RESPA (Pub. L. 93-533; 12 U.S.C.

2602(1)). Consistent with the preamble of the March 26 rule, the

Department had not intended to make any substantive change in the

definition. Nonetheless, adoption of the streamlined definition caused

some confusion about RESPA's applicability. Since the former definition

had pertained for decades, the Department has determined that the best

way to eliminate the confusion is to revert to the definition that

applied under Regulation X prior to the streamlining rule, with minor

technical clarifications, most notably, indicating that the term is

used interchangeably with the term ``mortgage loan'' in the regulation.

The other technical correction removes Appendix N. The preamble of

the March 26 streamlining rule explained that, as part of that

streamlining, the Department was removing certain appendices from

codification. The appendices to be removed included Appendix N, ``HUD-1

Aggregate Accounting Adjustment Example.'' Because of an error in the

amendatory instructions of that rule and the April 29, 1996 correction

to that rule (61 FR 18674), the instruction to remove Appendix N, as

specified in the preamble to the March 26 rule, was omitted. This final

rule includes those instructions and removes Appendix N from

codification. The appendices that have been removed, including Appendix

N, are available from the Department as Public Guidance Documents.

Persons should refer to the preamble of the June 7 rule and August

12 technical revision, both for general guidance and for additional

background on provisions that are being made effective by today's rule.

The only portions of the June 7 rule that are affected by the Act

concerning a delay in the effective date are those provisions

identified as Sec. 3500.14(g)(1) (vii)-(ix), for which the effective

date has been delayed.

Justification for Final Rulemaking

The Department generally publishes a rule for public comment before

issuing a rule for effect, in accordance with its regulations on

rulemaking in 24 CFR part 10. Part 10 provides for exceptions from this

general rule, however, when the agency finds good cause to omit advance

notice and public participation. The good cause requirement is

satisfied when prior public procedure is ``impracticable, unnecessary,

or contrary to the public interest'' (24 CFR 10.1).

This final rule establishes the effective date for certain

provisions in the June 7, 1996 final rule, for which the Department has

already solicited public comments. This rule also makes several

technical revisions or clarifications to the RESPA regulations that

strictly conform with the requirements of the Act; the Department is

not exercising any new regulatory discretion. Therefore, the Department

finds that good cause exists to publish this rule for effect without

first soliciting public comments, in that prior public procedure would

be unnecessary.

Findings and Certifications

Paperwork Reduction Act

The regulations implementing the statutory requirement for a

disclosure regarding ``affiliated'' business arrangements are in 24 CFR

3500.15(b). In accordance with the emergency processing procedures in 5

CFR 1320.13, the information collection requirements in Sec. 3500.15(b)

have been approved by the Office of Management and Budget (OMB) under

the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), and assigned

OMB control number 2502-0516. The Department provided notice of the

estimate of the average burden of the collection, and solicited public

comments on this estimate, on August 12, 1996 (61 FR 44990). The

Department is in the process of seeking OMB approval of the information

collection requirements through the regular processing procedures in 5

CFR part 1320; the regular approval number, when assigned, will be

announced by separate notice in the Federal Register. An agency may not

conduct or sponsor, and a person is not required to respond to, a

collection of information unless the collection displays a valid

control number.

This final rule does not impose additional information collection

requirements, nor does it substantively change the information

collection requirements in Sec. 3500.15(b) issued in the June 7, 1996

final rule (61 FR 29238), and corrected and revised on August 12, 1996

(61 FR 41944). The only effect of this rule upon the information

collection requirements is to redesignate the term ``controlled

business arrangements'' as ``affiliated business arrangements,'' in

accordance with section 2103(c) of the Act.

Environmental Impact

A finding of no significant impact with respect to the environment

was made at the time of the development of the June 7, 1996 final rule

(61 FR 29238), in accordance with HUD regulations in 24 CFR part 50

[[Page 58475]]

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

of 1969 (42 U.S.C. 4332). That finding continues to apply to this final

rule, and is available for public inspection during regular business

hours in the Office of General Counsel, the 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.

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 final 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 amends 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 final 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.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-

4; approved March 22, 1995) (UMRA) establishes requirements for Federal

agencies to assess the effects of their regulatory actions on State,

local, and tribal governments, and the private sector. This rule does

not impose any Federal mandates on any State, local, or tribal

governments, or on the private sector, within the meaning of the UMRA.

List of Subjects in 24 CFR Part 3500

Consumer protection, Condominiums, Housing, Mortgages, Mortgage

servicing, Reporting and recordkeeping requirements.

Accordingly, for the reasons set out in the preamble, Interpretive

Rule 1995-1, published in the Federal Register on February 27, 1995 (60

FR 10762), is removed; and part 3500 of title 24 of the Code of Federal

Regulations is amended as follows:

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

1. The authority citation for 24 CFR part 3500 is revised to read

as follows:

Authority: 12 U.S.C. 2601 et seq.; 28 U.S.C. 2461 note; 42

U.S.C. 3535(d).

2. In Sec. 3500.2, paragraph (b) is amended by revising the

definition of ``Federally related mortgage loan'' to read as follows:

Sec. 3500.2 Definitions.

* * * * *

Federally related mortgage loan or 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 real 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.

(3) If the residential real property securing a mortgage loan is

not located in a State, the loan is not a federally related mortgage

loan.

* * * * *

Sec. 3500.5 [Amended]

3. Section 3500.5 is amended by revising paragraph (b)(2) to read

as follows:

Sec. 3500.5 Coverage of RESPA.

* * * * *

(b) * * *

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

business, commercial, or agricultural purpose, as defined by Regulation

Z, 12 CFR 226.3(a)(1). Persons may rely on Regulation Z in determining

whether the exemption applies.

* * * * *

[[Page 58476]]

Sec. 3500.7 [Amended]

4. In Sec. 3500.7, paragraph (e)(3) is amended by removing the

phrase ``a controlled'', and by adding in its place the phrase ``an

affiliated''.

Sec. 3500.8 [Amended]

5. In Sec. 3500.8, the fourth sentence of paragraph (c)(2) is

amended by removing the reference ``Appendix F'', and by adding in its

place the reference ``Appendix E''.

Sec. 3500.13 [Amended]

6. In Sec. 3500.13, paragraph (b)(2) is amended by removing the

word ``controlled'' wherever it appears, and by adding in its place the

word ``affiliated''.

Sec. 3500.14 [Amended]

7. In Sec. 3500.14, paragraph (g) is amended by removing paragraph

(g)(1)(viii); by adding the word ``or'' at the end of paragraph

(g)(1)(vi); and by removing the phrase ``; or'' at the end of paragraph

(g)(1)(vii), and by adding in its place a period.

8. Section 3500.15 is amended as follows:

a. The section heading is revised as set forth below;

b. Paragraph (a) is amended by removing the phrase ``A

controlled'', and by adding in its place the phrase ``An affiliated'';

c. The first sentence of the introductory text of paragraph (b)(1)

is amended by removing the word ``Controlled'', and by adding in its

place the word ``Affiliated'';

d. Paragraph (b)(3)(i) is amended by removing the phrase ``a

controlled'' and adding in its place the phrase ``an affiliated''; and

e. The introductory text of paragraph (b) is amended by removing

the phrase ``A controlled'', and by adding in its place the phrase ``An

affiliated''; and is further amended by adding a new sentence at the

end of the introductory text, to read as follows:

Sec. 3500.15 Affiliated business arrangements.

* * * * *

(b) * * * Paragraph (b)(1) of this section shall not apply to the

extent it is inconsistent with section 8(c)(4)(A) of RESPA (12 U.S.C.

2607(c)(4)(A)).

* * * * *

Sec. 3500.17 [Amended]

9. Section 3500.17 is amended as follows:

a. In paragraph (b), the last sentence of the definition of

``Aggregate (or) composite analysis'' and the last sentence of the

definition of ``Single-item analysis'' are amended by removing the

references ``Appendix F'', and by adding in their place the references

``Appendix E'';

b. In paragraph (c)(1)(i), the second sentence is amended by

removing the reference ``appendix F'', and by adding in its place the

reference ``Appendix E''; and

c. In paragraph (d)(1)(ii), the last sentence is amended by

removing the reference ``Appendix F'', and by adding in its place the

reference ``Appendix E''.

Appendix B to Part 3500 [Amended]

10. Appendix B to part 3500 is amended as follows:

a. In Illustration 7, ``Comments'', the first sentence is amended

by removing the phrase ``a controlled,'' and by adding in its place the

phrase ``an affiliated''; and the third and last sentences are amended

by removing the word ``controlled'', and by adding in its place the

word ``affiliated'';

b. In Illustration 8, ``Comments'', the first sentence is amended

by removing the word ``CBA'', and by adding in its place the phrase

``affiliated business arrangement'';

c. In Illustration 9, ``Comments'', the first sentence is amended

by removing the phrase ``a controlled'', and by adding in its place the

phrase ``an affiliated'';

d. In Illustration 10, ``Comments'', the first and second sentences

are amended by removing the phrase ``a controlled'', and by adding in

its place the phrase ``an affiliated''; and the second sentence is

further amended by removing the phrase ``the controlled'', and by

adding in its place the phrase ``the affiliated''; and

e. In Illustration 11, ``Facts'', the last sentence is amended by

removing the phrase ``a controlled'', and by adding in its place the

phrase ``an affiliated''; and in Illustration 11, ``Comments'', the

second sentence is amended by removing the word ``controlled'', and by

adding in its place the word ``affiliated''.

11. Appendix D to part 3500 is revised to read as follows:

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[GRAPHIC] [TIFF OMITTED] TR15NO96.001

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Appendix E to part 3500 [Removed]

12. Appendix E to part 3500 is removed.

Appendix F to part 3500 [Redesignated]

13. Appendix F to part 3500 is redesignated as Appendix E to part

3500.

Appendix N to part 3500 [Removed]

14. Appendix N to part 3500 is removed.

Dated: November 8, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner

[FR Doc. 96-29278 Filed 11-14-96; 8:45 am]

BILLING CODE 4210-27-M