Office of the Assistant Secretary for HousingFederal Housing Commissioner; Real Estate Settlement Procedures Act; Streamlining Final Rule

SUMMARY: This final rule amends HUD's regulations under the Real Estate

Settlement Procedures Act (RESPA). In an effort to comply with the

President's regulatory reform initiatives, this rule streamlines the

RESPA regulations by eliminating provisions that repeat statutes or are

otherwise unnecessary. A number of the appendices that were intended to

be illustrative, rather than regulatory, have been removed from

codification, but will be made available by the Department as Public

Guidance Documents. Therefore, this final rule makes the RESPA

regulations clearer and more concise.

EFFECTIVE DATE: April 25, 1996.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, Office

of Consumer and Regulatory Affairs, Room 5241, Department of Housing

and Urban Development, 451 Seventh Street SW., Washington, DC 20410,

telephone number (202) 708-4560 (this is not a toll-free number); or

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

GSE/RESPA, or Grant E. Mitchell, Senior Attorney for RESPA, Room 9262,

Department of Housing and Urban Development, 451 Seventh Street SW.,

Washington, DC 20410, telephone number (202) 708-1550 (this is not a

toll-free number). For hearing- or speech-impaired persons, this number

may be accessed via TDD by calling the Federal Information Relay

Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton issued a

memorandum to all Federal departments and agencies regarding regulatory

reinvention. In response to this memorandum, the Department of Housing

and Urban Development conducted a page-by-page review of its

regulations to determine which could be eliminated, consolidated, or

otherwise improved. HUD has determined that the regulations for

implementing RESPA can be improved and streamlined by eliminating

unnecessary provisions.

Several provisions in the regulations repeat statutory language

from the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. 2601

et seq. It is unnecessary to maintain statutory requirements in the

Code of Federal Regulations (CFR), since those requirements are

otherwise fully accessible and binding. Furthermore, if regulations

contain statutory language, HUD must amend the regulations whenever

Congress amends the statute. Therefore, this final rule will remove

repetitious statutory language and replace it with a citation to the

specific statutory section for easy reference. For example,

Sec. 3500.19(a) has been substantially streamlined to delete provisions

that simply repeated statutory provisions that do not need to be

implemented by regulation.

This final rule also removes from codification several of the

appendices that previously accompanied part 3500. The Department

intends to preserve the material contained in the appendices to be

removed, but will no longer codify that material. Instead, that

material will be available as Public Guidance Documents, as defined in

this rule. Although not codified, Public Guidance Documents have been

or will be published in the Federal Register and any amendments to the

documents will be published in the Federal Register, as well. In

addition, the rule specifies that these documents are available from

HUD at the address provided. The appendices being removed from

codification are as follows:

Appendix G--consisting of: (1) Appendix G-1 entitled

``Initial Escrow Account Disclosure Statement--Format,'' published at

60 FR 24736 (May 9, 1995); and (2) Appendix G-2 entitled ``Initial

Escrow Account Disclosure Statement--Example,'' published at 60 FR 8819

(Feb. 15, 1995), but amended at 60 FR 24735 (May 9, 1995).

Appendix H--consisting of Appendix H-1 and Appendix H-2,

each entitled ``Biweekly Payments--Example,'' published at 60 FR 8820-

8821 (Feb. 15, 1995).

Appendix I--consisting of: (1) Appendices I-1, I-2, I-5,

and I-6, each entitled ``Annual Escrow Account Disclosure Statement--

Format,'' published at 60 FR 24737-24740 (May 9, 1995); and (2)

Appendices I-3, I-4, I-7, and I-8, each entitled ``Annual Escrow

Account Disclosure Statement--Example,'' published at 60 FR 8824, 8825,

8828, and 8829 (Feb. 15, 1995).

Appendix J--consisting of Appendices J-1 and J-2, each

entitled ``Annual Escrow Account Disclosure Statement--Example,''

published at 60 FR 8830-8831 (Feb. 15, 1995).

Appendix K--consisting of Appendices K-1 through K-4, each

entitled ``Short Year Statements--Example,'' published at 60 FR 8832-

8835 (Feb. 15, 1995).

Appendix L--``Side-by-Side Presentation of Old Projection

and History,'' published at 60 FR 8836 (Feb. 15, 1995).

Appendix M--``Illustration of Option of Identifying

Simultaneous Deficiency and Shortage,'' published at 60 FR 8837 (Feb.

15, 1995).

Appendix N--``HUD-1 Aggregate Accounting Adjustment

Example,'' published at 60 FR 8838 (Feb. 15, 1995).

Aside from having been published previously in the Federal Register

as indicated above, these appendices were also published in the 1995

edition of the CFR (though after publication of the 1995 edition

further revisions to Appendices G and I were made at 60 FR 24735-24740

(May 9, 1995)). While the guidance in these appendices remains

applicable and the examples and explanations are very helpful to users,

it is not necessary that it be published in the CFR. HUD will more

appropriately provide this information through other public guidance

materials rather than maintain it in the CFR. HUD may update this

information from time to time by publication in the Federal Register.

The information is also available from HUD at the address indicated in

24 CFR 3500.3.

The investigation provisions formerly at Sec. 3500.20 previously

were removed from this Part and consolidated in a new part 3800 with

similar provisions for manufactured housing (part 3282) and interstate

land sales (part 1720) (see FR-4026, a reinvention rule published

shortly before this rule).

Justification for Final Rulemaking

HUD generally publishes a rule for public comment before issuing a

rule for effect, in accordance with its own regulations on rulemaking

in 24 CFR part 10. However, part 10 provides for exceptions to the

general rule if 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). HUD finds that good cause exists

to publish this rule for effect without first soliciting public

comment. This rule removes unnecessary regulatory provisions and

nonbinding guidance material and corrects minor, nonsubstantive

editorial errors in the

[[Page 13233]]

text of the current regulations. Because of the nature of the changes,

prior public comment is unnecessary.

Other Matters

Regulatory Flexibility Act

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

U.S.C. 605(b)), has reviewed and approved this final rule, and in so

doing certifies that this rule will not have a significant economic

impact on a substantial number of small entities. This rule merely

streamlines regulations by removing unnecessary provisions. The rule

will have no adverse or disproportionate economic impact on small

businesses.

Environmental Impact

This rulemaking does not have an environmental impact. This

rulemaking simply amends an existing regulation by consolidating and

streamlining provisions and does not alter the environmental effect of

the regulations being amended. Findings of No Significant Impact with

respect to the environment were 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) at the time of

development of regulations implementing RESPA. Those findings remain

applicable to this rule, and are 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.

Executive Order 12612, Federalism

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

of Executive Order 12612, Federalism, has determined that 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. No programmatic or policy changes

will result from this rule that would affect the relationship between

the Federal Government and State and local governments.

Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

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

the potential for significant impact on family formation, maintenance,

or 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.

List of Subjects in 24 CFR Part 3500

Consumer protection, Condominiums, Housing, Mortgages, Mortgage

servicing, Reporting and recordkeeping requirements.

Accordingly, 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 part 3500 continues to read as

follows:

Authority: 12 U.S.C. 2601 et seq.; 42 U.S.C. 3535(d).

2. Sections 3500.1 through 3500.19 and 3500.21 are revised to read

as follows:

Sec. 3500.1 Designation.

This part may be referred to as Regulation X.

Sec. 3500.2 Definitions.

(a) Statutory terms. All terms defined in RESPA (12 U.S.C. 2602)

are used in accordance with their statutory meaning unless otherwise

defined in paragraph (b) of this section or elsewhere in this part.

(b) Other terms. 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 the

entity's business functions.

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.

Effective date of transfer is defined in section 6(i)(1) of RESPA

(12 U.S.C. 2605(i)(1)). In the case of a home equity conversion

mortgage or reverse mortgage as referenced in this section, the

effective date of transfer is the transfer date agreed upon by the

transferee servicer and the transferor servicer.

Federally related mortgage loan, also referred to in this rule as a

``mortgage loan,'' is defined in section 3(1) of RESPA (12 U.S.C.

2602(1)). If the residential property securing a mortgage loan is not

located in a State, it is not a federally related mortgage loan. A

federally related mortgage loan also includes:

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

loan) which meets the requirements in section 3(1)(A) of RESPA (12

U.S.C. 2602(1)(A)) and which is either:

(i) Originated by a dealer or, if the obligation is to be assigned

to any maker of mortgage loans specified in section 3(1)(B)(i)-(iv) of

RESPA (12 U.S.C. 2602(1)(B)(i)-(iv), by a mortgage broker; or

(ii) The subject of a home equity conversion mortgage, also

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

mortgage loans specified in section 3(1)(B)(i)-(iv) of RESPA (12 U.S.C.

2602(1)(B)(i)-(iv)).

(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

section 3(1)(B)(i)-(iv) of RESPA (12 U.S.C. 2602(1)(B)(i)-(iv)).

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.

[[Page 13234]]

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)(7), secondary market

transactions.

Manufactured home is defined in Sec. 3280.2 of this title.

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 Sec. 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 is defined in section 3(5) of RESPA (12 U.S.C. 2602(5)).

Public Guidance Documents means documents that HUD has published in

the Federal Register, and that it may amend from time-to-time by

publication in the Federal Register. These documents are also available

from HUD at the address indicated in 24 CFR 3500.3.

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.

Servicer means the person responsible for the servicing of a

mortgage loan (including the person who makes or holds a mortgage loan

if such person also services the mortgage loan). The term does not

include:

(1) The Federal Deposit Insurance Corporation (FDIC) or the

Resolution Trust Corporation (RTC), in connection with assets acquired,

assigned, sold, or transferred pursuant to section 13(c) of the Federal

Deposit Insurance Act or as receiver or conservator of an insured

depository institution; and

(2) The Federal National Mortgage Corporation (FNMA); the Federal

Home Loan Mortgage Corporation (Freddie Mac); the RTC; the FDIC; HUD,

including the Government National Mortgage Association (GNMA) and the

Federal Housing Administration (FHA) (including cases in which a

mortgage insured under the National Housing Act (12 U.S.C. 1701 et

seq.) is assigned to HUD); the National Credit Union Administration

(NCUA); the Farmers Home Administration or its successor agency under

Public Law 103-354 (FmHA); and the Department of Veterans Affairs (VA),

in any case in which the assignment, sale, or transfer of the servicing

of the mortgage loan is preceded by termination of the contract for

servicing the loan for cause, commencement of proceedings for

bankruptcy of the servicer, or commencement of proceedings by the FDIC

or RTC for conservatorship or receivership of the servicer (or an

entity by which the servicer is owned or controlled).

Servicing means receiving any scheduled periodic payments from a

borrower pursuant to the terms of any mortgage loan, including amounts

for escrow accounts under section 10 of RESPA (12 U.S.C. 2609), and

making the payments to the owner of the loan or other third parties of

principal and interest and such other payments with respect to the

amounts received from the borrower as may be required pursuant to the

terms of the mortgage servicing loan documents or servicing contract.

In the case of a home equity conversion mortgage or reverse mortgage as

referenced in this section, servicing includes making payments to the

borrower.

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, but not limited to, 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;

[[Page 13235]]

(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.

Sec. 3500.3 Questions or suggestions from public and copies of public

guidance documents.

Any questions or suggestions from the public regarding RESPA, or

requests for copies of HUD Public Guidance Documents, should be

directed to the Director, Office of Consumer and Regulatory Affairs,

Department of Housing and Urban Development, 451 7th Street SW.,

Washington, DC 20410-8000, rather than to HUD field offices. Legal

questions may be directed to the Assistant General Counsel, GSE/RESPA

Division, at this address.

Sec. 3500.4 Reliance upon rule, regulation or interpretation by HUD.

(a) Rule, regulation or interpretation.--(1) For purposes of

sections 19 (a) and (b) of RESPA (12 U.S.C. 2617 (a) and (b)) only the

following constitute a rule, regulation or interpretation of the

Secretary:

(i) All provisions, including appendices, of this part. Any other

document referred to in this part is not incorporated in this part

unless it is specifically set out in this part;

(ii) Any other document that is published in the Federal Register

by the Secretary and states that it is an ``interpretation,''

``interpretive rule,'' ``commentary,'' or a ``statement of policy'' for

purposes of section 19(a) of RESPA. Such documents will be prepared by

HUD staff and counsel. Such documents may be revoked or amended by a

subsequent document published in the Federal Register by the Secretary.

(2) A ``rule, regulation, or interpretation thereof by the

Secretary'' for purposes of section 19(b) of RESPA (12 U.S.C. 2617(b))

shall not include the special information booklet prescribed by the

Secretary or any other statement or issuance, whether oral or written,

by an officer or representative of the Department of Housing and Urban

Development (HUD), letter or memorandum by the Secretary, General

Counsel, any Assistant Secretary or other officer or employee of HUD,

preamble to a regulation or other issuance of HUD, Public Guidance

Document, report to Congress, pleading, affidavit or other document in

litigation, pamphlet, handbook, guide, telegraphic communication,

explanation, instructions to forms, speech or other material of any

nature which is not specifically included in paragraph (a)(1) of this

section.

(b) Unofficial interpretations; staff discretion. In response to

requests for interpretation of matters not adequately covered by this

part or by an official interpretation issued under paragraph (a)(1)(ii)

of this section, unofficial staff interpretations may be provided at

the discretion of HUD staff or counsel. Written requests for such

interpretations should be directed to the address indicated in

Sec. 3500.3. Such interpretations provide no protection under section

19(b) of RESPA (12 U.S.C. 2617(b)). Ordinarily, staff or counsel will

not issue unofficial interpretations on matters adequately covered by

this Part or by official interpretations or commentaries issued under

paragraph (a)(1)(ii) of this section.

(c) All informal counsel's opinions and staff interpretations

issued before November 2, 1992, were withdrawn as of that date. Courts

and administrative agencies, however, may use previous opinions to

determine the validity of conduct under the previous Regulation X.

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.

(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), and persons may rely on

Regulation Z in determining whether the exemption applies.

Notwithstanding the foregoing, the exemption in this section 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. An individual who

voluntarily chooses to act as a sole proprietorship is not considered

to be acting in an individual capacity for purposes of this part.

(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

[[Page 13236]]

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 (12 U.S.C. 2605) 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.)

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.

(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

(12 CFR), 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

(12 U.S.C. 2617(a)), 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 12 CFR 226.2(a)(10) of

Regulation Z, when the lender takes a subordinate lien;

(iii) Reverse mortgages; and

(iv) Any other federally related mortgage loan whose purpose is not

the purchase of a 1- to 4-family residential property.

(b) Revision. The Secretary may from time to time revise the

special information booklet by publishing a notice in the Federal

Register.

(c) Reproduction. The special information booklet may be reproduced

in any form, provided that no change is made other than as provided

under paragraph (d) of this section. The special information booklet

may not be made a part of a larger document for purposes of

distribution under RESPA and this section. Any color, size and quality

of paper, type of print, and method of reproduction may be used so long

as the booklet is clearly legible.

(d) Permissible changes. (1) No changes to, deletions from, or

additions to the special information booklet currently prescribed by

the Secretary shall be made other than those specified in this

paragraph (d) or any others approved in writing by the Secretary. A

request to the Secretary for approval of any changes shall be submitted

in writing to the address indicated in Sec. 3500.3, stating the reasons

why the applicant believes such changes, deletions or additions are

necessary.

(2) The cover of the booklet may be in any form and may contain any

drawings, pictures or artwork, provided that the words ``settlement

costs'' are used in the title. Names, addresses and telephone numbers

of the lender or others and similar information may appear on the

cover, but no discussion of the matters covered in the booklet shall

appear on the cover.

(3) The special information booklet may be translated into

languages other than English.

Sec. 3500.7 Good faith estimate.

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

[[Page 13237]]

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) Mortgage broker to provide. In the event an application is

received by a mortgage broker who is not an exclusive agent of the

lender, the mortgage broker must provide a good faith estimate within

three days of receiving a loan application based on his or her

knowledge of the range of costs (a suggested format is set forth in

Appendix C of this part). 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) Content of good faith estimate. A good faith estimate consists

of an estimate, as a dollar amount or range, of each charge which:

(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

(2) That the borrower will normally pay or incur at or before

settlement based upon common practice in the locality of the mortgaged

property. Each such estimate must be made in good faith and bear a

reasonable relationship to the charge a borrower is likely to be

required to pay at settlement, and must be based upon experience in the

locality of the mortgaged property. As to each charge with respect to

which the lender requires a particular settlement service provider to

be used, the lender shall make its estimate based upon the lender's

knowledge of the amounts charged by such provider.

(d) Form of good faith estimate. A suggested good faith estimate

form is set forth in Appendix C to this part and is in compliance with

the requirements of the Act except for any additional requirements of

paragraph (e) of this section. The good faith estimate may be provided

together with disclosures required by the Truth in Lending Act, 15

U.S.C. 1601 et seq., so long as all required material for the good

faith estimate is grouped together. The lender may include additional

relevant information, such as the name/signature of the applicant and

loan officer, date, and information identifying the loan application

and property, as long as the form remains clear and concise and the

additional information is not more prominent than the required

material.

(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.'' (The lender is not required to keep

detailed records of the percentages of use. Similar language, such as

``X was used [regularly] [frequently] in our settlements the past

year'' is also sufficient for the purposes of this paragraph.) 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 12 U.S.C. 2602(8);

(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 226.5b of

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

deemed to satisfy the requirements of this section.

(Approved by the Office of Management and Budget under control

number 2502-0265)

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, unless its use is specifically exempted, but the HUD-1 or

HUD-1A may be modified as permitted under this part. The use of the

HUD-1 or HUD-1A is exempted for open-end lines of credit (home-equity

plans) covered by the Truth in Lending Act and Regulation Z.

(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.

(c) Aggregate Accounting At Settlement. (1) After itemizing

individual deposits in the 1000 series using single-item accounting,

the servicer shall make an adjustment based on aggregate accounting.

This adjustment equals the difference in the deposit required under

aggregate accounting and the sum of the deposits required under single-

item accounting. The computation steps for both accounting methods are

set out in Sec. 3500.17(d). The adjustment will always be a negative

number or zero (-0-). The settlement agent shall enter the aggregate

adjustment amount on a final line in the 1000 series of the HUD-1 or

HUD-1A statement.

(2) During the phase-in period, as defined in Sec. 3500.17(b), an

alternative procedure is available. The settlement

[[Page 13238]]

agent may initially calculate the 1000 series deposits for the HUD-1

and HUD-1A settlement statement using single-item analysis with only a

one-month cushion (unless the mortgage loan documents indicate a

smaller amount). In the escrow account analysis conducted within 45

days of settlement, however, the servicer shall adjust the escrow

account to reflect the aggregate accounting balance. Appendix F to this

part sets out examples of aggregate analysis. Appendix A to this part

contains instructions for completing the HUD-1 or HUD-1A settlement

statements using an aggregate analysis adjustment and the alternative

process during the phase-in period.

(Approved by the Office of Management and Budget under control

numbers 2502-0265 and 2502-0491)

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) and (6) of this section.

(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)

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

number 2502-0265)

[[Page 13239]]

Sec. 3500.11 Mailing.

The provisions of this part requiring or permitting mailing of

documents shall be deemed to be satisfied by placing the document in

the mail (whether or not received by the addressee) addressed to the

addresses stated in the loan application or in other information

submitted to or obtained by the lender at the time of loan application

or submitted or obtained by the lender or settlement agent, except that

a revised address shall be used where the lender or settlement agent

has been expressly informed in writing of a change in address.

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(i)(2)) 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 (12 U.S.C.

2609), or statements required by the Truth in Lending Act, 15 U.S.C.

1601 et seq.

Sec. 3500.13 Relation to State laws.

(a) State laws that are inconsistent with RESPA or this part are

preempted to the extent of the inconsistency. However, RESPA and these

regulations do not annul, alter, affect, or exempt any person subject

to their provisions from complying with the laws of any State with

respect to settlement practices, except to the extent of the

inconsistency.

(b) Upon request by any person, the Secretary is authorized to

determine if inconsistencies with State law exist; in doing so, the

Secretary shall consult with appropriate Federal agencies.

(1) The Secretary may not determine that a State law or regulation

is inconsistent with any provision of RESPA or this part, if the

Secretary determines that such law or regulation gives greater

protection to the consumer.

(2) In determining whether provisions of State law or regulations

concerning controlled business arrangements are inconsistent with RESPA

or this part, the Secretary may not construe those provisions that

impose more stringent limitations on controlled business arrangements

as inconsistent with RESPA so long as they give more protection to

consumers and/or competition.

(c) Any person may request the Secretary to determine whether an

inconsistency exists by submitting to the address indicated in

Sec. 3500.3, a copy of the State law in question, any other law or

judicial or administrative opinion that implements, interprets or

applies the relevant provision, and an explanation of the possible

inconsistency. A determination by the Secretary that an inconsistency

with State law exists will be made by publication of a notice in the

Federal Register. ``Law'' as used in this section includes regulations

and any enactment which has the force and effect of law and is issued

by a State or any political subdivision of a State.

(d) A specific preemption of conflicting State laws regarding

notices and disclosures of mortgage servicing transfers is set forth in

Sec. 3500.21(h).

Sec. 3500.14 Prohibition against kickbacks and unearned fees.

(a) Section 8 violation. Any violation of this section is a

violation of section 8 of RESPA (12 U.S.C. 2607) and is subject to

enforcement as such under Sec. 3500.19.

(b) No referral fees. No person shall give and no person shall

accept any fee, kickback or other thing of value pursuant to any

agreement or understanding, oral or otherwise, that business incident

to or part of a settlement service involving a federally related

mortgage loan shall be referred to any person. Any referral of a

settlement service is not a compensable service, except as set forth in

Sec. 3500.14(g)(1). A company may not pay any other company or the

employees of any other company for the referral of settlement service

business.

(c) No split of charges except for actual services performed. No

person shall give and no person shall accept any portion, split, or

percentage of any charge made or received for the rendering of a

settlement service in connection with a transaction involving a

federally related mortgage loan other than for services actually

performed. A charge by a person for which no or nominal services are

performed or for which duplicative fees are charged is an unearned fee

and violates this section. The source of the payment does not determine

whether or not a service is compensable. Nor may the prohibitions of

this Part be avoided by creating an arrangement wherein the purchaser

of services splits the fee.

(d) Thing of value. This term is broadly defined in section 3(2) of

RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies,

things, discounts, salaries, commissions, fees, duplicate payments of a

charge, stock, dividends, distributions of partnership profits,

franchise royalties, credits representing monies that may be paid at a

future date, the opportunity to participate in a money-making program,

retained or increased earnings, increased equity in a parent or

subsidiary entity, special bank deposits or accounts, special or

unusual banking terms, services of all types at special or free rates,

sales or rentals at special prices or rates, lease or rental payments

based in whole or in part on the amount of business referred, trips and

payment of another person's expenses, or reduction in credit against an

existing obligation. The term ``payment'' is used throughout

Secs. 3500.14 and 3500.15 as synonymous with the giving or receiving

any ``thing of value'' and does not require transfer of money.

(e) Agreement or understanding. An agreement or understanding for

the referral of business incident to or part of a settlement service

need not be written or verbalized but may be established by a practice,

pattern or course of conduct. When a thing of value is received

repeatedly and is connected in any way with the volume or value of the

business referred, the receipt of the thing of value is evidence that

it is made pursuant to an agreement or understanding for the referral

of business.

(f) Referral--(1) A referral includes any oral or written action

directed to a person which has the effect of affirmatively influencing

the selection by any person of a provider of a settlement service or

business incident to or part of a settlement service when such person

will pay for such settlement service or business incident thereto or

pay a charge attributable in whole or in part to such settlement

service or business.

(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) Fees, salaries, compensation, or other payments. (1) Section 8

of RESPA permits:

(i) A payment to an attorney at law for services actually rendered;

(ii) A payment by a title company to its duly appointed agent for

services actually performed in the issuance of a policy of title

insurance;

(iii) A payment by a lender to its duly appointed agent or

contractor for services actually performed in the origination,

processing, or funding of a loan;

(iv) A payment to any person of a bona fide salary or compensation

or other payment for goods or facilities

[[Page 13240]]

actually furnished or for services actually performed;

(v) A payment 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.);

(vi) Normal promotional and educational activities that are not

conditioned on the referral of business and that do not involve the

defraying of expenses that otherwise would be incurred by persons in a

position to refer settlement services or business incident thereto;

(vii) An employer's payment to its own employees for any referral

activities; or

(viii) Any payment by a borrower for computer loan origination

services, so long as the disclosure set forth in Appendix E of this

part is provided the borrower.

(2) The Department may investigate high prices to see if they are

the result of a referral fee or a split of a fee. If the payment of a

thing of value bears no reasonable relationship to the market value of

the goods or services provided, then the excess is not for services or

goods actually performed or provided. These facts may be used as

evidence of a violation of section 8 and may serve as a basis for a

RESPA investigation. High prices standing alone are not proof of a

RESPA violation. The value of a referral (i.e., the value of any

additional business obtained thereby) is not to be taken into account

in determining whether the payment exceeds the reasonable value of such

goods, facilities or services. The fact that the transfer of the thing

of value does not result in an increase in any charge made by the

person giving the thing of value is irrelevant in determining whether

the act is prohibited.

(3) Multiple services. When a person in a position to refer

settlement service business, such as an attorney, mortgage lender, real

estate broker or agent, or developer or builder, receives a payment for

providing additional settlement services as part of a real estate

transaction, such payment must be for services that are actual,

necessary and distinct from the primary services provided by such

person. For example, for an attorney of the buyer or seller to receive

compensation as a title agent, the attorney must perform core title

agent services (for which liability arises) separate from attorney

services, including the evaluation of the title search to determine the

insurability of the title, the clearance of underwriting objections,

the actual issuance of the policy or policies on behalf of the title

insurance company, and, where customary, issuance of the title

commitment, and the conducting of the title search and closing.

(h) Recordkeeping. Any documents provided pursuant to this section

shall be retained for five (5) years from the date of execution.

(i) Appendix B of this part. Illustrations in Appendix B of this

part demonstrate some of the requirements of this section.

Sec. 3500.15 Controlled business arrangements.

(a) General. A controlled business arrangement is defined in

section 3(7) of RESPA (12 U.S.C. 2602(7)).

(b) Violation and exemption. A controlled business arrangement is

not a violation of section 8 of RESPA (12 U.S.C. 2607) and of

Sec. 3500.14 if the conditions set forth in this section are satisfied.

(1) The person making each referral has provided to each person

whose business is referred a written disclosure, in the format of the

Controlled Business Arrangement Disclosure Statement set forth in

Appendix D of this part, of the nature of the relationship (explaining

the ownership and financial interest) between the provider of

settlement services (or business incident thereto) and the person

making the referral and of an estimated charge or range of charges

generally made by such provider (which describes the charge using the

same terminology, as far as practical, as section L of the HUD-1

settlement statement). The disclosures must be provided on a separate

piece of paper no later than the time of each referral or, if the

lender requires use of a particular provider, the time of loan

application, except that:

(i) Where a lender makes the referral to a borrower, the condition

contained in paragraph (b)(1) of this section may be satisfied at the

time that the good faith estimate or a statement under Sec. 3500.7(d)

is provided; and

(ii) Whenever an attorney or law firm requires a client to use a

particular title insurance agent, the attorney or law firm shall

provide the disclosures no later than the time the attorney or law firm

is engaged by the client. Failure to comply with the disclosure

requirements of this section may be overcome if the person making a

referral can prove by a preponderance of the evidence that procedures

reasonably adopted to result in compliance with these conditions have

been maintained and that any failure to comply with these conditions

was unintentional and the result of a bona fide error. An error of

legal judgment with respect to a person's obligations under RESPA is

not a bona fide error. Administrative and judicial interpretations of

section 130(c) of the Truth in Lending Act shall not be binding

interpretations of the preceding sentence or section 8(d)(3) of RESPA

(12 U.S.C. 2607(d)(3)).

(2) No person making a referral has required (as defined in

Sec. 3500.2, ``required use'') any person to use any particular

provider of settlement services or business incident thereto, except if

such person is a lender, for requiring a buyer, borrower or seller to

pay for the services of an attorney, credit reporting agency, or real

estate appraiser chosen by the lender to represent the lender's

interest in a real estate transaction, or except if such person is an

attorney or law firm for arranging for issuance of a title insurance

policy for a client, directly as agent or through a separate corporate

title insurance agency that may be operated as an adjunct to the law

practice of the attorney or law firm, as part of representation of that

client in a real estate transaction.

(3) The only thing of value that is received from the arrangement

other than payments listed in Sec. 3500.14(g) is a return on an

ownership interest or franchise relationship.

(i) In a controlled business arrangement:

(A) Bona fide dividends, and capital or equity distributions,

related to ownership interest or franchise relationship, between

entities in an affiliate relationship, are permissible; and

(B) Bona fide business loans, advances, and capital or equity

contributions between entities in an affiliate relationship (in any

direction), are not prohibited--so long as they are for ordinary

business purposes and are not fees for the referral of settlement

service business or unearned fees.

(ii) A return on an ownership interest does not include:

(A) Any payment which has as a basis of calculation no apparent

business motive other than distinguishing among recipients of payments

on the basis of the amount of their actual, estimated or anticipated

referrals;

(B) Any payment which varies according to the relative amount of

referrals by the different recipients of similar payments; or

[[Page 13241]]

(C) A payment based on an ownership, partnership or joint venture

share which has been adjusted on the basis of previous relative

referrals by recipients of similar payments.

(iii) Neither the mere labelling of a thing of value, nor the fact

that it may be calculated pursuant to a corporate or partnership

organizational document or a franchise agreement, will determine

whether it is a bona fide return on an ownership interest or franchise

relationship. Whether a thing of value is such a return will be

determined by analyzing facts and circumstances on a case by case

basis.

(iv) A return on franchise relationship may be a payment to or from

a franchisee but it does not include any payment which is not based on

the franchise agreement, nor any payment which varies according to the

number or amount of referrals by the franchisor or franchisee or which

is based on a franchise agreement which has been adjusted on the basis

of a previous number or amount of referrals by the franchiser or

franchisees. A franchise agreement may not be constructed to insulate

against kickbacks or referral fees.

(c) Definitions. As used in this section:

(1) Associate is defined in section 3(8) of RESPA (12 U.S.C.

2602(8)).

(2) Affiliate relationship means the relationship among business

entities where one entity has effective control over the other by

virtue of a partnership or other agreement or is under common control

with the other by a third entity or where an entity is a corporation

related to another corporation as parent to subsidiary by an identity

of stock ownership.

(3) Beneficial ownership means the effective ownership of an

interest in a provider of settlement services or the right to use and

control the ownership interest involved even though legal ownership or

title may be held in another person's name.

(4) Control, as used in the definitions of ``associate'' and

``affiliate relationship,'' means that a person:

(i) Is a general partner, officer, director, or employer of another

person;

(ii) Directly or indirectly or acting in concert with others, or

through one or more subsidiaries, owns, holds with power to vote, or

holds proxies representing, more than 20 percent of the voting

interests of another person;

(iii) Affirmatively influences in any manner the election of a

majority of the directors of another person; or

(iv) Has contributed more than 20 percent of the capital of the

other person.

(5) Direct ownership means the holding of legal title to an

interest in a provider of settlement service except where title is

being held for the beneficial owner.

(6) Franchise is defined in 16 CFR 436.2(a).

(7) Franchisor is defined in 16 CFR 436.2(c).

(8) Franchisee is defined in 16 CFR 436.2(d).

(9) Person who is in a position to refer settlement service

business means any real estate broker or agent, lender, mortgage

broker, builder or developer, attorney, title company, title agent, or

other person deriving a significant portion of his or her gross income

from providing settlement services.

(d) Recordkeeping. Any documents provided pursuant to this section

shall be retained for 5 years after the date of execution.

(e) Appendix B of this part. Illustrations in Appendix B of this

part demonstrate some of the requirements of this section.

Sec. 3500.16 Title companies.

No seller of property that will be purchased with the assistance of

a federally related mortgage loan shall violate section 9 of RESPA (12

U.S.C. 2608). Section 3500.2 defines ``required use'' of a provider of

a settlement service. Section 3500.19(c) explains the liability of a

seller for a violation of this section.

Sec. 3500.17 Escrow accounts.

(a) General. This section sets out the requirements for an escrow

account that a lender establishes in connection with a federally

related mortgage loan. It sets limits for escrow accounts using

calculations based on monthly payments and disbursements within a

calendar year. If an escrow account involves biweekly or any other

payment period, the requirements in this section shall be modified

accordingly. A HUD Public Guidance Document entitled ``Biweekly

Payments--Example'' provides examples of biweekly accounting and a HUD

Public Guidance Document entitled ``Annual Escrow Account Disclosure

Statement--Example'' provides examples of a 3-year accounting cycle

that may be used in accordance with paragraph (c)(9) of this section.

(b) Definitions. As used in this section:

Acceptable accounting method means an accounting method that a

servicer uses to conduct an escrow account analysis for an escrow

account subject to the provisions of Sec. 3500.17(c).

Aggregate (or) composite analysis, hereafter called aggregate

analysis, means an accounting method a servicer uses in conducting an

escrow account analysis by computing the sufficiency of escrow account

funds by analyzing the account as a whole. Appendix F to this part sets

forth examples of aggregate escrow account analyses.

Annual Escrow Account Statement means a statement containing all of

the information set forth in Sec. 3500.17(i). As noted in

Sec. 3500.17(i), a servicer shall submit an annual escrow account

statement to the borrower within 30 calendar days of the end of the

escrow account computation year, after conducting an escrow account

analysis.

Conversion date means the date three years after the publication

date of the rule adding this section (i.e., October 27, 1997) by which

date all servicers shall use aggregate analysis.

Cushion or reserve (hereafter cushion) means funds that a servicer

may require a borrower to pay into an escrow account to cover

unanticipated disbursements or disbursements made before the borrower's

payments are available in the account, as limited by Sec. 3500.17(c).

Deficiency is the amount of a negative balance in an escrow

account. As noted in Sec. 3500.17(f), if a servicer advances funds for

a borrower, then the servicer must perform an escrow account analysis

before seeking repayment of the deficiency.

Delivery means the placing of a document in the United States mail,

first-class postage paid, addressed to the last known address of the

recipient. Hand delivery also constitutes delivery.

Disbursement date means the date on which the servicer actually

pays an escrow item from the escrow account. Section 3500.17(k)

provides that the servicer shall use as the disbursement date a date on

or before the earlier of the deadline to take advantage of discounts,

if available, or the deadline to avoid a penalty.

Escrow account means any account that a servicer establishes or

controls on behalf of a borrower to pay taxes, insurance premiums

(including flood insurance), or other charges with respect to a

federally related mortgage loan, including charges that the borrower

and servicer have voluntarily agreed that the servicer should collect

and pay. The definition encompasses any account established for this

purpose, including a ``trust account'', ``reserve account'', ``impound

account'', or other term in different localities. An ``escrow account''

includes any arrangement where the servicer adds a portion of the

borrower's payments to principal and subsequently deducts from

principal the disbursements for escrow account items.

[[Page 13242]]

For purposes of this section, the term ``escrow account'' excludes any

account that is under the borrower's total control.

Escrow account analysis means the accounting that a servicer

conducts in the form of a trial running balance for an escrow account

to:

(1) Determine the appropriate target balances;

(2) Compute the borrower's monthly payments for the next escrow

account computation year and any deposits needed to establish or

maintain the account; and

(3) Determine whether shortages, surpluses or deficiencies exist.

Escrow account computation year is a 12-month period that a

servicer establishes for the escrow account beginning with the

borrower's initial payment date. The term includes each 12-month period

thereafter, unless a servicer chooses to issue a short year statement

under the conditions stated in Sec. 3500.17(i)(4).

Escrow account item or separate item means any separate expenditure

category, such as ``taxes'' or ``insurance'', for which funds are

collected in the escrow account for disbursement. An escrow account

item with installment payments, such as local property taxes, remains

one escrow account item regardless of multiple disbursement dates to

the tax authority.

Initial escrow account statement means the first disclosure

statement that the servicer delivers to the borrower concerning the

borrower's escrow account. The initial escrow account statement shall

meet the requirements of Sec. 3500.17(g) and be in substantially the

format set forth in Sec. 3500.17(h).

Installment payment means one of two or more payments payable on an

escrow account item during an escrow account computation year. An

example of an installment payment is where a jurisdiction bills

quarterly for taxes.

Payment due date means the date each month when the borrower's

monthly payment to an escrow account is due to the servicer. The

initial payment date is the borrower's first payment due date to an

escrow account.

Phase-in period means the period beginning on the effective date of

this final rule and ending on the conversion date, i.e., October 27,

1997, by which date all servicers shall use the aggregate accounting

method in conducting escrow account analyses.

Post-rule account means an escrow account established in connection

with a federally related mortgage loan whose settlement date is on or

after the effective date of this section.

Pre-accrual is a practice some servicers use to require borrowers

to deposit funds, needed for disbursement and maintenance of a cushion,

in the escrow account some period before the disbursement date. Pre-

accrual is subject to the limitations of Sec. 3500.17(c).

Pre-rule account is an escrow account established in connection

with a federally related mortgage loan whose settlement date is before

the effective date of this rule.

Shortage means an amount by which a current escrow account balance

falls short of the target balance at the time of escrow analysis.

Single-item analysis means an accounting method servicers use in

conducting an escrow account analysis by computing the sufficiency of

escrow account funds by considering each escrow item separately.

Appendix F to this part sets forth examples of single-item analysis.

Submission (of an escrow account statement) means the delivery of

the statement.

Surplus means an amount by which the current escrow account balance

exceeds the target balance for the account.

System of recordkeeping means the servicer's method of keeping

information that reflects the facts relating to that servicer's

handling of the borrower's escrow account, including, but not limited

to, the payment of amounts from the escrow account and the submission

of initial and annual escrow account statements to borrowers.

Target balance means the estimated month end balance in an escrow

account that is just sufficient to cover the remaining disbursements

from the escrow account in the escrow account computation year, taking

into account the remaining scheduled periodic payments, and a cushion,

if any.

Trial running balance means the accounting process that derives the

target balances over the course of an escrow account computation year.

Section 3500.17(d) provides a description of the steps involved in

performing a trial running balance.

(c) Limits on payments to escrow accounts; acceptable accounting

methods to determine limits.

(1) A lender or servicer (hereafter servicer) shall not require a

borrower to deposit into any escrow account, created in connection with

a federally related mortgage loan, more than the following amounts:

(i) Charges at settlement or upon creation of an escrow account. At

the time a servicer creates an escrow account for a borrower, the

servicer may charge the borrower an amount sufficient to pay the

charges respecting the mortgaged property, such as taxes and insurance,

which are attributable to the period from the date such payment(s) were

last paid until the initial payment date. The ``amount sufficient to

pay'' is computed so that the lowest month end target balance projected

for the escrow account computation year is zero (-0-) (see Step 2 in

Appendix F to this part). In addition, the servicer may charge the

borrower a cushion that shall be no greater than one-sixth (\1/6\) of

the estimated total annual payments from the escrow account.

(ii) Charges during the life of the escrow account. Throughout the

life of an escrow account, the servicer may charge the borrower a

monthly sum equal to one-twelfth (\1/12\) of the total annual escrow

payments which the servicer reasonably anticipates paying from the

account. In addition, the servicer may add an amount to maintain a

cushion no greater than one-sixth (\1/6\) of the estimated total annual

payments from the account. However, if a servicer determines through an

escrow account analysis that there is a shortage or deficiency, the

servicer may require the borrower to pay additional deposits to make up

the shortage or eliminate the deficiency, subject to the limitations

set forth in Sec. 3500.17(f).

(2) Escrow analysis at creation of escrow account. Before

establishing an escrow account, the servicer shall conduct an escrow

account analysis to determine the amount the borrower shall deposit

into the escrow account, subject to the limitations of

Sec. 3500.17(c)(1)(i) and the amount of the borrower's periodic

payments into the escrow account, subject to the limitations of

Sec. 3500.17(c)(1)(ii). In conducting the escrow account analysis, the

servicer shall estimate the disbursement amounts according to

Sec. 3500.17(c)(7). Pursuant to Sec. 3500.17(k), the servicer shall use

a date on or before the earlier of the deadline to take advantage of

discounts, if available, or the deadline to avoid a penalty as the

disbursement date for the escrow item. Upon completing the initial

escrow account analysis, the servicer shall prepare and deliver an

initial escrow account statement to the borrower, as set forth in

Sec. 3500.17(g). The servicer shall use the escrow account analysis to

determine whether a surplus, shortage or deficiency exists since

settlement and shall make any adjustments to the account pursuant to

Sec. 3500.17(f).

(3) Subsequent escrow account analyses. For each escrow account,

the servicer shall conduct an escrow account analysis at the completion

of

[[Page 13243]]

the escrow account computation year to determine the borrower's monthly

escrow account payments for the next computation year, subject to the

limitations of Sec. 3500.17(c)(1)(ii). In conducting the escrow account

analysis, the servicer shall estimate the disbursement amounts

according to Sec. 3500.17(c)(7). Pursuant to Sec. 3500.17(k), the

servicer shall use a date on or before the earlier of the deadline to

take advantage of discounts, if available, or the deadline to avoid a

penalty as the disbursement date for the escrow item. The servicer

shall use the escrow account analysis to determine whether a surplus,

shortage or deficiency exists and shall make any adjustments to the

account pursuant to Sec. 3500.17(f). Upon completing an escrow account

analysis, the servicer shall prepare and submit an annual escrow

account statement to the borrower, as set forth in Sec. 3500.17(i).

(4) Acceptable accounting methods to determine escrow limits. The

following are acceptable accounting methods that servicers may use in

conducting an escrow account analysis.

(i) Pre-rule accounts. For pre-rule accounts, servicers may use

either single-item analysis or aggregate-analysis during the phase-in

period. In conducting the escrow account analysis, servicers shall use

``month-end'' accounting. Under month-end accounting, the timing of the

disbursements and payments within the month is irrelevant. As of the

conversion date, all pre-rule accounts shall comply with the

requirements for post-rule accounts in paragraph (c)(4)(ii) of this

section. During the phase-in period, the transfer of servicing of a

pre-rule account to another servicer does not convert the account to a

post-rule account. After the effective date of this rule, refinancing

transactions (as defined in Sec. 3500.2) shall comply with the

requirements for post-rule accounts.

(ii) Post-rule accounts. For post-rule accounts, servicers shall

use aggregate accounting to conduct an escrow account analysis. In

conducting the escrow account analysis, servicers shall use ``month-

end'' accounting. Under month-end accounting, the timing of the

disbursements and payments within the month is irrelevant.

(5) Cushion. For post-rule accounts, the cushion shall be no

greater than one-sixth (\1/6\) of the estimated total annual

disbursements from the escrow account using aggregate analysis

accounting. For pre-rule accounts, the cushion may not exceed the total

of one-sixth of the estimated annual disbursements for each escrow

account item using single-item analysis accounting. In determining the

cushion using single-item analysis, a servicer shall not divide an

escrow account item into sub-accounts, even if the payee requires

installment payments.

(6) Restrictions on pre-accrual. For pre-rule accounts, a servicer

shall not require any pre-accrual that results in the escrow account

balance exceeding the limits of paragraph (c)(1) of this section. In

addition, if the mortgage documents in a pre-rule account are silent

about the amount of pre-accrual, the servicer shall not require in

excess of one month of pre-accrual, subject to the additional

limitations provided in paragraph (c)(8) of this section. For post-rule

accounts, a servicer shall not practice pre-accrual.

(7) Servicer estimates of disbursement amounts. To conduct an

escrow account analysis, the servicer shall estimate the amount of

escrow account items to be disbursed. If the servicer knows the charge

for an escrow item in the next computation year, then the servicer

shall use that amount in estimating disbursement amounts. If the charge

is unknown to the servicer, the servicer may base the estimate on the

preceding year's charge, or the preceding year's charge as modified by

an amount not exceeding the most recent year's change in the national

Consumer Price Index for all urban consumers (CPI, all items). In cases

of unassessed new construction, the servicer may base an estimate on

the assessment of comparable residential property in the market area.

(8) Provisions in mortgage documents. The servicer shall examine

the mortgage loan documents to determine the applicable cushion and

limitations on pre-accrual for each escrow account. If the mortgage

loan documents provide for lower cushion limits or less pre-accrual

than this section, then the terms of the loan documents apply. Where

the terms of any mortgage loan document allow greater payments to an

escrow account than allowed by this section, then this section controls

the applicable limits. Where the mortgage loan documents do not

specifically establish an escrow account, whether a servicer may

establish an escrow account for the loan is a matter for determination

by State law. If the mortgage loan document is silent on the escrow

account limits (for cushion or pre-accrual) and a servicer establishes

an escrow account under State law, then the limitations of this section

apply unless State law provides for a lower amount. If the loan

documents provide for escrow accounts up to the RESPA limits, then the

servicer may require the maximum amounts consistent with this section,

unless an applicable State law sets a lesser amount.

(9) Assessments for periods longer than one year. Some escrow

account items may be billed for periods longer than one year. For

example, servicers may need to collect flood insurance or water

purification escrow funds for payment every three years. In such cases,

the servicer shall estimate the borrower's payments for a full cycle of

disbursements. For a flood insurance premium payable every 3 years, the

servicer shall collect the payments reflecting 36 equal monthly

amounts. For two out of the three years, however, the account balance

may not reach its low monthly balance because the low point will be on

a three-year cycle, as compared to an annual one. The annual escrow

account statement shall explain this situation (see example in the HUD

Public Guidance Document entitled ``Annual Escrow Account Disclosure

Statement--Example'', available in accordance with Sec. 3500.3).

(d) Methods of escrow account analysis. Paragraph (c) of this

section prescribes acceptable accounting methods. The following sets

forth the steps servicers shall use to determine whether their use of

an acceptable accounting method conforms with the limitations in

Sec. 3500.17(c)(1). The steps set forth in this section derive maximum

limits. Servicers may use accounting procedures that result in lower

target balances. In particular, servicers may use a cushion less than

the permissible cushion or no cushion at all. This section does not

require the use of a cushion.

(1) Aggregate analysis. (i) When a servicer uses aggregate analysis

in conducting the escrow account analysis, the target balances may not

exceed the balances computed according to the following arithmetic

operations:

(A) The servicer first projects a trial balance for the account as

a whole over the next computation year (a trial running balance). In

doing so the servicer assumes that it will make estimated disbursements

on or before the earlier of the deadline to take advantage of

discounts, if available, or the deadline to avoid a penalty. The

servicer does not use pre-accrual on these disbursement dates. The

servicer also assumes that the borrower will make monthly payments

equal to one-twelfth of the estimated total annual escrow account

disbursements.

(B) The servicer then examines the monthly trial balances and adds

to the first monthly balance an amount just sufficient to bring the

lowest monthly trial balance to zero, and adjusts all other monthly

balances accordingly.

[[Page 13244]]

(C) The servicer then adds to the monthly balances the permissible

cushion. The cushion is two months of the borrower's escrow payments to

the servicer or a lesser amount specified by State law or the mortgage

document (net of any increases or decreases because of prior year

shortages or surpluses, respectively).

(ii) Lowest monthly balance. Under aggregate analysis, the lowest

monthly target balance for the account shall be less than or equal to

one-sixth of the estimated total annual escrow account disbursements or

a lesser amount specified by State law or the mortgage document. The

target balances that the servicer derives using these steps yield the

maximum limit for the escrow account. Appendix F to this part

illustrates these steps.

(2) Single-item or other non-aggregate analysis method. (i) When a

servicer uses single-item analysis or any hybrid accounting method in

conducting an escrow account analysis during the phase-in period, the

target balances may not exceed the balances computed according to the

following arithmetic operations:

(A) The servicer first projects a trial balance for each item over

the next computation year (a trial running balance). In doing so the

servicer assumes that it will make estimated disbursements on or before

the earlier of the deadline to take advantage of discounts, if

available, or the deadline to avoid a penalty. The servicer does not

use pre-accrual on these disbursement dates. The servicer also assumes

that the borrower will make periodic payments equal to one-twelfth of

the estimated total annual escrow account disbursements.

(B) The servicer then examines the monthly trial balance for each

escrow account item and adds to the first monthly balance for each

separate item an amount just sufficient to bring the lowest monthly

trial balance for that item to zero, and then adjusts all other monthly

balances accordingly.

(C) The servicer then adds the permissible cushion, if any, to the

monthly balance for the separate escrow account item. The permissible

cushion is two months of escrow payments for the escrow account item

(net of any increases or decreases because of prior year shortages or

surpluses, respectively) or a lesser amount specified by State law or

the mortgage document.

(D) The servicer then examines the balances for each item to make

certain that the lowest monthly balance for that item is less than or

equal to one-sixth of the estimated total annual escrow account

disbursements for that item or a lesser amount specified by State law

or the mortgage document.

(ii) In performing an escrow account analysis using single-item

analysis, servicers may account for each escrow account item

separately, but servicers shall not further divide accounts into sub-

accounts, even if the payee of a disbursement requires installment

payments. The target balances that the servicer derives using these

steps yield the maximum limit for the escrow account. Appendix F to

this part illustrates these steps.

(e) Transfer of servicing. (1) If the new servicer changes either

the monthly payment amount or the accounting method used by the

transferor (old) servicer, then the new servicer shall provide the

borrower with an initial escrow account statement within 60 days of the

date of servicing transfer.

(i) Where a new servicer provides an initial escrow account

statement upon the transfer of servicing, the new servicer shall use

the effective date of the transfer of servicing to establish the new

escrow account computation year.

(ii) Where the new servicer retains the monthly payments and

accounting method used by the transferor servicer, then the new

servicer may continue to use the escrow account computation year

established by the transferor servicer or may choose to establish a

different computation year using a short-year statement. At the

completion of the escrow account computation year or any short year,

the new servicer shall perform an escrow analysis and provide the

borrower with an annual escrow account statement.

(2) The new servicer shall treat shortages, surpluses and

deficiencies in the transferred escrow account according to the

procedures set forth in Sec. 3500.17(f).

(3) A pre-rule account remains a pre-rule account upon the transfer

of servicing to a new servicer so long as the transfer occurs before

the conversion date.

(f) Shortages, surpluses, and deficiencies requirements. (1) Escrow

account analysis. For each escrow account, the servicer shall conduct

an escrow account analysis to determine whether a surplus, shortage or

deficiency exists.

(i) As noted in Sec. 3500.17(c) (2) and (3), the servicer shall

conduct an escrow account analysis upon establishing an escrow account

and at completion of the escrow account computation year.

(ii) The servicer may conduct an escrow account analysis at other

times during the escrow computation year. If a servicer advances funds

in paying a disbursement, which is not the result of a borrower's

payment default under the underlying mortgage document, then the

servicer shall conduct an escrow account analysis to determine the

extent of the deficiency before seeking repayment of the funds from the

borrower under this paragraph (f).

(2) Surpluses. (i) If an escrow account analysis discloses a

surplus, the servicer shall, within 30 days from the date of the

analysis, refund the surplus to the borrower if the surplus is greater

than or equal to 50 dollars ($50). If the surplus is less than 50

dollars ($50), the servicer may refund such amount to the borrower, or

credit such amount against the next year's escrow payments.

(ii) These provisions regarding surpluses apply if the borrower is

current at the time of the escrow account analysis. A borrower is

current if the servicer receives the borrower's payments within 30 days

of the payment due date. If the servicer does not receive the

borrower's payment within 30 days of the payment due date, then the

servicer may retain the surplus in the escrow account pursuant to the

terms of the mortgage loan documents.

(3) Shortages. (i) If an escrow account analysis discloses a

shortage of less than one month's escrow account payment, then the

servicer has three possible courses of action:

(A) The servicer may allow a shortage to exist and do nothing to

change it;

(B) The servicer may require the borrower to repay the shortage

amount within 30 days; or

(C) The servicer may require the borrower to repay the shortage

amount in equal monthly payments over at least a 12-month period.

(ii) If an escrow account analysis discloses a shortage that is

greater than or equal to one month's escrow account payment, then the

servicer has two possible courses of action:

(A) The servicer may allow a shortage to exist and do nothing to

change it; or

(B) The servicer may require the borrower to repay the shortage in

equal monthly payments over at least a 12-month period.

(4) Deficiency. If the escrow account analysis confirms a

deficiency, then the servicer may require the borrower to pay

additional monthly deposits to the account to eliminate the deficiency.

(i) If the deficiency is less than one month's escrow account

payment, then the servicer:

(A) May allow the deficiency to exist and do nothing to change it;

(B) May require the borrower to repay the deficiency within 30

days; or

[[Page 13245]]

(C) May require the borrower to repay the deficiency in 2 or more

equal monthly payments.

(ii) If the deficiency is greater than or equal to 1 month's escrow

payment, the servicer may allow the deficiency to exist and do nothing

to change it or may require the borrower to repay the deficiency in two

or more equal monthly payments.

(iii) These provisions regarding deficiencies apply if the borrower

is current at the time of the escrow account analysis. A borrower is

current if the servicer receives the borrower's payments within 30 days

of the payment due date. If the servicer does not receive the

borrower's payment within 30 days of the payment due date, then the

servicer may recover the deficiency pursuant to the terms of the

mortgage loan documents.

(5) Notice of Shortage or Deficiency in Escrow Account. The

servicer shall notify the borrower at least once during the escrow

account computation year if there is a shortage or deficiency in the

escrow account. The notice may be part of the annual escrow account

statement or it may be a separate document.

(g) Initial Escrow Account Statement. (1) Submission at settlement,

or within 45 calendar days of settlement. As noted in

Sec. 3500.17(c)(2), the servicer shall conduct an escrow account

analysis before establishing an escrow account to determine the amount

the borrower shall deposit into the escrow account, subject to the

limitations of Sec. 3500.17(c)(1)(i). After conducting the escrow

account analysis for each escrow account, the servicer shall submit an

initial escrow account statement to the borrower at settlement or

within 45 calendar days of settlement for escrow accounts that are

established as a condition of the loan.

(i) The initial escrow account statement shall include the amount

of the borrower's monthly mortgage payment and the portion of the

monthly payment going into the escrow account and shall itemize the

estimated taxes, insurance premiums, and other charges that the

servicer reasonably anticipates to be paid from the escrow account

during the escrow account computation year and the anticipated

disbursement dates of those charges. The initial escrow account

statement shall indicate the amount that the servicer selects as a

cushion. The statement shall include a trial running balance for the

account.

(ii) Pursuant to Sec. 3500.17(h)(2), the servicer may incorporate

the initial escrow account statement into the HUD-1 or HUD-1A

settlement statement. If the servicer does not incorporate the initial

escrow account statement into the HUD-1 or HUD-1A settlement statement,

then the servicer shall submit the initial escrow account statement to

the borrower as a separate document.

(2) Time of submission of initial escrow account statement for an

escrow account established after settlement. For escrow accounts

established after settlement (and which are not a condition of the

loan), a servicer shall submit an initial escrow account statement to a

borrower within 45 calendar days of the date of establishment of the

escrow account.

(h) Format for initial escrow account statement. (1) The format and

a completed example for an initial escrow account statement are set out

in HUD Public Guidance Documents entitled ``Initial Escrow Account

Disclosure Statement--Format'' and ``Initial Escrow Account Disclosure

Statement--Example'', available in accordance with Sec. 3500.3.

(2) Incorporation of Initial Escrow Account Statement Into HUD-1 or

HUD-1A Settlement Statement. Pursuant to Sec. 3500.9(a)(11), a servicer

may add the initial escrow account statement to the HUD-1 or HUD-1A

settlement statement. The servicer may include the initial escrow

account statement in the basic text or may attach the initial escrow

account statement as an additional page to the HUD-1 or HUD-1A

settlement statement.

(3) Identification of Payees. The initial escrow account statement

need not identify a specific payee by name if it provides sufficient

information to identify the use of the funds. For example, appropriate

entries include: county taxes, hazard insurance, condominium dues, etc.

If a particular payee, such as a taxing body, receives more than one

payment during the escrow account computation year, the statement shall

indicate each payment and disbursement date. If there are several

taxing authorities or insurers, the statement shall identify each

taxing body or insurer (e.g., ``City Taxes'', ``School Taxes'',

``Hazard Insurance'', or ``Flood Insurance,'' etc.).

(i) Annual Escrow Account Statements. For each escrow account, a

servicer shall submit an annual escrow account statement to the

borrower within 30 days of the completion of the escrow account

computation year. The servicer shall also submit to the borrower the

previous year's projection or initial escrow account statement. The

servicer shall conduct an escrow account analysis before submitting an

annual escrow account statement to the borrower.

(1) Contents of Annual Escrow Account Statement. The annual escrow

account statement shall provide an account history, reflecting the

activity in the escrow account during the escrow account computation

year, and a projection of the activity in the account for the next

year. In preparing the statement, the servicer may assume scheduled

payments and disbursements will be made for the final 2 months of the

escrow account computation year. The annual escrow account statement

shall include, at a minimum, the following:

(i) The amount of the borrower's current monthly mortgage payment

and the portion of the monthly payment going into the escrow account;

(ii) The amount of the past year's monthly mortgage payment and the

portion of the monthly payment that went into the escrow account;

(iii) The total amount paid into the escrow account during the past

computation year;

(iv) The total amount paid out of the escrow account during the

same period for taxes, insurance premiums, and other charges;

(v) The balance in the escrow account at the end of the period;

(vi) An explanation of how any surplus is being handled by the

servicer;

(vii) An explanation of how any shortage or deficiency is to be

paid by the borrower; and

(viii) If applicable, the reason(s) why the estimated low monthly

balance was not reached, as indicated by noting differences between the

most recent account history and last year's projection. HUD Public

Guidance Documents entitled ``Annual Escrow Account Disclosure

Statement--Format'' and ``Annual Escrow Account Disclosure Statement--

Example'' set forth an acceptable format and methodology for conveying

this information.

(2) No annual statements in the case of default, foreclosure, or

bankruptcy. This paragraph (i)(2) contains an exemption from the

provisions of Sec. 3500.17(i)(1). If at the time the servicer conducts

the escrow account analysis the borrower is more than 30 days overdue,

then the servicer is exempt from the requirements of submitting an

annual escrow account statement to the borrower under Sec. 3500.17(i).

This exemption also applies in situations where the servicer has

brought an action for foreclosure under the underlying mortgage loan,

or where the borrower is in bankruptcy proceedings. If the servicer

does not issue an annual statement pursuant to this exemption and the

loan subsequently is reinstated

[[Page 13246]]

or otherwise becomes current, the servicer shall provide a history of

the account since the last annual statement (which may be longer than 1

year) within 90 days of the date the account became current.

(3) Delivery with other material. The servicer may deliver the

annual escrow account statement to the borrower with other statements

or materials, including the Substitute 1098, which is provided for

federal income tax purposes.

(4) Short year statements. A servicer may issue a short year annual

escrow account statement (``short year statement'') to change one

escrow account computation year to another. By using a short year

statement a servicer may adjust its production schedule or alter the

escrow account computation year for the escrow account.

(i) Effect of short year statement. The short year statement shall

end the ``escrow account computation year'' for the escrow account and

establish the beginning date of the new escrow account computation

year. The servicer shall deliver the short year statement to the

borrower within 60 days from the end of the short year.

(ii) Short year statement upon servicing transfer. Upon the

transfer of servicing, the transferor (old) servicer shall submit a

short year statement to the borrower within 60 days of the effective

date of transfer.

(iii) Short year statement upon loan payoff. If a borrower pays off

a mortgage loan during the escrow account computation year, the

servicer shall submit a short year statement to the borrower within 60

days after receiving the pay-off funds.

(j) Formats for annual escrow account statement. The formats and

completed examples for annual escrow account statements using single-

item analysis (pre-rule accounts) and aggregate analysis are set out in

HUD Public Guidance Documents entitled ``Annual Escrow Account

Disclosure Statement--Format'' and ``Annual Escrow Account Disclosure

Statement--Example''.

(k) Timely payments. (1) If the terms of any federally related

mortgage loan require the borrower to make payments to an escrow

account, the servicer shall pay the disbursements in a timely manner,

that is, by the disbursement date, so long as the borrower's payment is

not more than 30 days overdue. In calculating the disbursement date,

the servicer shall use a date on or before the earlier of the deadline

to take advantage of discounts, if available, or the deadline to avoid

a penalty.

(2) The servicer shall advance funds to make disbursements in a

timely manner so long as the borrower's payment is not more than 30

days overdue. Upon advancing funds to pay a disbursement, the servicer

may seek repayment from the borrower for the deficiency pursuant to

Sec. 3500.17(f).

(l) System of recordkeeping. (1) Each servicer shall keep records,

which may involve electronic storage, microfiche storage, or any method

of computerized storage, so long as the information is easily

retrievable, reflecting the servicer's handling of each borrower's

escrow account. The servicer's records shall include, but not be

limited to, the payment of amounts into and from the escrow account and

the submission of initial and annual escrow account statements to the

borrower.

(2) The servicer responsible for servicing the borrower's escrow

account shall maintain the records for that account for a period of at

least five years after the servicer last serviced the escrow account.

(3) A servicer shall provide the Secretary with information

contained in the servicer's records for a specific escrow account, or

for a number or class of escrow accounts, within 30 days of the

Secretary's written request for the information. The servicer shall

convert any information contained in electronic storage, microfiche or

computerized storage to paper copies for review by the Secretary.

(i) To aid in investigations, the Secretary may also issue an

administrative subpoena for the production of documents, and for the

testimony of such witnesses as the Secretary deems advisable.

(ii) If the subpoenaed party refuses to obey the Secretary's

administrative subpoena, the Secretary is authorized to seek a court

order requiring compliance with the subpoena from any United States

district court. Failure to obey such an order of the court may be

punished as contempt of court.

(4) Borrowers may seek information contained in the servicer's

records by complying with the provisions set forth in 12 U.S.C. 2605(e)

and Sec. 3500.21(f).

(5) After receiving a request (by letter or subpoena) from the

Department for information relating to whether a servicer submitted an

escrow account statement to the borrower, the servicer shall respond

within 30 days. If the servicer is unable to provide the Department

with such information, the Secretary shall deem that lack of

information to be evidence of the servicer's failure to submit the

statement to the borrower.

(m) Penalties. A servicer's failure to submit to a borrower an

initial or annual escrow account statement meeting the requirements of

this part shall constitute a violation of section 10(d) of RESPA (12

U.S.C. 2609(d)) and this section. For each such violation, the

Secretary shall assess a civil penalty in accordance with section 10(d)

of RESPA.

(n) Civil penalties procedures. The following procedures shall

apply whenever the Department seeks to impose a civil money penalty for

violation of section 10(c) of RESPA (12 U.S.C. 2609(c)):

(1) Purpose and scope. This paragraph (n) explains the procedures

by which the Secretary may impose penalties under 12 U.S.C. 2609(d).

These procedures include administrative hearings, judicial review, and

collection of penalties. This paragraph (n) governs penalties imposed

under 12 U.S.C. 2609(d) and, when noted, adopts those portions of 24

CFR part 30, subpart E, that apply to all other civil penalty

proceedings initiated by the Secretary.

(2) Authority. The Secretary has the authority to impose civil

penalties under section 10(d) of RESPA (12 U.S.C. 2609(d)).

(3) Notice of intent to impose civil money penalties. Whenever the

Secretary intends to impose a civil money penalty for violations of

section 10(c) of RESPA (12 U.S.C. 2609(c)), the responsible program

official, or his or her designee, shall serve a written Notice of

Intent to Impose Civil Money Penalties (Notice of Intent) upon any

servicer on which the Secretary intends to impose the penalty. A copy

of the Notice of Intent must be filed with the Chief Docket Clerk,

Office of Administrative Law Judges, at the address provided in the

Notice of Intent. The Notice of Intent will provide:

(i) A short, plain statement of the facts upon which the Secretary

has determined that a civil money penalty should be imposed, including

a brief description of the specific violations under 12 U.S.C. 2609(c)

with which the servicer is charged and whether such violations are

believed to be intentional or unintentional in nature, or a combination

thereof;

(ii) The amount of the civil money penalty that the Secretary

intends to impose and whether the limitations in 12 U.S.C. 2609(d)(1),

apply;

(iii) The right of the servicer to a hearing on the record to

appeal the Secretary's preliminary determination to impose a civil

penalty;

(iv) The procedures to appeal the penalty;

(v) The consequences of failure to appeal the penalty; and

(vi) The name, address, and telephone number of the representative

of the Department, and the address of the Chief Docket Clerk, Office of

[[Page 13247]]

Administrative Law Judges, should the servicer decide to appeal the

penalty.

(4) Appeal procedures. (i) Answer. To appeal the imposition of a

penalty, a servicer shall, within 30 days after receiving service of

the Notice of Intent, file a written Answer with the Chief Docket

Clerk, Office of Administrative Law Judges, Department of Housing and

Urban Development, at the address provided in the Notice of Intent. The

Answer shall include a statement that the servicer admits, denies, or

does not have (and is unable to obtain) sufficient information to admit

or deny each allegation made in the Notice of Intent. A statement of

lack of information shall have the effect of a denial. Any allegation

that is not denied shall be deemed admitted. Failure to submit an

Answer within the required period of time will result in a decision by

the Administrative Law Judge based upon the Department's submission of

evidence in the Notice of Intent.

(ii) Submission of evidence. A servicer that receives the Notice of

Intent has a right to present evidence. Evidence must be submitted

within 45 calendar days from the date of service of the Notice of

Intent, or by such other time as may be established by the

Administrative Law Judge (ALJ). The servicer's failure to submit

evidence within the required period of time will result in a decision

by the Administrative Law Judge based upon the Department's submission

of evidence in the Notice of Intent. The servicer may present evidence

of the following:

(A) The servicer did submit the required escrow account

statement(s) to the borrower(s); or

(B) Even if the servicer did not submit the required statement(s),

that the failure was not the result of an intentional disregard of the

requirements of RESPA (for purposes of determining the penalty).

(iii) Review of the record. The Administrative Law Judge will

review the evidence submitted by the servicer, if any, and that

submitted by the Department. The Administrative Law Judge shall make a

determination based upon a review of the written record, except that

the Administrative Law Judge may order an oral hearing if he or she

finds that the determination turns on the credibility or veracity of a

witness, or that the matter cannot be resolved by review of the

documentary evidence. If the Administrative Law Judge decides that an

oral hearing is appropriate, then the procedural rules set forth at 24

CFR part 30, subpart E, shall apply, to the extent that they are not

inconsistent with this section.

(iv) Burden of Proof. The burden of proof or the burden of going

forward with the evidence shall be upon the proponent of an action. The

Department's submission of evidence that the servicer's system of

records lacks information that the servicer submitted the escrow

account statement(s) to the borrower(s) shall satisfy the Department's

burden. Upon the Department's presentation of evidence of this lack of

information in the servicer's system of records, the burden of proof

shifts from the Secretary to the servicer to provide evidence that it

submitted the statement(s) to the borrower.

(v) Standard of Proof. The standard of proof shall be the

preponderance of the evidence.

(5) Determination of the Administrative Law Judge.

(i) Following the hearing or the review of the written record, the

Administrative Law Judge shall issue a decision that shall contain

findings of fact, conclusions of law, and the amount of any penalties

imposed. The decision shall include a determination of whether the

servicer has failed to submit any required statements and, if so,

whether the servicer's failure was the result of an intentional

disregard for the law's requirements.

(ii) The Administrative Law Judge shall issue the decision to all

parties within 30 days of the submission of the evidence or the post-

hearing briefs, whichever is the last to occur.

(iii) The decision of the Administrative Law Judge shall constitute

the final decision of the Department and shall be final and binding on

the parties.

(6) Judicial review. (i) A person against whom the Department has

imposed a civil money penalty under this part may obtain a review of

the Department's final decision by filing a written petition for a

review of the record with the appropriate United States district court.

(ii) The petition must be filed within 30 days after the decision

is filed with the Chief Docket Clerk, Office of Administrative Law

Judges.

(7) Collection of penalties. (i) If any person fails to comply with

the Department's final decision imposing a civil money penalty, the

Secretary, if the time for judicial review of the decision has expired,

may request the Attorney General to bring an action in an appropriate

United States district court to obtain a judgment against the person

that has failed to comply with the Department's final decision.

(ii) In any such collection action, the validity and

appropriateness of the Department's final decision imposing the civil

penalty shall not be subject to review in the district court.

(iii) The Secretary may obtain such other relief as may be

available, including attorney fees and other expenses in connection

with the collection action.

(iv) Interest on and other charges for any unpaid penalty may be

assessed in accordance with 31 U.S.C. 3717.

(8) Offset. In addition to any other rights as a creditor, the

Secretary may seek to collect a civil money penalty through

administrative offset.

(9) At any time before the decision of the Administrative Law

Judge, the Secretary and the servicer may enter into an administrative

settlement. The settlement may include provisions for interest,

attorney's fees, and costs related to the proceeding. Such settlement

will terminate the appearance before the Administrative Law Judge.

(o) Discretionary payments. Any borrower's discretionary payment

(such as credit life or disability insurance) made as part of a monthly

mortgage payment is to be noted on the initial and annual statements.

If a discretionary payment is established or terminated during the

escrow account computation year, this change should be noted on the

next annual statement. A discretionary payment is not part of the

escrow account unless the payment is required by the lender, in

accordance with the definition of ``settlement service'' in

Sec. 3500.2, or the servicer chooses to place the discretionary payment

in the escrow account. If a servicer has not established an escrow

account for a federally related mortgage loan and only receives

payments for discretionary items, this section is not applicable.

(Approved by the Office of Management and Budget under control

number 2502-0501)

Sec. 3500.18 Validity of contracts and liens.

Section 17 of RESPA (12 U.S.C. 2615) governs the validity of

contracts and liens under RESPA.

Sec. 3500.19 Enforcement.

(a) Enforcement Policy. It is the policy of the Secretary regarding

RESPA enforcement matters to cooperate with Federal, State or local

agencies having supervisory powers over lenders or other persons with

responsibilities under RESPA. Federal agencies with supervisory powers

over lenders may use their powers to require compliance with RESPA. In

addition, failure to comply with RESPA may be grounds for

administrative action by the Secretary under part 24 of this title

concerning debarment, suspension, ineligibility of

[[Page 13248]]

contractors and grantees, or under part 25 of this title concerning the

HUD Mortgagee Review Board. Nothing in this paragraph is a limitation

on any other form of enforcement which may be legally available.

(b) Violations of section 8 of RESPA (12 U.S.C. 2607),

Sec. 3500.14, or Sec. 3500.15. Any person who violates Secs. 3500.14 or

3500.15 shall be deemed to violate Section 8 of RESPA and shall be

sanctioned accordingly.

(c) Violations of section 9 of RESPA (12 U.S.C. 2608) or

Sec. 3500.16. Any person who violates Section 3500.16 of this part

shall be deemed to violate Section 9 of RESPA and shall be sanctioned

accordingly.

(d) Investigations. The procedures for investigations and

investigational proceedings are set forth in 24 CFR part 3800.

Sec. 3500.21 Mortgage servicing transfers.

(a) Definitions. As used in this section:

Master servicer means the owner of the right to perform servicing,

which may actually perform the servicing itself or may do so through a

subservicer.

Mortgage servicing loan means a federally related mortgage loan, as

that term is defined in Sec. 3500.2, subject to the exemptions in

Sec. 3500.5, when the mortgage loan is secured by a first lien. The

definition does not include subordinate lien loans or open-end lines of

credit (home equity plans) covered by the Truth in Lending Act and

Regulation Z, including open-end lines of credit secured by a first

lien.

Qualified written request means a written correspondence from the

borrower to the servicer prepared in accordance with paragraph (e)(2)

of this section.

Subservicer means a servicer who does not own the right to perform

servicing, but who does so on behalf of the master servicer.

Transferee servicer means a servicer who obtains or who will obtain

the right to perform servicing functions pursuant to an agreement or

understanding.

Transferor servicer means a servicer, including a table funding

mortgage broker or dealer on a first lien dealer loan, who transfers or

will transfer the right to perform servicing functions pursuant to an

agreement or understanding.

(b) Servicing Disclosure Statement and Applicant Acknowledgement;

requirements. (1) At the time an application for a mortgage servicing

loan is submitted, or within 3 business days after submission of the

application, the lender, mortgage broker who anticipates using table

funding, or dealer who anticipates a first lien dealer loan shall

provide to each person who applies for such a loan a Servicing

Disclosure Statement. This requirement shall not apply when the

application for credit is turned down within three business days after

receipt of the application. A format for the Servicing Disclosure

Statement appears as Appendix MS-1 to this part. Except as provided in

paragraph (b)(2) of this section, the specific language of the

Servicing Disclosure Statement is not required to be used, but the

Servicing Disclosure Statement must include the information set out in

paragraph (b)(3) of this section, including the statement of the

borrower's rights in connection with complaint resolution. The

information set forth in Instructions to Preparer on the Servicing

Disclosure Statement need not be included on the form given to

applicants, and material in square brackets is optional or alternative

language.

(2) The Applicant's Acknowledgement portion of the Servicing

Disclosure Statement in the format stated is mandatory. Additional

lines may be added to accommodate more than two applicants.

(3) The Servicing Disclosure Statement must contain the following

information, except as provided in paragraph (b)(3)(ii) of this

section:

(i) Whether the servicing of the loan may be assigned, sold or

transferred to any other person at any time while the loan is

outstanding. If the lender, table funding mortgage broker, or dealer in

a first lien dealer loan does not engage in the servicing of any

mortgage servicing loans, the disclosure may consist of a statement to

the effect that there is a current intention to assign, sell, or

transfer servicing of the loan.

(ii) The percentages (rounded to the nearest quartile (25%)) of

mortgage servicing loans originated by the lender in each calendar year

for which servicing has been assigned, sold, or transferred for such

calendar year. Compliance with this paragraph (b)(3)(ii) is not

required if the lender, table funding mortgage broker, or dealer on a

first lien dealer loan chooses option B in the model format in

paragraph (b)(4) of this section, including in square brackets the

language ``[and have not serviced mortgage loans in the last three

years.]''. The percentages shall be provided as follows:

(A) This information shall be set out for the most recent three

calendar years completed, with percentages as of the end of each year.

This information shall be updated in the disclosure no later than March

31 of the next calendar year. Each percentage should be obtained by

using as the numerator the number of mortgage servicing loans

originated during the calendar year for which servicing is transferred

within the calendar year and, as the denominator, the total number of

mortgage servicing loans originated in the calendar year. If the volume

of transfers is less than 12.5 percent, the word ``nominal'' or the

actual percentage amount of servicing transfers may be used.

(B) This statistical information does not have to include the

assignment, sale, or transfer of mortgage loan servicing by the lender

to an affiliate or subsidiary of the lender. However, lenders may

voluntarily include transfers to an affiliate or subsidiary. The lender

should indicate whether the percentages provided include assignments,

sales, or transfers to affiliates or subsidiaries.

(C) In the alternative, if applicable, the following statement may

be substituted for the statistical information required to be provided

in accordance with paragraph (b)(3)(ii) of this section: ``We have

previously assigned, sold, or transferred the servicing of federally

related mortgage loans.''

(iii) The best available estimate of the percentage (0 to 25

percent, 26 to 50 percent, 51 to 75 percent, or 76 to 100 percent) of

all loans to be made during the 12-month period beginning on the date

of origination for which the servicing may be assigned, sold, or

transferred. Each percentage should be obtained by using as the

numerator the estimated number of mortgage servicing loans that will be

originated for which servicing may be transferred within the 12-month

period and, as the denominator, the estimated total number of mortgage

servicing loans that will be originated in the 12-month period.

(A) If the lender, mortgage broker, or dealer anticipates that no

loan servicing will be sold during the calendar year, the word ``none''

may be substituted for ``0 to 25 percent.'' If it is anticipated that

all loan servicing will be sold during the calendar year, the word

``all'' may be substituted for ``76 to 100 percent.''

(B) This statistical information does not have to include the

estimated assignment, sale, or transfer of mortgage loan servicing to

an affiliate or subsidiary of that person. However, this information

may be provided voluntarily. The Servicing Disclosure Statements should

indicate whether the percentages provided include assignments, sales or

transfers to affiliates or subsidiaries.

(iv) The information set out in paragraphs (d) and (e) of this

section.

[[Page 13249]]

(v) A written acknowledgement that the applicant (and any co-

applicant) has/have read and understood the disclosure, and understand

that the disclosure is a required part of the mortgage application.

This acknowledgement shall be evidenced by the signature of the

applicant and any co-applicant.

(4) The following is a model format, which includes several

options, for complying with the requirements of paragraph (b)(3) of

this section. The model format may be annotated with additional

information that clarifies or enhances the model language. The lender

or table funding mortgage broker (or dealer) should use the language

that best describes the particular circumstances.

(i) Model Format: The following is the best estimate of what will

happen to the servicing of your mortgage loan:

(A) Option A. We may assign, sell, or transfer the servicing of

your loan while the loan is outstanding. [We are able to service your

loan[.][,] and we [will] [will not] [haven't decided whether to]

service your loan.]; or

(B) Option B. We do not service mortgage loans[.][,] [and have not

serviced mortgage loans in the past three years.] We presently intend

to assign, sell, or transfer the servicing of your mortgage loan. You

will be informed about your servicer.

(C) As appropriate, the following paragraph may be used:

We assign, sell, or transfer the servicing of some of our loans

while the loans are outstanding, depending on the type of loan and

other factors. For the program for which you have applied, we expect to

[assign, sell, or transfer all of the mortgage servicing][retain all of

the mortgage servicing] [assign, sell, or transfer ________% of the

mortgage servicing].

(ii) [Reserved]

(c) Servicing Disclosure Statement and Applicant Acknowledgement;

delivery. The lender, table funding mortgage broker, or dealer that

anticipates a first lien dealer loan shall deliver Servicing Disclosure

Statements to each applicant for mortgage servicing loans. Each

applicant or co-applicant must sign an Acknowledgement of receipt of

the Servicing Disclosure Statement before settlement.

(1) In the case of a face-to-face interview with one or more

applicants, the Servicing Disclosure Statement shall be delivered at

the time of application. An applicant present at the interview may sign

the Acknowledgment on his or her own behalf at that time. An applicant

present at the interview also may accept delivery of the Servicing

Disclosure Statement on behalf of the other applicants.

(2) If there is no face-to-face interview, the Servicing Disclosure

Statement shall be delivered by placing it in the mail, with prepaid

first-class postage, within 3 business days from receipt of the

application. If co-applicants indicate the same address on their

application, one copy delivered to that address is sufficient. If

different addresses are shown by co-applicants on the application, a

copy must be delivered to each of the co-applicants.

(3) The signed Applicant Acknowledgment(s) shall be retained for a

period of 5 years after the date of settlement as part of the loan file

for every settled loan. There is no requirement for retention of

Applicant Acknowledgment(s) if the loan is not settled.

(d) Notices of Transfer; loan servicing. (1) Requirement for

notice. (i) Except as provided in this paragraph (d)(1)(i) or paragraph

(d)(1)(ii) of this section, each transferor servicer and transferee

servicer of any mortgage servicing loan shall deliver to the borrower a

written Notice of Transfer, containing the information described in

paragraph (d)(3) of this section, of any assignment, sale, or transfer

of the servicing of the loan. The following transfers are not

considered an assignment, sale, or transfer of mortgage loan servicing

for purposes of this requirement if there is no change in the payee,

address to which payment must be delivered, account number, or amount

of payment due:

(A) Transfers between affiliates;

(B) Transfers resulting from mergers or acquisitions of servicers

or subservicers; and

(C) Transfers between master servicers, where the subservicer

remains the same.

(ii) The Federal Housing Administration (FHA) is not required under

paragraph (d) of this section to submit to the borrower a Notice of

Transfer in cases where a mortgage insured under the National Housing

Act is assigned to FHA.

(2) Time of notice. (i) Except as provided in paragraph (d)(2)(ii)

of this section:

(A) The transferor servicer shall deliver the Notice of Transfer to

the borrower not less than 15 days before the effective date of the

transfer of the servicing of the mortgage servicing loan;

(B) The transferee servicer shall deliver the Notice of Transfer to

the borrower not more than 15 days after the effective date of the

transfer; and

(C) The transferor and transferee servicers may combine their

notices into one notice, which shall be delivered to the borrower not

less than 15 days before the effective date of the transfer of the

servicing of the mortgage servicing loan.

(ii) The Notice of Transfer shall be delivered to the borrower by

the transferor servicer or the transferee servicer not more than 30

days after the effective date of the transfer of the servicing of the

mortgage servicing loan in any case in which the transfer of servicing

is preceded by:

(A) Termination of the contract for servicing the loan for cause;

(B) Commencement of proceedings for bankruptcy of the servicer; or

(C) Commencement of proceedings by the Federal Deposit Insurance

Corporation (FDIC) or the Resolution Trust Corporation (RTC) for

conservatorship or receivership of the servicer or an entity that owns

or controls the servicer.

(iii) Notices of Transfer delivered at settlement by the transferor

servicer and transferee servicer, whether as separate notices or as a

combined notice, will satisfy the timing requirements of paragraph

(d)(2) of this section.

(3) Notices of Transfer; contents. The Notices of Transfer required

under paragraph (d) of this section shall include the following

information:

(i) The effective date of the transfer of servicing;

(ii) The name, consumer inquiry addresses (including, at the option

of the servicer, a separate address where qualified written requests

must be sent), and a toll-free or collect-call telephone number for an

employee or department of the transferee servicer;

(iii) A toll-free or collect-call telephone number for an employee

or department of the transferor servicer that can be contacted by the

borrower for answers to servicing transfer inquiries;

(iv) The date on which the transferor servicer will cease to accept

payments relating to the loan and the date on which the transferee

servicer will begin to accept such payments. These dates shall either

be the same or consecutive days;

(v) Information concerning any effect the transfer may have on the

terms or the continued availability of mortgage life or disability

insurance, or any other type of optional insurance, and any action the

borrower must take to maintain coverage;

(vi) A statement that the transfer of servicing does not affect any

other term or condition of the mortgage documents, other than terms

directly related to the servicing of the loan; and

[[Page 13250]]

(vii) A statement of the borrower's rights in connection with

complaint resolution, including the information set forth in paragraph

(e) of this section. Appendix MS-2 of this part illustrates a statement

satisfactory to the Secretary.

(4) Notices of Transfer; sample notice. Sample language that may be

used to comply with the requirements of paragraph (d) of this section

is set out in Appendix MS-2 of this part. Minor modifications to the

sample language may be made to meet the particular circumstances of the

servicer, but the substance of the sample language shall not be omitted

or substantially altered.

(5) Consumer protection during transfer of servicing. During the

60-day period beginning on the effective date of transfer of the

servicing of any mortgage servicing loan, if the transferor servicer

(rather than the transferee servicer that should properly receive

payment on the loan) receives payment on or before the applicable due

date (including any grace period allowed under the loan documents), a

late fee may not be imposed on the borrower with respect to that

payment and the payment may not be treated as late for any other

purposes.

(e) Duty of loan servicer to respond to borrower inquiries.

(1) Notice of receipt of inquiry. Within 20 business days of a

servicer of a mortgage servicing loan receiving a qualified written

request from the borrower for information relating to the servicing of

the loan, the servicer shall provide to the borrower a written response

acknowledging receipt of the qualified written response. This

requirement shall not apply if the action requested by the borrower is

taken within that period and the borrower is notified of that action in

accordance with the paragraph (f)(3) of this section. By notice either

included in the Notice of Transfer or separately delivered by first-

class mail, postage prepaid, a servicer may establish a separate and

exclusive office and address for the receipt and handling of qualified

written requests.

(2) Qualified written request; defined. (i) For purposes of

paragraph (e) of this section, a qualified written request means a

written correspondence (other than notice on a payment coupon or other

payment medium supplied by the servicer) that includes, or otherwise

enables the servicer to identify, the name and account of the borrower,

and includes a statement of the reasons that the borrower believes the

account is in error, if applicable, or that provides sufficient detail

to the servicer regarding information relating to the servicing of the

loan sought by the borrower.

(ii) A written request does not constitute a qualified written

request if it is delivered to a servicer more than 1 year after either

the date of transfer of servicing or the date that the mortgage

servicing loan amount was paid in full, whichever date is applicable.

(3) Action with respect to the inquiry. Not later than 60 business

days after receiving a qualified written request from the borrower,

and, if applicable, before taking any action with respect to the

inquiry, the servicer shall:

(i) Make appropriate corrections in the account of the borrower,

including the crediting of any late charges or penalties, and transmit

to the borrower a written notification of the correction. This written

notification shall include the name and telephone number of a

representative of the servicer who can provide assistance to the

borrower; or

(ii) After conducting an investigation, provide the borrower with a

written explanation or clarification that includes:

(A) To the extent applicable, a statement of the servicer's reasons

for concluding the account is correct and the name and telephone number

of an employee, office, or department of the servicer that can provide

assistance to the borrower; or

(B) Information requested by the borrower, or an explanation of why

the information requested is unavailable or cannot be obtained by the

servicer, and the name and telephone number of an employee, office, or

department of the servicer that can provide assistance to the borrower.

(4) Protection of credit rating. (i) During the 60-business day

period beginning on the date of the servicer receiving from a borrower

a qualified written request relating to a dispute on the borrower's

payments, a servicer may not provide adverse information regarding any

payment that is the subject of the qualified written request to any

consumer reporting agency (as that term is defined in section 603 of

the Fair Credit Reporting Act, 15 U.S.C. 1681a).

(ii) In accordance with section 17 of RESPA (12 U.S.C. 2615), the

protection of credit rating provision of paragraph (e)(4)(i) of this

section does not impede a lender or servicer from pursuing any of its

remedies, including initiating foreclosure, allowed by the underlying

mortgage loan instruments.

(f) Damages and costs. (1) Whoever fails to comply with any

provision of this section shall be liable to the borrower for each

failure in the following amounts:

(i) Individuals. In the case of any action by an individual, an

amount equal to the sum of any actual damages sustained by the

individual as the result of the failure and, when there is a pattern or

practice of noncompliance with the requirements of this section, any

additional damages in an amount not to exceed $1,000.

(ii) Class Actions. In the case of a class action, an amount equal

to the sum of any actual damages to each borrower in the class that

result from the failure and, when there is a pattern or practice of

noncompliance with the requirements of this section, any additional

damages in an amount not greater than $1,000 for each class member.

However, the total amount of any additional damages in a class action

may not exceed the lesser of Sec. 500,000 or 1 percent of the net worth

of the servicer.

(iii) Costs. In addition, in the case of any successful action

under paragraph (f) of this section, the costs of the action and any

reasonable attorneys' fees incurred in connection with the action.

(2) Nonliability. A transferor or transferee servicer shall not be

liable for any failure to comply with the requirements of this section,

if within 60 days after discovering an error (whether pursuant to a

final written examination report or the servicer's own procedures) and

before commencement of an action under this section and the receipt of

written notice of the error from the borrower, the servicer notifies

the person concerned of the error and makes whatever adjustments are

necessary in the appropriate account to ensure that the person will not

be required to pay an amount in excess of any amount that the person

otherwise would have paid.

(g) Timely payments by servicer. If the terms of any mortgage

servicing loan require the borrower to make payments to the servicer of

the loan for deposit into an escrow account for the purpose of assuring

payment of taxes, insurance premiums, and other charges with respect to

the mortgaged property, the servicer shall make payments from the

escrow account in a timely manner for the taxes, insurance premiums,

and other charges as the payments become due, as governed by the

requirements in Sec. 3500.17(k).

(h) Preemption of State laws. A lender who makes a mortgage

servicing loan or a servicer shall be considered to have complied with

the provisions of any State law or regulation requiring notice to a

borrower at the time of application for a loan or transfer of servicing

of a loan if the lender or servicer complies with the requirements of

this section. Any State law requiring notice to the borrower at the

time of application or at

[[Page 13251]]

the time of transfer of servicing of the loan is preempted, and there

shall be no additional borrower disclosure requirements. Provisions of

State law, such as those requiring additional notices to insurance

companies or taxing authorities, are not preempted by section 6 of

RESPA or this section, and this additional information may be added to

a notice prepared under this section, if the procedure is allowable

under State law.

(Approved by the Office of Management and Budget under control

number 2502-0458)

3. Appendix A is amended by revising the heading of the appendix to

read as follows:

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

Settlement Statements; Sample HUD 1 and HUD 1A Statements

4. Appendix B is amended in Illustration 11, in the paragraph

headed ``Comments,'' by substituting the reference ``section

3500.14(g)(1)'' for the reference ``Section 3500.14(g)(2)''.

5. Appendix MS-2 is revised to read as follows:

BILLING CODE 4210-27-P

[[Page 13252]]

[GRAPHIC] [TIFF OMITTED] TR26MR96.000

[[Page 13253]]

[GRAPHIC] [TIFF OMITTED] TR26MR96.001

[[Page 13254]]

[GRAPHIC] [TIFF OMITTED] TR26MR96.002

[[Page 13255]]

Dated: March 6, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner,

[FR Doc. 96-6511 Filed 3-25-96; 8:45 am]

BILLING CODE 4210-27-C