Amendments to Real Estate Settlement Procedures Act Regulation: Exemption for Employer Payments to Employees Who Make Like-Provider Referrals and Other Amendments; Proposed Rule

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-4173-P-01]

RIN 2502-AG88

Amendments to Real Estate Settlement Procedures Act Regulation:

Exemption for Employer Payments to Employees Who Make Like-Provider

Referrals and Other Amendments; Proposed Rule

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

Commissioner, HUD.

ACTION: Proposed rule.

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SUMMARY: In this proposed rule, the Department is seeking comments on a

new exemption under Regulation X, its regulation implementing the Real

Estate Settlement Procedures Act of 1974 (RESPA). The exemption would

allow payments by an employer to its own bona fide employees for the

referral of settlement service business to an affiliated settlement

service provider, provided that the settlement service business that is

referred is the same category of settlement service as provided by the

employer of the employee making the referral, the employee makes the

affiliated business arrangement disclosure as provided in 24 CFR

3500.15, and the employee making the referral does not perform any

other category of settlement service in the same transaction.

This rule also proposes to implement two amendments to RESPA in

recent legislation. One concerns referrals of settlement service

business through telemarketing, in writing, or through electronic

media. The other concerns mortgage servicing sales or transfers. The

rule also describes additional technical corrections and clarifications

the Department intends to make at a later date.

DATES: Comment due date: July 8, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding

this proposed rule to the Rules Docket Clerk, Office of General

Counsel, Room 10276, Department of Housing and Urban Development, 451

Seventh Street, SW., Washington, DC 20410-0500. Communications should

refer to the above docket number and title. Facsimile (FAX) comments

are not acceptable. A copy of each communication submitted will be

available for public inspection and copying between 7:30 a.m. and 5:30

p.m. weekdays at the above address.

The Department also invites interested persons to submit comments

on the proposed information collection requirements in Sec. 3500.15(b)

of this proposed rule. Comments should refer to the above docket number

and title, and should be sent to the Office of Information and

Regulatory Affairs, Office of Management and Budget, Attention: Desk

Officer for HUD, Washington, DC 20503.

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

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

4560; or,

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

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

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

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

and speech-impaired persons, these numbers may be accessed via TTY

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

800-877-8339. The address for the above-listed persons is: Department

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

DC 20410.

SUPPLEMENTARY INFORMATION:

I. Background

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

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

Act: Withdrawal of Employer-Employee and Computer Loan Origination

Systems (CLOs) Exemptions,'' the Department withdrew a broad exemption

for payments by employers to their own employees for any referral

activities (24 CFR 3500.14(g)(1)(vii)). In its place, the rule

established three narrower exemptions for employer payments to

employees: (1) One for managerial employees (Sec. 3500.14(g)(1)(viii)

of the June 7 rule); (2) One for employees who do not perform

settlement services in any transaction (Sec. 3500.14(g)(1)(ix) of the

June 7 rule); and (3) A provision clarifying that ``[a] payment by an

employer to its own bona fide employee for generating business for that

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

The rule was to have become effective on October 7, 1996, 120 days from

publication. (Note: The June 7 rule was corrected and revised on August

12, 1996 (61 FR 41944).)

Section 2103 of the Economic Growth and Regulatory Paperwork

Reduction Act of 1996, (Title II of the Omnibus Consolidated

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

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

Act delayed the effective date of the provisions of the Department's

June 7, 1996 final RESPA rule concerning payments to employees by their

employers to no earlier than July 31, 1997.

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

the Department delayed temporarily the effective date of the entire

June 7 final rule, as corrected and revised on August 12, 1996. The

reason for the delay was to provide the Department with an opportunity

to analyze the Act and develop an appropriate time schedule for

establishing the effective dates of the various provisions of the June

7 rule, as revised August 12.

On November 4, 1996 (61 FR 56624), the Department published another

notice in the Federal Register announcing that, consistent with the

Act, the Department would shortly publish a revised final rule that

would make effective those provisions of the June 7 final rule that are

unaffected by the delay provisions of the legislation. On November 15,

1996 (61 FR 58472), the Department published a final rule in the

Federal Register making effective certain portions of the June 7 final

rule and August 12 technical revisions that were not delayed by the

Act. The November 15, 1996 final rule put into effect those portions of

the June 7 final rule dealing with Computer Loan Origination (CLO)

Systems. The November 15 final rule thereby effectuated the withdrawal

of the CLO exemption and the elimination of the CLO Fee Disclosure

form. It also put into effect the revised Appendix D to part 3500 as

published August 12, 1996. Further, it made several technical revisions

and corrections to Regulation X.

This proposed rule furthers the plans indicated in the November 4,

1996 notice to move forward as expeditiously as possible, subject to

the requirements of the Act, to establish new rules addressing employer

payments to employees in lieu of the former broad exemption. It also

proposes, in conjunction with putting into effect the revisions in the

June 7 rule concerning employer payments to employees, to establish a

new exemption. This exemption would allow payments by an employer to

its own bona fide employees for the referral of settlement service

business to an affiliated settlement service provider, under the

following conditions: (1) The settlement service business that is

referred is the same category of settlement service as provided by the

employer of the employee making the referral; (2) The employee makes

the affiliated business

[[Page 25741]]

arrangement disclosure in accordance with 24 CFR 3500.15; and (3) The

employee does not perform any other category of settlement service in

the same transaction. The Department anticipates that this new

exemption will become effective at the same time as the Department

makes the changes that were delayed by the Act (i.e., eliminating the

exemption for payments by an employer to its employees for referral

activities, currently codified as 24 CFR 3500.14(g)(1)(vii), and

substituting the more limited exemptions that the June 7 rule would

have codified as 24 CFR 3500.14(g)(1)(vii)-(ix))). The Act does not

permit the Department to make those changes before July 31, 1997, or to

announce an effective date for those provisions more than 180 days

before the effective date.

The Department also anticipates making the following technical

clarifications and corrections to those provisions of the June 7 rule,

as part of the final rule that will make those provisions effective

subject to the requirements of the Act:

(1) A technical clarification indicating that under the managerial

exemption (Sec. 3500.14(g)(1)(viii) of the June 7 rule), a manager not

routinely performing settlement services may still receive compensation

under the exemption if either: (1) The total value of the services

provided by the manager does not exceed 5 percent of the annual income

to the office or unit for which the manager is responsible attributable

to RESPA-covered transactions, or (2) the manager performs settlement

services in no more than three RESPA-covered transactions.

(2) A technical clarification indicating that in using the term

``in any transaction'' in the exemption for employees who do not

perform settlement services (Sec. 3500.14(g)(1)(ix) of the June 7

rule), the Department did not intend that an employee who has stopped

providing settlement services, an employee who changes jobs and no

longer provides settlement services, or a new employee is forever

prohibited from receiving compensation for referrals.

(3) A technical correction redesignating ``Controlled Business

Arrangements'' as ``Affiliated Business Arrangements'' or ``AfBAs,''

reflecting the change in terminology in section 2103(c) of the Act.

(4) A technical correction relating to the timing of providing the

AfBA disclosure, to conform the language of the regulation and Appendix

B more closely to the statutory language as revised in section 2103(d)

of the Act, to provide consistently that the AfBA disclosure statement

must be provided in accordance with Sec. 3500.15(b).

This proposed rule also proposes to implement amendments to RESPA

contained in the Act. One amendment concerns referrals through

telemarketing and electronic media. The other amendment concerns

mortgage servicing sales, assignments, or transfers under section 6 of

RESPA.

Finally, the proposed rule proposes some changes in response to

section 2101 of the Act. In that section, Congress mandated that the

Department and the Federal Reserve Board (the Board) work together to

``simplify and improve'' the disclosures given in a mortgage

transaction subject to the Truth in Lending Act (TILA) and RESPA, and

to create a unified format to satisfy the requirements of both

statutes. On December 31, 1996, the Department and the Board published

an Advance Notice of Proposed Rulemaking (ANPR) on Improvement of

Disclosures Under RESPA and TILA (61 FR 69055), in order to solicit

suggestions from the public regarding possible ways to simplify and

improve disclosures required under the statutes. The Department

received 82 comments from all sectors of the industry in response to

the ANPR. The preamble of this rule describes how the Department

proposes to incorporate some of the suggestions and recommendations

generated by the ANPR into this proposed rule. The Department

anticipates that other suggestions could be incorporated into

subsequent rulemaking.

The Department believes, however, that significant simplification

may only be possible through legislative changes and will work with the

Board in making recommendations towards that end. Under the Act,

Congress has required that the Department and the Board recommend any

legislation that would be necessary to accomplish the objectives of

simplifying and improving the disclosures subject to TILA and RESPA.

Both agencies are currently considering several approaches to

streamlining the disclosure requirements.

II. Proposed Exemption for Like-Provider Referrals

A. Description of Problem

The Department published a proposed rule on July 21, 1994 (59 FR

37360) to revise Regulation X. During the comment period on the

Department's July 21, 1994 proposed rule, some commenters raised

concern that the Department's proposed withdrawal of the broad

exemption for employer payments to employees for referrals and its

replacement with narrower exemptions would unduly restrict compensation

of bank employees for making referrals to mortgage banking affiliates.

A major trade association for the banking industry, for example, raised

concern that while a banker could compensate its employee for the

referral of mortgage loan business to a mortgage lending division

within the bank, a banker would be prohibited from compensating an

employee for the referral of a bank customer to a mortgage banking

affiliate of the bank or a mortgage banking subsidiary of the parent

holding company.

The trade association urged the Department to reconsider making

such a distinction in its final rule, arguing that the distinction

lacked justification or merit and, in essence, was solely based on the

structure of the bank and the location of the mortgage lending function

within the banking institution. The trade association explained that

the proposed rule would penalize banks, their affiliates, holding

companies, boards of directors, officers, and employees solely because

of their corporate structures, which ``are specifically authorized by

statute, implemented by state or Federal bank regulatory authorities

and constantly monitored and examined for safety and soundness and

compliance purposes.'' The trade association argued:

From the consumer's perspective, the location of this mortgage

lending activity within the banking institution's family of

companies is irrelevant. The consumer's objective is to obtain a

mortgage loan. To the consumer and the bank, this is the business of

banking whether it takes place within the bank or as part of the

banking institution's corporate family.

Since the Department's promulgation of its final rule on June 7,

1996, withdrawing the broader exemption and establishing more limited

exemptions, similar concerns have been echoed by others. A mortgage

lending subsidiary of a diversified financial services company

indicated that for various business and regulatory reasons, it offers

its services through more than one corporate entity. It argued that

bank branch personnel should be able to receive compensation for

referring customers who enter the branch and inquire about a first

mortgage loan to the mortgage lending subsidiary. It pointed out that

there is no danger of adverse steering since the customer is provided

the controlled business disclosure (now referred to as the Affiliated

Business Arrangement Disclosure Statement or AfBA Disclosure

Statement), which alerts the

[[Page 25742]]

customer that he or she is dealing with the mortgage lending

subsidiary; from the customer's perspective, the loan is still from the

bank.

A major bank made essentially the same arguments. It faulted the

June 7 rule for failing to accommodate the practice of referral of loan

business by a lender to its affiliate. In a letter to the Department,

the bank stated:

We believe that when a consumer comes to [the bank] to inquire

about mortgage financing, whether to purchase a home or refinance an

existing mortgage, the consumer has come to us because of our name

and reputation. Whether contact is made in person at a branch

office, by phone, or over the Internet, the consumer expects to

learn about [bank] loan products that meet his or her financing

needs, regardless of whether such loans are marketed, originated or

serviced by different * * * legal entities. It makes little or no

difference to our borrowers which * * * subsidiary originates their

loans or whether their original contact was a loan officer employed

by a different subsidiary. * * *

Without a change to the final rule, we will be forced into a

costly reorganization to create a permissible compensation

structure. We would either have to staff each branch with one or

more mortgage lending division loan officers, or originate and book

mortgage loans in each branch where the initial inquiry was made. In

either case, any potential economies would be eliminated without

adding value or convenience for our customers.

B. Proposed Solution

Under the June 7 rule, if a bank customer asks a loan officer who

provides settlement services in any transaction about a type of loan

that the bank does not make, but which the bank's affiliate does make,

the bank would have been precluded from compensating the loan officer

for making the referral to the appropriate affiliate. However, the June

7 rule would have created an exemption to the prohibition against

referral fees for employer payments to employees who do not perform

settlement services in any transaction and who refer settlement service

business to an affiliate, so long as the controlled business

arrangement disclosure is provided. Thus, an employee of a bank could

have referred a bank customer to a mortgage banking affiliate of the

bank or a mortgage banking subsidiary of the parent holding company and

could have received referral-based compensation. The only restrictions

would have been that the controlled business arrangement disclosure

would have to be provided, and, if the employee was to be compensated

for the referral, the employee could not be one who performed

settlement services in any residential real estate transaction covered

by RESPA. (Part V(B) of this preamble discusses the meaning of ``in any

transaction.'')

In light of certain of the expressed concerns, the Department is

proposing to exercise its exemption authority under RESPA, to add a new

exemption to section 8 of RESPA's prohibition against kickbacks and

unearned fees. The Secretary has authority to create exemptions under

section 19(a) of RESPA for classes of transactions as may be necessary

to achieve the purposes of RESPA (12 U.S.C. 2617(a)). In addition,

under section 8(c)(5) of RESPA, the Secretary may create regulatory

exemptions for ``such other payments or classes of payments,'' after

consulting with various Federal agencies (12 U.S.C. 2607(c)(5)). The

exemption to be created under this proposed rule, like the exemptions

promulgated June 7, would be issued pursuant to the Secretary's clear

authority to create reasonable exemptions to further the purposes of

RESPA.

Under the proposed exemption, Sec. 3500.14(g)(1) would be amended

by adding an exemption for a payment by an employer to its bona fide

employee for referring settlement service business to a settlement

service provider that has an affiliate relationship with the employer,

or in which the employer has a direct or beneficial ownership interest

of more than 1 percent, if the following conditions are met:

1. The settlement service business that is referred is the same

category of settlement service that the employer of the employee making

the referral provides;

2. The employee provides to the person being referred the

affiliated business arrangement disclosure in accordance with

Sec. 3500.15(b); and

3. The employee making the referral does not perform any other

category of settlement service in the same transaction.

The rule would specify that, for purposes of this exemption, each

paragraph in the definition of ``settlement service'' provided in 24

CFR 3500.2(b) (excluding paragraphs (b)(15) and (b)(16) of that

definition), as it is proposed to be revised, constitutes a separate

``category of settlement service.'' Some ``categories of settlement

services'' to which this exemption might commonly apply would include

originating mortgage loans, providing services involving hazard

insurance, and providing title services.

While the rendering of services by a real estate agent or real

estate broker is a settlement service (see paragraph (b)(15) of the

definition of ``settlement service'' in Sec. 3500.2 as proposed to be

revised), referrals from one real estate agent or broker to another are

generally exempt pursuant to section 8(c)(3) of RESPA (12 U.S.C.

2607(c)(3)) and 24 CFR 3500.14(g)(1)(v) of the RESPA regulations.

Because the section 8(c)(3) exemption already exists, the referral of

services by a real estate agent or real estate broker to another real

estate agent or real estate broker is not included under the new

exemption. In addition, real estate agents are usually independent

contractors, and thus would not be considered ``employees'' eligible

for this exemption for employer payments to employees.

In addition, paragraph (b)(16) of the definition of ``settlement

service'' in Sec. 3500.2 as proposed to be revised includes as a

settlement service ``other services for which a settlement service

provider requires a borrower or seller to pay.'' This catchall,

however, is too open-ended to apply to the new exemption proposed.

Commenters are encouraged to provide examples of other settlement

services that would qualify under paragraph (b)(16). The Department

will consider the examples submitted and possibly add them to the list

of categories of settlement services enumerated in the definition so

that referrals of such services may qualify for the new exemption

proposed.

As with the exemptions contained in the June 7 rule, this

additional exemption only pertains to bona fide employees. Individuals

may not be hired on a part-time basis to make referrals because of

their access to consumers as settlement service providers and then be

compensated for such referrals. Sham employment arrangements are also

prohibited. See 61 FR 29243 (column 3). Moreover, the exemption does

not affect the prohibition in 24 CFR 3500.14(b) against the entity to

which business is referred from compensating the affiliate or the

employee of the affiliate making the referral.

It is anticipated that when the Department makes this proposed rule

final, it will do so in a rule that will also make effective the

changes to the exemptions for employer payments to employees as

contained in the June 7 rule, subject to any further technical

corrections or clarifications to such exemptions that the Department

may announce. The language of the June 7 rule and the technical

corrections and clarifications are not republished here, since the

Department is not requesting comments on them.

[[Page 25743]]

C. Questions for Commenters

The Department is particularly interested in comments on the

following issues:

1. What potential disadvantages or dangers, if any, would the

exemption for employer payments to employees who make like-provider

referrals pose for consumers? As summarized above, it has been argued

by members of the settlement service industry that in the types of

referrals covered by the proposed rule, there is little danger of

adverse steering or adverse consequences to customers. However, the

Department would like to hear from those with other views, including

those with additional bases in support of such an exemption.

2. The Department seeks comments on whether a potential danger is

created for consumers that, through the design of compensation systems,

the exemption could cause greater steering of consumers to products

that are more profitable for the entity making or receiving the

referral, but that are not necessarily in the consumer's best interest.

For example, a loan officer of a lender that makes home equity loans

might receive a $50 bonus for every home equity loan closed. In

contrast, the same loan officer might receive a $100 bonus for

referring a customer who inquires about a home equity loan to an

affiliate of the lender that will refinance the primary mortgage, or

$150 if he or she could originate the refinance of the primary mortgage

in the name of the affiliate (and do only a minimum of work regarding

origination of the loan). Please comment on whether this exemption

would create a danger that consumers will be steered for reasons other

than what is in their best interest, and if so, how this danger may be

lessened or eliminated. Also comment on whether not creating this

exemption would create different dangers for consumers, such as

situations in which consumers who would benefit from referrals will not

be referred because some employees who would be in a position to make

referrals would not be compensated for doing so.

3. What are the advantages and disadvantages of limiting the

exemption to those employees who do not perform any other category of

settlement service in the same transaction, as proposed? Should the

Department narrow the exemption by limiting it to those employees who

do not perform any settlement service in the same transaction?

4. The Department recognizes that there could be some overlap among

the 16 categories in the proposed rule. What refinements of the

categories would ensure that the purposes of the exemption are

fulfilled? Does the Department's proposal provide adequate guidance as

to what is the ``same category of settlement service?'' How could this

point be clarified further? What specific categories of settlement

services would fall under paragraph (b)(16) of the definition of

``settlement service'' in Sec. 3500.2 (``provision of any other

services for which a settlement service provider requires a borrower or

seller to pay''), as it is proposed to be revised?

5. Since the concerns which resulted in this proposed new exemption

came mainly from lenders, should the Department narrow the scope of the

exemption being proposed to apply only to lenders? What problems would

other settlement service providers face if the exemption were limited

in this fashion?

6. The exemption, as proposed, would not apply in situations in

which a bank that does not originate any mortgage loans refers

customers seeking mortgage loans to the bank's mortgage lending

subsidiary. In such cases, the referring bank does not originate

mortgage loans, and thus does not perform settlement service business

in the same category as the business being referred. Should the

exemption be expanded to allow compensation for such referrals?

III. Referrals Involving Telemarketing and Electronic Media

This proposed rule would revise Sec. 3500.15(b)(1) of the RESPA

regulations to conform to changes to RESPA made in section 2103(d) of

the Act. Section 2103(d) of the Act primarily amended section

8(c)(4)(A) of RESPA (12 U.S.C. 2607(c)(4)(A)) to establish special

procedures for disclosures of affiliated business arrangements in

conjunction with referrals in which the telephone or electronic media

are used in marketing. The proposed rule would set forth the new

provisions regarding the timing of providing the disclosure, the

methods of providing the disclosure, and the evidence needed to

substantiate that the disclosure was provided.

The proposed rule would, consistent with the Department's prior

rules, require that the Affiliated Business Arrangement Disclosure

Statement be provided in writing on a separate piece of paper, and in

the format set forth in Appendix D to part 3500. In proposing to revise

Sec. 3500.15(b)(1) to be consistent with the Act, the Department is

also proposing to clarify the required elements of a proper affiliated

business disclosure, as provided in Appendix D, which specifically

includes the requirement that the disclosure contain an acknowledgement

for the person being referred to sign. It also specifies that the

person making the referral must request that the person being referred

sign the disclosure promptly and return it to the affiliate making the

referral or a designated addressee, and must provide information on

where to send the signed disclosure.

Consistent with the Act, the proposed rule provides that, in the

case of a face-to-face referral or a referral made in writing or by

electronic media, the written disclosure must be provided at or before

the time of the referral. In the case of a referral made by telephone,

an abbreviated verbal disclosure also must be made during the telephone

referral that, in clear and understandable language: (1) Specifies the

nature of the relationship (explaining the ownership and financial

interest) between the entity making the referral and the entity

performing settlement services (or business incident thereto); (2)

explains that because of this relationship, this referral may provide a

financial or other benefit to the referring party; (3) states that the

existence of this relationship does not require that the person being

referred use the provider to whom he or she is being referred as a

condition of settlement of the loan, or purchase, sale, or refinance of

the property, as applicable; and (4) advises that a written disclosure

will be provided within 3 business days. Different timing provisions

for providing the written disclosure are contained in

Sec. 3500.15(b)(2) (iii)-(iv) of this proposed rule. These exceptions,

which are simply a continuation of exceptions contained in prior rules

regarding provision of such disclosure, involve referrals by a lender

and situations involving an attorney or law firm that requires a client

to use a particular title insurance agent or company.

Consistent with the Act, in all cases the person being referred

must sign the disclosure. The person being referred should sign the

disclosure at the time that the disclosure is provided. If the person

being referred chooses not to sign the disclosure at the time that the

disclosure is provided, the signature of the person being referred must

be obtained at or before closing or settlement.

The proposed rule also provides that if a notation was made at the

time that the disclosure was provided, in a written, electronic, or

similar system of records maintained in the regular course of business,

that notation may be used as evidence that the disclosure was provided

at the time of the referral. Such a notation is to include a statement

that the person being referred

[[Page 25744]]

chose not to sign the disclosure at the time that it was provided. The

existence of such a notation, however, does not substitute for

obtaining a signature at or before closing or settlement. In the case

of a face-to-face referral, if the person being referred chooses not to

sign the disclosure at the time that the disclosure is provided, such

notation is mandatory.

IV. Sales or Transfers of Mortgage Servicing

This proposed rule also proposes to revise the RESPA regulations to

reflect an amendment to section 6 of RESPA, set forth in section

2103(a) of the Act. Section 6(a), as amended, requires disclosure to

applicants regarding the possibility of the assignment, sale, or

transfer of the rights to service the applicant's federally related

mortgage loan. Prior to the amendment, section 6 also provided that an

applicant for a mortgage loan had to be provided a disclosure of the

lender's historical practice in assigning, selling, and transferring

servicing of loans, or, as an alternative to providing the historical

data, a statement that the lender had previously sold servicing. A

signed acknowledgment of receipt of the disclosure statement was also

required in the applicant's loan file. The Act eliminates the

historical data provisions and the acknowledgment requirement.

This proposed rule would implement the statutory amendment by

striking language in Sec. 3500.21 to make it consistent with the

statutory amendment. The rule proposes to revise Appendix MS-1 to part

3500, the model Servicing Disclosure Statement format, to conform to

the amendment. This proposed rule recognizes that certain entities do

not undertake loan servicing and, therefore, transfer servicing before

the first payment is due; the disclosure format may so state. The

disclosure format in its revised form would be published in the Code of

Federal Regulations for the convenience of compliance by affected

parties. In response to comments received pursuant to the ANPR urging

the Department to consolidate the Mortgage Servicing Disclosure with

other RESPA forms, the proposed rule furthers section 2101 of the Act

by proposing to clarify that the format language may also be included

as part of the Good Faith Estimate.

The Department is interested in comments addressing alternative

approaches to implementing the statutory language while protecting

consumers. In connection with the report to Congress which the

Department is developing pursuant to section 2101 of the Act, which

will contain the Department's recommendations for statutory amendments,

the Department is also considering whether the disclosure might be

combined with other RESPA or Truth In Lending Act (TILA) disclosures,

consistent with section 2101 of the Act. In addition, if commenters

propose that the Department should continue to require more information

in the disclosure than in the format proposed, they should address what

the Department's authority to do so would be in light of the statutory

amendment in section 2103(a) of the Act.

In a related matter, section 2103(e) establishes a 3-year

limitation on the time aggrieved borrowers or classes of borrowers

could bring actions under section 6 of RESPA. Inasmuch as this

limitation is longer than the statute of limitations for other actions

by individuals under RESPA (1 year), a new paragraph (f)(1)(iv) would

be added to Sec. 3500.21 of the regulations to highlight this

provision.

V. Additional Technical Corrections and Clarifications Contemplated

In addition to the proposed revisions described in the preceding

portions of this preamble, the Department intends that when it makes

effective the provisions of the June 7 rule amending RESPA regulations

concerning employer payments to employees, the Department will make

further technical corrections and clarifications to the June 7 rule.

While these technical corrections and clarifications are described

below for informational purposes, the text is not published here, since

the Department is not requesting comments on them.

A. Routine Dealing

The Department has been asked about language in the preamble and in

Appendix B, ``Illustrations of the Requirements of RESPA,'' regarding

the definition of a managerial employee as an ``employee * * * who does

not routinely deal directly with consumers * * *.'' This definition

applies to the exemption for employer payments to managerial employees

(Sec. 3500.14(g)(1)(viii) of the June 7 rule). In the preamble to the

Department's June 7, 1996 rule (61 FR 29245; bottom of middle column)

the Department stated, ``HUD intends this phrase (`does not routinely')

to allow a managerial employee who performs and is compensated for

occasional settlement services (not more than three transactions a

year) to be eligible for the exemption.'' The last sentence of Appendix

B, illustration 12 of the June 7 rule also contained a statement

referring to this three-transaction guideline.

Following publication of the June 7 rule, the Department has found

that setting as a guide a fixed, maximum number of transactions for all

managers under the Department's rule would unduly interfere with the

functioning of offices. Roles and functions are not rigidly specified

and because of departures, absences for illnesses, or other reasons, a

manager may be called upon to complete transactions in process or

otherwise become involved in troublesome transactions, in addition to

any personal transactions the manager might otherwise undertake.

Accordingly, the Department agrees that a manager who does not

routinely deal with the public may perform greater than three

transactions and still remain eligible for the managerial exemption. A

more appropriate guideline is that a manager not routinely performing

settlement services may still receive compensation under the exemption

if either: (1) the total value of the services provided by the manager

does not exceed 5 percent of the annual income to the office or unit

for which the manager is responsible attributable to RESPA-covered

transactions, or (2) the manager performs settlement services in no

more than three RESPA-covered transactions.

In publishing the final rule, the Department will clarify this

point.

B. In Any Transaction

The final rule will put into effect the exemption promulgated in

the June 7 rule to the otherwise applicable prohibition against

kickbacks and unearned fees. The exemption applies in affiliate

relationships and allows payments made to employees who do not perform

settlement services ``in any transaction'' and who provide the

disclosure statement (24 CFR 3500.14(g)(1)(ix)). The use of the term

``in any transaction'' has created concern for some affiliated

settlement service providers regarding the breadth of the restriction.

The Department sought to provide this exemption to those who were

not currently involved in the provision of settlement services.

Therefore, when the Department puts this exemption into effect in the

final rule, it will clarify that it does not intend, by the use of the

term ``in any transaction,'' that if an employee performs settlement

services one time in his or her life, he or she shall forever lose the

ability to receive payments pursuant to this exemption. Rather, in

publishing the final rule the Department will clarify that it intends

the ``in any transaction'' language to

[[Page 25745]]

allow an employee who has performed settlement services in the past to

qualify for the exemption in any of the following types of

circumstances:

1. No longer providing settlement services. This type of

circumstance involves an employee who has not performed settlement

services for his or her current employer (in the same job position) in

any transaction for 1 year or more. OR

2. An employee who changes jobs. This type of circumstance involves

an employee who performed settlement services for his or her employer

in the past but, although still employed by the same employer, changes

jobs so that he or she no longer holds the former position and does not

perform settlement services in the new position. OR

3. A new employee. This type of circumstance involves an employee

who performed settlement services for another employer on a past job,

but no longer holds that job or works for that employer, and does not

perform settlement services on his or her current job for the new

employer.

In publishing the final rule the Department also will clarify that,

as explained in the preamble to the June 7 rule (61 FR 29243), under

all these circumstances, the employment relationship must be bona fide

and not a sham designed to facilitate kickbacks among affiliated

companies. Otherwise, the exemption will not apply.

C. ``Affiliated Business Arrangement''

The Department will make a technical correction required by an

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

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

Business Arrangements'' or ``AfBAs.'' The final rule will incorporate

into the RESPA rules the term ``affiliated business arrangement''

instead of the term ``controlled business arrangement'' used in the

June 7 rule, completing the process of changing the terminology begun

in the November 15, 1996 rule (61 FR 58472).

D. Timing of Affiliated Business Arrangement Disclosure

The Department will make a technical correction relating to the

timing of providing the AfBA disclosure. The June 7 rule used

inconsistent language to describe when the disclosure was to be

provided. (See 24 CFR 3500.14(g)(1)(ix)(A)(2) (``before the

referral''); 24 CFR 3500.15(b)(1) (``prior to the referral,'' ``no

later than the time of each referral,''); Appendix B, illustration 11

(``at or before the time that the referral is made''); Appendix B,

illustration 12 (``at the time of the referral'').) The Department will

conform the language of the regulation and Appendix B more closely to

the statutory language as revised in section 2103(d) of the Act, to

provide consistently that the AfBA disclosure statement must be

provided in accordance with Sec. 3500.15(b).

Section 3500.15(b) sets forth the applicable time frames for

providing the disclosure. This provision requires, in the case of a

face-to-face referral or a referral made in writing or by electronic

media, providing a written disclosure at or before the time of the

referral, except in cases of a referral by a lender or situations

involving an attorney or law firm that requires a client to use a

particular title insurance agent. In the case of a telephone referral,

a written disclosure must be provided within 3 business days after the

referral by telephone and an abbreviated verbal disclosure must be made

during the telephone referral. The change that will be included in the

final rule will eliminate the use of inconsistent terminology and will

conform the description of the timing for providing the disclosure to

be consistent with section 8(c)(4) of RESPA, as amended by section

2103(d) of the Act.

Findings and Certifications

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this proposed

rule under Executive Order 12866, Regulatory Planning and Review,

issued by the President on September 30, 1993. OMB determined that this

rule is a ``significant regulatory action,'' as defined in section 3(f)

of the Order (although not economically significant, as provided in

section 3(f)(1) of the Order). Any changes made in this rule subsequent

to its submission to OMB are identified in the docket file, which is

available for public inspection between 7:30 a.m. and 5:30 p.m.

weekdays in the Office of the Rules Docket Clerk, Office of General

Counsel, Room 10276, Department of Housing and Urban Development, 451

Seventh Street, SW, Washington, DC.

Paperwork Reduction Act

The information collection requirements contained in

Sec. 3500.15(b) prior to this proposed rule have been approved by the

Office of Management and Budget (OMB) under the Paperwork Reduction Act

of 1995 (44 U.S.C. 3501-3520), and assigned OMB control number 2502-

0516. In securing that approval, the Department had estimated that the

annual reporting and recordkeeping hour burden would be 240,000 hours

(2.4 million annual responses at 6 minutes per response). The

provisions of Sec. 3500.15(b) of this proposed rule regarding the

Affiliated Business Arrangement Disclosure would simply clarify the

timing and the methods of providing the disclosure, and the evidence

needed to substantiate that the disclosure was provided, in

circumstances in which the referral is made over the telephone or

through electronic media. The Department does not anticipate that the

provisions of Sec. 3500.15(b) of this proposed rule will increase the

number of annual burden hours described above. The Department has,

however, submitted the information collection requirements in

Sec. 3500.15(b) of this proposed rule to OMB for review under the

Paperwork Reduction Act and the procedures set forth in 5 CFR part

1320. As required by the Paperwork Reduction Act, interested persons

are invited to submit comments according to the instructions in the

DATES and ADDRESSES sections in the preamble of this proposed rule. The

Department specifically requests comments on the following:

(1) Whether the proposed collection of information is necessary for

the proper performance of the functions of the Department, including

whether the information will have practical utility;

(2) The accuracy of the Department's estimate of the burden of the

proposed collection of information;

(3) How to enhance the quality, utility, and clarity of the

information to be collected; and

(4) How to minimize the burden of the collection of information on

those who are to respond, including through the use of appropriate

automated, electronic, mechanical, or other technological collection

techniques or other forms of information technology, e.g., permitting

electronic submission of responses.

The information collection requirements in Sec. 3500.21 of this

proposed rule also have been approved by OMB, and assigned OMB control

number 2502-0458. The rule does not propose to make changes to the

information collection requirements set forth in Sec. 3500.21. The rule

proposes to make changes to the Servicing Disclosure Statement format

described in this section, but this format is a model format and is not

required to be used. The OMB approval number for this section is also

in the process of being renewed in accordance with the procedures set

forth in OMB's regulations implementing the Paperwork Reduction Act of

1995 and codified at 5 CFR part 1320.

[[Page 25746]]

Environmental Impact

In accordance with 24 CFR 50.19(c)(1) of the Department's

regulations, published in a final rule on September 27, 1996 (61 FR

50914), this proposed rule does not direct, provide for assistance or

loan and mortgage insurance for, or otherwise govern or regulate

property acquisition, disposition, lease, rehabilitation, alteration,

demolition, or new construction, or set out or provide for standards

for construction or construction materials, manufactured housing, or

occupancy. Therefore, this proposed rule is categorically excluded from

the requirements of the National Environmental Policy Act.

Regulatory Flexibility Act

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

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

by approving it certifies that this rule would not have a significant

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

those impacts specifically required to be applied universally by the

RESPA statute. In this proposed rule, the Department strives to provide

flexible requirements in order to reduce any burden on small entities.

Executive Order 12612, Federalism

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

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

contained in this proposed rule would not have substantial direct

effects on States or their political subdivisions, or the relationship

between the Federal Government and the States, or on the distribution

of power and responsibilities among the various levels of government.

As a result, the proposed rule is not subject to review under the

Order.

Unfunded Mandates Reform Act

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

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

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

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

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

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

List of Subjects in 24 CFR Part 3500

Condominiums, Consumer protection, Housing, Mortgages, Mortgage

servicing, Reporting and recordkeeping requirements.

Accordingly, for the reasons set out in the preamble, part 3500 of

Title 24 of the Code of Federal Regulations is proposed to be amended

as follows:

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

1. The authority citation for 24 CFR part 3500 continues to read as

follows:

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

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

definition of ``Settlement service'' to read as follows:

Sec. 3500.2 Definitions.

* * * * *

(b) * * *

Settlement service means any service provided in connection with a

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

following:

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

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

and the underwriting and funding of such loans), or 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);

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

examinations, abstract preparation, insurability determinations, and

the issuance of title commitments and title insurance policies;

(3) Rendering of services by an attorney;

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

recordation;

(5) Rendering of credit reports;

(6) Rendering of appraisals;

(7) 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;

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

services;

(9) Provision of services involving mortgage insurance;

(10) Provision of services involving hazard or other casualty

insurance;

(11) Provision of services involving flood insurance;

(12) Provision of services involving homeowner's warranties;

(13) 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;

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

other assessments or charges on the real property;

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

broker; and

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

provider requires a borrower or seller to pay.

* * * * *

3. Section 3500.14 is amended by adding and reserving new

paragraphs (g)(1)(viii) and (g)(1)(ix), and by adding a new paragraph

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

Sec. 3500.14 Prohibition against kickbacks and unearned fees.

* * * * *

(g) * * *

(1) * * *

(viii) [Reserved]

(ix) [Reserved]

(x)(A) A payment by an employer to its bona fide employee for the

referral of settlement service business to a settlement service

provider that has an affiliate relationship with the employer or in

which the employer has a direct or beneficial ownership interest of

more than 1 percent, if the following conditions are met:

(1) The settlement service business that is referred is the same

category of settlement service that the employer of the employee making

the referral provides;

(2) The employee provides to the person being referred the

affiliated business arrangement disclosure in accordance with

Sec. 3500.15; and

(3) The employee making the referral does not perform any other

category of settlement service (including a service described by

paragraph (b)(15) or (b)(16) of the definition of ``Settlement

service'' in Sec. 3500.2(b)) in the same transaction.

(B) For purposes of this paragraph (g)(1)(x), each service

described in the definition of ``Settlement service'' in Sec. 3500.2

(b)(1) through (b)(15) constitutes a different category of settlement

service that may qualify for this exemption.

* * * * *

4. Section 3500.15 is amended by revising paragraph (b)(1); by

redesignating paragraphs (b)(2) and (b)(3) as paragraphs (b)(5) and

(b)(6), respectively; and by adding new paragraphs (b)(2) through

(b)(4); to read as follows:

Sec. 3500.15 Affiliated business arrangements.

* * * * *

[[Page 25747]]

(b) * * *

(1) The person making a referral provides to each person being

referred a written disclosure on a separate piece of paper, in the

format of the Affiliated Business Arrangement Disclosure Statement set

forth in Appendix D to this part. The person making the referral must

request that the person being referred sign the disclosure promptly and

return it to the affiliate making the referral or a designated

addressee, and must provide information on where to send the signed

disclosure. The disclosure shall:

(i) Specify the nature of the relationship (explaining the

ownership and financial interest) between the person performing

settlement services (or business incident thereto) and the person

making the referral;

(ii) Describe the estimated charge or range of charges (using the

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

HUD-1A settlement statement) generally made by the provider of

settlement services; and

(iii) Include an acknowledgement for the person being referred to

sign.

(2) The person making the referral shall provide the disclosure in

accordance with the following timetable:

(i) In the case of a face-to-face referral or a referral made in

writing or by electronic media, at or before the time of the referral,

except as provided in paragraph (b)(2)(iii) or (b)(2)(iv) of this

section;

(ii) In the case of a referral made by telephone, within 3 business

days after the referral by telephone, except as provided in paragraph

(b)(2)(iii) or (b)(2)(iv) of this section. In the case of a referral

made by telephone, an abbreviated verbal disclosure also must be made

during the telephone referral that, in clear and understandable

language:

(A) Specifies the nature of the relationship (explaining the

ownership and financial interest) between the entity making the

referral and the entity performing settlement services (or business

incident thereto);

(B) Explains that because of this relationship, this referral may

provide a financial or other benefit to the referring party;

(C) States that the existence of this relationship does not mean

that the person being referred must use the provider to whom he or she

is being referred as a condition of settlement of the loan, or

purchase, sale, or refinance of the property, as applicable; and

(D) Advises that a written disclosure will be provided within 3

business days.

(iii) In the case of a referral by a lender (including a referral

by a lender to an affiliated lender) the disclosure may be provided at

the time that the good faith estimate required under section 5(c) of

RESPA (12 U.S.C. 2604) is provided.

(iv) In the case of an attorney or law firm that requires a client

to use a particular title insurance agent, the attorney or law firm

shall provide the written disclosure no later than the time the

attorney or law firm is engaged by the client.

(3)(i) Signature. In all cases, the person being referred must sign

the disclosure. The person being referred should sign the disclosure at

the time that the disclosure is provided. If the person being referred

chooses not to sign the disclosure at the time that the disclosure is

provided, the signature of the person being referred must be obtained

at or before closing or settlement.

(ii) Other evidence of compliance. The existence of a notation

having been made, at the time that the disclosure was provided, in a

written, electronic, or similar system of records maintained in the

regular course of business, which includes a notation of the fact that

the person being referred chose not to sign the disclosure at the time

that it was provided, may be used as evidence that the disclosure was

provided at the time of the referral, but does not substitute for

obtaining a signature in accordance with paragraph (b)(3)(i) of this

section. In the case of a face-to-face referral, if the person being

referred chooses not to sign the disclosure at the time that the

disclosure is provided, such notation is mandatory.

(4) 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 (15 U.S.C. 1640(c)) shall not be binding

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

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

* * * * *

5. Section 3500.21 is amended by revising paragraphs (b) and (c);

and by adding a new paragraph (f)(1)(iv); to read as follows:

Sec. 3500.21 Mortgage servicing transfers.

* * * * *

(b) Servicing Disclosure Statement; 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. A format for the

Servicing Disclosure Statement appears as Appendix MS-1 to this part.

The specific language of the Servicing Disclosure Statement is not

required to be used, and the statement may be included in the Good

Faith Estimate required under Sec. 3500.7(a), so long as the title

``SERVICING DISCLOSURE STATEMENT'' is used. The information set forth

in ``Instructions to Preparer'' on the Servicing Disclosure Statement

need not be included with the information given to applicants, and

material in square brackets is optional or alternative language. The

model format may be annotated with additional information that

clarifies or enhances the model language. The lender, table funding

mortgage broker, or dealer should use the language that best describes

the particular circumstances.

(2) The Servicing Disclosure Statement must indicate 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 loans, the disclosure

may consist of a statement that such entity intends to assign, sell, or

transfer servicing of the loan before the first loan payment is due.

(c) Servicing Disclosure Statement; 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 a mortgage servicing loan at the time of application, or by placing

it in the mail with prepaid first-class postage within 3 business days

from receipt of the application. In the event the borrower is denied

credit within the 3-business day period, no servicing disclosure

statement is required to be delivered. 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.

* * * * *

[[Page 25748]]

(f) * * *

(1) * * *

(iv) Limitation on time of action. Any action pursuant to this

section must be brought within 3 years from the date of the occurrence

of the violation.

* * * * *

6. Appendix B to part 3500 is amended by adding a new illustration

15 at the end of the appendix, to read as follows:

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

* * * * *

15. Facts: A, a bank, is affiliated with, B, a mortgage banking

company. A customer walks into the bank, A, and asks F, A's loan

officer, about getting a mortgage loan to purchase a house. While A

makes home equity loans, A does not make first mortgage loans. Thus,

F refers the customer to B, the mortgage banking affiliate, takes an

application, and provides the customer with the affiliated business

arrangement disclosure statement. F receives a payment from his

employer, A, for making the referral. F does not perform any other

category of settlement service in this transaction.

Comments: Under Sec. 3500.14(g)(1)(x), employers may pay their

own bona fide employees for the referral of settlement service

business to a settlement service provider that has an affiliate

relationship with the employer or in which the employer has a direct

or beneficial ownership interest of more than 1 percent, if the

following conditions are met:

(1) The settlement service business that is referred is the same

category of settlement service that the employer of the employee

making the referral provides;

(2) The employee provides to the person being referred the

affiliated business arrangement disclosure in accordance with

Sec. 3500.15; and

(3) The employee making the referral does not perform any other

category of settlement service in the same transaction.

Employees who perform settlement services in other transactions

may still qualify for the exemption.

In this case, the settlement service business that is referred

is originating a mortgage loan, and the business entity for which

the employee works also provides this service. Thus, the same

category of settlement service is being referred as is performed by

the employer of the employee making the referral. (Categories of

settlement services that may qualify for this exemption are listed

in the definition of ``Settlement services'' in Sec. 3500.2 (b)(1)

through (b)(15).) Also, the employee provides the affiliated

business disclosure in accordance with Sec. 3500.15. While this

particular employee takes an application, he does not perform any

other category of settlement service in this transaction.

Thus, in the circumstances described, the employee may receive

the referral fee for making the referral without violating RESPA.

7. Appendix MS-1 to part 3500 is revised to read as follows:

BILLING CODE 4210-27-P

[[Page 25749]]

[GRAPHIC] [TIFF OMITTED] TP09MY97.003

Dated: February 13, 1997.

Nicolas P. Retsinas,

Assistant Secretary for Housing--Federal Housing Commissioner.

[FR Doc. 97-12081 Filed 5-8-97; 8:45 am]

BILLING CODE 4210-27-C