[Federal Register Volume 59, Number 28 (Thursday, February 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3035]
[[Page Unknown]]
[Federal Register: February 10, 1994]
_______________________________________________________________________
Part V
Department of Housing and Urban Development
_______________________________________________________________________
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner
_______________________________________________________________________
24 CFR Part 3500
Amendments to Regulation X, Real Estate Settlement Procedures Act
Regulation (Subordinate Liens); Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner
24 CFR Part 3500
[Docket No. R-94-1653; FR-3382-F-01]
RIN 2502-AG13
Amendments to Regulation X, the Real Estate Settlement Procedures
Act Regulation (Subordinate Liens)
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: The Department of Housing and Urban Development is
implementing the amendments to the Real Estate Settlement Procedures
Act of 1974 (RESPA) contained in sections 908 and 951 of the Housing
and Community Development Act of 1992, by amending HUD's RESPA
regulation at 24 CFR part 3500, Regulation X. That Act expanded the
coverage of RESPA to include refinancing transactions and mortgages
secured by subordinate liens. This rule adopts certain definitions and
disclosure requirements of the Truth in Lending Act (TILA) and its
implementing regulation, Regulation Z, to minimize the burden on
lenders and others in complying with different or conflicting
definitions and disclosure requirements for transactions also covered
by the TILA.
DATES: Effective date: August 9, 1994, except that exemptions set forth
in Sec. 3500.5(b) are effective March 14, 1994.
FOR FURTHER INFORMATION CONTACT: David Williamson, Director, RESPA
Enforcement, room 5241, (202) 708-4560 or, for legal questions, Grant
E. Mitchell, Senior Attorney for RESPA, Office of General Counsel, room
10252 (202) 708-1550, Department of Housing and Urban Development, 451
Seventh Street, SW., Washington, DC 20410-0500. The TDD number is (202)
708-4594. (These are not toll-free numbers.)
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act Statement
The information collection requirements contained in this final
rule have been approved by the Office of Management and Budget, under
section 3504(h) of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-
3520), and assigned OMB control number 2502-0491.
I. Background
The Department of Housing and Urban Development published on May
13, 1993, a proposed rule to amend Regulation X, HUD's Real Estate
Settlement Procedures Act (RESPA) regulation (58 FR 28477). HUD
initiated rulemaking primarily because of section 908 of the Housing
and Community Development Act of 1992 (the 1992 Act), which amended
RESPA to extend coverage to refinancing and subordinate lien
transactions. Section 951 of the Act amended RESPA to provide that
certain information need not be disclosed to a potential borrower if
the loan application was turned down within three business days. This
provision is also included in the rule. The Department also proposed
certain exemptions from RESPA coverage and certain technical changes to
the November 2, 1992, RESPA rule. HUD requested comments on this rule,
and 540 comments were received within the July 12, 1993, deadline.
II. Discussion of the Comments Received
Exemptions
In the May 13, 1993, proposed rule, HUD proposed several exemptions
from RESPA coverage, not only for subordinate lien transactions, but
for first lien transactions covered by the November 2, 1992, rule. The
following is a discussion of the exemptions proposed, the comments
received, and HUD's treatment of these exemptions in this final rule.
1. Reinstitution of the Exemption in the Previous Regulation X for
Farms of 25 or More Acres
One hundred thirty-four commenters supported the exemption as HUD
proposed it. Three commenters suggested reverting to the pre-1992
language, while three others wanted the 25-acre threshold lowered or
removed. One proposed rewording the exemption. Two Federal regulatory
agencies and several others suggested that the business purpose
Regulation Z standard be adopted for all transactions under 25 acres.
After review of various alternatives, the Department determined that it
would adopt the 25-acre exemption for all properties, whether the
property was vacant, the property was used for agricultural purposes,
or a 1- to 4-family residential real property was involved. This
provides an absolute exemption for property consisting of 25 or more
acres in a single transaction. The Department is also adopting the
Regulation Z business purpose test, which will apply, among other
purposes, to agricultural purpose loans under 25 acres.
2. Refinancing Transactions
The Department proposed an exemption to the general coverage of
refinancing transactions under RESPA for ``any transaction whose
purpose is to change the interest rate, term, or periodic payment
amount of an existing federally related mortgage loan, including
extension of the terms of a balloon note, so long as the transaction
involves no charge, or nominal charges (less than \1/4\ of 1% of the
outstanding loan amount) and does not involve a transfer of title.''
Ninety-one commenters favored this exemption; one opposed it.
Forty-five of these commenters addressed the \1/4\ of 1% limitation.
They suggested various modifications, including increases in the
percentage threshold for exemption from \1/2\ of 1% to 3%, fixed dollar
thresholds, and a total elimination of the cap. Eight commenters noted
the absence of a definition of a ``refinancing'' in the rule and
suggested that the Regulation Z definition be adopted. Under Regulation
Z, a refinancing occurs when ``an existing obligation * * * is
satisfied and replaced by a new obligation undertaken by the same
consumer.'' (12 CFR 226.20(a).) Two commenters wanted refinancings to
be totally exempt, while one felt they should be exempt if no new funds
were involved.
Upon review of all the comments, the Department concluded that its
proposed exemption would be an ineffective modality for differentiating
between classes of transactions. It was determined that a more
straightforward exemption should be utilized that incorporates and
expands upon the Regulation Z standards. Like Regulation Z, the final
rule provides that a refinancing is a covered transaction if a new
obligation is created to satisfy an existing obligation with the same
lender. Regulation X, however, also includes transactions with a new
lender to replace an existing obligation when no transfer of title is
involved.
A new loan for an increased amount with the same lender is also a
covered transaction. For any covered transaction, the borrower would
receive RESPA disclosures (including the Good Faith Estimate, but not
currently a HUD Settlement Booklet), and the HUD-1 or new HUD-1A would
be used.1 If the transaction only involves a modification of an
existing obligation with the same borrower (except for converting a
fixed-term obligation to a variable rate obligation, see
Sec. 226.19(b), Regulation Z), the transaction is not covered and no
additional good faith estimate or HUD settlement statement is needed.
If the terms of the original mortgage loan provide for conversion of
the loan to a different rate or term at the borrower's option with the
same lender, this is not a refinancing transaction (unless a new note
is written), even if an additional fee is required for conversion.
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\1\ While section 5 of RESPA authorizes the Booklet and Good
Faith Estimate only in purchase money transactions, the Secretary
has exercised his authority under section 19(a) of RESPA (12 U.S.C.
2617(a)) to extend the requirement for a good faith estimate to all
covered transactions.
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3. Exemptions for Home Equity Line of Credit (Open-End Credit Plan)
Transactions in Accordance With TILA (Regulation Z)
Two hundred fifty-eight commenters made comments regarding the
relationship of Regulation Z and RESPA requirements. Most commenters
maintained that the proposed RESPA disclosures under Regulation X would
be duplicative of TILA's Regulation Z disclosures. One commenter
opposed the use of Regulation Z as a standard for Regulation X
exemptions. Many commenters advocated adoption of Regulation Z
treatment for home equity lines of credit, citing extensive disclosure
materials already issued under Regulation Z. The Federal Reserve Board
materials were revised within recent years at Congress' direction.
Since these disclosure materials were extensive and there had been
recent thorough congressional oversight and action (Home Equity Loan
Consumer Protection Act of 1988, 15 U.S.C. 1647, Pub. L. 100-709),
commenters urged the appropriateness of deferral to the Regulation Z
structure.
This final rule defers to the Regulation Z requirements for home
equity lines of credit (open-end credit plans) for purposes of
disclosure only; lenders must follow the requirements under Regulation
Z for home equity lines of credit.
4. Exemption for Loans on Vacant Land or Unimproved Property, Unless It
Will Be Improved by a Residential Structure Purchased Using the Loan
Proceeds Within Two Years From the Date of the Loan
This exemption in the proposed rule was favored by 90 commenters,
opposed by 1. Six commenters spoke to the difficulty of lenders
monitoring the two-year period. One commenter urged that all vacant
lots including post-construction activities be exempt.
In this final rule, HUD adopts the proposed exemption. Lenders must
assure themselves that the purpose of the loan on vacant or unimproved
property is not to add or construct a 1- to 4-family residential
structure out of loan proceeds on the property within two years from
settlement of the loan. However, HUD has also included an absolute 25-
acre exemption for any real property. (See discussion regarding the
farm loan exemption in item l, above.)
5. Temporary Financing Such as a Construction Loan
Temporary financing is exempt from coverage under RESPA. The
exemption does not apply to a loan for construction or rehabilitation
of a 1- to 4-family structure that is used or may be converted to
permanent financing by the same lender. If a lender has issued a
commitment to provide permanent funding, with or without conditions,
the transaction is not exempt from RESPA. Any construction loan for a
new or rehabilitated 1- to 4-family residential structure, other than a
loan to a bona fide builder (a person who regularly engages in the
construction of residential properties for sale or lease), is a RESPA-
covered loan if its term is for two or more years. This clarifying
exemption was supported by 70 commenters; one opposed it. Five
commenters were uncertain about the application of the exemption to
bridge or swing loans. Commenters sought several clarifications
including: (i) The conversion to permanent loans provision; (ii) the
coverage of convertible/refinancable construction loans; and (iii) the
definition of the term ``bona fide builder''. Two commenters advocated
substituting the Regulation Z disclosures.
The final rule clarifies that so-called ``bridge'' or ``swing''
loans, which are short-term loans to facilitate a person who is selling
a property and buying another to cover interim obligations, are not
covered RESPA transactions. The rule also makes minor clarifying
language changes in response to comments received.
6. Secondary Market Transactions
A bona fide transfer of a loan obligation in the secondary market
is not covered by Section 8 of RESPA. The proposed rule included a
provision that stated that the assignment and transfer of ``dealer
loans'' was not a secondary market transaction, which would remove such
loans from RESPA's coverage. The Department did not seek comments
regarding other portions of the secondary market exception.
Nonetheless, 15 commenters maintained that ``table funding'' should be
considered a secondary market transaction. Other commenters sought
clarification concerning: (i) The ``real source of funding''; and (ii)
the scope of the exemption. Five comments were received on the proposed
language regarding dealer loans, including one from a trade
association, which argued that such loans were not federally related
mortgage loans within the purview of RESPA.
In the final rule, a dealer loan or dealer consumer credit contract
originated with the intent of subsequent assignment of the dealer's
interest is defined as a ``federally related mortgage loan.'' (See
definition in Sec. 3500.2 of ``federally related mortgage loan''.) The
dealer advances credit to the borrower based upon the lender's prior
agreement to fund the loan upon completion or delivery of goods and
services, with the net proceeds to be paid to the dealer. The lender to
whom the advance of credit is initially assigned is defined as a lender
for purposes of this rule. The initial assignment of a dealer loan is
not exempt from RESPA as a secondary market transaction, and the
funding lender is responsible for: (i) Assuring that the necessary
disclosures, such as the good faith estimate, are made in a timely
manner, by either the funding lender or the dealer; and (ii) the use of
the HUD-1 or HUD 1-A settlement statements.
A ``dealer loan'' or ``dealer consumer credit contract'' describes,
generally, any arrangement in which a dealer assists a borrower in
obtaining a loan from the funding lender, the dealer's interests are
assigned to the funding lender, and the dealer receives the net
proceeds of the loan. A loan or advance by a dealer in which the dealer
does not assign its interest and receives the loan payments directly
would not be a covered RESPA transaction, unless the dealer qualifies
as a creditor as defined under the definition of a ``federally related
mortgage loan''.
The Department was guided in these determinations by the Committee
Report language regarding the amendments in the 1992 Act. The report
stated in relevant part:
The Committee included second mortgages within RESPA because of
the unfortunate potential for fraud and abuse among the elderly and
inner-city homeowners. The Committee heard disturbing testimony at a
May, 1991, hearing in Boston that indicated some secondary [sic]
mortgage lenders, home-repair specialists and banks had allegedly
taken advantage of elderly and minority homeowners * * *. The
Committee believes that some homeowners might have been spared
foreclosure and bankruptcy if comprehensive RESPA disclosures had
been required during the negotiation process and if the anti-
kickback provisions had been in place. (Report 102-760, of the
Committee on Banking, Finance and Urban Affairs, House of
Representatives to accompany H.R. 5334, July 30, 1992.)
A new Illustration 13 of appendix B further discusses a dealer loan
transaction.
The final rule also adds a definition of the term ``table
funding,'' and HUD restates its position that table-funding
transactions are not secondary market transactions exempt from RESPA's
coverage. If a mortgage broker funds a loan with its own money, or from
a warehouse line for which the mortgage broker is liable, this is not a
table-funding transaction, and the mortgage broker is a lender for
purposes of this part. Section 3500.7(b) has been revised to provide
that the mortgage broker's good faith estimate is sufficient and the
funding lender is not required to provide additional disclosures.
However, the funding lender is responsible for ascertaining that the
good faith estimate has been delivered.
7. Exemptions for Business Purpose Transactions Similar to TILA
(Regulation Z)
Two-hundred sixty-six comments were received regarding the
possibility of making the business purpose test of Regulation Z
applicable to RESPA. Commenters requested the following exemptions from
Regulation X: (a) Loans to unnatural persons; (b) loans that are not
for personal residences; (c) loans securing guarantees for general
business purposes; and (d) loans that were indirect collateral, such as
those taken out of an abundance of caution, as backup collateral.
The Department decided generally to adopt the ``business purpose''
exemptions and test of Regulation Z, but does not include in the
business purpose exemption the placing of a first or subordinate lien
on 1- to 4-family residential properties by individuals (natural
persons). RESPA is oriented towards assuring that individual consumers
are able to make meaningful choices in shopping for settlement
services. The Department concluded that the disclosure and anti-
kickback provisions of RESPA should apply to all individual consumer
transactions.
Under this rule, loans regarding 1- to 4-family residential
property made to corporations, associations, partnerships, and trusts
(the other entities falling under the definition of ``person'' in
section 3 of RESPA) are not covered. The Department was informed that
certain loans are made where both an individual and a living trust, or
a corporation, association, or partnership is named on the note and/or
deed. As long as any individual is named, the transaction is covered by
RESPA.
8. Assumptions
Several commenters suggested that assumptions be exempt, while
others recommended use of the Regulation Z test. The November 2, 1992,
RESPA rule deleted the previous exemption of coverage for assumptions.
HUD adopted the following test for coverage: Assumptions are covered if
lender approval of the assumption is required by the mortgage
instruments and is obtained, whether or not a fee is charged for the
assumption. If lender approval is not required, the transaction is
exempt from RESPA.
9. Commenter Proposed Exemptions
Commenters suggested several other exemptions from RESPA's
coverage. Four commenters wished to exempt home improvement loans.
Other exemptions suggested included: (a) All subordinate loans; (b)
loans under $10,000; (c) loans under $30-50,000; (d) Small Business
Administration guaranteed loans; (e) loans not involving a transfer of
title and loans involving only modifications, balloons, or workouts;
(f) cross-collateral ``dragnet'' loans; (g) loans with a term of two
years or less; (h) ``no fee'' loans; (i) improved land loans; (j)
transactions by mortgage bankers subject to state regulation limiting
compensation; and (k) transactions by mortgage bankers or mortgage
brokers subject to ``pervasive'' State regulation, such as in
California. Some of the proposed exemptions are implicitly or
explicitly covered by the Department's adoption of exemptions similar
to the Regulation Z business purpose test. Otherwise, HUD has not added
additional exemptions in this rule except those discussed elsewhere in
this preamble.
Statutory Changes
1. Special Information Booklet (Sec. 3500.6)
A number of commenters took the position that because Congress had
not provided for separate booklets containing information for borrowers
other than those purchasing 1- to 4-family residential real property,
none could be required. Eighty-six opposed a new booklet, and three
supported it. Several commenters questioned whether each applicant must
be presented with a copy of the booklet if the applicant is not present
at the time of application. One commenter urged that the booklet be
freely available in foreign languages. Forty-one commenters advocated
exempting all but purchase money transactions from a new booklet
requirement. Five sought the merger of the booklet with the Regulation
Z disclosure documents. Three commenters raised questions about the
appropriateness of requiring a booklet if the loan is a home equity
first lien. Three others advocated a combined booklet for refinance and
junior loans. Two sought a single new booklet for first and second
liens.
The provisions in the existing RESPA rule have been continued in
this final rule; that is, a HUD Special Information Booklet is only
required to be given to persons purchasing a 1- to 4-family residential
structure. HUD anticipates updating as soon as possible the HUD Special
Information Booklet, which contains several outdated or inaccurate
statements (e.g., it states that RESPA does not cover refinancings).
This rule includes a provision giving HUD the discretion to issue other
booklets on refinancings and other liens in the future, after
appropriate review, which could include congressional review, and other
publication requirements have been met.
2. Good Faith Estimate (Sec. 3500.7)
Seven commenters maintained that RESPA ties the requirement for a
Good Faith Estimate (GFE) to the requirement that HUD be furnished the
Booklet, so that furnishing the GFE is not required whenever furnishing
a Booklet is not required, e.g., refinancings. A commenter suggested
that the GFE be furnished only at the borrower's request so as to avoid
needless paperwork. Another commenter suggested that the GFE should not
be required if the total settlement cost does not exceed $750. One
commenter considered the second GFE backing up a mortgage broker's GFE
as an unnecessary additive, and another suggested exempting brokered
loans from the second GFE requirement for the same reason. One
commenter maintained the GFE was not necessary for a home equity loan
because of the Regulation Z disclosures.
Two commenters strongly opposed disclosure of the mortgage broker
fee, maintaining that because it sometimes is included in the gross
interest rate, the borrower would believe the fee was being paid twice;
therefore, this double disclosure is misleading.
This final rule provides, using the Secretary's discretion under
section 19 of RESPA, that a GFE is required for every covered
transaction, except for the deferral to the Regulation Z's provisions
for disclosure for home equity plans (open-end lines of credit).
Miscellaneous Matters
This rule, as did the proposed rule, addresses several
miscellaneous matters contained in the revised RESPA rule of November
2, 1992.
1. Required provider disclosures (Sec. 3500.7(e)(3))
With respect to this provision, which requires the listing of
providers required by a lender, 17 commenters advocated that the
regulations be abolished or relaxed. Twenty-three commenters maintained
that these requirements interfere with the lender's performance of its
obligations under the Community Reinvestment Act. Some suggested that
lenders' attempts to develop relationships with low-income community
institutions, including making contributions for mortgage loans
generated (currently a prohibited practice under RESPA), would be
adversely impacted. One commenter suggested an exemption for payments
to charitable entities qualifying as such under section 501(c)(3) of
the Internal Revenue Code.
While five commenters were in favor of the list of ``five or more''
providers as suggested in the proposed rule, nine were opposed to the
concept. One advocated providing the list to the borrower only on
request, to avoid needless paperwork. Four commenters suggested the
threshold (of five providers) be lowered, because in certain areas it
would be impractically high. Five suggested requiring less detailed
information, such as permitting a range of costs. Two commenters
maintained that the reality of settlement transactions dictated that,
due to conflicts and the press of work, one never really knew who would
be providing the service until the settlement.
Ten commenters asserted a conflict between the ``required
provider'' rule and the non-RESPA (FIRREA) requirement to use approved
appraisers. It was suggested that the use of appraisers not be deemed a
``required use'' under such circumstances. One of these commenters
pointed out that the borrower had a right under the Equal Credit
Opportunity Act, upon request and payment, to obtain the appraisal.
Another commenter maintained that an even greater problem was presented
by obtaining construction engineering inspectors, because of the
limited number of inspectors deemed competent by bank staff that are
available to perform construction inspections.
Ten commenters sought exemptions from the required provider
provisions for all non-purchase money loans, for all ``No Fee'' loans,
and for all loans that close within 3 days of application. In this
final rule, HUD adopts the proposed modification to the required
provider disclosures, with the listing of five or more required
providers. (See further discussion regarding controlled business
disclosures in item 8, of this section.) Instructions for completing
the Good Faith Estimate and HUD-1 or HUD-1A for ``no point'' or ``no
cost'' loans are included in Sec. 3500.7 and in the Appendix B
instructions.
2. Definition of ``Table Funding''
One commenter suggested that the table-funded loan provision,
Sec. 3500.5, be clarified. The commenter believed that ``lender'' is
intended to refer to funder, and that a change to ``wholesale lender''
would better identify the real parties in interest. In this final rule,
HUD clarifies the definition of lender and defines ``table funding.''
3. Three-day Denial of Credit Period
Several commenters suggested that the three-day denial-of-credit
period in the proposed rule, which provided that if credit is denied
the booklet and good faith estimate would not be required, is
impractically short and should be closer to ten days to two weeks.
Another commenter suggested that the three-day denial period be
expanded to include a withdrawal of an application by a borrower within
three days. A third urged that the GFE time clock run from approval
rather than application. Another inquiry was received about the
effective date of section 951 of the Housing and Community Development
Act of 1992, which establishes the denial of credit provision.
The three-day period is a statutory requirement contained in
section 951 of the Housing and Community Development Act of 1992 (1992
Act), and HUD does not believe it has the regulatory discretion to
extend it. The provision does not, on its face, require rulemaking and
was included in a subtitle of the 1992 Act entitled ``Bank Regulatory
Clarification Provisions.'' While HUD is including the provision in
this rulemaking, HUD takes the position that the provision has been in
effect since the effective date of the 1992 Act (October 28, 1992).
4. Escrow Account Requirements and Mortgage Servicing Transfer
Requirements
Eighteen commenters advocated exempting subordinate liens from
escrow requirements, because lenders would not establish an escrow
account unless they were holding a first lien. A commenter maintained
that escrow fees were reasonable charges because the funds were held
for the borrower's account and benefit.
Nine commenters questioned whether the section 6 provisions of
RESPA, regarding disclosures when mortgage servicing is transferred,
extended to secondary liens. Two commenters suggested that servicing
transfer disclosures should only be required in the event of an actual
transfer.
HUD will implement separately a final rule regarding mortgage
servicing requirements of section 6 of RESPA (currently set forth in an
interim rule of April 26, 1991, which continues in effect until
supplanted by a final rule). That interim rule will continue to apply
only to first mortgage liens, including first mortgage refinancing
transactions, unless the final mortgage servicing rule changes this
position. A new Sec. 3500.17, relating to escrow accounts, is being
developed concurrently, which will state HUD's position regarding
escrow accounts and accounting procedures. (See the proposed rule
published at 58 FR 64065 (December 3, 1993).)
5. Form of HUD Settlement Statement for Refinancings and Subordinate
Lien Transactions
Forty-three commenters supported the proposed form set out as
Appendix F for use in one-party transactions, while 10 opposed the form
and 2 advocated that it be optional. Another commenter suggested that
no Appendix F be required if the total settlement cost does not exceed
$750. A significant number of commenters (56), while supporting the
form as effective, advocated combining Appendix F and the HUD-1, so as
to be able to cut back on the stock of paper as well as the paperwork.
Three commenters suggested that permission be granted to modify the
HUD-1, arguing that this would be particularly beneficial for those
lenders making few subordinate loans in the course of a year.
Seventeen commenters wished to follow only Regulation Z and sought
an exemption from use of appendix F for all subordinate liens. Seven
sought an exemption from all subordinate lien loans without reliance on
Regulation Z.
Twenty-four commenters sought specific instructions for using the
form. Clarifications were requested for when the form is used: (i) For
assumptions; (ii) in non-purchase money, non-refinance situations; and
(iii) in modifying a first lien.
Three commenters wished an exemption for ``no fee'' transactions,
and three sought an exemption for fixed-fee transactions. A commenter
suggested that the disclosure form be used only on request of the
borrower. Another commenter suggested that secondary (vacation or
rental) homes be exempt from disclosure. One commenter requested
guidance on how to reconcile the Appendix F form with the specific
State law requirements.
In the final rule, appendix F has been adopted, basically as
proposed. The form is denominated as HUD-1A and is included in appendix
A of this rule. HUD has provided instructions for filling out this form
at the end of appendix A. The final rule makes clear that settlement
agents may use this form for refinancing or any other one-party
transactions, but may also use the borrower's side of a HUD-1
settlement statement to convey the same information.
6. Compliance Burden
Fifty-three comments addressed the burden of compliance. They
generally indicated that first lien disclosures and the disclosures
under the proposed rule constituted a substantial paperwork burden on
lenders. The commenters believed that few borrowers read any disclosure
material, except, perhaps, the HUD-1. Seventeen commenters estimated
the additional cost per loan as being from $25-32; two commenters
alleged $1,000,000 each in compliance costs. HUD's own estimate of the
costs of complying with this regulation was substantially less than
these amounts. Commenters maintained that the compliance burden caused
a chilling effect on the making of loans. Commenters also noted a
training burden, because the lender staff making the loans in question
normally would not have dealt with RESPA.
In developing the final rule, and consistent with the
Administration's directives to ease the burden of regulations insofar
as possible, the Department has expended substantial effort in
interagency consultation to reduce the compliance and regulatory
burdens. As a result of this consultation, the interrelated
regulations, Regulation X and Regulation Z, function in harmony, as far
as possible. This, of course, was done within the various statutory
constraints placed upon HUD and the Federal Reserve Board.
7. Multiple Liens
The Department was advised that there are certain circumstances
when a first mortgage and a subordinate lien may be created at the same
settlement (such as when a residential property is purchased through an
affordable housing program with an advance of funds for down-payment or
closing costs under a subordinate lien). If the subordinate lien meets
the definition of a federally related mortgage loan, the related
charges for settlement services must be documented on a HUD-1 or HUD-
1A, as appropriate for the circumstances, but a single HUD-1 can be
used for both the first mortgage and the subordinate lien. If the
subordinate lien does not meet the definition of federally related
mortgage loan (e.g., it is held by a governmental entity), the related
charges may still be shown on the HUD-1 for the first mortgage or on a
separate HUD-1 or HUD-1A.
8. Controlled Business Disclosures
As noted previously, in this final rule the modification to the
required provider disclosures, with the list of five or more required
providers, has been adopted. The rule is also clarified to indicate
that it does not apply to in-house settlement service providers. A
related question is: what is the extent of effort that is needed by a
person in a position to refer business (such as a bank with a related
mortgage lending company) to warrant a controlled business disclosure?
This question has been deferred to future rulemaking, which may deal
further with controlled business disclosures. However, the Department
wishes to make clear that incidental and uncompensated referrals, such
as brochures in the bank lobby or street directions given by a bank
employee, are not perceived as rising to the level necessary to require
a controlled business disclosure.
9. Effective Date
Twenty-five commenters suggested that HUD allow sufficient time for
implementation of this rule, so that the form, software, and technical
compliance materials could be created by affected parties. A range of
two months to one year was suggested to be adequate. The commenters
suggested that the exemptions should be made effective as soon as
possible or within 30 days after publication.
The final rule is effective 180 days after publication, while
exemptions contained in this rule are effective 30 days after the
publication date. Persons covered by this rule also may comply with
this rule before the effective date.
III. Other Matters
Executive Order 12866
This rule was reviewed by the Office of Management and Budget under
Executive Order 12866, Regulatory Planning and Review. Any changes made
to the rule as a result of that review are clearly identified in the
docket file, which is available for public inspection in the office of
the Department's Rules Docket Clerk, room 10276, 451 Seventh Street,
SW., Washington, DC 20410-0500.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this rule before publication and by
approving it certifies that this rule does not have a significant
economic impact on a substantial number of small entities, other than
those impacts specifically required to be applied universally by the
RESPA statute.
Environmental Impact
At the time of publication of the proposed rule, a finding of no
significant impact with respect to the environment was made in
accordance with HUD regulations in 24 CFR part 50 that implement
section 102(2)(C) of the National Environmental Policy Act of 1969 (42
U.S.C. 4332). The proposed rule is adopted by this final rule without
significant change. Accordingly, the initial finding of no significant
impact remains applicable, and is available for public inspection
between 7:30 a.m. and 5:30 p.m. weekdays in the office of the Rules
Docket Clerk, Office of General Counsel, room 10276, Department of
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC
20410-0500.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in this rule will not have substantial direct effects on
States or their political subdivisions, or the relationship between the
federal government and the States, or on the distribution of power and
responsibilities among the various levels of government. As a result,
the rule is not subject to review under the Order. Promulgation of this
rule expands coverage of the applicable regulatory requirements
pursuant to statutory direction.
Executive Order 12606, the Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this rule does not have
potential for significant impact on family formation, maintenance, and
general well-being, and, thus, is not subject to review under the
order. No significant change in existing HUD policies or programs will
result from promulgation of this rule, as those policies and programs
relate to family concerns.
Regulatory Agenda
This rule was listed as item 1552 in the Department's Semiannual
Agenda of Regulations published on October 25, 1993 (58 FR 56402,
56433), in accordance with Executive Order 12866 and the Regulatory
Flexibility Act.
List of Subjects in 24 CFR Part 3500
Consumer protection, Housing, Mortgages, Real property acquisition,
Reporting and recordkeeping requirements.
For the reasons set out in the preamble, part 3500 of title 24 of
the Code of Federal Regulations is amended as set forth below.
PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT
1. The authority citation for part 3500 continues to read as
follows:
Authority: 12 U.S.C. 2601 et seq.
2. Section 3500.2 is revised to read as follows:
Sec. 3500.2 Definitions.
As used in this part:
Application means the submission of a borrower's financial
information in anticipation of a credit decision, whether written or
computer-generated, relating to a federally related mortgage loan. If
the submission does not state or identify a specific property, the
submission is an application for a pre-qualification and not an
application for a federally related mortgage loan under this part. The
subsequent addition of an identified property to the submission
converts the submission to an application for a federally related
mortgage loan.
Business day means a day on which the offices of the business
entity are open to the public for carrying on substantially all of its
business functions. ``Business day'' for purposes of compliance with
section 6 of RESPA (12 U.S.C. 2605) is defined in Sec. 3500.21.
Dealer means, in the case of property improvement loans, a seller,
contractor, or supplier of goods or services. In the case of
manufactured home loans, ``dealer'' means one who engages in the
business of manufactured home retail sales.
Dealer loan or dealer consumer credit contract means, generally,
any arrangement in which a dealer assists the borrower in obtaining a
federally related mortgage loan from the funding lender and then
assigns the dealer's legal interests to the funding lender and receives
the net proceeds of the loan. The funding lender is the lender for the
purposes of the disclosure requirements of this part. If a dealer is a
``creditor'' as defined under the definition of ``federally related
mortgage loan'' in this part, the dealer is the lender for purposes of
this part.
Federally related mortgage loan means as follows:
(1) Any loan (other than temporary financing, such as a
construction loan):
(i) That is secured by a first or subordinate lien on residential
real property, including a refinancing of any secured loan on
residential real property upon which there is either:
(A) Located or, following settlement, will be constructed using
proceeds of the loan, a structure or structures designed principally
for occupancy of from one to four families (including individual units
of condominiums and cooperatives and including any related interests,
such as a share in the cooperative or right to occupancy of the unit);
or
(B) Located or, following settlement, will be placed using proceeds
of the loan, a manufactured home; and
(ii) For which one of the following paragraphs applies. The loan:
(A) Is made in whole or in part by any lender that is either
regulated by or whose deposits or accounts are insured by any agency of
the Federal Government;
(B) Is made in whole or in part, or is insured, guaranteed,
supplemented, or assisted in any way:
(1) By the Secretary or any other officer or agency of the Federal
Government; or
(2) Under or in connection with a housing or urban development
program administered by the Secretary or a housing or related program
administered by any other officer or agency of the Federal Government;
(C) Is intended to be sold by the originating lender to the Federal
National Mortgage Association, the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation (or its
successors), or a financial institution from which the loan is to be
purchased by the Federal Home Loan Mortgage Corporation (or its
successors);
(D) Is made in whole or in part by a ``creditor,'' as defined in
section 103(f) of the Consumer Credit Protection Act (15 U.S.C.
1602(f)), that makes or invests in residential real estate loans
aggregating more than $1,000,000 per year. For purposes of this
definition, the term ``creditor'' does not include any agency or
instrumentality of any State, and the term ``residential real estate
loan'' means any loan secured by residential property, including
single-family and multifamily residential property;
(E) Is originated either by a dealer or, if the obligation is to be
assigned to any maker of mortgage loans specified in paragraphs
(1)(ii)(A) through (D) of this definition, by a mortgage broker; or
(F) Is the subject of a home equity conversion mortgage, also
frequently called a ``reverse mortgage,'' issued by any maker of
mortgage loans specified in paragraphs (1)(ii)(A) through (D) of this
definition.
(2) Any installment sales contract, land contract, or contract for
deed on otherwise qualifying residential property is a federally
related mortgage loan if the contract is funded in whole or in part by
proceeds of a loan made by any maker of mortgage loans specified in
paragraphs (1)(ii)(A) through (D) of this definition. If the
residential property securing a mortgage loan is not located in a
State, it is not a federally related mortgage loan.
Good faith estimate means an estimate, prepared in accordance with
section 5 of RESPA (12 U.S.C. 2604), of charges that a borrower is
likely to incur in connection with a settlement.
HUD-1 or HUD-1A settlement statement (also HUD-1 or HUD-1A) means
the statement that is prescribed by the Secretary in this part for
setting forth settlement charges in connection with either the purchase
or the refinancing (or other subordinate lien transaction) of 1- to 4-
family residential property.
Lender means, generally, the secured creditor or creditors named in
the debt obligation and document creating the lien. For loans
originated by a mortgage broker that closes a federally related
mortgage loan in its own name in a table funding transaction, the
lender is the person to whom the obligation is initially assigned at or
after settlement. A lender, in connection with dealer loans, is the
lender to whom the loan is assigned, unless the dealer meets the
definition of creditor as defined under ``federally related mortgage
loan'' in this section. See also Sec. 3500.5(b)(5), secondary market
transactions.
Manufactured home means the same as the term is defined in
Sec. 3280.2 of this chapter.
Mortgage broker means a person (not an employee or exclusive agent
of a lender) who brings a borrower and lender together to obtain a
federally related mortgage loan, and who renders services as described
in the definition of ``settlement services'' in this section. A loan
correspondent meeting the requirements of the Federal Housing
Administration under Sec. 202.2(b) or 202.15(a) of this title is a
mortgage broker for purposes of this part.
Mortgaged property means the real property that is security for the
federally related mortgage loan.
Person means any individual, corporation, partnership, trust,
association, or other entity.
Refinancing means a transaction in which an existing obligation
that was subject to a secured lien on residential real property is
satisfied and replaced by a new obligation undertaken by the same
borrower and with the same or a new lender. The following shall not be
treated as a refinancing, even when the existing obligation is
satisfied and replaced by a new obligation with the same lender (this
definition of ``refinancing'' as to transactions with the same lender
is similar to Regulation Z, 12 CFR 226.20(a)):
(1) A renewal of a single payment obligation with no change in the
original terms;
(2) A reduction in the annual percentage rate as computed under the
Truth in Lending Act with a corresponding change in the payment
schedule;
(3) An agreement involving a court proceeding;
(4) A workout agreement, in which a change in the payment schedule
or change in collateral requirements is agreed to as a result of the
consumer's default or delinquency, unless the rate is increased or the
new amount financed exceeds the unpaid balance plus earned finance
charges and premiums for continuation of allowable insurance; and
(5) The renewal of optional insurance purchased by the consumer
that is added to an existing transaction, if disclosures relating to
the initial purchase were provided.
Regulation Z means the regulations issued by the Board of Governors
of the Federal Reserve System (12 CFR part 226) to implement the
Federal Truth in Lending Act (15 U.S.C. 1601 et seq.), and includes the
Commentary on Regulation Z.
Required use means a situation in which a person must use a
particular provider of a settlement service in order to have access to
some distinct service or property, and the person will pay for the
settlement service of the particular provider or will pay a charge
attributable, in whole or in part, to the settlement service. However,
the offering of a package (or combination of settlement services) or
the offering of discounts or rebates to consumers for the purchase of
multiple settlement services does not constitute a required use. Any
package or discount must be optional to the purchaser. The discount
must be a true discount below the prices that are otherwise generally
available, and must not be made up by higher costs elsewhere in the
settlement process.
RESPA means the Real Estate Settlement Procedures Act of 1974, 12
U.S.C. 2601 et seq.
Secretary means the Secretary of Housing and Urban Development or
any official who is designated the authority of the Secretary with
respect to RESPA.
Settlement means the process of executing legally binding documents
regarding a lien on property that is subject to a federally related
mortgage loan. This process may also be called ``closing'' or
``escrow'' in different jurisdictions.
Settlement service means any service provided in connection with a
prospective or actual settlement, including any one or more of the
following:
(1) Origination of a federally related mortgage loan (including,
but not limited to, the taking of loan applications, loan processing,
and the underwriting and funding of such loans);
(2) Rendering of services by a mortgage broker (including
counseling, taking of applications, obtaining verifications and
appraisals, and other loan processing and origination services, and
communicating with the borrower and lender);
(3) Provision of any services related to the origination,
processing or funding of a federally related mortgage loan;
(4) Provision of title services, including title searches, title
examinations, abstract preparation, insurability determinations, and
the issuance of title commitments and title insurance policies;
(5) Rendering of services by an attorney;
(6) Preparation of documents, including notarization, delivery, and
recordation;
(7) Rendering of credit reports and appraisals;
(8) Rendering of inspections, including inspections required by
applicable law or any inspections required by the sales contract or
mortgage documents prior to transfer of title;
(9) Conducting of settlement by a settlement agent and any related
services;
(10) Provision of services involving mortgage insurance;
(11) Provision of services involving hazard, flood, or other
casualty insurance or homeowner's warranties;
(12) Provision of services involving mortgage life, disability, or
similar insurance designed to pay a mortgage loan upon disability or
death of a borrower, but only if such insurance is required by the
lender as a condition of the loan;
(13) Provision of services involving real property taxes or any
other assessments or charges on the real property;
(14) Rendering of services by a real estate agent or real estate
broker; and
(15) Provision of any other services for which a settlement service
provider requires a borrower or seller to pay.
Special information booklet means the booklet prepared by the
Secretary pursuant to section 5 of RESPA (12 U.S.C. 2604) to help
persons understand the nature and costs of settlement services. The
Secretary publishes the form of the special information booklet in the
Federal Register. The Secretary may issue or approve additional
booklets or alternative booklets by publication of a Notice in the
Federal Register.
State means any State of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, and any territory or
possession of the United States.
Table funding means a settlement at which a loan is funded by a
contemporaneous advance of loan funds and an assignment of the loan to
the person advancing the funds. A table-funded transaction is not a
secondary market transaction (see Sec. 3500.5(b)(7)).
Title company means any institution, or its duly authorized agent,
that is qualified to issue title insurance.
Section 3500.5 is revised to read as follows:
Sec. 3500.5 Coverage of RESPA.
(a) Applicability. RESPA and this part apply to all federally
related mortgage loans, except for the exemptions provided in paragraph
(b) of this section.
(b) Exemptions. (1) A loan on property of 25 acres or more. Any
loan on property constituting 25 or more acres, regardless of:
(i) Whether the land is vacant;
(ii) Whether the land contains a residential structure; and
(iii) The purpose of the loan.
(2) Business purpose loans. An extension of credit primarily for a
business, commercial, or agricultural purpose. The definition of such
an extension of credit for purposes of this exemption generally
parallels Regulation Z, 12 CFR 226.3(a)(1). However, the definition of
business purpose loans does not include any transaction in which one or
more persons, acting in an individual capacity (natural persons), place
a lien on a 1- to 4-family residential property, whether used for
occupancy or investment.
(3) Temporary financing. Temporary financing, such as a
construction loan. The exemption for temporary financing does not apply
to a loan made to finance construction of 1- to 4-family residential
property if the loan is used as, or may be converted to, permanent
financing by the same lender or is used to finance transfer of title to
the first user. If a lender issues a commitment for permanent
financing, with or without conditions, the loan is covered by this
part. Any construction loan for new or rehabilitated 1- to 4-family
residential property, other than a loan to a bona fide builder (a
person who regularly constructs 1- to 4-family residential structures
for sale or lease), is subject to this part if its term is for two
years or more. A ``bridge loan'' or ``swing loan'' in which a lender
takes a security interest in otherwise covered 1- to 4-family
residential property is not covered by RESPA and this part.
(4) Vacant land. Any loan secured by vacant or unimproved property,
unless within two years from the date of the settlement of the loan, a
structure or a manufactured home will be constructed or placed on the
real property using the loan proceeds. If a loan for a structure or
manufactured home to be placed on vacant or unimproved property will be
secured by a lien on that property, the transaction is covered by this
part.
(5) Assumption without lender approval. Any assumption in which the
lender does not have the right expressly to approve a subsequent person
as the borrower on an existing federally related mortgage loan. Any
assumption in which the lender's permission is both required and
obtained is covered by RESPA and this part, whether or not the lender
charges a fee for the assumption.
(6) Loan conversions. Any conversion of a federally related
mortgage loan to different terms that are consistent with provisions of
the original mortgage instrument, as long as a new note is not
required, even if the lender charges an additional fee for the
conversion.
(7) Secondary market transactions. A bona fide transfer of a loan
obligation in the secondary market is not covered by RESPA and this
part, except as set forth in section 6 of RESPA and Sec. 3500.21. In
determining what constitutes a bona fide transfer, HUD will consider
the real source of funding and the real interest of the funding lender.
Mortgage broker transactions that are table-funded are not secondary
market transactions. Neither the creation of a dealer loan or dealer
consumer credit contract, nor the first assignment of such loan or
contract to a lender, is a secondary market transaction (see
Sec. 3500.2.)
4. Section 3500.6 is amended by revising paragraph (a) to read as
follows:
Sec. 3500.6 Special information booklet at time of loan application.
(a) Lender to provide special information booklet. Subject to the
exceptions set forth in this paragraph, the lender shall provide a copy
of the special information booklet to a person from whom the lender
receives, or for whom the lender prepares, a written application for a
federally related mortgage loan. When two or more persons apply
together for a loan, the lender is in compliance if the lender provides
a copy of the booklet to one of the persons applying, but the lender
may provide additional booklets to other applicants and to guarantors.
(1) The lender shall provide the special information booklet by
delivering it or placing it in the mail to the applicant not later than
three business days (as that term is defined in Sec. 3500.2) after the
application is received or prepared. However, if the lender denies the
borrower's application for credit before the end of the three-business-
day period, then the lender need not provide the booklet to the
borrower. If a borrower uses a mortgage broker, the mortgage broker
shall distribute the special information booklet and the lender need
not do so. The intent of this provision is that the applicant receive
the special information booklet at the earliest possible date.
(2) In the case of a federally related mortgage loan involving an
open-ended credit plan, as defined in Sec. 226.2(a)(20) of Regulation
Z, a lender or mortgage broker that provides the borrower with a copy
of the brochure entitled ``When Your Home is On the Line: What You
Should Know About Home Equity Lines of Credit'', or any successor
brochure issued by the Board of Governors of the Federal Reserve
System, is deemed to be in compliance with this section.
(3) In the categories of transactions set forth at the end of this
paragraph, the lender or mortgage broker does not have to provide the
booklet to the borrower. Under the authority of section 19(a) of RESPA,
the Secretary may issue a revised or separate special information
booklet that deals with these transactions, or the Secretary may chose
to endorse the forms or booklets of other Federal agencies. In such an
event, the requirements for delivery by lenders and the availability of
the booklet or alternate materials for these transactions will be set
forth in a Notice in the Federal Register. This paragraph shall apply
to the following transactions:
(i) Refinancing transactions;
(ii) Closed-end loans, as defined in Sec. 226.2(a)(10) of
Regulation Z, when the lender takes a subordinate lien; and
(iii) Reverse mortgages.
* * * * *
5. Section 3500.7 is amended by revising paragraphs (a), (c)(1),
and (e); adding two sentences at the end of paragraph (b); by removing
the undesignated paragraph following paragraph (e); and adding a new
paragraph (f), to read as follows:
Sec. 3500.7 Good faith estimate.
(a) Lender to provide. Except as provided in this paragraph or
paragraph (f) of this section, the lender shall provide all applicants
for a federally related mortgage loan with a good faith estimate of the
amount of or range of charges for the specific settlement services the
borrower is likely to incur in connection with the settlement. The
lender shall provide the good faith estimate required under this
section (a suggested format is set forth in appendix C of this part)
either by delivering the good faith estimate or by placing it in the
mail to the loan applicant, not later than three business days after
the application is received or prepared.
(1) If the lender denies the application for a federally related
mortgage loan before the end of the three-business-day period, the
lender need not provide the denied borrower with a good faith estimate.
(2) For ``no cost'' or ``no point'' loans, the charges to be shown
on the good faith estimate include any payments to be made to
affiliated or independent settlement service providers. These payments
should be shown as P.O.C. (Paid Outside of Closing) on the Good Faith
Estimate and the HUD-1 or HUD-1A.
(3) In the case of dealer loans, the lender is responsible for
provision of the good faith estimate, either directly or by the dealer.
(4) If a mortgage broker is the exclusive agent of the lender,
either the lender or the mortgage broker shall provide the good faith
estimate within three business days after the mortgage broker receives
or prepares the application.
(b) * * * As long as the mortgage broker has provided the good
faith estimate, the funding lender is not required to provide an
additional good faith estimate, but the funding lender is responsible
for ascertaining that the good faith estimate has been delivered. If
the application for mortgage credit is denied before the end of the
three-business-day period, the mortgage broker need not provide the
denied borrower with a good faith estimate.
(c) * * *
(1) Will be listed in section L of the HUD-1 or HUD-1A in
accordance with the instructions set forth in appendix A to this part;
and
* * * * *
(e) Particular providers required by lender. (1) If the lender
requires the use (see Sec. 3500.2, ``required use'') of a particular
provider of a settlement service, other than the lender's own
employees, and also requires the borrower to pay any portion of the
cost of such service, then the good faith estimate must:
(i) Clearly state that use of the particular provider is required
and that the estimate is based on the charges of the designated
provider;
(ii) Give the name, address, and telephone number of each provider;
and
(iii) Describe the nature of any relationship between each such
provider and the lender. Plain English references to the relationship
should be utilized, e.g., ``X is a depositor of the lender,'' ``X is a
borrower from the lender,'' ``X has performed 60% of the lender's
settlements in the past year.'' In the event that more than one
relationship exists, each should be disclosed.
(2) For purposes of paragraph (e)(1) of this section, a
``relationship'' exists if:
(i) The provider is an associate of the lender, as that term is
defined in Sec. 3500.15(c)(1));
(ii) Within the last 12 months, the provider has maintained an
account with the lender or had an outstanding loan or credit
arrangement with the lender; or
(iii) The lender has repeatedly used or required borrowers to use
the services of the provider within the last 12 months.
(3) Except for a provider that is the lender's chosen attorney,
credit reporting agency, or appraiser, if the lender is in a controlled
business relationship (see Sec. 3500.15) with a provider, the lender
may not require the use of that provider.
(4) If the lender maintains a controlled list of required providers
(five or more for each discrete service) or relies on a list maintained
by others, and at the time of application the lender has not yet
decided which provider will be selected from that list, then the lender
may satisfy the requirements of this section if the lender:
(i) Provides the borrower with a written statement that the lender
will require a particular provider from a lender-controlled or -
approved list; and
(ii) Provides the borrower in the Good Faith Estimate the range of
costs for the required provider(s), and provides the name of the
specific provider and the actual cost on the HUD-1 or HUD-1A.
(f) Open-end lines of credit (home-equity plans) under Truth in
Lending Act. In the case of a federally related mortgage loan involving
an open-end line of credit (home-equity plan) covered under the Truth
in Lending Act and Regulation Z, a lender or mortgage broker that
provides the borrower with the disclosures required by 12 CFR 226.5(b)
of Regulation Z at the time the borrower applies for such loan shall be
deemed to satisfy the requirements of this section.
6. Section 3500.8 is revised to read as follows:
Sec. 3500.8 Use of HUD-1 or HUD-1A settlement statements.
(a) Use by settlement agent. The settlement agent shall use the
HUD-1 settlement statement in every settlement involving a federally
related mortgage loan in which there is a borrower and a seller. For
transactions in which there is a borrower and no seller, such as
refinancing loans or subordinate lien loans, the HUD-1 may be utilized
by using the borrower's side of the HUD-1 statement. Alternatively, the
form HUD-1A may be used for these transactions. Either the HUD-1 or the
HUD-1A, as appropriate, shall be used for every RESPA-covered
transaction, but may be modified as permitted under this part.
(b) Charges to be stated. The settlement agent shall complete the
HUD-1 or HUD-1A in accordance with the instructions set forth in
appendix A to this part.
(Approved by the Office of Management and Budget under control
numbers 2502-0265 and 2502-0491)
7. Section 3500.9 is revised to read as follows:
Sec. 3500.9 Reproduction of settlement statements.
(a) Permissible changes--HUD-1. The following changes and
insertions are permitted when the HUD-1 settlement statement is
reproduced:
(1) The person reproducing the HUD-1 may insert its business name
and logotype in Section A and may rearrange, but not delete, the other
information that appears in Section A.
(2) The name, address, and other information regarding the lender
and settlement agent may be printed in Sections F and H, respectively.
(3) Reproduction of the HUD-1 must conform to the terminology,
sequence, and numbering of line items as presented in lines 100-1400.
However, blank lines or items listed in lines 100-1400 that are not
used locally or in connection with mortgages by the lender may be
deleted, except for the following: Lines 100, 120, 200, 220, 300, 301,
302, 303, 400, 420, 500, 520, 600, 601, 602, 603, 700, 800, 900, 1000,
1100, 1200, 1300, and 1400. The form may be shortened correspondingly.
The number of a deleted item shall not be used for a substitute or new
item, but the number of a blank space on the HUD-1 may be used for a
substitute or new item.
(4) Charges not listed on the HUD-1, but that are customary locally
or pursuant to the lender's practice, may be inserted in blank spaces.
Where existing blank spaces on the HUD-1 are insufficient, additional
lines and spaces may be added and numbered in sequence with spaces on
the HUD-1.
(5) The following variations in layout and format are within the
discretion of persons reproducing the HUD-1 and do not require prior
HUD approval: size of pages; tint or color of pages; size and style of
type or print; vertical spacing between lines or provision for
additional horizontal space on lines (for example, to provide
sufficient space for recording time periods used in prorations);
printing of the HUD-1 contents on separate pages, on the front and back
of a single page, or on one continuous page; use of multicopy tear-out
sets; printing on rolls for computer purposes; reorganization of
Sections B through I, when necessary to accommodate computer printing;
and manner of placement of the HUD number, but not the OMB approval
number, neither of which may be deleted. The designation of the
expiration date of the OMB number may be deleted. Any changes in the
HUD number or OMB approval number may be announced by notice in the
Federal Register, rather than by amendment of this part.
(6) The borrower's information and the seller's information may be
provided on separate pages.
(7) Signature lines may be added.
(8) The HUD-1 may be translated into languages other than English.
(9) An additional page may be attached to the HUD-1 for the purpose
of including customary recitals and information used locally in real
estate settlements; for example, breakdown of payoff figures, a
breakdown of the borrower's total monthly mortgage payments, check
disbursements, a statement indicating receipt of funds, applicable
special stipulations between buyer and seller, and the date funds are
transferred. If space permits, such information may be added at the end
of the HUD-1.
(10) As required by HUD/FHA in FHA-insured loans.
(11) As allowed by Sec. 3500.17, relating to an initial escrow
account statement.
(b) Permissible changes--HUD-1A. The changes and insertions on the
HUD-1 permitted under paragraph (a) of this section are also permitted
when the HUD-1A settlement statement is reproduced, except the changes
described in paragraphs (a) (3), (6), and (11).
(c) Written approval. Any other deviation in the HUD-1 or HUD-1A
forms is permissible only upon receipt of written approval of the
Secretary. A request to the Secretary for approval shall be submitted
in writing to the address indicated in Sec. 3500.3 and shall state the
reasons why the applicant believes such deviation is needed. The
prescribed form(s) must be used until approval is received.
(Approved by the Office of Management and Budget under control
numbers 2502-0265 and 2502-0491)
8. Section 3500.10 is revised to read as follows:
Sec. 3500.10 One-day advance inspection of HUD-1 or HUD-1A settlement
statement; delivery; recordkeeping.
(a) Inspection one day prior to settlement upon request by the
borrower. The settlement agent shall permit the borrower to inspect the
HUD-1 or HUD-1A settlement statement, completed to set forth those
items that are known to the settlement agent at the time of inspection,
during the business day immediately preceding settlement. Items related
only to the seller's transaction may be omitted from the HUD-1.
(b) Delivery. The settlement agent shall provide a completed HUD-1
or HUD-1A to the borrower, the seller (if there is one), the lender (if
the lender is not the settlement agent), and/or their agents. When the
borrower's and seller's copies of the HUD-1 or HUD-1A differ as
permitted by the instructions in Appendix A to this part, both copies
shall be provided to the lender (if the lender is not the settlement
agent). The settlement agent shall deliver the completed HUD-1 or HUD-
1A at or before the settlement, except as provided in paragraphs (c)
and (d) of this section.
(c) Waiver. The borrower may waive the right to delivery of the
completed HUD-1 or HUD-1A no later than at settlement by executing a
written waiver at or before settlement. In such case, the completed
HUD-1 or HUD-1A shall be mailed or delivered to the borrower, seller,
and lender (if the lender is not the settlement agent) as soon as
practicable after settlement.
(d) Exempt transactions. When the borrower or the borrower's agent
does not attend the settlement, or when the settlement agent does not
conduct a meeting of the parties for that purpose, the transaction
shall be exempt from the requirements of paragraphs (a) and (b) of this
section, except that the HUD-1 or HUD-1A shall be mailed or delivered
as soon as practicable after settlement.
(e) Recordkeeping. The lender shall retain each completed HUD-1 or
HUD-1A and related documents for five years after settlement, unless
the lender disposes of its interest in the mortgage and does not
service the mortgage. In that case, the lender shall provide its copy
of the HUD-1 or HUD-1A to the owner or servicer of the mortgage as a
part of the transfer of the loan file. Such owner or servicer shall
retain the HUD-1 or HUD-1A for the remainder of the five-year period.
The Secretary shall have the right to inspect or require copies of
records covered by this paragraph (e).
(Approved by the Office of Management and Budget under control
numbers 2502-0265 and 2502-0491)
9. Section 3500.12 is revised to read as follows:
Sec. 3500.12 No fee.
No fee shall be imposed or charge made upon any other person, as a
part of settlement costs or otherwise, by a lender in connection with a
federally related mortgage loan made by it (or a loan for the purchase
of a manufactured home), or by a servicer (as that term is defined
under 12 U.S.C. 2605(1)) for or on account of the preparation and
distribution of the HUD-1 or HUD-1A settlement statement, escrow
account statements required pursuant to section 10 of RESPA, or
statements required by the Truth in Lending Act, 15 U.S.C. 1601 et seq.
10. Section 3500.14 is amended by revising paragraphs (f)(2) and
(g)(1)(v), to read as follows:
Sec. 3500.14 Prohibition against kickbacks and unearned fees.
* * * * *
(f) * * *
(2) A referral also occurs whenever a person paying for a
settlement service or business incident thereto is required to use (see
Sec. 3500.2, ``required use'') a particular provider of a settlement
service or business incident thereto.
(g) * * *
(1) * * *
(v) Pursuant to cooperative brokerage and referral arrangements or
agreements between real estate agents and real estate brokers. (The
statutory exemption restated in this paragraph refers only to fee
divisions within real estate brokerage arrangements when all parties
are acting in a real estate brokerage capacity, and has no
applicability to any fee arrangements between real estate brokers and
mortgage brokers or between mortgage brokers.)
* * * * *
Sec. 3500.15 [Amended]
Section 3500.15 is amended by revising the phrase ``(as defined in
Sec. 3500.2(a)(11)'' in paragraph (b)(2) to read ``(as defined in
Sec. 3500.2, `required use')''.
12. Section 3500.16 is amended by revising the second sentence, to
read as follows:
Sec. 3500.16 Title companies.
* * * Section 3500.2 defines ``required use'' of a provider of a
settlement service. * * *
13. Appendix A to part 3500 is amended by revising the title of the
appendix; by revising the introductory text and the paragraph beginning
with ``Line 902'' in Section L under the text heading ``Line Item
Instructions''; and by adding additional text, a HUD-1 settlement
statement form, and a HUD-1A settlement statement form at the end of
the appendix, to read as follows:
Appendix A to Part 3500--Instructions for Completing HUD-1 and HUD-1A
Settlement Statements
* * * * *
Line Item Instructions
* * * * *
Section L. Settlement Charges
For all items except for those paid to and retained by the
Lender, the name of the person or firm ultimately receiving the
payment should be shown. In the case of ``no cost'' or ``no point''
loans, the charge to be paid by the lender to an affiliated or
independent service provider should be shown as P.O.C. (Paid Outside
of Closing) and should not be used in computing totals. Such charges
also include indirect payments or back-funded payments to mortgage
brokers that arise from the settlement transaction. When used,
``P.O.C.'' should be placed in the appropriate lines next to the
identified item, not in the columns themselves.
* * * * *
Line 902 is used for mortgage insurance premiums due and payable
at settlement, except reserves collected by the Lender and recorded
in the 1000 series. A lump sum mortgage insurance premium paid at
settlement should be inserted on Line 902, with a note that
indicates that the premium is for the life of the loan.
* * * * *
Line Item Instructions for Completing HUD-1A
Note: HUD-1A is an optional form that may be used for
refinancing and subordinate lien federally related mortgage loans,
as well as for any other one-party transaction that does not involve
the transfer of title to residential real property. The HUD-1 form
may also be used for such transactions, by utilizing the borrower's
side of the HUD-1 and following the relevant parts of the
instructions as set forth above. The use of either the HUD-1 or HUD-
1A is not mandatory for open-end lines of credit (home-equity
plans), as long as the provisions of Regulation Z are followed.
Background
The HUD-1A settlement statement is to be used as a statement of
actual charges and adjustments to be given to the borrower at
settlement, as defined in this part. The instructions for completion
of the HUD-1A are for the benefit of the settlement agent who
prepares the statement; the instructions are not a part of the
statement and need not be transmitted to the borrower. There is no
objection to using the HUD-1A in transactions in which it is not
required, and its use in open-end lines of credit transactions
(home-equity plans) is encouraged. It may not be used as a
substitute for a HUD-1 in any transaction in which there is a
transfer of title and a first lien is taken as security.
Refer to the ``definitions'' section of Regulation X for
specific definitions of terms used in these instructions.
General Instructions
Information and amounts may be filled in by typewriter, hand
printing, computer printing, or any other method producing clear and
legible results. Refer to Sec. 3500.9 regarding rules for
reproduction of the HUD-1A. Additional pages may be attached to the
HUD-1A for the inclusion of customary recitals and information used
locally for settlements or if there are insufficient lines on the
HUD-1A.
The settlement agent shall complete the HUD-1A to itemize all
charges imposed upon the borrower by the lender, whether to be paid
at settlement or outside of settlement, and any other charges that
the borrower will pay for at settlement. In the case of ``no cost''
or ``no point'' loans, these charges include any payments the lender
will make to affiliated or independent settlement service providers
relating to this settlement. These charges shall be included on the
HUD-1A, but marked ``P.O.C.'' for ``paid outside of closing,'' and
shall not be used in computing totals. Such charges also include
indirect payments or back-funded payments to mortgage brokers that
arise from the settlement transaction. When used, ``P.O.C.'' should
be placed in the appropriate lines next to the identified item, not
in the columns themselves.
Blank lines are provided in Section L for any additional
settlement charges. Blank lines are also provided in Section M for
recipients of all or portions of the loan proceeds. The names of the
recipients of the settlement charges in Section L and the names of
the recipients of the loan proceeds in Section M should be set forth
on the blank lines.
Line Item Instructions
The identification information at the top of the HUD-1A should
be completed as follows:
The borrower's name and address is entered in the space
provided. If the property securing the loan is different from the
borrower's address, the address or other location information on the
property should be entered in the space provided. The loan number is
the lender's identification number for the loan. The settlement date
is the date of settlement in accordance with Sec. 3500.2, not the
end of any applicable rescission period. The name and address of the
lender should be entered in the space provided.
Section L. Settlement Charges. This section of the HUD-1A is
similar to Section L of the HUD-1, with minor changes or omissions,
including deletion of lines 700 through 704, relating to real estate
broker commissions. The instructions for Section L in the HUD-1,
should be followed insofar as possible. Inapplicable charges should
be ignored, as should any instructions regarding seller items.
Line 1400 in the HUD-1A is for the total settlement charges
charged to the borrower. Enter this total on line 1602 as well. This
total should include Section L amounts from additional pages, if any
are attached to this HUD-1A.
Section M. Disbursement to Others. This section is used to list
payees, other than the borrower, of all or portions of the loan
proceeds (including the lender, if the loan is paying off a prior
loan made by the same lender), when the payee will be paid directly
out of the settlement proceeds. It is not used to list payees of
settlement charges, nor to list funds disbursed directly to the
borrower, even if the lender knows the borrower's intended use of
the funds.
For example, in a refinancing transaction, the loan proceeds are
used to pay off an existing loan. The name of the lender for the
loan being paid off and the pay-off balance would be entered in
Section M. In a home improvement transaction when the proceeds are
to be paid to the home improvement contractor, the name of the
contractor and the amount paid to the contractor would be entered in
Section M. In a consolidation loan, or when part of the loan
proceeds is used to pay off other creditors, the name of each
creditor and the amount paid to that creditor would be entered in
Section M. If the proceeds are to be given directly to the borrower
and the borrower will use the proceeds to pay off existing
obligations, this would not be reflected in Section M.
Section N. Net Settlement. Line 1600 normally sets forth the
principal amount of the loan as it appears on the related note for
this loan. In the event this form is used for an open-ended home
equity line whose approved amount is greater than the initial amount
advanced at settlement, the amount shown on Line 1600 will be the
loan amount advanced at settlement. Line 1601 is used for all
settlement charges that are both included in the totals for lines
1400 and 1602 and are not financed as part of the principal amount
of the loan. This is the amount normally received by the lender from
the borrower at settlement, which would occur when some or all of
the settlement charges were paid in cash by the borrower at
settlement, instead of being financed as part of the principal
amount of the loan. Failure to include any such amount in line 1601
will result in an error in the amount calculated on line 1604.
P.O.C. amounts should not be included in line 1601.
Line 1602 is the total amount from line 1400.
Line 1603 is the total amount from line 1520.
Line 1604 is the amount disbursed to the borrower. This is
determined by adding together the amounts for lines 1600 and 1601,
and then subtracting any amounts listed on lines 1602 and 1603.
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14. Appendix B to part 3500 is amended by adding illustration 13 at
the end of the appendix, to read as follows:
Appendix B to Part 3500--Illustration of Requirements of RESPA
* * * * *
13. Facts. A is a dealer in home improvements who has
established funding arrangements with several lenders. Customers for
home improvements receive a proposed contract from A. The proposal
requires that customers both execute forms authorizing a credit
check and employment verification, and, frequently, execute a dealer
consumer credit contract secured by a lien on the customer's
(borrower's) 1- to 4-family residential property. Simultaneously
with the completion and certification of the home improvement work,
the note is assigned by the dealer to a funding lender.
Comments. The loan that is assigned to the funding lender is a
loan covered by RESPA, when a lien is placed on the borrower's 1- to
4-family residential structure. The dealer loan or consumer credit
contract originated by a dealer is also a RESPA-covered transaction,
except when the dealer is not a ``creditor'' under the definition of
``federally related mortgage loan'' in Sec. 3500.2. The lender to
whom the loan will be assigned is responsible for assuring that the
lender or the dealer delivers to the borrower a Good Faith Estimate
of closing costs consistent with Regulation X, and that the HUD-1 or
HUD-1A Settlement Statement is used in conjunction with the
settlement of the loan to be assigned. A dealer who, under
Sec. 3500.2, is covered by RESPA as a creditor is responsible for
the Good Faith Estimate of Closing Costs and the use of the
appropriate settlement statement in connection with the loan.
15. Appendix C to part 3500 is amended by revising the second
paragraph and the last paragraph before the footnotes; by revising the
heading in the second column of the chart to read ``HUD-1 or HUD-1A'';
and by removing the last sentence, beginning with ``A lender will
provide you'', in footnote 1, to read as follows:
Appendix C to Part 3500--Sample Form of Good Faith Estimate
* * * * *
The numbers listed beside the estimates generally correspond to
the numbered lines contained in the HUD-1 or HUD-1A settlement
statement that you will be receiving at settlement. The HUD-1 or
HUD-1A settlement statement will show you the actual cost for items
paid at settlement.
* * * * *
These estimates are provided pursuant to the Real Estate
Settlement Procedures Act of 1974, as amended (RESPA). Additional
information can be found in the HUD Special Information Booklet,
which is to be provided to you by your mortgage broker or lender, if
your application is to purchase residential real property and the
Lender will take a first lien on the property.
* * * * *
Dated: February 4, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 94-3035 Filed 2-9-94; 8:45 am]
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