[Federal Register Volume 59, Number 242 (Monday, December 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30413]


[[Page Unknown]]

[Federal Register: December 19, 1994]


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Part IV





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner



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24 CFR Parts 203 and 3500




Real Estate Settlement Procedures Act, Section 6, Transfer of Servicing 
of Mortgage Loans and Real Estate Settlement Procedures Act (Regulation 
X); Escrow Accounting Procedures; Technical Correction; Final Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Parts 203 and 3500

[Docket Nos. R-94-1538; FR-2942-F-04 and R-94-1688; FR-3255-F-04]
RIN: 2502-AG27

 
Real Estate Settlement Procedures Act, Section 6, Transfer of 
Servicing of Mortgage Loans (Regulation X); and Real Estate Settlement 
Procedures Act (Regulation X); Escrow Accounting Procedures; Technical 
Correction

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, (HUD).

ACTION: Final rule.

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SUMMARY: This final rule replaces the Interim Rule dated April 26, 
1991, and implements the provisions of section 6 of the Real Estate 
Settlement Procedures Act (RESPA). Most recently, the Riegle Community 
Development and Regulatory Improvement Act of 1994 provides alternate 
methods for disclosure of mortgage servicing history. Section 6 also 
sets forth procedures regarding the transfer of mortgage servicing for 
any federally related mortgage loan, as defined in section 3 of RESPA 
and the definition is refined in the implementing regulation for RESPA 
and 24 CFR 3500.2. Although RESPA was extended by section 908 of the 
Housing and Community Development Act of 1992 to subordinate liens, in 
this rule the Secretary has exempted from RESPA's mortgage servicing 
coverage all federally related mortgage loans that are not secured by a 
first lien. In addition, the Department has adopted conforming 
amendments to 24 CFR part 203, the FHA Single Family Mortgage Insurance 
program.
    The Department is also publishing a conforming amendment to its 
final rule on escrow accounting procedures, published on October 26, 
1994 (59 FR 53890). This amendment will update a cross-reference in 
another section of part 3500 that references enforcement of escrow 
accounting provisions.

EFFECTIVE DATE: June 19, 1995.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, RESPA 
Staff, Room 5239, Department of Housing and Urban Development, 451 7th 
Street SW., Washington, D.C. 20410, telephone (202) 708-4560. The TDD 
number for hearing-impaired persons is (202) 708-4594. (These are not 
toll-free numbers.)

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Statement

    The information collection requirements contained in this 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. 3504(h)), and 
assigned OMB control number 2502-0458.

Justification for Final Rulemaking--Part 203

    In general, the Department publishes a rule for public comment 
before issuing a rule for effect, in accordance with its own 
regulations on rulemaking, 24 CFR part 10. However, part 10 does 
provide for exceptions from that general rule where the agency finds 
good cause to omit advance notice and public participation. The good 
cause requirement is satisfied when prior public procedure is 
``impracticable, unnecessary, or contrary to the public interest.'' (24 
CFR 10.1) The Department finds that good cause exists to publish for 
effect without first soliciting public comment the sections of this 
rule that pertain to 24 CFR part 203, and that prior public procedure 
is unnecessary because those portions of this rule merely conform part 
203 to the provisions of Section 6 of the Real Estate Settlement 
Procedures Act of 1974 (12 U.S.C. 2605) that have been developed 
through notice and comment rulemaking.

Background

    Section 941 of the Cranston-Gonzalez National Affordable Housing 
Act (Pub. L. 101-625, approved November 28, 1990) amended the Real 
Estate Settlement Procedures Act of 1974, 12 U.S.C. 2601 et seq. 
(RESPA), by adding a new section 6, which addresses mortgage servicing 
requirements (i.e., the right to collect mortgage payments for 
principal, interest, and any escrow account items). Section 6 (12 
U.S.C. 2605) requires disclosure to certain mortgage loan applicants of 
historical data regarding the transfer of mortgage servicing, as well 
as estimates regarding the potential transfer of servicing pertaining 
to the applicant's mortgage loan and other mortgage loans. Section 6 
was further amended on April 10, 1991, by Dire Emergency Supplemental 
Appropriations Act (Pub. L. 102-27), to create a transition period 
during which lenders and servicers would not be liable for violations 
of the Act. This amendment also directed HUD to publish implementing 
regulations effective no later than April 20, 1991. On April 26, 1991, 
the Department published an Interim Rule implementing Section 6 (56 FR 
19505). That rule remains in effect until it is replaced by this final 
rule.
    Section 6 requires that, at the time of application for federally 
related mortgage loans, applicants be given information in a disclosure 
statement (hereafter called ``Servicing Disclosure Statement'') 
concerning the likelihood that the servicing of their mortgage may be 
transferred and information regarding the history of mortgage servicing 
transfers of the person making the loan. Section 6 sets forth 
additional notice requirements at the time of a servicing transfer 
(hereafter called ``Notice of Transfer'') and other rights for 
borrowers, and provides for the collection of damages and costs by 
borrowers from servicers for noncompliance. Finally, section 6 preempts 
any State law or regulation regarding notice to borrowers at the time 
of application or servicing transfer, as long as the lender or servicer 
complies with the relevant provisions of section 6.
    HUD originally complied with the requirements to promulgate a model 
disclosure statement and applicant's acknowledgement by publication of 
a notice in the Federal Register on March 20, 1991 (56 FR 11886). These 
requirements were restated in an Interim Rule of April 26, 1991 (56 FR 
19505). HUD encourages persons covered by this new rule to implement 
its provisions earlier than its effective date. (The Department also 
recently published a related rule on escrow accounting procedures under 
section 10 of RESPA (59 FR 53890, October 26, 1994).

Comments on Interim Rule and Responses

    In the interim rule the Department requested comments on the 
provisions of the rule. The following is a summary of comments received 
and HUD's position on the issues in the final rule.

Questions Regarding Definitions

    Business day. There were two comments about the definition of 
``business day.'' Both recommended that the definition be put in 
Sec. 3500.2, so that it would apply to the entire regulation, and that 
it be the same definition in Regulation X and Regulation Z (Truth in 
Lending).
    HUD response. The current RESPA rule defines a ``business day'' 
utilizing language conforming with the definition in Regulation Z, 
which implements the Truth in Lending Act. Section 6 of RESPA does not 
specifically define ``business day'', but in certain provisions 
excludes public holidays, Saturdays, and Sundays from references to 
``days''. To assure uniform statutory construction, as well as to 
continue uniformity with related Federal regulatory statutes, the 
Department is applying the ``business day'' definition of the 
Regulation X in this rule. Therefore, business day means a day on which 
the offices of the business entity are open to the public for carrying 
on substantially all of the entity's business functions. If a day is 
not specified as a business day in this rule, the reference is to a 
calendar day.
    Effective date of transfer. There were three comments on this 
definition. One commenter approved of the definition because the date 
was pinpointed. Another commenter disagreed and considered the date 
indefinite, particularly as it relates to delinquent mortgages. The 
third thought the effective date of transfer should be the date the 
contract between the parties states that the transfer takes place.
    HUD response. The term ``effective date of transfer'' is defined in 
Section 6 of the Act as the date on which the mortgage payment of a 
borrower is first due to the transferee servicer (new servicer) 
pursuant to the assignment, sale, or transfer of the servicing of the 
mortgage loan. The statute controls and HUD does not have discretion to 
consider the suggested alternatives.
    Mortgage servicing loan. The Department received several comments 
regarding the extent and limitations of coverage under this rule. The 
term ``federally related mortgage loan'' was the starting point for 
delineating coverage and is defined in Sec. 3500.2, subject to the 
exemptions in Sec. 3500.5. Pursuant to section 19(a) of RESPA, at this 
time the Secretary has exempted from the requirements of this rule any 
subordinate lien federally related mortgage loans and has excluded all 
open-end lines of credit (home equity plans), whether secured by a 
first or subordinate lien, that are covered under the Truth in Lending 
Act and Regulation Z. The penalty provisions of the Truth in Lending 
Act are similar to those of Section 6 of RESPA, and the error 
resolution section of Regulation Z (12 CFR 226.13) provides protections 
similar to Section 6 of RESPA. Any other federally related mortgage 
loan secured by a first lien and not exempted under Sec. 3500.5, is 
covered by these requirements and called a ``mortgage servicing loan.''

Other Terms

    Four commenters asked for definitions of additional terms. One 
commenter suggested that ``loans made'' be distinguished from ``loans 
originated'', and that ``servicing transfer'' be defined.
    HUD response. The terms ``loans made'' and ``loans originated'' are 
synonymous, but the Department agrees that consistent use of 
terminology would avoid confusion and, therefore, has eliminated the 
term ``loans made.'' HUD considers a ``servicing transfer'' to be a 
sale, assignment, or transfer of servicing to a person or legal entity 
other than the maker of the loan named in the legal documents. Also, as 
discussed more fully later in this preamble, a servicing transfer 
occurs as part of a table-funding (defined in Sec. 3500.2) between the 
mortgage broker, as transferor, and the funding lender, as transferee.

Refinancing Transactions

    The Department received 18 comments relating to refinancing 
transactions. Seven commenters recommended that refinancing be defined. 
Three commenters questioned the statutory authority for covering 
refinancing transactions. Since HUD received these comments, the 
Housing and Community Development Act of 1992 amended RESPA to state 
specifically that refinancing transactions are covered. A definition of 
refinancing was added to part 3500 in revisions published on February 
10, 1994 (59 FR 6505, concerning subordinate liens), and is applicable 
to this section. The impact of this definition is that transactions 
specifically excluded from the definition of refinancing do not require 
new disclosures.

Questions Involving State Law Preemption

    One commenter asked about the effect of Section 6 on State laws. 
While Section 18 of RESPA (12 U.S.C. 2616) sets forth general 
provisions regarding preemption, Section 6 contains its own preemption 
provision.
    The Secretary believes that one of the significant achievements of 
Section 6 was the elimination of perceived difficulties in the 
marketing of servicing rights for mortgage loans originated in various 
States. In part, Section 6 constituted a recognition of the de facto 
national market for mortgages and mortgage servicing and represented an 
attempt to facilitate such a market by establishing uniform standards. 
Therefore, Section 6 is determinative of the information required for 
the Servicing Disclosure Statement and the Notice(s) of Transfer; any 
other similar State requirements are preempted. Other provisions of 
State laws, such as those requiring additional notices to insurance 
companies or taxing authorities are not preempted by Section 6 or this 
rule. If permitted under State law, such additional information may be 
added to a notice prepared under this section.

Requests for Exemption

    (1) Nine commenters requested that their institutions be exempted 
from providing Servicing Disclosure Statements, either because they 
were not institutions that transferred servicing or because they were 
chartered to make certain public purpose loans. Another commenter 
wanted an exemption for lenders that always transfer loans at closing; 
three commenters requested an exemption for lenders that do not sell 
the servicing rights.
    HUD response. While the Secretary has the authority to create 
classes of exemptions under Section 19 of RESPA, no commenter advanced 
a reason that would justify an exempted class. The Servicing Disclosure 
Statement is particularly appropriate when a lender always transfers 
loans at closing. When a servicer never sells servicing rights, it can 
simply state that fact. In any event, the information relating to 
complaint resolution must be provided, although lenders that do not 
transfer servicing may incorporate this information into the HUD-1 or 
HUD-1A. HUD amended the Servicing Disclosure Statement to include a 
sentence in the heading suggesting that a borrower save the statement 
if a loan is approved and to include alternate language regarding the 
history of mortgage servicing transfers that is allowed under the 1994 
amendments of Section 6.
    (2) In the event a lender changes its policy and begins to sell the 
servicing, a commenter suggested that these lenders have to follow the 
rule within six months after beginning sale of servicing.
    HUD response. When a lender determines that it will sell servicing, 
the lender will be subject to the requirement that it furnish to the 
borrower a 15-day Notice of Transfer. The lender may also be required 
to revise its Servicing Disclosure Statement at the next calendar year 
revision. There is no obligation to send an amended Servicing 
Disclosure Statement for previously closed loans at the time of the 
sale of servicing; the 15-day Notice of Transfer provides the required 
information.
    (3) Three commenters suggested that mortgage brokers should be 
exempt from furnishing the Servicing Disclosure Statement, because 
furnishing the Statement is the obligation of the funding lender. 
However, another commenter suggested that a face-to-face meeting with 
the mortgage broker should satisfy the face-to-face meeting requirement 
for a lender. Two other commenters stated that the time (3 business 
days) should begin to run after the lender receives the written 
application from another party.
    HUD response. The general rule is that the Servicing Disclosure 
Statement shall be provided within 3 days of receipt of the borrower's 
written loan application, unless the application for credit is turned 
down within that time. If an application is received by a mortgage 
broker that will close the loan in its own name using table funding, 
the table funding mortgage broker is to provide the Servicing 
Disclosure Statement, using the ``we do not service mortgage loans'' 
optional language in Sec. 3500.21(b)(4). Similarly, for first-lien 
dealer loans, the dealer should provide the Servicing Disclosure 
Statement, using the ``we do not service mortgage loans'' optional 
language.
    (4) A commenter questioned whether a Servicing Disclosure Statement 
is required when the mortgage servicing function is transferred to an 
affiliated entity. A question was also posited as to how to treat a 
circumstance when a lender had a program that always sold servicing and 
another where no servicing was required.
    HUD response. A Notice of Transfer generally is required when there 
is a transfer of servicing between or to affiliates, unless there are 
no substantial changes in the way the borrower makes payments (see 
discussion below). However, the information regarding affiliate or 
subsidiary transfers is not required to be included in the statistical 
computations found in the Servicing Disclosure Statement. In the 
interest of full disclosure, this information may be provided 
voluntarily; the model format allows for this disclosure. If the lender 
is providing the historical data, the lender should indicate whether 
the Servicing Disclosure Statement includes assignments, sales or 
transfers to affiliates or subsidiaries. When the lender has a variety 
of programs, some of which sell servicing and some of which do not, 
information may be added to the model format to allow the servicer to 
describe this situation, or some variation of this situation. Further, 
while the use of the acknowledgment is mandatory, the use of the model 
format is not, and the incorporation in a footnote or otherwise of 
reasonable additional information, to describe situations that do not 
fit conveniently into the format is anticipated and expected. Sample 
language describing other alternative situations has been included with 
the model format.
    (5) Several commenters discussed proposed variations to the 
Servicing Disclosure Statement. These variations included permitting a 
lender to: (i) state its reasons for servicing or not servicing loans; 
(ii) identify the types of loans it services and, by the percentages of 
each type of loan transferred, the types of loans it sells; and (iii) 
advise the borrower of the new servicer, if any, at settlement. One 
commenter suggested that Sec. 3500.21(c) contain a statement that the 
use of the sample language in the appendices be considered as 
compliance with the disclosure requirements of that paragraph. Fifteen 
commenters recommended that lenders should not be required to obtain 
written acknowledgements of the Servicing Disclosure Statement from 
loan applicants whose applications are rejected or withdrawn. One 
commenter recommended that actual percentages be used rather than 
rounding to the nearest quartile. Commenters also requested that HUD 
permit longer than 31 days to calculate the percentage after the end of 
the calendar year.
    HUD response. The elements contained in the rule and Servicing 
Disclosure Statement comply with the Secretary's mandate under Section 
6 of RESPA. The Secretary is required to develop a disclosure statement 
that would notify applicants for federally related mortgage loans about 
the servicing procedures, transfer practices and requirements, and the 
available complaint resolution process. In addition, the Secretary must 
develop an acknowledgement that the disclosure has been read and 
understood, as evidenced by signatures of the applicants when such a 
statement appears in the application. As in the interim rule, the 
Secretary has determined that is in the applicant's best interest for 
the signature to be at the end of the Servicing Disclosure Statement, 
because this directs the applicant's attention particularly to the 
servicing transfer issue.
    While the precise wording of the Servicing Disclosure Statement is 
left to the lender's discretion, HUD presumes that lenders will use the 
sample language in developing their own forms. However, HUD will not 
give blanket approval to forms that it has not seen; the lender must 
determine the appropriate language to make proper disclosure to the 
borrower. Only the language in the model Applicant's Acknowledgement is 
mandatory and must be followed precisely.
    Even though the Department believes that most lenders will use the 
simpler alternative language allowed by the Riegle Community 
Development and Regulatory Improvement Act of 1994 (Pub. L. 103-325, 
approved September 23, 1994), the Department has adopted the suggestion 
of permitting a longer time for computation of the previous year's 
percentages. The final rule allows the lender to calculate the 
percentages no later than the end of the first quartile in the next 
calendar year (March 31). Under his Section 19 authority, the Secretary 
has also created an exemption to the disclosure requirement, including 
the signed acknowledgment, if an applicant is turned down for credit 
within three business days of receipt of the application. This 
exemption makes all the mortgage servicing notice provisions consistent 
with good faith estimate amendments in section 951 of the Housing and 
Community Development Act of 1992.

Merger and/or Acquisition of Servicing

    (1) Several commenters asked various questions as to what 
disclosures were necessary when a servicer buys another servicer, with 
or without changing the servicer's name, or merges one servicer into 
another servicer. In addition, two comments concerned the functions of 
``master servicers'' and ``subservicers.'' The entity holding servicing 
rights is frequently called the ``master servicer,'' and the entity 
performing the actual servicing is called the ``subservicer''. Two 
situations were posited: first, the rights to servicing are sold, but 
the subservicer remains the same. Second, the subservicer changes, but 
the master servicer remains the same.
    HUD response. The controlling consideration in whether a Notice of 
Transfer must be delivered for a sale, transfer, or assignment is 
whether there is a significant change of servicing that potentially 
affects the borrower. In ordinary transfers of servicing between 
distinct entities, the Notice of Transfer is always required. In 
certain other situations--e.g., transfers between affiliates, transfers 
because a servicer or subservicer is bought or merged into another 
entity, and transfers between master servicers when the subservicer 
stays the same and when the subservicer changes--a Notice of Transfer 
is required unless there is no change in the payee, the collection 
address, account number, or the amount of the payment.
    (2) Six commenters suggested that when there are multiple 
applicants, it should be sufficient for the lender to give the 
Servicing Disclosure Statement to one of the co-applicants in a face-
to-face interview. One commenter requested that a co-signer not be 
considered as a person who applies for a loan, therefore obviating the 
need for the co-signer to receive a Servicing Disclosure Statement. 
Another commenter asked how long a lender must keep co-signers' 
signatures on file.
    HUD response. Delivery of a single Servicing Disclosure Statement 
in a face-to-face meeting with one or more applicants is acceptable, 
and the Acknowledgement may be signed at that time. For each applicant 
or co-applicant who is not present, the Servicing Disclosure Statement 
may be delivered on his or her behalf to an applicant who is present, 
or may be mailed within 3 business days by first class mail, postage 
prepaid. While a co-signer might be an integral party to the 
transaction, a co-signer is primarily interested in timely payments of 
the mortgage, not in who holds the mortgage servicing. Therefore, a co-
signer's acknowledgment is not required.
    The signed acknowledgments are to be in the loan package. 
Consistent with other record-retention requirements of part 3500, the 
lender must keep the signed acknowledgments for five years after the 
date of settlement of the loan unless the lender disposes of its 
interest in the loan and does not service the mortgage. In this case, 
the Servicing Disclosure Statement would be part of the transferred 
loan file.
    (3) One comment suggested that requiring prepaid, first-class 
postage for a Servicing Disclosure Statement that is mailed is 
unnecessary, costly, and inconsistent with the disclosure mailed in 
compliance with the Truth in Lending and Equal Credit Opportunity Acts. 
If the transaction is handled by mail, one commenter suggested, the 
period of three business days should begin only after the lender 
receives a written application from the borrower.
    HUD response. The use of prepaid, first-class mail is common 
business practice. The practice reasonably assures that the borrower 
will receive the Servicing Disclosure Statement and, thus, affords 
protection to those responsible for delivering the statement. The 3-
business day period begins only when the application is received.
    (4) Four commenters suggested that lenders be permitted to include 
in the Servicing Disclosure Statement a statement that ``the loan 
cannot be funded unless the acknowledgements are signed and returned.'' 
One commenter asked that no follow-up correspondence be required if the 
lender has provided the Servicing Disclosure Statement to the borrower 
and the borrower has not returned a signed Acknowledgement.
    HUD response. The Department has deleted in this final rule the 
provision that no loan should be funded unless the signed 
Acknowledgement was contained in the loan package. HUD has determined 
that there is sufficient oversight by regulators and secondary market 
purchasers, and no overriding reason to highlight the Servicing 
Disclosure Statement over any other required statement. However, the 
Acknowledgement is still required to be a part of the loan package. The 
Department has also eliminated the mandatory follow-up requirement that 
was included in the interim rule.
    (5) One commenter stated that if the servicing is always sold, 
transferred, or assigned, there is not a ``present servicer'' or a 
``new servicer'' at the time of application for the loan. The model 
language of the Notice of Transfer indicates that the borrower will be 
informed about the servicer, but the language fails to state when and 
in what format the borrower will receive this information.
    HUD response. The Department disagrees with the content of this 
comment. Whoever sells, transfers, or assigns a federally related 
mortgage loan is considered the present servicer and is called the 
``transferor servicer'' in this rule. The servicer that buys, is 
transferred, or is assigned the mortgage servicing function is the new 
servicer and is called the ``transferee servicer.'' A mortgage broker 
that closes a table-funded transaction in its own name is in the 
position of a transferor servicer. A dealer in a first lien dealer loan 
situation is also a transferor servicer. Appendix B of the interim rule 
presented sample language for the Notice of Transfer; the language is 
retained in substantial degree in this final rule. As with the 
Servicing Disclosure Statement, discretion is allowed concerning the 
exact wording of the Notice of Transfer, but the various elements that 
the notice must contain are detailed in Sec. 3500.21(e).
    (6) Two commenters requested clarification about who bears the 
primary responsibility for notifying the borrower of a transfer of 
servicing when the transferor and transferee choose to notify the 
borrower in a single, joint Notice of Transfer.
    HUD response. HUD believes that in normal business transactions, 
the timing and issuance of Notices of Transfer would be resolved as 
part of the purchase and sale agreement. If a joint notice is not 
feasible, both notices will be required.
    (7) Several commenters were concerned about the impact of the 
requirements on the servicer's ability to administer collection 
practices consistent with investor requirements. A commenter questioned 
whether a late payment could be assessed prior to the 60-day period if 
the payment had not been made to the transferee. Also, two commenters 
asked whether late fees due prior to the transfer could be assessed.
    HUD position. If within the 60-day period the borrower has 
mistakenly mailed a payment to the transferor instead of the 
transferee, a late fee may not be imposed. However, if neither the 
transferor nor the transferee has received a regularly scheduled 
payment within the 60-day period, or any longer applicable grace 
period, late payment charges may be assessed in accordance with the 
servicer's established practices. Late charges due from the borrower 
before the effective date of transfer of servicing are not covered by 
RESPA or this rule.

Questions Relating To Qualified Written Requests

    (1) Two comments addressed the type of information that HUD permits 
a borrower to include in a ``qualified written request.'' One commenter 
wished to limit the requirements to those inquiries asserting errors 
that have been caused by the transfer of servicing on a mortgage 
account. The other commenter wanted clarification on whether the 
requirements were limited to inquiries on payments and account 
balances. Another question concerned the length of time a servicer has 
to respond to qualified written requests after a loan is paid off or 
after servicing has been transferred.
    HUD response. The statute encompasses all information relating to 
the servicing of a mortgage loan and does not restrict the subject 
matter to questions concerning the transfer of servicing, installment 
payments, or account balances. For example, a written inquiry 
concerning a collection for or disbursement from an escrow account 
would be a qualified written request if the correspondence contains the 
required identifying elements. In Sec. 3500.21(f)(2), the Department 
establishes a 1-year period in which a qualified written request is 
valid after the date of loan pay-off or mortgage servicing transfer.
    (2) Three commenters were concerned about how written requests were 
received. One said that the regulations should state that ``a qualified 
written request'' must be mailed to an address supplied by the servicer 
in the coupon book or written correspondence and not the address for 
the mortgage payment. Another wanted to disregard requests that lacked 
the account number or were attached to the borrower's check, as 
distinguished from being placed in the same envelope. The third 
suggested that the regulations should specifically disqualify written 
inquiries that the borrower includes with the loan payment. A commenter 
suggested that the Department require a servicer to provide to the 
borrower information identifying the name and telephone number of a 
representative or the office or department of the servicer through 
which the borrower will receive assistance after submitting a qualified 
written request.
    HUD response. (i) This rule does not require that a servicer 
establish an office to handle borrowers' complaints. It does, however, 
allow the servicer to do so. In the event the servicer establishes such 
an office and complies with all the necessary notice provisions of this 
rule, then the borrower must deliver its request to that office in 
order for the inquiry to be a ``qualified written request'' (see the 
optional language in Appendix MS-2 to part 3500).
    (ii) If the servicer determines that a borrower's correspondence 
does not constitute a qualified written request (the most likely 
disqualification would be writing the inquiry on the payment coupon), 
the servicer should retain sufficient information to support its 
determination.
    (3) A commenter sought clarification of when the Department 
considers an inquiry to be resolved.
    HUD response. An inquiry is resolved when the servicer supplies the 
requested information or corrects an error. See, for example, 
Regulation Z, 12 U.S.C. 226.13(e) and (f) for similar complaint 
resolution provisions.
    (4) Eight commenters discussed the protection of the borrower's 
credit rating during a dispute. Most commenters asked whether a lender 
could provide payment information to a consumer reporting agency prior 
to the end of the 60-business day period if the dispute was resolved. 
Two commenters noted that a servicer would be in an unfair position if 
the servicer has previously reported a borrower's loan as past due and 
then is not allowed to report the payment. The commenters suggested 
that the servicer be permitted to advise the credit agency that the 
servicer is prohibited by law from providing additional information at 
that time. As a benefit to the borrower, one comment suggested that the 
servicer be allowed to report prior to the 60-business day period to 
clear a borrower's record. One commenter raised a question about 
whether a lender should assume that a third party is acting as the 
borrower's agent, or should require proof from the borrower of this 
delegation of authority. Furthermore, the commenter asked if the 20-
business day time-frame, in which the borrower must receive a written 
acknowledgement from the servicer, is calculated from when the request 
is received or when the servicer confirms that the third party is the 
borrower's agent.
    HUD response. HUD interprets the statute to mean that no adverse 
information relating to a borrower's overdue payment information may be 
provided to a credit reporting agency within the 60-day period after 
the servicing function is transferred, assigned, or sold or after the 
servicer receives a qualified written request for information. The 
statute is implemented by this rule in a manner that does not prohibit 
a servicer from reporting an improvement (such as a payment found or 
received) in the borrower's record within the 60 day period. It is the 
servicer's responsibility to determine whether it has sufficient 
information that a third party is acting as the borrower's agent or the 
borrower should verify the agent's representative capacity. When the 
servicer is in doubt as to the status of the third party, the written 
acknowledgement can also be mailed to the borrower to ask that the 
borrower verify the status of the third party.
    (5) One comment asked for clarification of whether the servicer was 
prohibited from reporting delinquencies unrelated to a dispute.
    HUD response. A servicer may report a delinquency to a credit 
reporting agency provided that the report does not concern a pending 
qualified written request, which questions the correctness of the 
account, or a loan payment sent by the borrower to the transferor, 
rather than the transferee, within 60 days after the servicing of the 
loan is transferred.
    (6) One commenter hypothesized a situation in which a borrower 
sends a qualified request in September concerning a late charge 
assessed on the March payment, yet the borrower has not made his April 
through August payments. Is the servicer prohibited from reporting 
these delinquencies in September, although they are unrelated to the 
March dispute?
    HUD position. The receipt of a qualified written request by the 
servicer determines when the 60-business day period begins. If the 
April through August delinquencies are caused by the problem or issue 
identified by the borrower in the request, adverse information related 
to all of these delinquencies may not be submitted or resubmitted, if 
previously reported. In this instance, the 60-business day period 
begins when the qualified written request is received in September. 
However, there is nothing in RESPA that prohibits the servicer from 
initiating foreclosure action, or taking other remedial actions under 
the applicable mortgage documents, against the mortgaged property based 
on the delinquent payments in March through August. The servicer's 
timing on initiating foreclosure action is governed by the provisions 
of the borrower's mortgage document.

Servicing Involving Certain Government-Related Agencies or Enterprises

    Section 6 provides that certain government or government-sponsored 
entities that have oversight or other relationships with servicers are 
not themselves servicers for purposes of Section 6. These entities 
include the Federal Deposit Insurance Corporation (FDIC) and the 
Resolution Trust Corporation (RTC) in connection with assets acquired, 
assigned, sold, or transferred pursuant to section 13(c) of the Federal 
Deposit Insurance Act or as receiver or conservator of an insured 
depository institution. Section 6 also makes provisions for certain 
circumstances involving mortgage servicing loans when government or 
government-sponsored entities have to deal with the termination for 
cause of the contract for servicing a loan or with the commencement of 
proceedings for bankruptcy of the servicer in a program involving such 
entity. In addition, in giving the transfer notice the statute also 
allows a delay of up to 30 days after the transfer of servicing. HUD 
believes that Congress exempted these entities from most mortgage 
servicing transfer requirements so as not to interfere with the 
fiduciary responsibilities of the entities with regard to protective 
actions needed to be taken by such entities, and not to create for such 
governmental entities potential liability that could inhibit the 
orderly transfer of servicing. Also, imposition of standard business 
requirements in troubled situations involving a fiduciary could 
adversely affect the underlying value of the related mortgage 
servicing. Because the rationales discussed above apply equally well to 
other Federal entities not specifically enumerated in Section 6(i)(2) 
of the Act, the Secretary has exercised his authority under Section 
19(a) of RESPA and has added certain other Federal agencies (HUD, 
including FHA; VA; NCUA; and FmHA) that might also be in a fiduciary 
position or need to protect a borrower in an otherwise covered mortgage 
loan situation.
    In addition, under Section 19 the Secretary has exempted FHA from 
having to provide the Notice of Transfer in those instances where the 
mortgage has been assigned (along with the servicing) to FHA for the 
payment of the mortgage insurance benefits pursuant to section 230 of 
the National Housing Act (12 U.S.C. 1715u). Under the assignment 
program, the mortgagor actively provides information to both the 
mortgagee and FHA in order to show that the mortgagor meets certain 
eligibility criteria. The assignment of the mortgage to FHA is not a 
business decision. Rather, it is a means by which eligible mortgagors 
can avoid foreclosure and keep their homes.
    Mortgagors are aware early on in the process that, if deemed 
eligible, HUD will become their mortgagee and servicer. HUD also 
accepts assignment of other single-family insured mortgage loans under 
certain specialty programs. These assignments are not comparable to the 
normal sale and purchase transactions that the mortgage servicing 
transfer provisions of Section 6 were designed to address. Thus, 
requiring HUD to provide the notice of transfer in cases where 
mortgages are assigned to HUD would not serve the purposes of Section 
6, and these assignments have been exempted under the Secretary's 
authority in Section 19.

Damages and Costs

    (1) The statute provides that whoever fails to comply with any 
provision of Section 6 shall be liable to the borrower. These damages 
include actual damages and, in an action brought by an individual, up 
to $1,000 for a pattern of noncompliance; in a class action, the 
additional damages may not exceed the lesser of $500,000 or 1% of the 
servicer's net worth.
    A commenter noted that ``actual damages'' should be clarified. If a 
servicer reported a debt to a credit bureau within the 60-business day 
proscribed period, and the borrower alleges that the reporting resulted 
in the borrower's inability to obtain credit, the servicer could be 
liable for damages, even if the report was correct. Therefore, the 
commenter suggested that to prove actual damages the borrower must 
show:
    (a) The servicer made the report to a credit company within the 
proscribed period;
    (b) The borrower was correct, the dispute was resolved in the 
borrower's favor; and
    (c) The borrower would have otherwise been approved for the credit.
    HUD position. If a servicer violates Sec. 3500.21(g) by reporting 
information on a borrower to a credit agency relating to a dispute 
regarding the borrower's payments within 60 business days of receiving 
a qualified written inquiry from the borrower, that servicer will be 
liable for all proven actual damages that the borrower suffered because 
of the servicer's action. Further, if a pattern of noncompliance can be 
established, the servicer may be liable to that borrower for additional 
damages not to exceed $1,000. The costs of the action and attorneys 
fees also can be recovered. The statute requires no qualifying criteria 
that the borrower must meet before actual damages may be sought from 
the servicer.
    (2) One commenter suggested that the date on the Servicing 
Disclosure Statement was unnecessary. Another commenter noted that the 
Acknowledgment Form requires the applicant to state that he has read 
and ``understands'' its contents; however, the commenter stated, this 
might create potential legal complications.
    HUD response. Since the servicer is liable for damages and costs, 
it is in the servicer's own interest to note, by dating the form, when 
the Servicing Disclosure Statement was given (or placed in the mail) to 
the borrower. In any event, the requirement is statutory and has been 
retained in the final rule. Similarly, the language concerning the 
applicant's understanding of the disclosure statement reflects the 
statute and follows common business practice.

Conforming Amendment to Escrow Rule

    The Department is also publishing a conforming amendment to its 
final rule on escrow accounting procedures, published on October 26, 
1994 (59 FR 53890).

Other Matters

Regulatory Flexibility Act

    Under 5 U.S.C. 605(b), the Regulatory Flexibility Act, the 
undersigned hereby certifies that this rule will not have a significant 
economic impact on a substantial number of small entities. HUD finds 
that there are no anticompetitive aspects of the interim rule that are 
discriminatory with regard to small entities nor are there any unusual 
procedures that would need to be complied with by small entities. In 
any event, by statute, the requirements of this rule must be adhered to 
by all lenders and servicers.

Environmental Impact

    At the time of publication of the interim 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). This final rule does not make changes to the interim rule 
that are significant in this context. 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 at the above address.

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, 
S.W., Washington, DC 20410-0500.

Executive Order 12616, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12616, Federalism, has determined that the policies 
contained in this regulation do not have significant federalism 
implications and, thus, are not subject to review under the Order. 
Issuance of the regulation does not change existing Federal, State or 
local governmental relationships, except that, under the statute, 
compliance with the disclosure provisions of this rule will preempt 
State law requirements dealing with identical subject matter. Given the 
lack of discretion pertaining to the preemption issue by the statute, 
further analysis of the federalism implications of the rule would serve 
no purpose.

Executive Order 12606, the Family

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12606, the Family, has determined that the policies 
contained in this regulation do not have a potential significant impact 
on family function, maintenance and general well being, and, thus, are 
not subject to review under the order.

Semiannual Agenda of Regulations

    This final rule was listed as Item No. 1813 on the Department's 
Semiannual Agenda of Regulations, published on November 14, 1994 (59 FR 
57632, 57659), as required by Executive Order 12866 and the Regulatory 
Flexibility Act.

List of Subjects

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

24 CFR Part 3500

    Consumer protection, Condominiums, Housing, Mortgages, Mortgage 
servicing, Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, parts 203 and 3500 of title 
24 of the Code of Federal Regulations are amended as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    1. The authority citation for part 203 is revised to read as 
follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b and 1715u; 42 U.S.C. 
3535(d).

    2. In Sec. 203.502, paragraph (b) is revised to read as follows:


Sec. 203.502   Responsibility for servicing.

* * * * *
    (b) Whenever servicing of any mortgage is transferred from one 
mortgagee or servicer to another, notice of the transfer of service 
shall be delivered:
    (1) By the transferor mortgagee or servicer:
    (i) To the mortgagor. The notification shall be delivered not less 
than 15 days before the effective date of the transfer and shall 
contain the information required in Sec. 3500.21(e)(2) of this title; 
and
    (ii) To the Secretary. This notification shall be delivered within 
15 days of the transfer, on a form approved by the Secretary; and
    (2) By the transferee mortgagee or servicer to the mortgagor. The 
notification shall be delivered not more than 15 days after the 
effective date of the transfer and shall contain the information 
required in Sec. 3500.21(e)(2) of this title.
    3. Section 203.508 is amended by adding a new paragraph (e), to 
read as follows:


Sec. 203.508   Providing information.

* * * * *
    (e) Each servicer of a mortgage shall deliver to the mortgagor a 
written notice of any assignment, sale, or transfer of the servicing of 
the mortgage. The notice must be sent in accordance with the provisions 
of Sec. 3500.21(e)(1) of this title and shall contain the information 
required by Sec. 3500.21(e)(2) of this title. Servicers must respond to 
mortgagor inquiries pertaining to the transfer of servicing in 
accordance with Sec. 3500.21(f) of this title.
* * * * *
    4. Section 203.554 is amended by adding a new paragraph (d), to 
read as follows:


Sec. 203.554   Enforcement of late charges.

* * * * *
    (d) During the 60-day period beginning on the effective date of 
transfer of the servicing of a mortgage, a late charge shall not be 
imposed on the mortgagor with respect to any payment on the loan. No 
payment shall be treated as late for any other purpose if the payment 
is received by the transferor servicer, rather than the transferee 
servicer that should receive the payment, before the due date 
(including any applicable grace period allowed under the mortgage 
documents) applicable to such payment.

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

    5. The authority citation for 24 CFR part 3500 continues to read as 
follows:

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

    6. Section 3500.2 is amended by revising the definition of 
``Business day'', to read as follows:


Sec. 3500.2   Definitions.

* * * * *
    Business day means a day on which the offices of the business 
entity are open to the public for carrying on substantially all of the 
entity's business functions.
* * * * *
    7. In Sec. 3500.19, paragraph (a) is amended by revising the second 
sentence, to read as follows:


Sec. 3500.19   Enforcement.

    (a) * * * Specific provisions for enforcing the escrow account 
statement provisions (12 U.S.C. 2609(c) and (d)) are set out in 
Sec. 3500.17. * * *
* * * * *
    8. A new Sec. 3500.21 is added, to read as follows:


Sec. 3500.21   Mortgage servicing transfers.

    (a) Definitions. As used in this section:
    Effective date of transfer means the date on which the mortgage 
payment of a borrower is first due to the transferee servicer of a 
mortgage servicing loan pursuant to the assignment, sale or transfer of 
the servicing of the mortgage servicing loan.
    Master servicer means the owner of the right to perform servicing, 
which may actually perform the servicing itself or may do so through a 
subservicer.
    Mortgage servicing loan means a federally related mortgage loan, as 
that term is defined in Sec. 3500.2, subject to the exemptions in 
Sec. 3500.5, when the mortgage loan is secured by a first lien. The 
definition does not include subordinate lien loans or open-end lines of 
credit (home equity plans) covered by the Truth in Lending Act and 
Regulation Z, including open-end lines of credit secured by a first 
lien.
    Qualified written request means a written correspondence from the 
borrower to the servicer prepared in accordance with paragraph (f)(2) 
of this section.
    Servicer means the person responsible for the servicing of a loan 
(including the person who makes or holds a loan if such person also 
services the loan). The term does not include:
    (1) The Federal Deposit Insurance Corporation (FDIC) or the 
Resolution Trust Corporation (RTC), in connection with assets acquired, 
assigned, sold, or transferred pursuant to section 13(c) of the Federal 
Deposit Insurance Act or as receiver or conservator of an insured 
depository institution; or
    (2) The Federal National Mortgage Corporation (FNMA); the Federal 
Home Loan Mortgage Corporation (Freddie Mac); the Resolution Trust 
Corporation (RTC); the Federal Deposit Insurance Corporation (FDIC); 
the Department of Housing and Urban Development (HUD), including the 
Government National Mortgage Association (GNMA) and the Federal Housing 
Administration (FHA); the National Credit Union Administration (NCUA); 
the Farmers Home Administration (FmHA); and the Department of Veterans 
Affairs (VA), in any case in which the assignment, sale, or transfer of 
the servicing of the mortgage servicing loan is preceded by termination 
of the contract for servicing the loan for cause, commencement of 
proceedings for bankruptcy of the servicer, or commencement of 
proceedings by the FDIC or RTC for conservatorship or receivership of 
the servicer (or an entity by which the servicer is owned or 
controlled).
    (3) The Federal Housing Administration (FHA), in cases where a 
mortgage insured under the National Housing Act is assigned to HUD.
    Servicing means receiving any scheduled periodic payments from a 
borrower pursuant to the terms of any mortgage servicing loan, 
including amounts for escrow accounts under section 10 of RESPA, and 
making the payments to the owner of the loan or other third parties of 
principal and interest and such other payments with respect to the 
amounts received from the borrower as may be required pursuant to the 
terms of the mortgage servicing loan documents or servicing contract. 
In the case of a home equity conversion mortgage or reverse mortgage as 
defined in Sec. 3500.2, servicing includes making payments to the 
borrower.
    Subservicer means a servicer who does not own the right to perform 
servicing, but who does so on behalf of the master servicer.
    Transferee servicer means a servicer who obtains or who will obtain 
the right to perform servicing functions pursuant to an agreement or 
understanding.
    Transferor servicer means a servicer, including a table funding 
mortgage broker or dealer on a first lien dealer loan, who transfers or 
will transfer the right to perform servicing functions pursuant to an 
agreement or understanding.
    (b) Servicing Disclosure Statement and Applicant Acknowledgement; 
requirements. (1) At the time an application for a mortgage servicing 
loan is submitted, or within 3 business days after submission of the 
application, the lender, mortgage broker who anticipates using table 
funding, or dealer who anticipates a first lien dealer loan shall 
provide to each person who applies for such a loan a Servicing 
Disclosure Statement. This requirement shall not apply when the 
application for credit is turned down within three business days after 
receipt of the application. A format for the Servicing Disclosure 
Statement appears as Appendix MS-1 to this part. Except as provided in 
paragraph (b)(2) of this section, the specific language of the 
Servicing Disclosure Statement is not required to be used, but the 
Servicing Disclosure Statement must include the information set out in 
paragraph (b)(3) of this section, including the statement of the 
borrower's rights in connection with complaint resolution. The 
information set forth in Instructions to Preparer on the Servicing 
Disclosure Statement need not be included on the form given to 
applicants, and material in square brackets is optional or alternative 
language.
    (2) The Applicant's Acknowledgement portion of the Servicing 
Disclosure Statement in the format stated is mandatory. Additional 
lines may be added to accommodate more than two applicants.
    (3) The Servicing Disclosure Statement must contain the following 
information, except as provided in paragraph (b)(3)(ii) of this 
section:
    (i) Whether the servicing of the loan may be assigned, sold or 
transferred to any other person at any time while the loan is 
outstanding. If the lender, table funding mortgage broker, or dealer in 
a first lien dealer loan does not engage in the servicing of any 
mortgage servicing loans, the disclosure may consist of a statement to 
the effect that there is a current intention to assign, sell, or 
transfer servicing of the loan.
    (ii) The percentages (rounded to the nearest quartile (25%)) of 
mortgage servicing loans originated by the lender in each calendar year 
for which servicing has been assigned, sold, or transferred for such 
calendar year. Compliance with this paragraph (b)(3)(ii) is not 
required if the lender, table funding mortgage broker, or dealer on a 
first lien dealer loan chooses option B in the model format in 
paragraph (b)(4) of this section, including in square brackets the 
language ``[and have not serviced mortgage loans in the last three 
years.]''. The percentages shall be provided as follows:
    (A) This information shall be set out for the most recent three 
calendar years completed, with percentages as of the end of each year. 
This information shall be updated in the disclosure no later than March 
31 of the next calendar year. Each percentage should be obtained by 
using as the numerator the number of mortgage servicing loans 
originated during the calendar year for which servicing is transferred 
within the calendar year and, as the denominator, the total number of 
mortgage servicing loans originated in the calendar year. If the volume 
of transfers is less than 12.5 percent, the word ``nominal'' or the 
actual percentage amount of servicing transfers may be used.
    (B) This statistical information does not have to include the 
assignment, sale, or transfer of mortgage loan servicing by the lender 
to an affiliate or subsidiary of the lender. However, lenders may 
voluntarily include transfers to an affiliate or subsidiary. The lender 
should indicate whether the percentages provided include assignments, 
sales, or transfers to affiliates or subsidiaries.
    (C) In the alternative, if applicable, the following statement may 
be substituted for the statistical information required to be provided 
in accordance with paragraph (b)(3)(ii) of this section: ``We have 
previously assigned, sold, or transferred the servicing of federally 
related mortgage loans.''
    (iii) The best available estimate of the percentage (0 to 25 
percent, 26 to 50 percent, 51 to 75 percent, or 76 to 100 percent) of 
all loans to be made during the 12-month period beginning on the date 
of origination for which the servicing may be assigned, sold, or 
transferred. Each percentage should be obtained by using as the 
numerator the estimated number of mortgage servicing loans that will be 
originated for which servicing may be transferred within the calendar 
year and, as the denominator, the estimated total number of mortgage 
servicing loans that will be originated in the calendar year.
    (A) If the lender, mortgage broker, or dealer anticipates that no 
loan servicing will be sold during the calendar year, the word ``none'' 
may be substituted for ``0 to 25 percent.'' If it is anticipated that 
all loan servicing will be sold during the calendar year, the word 
``all'' may be substituted for ``76 to 100 percent.''
    (B) This statistical information does not have to include the 
estimated assignment, sale, or transfer of mortgage loan servicing to 
an affiliate or subsidiary of that person. However, this information 
may be provided voluntarily. The Servicing Disclosure Statements should 
indicate whether the percentages provided include assignments, sales or 
transfers to affiliates or subsidiaries.
    (iv) The information set out in paragraphs (d) and (e) of this 
section.
    (v) A written acknowledgement that the applicant (and any co-
applicant) has/have read and understood the disclosure, and understand 
that the disclosure is a required part of the mortgage application. 
This acknowledgement shall be evidenced by the signature of the 
applicant and any co-applicant.
    (4) The following is a model format, which includes several 
options, for complying with the requirements of paragraph (b)(3) of 
this section. The model format may be annotated with additional 
information that clarifies or enhances the model language. The lender 
or table funding mortgage broker (or dealer) should use the language 
that best describes the particular circumstances.
    (i) Model Format: The following is the best estimate of what will 
happen to the servicing of your mortgage loan:
    (A) Option A. We may assign, sell, or transfer the servicing of 
your loan while the loan is outstanding. [We are able to service your 
loan[.][,] and we [will] [will not] [haven't decided whether to] 
service your loan.]; or
    (B) Option B. We do not service mortgage loans[.][,] [and have not 
serviced mortgage loans in the past three years.] We presently intend 
to assign, sell, or transfer the servicing of your mortgage loan. You 
will be informed about your servicer.
    (C) As appropriate, the following paragraph may be used:

    We assign, sell, or transfer the servicing of some of our loans 
while the loans are outstanding, depending on the type of loan and 
other factors. For the program for which you have applied, we expect 
to [assign, sell, or transfer all of the mortgage servicing][retain 
all of the mortgage servicing] [assign, sell, or transfer ____% of 
the mortgage servicing].

    (ii) [Reserved]
    (c) Servicing Disclosure Statement and Applicant Acknowledgement; 
delivery. The lender, table funding mortgage broker, or dealer that 
anticipates a first lien dealer loan shall deliver Servicing Disclosure 
Statements to each applicant for mortgage servicing loans. Each 
applicant or co-applicant must sign an Acknowledgement of receipt of 
the Servicing Disclosure Statement before settlement.
    (1) In the case of a face-to-face interview with one or more 
applicants, the Servicing Disclosure Statement shall be delivered at 
the time of application. An applicant present at the interview may sign 
the Acknowledgment on his or her own behalf at that time. An applicant 
present at the interview also may accept delivery of the Servicing 
Disclosure Statement on behalf of the other applicants.
    (2) If there is no face-to-face interview, the Servicing Disclosure 
Statement shall be delivered by placing it in the mail, with prepaid 
first-class postage, within 3 business days from receipt of the 
application. If co-applicants indicate the same address on their 
application, one copy delivered to that address is sufficient. If 
different addresses are shown by co-applicants on the application, a 
copy must be delivered to each of the co-applicants.
    (d) Notices of Transfer; loan servicing. (1) Requirement for 
notice. (i) Except as provided in this paragraph or paragraph 
(d)(1)(ii) of this section, each transferor servicer and transferee 
servicer of any mortgage servicing loan shall deliver to the borrower a 
written Notice of Transfer, containing the information described in 
paragraph (d)(3) of this section, of any assignment, sale, or transfer 
of the servicing of the loan. The following transfers are not 
considered an assignment, sale, or transfer of mortgage loan servicing 
for purposes of this requirement if there is no change in the payee, 
address to which payment must be delivered, account number, or amount 
of payment due:
    (A) Transfers between affiliates;
    (B) Transfers resulting from mergers or acquisitions of servicers 
or subservicers; and
    (C) Transfers between master servicers, where the subservicer 
remains the same.
    (ii) The Federal Housing Administration (FHA) is not required under 
paragraph (d) of this section to submit to the borrower a Notice of 
Transfer in cases where a mortgage insured under the National Housing 
Act is assigned to FHA.
    (2) Time of notice. (i) Except as provided in paragraph (d)(2)(ii) 
of this section:
    (A) The transferor servicer shall deliver the Notice of Transfer to 
the borrower not less than 15 days before the effective date of the 
transfer of the servicing of the mortgage servicing loan; and
    (B) The transferee servicer shall deliver the Notice of Transfer to 
the borrower not more than 15 days after the effective date of the 
transfer.
    (C) The transferor and transferee servicers may combine their 
notices into one notice, which shall be delivered to the borrower not 
less than 15 days before the effective date of the transfer of the 
servicing of the mortgage servicing loan.
    (ii) The Notice of Transfer shall be delivered to the borrower by 
the transferor servicer or the transferee servicer not more than 30 
days after the effective date of the transfer of the servicing of the 
mortgage servicing loan in any case in which the transfer of servicing 
is preceded by:
    (A) Termination of the contract for servicing the loan for cause;
    (B) Commencement of proceedings for bankruptcy of the servicer; or
    (C) Commencement of proceedings by the Federal Deposit Insurance 
Corporation (FDIC) or the Resolution Trust Corporation (RTC) for 
conservatorship or receivership of the servicer or an entity that owns 
or controls the servicer.
    (iii) Notices of Transfer delivered at settlement by the transferor 
servicer and transferee servicer, whether as separate notices or as a 
combined notice, will satisfy the timing requirements of paragraph 
(d)(2) of this section.
    (3) Notices of Transfer; contents. The Notices of Transfer required 
under paragraph (d) of this section shall include the following 
information:
    (i) The effective date of the transfer of servicing;
    (ii) The name, payment amount, and consumer inquiry addresses 
(including, at the option of the servicer, a separate address where 
qualified written requests must be sent), and a toll-free or collect-
call telephone number of the transferee servicer;
    (iii) A toll-free or collect-call telephone number for an employee 
or department of the servicer that can be contacted by the borrower for 
answers to servicing transfer inquiries;
    (iv) The date on which the transferor servicer will cease to accept 
payments relating to the loan and the date on which the transferee 
servicer will begin to accept such payments. These dates shall either 
be the same or consecutive days;
    (v) Information concerning any effect the transfer may have on the 
terms or the continued availability of mortgage life or disability 
insurance, or any other type of optional insurance, and any action the 
borrower must take to maintain coverage; and
    (vi) A statement that the transfer of servicing does not affect any 
other term or condition of the mortgage documents, other than terms 
directly related to the servicing of the loan.
    (4) Notices of Transfer; sample notice. Sample language that may be 
used to comply with the requirements of paragraph (d) of this section 
is set out in Appendix MS-2 of this part. Minor modifications to the 
sample language may be made to meet the particular circumstances of the 
servicer, but the substance of the sample language shall not be omitted 
or substantially altered.
    (5) Consumer protection during transfer of servicing. During the 
60-business day period beginning on the effective date of transfer of 
the servicing of a mortgage servicing loan, a late fee may not be 
imposed on the borrower with respect to any payment on the loan. In 
addition, a payment made within that time by the borrower may not be 
treated as late for any other purposes if the payment is received by 
the transferor servicer, rather than by the transferee servicer, before 
the due date (including any applicable grace period allowed under the 
mortgage documents) applicable to the payment.
    (e) Duty of loan servicer to respond to borrower inquiries. (1) 
Notice of receipt of inquiry. Within 20 business days of a servicer of 
a mortgage servicing loan receiving a qualified written request from 
the borrower for information relating to the servicing of the loan, the 
servicer shall provide to the borrower a written response acknowledging 
receipt of the qualified written response. This requirement shall not 
apply if the action requested by the borrower is taken within that 
period and the borrower is notified of that action in accordance with 
the paragraph (f)(3) of this section. By notice either included in the 
Notice of Transfer or separately delivered by first-class mail, postage 
prepaid, a servicer may establish a separate and exclusive office and 
address for the receipt and handling of qualified written requests.
    (2) Qualified written request; defined. (i) For purposes of 
paragraph (f) of this section, a qualified written request means a 
written correspondence (other than notice on a payment coupon or other 
payment medium supplied by the servicer) that includes, or otherwise 
enables the servicer to identify, the name and account of the borrower, 
and includes a statement of the reasons that the borrower believes the 
account is in error, if applicable, or that provides sufficient detail 
to the servicer regarding information relating to the servicing of the 
loan sought by the borrower.
    (ii) A written request does not constitute a qualified written 
request if it is delivered to a servicer more than 1 year after either 
the date of transfer of servicing or the date that the mortgage 
servicing loan amount was paid in full, whichever date is applicable.
    (3) Action with respect to the inquiry. Not later than 60 business 
days after receiving a qualified written request from the borrower, 
and, if applicable, before taking any action with respect to the 
inquiry, the servicer shall:
    (i) Make appropriate corrections in the account of the borrower, 
including the crediting of any late charges or penalties, and transmit 
to the borrower a written notification of the correction. This written 
notification shall include the name and telephone number of a 
representative of the servicer who can provide assistance to the 
borrower; or
    (ii) After conducting an investigation, provide the borrower with a 
written explanation or clarification that includes:
    (A) To the extent applicable, a statement of the servicer's reasons 
for concluding the account is correct and the name and telephone number 
of an employee, office, or department of the servicer that can provide 
assistance to the borrower; or
    (B) Information requested by the borrower, or an explanation of why 
the information requested is unavailable or cannot be obtained by the 
servicer, and the name and telephone number of an employee, office, or 
department of the servicer that can provide assistance to the borrower.
    (4) Protection of credit rating. (i) During the 60 business day 
period beginning on the date of the servicer receiving from a borrower 
a qualified written request relating to a dispute on the borrower's 
payments, a servicer may not provide adverse information regarding any 
payment that is the subject of the qualified written request to any 
consumer reporting agency (as that term is defined in section 603 of 
the Fair Credit Reporting Act, 15 U.S.C. 1681a).
    (ii) In accordance with section 17 of RESPA, 12 U.S.C. 2615, the 
protection of credit rating provision of paragraph (e)(4)(i) of this 
section does not impede a lender or servicer from pursuing any of its 
remedies, including initiating foreclosure, allowed by the underlying 
mortgage loan instruments.
    (f) Damages and costs. (1) Whoever fails to comply with any 
provision of this section shall be liable to the borrower for each 
failure in the following amounts:
    (i) Individuals. In the case of any action by an individual, an 
amount equal to the sum of any actual damages sustained by the 
individual as the result of the failure and, when there is a pattern or 
practice of noncompliance with the requirements of this section, any 
additional damages in an amount not to exceed $1,000.
    (ii) Class Actions. In the case of a class action, an amount equal 
to the sum of any actual damages to each borrower in the class that 
result from the failure and, when there is a pattern or practice of 
noncompliance with the requirements of this section, any additional 
damages in an amount not greater than $1,000 for each class member. 
However, the total amount of any additional damages in a class action 
may not exceed the lesser of $500,000 or 1 percent of the net worth of 
the servicer.
    (iii) Costs. In addition, in the case of any successful action 
under paragraph (f) of this section, the costs of the action and any 
reasonable attorneys' fees incurred in connection with the action.
    (2) Nonliability. A transferor or transferee servicer shall not be 
liable for any failure to comply with the requirements of this section, 
if within 60 days after discovering an error (whether pursuant to a 
final written examination report or the servicer's own procedures) and 
before commencement of an action under this section and the receipt of 
written notice of the error from the borrower, the servicer notifies 
the person concerned of the error and makes whatever adjustments are 
necessary in the appropriate account to ensure that the person will not 
be required to pay an amount in excess of any amount that the person 
otherwise would have paid.
    (g) Timely payments by servicer. If the terms of any mortgage 
servicing loan require the borrower to make payments to the servicer of 
the loan for deposit into an escrow account for the purpose of assuring 
payment of taxes, insurance premiums, and other charges with respect to 
the mortgaged property, the servicer shall make payments from the 
escrow account in a timely manner for the taxes, insurance premiums, 
and other charges as the payments become due, as governed by the 
requirements in Sec. 3500.17(k).
    (h) Preemption of State laws. A lender who makes a mortgage 
servicing loan or a servicer shall be considered to have complied with 
the provisions of any State law or regulation requiring notice to a 
borrower at the time of application for a loan or transfer of servicing 
of a loan if the lender or servicer complies with the requirements of 
this section. Any State law requiring notice to the borrower at the 
time of application or at the time of transfer of servicing of the loan 
is preempted, and there shall be no additional borrower disclosure 
requirements. Provisions of State law, such as those requiring 
additional notices to insurance companies or taxing authorities, are 
not preempted by Section 6 of RESPA or this section, and this 
additional information may be added to a notice prepared under this 
section, if the procedure is allowable under State law.
    9. Appendices K through M are reserved and appendices MS-1 and MS-2 
are added to part 3500, to read as follows:

BILLING CODE 4210-27-P

TR19DE94.007


TR19DE94.008


TR19DE94.009


TR19DE94.010


TR19DE94.011


TR19DE94.012


TR19DE94.013


      
BILLING CODE 4210-27-C
    Dated: December 6, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 94-30413 Filed 12-16-94; 8:45 am]
BILLING CODE 4210-27-P