[Federal Register Volume 60, Number 31 (Wednesday, February 15, 1995)]
[Rules and Regulations]
[Pages 8812-8839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3683]




[[Page 8811]]

_______________________________________________________________________

Part VI





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner



_______________________________________________________________________



24 CFR Part 3500



Real Estate Settlement Procedures Act (Regulation X); Escrow Accounting 
Procedures; Final Rule

  Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / 
Rules and Regulations   
[[Page 8812]] 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Part 3500

[Docket No. R-95-1688; FR-3255-F-05]
RIN 2502-AF77


Real Estate Settlement Procedures Act (Regulation X); Escrow 
Accounting Procedures

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: On October 26, 1994, HUD published a rule, to become effective 
on April 24, 1995, establishing escrow accounting procedures under 
Sections 6(g) and 10 of the Real Estate Settlement Procedures Act. 
Subsequent to the publication of that rule, HUD received a number of 
requests asking HUD to correct, clarify, or further illustrate matters 
contained in the final rule. Because the Department agrees that further 
action may help illuminate its intentions and avoid confusion on the 
part of persons responsible for complying with the requirements of the 
October 26 rule, the Department is issuing this subsequent final rule. 
This rule responds to inquiries concerning the applicability of the 
October 26 rule and, as was the October 26 rule, is based on policy 
decisions made while reconsidering the proposed rule published on this 
subject earlier and the public comments received in connection with the 
proposed rule.
    Both this rule and the October 26 rule will be effective on the 
same date, which is delayed by 1 month from the effective date 
originally announced in the October 26 rule. Where applicable, the 
provisions and appendices in this rule will supersede the provisions 
and appendices in the October 26 rule. As part of these corrections, 
clarifications, and further illustrations, HUD is reissuing Appendices 
G, H, I, and J in their entirety, and is adding Appendices K, L, M, and 
N, which provide additional examples or information.

EFFECTIVE DATE: The final rule is effective May 24, 1995, and the 
effective date of the final rule published at 59 FR 53890, is delayed 
until May 24, 1995.

FOR FURTHER INFORMATION CONTACT: William Reid, Research Economist, 
Office of Policy Development and Research, Room 8212, telephone (202) 
708-0421. For legal questions: Grant E. Mitchell, Senior Attorney for 
RESPA, Room 9262, telephone (202) 708-1552; or Kenneth A. Markison, 
Assistant General Counsel for Government-Sponsored Enterprises/RESPA, 
Room 9262, telephone (202) 708-3137. The address for all of these 
contact persons is: 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 rule have 
been approved by the Office of Management and Budget (OMB), under 
section 3504(h) of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-
3520), and assigned OMB control number 2502-0501.

Justification for Final Rulemaking

    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 this 
rule for effect without first soliciting separate public comment, in 
that any changes in the existing requirements made by this final rule 
evolve from the proposed rule published on December 3, 1993 (58 FR 
64065). Prior public procedure is unnecessary with respect to the 
corrections, clarifications, and information contained in this rule and 
its preamble because the corrections, clarifications, and information 
do not impose additional requirements, but are merely explanatory in 
nature or correct certain technical requirements of the October 26, 
1994, rule to make it easier to comply with the substance of the rule. 
This rule is being issued in response to requests for such corrections, 
clarifications, and information, and, therefore, delaying its issuance 
would also be contrary to the public interest. Immediate issuance of 
this rule will ease the regulatory compliance burden of persons subject 
to the October 26, 1994, rule (59 FR 53890) (October 26 rule) and will 
eliminate the possibility of having to make intermediate changes in 
business practices, required by that rule, pending the completion of 
notice-and-comment procedures for this rule. As has been urged by some 
persons subject to the requirements of the October 26 rule, the 
Department is issuing this subsequent rule with the belief that it will 
make timely compliance with the October 26 rule easier. In order to 
facilitate compliance further, the Department also is delaying the 
effective date of the escrow accounting requirements by 1 month from 
the effective date announced in the October 26 rule.

Background

    On October 26, 1994 (59 FR 53890), the Department published a final 
rule establishing escrow accounting procedures under Sections 6(g) and 
10 of the Real Estate Settlement Procedures Act of 1974 (RESPA; see 12 
U.S.C. 2605(g) and 2609). In response to a number of requests from 
mortgage servicing industry spokespersons, including those in the form 
and computer software businesses, asking for corrections, 
clarifications, or further illustration of matters contained in the 
final rule, in this document the Department is setting forth 
clarifications and technical corrections of the October 26 final rule. 
Following publication of the final rule, the Department also received 
requests for extension of the April 24, 1995, effective date of the 
rule. The Department has concluded that today's corrections and 
clarifications, coupled with the original rule, provide sufficient 
information to allow the industry to implement the rule by May 24, 
1995, which is 1 month later than the effective date originally 
announced for the October 26 rule. In addition, the Department 
anticipates publishing soon a Mortgagee Letter containing instructions 
regarding the RESPA escrow rule and the FHA single family program.

Clarifications of Final Rule

    Clarifications of the final rule that do not require modifications 
of the language in the rule are set out in the following paragraphs of 
this document. When appropriate for ease in referencing the final rule, 
the clarification references in brackets the page number of the 
relevant provision of the rule as published in the October 26, 1994, 
Federal Register.
    (a.) May dollar amounts under this rule be rounded?
    Answer: Yes, any dollar amount referenced in this rule may be 
rounded up or down to the nearest dollar.
    (b.) What impact does the escrow accounting rule have on the Good 
Faith [[Page 8813]] Estimate requirement under Sec. 3500.7 of the RESPA 
rules?
    Answer:  Good Faith Estimates are set forth in dollar amounts or 
ranges. The Good Faith Estimate range or number for reserves (the 1000 
series on the HUD-1 or HUD-1A) will generally be lower than before the 
effective date of the rule, because of the requirements of the escrow 
accounting rule to use aggregate accounting. During the phase-in 
period, Sec. 3500.8(c) (as added by the October 26 final rule, 59 FR at 
53901) servicers are allowed, as an alternative to the use of aggregate 
analysis, to use single-item analysis with a maximum 1-month cushion 
amount at closing. The use of single item analysis with a maximum 1-
month cushion for establishing a range for Good Faith Estimate purposes 
is acceptable until October 27, 1997. See Appendix N, for an example of 
these alternatives on a HUD-1.
    (c.) Is an assumption of an existing loan by a new purchaser which 
is covered by RESPA under Sec. 3500.2 a new loan for purposes of this 
rule, even if the existing escrow account is assigned to the new 
purchaser?
    Answer: Yes.
    (d.) [Page 53902, Sec. 3500.17(b), Definitions, ``Escrow account 
item''.] Are certain payments that may enter and leave the account 
within the same month, such as FHA monthly premiums, private mortgage 
insurance, or credit life insurance, considered to be escrow account 
items?
    Answer: Yes. All items in the account are included so that the 
projected low monthly balance is zero (-0-) at the end of Step 2 in the 
Appendix I examples. The chosen cushion may be no more than the lesser 
of 2 months or the number of months allowed in the loan documents, 
multiplied by \1/12\ the sum of the estimated disbursements for the 
items that may be included in the cushion.

    Note: State laws or Federal program requirements may prohibit 
cushioning for certain of these payments.

    (e.) [Page 53902, Sec. 3500.17(b), Definitions, ``Phase-in 
period''.] Is the switch to aggregate accounting for existing accounts, 
and the use of the alternate method for calculating escrow account 
requirements at settlement, the only requirements that are allowed a 3-
year phase-in period under the rule?
    Answer: Yes.
    (f.) [Page 53903, Sec. 3500.17(c).] Do surpluses generated by 
voluntary borrower prepayments before the due date (frequently of 
principal, interest, and escrow account amounts) constitute a violation 
of the escrow account limits if they remain in the account in the next 
escrow account computation year?
    Answer: No. The escrow account portions of any voluntary prepayment 
by a borrower should be treated as an accrual for the upcoming escrow 
account computation year, and not counted for the purpose of 
determining whether a surplus is to be credited or returned. In these 
circumstances, shortage or surplus adjustments to monthly escrow 
account payments for the succeeding escrow account computation year 
may, at the servicer's option, be spread over the period remaining in 
the escrow account computation year after the prepayment accrual 
period. This precept also applies for other unusual accumulations in 
the escrow account; e.g., loss drafts for property damage, or 
continuing accumulation because new construction is not assessed for 
more than a year after completion, but the tax charges are billed 
retroactively.
    (g.) [Page 53903, Sec. 3500.17(c)(1)(i), and page 53904, 
Sec. 3500.17(c)(7).] In the case where an account is being established 
for a new borrower, is the servicer bound by the charges the previous 
owner paid regarding the subject property, particularly where taxes or 
other charges may have been held down because of the seller's status or 
tax laws relating to ownership?
    Answer: No. In creating a new escrow account, the servicer should 
estimate disbursement amounts using its best judgment with information 
known or readily available.
    (h.) [Page 53903, Sec. 3500.17(c)(2) and (3).] May a servicer 
choose a disbursement date earlier than the date due for a 
disbursement, for example, to give the borrower the advantage of a 
current year tax deduction, even though the payment is due in the next 
calendar year?
    Answer: Yes, the rule states that the servicer shall use as the 
disbursement date for the escrow item a date on or before the earlier 
of either a deadline to take advantage of discounts, if available, or 
the deadline to avoid a penalty. There is no conflict with the 
statement in the background information (page 53893, third column, 
first full sentence): ``Unless there is a discount to the borrower for 
early payments, the regulation does not allow servicers to pay 
installment payments on an annual or other prepayment basis.'' This 
statement dealt with a practice, previously engaged in by some 
servicers, of collecting and paying a full-year's taxes in advance, 
although they were billed on an installment basis.
    (i.) [Page 53904, Sec. 3500.17(c)(7).] How does a servicer compute 
the Consumer Price Index (CPI) adjustment factor to estimate 
disbursements?
    Answer: This factor is the ratio of the monthly CPI for all urban 
consumers, all items, reported most recently, to the same monthly CPI 
reported 12 months earlier; i.e.:
[GRAPHIC][TIFF OMITTED]TR15FE95.021


    The adjustment is made by multiplying last year's disbursement by 
this ratio. For example, if last year's school tax bill was $827, the 
value of the most recent CPI (September 1994) was 149.4, and the value 
of the CPI in September 1993 was 145.1, then the school tax projection 
using this technique may not exceed $851.51:
[GRAPHIC][TIFF OMITTED]TR15FE95.022


    The two CPI numbers must have the same base period and must either 
both be seasonably adjusted or both be not seasonably adjusted.
    (j.) [Page 53905, Sec. 3500.17(e).] For what period of time is the 
transferor (old) servicer or transferee (new) servicer responsible for 
delivering an account history or projection in the case of a transfer 
of mortgage servicing?
    Answer: Each servicer is generally responsible for providing data 
for the period for which it services the loan. The transferor (old) 
servicer is responsible for providing a short-year annual statement 
(but not a projection) for the portion of the year it controlled the 
servicing. (Also see ``short year'' statement discussion in paragraph 
(r), below.) If the transferee servicer provides an initial escrow 
account statement, the transferee servicer uses the effective date of 
the transfer of servicing to establish a new escrow account computation 
year. The transferee servicer may also retain the payment schedule and 
accounting method of the previous servicer and not provide an initial 
escrow account statement after transfer.
    (k.) [Page 53905, Sec. 3500.17(f).] May a servicer return surplus 
funds by wire transfer, rather than by a check?
    Answer: Yes. The rule does not specify the manner in which refunds 
are to be paid.
    (l.) [Page 53905, Sec. 3500.17(f).] How does the servicer show the 
collection of a deficiency and a remaining shortage in the same 
account?
    Answer: The servicer first computes the deficiency and then 
computes the remaining shortage, and informs the borrower accordingly, 
based on the format in Appendix I. That format [[Page 8814]] allows for 
explanatory language in the event of both a deficiency and a remaining 
shortage.
    (m.) [Page 53905, Sec. 3500.17(f)(2).] May a servicer give the 
borrower an option to credit a refundable surplus directly to 
principal, rather than refund the surplus to the borrower?
    Answer: No. However, the servicer may inform the borrower in the 
information accompanying the return of the surplus that the borrower 
may also choose to use the refund to credit principal or the escrow 
account.
    (n.) [Page 53906, Sec. 3500.17(g)(1)(i).] The rule indicates that 
the trial running balance is required to be submitted for an initial 
escrow account statement. Is it also required to be submitted for 
subsequent years as part of the annual statement projections?
    Answer: The reference cited in Sec. 3500.17(g)(1)(i) means that the 
information from the trial running balance is to be included in the 
initial escrow account statement. Similarly, the information from a 
trial running balance is included as the projections in the annual 
statement after the first escrow account computation year. There is no 
requirement for duplication of the same information.
    (o.) [Page 53906, Secs. 3500.17(h)(3) and (i)(l)]. If a particular 
payee collects payments on behalf of several taxing or other entities, 
how much information identifying these subpayees is necessary?
    Answer: The minimum amount of information to be disclosed is that 
which describes the payee to whom the servicer delivers the funds. The 
servicer may, but is not required to, identify the subpayees on the 
account. If there are several payees for similar categories of items, 
such as taxes or insurance, there should be sufficient differentiation 
to identify the use of funds (see last sentence of Sec. 3500.17(h)(3) 
for examples).
    (p.) [Page 53906, Sec. 3500.17(i)(1).] Does the servicer have to 
highlight a change in the monthly mortgage payments during the year 
caused by such factors as an adjustable rate mortgage (ARM) 
readjustment?
    Answer: This rule does not require that such a change be 
specifically highlighted after an annual statement has been delivered. 
Language is provided in Appendix I to alert the borrower that principal 
or interest may change during the escrow account computation year under 
certain loan programs, such as ARMs. The borrower should receive notice 
of an ARM change prior to the change. The next annual statement history 
will note the change in principal and interest.
    (q.) [Page 53906, Sec. 3500.17(i)(4).] If the servicer determines 
that new escrow items should be added to the account, what further 
activities are required of the servicer?
    Answer: If the servicer is going to change the payment amount, then 
the servicer should reanalyze the account to include the new items and 
issue a short-year annual statement, with a new projection for a new 
escrow account computation year. If there is no payment change, there 
is no activity required of the servicer.
    (r.) [Sec. 3500.17(i)(4)]. Please explain in more detail when and 
how short-year statements are used under this rule.
    Answer: Short-year statements must include all the elements 
normally provided in an annual statement, with the clarifications noted 
below. These elements consist of a history of the account since the 
last annual statement, a copy of the projections issued with the last 
annual statement, and projections for the next 12 months. The following 
principles are followed in developing short-year statements:
    (1.) The servicer that prepared the projections issued with the 
last annual statement must provide to the borrower another copy, with 
all 12 months of those projections, at the time the servicer's 
components of the short-year statement are provided.
    (2.) The servicer that prepared the projections issued with the 
last annual statement will report history, with asterisks, from the 
time of the last analysis to the time of the short-year statement.
    (3.) Upon transfer, payoff, or maturity, the paragraphs beginning 
with ``Last year we * * *'' and ``Your actual lowest * * *'' on the 
account history are not required. Otherwise, if the account will be 
ongoing with the same servicer, these paragraphs are required only if 
the projected lowest monthly balance was in the period covered by the 
history.
    (4.) Upon transfer, the new servicer must issue a short-year 
statement at the time of transfer only if the monthly escrow payment or 
accounting method changes. Otherwise, the servicer may wait until up to 
the end of the regular yearly cycle to issue an annual statement. The 
transferor (old) servicer shall submit a short-year statement to the 
borrower within 60 days of the transfer.
    (5.) With a transfer, the account history issued by the new 
servicer must report the transferred balance along with the history for 
the period since the transfer. Asterisks, inclusion of a copy of the 
projections issued with the last annual statement, and the paragraphs 
beginning with ``Last year we * * *'' and ``Your actual lowest * * *'' 
on the account history are not required of the new servicer.
    (6.) A projection for the next 12 months is not required upon 
maturity or payoff. Upon transfer, the old servicer is not required to 
produce a projection for the next 12 months. The new servicer issues a 
projection for the next 12 months when it does its analysis. For the 
new servicer this must occur at the time of transfer if the monthly 
payment or the accounting method changes. Otherwise, the new servicer 
has until the end of the regular 12-month cycle to perform the 
analysis, including the projection for the next 12 months.
    With two exceptions, servicers must always project the account 
forward for a period of 12 months to determine monthly payments and the 
existence of surpluses, shortages, and deficiencies. The term ``short-
year'' refers to the time since the last annual statement, not the 
period to be covered by the old or new projections.
    The first exception is for mortgages scheduled to terminate within 
the next 12 months, when projections of less than 12 months are 
permissible. The second exception is for escrow accounts covering 
items, such as flood insurance, that have disbursements less frequently 
than every 12 months. In this case, projections longer than 12 months 
are required. In the latter case, servicers may opt to report only the 
first 12 months of a projection covering a longer period.
    (s.) [Appendix K] How is the annual statement projection prepared 
when the loan is scheduled to mature within the upcoming escrow account 
computation year?
    Answer: The account may be analyzed and payments collected as if 
the account would be in existence for a full computation year. 
Alternatively, the account may be analyzed and payments collected and 
disbursed as if the account were terminating on the date of maturity. 
In either event, any balances are returned to the borrower following 
maturity of the loan. The judgment of the servicer as to which method 
to use may be based on the length of time the account will be open and 
the size of payments to be made within that period. The short-year 
statement after payoff should be furnished consistent with 
Sec. 3500.17(i)(4)(iii).
    (t.) During the first year of operation of the rule (i.e. May 24, 
1995, through May 23, 1996), certain information may not be available, 
such as the previous year's projection or history. Is a servicer 
required to reconstruct or hypothesize about such documents? 
[[Page 8815]] 
    Answer: No. If no projection or history has been prepared or the 
records are not in a readily retrievable form, neither document is 
required to be submitted during the first year's operation. The 
Appendix I format allows for the reference to such documents to be 
deleted.
    (u.) Is the annual charge for mortgage insurance under FHA's Title 
I property improvement program covered by this rule if the lender 
collects the charge in monthly installments?
    Answer: HUD is considering either exempting such fee from coverage 
of this rule or otherwise clarifying coverage. Title I lenders need not 
treat the periodic collection of this fee as triggering a requirement 
to comply with this rule, pending the issuance of such clarification.

Technical Corrections With Changes in Rule Language

    Technical corrections made in this document are for the purposes 
of:
    (1) Providing language that is consistent with Appendix F. The 
language provides that the initial computation of an escrow account is 
to be based on an analysis yielding a lowest month-end balance of zero 
(-0-) at some time during the year, before the addition of the cushion;
    (2) Conforming the language for servicer handling of shortages of 
less than 1-month's escrow deposit with the language for 
``deficiencies'', allowing servicers to require payments within 30 
days;
    (3) Clarifying that the servicer must allow the borrower to repay 
in a period of 12 months or longer a shortage equal to or greater than 
1 month's escrow deposit;
    (4) Clarifying that the servicer may require the borrower to repay 
in any period of 2 months or more a deficiency equal to or greater than 
1 month's escrow deposit;
    (5) Conforming the shortage and deficiency requirements by 
substituting the word ``require'' rather than ``allow'' in a 1-month 
deficiency situation;
    (6) Permitting the servicer to assume that payments and 
disbursements for the final 2 months of an escrow account computation 
year will be made as estimated, thereby allowing the annual account 
history and projections to be produced in a timely manner;
    (7) Including a reference to the information in Appendix I that 
allows the servicer to identify, using asterisks (*), the items for 
which there are differences between estimated and actual amounts or 
payment dates in the most recent account history and the last year's 
projection, thereby aiding computer-generated statements that give an 
indication about why a low point was not reached;
    (8) Specifying a time period (90 days) in which a servicer must 
produce an annual statement, if production of the statement otherwise 
required was deferred because the loan was in default, foreclosure, or 
bankruptcy. ``Bankruptcy'' is added as another circumstance in which 
the statement need not be produced;
    (9) Correcting a month reference in Example I, Step 3, of Appendix 
F from ``Jul'' to ``Jun'', and correcting an error in the column 
headings in Example II, Step 1, of Appendix F; and
    (10) Clarifying the instructions regarding aggregate accounting 
adjustments at settlement.

Other Matters

Environmental Impact

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.20 of the HUD regulations, the 
policies and procedures contained in this rule do not affect a physical 
structure or property and relate only to statutorily required 
accounting and reporting procedures, and, therefore, are categorically 
excluded from the requirements of the National Environmental Policy 
Act.

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.

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 would not have a significant 
economic impact on a substantial number of small entities. The rule is 
in the nature of minor changes and clarifications of an earlier rule 
(59 FR 53890, October 26, 1994), which was directed toward the 
accounting procedures used in the mortgage servicing industry and the 
disclosure to consumers of related information.

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 do 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. The rule clarifies 
and makes minor changes in a previous rule (59 FR 53890, October 26, 
1994) setting out requirements concerning the accounting procedures 
used in the mortgage servicing industry and the disclosure to consumers 
of related information.

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 
the 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 underlying rulemaking for this rule was listed as item number 
1811 in the Department's Semiannual Agenda of Regulations published on 
November 14, 1994 (59 FR 57632, 57658), under Executive Order 12866 and 
the Regulatory Flexibility Act, and was requested by and submitted to 
the Committee on Banking, Housing and Urban Affairs of the Senate and 
the Committee on Banking, Finance and Urban Affairs of the House of 
Representatives under section 7(o) of the Department of Housing and 
Urban Development 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, the effective date of FR 
Doc. 94-26583, Real Estate Settlement Procedures Act (Regulation X): 
Escrow Accounting Procedures, published on October 26, 1994 (59 FR 
53890), is delayed from April 24, 1995, to May 24, 1995, and part 3500 
of title 24 of the Code of Federal Regulations is amended as follows: 
[[Page 8816]] 

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

    1. The authority citation for part 3500 is revised to read as 
follows:

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

    2. Section 3500.8(c)(1) is revised to read as follows:


Sec. 3500.8  Use of HUD-1 or HUD-1A settlement statements.

* * * * *
    (c) * * *
    (1) After itemizing individual deposits in the 1000 series using 
single-item accounting, the settlement agent shall make an adjustment 
based on an aggregate analysis to reflect the difference between the 
deposit required under aggregate accounting and the sum of the deposits 
required under single-item accounting. The computation steps for both 
accounting methods are set out in Sec. 3500.17(d). The adjustment will 
always be a negative number or zeroP (-0-). The servicer shall enter 
the aggregate adjustment amount on a final line in the 1000 series of 
the HUD-1 or HUD-1A statement.
* * * * *
    3. Section Sec. 3500.17 is amended by:
    a. Revising the fourth sentence of paragraph (a);
    b. Removing the word ``servicing'' following the phrase ``the terms 
of any mortgage'' in the definition of ``Servicing'' in paragraph (b);
    c. Adding a sentence after the first sentence in paragraph 
(c)(1)(i);
    d. Revising paragraphs (f)(3)(i)(B) and (C);
    e. Revising paragraph (f)(3)(ii)(B);
    f. Revising paragraph (f)(4)(i)(C);
    g. Revising paragraph (f)(4)(ii);
    h. Adding a sentence after the first sentence in paragraph (i) 
introductory text;
    i. Adding a sentence after the first sentence in paragraph (i)(1) 
introductory text;
    j. Removing the period at the end of paragraph (i)(1)(viii), and by 
adding a phrase and sentence to the end of the paragraph; and
    k. Revising paragraph (i)(2), to read as follows:


Sec. 3500.17  Escrow accounts.

    (a) * * * Appendix H to this part provides examples of biweekly 
accounting and Appendix J to this part provides examples of a 3-year 
accounting cycle that may be used in accordance with paragraph (c)(9) 
of this section.
* * * * *
    (c) * * *
    (1) * * *
    (i) Charges at settlement or upon creation of an escrow account. * 
* * The ``amount sufficient to pay'' is computed so that the lowest 
month end target balance projected for the escrow account computation 
year is zero (-0-) (see Step 2 in Appendix F). * * *
* * * * *
    (f) * * *
    (3) * * *
    (i) * * *
    (B) The servicer may require the borrower to repay the shortage 
amount within 30 days; or
    (C) The servicer may require the borrower to repay the shortage 
amount in equal monthly payments over at least a 12-month period.
    (ii) * * *
    (B) The servicer may require the borrower to repay the shortage in 
equal monthly payments over at least a 12-month period.
    (4) * * *
    (i) * * *
    (C) May require the borrower to repay the deficiency in 2 or more 
equal monthly payments.
    (ii) If the deficiency is greater than or equal to 1 month's escrow 
payment, the servicer may allow the deficiency to exist and do nothing 
to change it or may require the borrower to repay the deficiency in two 
or more equal monthly payments.
* * * * *
    (i) * * * The servicer shall also submit to the borrower the 
previous year's projection or initial escrow account statement. * * *
    (1) Contents of Annual Escrow Account Statement. * * * In preparing 
the statement, the servicer may assume scheduled payments and 
disbursements will be made for the final 2 months of the escrow account 
computation year. * * *
* * * * *
    (viii) * * *, as indicated by noting differences between the most 
recent account history and last year's projection. Appendix I of this 
part sets forth an acceptable format and methodology for conveying this 
information.
    (2) No annual statements in the case of default, foreclosure, or 
bankruptcy. This paragraph contains an exemption from the provisions of 
Sec. 3500.17(i)(1). If at the time the servicer conducts the escrow 
account analysis the borrower is more than 30 days overdue, then the 
servicer is exempt from the requirements of submitting an annual escrow 
account statement to the borrower under Sec. 3500.17(i). This exemption 
also applies in situations where the servicer has brought an action for 
foreclosure under the underlying mortgage loan, or where the borrower 
is in bankruptcy proceedings. If the servicer does not issue an annual 
statement pursuant to this exemption and the loan subsequently is 
reinstated or otherwise becomes current, the servicer shall provide a 
history of the account since the last annual statement (which may be 
longer than 1 year) within 90 days of the date the account became 
current.
* * * * *
    4. In Appendix A to part 3500, the heading for the Appendix is 
revised, and the second paragraph for lines 1000-1008 under the heading 
``Line Item Instructions'' is revised, to read as follows:

Appendix A to Part 3500--Instructions for Completing HUD-1 and HUD-1A 
Settlement Statements

* * * * *

Line Item Instructions

* * * * *
    Lines 1000-1008. * * *
    After itemizing individual deposits in the 1000 series using 
single-item accounting, the settlement agent shall make an adjustment 
based on an aggregate analysis to reflect the difference between the 
deposit required under aggregate accounting and the sum of the deposits 
required under single-item accounting. The computation steps for both 
accounting methods are set out in 24 CFR 3500.17(d). The adjustment 
will always be either a negative number or zero (-0-). The servicer 
shall enter the aggregate adjustment amount on a final line in the 1000 
series of the HUD-1 or HUD-1A statement.
* * * * *
    5. Appendix F to part 3500 is amended by:
    a. Revising in Example I, illustrating aggregate analysis, step 3, 
the reference to ``Jul'', which immediately follows ``May'' to read 
``Jun''; and
    b. Revising the chart for ``Step 1.--Initial Trial Balance'' in 
Example II, illustrating single-item analysis (existing accounts), to 
read as follows:

                                                                        
[[Page 8817]]                                                           
                                                             Step 1.--Initial Trial Balance                                                             
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    Single-item                                         
                                                         -----------------------------------------------------------------------------------------------
                                                                               Taxes                                       School taxes                 
                                                         -----------------------------------------------------------------------------------------------
                                                                pmt            disb             bal             pmt            disb             bal     
--------------------------------------------------------------------------------------------------------------------------------------------------------
June....................................................               0               0               0               0               0               0
July....................................................             100             500            -400              30               0              30
August..................................................             100               0            -300              30               0              60
September...............................................             100               0            -200              30             360            -270
October.................................................             100               0            -100              30               0            -240
November................................................             100               0               0              30               0            -210
December................................................             100             700            -600              30               0            -180
January.................................................             100               0            -500              30               0            -150
February................................................             100               0            -400              30               0            -120
March...................................................             100               0            -300              30               0             -90
April...................................................             100               0            -200              30               0             -60
May.....................................................             100               0            -100              30               0             -30
June....................................................             100               0               0              30               0               0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    6. In part 3500, the appendices are amended as follows: The text of 
Appendix G is removed, the heading of Appendix G is revised to read 
``APPENDIX G--(Appendix G consists of Appendices G-1 and G-2)'' and 
Appendices G-1 and G-2 are added after the parenthetical to read as set 
forth below;
    The text of Appendix H is removed, the heading of Appendix H is 
revised to read ``APPENDIX H--(Appendix H consists of Appendices H-1 
and H-2)'' and Appendices H-1 and H-2 are added after the parenthetical 
to read as set forth below;
    The text of Appendix I is removed, the heading of Appendix I is 
revised to read ``APPENDIX I--(Appendix I consists of Appendices I-1 
through I-8)'' and Appendices I-1 through I-8 are added after the 
parenthetical to read as set forth below;
    The text of Appendix J is removed, the heading of Appendix J is 
revised to read ``APPENDIX J--(Appendix J consists of Appendices J-1 
and J-2)'' and Appendices J-1 and J-2 are added after the parenthetical 
to read as set forth below; and Appendices K through N are added, 
reading as follows:

                                                 BILLING CODE 4210-27-P
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APPENDIX K

(APPENDIX K consists of Appendices K-1 through K-4)
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    Dated: February 8, 1995.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 95-3683 Filed 2-10-95; 12:46 pm]
BILLING CODE 4210-27-C