[Federal Register Volume 61, Number 59 (Tuesday, March 26, 1996)]
[Rules and Regulations]
[Pages 13232-13255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6511]




[[Page 13231]]

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Part II





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 3500



Real Estate Settlement Procedures Act; Streamlining Final Rule

  Federal Register / Vol. 61, No. 59 / Tuesday, March 26, 1996 / Rules 
and Regulations  

[[Page 13232]]


DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-4023-F-01]
RIN 2502-AG69


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

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

ACTION: Final rule.

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

SUMMARY: This final rule amends HUD's regulations under the Real Estate 
Settlement Procedures Act (RESPA). In an effort to comply with the 
President's regulatory reform initiatives, this rule streamlines the 
RESPA regulations by eliminating provisions that repeat statutes or are 
otherwise unnecessary. A number of the appendices that were intended to 
be illustrative, rather than regulatory, have been removed from 
codification, but will be made available by the Department as Public 
Guidance Documents. Therefore, this final rule makes the RESPA 
regulations clearer and more concise.

EFFECTIVE DATE: April 25, 1996.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, Office 
of Consumer and Regulatory Affairs, Room 5241, Department of Housing 
and Urban Development, 451 Seventh Street SW., Washington, DC 20410, 
telephone number (202) 708-4560 (this is not a toll-free number); or 
for legal questions: Kenneth A. Markison, Assistant General Counsel for 
GSE/RESPA, or Grant E. Mitchell, Senior Attorney for RESPA, Room 9262, 
Department of Housing and Urban Development, 451 Seventh Street SW., 
Washington, DC 20410, telephone number (202) 708-1550 (this is not a 
toll-free number). For hearing- or speech-impaired persons, this number 
may be accessed via TDD by calling the Federal Information Relay 
Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton issued a 
memorandum to all Federal departments and agencies regarding regulatory 
reinvention. In response to this memorandum, the Department of Housing 
and Urban Development conducted a page-by-page review of its 
regulations to determine which could be eliminated, consolidated, or 
otherwise improved. HUD has determined that the regulations for 
implementing RESPA can be improved and streamlined by eliminating 
unnecessary provisions.
    Several provisions in the regulations repeat statutory language 
from the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. 2601 
et seq. It is unnecessary to maintain statutory requirements in the 
Code of Federal Regulations (CFR), since those requirements are 
otherwise fully accessible and binding. Furthermore, if regulations 
contain statutory language, HUD must amend the regulations whenever 
Congress amends the statute. Therefore, this final rule will remove 
repetitious statutory language and replace it with a citation to the 
specific statutory section for easy reference. For example, 
Sec. 3500.19(a) has been substantially streamlined to delete provisions 
that simply repeated statutory provisions that do not need to be 
implemented by regulation.
    This final rule also removes from codification several of the 
appendices that previously accompanied part 3500. The Department 
intends to preserve the material contained in the appendices to be 
removed, but will no longer codify that material. Instead, that 
material will be available as Public Guidance Documents, as defined in 
this rule. Although not codified, Public Guidance Documents have been 
or will be published in the Federal Register and any amendments to the 
documents will be published in the Federal Register, as well. In 
addition, the rule specifies that these documents are available from 
HUD at the address provided. The appendices being removed from 
codification are as follows:
     Appendix G--consisting of: (1) Appendix G-1 entitled 
``Initial Escrow Account Disclosure Statement--Format,'' published at 
60 FR 24736 (May 9, 1995); and (2) Appendix G-2 entitled ``Initial 
Escrow Account Disclosure Statement--Example,'' published at 60 FR 8819 
(Feb. 15, 1995), but amended at 60 FR 24735 (May 9, 1995).
     Appendix H--consisting of Appendix H-1 and Appendix H-2, 
each entitled ``Biweekly Payments--Example,'' published at 60 FR 8820-
8821 (Feb. 15, 1995).
     Appendix I--consisting of: (1) Appendices I-1, I-2, I-5, 
and I-6, each entitled ``Annual Escrow Account Disclosure Statement--
Format,'' published at 60 FR 24737-24740 (May 9, 1995); and (2) 
Appendices I-3, I-4, I-7, and I-8, each entitled ``Annual Escrow 
Account Disclosure Statement--Example,'' published at 60 FR 8824, 8825, 
8828, and 8829 (Feb. 15, 1995).
     Appendix J--consisting of Appendices J-1 and J-2, each 
entitled ``Annual Escrow Account Disclosure Statement--Example,'' 
published at 60 FR 8830-8831 (Feb. 15, 1995).
     Appendix K--consisting of Appendices K-1 through K-4, each 
entitled ``Short Year Statements--Example,'' published at 60 FR 8832-
8835 (Feb. 15, 1995).
     Appendix L--``Side-by-Side Presentation of Old Projection 
and History,'' published at 60 FR 8836 (Feb. 15, 1995).
     Appendix M--``Illustration of Option of Identifying 
Simultaneous Deficiency and Shortage,'' published at 60 FR 8837 (Feb. 
15, 1995).
     Appendix N--``HUD-1 Aggregate Accounting Adjustment 
Example,'' published at 60 FR 8838 (Feb. 15, 1995).
    Aside from having been published previously in the Federal Register 
as indicated above, these appendices were also published in the 1995 
edition of the CFR (though after publication of the 1995 edition 
further revisions to Appendices G and I were made at 60 FR 24735-24740 
(May 9, 1995)). While the guidance in these appendices remains 
applicable and the examples and explanations are very helpful to users, 
it is not necessary that it be published in the CFR. HUD will more 
appropriately provide this information through other public guidance 
materials rather than maintain it in the CFR. HUD may update this 
information from time to time by publication in the Federal Register. 
The information is also available from HUD at the address indicated in 
24 CFR 3500.3.
    The investigation provisions formerly at Sec. 3500.20 previously 
were removed from this Part and consolidated in a new part 3800 with 
similar provisions for manufactured housing (part 3282) and interstate 
land sales (part 1720) (see FR-4026, a reinvention rule published 
shortly before this rule).

Justification for Final Rulemaking

    HUD generally publishes a rule for public comment before issuing a 
rule for effect, in accordance with its own regulations on rulemaking 
in 24 CFR part 10. However, part 10 provides for exceptions to the 
general rule if the agency finds good cause to omit advance notice and 
public participation. The good cause requirement is satisfied when 
prior public procedure is ``impracticable, unnecessary, or contrary to 
the public interest'' (24 CFR 10.1). HUD finds that good cause exists 
to publish this rule for effect without first soliciting public 
comment. This rule removes unnecessary regulatory provisions and 
nonbinding guidance material and corrects minor, nonsubstantive 
editorial errors in the

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text of the current regulations. Because of the nature of the changes, 
prior public comment is unnecessary.

Other Matters

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this final rule, and in so 
doing certifies that this rule will not have a significant economic 
impact on a substantial number of small entities. This rule merely 
streamlines regulations by removing unnecessary provisions. The rule 
will have no adverse or disproportionate economic impact on small 
businesses.

Environmental Impact

    This rulemaking does not have an environmental impact. This 
rulemaking simply amends an existing regulation by consolidating and 
streamlining provisions and does not alter the environmental effect of 
the regulations being amended. Findings of No Significant Impact with 
respect to the environment were made in accordance with HUD regulations 
in 24 CFR part 50 that implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332) at the time of 
development of regulations implementing RESPA. Those findings remain 
applicable to this rule, and are available for public inspection 
between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules 
Docket Clerk, Office of General Counsel, Room 10276, Department of 
Housing and Urban Development, 451 Seventh Street, SW, Washington, DC.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that this rule 
will not have substantial direct effects on States or their political 
subdivisions, or the relationship between the Federal government and 
the States, or on the distribution of power and responsibilities among 
the various levels of government. No programmatic or policy changes 
will result from this rule that would affect the relationship between 
the Federal Government and State and local governments.

Executive Order 12606, The Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that this rule will not have 
the potential for significant impact on family formation, maintenance, 
or general well-being, and thus is not subject to review under the 
Order. No significant change in existing HUD policies or programs will 
result from promulgation of this rule.

List of Subjects in 24 CFR Part 3500

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

    Accordingly, part 3500 of title 24 of the Code of Federal 
Regulations is amended as follows:

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

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

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

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


Sec. 3500.1  Designation.

    This part may be referred to as Regulation X.


Sec. 3500.2  Definitions.

    (a) Statutory terms. All terms defined in RESPA (12 U.S.C. 2602) 
are used in accordance with their statutory meaning unless otherwise 
defined in paragraph (b) of this section or elsewhere in this part.
    (b) Other terms. As used in this part:
    Application means the submission of a borrower's financial 
information in anticipation of a credit decision, whether written or 
computer-generated, relating to a federally related mortgage loan. If 
the submission does not state or identify a specific property, the 
submission is an application for a pre-qualification and not an 
application for a federally related mortgage loan under this part. The 
subsequent addition of an identified property to the submission 
converts the submission to an application for a federally related 
mortgage loan.
    Business day means a day on which the offices of the business 
entity are open to the public for carrying on substantially all of the 
entity's business functions.
    Dealer means, in the case of property improvement loans, a seller, 
contractor, or supplier of goods or services. In the case of 
manufactured home loans, ``dealer'' means one who engages in the 
business of manufactured home retail sales.
    Dealer loan or dealer consumer credit contract means, generally, 
any arrangement in which a dealer assists the borrower in obtaining a 
federally related mortgage loan from the funding lender and then 
assigns the dealer's legal interests to the funding lender and receives 
the net proceeds of the loan. The funding lender is the lender for the 
purposes of the disclosure requirements of this part. If a dealer is a 
``creditor'' as defined under the definition of ``federally related 
mortgage loan'' in this part, the dealer is the lender for purposes of 
this part.
    Effective date of transfer is defined in section 6(i)(1) of RESPA 
(12 U.S.C. 2605(i)(1)). In the case of a home equity conversion 
mortgage or reverse mortgage as referenced in this section, the 
effective date of transfer is the transfer date agreed upon by the 
transferee servicer and the transferor servicer.
    Federally related mortgage loan, also referred to in this rule as a 
``mortgage loan,'' is defined in section 3(1) of RESPA (12 U.S.C. 
2602(1)). If the residential property securing a mortgage loan is not 
located in a State, it is not a federally related mortgage loan. A 
federally related mortgage loan also includes:
    (1) Any loan (other than temporary financing such as a construction 
loan) which meets the requirements in section 3(1)(A) of RESPA (12 
U.S.C. 2602(1)(A)) and which is either:
    (i) Originated by a dealer or, if the obligation is to be assigned 
to any maker of mortgage loans specified in section 3(1)(B)(i)-(iv) of 
RESPA (12 U.S.C. 2602(1)(B)(i)-(iv), by a mortgage broker; or
    (ii) The subject of a home equity conversion mortgage, also 
frequently called a ``reverse mortgage,'' issued by any maker of 
mortgage loans specified in section 3(1)(B)(i)-(iv) of RESPA (12 U.S.C. 
2602(1)(B)(i)-(iv)).
    (2) Any installment sales contract, land contract, or contract for 
deed on otherwise qualifying residential property is a federally 
related mortgage loan if the contract is funded in whole or in part by 
proceeds of a loan made by any maker of mortgage loans specified in 
section 3(1)(B)(i)-(iv) of RESPA (12 U.S.C. 2602(1)(B)(i)-(iv)).
    Good faith estimate means an estimate, prepared in accordance with 
section 5 of RESPA (12 U.S.C. 2604), of charges that a borrower is 
likely to incur in connection with a settlement.
    HUD-1 or HUD-1A settlement statement (also HUD-1 or HUD-1A) means 
the statement that is prescribed by the Secretary in this part for 
setting forth settlement charges in connection with either the purchase 
or the refinancing (or other subordinate lien transaction) of 1- to 4-
family residential property.

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    Lender means, generally, the secured creditor or creditors named in 
the debt obligation and document creating the lien. For loans 
originated by a mortgage broker that closes a federally related 
mortgage loan in its own name in a table funding transaction, the 
lender is the person to whom the obligation is initially assigned at or 
after settlement. A lender, in connection with dealer loans, is the 
lender to whom the loan is assigned, unless the dealer meets the 
definition of creditor as defined under ``federally related mortgage 
loan'' in this section. See also Sec. 3500.5(b)(7), secondary market 
transactions.
    Manufactured home is defined in Sec. 3280.2 of this title.
    Mortgage broker means a person (not an employee or exclusive agent 
of a lender) who brings a borrower and lender together to obtain a 
federally related mortgage loan, and who renders services as described 
in the definition of ``settlement services'' in this section. A loan 
correspondent meeting the requirements of the Federal Housing 
Administration under Sec. 202.2(b) or Sec. 202.15(a) of this title is a 
mortgage broker for purposes of this part.
    Mortgaged property means the real property that is security for the 
federally related mortgage loan.
    Person is defined in section 3(5) of RESPA (12 U.S.C. 2602(5)).
    Public Guidance Documents means documents that HUD has published in 
the Federal Register, and that it may amend from time-to-time by 
publication in the Federal Register. These documents are also available 
from HUD at the address indicated in 24 CFR 3500.3.
    Refinancing means a transaction in which an existing obligation 
that was subject to a secured lien on residential real property is 
satisfied and replaced by a new obligation undertaken by the same 
borrower and with the same or a new lender. The following shall not be 
treated as a refinancing, even when the existing obligation is 
satisfied and replaced by a new obligation with the same lender (this 
definition of ``refinancing'' as to transactions with the same lender 
is similar to Regulation Z, 12 CFR 226.20(a)):
    (1) A renewal of a single payment obligation with no change in the 
original terms;
    (2) A reduction in the annual percentage rate as computed under the 
Truth in Lending Act with a corresponding change in the payment 
schedule;
    (3) An agreement involving a court proceeding;
    (4) A workout agreement, in which a change in the payment schedule 
or change in collateral requirements is agreed to as a result of the 
consumer's default or delinquency, unless the rate is increased or the 
new amount financed exceeds the unpaid balance plus earned finance 
charges and premiums for continuation of allowable insurance; and
    (5) The renewal of optional insurance purchased by the consumer 
that is added to an existing transaction, if disclosures relating to 
the initial purchase were provided.
    Regulation Z means the regulations issued by the Board of Governors 
of the Federal Reserve System (12 CFR part 226) to implement the 
Federal Truth in Lending Act (15 U.S.C. 1601 et seq.), and includes the 
Commentary on Regulation Z.
    Required use means a situation in which a person must use a 
particular provider of a settlement service in order to have access to 
some distinct service or property, and the person will pay for the 
settlement service of the particular provider or will pay a charge 
attributable, in whole or in part, to the settlement service. However, 
the offering of a package (or combination of settlement services) or 
the offering of discounts or rebates to consumers for the purchase of 
multiple settlement services does not constitute a required use. Any 
package or discount must be optional to the purchaser. The discount 
must be a true discount below the prices that are otherwise generally 
available, and must not be made up by higher costs elsewhere in the 
settlement process.
    RESPA means the Real Estate Settlement Procedures Act of 1974, 12 
U.S.C. 2601 et seq.
    Servicer means the person responsible for the servicing of a 
mortgage loan (including the person who makes or holds a mortgage loan 
if such person also services the mortgage loan). The term does not 
include:
    (1) The Federal Deposit Insurance Corporation (FDIC) or the 
Resolution Trust Corporation (RTC), in connection with assets acquired, 
assigned, sold, or transferred pursuant to section 13(c) of the Federal 
Deposit Insurance Act or as receiver or conservator of an insured 
depository institution; and
    (2) The Federal National Mortgage Corporation (FNMA); the Federal 
Home Loan Mortgage Corporation (Freddie Mac); the RTC; the FDIC; HUD, 
including the Government National Mortgage Association (GNMA) and the 
Federal Housing Administration (FHA) (including cases in which a 
mortgage insured under the National Housing Act (12 U.S.C. 1701 et 
seq.) is assigned to HUD); the National Credit Union Administration 
(NCUA); the Farmers Home Administration or its successor agency under 
Public Law 103-354 (FmHA); and the Department of Veterans Affairs (VA), 
in any case in which the assignment, sale, or transfer of the servicing 
of the mortgage loan is preceded by termination of the contract for 
servicing the loan for cause, commencement of proceedings for 
bankruptcy of the servicer, or commencement of proceedings by the FDIC 
or RTC for conservatorship or receivership of the servicer (or an 
entity by which the servicer is owned or controlled).
    Servicing means receiving any scheduled periodic payments from a 
borrower pursuant to the terms of any mortgage loan, including amounts 
for escrow accounts under section 10 of RESPA (12 U.S.C. 2609), and 
making the payments to the owner of the loan or other third parties of 
principal and interest and such other payments with respect to the 
amounts received from the borrower as may be required pursuant to the 
terms of the mortgage servicing loan documents or servicing contract. 
In the case of a home equity conversion mortgage or reverse mortgage as 
referenced in this section, servicing includes making payments to the 
borrower.
    Settlement means the process of executing legally binding documents 
regarding a lien on property that is subject to a federally related 
mortgage loan. This process may also be called ``closing'' or 
``escrow'' in different jurisdictions.
    Settlement service means any service provided in connection with a 
prospective or actual settlement, including, but not limited to, any 
one or more of the following:
    (1) Origination of a federally related mortgage loan (including, 
but not limited to, the taking of loan applications, loan processing, 
and the underwriting and funding of such loans);
    (2) Rendering of services by a mortgage broker (including 
counseling, taking of applications, obtaining verifications and 
appraisals, and other loan processing and origination services, and 
communicating with the borrower and lender);
    (3) Provision of any services related to the origination, 
processing or funding of a federally related mortgage loan;
    (4) Provision of title services, including title searches, title 
examinations, abstract preparation, insurability determinations, and 
the issuance of title commitments and title insurance policies;

[[Page 13235]]

    (5) Rendering of services by an attorney;
    (6) Preparation of documents, including notarization, delivery, and 
recordation;
    (7) Rendering of credit reports and appraisals;
    (8) Rendering of inspections, including inspections required by 
applicable law or any inspections required by the sales contract or 
mortgage documents prior to transfer of title;
    (9) Conducting of settlement by a settlement agent and any related 
services;
    (10) Provision of services involving mortgage insurance;
    (11) Provision of services involving hazard, flood, or other 
casualty insurance or homeowner's warranties;
    (12) Provision of services involving mortgage life, disability, or 
similar insurance designed to pay a mortgage loan upon disability or 
death of a borrower, but only if such insurance is required by the 
lender as a condition of the loan;
    (13) Provision of services involving real property taxes or any 
other assessments or charges on the real property;
    (14) Rendering of services by a real estate agent or real estate 
broker; and
    (15) Provision of any other services for which a settlement service 
provider requires a borrower or seller to pay.
    Special information booklet means the booklet prepared by the 
Secretary pursuant to section 5 of RESPA (12 U.S.C. 2604) to help 
persons understand the nature and costs of settlement services. The 
Secretary publishes the form of the special information booklet in the 
Federal Register. The Secretary may issue or approve additional 
booklets or alternative booklets by publication of a Notice in the 
Federal Register.
    State means any State of the United States, the District of 
Columbia, the Commonwealth of Puerto Rico, and any territory or 
possession of the United States.
    Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds. A table-funded transaction is not a 
secondary market transaction (see Sec. 3500.5(b)(7)).
    Title company means any institution, or its duly authorized agent, 
that is qualified to issue title insurance.


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

    Any questions or suggestions from the public regarding RESPA, or 
requests for copies of HUD Public Guidance Documents, should be 
directed to the Director, Office of Consumer and Regulatory Affairs, 
Department of Housing and Urban Development, 451 7th Street SW., 
Washington, DC 20410-8000, rather than to HUD field offices. Legal 
questions may be directed to the Assistant General Counsel, GSE/RESPA 
Division, at this address.


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

    (a) Rule, regulation or interpretation.--(1) For purposes of 
sections 19 (a) and (b) of RESPA (12 U.S.C. 2617 (a) and (b)) only the 
following constitute a rule, regulation or interpretation of the 
Secretary:
    (i) All provisions, including appendices, of this part. Any other 
document referred to in this part is not incorporated in this part 
unless it is specifically set out in this part;
    (ii) Any other document that is published in the Federal Register 
by the Secretary and states that it is an ``interpretation,'' 
``interpretive rule,'' ``commentary,'' or a ``statement of policy'' for 
purposes of section 19(a) of RESPA. Such documents will be prepared by 
HUD staff and counsel. Such documents may be revoked or amended by a 
subsequent document published in the Federal Register by the Secretary.
    (2) A ``rule, regulation, or interpretation thereof by the 
Secretary'' for purposes of section 19(b) of RESPA (12 U.S.C. 2617(b)) 
shall not include the special information booklet prescribed by the 
Secretary or any other statement or issuance, whether oral or written, 
by an officer or representative of the Department of Housing and Urban 
Development (HUD), letter or memorandum by the Secretary, General 
Counsel, any Assistant Secretary or other officer or employee of HUD, 
preamble to a regulation or other issuance of HUD, Public Guidance 
Document, report to Congress, pleading, affidavit or other document in 
litigation, pamphlet, handbook, guide, telegraphic communication, 
explanation, instructions to forms, speech or other material of any 
nature which is not specifically included in paragraph (a)(1) of this 
section.
    (b) Unofficial interpretations; staff discretion. In response to 
requests for interpretation of matters not adequately covered by this 
part or by an official interpretation issued under paragraph (a)(1)(ii) 
of this section, unofficial staff interpretations may be provided at 
the discretion of HUD staff or counsel. Written requests for such 
interpretations should be directed to the address indicated in 
Sec. 3500.3. Such interpretations provide no protection under section 
19(b) of RESPA (12 U.S.C. 2617(b)). Ordinarily, staff or counsel will 
not issue unofficial interpretations on matters adequately covered by 
this Part or by official interpretations or commentaries issued under 
paragraph (a)(1)(ii) of this section.
    (c) All informal counsel's opinions and staff interpretations 
issued before November 2, 1992, were withdrawn as of that date. Courts 
and administrative agencies, however, may use previous opinions to 
determine the validity of conduct under the previous Regulation X.


Sec. 3500.5  Coverage of RESPA.

    (a) Applicability. RESPA and this part apply to all federally 
related mortgage loans, except for the exemptions provided in paragraph 
(b) of this section.
    (b) Exemptions. (1) A loan on property of 25 acres or more.
    (2) Business purpose loans. An extension of credit primarily for a 
business, commercial, or agricultural purpose. The definition of such 
an extension of credit for purposes of this exemption generally 
parallels Regulation Z, 12 CFR 226.3(a)(1), and persons may rely on 
Regulation Z in determining whether the exemption applies. 
Notwithstanding the foregoing, the exemption in this section for 
business purpose loans does not include any loan to one or more persons 
acting in an individual capacity (natural persons) to acquire, 
refinance, improve, or maintain 1- to 4-family residential property 
used, or to be used, to rent to other persons. An individual who 
voluntarily chooses to act as a sole proprietorship is not considered 
to be acting in an individual capacity for purposes of this part.
    (3) Temporary financing. Temporary financing, such as a 
construction loan. The exemption for temporary financing does not apply 
to a loan made to finance construction of 1- to 4-family residential 
property if the loan is used as, or may be converted to, permanent 
financing by the same lender or is used to finance transfer of title to 
the first user. If a lender issues a commitment for permanent 
financing, with or without conditions, the loan is covered by this 
part. Any construction loan for new or rehabilitated 1- to 4-family 
residential property, other than a loan to a bona fide builder (a 
person who regularly constructs 1- to 4-family residential structures 
for sale or lease), is subject to this part if its term is for two 
years or more. A ``bridge loan'' or ``swing loan'' in which a lender 
takes a security

[[Page 13236]]
interest in otherwise covered 1- to 4-family residential property is 
not covered by RESPA and this part.
    (4) Vacant land. Any loan secured by vacant or unimproved property, 
unless within two years from the date of the settlement of the loan, a 
structure or a manufactured home will be constructed or placed on the 
real property using the loan proceeds. If a loan for a structure or 
manufactured home to be placed on vacant or unimproved property will be 
secured by a lien on that property, the transaction is covered by this 
part.
    (5) Assumption without lender approval. Any assumption in which the 
lender does not have the right expressly to approve a subsequent person 
as the borrower on an existing federally related mortgage loan. Any 
assumption in which the lender's permission is both required and 
obtained is covered by RESPA and this part, whether or not the lender 
charges a fee for the assumption.
    (6) Loan conversions. Any conversion of a federally related 
mortgage loan to different terms that are consistent with provisions of 
the original mortgage instrument, as long as a new note is not 
required, even if the lender charges an additional fee for the 
conversion.
    (7) Secondary market transactions. A bona fide transfer of a loan 
obligation in the secondary market is not covered by RESPA and this 
part, except as set forth in section 6 of RESPA (12 U.S.C. 2605) and 
Sec. 3500.21. In determining what constitutes a bona fide transfer, HUD 
will consider the real source of funding and the real interest of the 
funding lender. Mortgage broker transactions that are table-funded are 
not secondary market transactions. Neither the creation of a dealer 
loan or dealer consumer credit contract, nor the first assignment of 
such loan or contract to a lender, is a secondary market transaction 
(see Sec. 3500.2.)


Sec. 3500.6  Special information booklet at time of loan application.

    (a) Lender to provide special information booklet. Subject to the 
exceptions set forth in this paragraph, the lender shall provide a copy 
of the special information booklet to a person from whom the lender 
receives, or for whom the lender prepares, a written application for a 
federally related mortgage loan. When two or more persons apply 
together for a loan, the lender is in compliance if the lender provides 
a copy of the booklet to one of the persons applying.
    (1) The lender shall provide the special information booklet by 
delivering it or placing it in the mail to the applicant not later than 
three business days (as that term is defined in Sec. 3500.2) after the 
application is received or prepared. However, if the lender denies the 
borrower's application for credit before the end of the three-business-
day period, then the lender need not provide the booklet to the 
borrower. If a borrower uses a mortgage broker, the mortgage broker 
shall distribute the special information booklet and the lender need 
not do so. The intent of this provision is that the applicant receive 
the special information booklet at the earliest possible date.
    (2) In the case of a federally related mortgage loan involving an 
open-ended credit plan, as defined in Sec. 226.2(a)(20) of Regulation Z 
(12 CFR), a lender or mortgage broker that provides the borrower with a 
copy of the brochure entitled ``When Your Home is On the Line: What You 
Should Know About Home Equity Lines of Credit'', or any successor 
brochure issued by the Board of Governors of the Federal Reserve 
System, is deemed to be in compliance with this section.
    (3) In the categories of transactions set forth at the end of this 
paragraph, the lender or mortgage broker does not have to provide the 
booklet to the borrower. Under the authority of section 19(a) of RESPA 
(12 U.S.C. 2617(a)), the Secretary may issue a revised or separate 
special information booklet that deals with these transactions, or the 
Secretary may chose to endorse the forms or booklets of other Federal 
agencies. In such an event, the requirements for delivery by lenders 
and the availability of the booklet or alternate materials for these 
transactions will be set forth in a Notice in the Federal Register. 
This paragraph shall apply to the following transactions:
    (i) Refinancing transactions;
    (ii) Closed-end loans, as defined in 12 CFR 226.2(a)(10) of 
Regulation Z, when the lender takes a subordinate lien;
    (iii) Reverse mortgages; and
    (iv) Any other federally related mortgage loan whose purpose is not 
the purchase of a 1- to 4-family residential property.
    (b) Revision. The Secretary may from time to time revise the 
special information booklet by publishing a notice in the Federal 
Register.
    (c) Reproduction. The special information booklet may be reproduced 
in any form, provided that no change is made other than as provided 
under paragraph (d) of this section. The special information booklet 
may not be made a part of a larger document for purposes of 
distribution under RESPA and this section. Any color, size and quality 
of paper, type of print, and method of reproduction may be used so long 
as the booklet is clearly legible.
    (d) Permissible changes. (1) No changes to, deletions from, or 
additions to the special information booklet currently prescribed by 
the Secretary shall be made other than those specified in this 
paragraph (d) or any others approved in writing by the Secretary. A 
request to the Secretary for approval of any changes shall be submitted 
in writing to the address indicated in Sec. 3500.3, stating the reasons 
why the applicant believes such changes, deletions or additions are 
necessary.
    (2) The cover of the booklet may be in any form and may contain any 
drawings, pictures or artwork, provided that the words ``settlement 
costs'' are used in the title. Names, addresses and telephone numbers 
of the lender or others and similar information may appear on the 
cover, but no discussion of the matters covered in the booklet shall 
appear on the cover.
    (3) The special information booklet may be translated into 
languages other than English.


Sec. 3500.7  Good faith estimate.

    (a) Lender to provide. Except as provided in this paragraph (a) or 
paragraph (f) of this section, the lender shall provide all applicants 
for a federally related mortgage loan with a good faith estimate of the 
amount of or range of charges for the specific settlement services the 
borrower is likely to incur in connection with the settlement. The 
lender shall provide the good faith estimate required under this 
section (a suggested format is set forth in Appendix C of this part) 
either by delivering the good faith estimate or by placing it in the 
mail to the loan applicant, not later than three business days after 
the application is received or prepared.
    (1) If the lender denies the application for a federally related 
mortgage loan before the end of the three-business-day period, the 
lender need not provide the denied borrower with a good faith estimate.
    (2) For ``no cost'' or ``no point'' loans, the charges to be shown 
on the good faith estimate include any payments to be made to 
affiliated or independent settlement service providers. These payments 
should be shown as P.O.C. (Paid Outside of Closing) on the Good Faith 
Estimate and the HUD-1 or HUD-1A.
    (3) In the case of dealer loans, the lender is responsible for 
provision of the good faith estimate, either directly or by the dealer.
    (4) If a mortgage broker is the exclusive agent of the lender, 
either the

[[Page 13237]]
lender or the mortgage broker shall provide the good faith estimate 
within three business days after the mortgage broker receives or 
prepares the application.
    (b) Mortgage broker to provide. In the event an application is 
received by a mortgage broker who is not an exclusive agent of the 
lender, the mortgage broker must provide a good faith estimate within 
three days of receiving a loan application based on his or her 
knowledge of the range of costs (a suggested format is set forth in 
Appendix C of this part). As long as the mortgage broker has provided 
the good faith estimate, the funding lender is not required to provide 
an additional good faith estimate, but the funding lender is 
responsible for ascertaining that the good faith estimate has been 
delivered. If the application for mortgage credit is denied before the 
end of the three-business-day period, the mortgage broker need not 
provide the denied borrower with a good faith estimate.
    (c) Content of good faith estimate. A good faith estimate consists 
of an estimate, as a dollar amount or range, of each charge which:
    (1) Will be listed in section L of the HUD-1 or HUD-1A in 
accordance with the instructions set forth in Appendix A to this part; 
and
    (2) That the borrower will normally pay or incur at or before 
settlement based upon common practice in the locality of the mortgaged 
property. Each such estimate must be made in good faith and bear a 
reasonable relationship to the charge a borrower is likely to be 
required to pay at settlement, and must be based upon experience in the 
locality of the mortgaged property. As to each charge with respect to 
which the lender requires a particular settlement service provider to 
be used, the lender shall make its estimate based upon the lender's 
knowledge of the amounts charged by such provider.
    (d) Form of good faith estimate. A suggested good faith estimate 
form is set forth in Appendix C to this part and is in compliance with 
the requirements of the Act except for any additional requirements of 
paragraph (e) of this section. The good faith estimate may be provided 
together with disclosures required by the Truth in Lending Act, 15 
U.S.C. 1601 et seq., so long as all required material for the good 
faith estimate is grouped together. The lender may include additional 
relevant information, such as the name/signature of the applicant and 
loan officer, date, and information identifying the loan application 
and property, as long as the form remains clear and concise and the 
additional information is not more prominent than the required 
material.
    (e) Particular providers required by lender. (1) If the lender 
requires the use (see Sec. 3500.2, ``required use'') of a particular 
provider of a settlement service, other than the lender's own 
employees, and also requires the borrower to pay any portion of the 
cost of such service, then the good faith estimate must:
    (i) Clearly state that use of the particular provider is required 
and that the estimate is based on the charges of the designated 
provider;
    (ii) Give the name, address, and telephone number of each provider; 
and
    (iii) Describe the nature of any relationship between each such 
provider and the lender. Plain English references to the relationship 
should be utilized, e.g., ``X is a depositor of the lender,'' ``X is a 
borrower from the lender,'' ``X has performed 60% of the lender's 
settlements in the past year.'' (The lender is not required to keep 
detailed records of the percentages of use. Similar language, such as 
``X was used [regularly] [frequently] in our settlements the past 
year'' is also sufficient for the purposes of this paragraph.) In the 
event that more than one relationship exists, each should be disclosed.
    (2) For purposes of paragraph (e)(1) of this section, a 
``relationship'' exists if:
    (i) The provider is an associate of the lender, as that term is 
defined in 12 U.S.C. 2602(8);
    (ii) Within the last 12 months, the provider has maintained an 
account with the lender or had an outstanding loan or credit 
arrangement with the lender; or
    (iii) The lender has repeatedly used or required borrowers to use 
the services of the provider within the last 12 months.
    (3) Except for a provider that is the lender's chosen attorney, 
credit reporting agency, or appraiser, if the lender is in a controlled 
business relationship (see Sec. 3500.15) with a provider, the lender 
may not require the use of that provider.
    (4) If the lender maintains a controlled list of required providers 
(five or more for each discrete service) or relies on a list maintained 
by others, and at the time of application the lender has not yet 
decided which provider will be selected from that list, then the lender 
may satisfy the requirements of this section if the lender:
    (i) Provides the borrower with a written statement that the lender 
will require a particular provider from a lender-controlled or -
approved list; and
    (ii) Provides the borrower in the Good Faith Estimate the range of 
costs for the required provider(s), and provides the name of the 
specific provider and the actual cost on the HUD-1 or HUD-1A.
    (f) Open-end lines of credit (home-equity plans) under Truth in 
Lending Act. In the case of a federally related mortgage loan involving 
an open-end line of credit (home-equity plan) covered under the Truth 
in Lending Act and Regulation Z, a lender or mortgage broker that 
provides the borrower with the disclosures required by 12 CFR 226.5b of 
Regulation Z at the time the borrower applies for such loan shall be 
deemed to satisfy the requirements of this section.

(Approved by the Office of Management and Budget under control 
number 2502-0265)


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

    (a) Use by settlement agent. The settlement agent shall use the 
HUD-1 settlement statement in every settlement involving a federally 
related mortgage loan in which there is a borrower and a seller. For 
transactions in which there is a borrower and no seller, such as 
refinancing loans or subordinate lien loans, the HUD-1 may be utilized 
by using the borrower's side of the HUD-1 statement. Alternatively, the 
form HUD-1A may be used for these transactions. Either the HUD-1 or the 
HUD-1A, as appropriate, shall be used for every RESPA-covered 
transaction, unless its use is specifically exempted, but the HUD-1 or 
HUD-1A may be modified as permitted under this part. The use of the 
HUD-1 or HUD-1A is exempted for open-end lines of credit (home-equity 
plans) covered by the Truth in Lending Act and Regulation Z.
    (b) Charges to be stated. The settlement agent shall complete the 
HUD-1 or HUD-1A in accordance with the instructions set forth in 
Appendix A to this part.
    (c) Aggregate Accounting At Settlement. (1) After itemizing 
individual deposits in the 1000 series using single-item accounting, 
the servicer shall make an adjustment based on aggregate accounting. 
This adjustment equals the difference in the deposit required under 
aggregate accounting and the sum of the deposits required under single-
item accounting. The computation steps for both accounting methods are 
set out in Sec. 3500.17(d). The adjustment will always be a negative 
number or zero (-0-). The settlement agent shall enter the aggregate 
adjustment amount on a final line in the 1000 series of the HUD-1 or 
HUD-1A statement.
    (2) During the phase-in period, as defined in Sec. 3500.17(b), an 
alternative procedure is available. The settlement

[[Page 13238]]
agent may initially calculate the 1000 series deposits for the HUD-1 
and HUD-1A settlement statement using single-item analysis with only a 
one-month cushion (unless the mortgage loan documents indicate a 
smaller amount). In the escrow account analysis conducted within 45 
days of settlement, however, the servicer shall adjust the escrow 
account to reflect the aggregate accounting balance. Appendix F to this 
part sets out examples of aggregate analysis. Appendix A to this part 
contains instructions for completing the HUD-1 or HUD-1A settlement 
statements using an aggregate analysis adjustment and the alternative 
process during the phase-in period.

(Approved by the Office of Management and Budget under control 
numbers 2502-0265 and 2502-0491)


Sec. 3500.9  Reproduction of settlement statements.

    (a) Permissible changes--HUD-1. The following changes and 
insertions are permitted when the HUD-1 settlement statement is 
reproduced:
    (1) The person reproducing the HUD-1 may insert its business name 
and logotype in Section A and may rearrange, but not delete, the other 
information that appears in Section A.
    (2) The name, address, and other information regarding the lender 
and settlement agent may be printed in Sections F and H, respectively.
    (3) Reproduction of the HUD-1 must conform to the terminology, 
sequence, and numbering of line items as presented in lines 100-1400. 
However, blank lines or items listed in lines 100-1400 that are not 
used locally or in connection with mortgages by the lender may be 
deleted, except for the following: Lines 100, 120, 200, 220, 300, 301, 
302, 303, 400, 420, 500, 520, 600, 601, 602, 603, 700, 800, 900, 1000, 
1100, 1200, 1300, and 1400. The form may be shortened correspondingly. 
The number of a deleted item shall not be used for a substitute or new 
item, but the number of a blank space on the HUD-1 may be used for a 
substitute or new item.
    (4) Charges not listed on the HUD-1, but that are customary locally 
or pursuant to the lender's practice, may be inserted in blank spaces. 
Where existing blank spaces on the HUD-1 are insufficient, additional 
lines and spaces may be added and numbered in sequence with spaces on 
the HUD-1.
    (5) The following variations in layout and format are within the 
discretion of persons reproducing the HUD-1 and do not require prior 
HUD approval: size of pages; tint or color of pages; size and style of 
type or print; vertical spacing between lines or provision for 
additional horizontal space on lines (for example, to provide 
sufficient space for recording time periods used in prorations); 
printing of the HUD-1 contents on separate pages, on the front and back 
of a single page, or on one continuous page; use of multicopy tear-out 
sets; printing on rolls for computer purposes; reorganization of 
Sections B through I, when necessary to accommodate computer printing; 
and manner of placement of the HUD number, but not the OMB approval 
number, neither of which may be deleted. The designation of the 
expiration date of the OMB number may be deleted. Any changes in the 
HUD number or OMB approval number may be announced by notice in the 
Federal Register, rather than by amendment of this part.
    (6) The borrower's information and the seller's information may be 
provided on separate pages.
    (7) Signature lines may be added.
    (8) The HUD-1 may be translated into languages other than English.
    (9) An additional page may be attached to the HUD-1 for the purpose 
of including customary recitals and information used locally in real 
estate settlements; for example, breakdown of payoff figures, a 
breakdown of the borrower's total monthly mortgage payments, check 
disbursements, a statement indicating receipt of funds, applicable 
special stipulations between buyer and seller, and the date funds are 
transferred. If space permits, such information may be added at the end 
of the HUD-1.
    (10) As required by HUD/FHA in FHA-insured loans.
    (11) As allowed by Sec. 3500.17, relating to an initial escrow 
account statement.
    (b) Permissible changes--HUD-1A. The changes and insertions on the 
HUD-1 permitted under paragraph (a) of this section are also permitted 
when the HUD-1A settlement statement is reproduced, except the changes 
described in paragraphs (a) (3) and (6) of this section.
    (c) Written approval. Any other deviation in the HUD-1 or HUD-1A 
forms is permissible only upon receipt of written approval of the 
Secretary. A request to the Secretary for approval shall be submitted 
in writing to the address indicated in Sec. 3500.3 and shall state the 
reasons why the applicant believes such deviation is needed. The 
prescribed form(s) must be used until approval is received.

(Approved by the Office of Management and Budget under control 
numbers 2502-0265 and 2502-0491)


Sec. 3500.10  One-day advance inspection of HUD-1 or HUD-1A settlement 
statement; delivery; recordkeeping.

    (a) Inspection one day prior to settlement upon request by the 
borrower. The settlement agent shall permit the borrower to inspect the 
HUD-1 or HUD-1A settlement statement, completed to set forth those 
items that are known to the settlement agent at the time of inspection, 
during the business day immediately preceding settlement. Items related 
only to the seller's transaction may be omitted from the HUD-1.
    (b) Delivery. The settlement agent shall provide a completed HUD-1 
or HUD-1A to the borrower, the seller (if there is one), the lender (if 
the lender is not the settlement agent), and/or their agents. When the 
borrower's and seller's copies of the HUD-1 or HUD-1A differ as 
permitted by the instructions in Appendix A to this part, both copies 
shall be provided to the lender (if the lender is not the settlement 
agent). The settlement agent shall deliver the completed HUD-1 or HUD-
1A at or before the settlement, except as provided in paragraphs (c) 
and (d) of this section.
    (c) Waiver. The borrower may waive the right to delivery of the 
completed HUD-1 or HUD-1A no later than at settlement by executing a 
written waiver at or before settlement. In such case, the completed 
HUD-1 or HUD-1A shall be mailed or delivered to the borrower, seller, 
and lender (if the lender is not the settlement agent) as soon as 
practicable after settlement.
    (d) Exempt transactions. When the borrower or the borrower's agent 
does not attend the settlement, or when the settlement agent does not 
conduct a meeting of the parties for that purpose, the transaction 
shall be exempt from the requirements of paragraphs (a) and (b) of this 
section, except that the HUD-1 or HUD-1A shall be mailed or delivered 
as soon as practicable after settlement.
    (e) Recordkeeping. The lender shall retain each completed HUD-1 or 
HUD-1A and related documents for five years after settlement, unless 
the lender disposes of its interest in the mortgage and does not 
service the mortgage. In that case, the lender shall provide its copy 
of the HUD-1 or HUD-1A to the owner or servicer of the mortgage as a 
part of the transfer of the loan file. Such owner or servicer shall 
retain the HUD-1 or HUD-1A for the remainder of the five-year period. 
The Secretary shall have the right to inspect or require copies of 
records covered by this paragraph (e).

(Approved by the Office of Management and Budget under control 
number 2502-0265)

[[Page 13239]]



Sec. 3500.11  Mailing.

    The provisions of this part requiring or permitting mailing of 
documents shall be deemed to be satisfied by placing the document in 
the mail (whether or not received by the addressee) addressed to the 
addresses stated in the loan application or in other information 
submitted to or obtained by the lender at the time of loan application 
or submitted or obtained by the lender or settlement agent, except that 
a revised address shall be used where the lender or settlement agent 
has been expressly informed in writing of a change in address.


Sec. 3500.12  No fee.

    No fee shall be imposed or charge made upon any other person, as a 
part of settlement costs or otherwise, by a lender in connection with a 
federally related mortgage loan made by it (or a loan for the purchase 
of a manufactured home), or by a servicer (as that term is defined 
under 12 U.S.C. 2605(i)(2)) for or on account of the preparation and 
distribution of the HUD-1 or HUD-1A settlement statement, escrow 
account statements required pursuant to section 10 of RESPA (12 U.S.C. 
2609), or statements required by the Truth in Lending Act, 15 U.S.C. 
1601 et seq.


Sec. 3500.13  Relation to State laws.

    (a) State laws that are inconsistent with RESPA or this part are 
preempted to the extent of the inconsistency. However, RESPA and these 
regulations do not annul, alter, affect, or exempt any person subject 
to their provisions from complying with the laws of any State with 
respect to settlement practices, except to the extent of the 
inconsistency.
    (b) Upon request by any person, the Secretary is authorized to 
determine if inconsistencies with State law exist; in doing so, the 
Secretary shall consult with appropriate Federal agencies.
    (1) The Secretary may not determine that a State law or regulation 
is inconsistent with any provision of RESPA or this part, if the 
Secretary determines that such law or regulation gives greater 
protection to the consumer.
    (2) In determining whether provisions of State law or regulations 
concerning controlled business arrangements are inconsistent with RESPA 
or this part, the Secretary may not construe those provisions that 
impose more stringent limitations on controlled business arrangements 
as inconsistent with RESPA so long as they give more protection to 
consumers and/or competition.
    (c) Any person may request the Secretary to determine whether an 
inconsistency exists by submitting to the address indicated in 
Sec. 3500.3, a copy of the State law in question, any other law or 
judicial or administrative opinion that implements, interprets or 
applies the relevant provision, and an explanation of the possible 
inconsistency. A determination by the Secretary that an inconsistency 
with State law exists will be made by publication of a notice in the 
Federal Register. ``Law'' as used in this section includes regulations 
and any enactment which has the force and effect of law and is issued 
by a State or any political subdivision of a State.
    (d) A specific preemption of conflicting State laws regarding 
notices and disclosures of mortgage servicing transfers is set forth in 
Sec. 3500.21(h).


Sec. 3500.14  Prohibition against kickbacks and unearned fees.

    (a) Section 8 violation. Any violation of this section is a 
violation of section 8 of RESPA (12 U.S.C. 2607) and is subject to 
enforcement as such under Sec. 3500.19.
    (b) No referral fees. No person shall give and no person shall 
accept any fee, kickback or other thing of value pursuant to any 
agreement or understanding, oral or otherwise, that business incident 
to or part of a settlement service involving a federally related 
mortgage loan shall be referred to any person. Any referral of a 
settlement service is not a compensable service, except as set forth in 
Sec. 3500.14(g)(1). A company may not pay any other company or the 
employees of any other company for the referral of settlement service 
business.
    (c) No split of charges except for actual services performed. No 
person shall give and no person shall accept any portion, split, or 
percentage of any charge made or received for the rendering of a 
settlement service in connection with a transaction involving a 
federally related mortgage loan other than for services actually 
performed. A charge by a person for which no or nominal services are 
performed or for which duplicative fees are charged is an unearned fee 
and violates this section. The source of the payment does not determine 
whether or not a service is compensable. Nor may the prohibitions of 
this Part be avoided by creating an arrangement wherein the purchaser 
of services splits the fee.
    (d) Thing of value. This term is broadly defined in section 3(2) of 
RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, 
things, discounts, salaries, commissions, fees, duplicate payments of a 
charge, stock, dividends, distributions of partnership profits, 
franchise royalties, credits representing monies that may be paid at a 
future date, the opportunity to participate in a money-making program, 
retained or increased earnings, increased equity in a parent or 
subsidiary entity, special bank deposits or accounts, special or 
unusual banking terms, services of all types at special or free rates, 
sales or rentals at special prices or rates, lease or rental payments 
based in whole or in part on the amount of business referred, trips and 
payment of another person's expenses, or reduction in credit against an 
existing obligation. The term ``payment'' is used throughout 
Secs. 3500.14 and 3500.15 as synonymous with the giving or receiving 
any ``thing of value'' and does not require transfer of money.
    (e) Agreement or understanding. An agreement or understanding for 
the referral of business incident to or part of a settlement service 
need not be written or verbalized but may be established by a practice, 
pattern or course of conduct. When a thing of value is received 
repeatedly and is connected in any way with the volume or value of the 
business referred, the receipt of the thing of value is evidence that 
it is made pursuant to an agreement or understanding for the referral 
of business.
    (f) Referral--(1) A referral includes any oral or written action 
directed to a person which has the effect of affirmatively influencing 
the selection by any person of a provider of a settlement service or 
business incident to or part of a settlement service when such person 
will pay for such settlement service or business incident thereto or 
pay a charge attributable in whole or in part to such settlement 
service or business.
    (2) A referral also occurs whenever a person paying for a 
settlement service or business incident thereto is required to use (see 
Sec. 3500.2, ``required use'') a particular provider of a settlement 
service or business incident thereto.
    (g) Fees, salaries, compensation, or other payments. (1) Section 8 
of RESPA permits:
    (i) A payment to an attorney at law for services actually rendered;
    (ii) A payment by a title company to its duly appointed agent for 
services actually performed in the issuance of a policy of title 
insurance;
    (iii) A payment by a lender to its duly appointed agent or 
contractor for services actually performed in the origination, 
processing, or funding of a loan;
    (iv) A payment to any person of a bona fide salary or compensation 
or other payment for goods or facilities

[[Page 13240]]
actually furnished or for services actually performed;
    (v) A payment pursuant to cooperative brokerage and referral 
arrangements or agreements between real estate agents and real estate 
brokers. (The statutory exemption restated in this paragraph refers 
only to fee divisions within real estate brokerage arrangements when 
all parties are acting in a real estate brokerage capacity, and has no 
applicability to any fee arrangements between real estate brokers and 
mortgage brokers or between mortgage brokers.);
    (vi) Normal promotional and educational activities that are not 
conditioned on the referral of business and that do not involve the 
defraying of expenses that otherwise would be incurred by persons in a 
position to refer settlement services or business incident thereto;
    (vii) An employer's payment to its own employees for any referral 
activities; or
    (viii) Any payment by a borrower for computer loan origination 
services, so long as the disclosure set forth in Appendix E of this 
part is provided the borrower.
    (2) The Department may investigate high prices to see if they are 
the result of a referral fee or a split of a fee. If the payment of a 
thing of value bears no reasonable relationship to the market value of 
the goods or services provided, then the excess is not for services or 
goods actually performed or provided. These facts may be used as 
evidence of a violation of section 8 and may serve as a basis for a 
RESPA investigation. High prices standing alone are not proof of a 
RESPA violation. The value of a referral (i.e., the value of any 
additional business obtained thereby) is not to be taken into account 
in determining whether the payment exceeds the reasonable value of such 
goods, facilities or services. The fact that the transfer of the thing 
of value does not result in an increase in any charge made by the 
person giving the thing of value is irrelevant in determining whether 
the act is prohibited.
    (3) Multiple services. When a person in a position to refer 
settlement service business, such as an attorney, mortgage lender, real 
estate broker or agent, or developer or builder, receives a payment for 
providing additional settlement services as part of a real estate 
transaction, such payment must be for services that are actual, 
necessary and distinct from the primary services provided by such 
person. For example, for an attorney of the buyer or seller to receive 
compensation as a title agent, the attorney must perform core title 
agent services (for which liability arises) separate from attorney 
services, including the evaluation of the title search to determine the 
insurability of the title, the clearance of underwriting objections, 
the actual issuance of the policy or policies on behalf of the title 
insurance company, and, where customary, issuance of the title 
commitment, and the conducting of the title search and closing.
    (h) Recordkeeping. Any documents provided pursuant to this section 
shall be retained for five (5) years from the date of execution.
    (i) Appendix B of this part. Illustrations in Appendix B of this 
part demonstrate some of the requirements of this section.


Sec. 3500.15  Controlled business arrangements.

    (a) General. A controlled business arrangement is defined in 
section 3(7) of RESPA (12 U.S.C. 2602(7)).
    (b) Violation and exemption. A controlled business arrangement is 
not a violation of section 8 of RESPA (12 U.S.C. 2607) and of 
Sec. 3500.14 if the conditions set forth in this section are satisfied.
    (1) The person making each referral has provided to each person 
whose business is referred a written disclosure, in the format of the 
Controlled Business Arrangement Disclosure Statement set forth in 
Appendix D of this part, of the nature of the relationship (explaining 
the ownership and financial interest) between the provider of 
settlement services (or business incident thereto) and the person 
making the referral and of an estimated charge or range of charges 
generally made by such provider (which describes the charge using the 
same terminology, as far as practical, as section L of the HUD-1 
settlement statement). The disclosures must be provided on a separate 
piece of paper no later than the time of each referral or, if the 
lender requires use of a particular provider, the time of loan 
application, except that:
    (i) Where a lender makes the referral to a borrower, the condition 
contained in paragraph (b)(1) of this section may be satisfied at the 
time that the good faith estimate or a statement under Sec. 3500.7(d) 
is provided; and
    (ii) Whenever an attorney or law firm requires a client to use a 
particular title insurance agent, the attorney or law firm shall 
provide the disclosures no later than the time the attorney or law firm 
is engaged by the client. Failure to comply with the disclosure 
requirements of this section may be overcome if the person making a 
referral can prove by a preponderance of the evidence that procedures 
reasonably adopted to result in compliance with these conditions have 
been maintained and that any failure to comply with these conditions 
was unintentional and the result of a bona fide error. An error of 
legal judgment with respect to a person's obligations under RESPA is 
not a bona fide error. Administrative and judicial interpretations of 
section 130(c) of the Truth in Lending Act shall not be binding 
interpretations of the preceding sentence or section 8(d)(3) of RESPA 
(12 U.S.C. 2607(d)(3)).
    (2) No person making a referral has required (as defined in 
Sec. 3500.2, ``required use'') any person to use any particular 
provider of settlement services or business incident thereto, except if 
such person is a lender, for requiring a buyer, borrower or seller to 
pay for the services of an attorney, credit reporting agency, or real 
estate appraiser chosen by the lender to represent the lender's 
interest in a real estate transaction, or except if such person is an 
attorney or law firm for arranging for issuance of a title insurance 
policy for a client, directly as agent or through a separate corporate 
title insurance agency that may be operated as an adjunct to the law 
practice of the attorney or law firm, as part of representation of that 
client in a real estate transaction.
    (3) The only thing of value that is received from the arrangement 
other than payments listed in Sec. 3500.14(g) is a return on an 
ownership interest or franchise relationship.
    (i) In a controlled business arrangement:
    (A) Bona fide dividends, and capital or equity distributions, 
related to ownership interest or franchise relationship, between 
entities in an affiliate relationship, are permissible; and
    (B) Bona fide business loans, advances, and capital or equity 
contributions between entities in an affiliate relationship (in any 
direction), are not prohibited--so long as they are for ordinary 
business purposes and are not fees for the referral of settlement 
service business or unearned fees.
    (ii) A return on an ownership interest does not include:
    (A) Any payment which has as a basis of calculation no apparent 
business motive other than distinguishing among recipients of payments 
on the basis of the amount of their actual, estimated or anticipated 
referrals;
    (B) Any payment which varies according to the relative amount of 
referrals by the different recipients of similar payments; or

[[Page 13241]]

    (C) A payment based on an ownership, partnership or joint venture 
share which has been adjusted on the basis of previous relative 
referrals by recipients of similar payments.
    (iii) Neither the mere labelling of a thing of value, nor the fact 
that it may be calculated pursuant to a corporate or partnership 
organizational document or a franchise agreement, will determine 
whether it is a bona fide return on an ownership interest or franchise 
relationship. Whether a thing of value is such a return will be 
determined by analyzing facts and circumstances on a case by case 
basis.
    (iv) A return on franchise relationship may be a payment to or from 
a franchisee but it does not include any payment which is not based on 
the franchise agreement, nor any payment which varies according to the 
number or amount of referrals by the franchisor or franchisee or which 
is based on a franchise agreement which has been adjusted on the basis 
of a previous number or amount of referrals by the franchiser or 
franchisees. A franchise agreement may not be constructed to insulate 
against kickbacks or referral fees.
    (c) Definitions. As used in this section:
    (1) Associate is defined in section 3(8) of RESPA (12 U.S.C. 
2602(8)).
    (2) Affiliate relationship means the relationship among business 
entities where one entity has effective control over the other by 
virtue of a partnership or other agreement or is under common control 
with the other by a third entity or where an entity is a corporation 
related to another corporation as parent to subsidiary by an identity 
of stock ownership.
    (3) Beneficial ownership means the effective ownership of an 
interest in a provider of settlement services or the right to use and 
control the ownership interest involved even though legal ownership or 
title may be held in another person's name.
    (4) Control, as used in the definitions of ``associate'' and 
``affiliate relationship,'' means that a person:
    (i) Is a general partner, officer, director, or employer of another 
person;
    (ii) Directly or indirectly or acting in concert with others, or 
through one or more subsidiaries, owns, holds with power to vote, or 
holds proxies representing, more than 20 percent of the voting 
interests of another person;
    (iii) Affirmatively influences in any manner the election of a 
majority of the directors of another person; or
    (iv) Has contributed more than 20 percent of the capital of the 
other person.
    (5) Direct ownership means the holding of legal title to an 
interest in a provider of settlement service except where title is 
being held for the beneficial owner.
    (6) Franchise is defined in 16 CFR 436.2(a).
    (7) Franchisor is defined in 16 CFR 436.2(c).
    (8) Franchisee is defined in 16 CFR 436.2(d).
    (9) Person who is in a position to refer settlement service 
business means any real estate broker or agent, lender, mortgage 
broker, builder or developer, attorney, title company, title agent, or 
other person deriving a significant portion of his or her gross income 
from providing settlement services.
    (d) Recordkeeping. Any documents provided pursuant to this section 
shall be retained for 5 years after the date of execution.
    (e) Appendix B of this part. Illustrations in Appendix B of this 
part demonstrate some of the requirements of this section.


Sec. 3500.16  Title companies.

    No seller of property that will be purchased with the assistance of 
a federally related mortgage loan shall violate section 9 of RESPA (12 
U.S.C. 2608). Section 3500.2 defines ``required use'' of a provider of 
a settlement service. Section 3500.19(c) explains the liability of a 
seller for a violation of this section.


Sec. 3500.17  Escrow accounts.

    (a) General. This section sets out the requirements for an escrow 
account that a lender establishes in connection with a federally 
related mortgage loan. It sets limits for escrow accounts using 
calculations based on monthly payments and disbursements within a 
calendar year. If an escrow account involves biweekly or any other 
payment period, the requirements in this section shall be modified 
accordingly. A HUD Public Guidance Document entitled ``Biweekly 
Payments--Example'' provides examples of biweekly accounting and a HUD 
Public Guidance Document entitled ``Annual Escrow Account Disclosure 
Statement--Example'' provides examples of a 3-year accounting cycle 
that may be used in accordance with paragraph (c)(9) of this section.
    (b) Definitions. As used in this section:
    Acceptable accounting method means an accounting method that a 
servicer uses to conduct an escrow account analysis for an escrow 
account subject to the provisions of Sec. 3500.17(c).
    Aggregate (or) composite analysis, hereafter called aggregate 
analysis, means an accounting method a servicer uses in conducting an 
escrow account analysis by computing the sufficiency of escrow account 
funds by analyzing the account as a whole. Appendix F to this part sets 
forth examples of aggregate escrow account analyses.
    Annual Escrow Account Statement means a statement containing all of 
the information set forth in Sec. 3500.17(i). As noted in 
Sec. 3500.17(i), a servicer shall submit an annual escrow account 
statement to the borrower within 30 calendar days of the end of the 
escrow account computation year, after conducting an escrow account 
analysis.
    Conversion date means the date three years after the publication 
date of the rule adding this section (i.e., October 27, 1997) by which 
date all servicers shall use aggregate analysis.
    Cushion or reserve (hereafter cushion) means funds that a servicer 
may require a borrower to pay into an escrow account to cover 
unanticipated disbursements or disbursements made before the borrower's 
payments are available in the account, as limited by Sec. 3500.17(c).
    Deficiency is the amount of a negative balance in an escrow 
account. As noted in Sec. 3500.17(f), if a servicer advances funds for 
a borrower, then the servicer must perform an escrow account analysis 
before seeking repayment of the deficiency.
    Delivery means the placing of a document in the United States mail, 
first-class postage paid, addressed to the last known address of the 
recipient. Hand delivery also constitutes delivery.
    Disbursement date means the date on which the servicer actually 
pays an escrow item from the escrow account. Section 3500.17(k) 
provides that the servicer shall use as the disbursement date a date on 
or before the earlier of the deadline to take advantage of discounts, 
if available, or the deadline to avoid a penalty.
    Escrow account means any account that a servicer establishes or 
controls on behalf of a borrower to pay taxes, insurance premiums 
(including flood insurance), or other charges with respect to a 
federally related mortgage loan, including charges that the borrower 
and servicer have voluntarily agreed that the servicer should collect 
and pay. The definition encompasses any account established for this 
purpose, including a ``trust account'', ``reserve account'', ``impound 
account'', or other term in different localities. An ``escrow account'' 
includes any arrangement where the servicer adds a portion of the 
borrower's payments to principal and subsequently deducts from 
principal the disbursements for escrow account items.

[[Page 13242]]
For purposes of this section, the term ``escrow account'' excludes any 
account that is under the borrower's total control.
    Escrow account analysis means the accounting that a servicer 
conducts in the form of a trial running balance for an escrow account 
to:
    (1) Determine the appropriate target balances;
    (2) Compute the borrower's monthly payments for the next escrow 
account computation year and any deposits needed to establish or 
maintain the account; and
    (3) Determine whether shortages, surpluses or deficiencies exist.
    Escrow account computation year is a 12-month period that a 
servicer establishes for the escrow account beginning with the 
borrower's initial payment date. The term includes each 12-month period 
thereafter, unless a servicer chooses to issue a short year statement 
under the conditions stated in Sec. 3500.17(i)(4).
    Escrow account item or separate item means any separate expenditure 
category, such as ``taxes'' or ``insurance'', for which funds are 
collected in the escrow account for disbursement. An escrow account 
item with installment payments, such as local property taxes, remains 
one escrow account item regardless of multiple disbursement dates to 
the tax authority.
    Initial escrow account statement means the first disclosure 
statement that the servicer delivers to the borrower concerning the 
borrower's escrow account. The initial escrow account statement shall 
meet the requirements of Sec. 3500.17(g) and be in substantially the 
format set forth in Sec. 3500.17(h).
    Installment payment means one of two or more payments payable on an 
escrow account item during an escrow account computation year. An 
example of an installment payment is where a jurisdiction bills 
quarterly for taxes.
    Payment due date means the date each month when the borrower's 
monthly payment to an escrow account is due to the servicer. The 
initial payment date is the borrower's first payment due date to an 
escrow account.
    Phase-in period means the period beginning on the effective date of 
this final rule and ending on the conversion date, i.e., October 27, 
1997, by which date all servicers shall use the aggregate accounting 
method in conducting escrow account analyses.
    Post-rule account means an escrow account established in connection 
with a federally related mortgage loan whose settlement date is on or 
after the effective date of this section.
    Pre-accrual is a practice some servicers use to require borrowers 
to deposit funds, needed for disbursement and maintenance of a cushion, 
in the escrow account some period before the disbursement date. Pre-
accrual is subject to the limitations of Sec. 3500.17(c).
    Pre-rule account is an escrow account established in connection 
with a federally related mortgage loan whose settlement date is before 
the effective date of this rule.
    Shortage means an amount by which a current escrow account balance 
falls short of the target balance at the time of escrow analysis.
    Single-item analysis means an accounting method servicers use in 
conducting an escrow account analysis by computing the sufficiency of 
escrow account funds by considering each escrow item separately. 
Appendix F to this part sets forth examples of single-item analysis.
    Submission (of an escrow account statement) means the delivery of 
the statement.
    Surplus means an amount by which the current escrow account balance 
exceeds the target balance for the account.
    System of recordkeeping means the servicer's method of keeping 
information that reflects the facts relating to that servicer's 
handling of the borrower's escrow account, including, but not limited 
to, the payment of amounts from the escrow account and the submission 
of initial and annual escrow account statements to borrowers.
    Target balance means the estimated month end balance in an escrow 
account that is just sufficient to cover the remaining disbursements 
from the escrow account in the escrow account computation year, taking 
into account the remaining scheduled periodic payments, and a cushion, 
if any.
    Trial running balance means the accounting process that derives the 
target balances over the course of an escrow account computation year. 
Section 3500.17(d) provides a description of the steps involved in 
performing a trial running balance.
    (c) Limits on payments to escrow accounts; acceptable accounting 
methods to determine limits.
    (1) A lender or servicer (hereafter servicer) shall not require a 
borrower to deposit into any escrow account, created in connection with 
a federally related mortgage loan, more than the following amounts:
    (i) Charges at settlement or upon creation of an escrow account. At 
the time a servicer creates an escrow account for a borrower, the 
servicer may charge the borrower an amount sufficient to pay the 
charges respecting the mortgaged property, such as taxes and insurance, 
which are attributable to the period from the date such payment(s) were 
last paid until the initial payment date. The ``amount sufficient to 
pay'' is computed so that the lowest month end target balance projected 
for the escrow account computation year is zero (-0-) (see Step 2 in 
Appendix F to this part). In addition, the servicer may charge the 
borrower a cushion that shall be no greater than one-sixth (\1/6\) of 
the estimated total annual payments from the escrow account.
    (ii) Charges during the life of the escrow account. Throughout the 
life of an escrow account, the servicer may charge the borrower a 
monthly sum equal to one-twelfth (\1/12\) of the total annual escrow 
payments which the servicer reasonably anticipates paying from the 
account. In addition, the servicer may add an amount to maintain a 
cushion no greater than one-sixth (\1/6\) of the estimated total annual 
payments from the account. However, if a servicer determines through an 
escrow account analysis that there is a shortage or deficiency, the 
servicer may require the borrower to pay additional deposits to make up 
the shortage or eliminate the deficiency, subject to the limitations 
set forth in Sec. 3500.17(f).
    (2) Escrow analysis at creation of escrow account. Before 
establishing an escrow account, the servicer shall conduct an escrow 
account analysis to determine the amount the borrower shall deposit 
into the escrow account, subject to the limitations of 
Sec. 3500.17(c)(1)(i) and the amount of the borrower's periodic 
payments into the escrow account, subject to the limitations of 
Sec. 3500.17(c)(1)(ii). In conducting the escrow account analysis, the 
servicer shall estimate the disbursement amounts according to 
Sec. 3500.17(c)(7). Pursuant to Sec. 3500.17(k), the servicer shall use 
a date on or before the earlier of the deadline to take advantage of 
discounts, if available, or the deadline to avoid a penalty as the 
disbursement date for the escrow item. Upon completing the initial 
escrow account analysis, the servicer shall prepare and deliver an 
initial escrow account statement to the borrower, as set forth in 
Sec. 3500.17(g). The servicer shall use the escrow account analysis to 
determine whether a surplus, shortage or deficiency exists since 
settlement and shall make any adjustments to the account pursuant to 
Sec. 3500.17(f).
    (3) Subsequent escrow account analyses. For each escrow account, 
the servicer shall conduct an escrow account analysis at the completion 
of

[[Page 13243]]
the escrow account computation year to determine the borrower's monthly 
escrow account payments for the next computation year, subject to the 
limitations of Sec. 3500.17(c)(1)(ii). In conducting the escrow account 
analysis, the servicer shall estimate the disbursement amounts 
according to Sec. 3500.17(c)(7). Pursuant to Sec. 3500.17(k), the 
servicer shall use a date on or before the earlier of the deadline to 
take advantage of discounts, if available, or the deadline to avoid a 
penalty as the disbursement date for the escrow item. The servicer 
shall use the escrow account analysis to determine whether a surplus, 
shortage or deficiency exists and shall make any adjustments to the 
account pursuant to Sec. 3500.17(f). Upon completing an escrow account 
analysis, the servicer shall prepare and submit an annual escrow 
account statement to the borrower, as set forth in Sec. 3500.17(i).
    (4) Acceptable accounting methods to determine escrow limits. The 
following are acceptable accounting methods that servicers may use in 
conducting an escrow account analysis.
    (i) Pre-rule accounts. For pre-rule accounts, servicers may use 
either single-item analysis or aggregate-analysis during the phase-in 
period. In conducting the escrow account analysis, servicers shall use 
``month-end'' accounting. Under month-end accounting, the timing of the 
disbursements and payments within the month is irrelevant. As of the 
conversion date, all pre-rule accounts shall comply with the 
requirements for post-rule accounts in paragraph (c)(4)(ii) of this 
section. During the phase-in period, the transfer of servicing of a 
pre-rule account to another servicer does not convert the account to a 
post-rule account. After the effective date of this rule, refinancing 
transactions (as defined in Sec. 3500.2) shall comply with the 
requirements for post-rule accounts.
    (ii) Post-rule accounts. For post-rule accounts, servicers shall 
use aggregate accounting to conduct an escrow account analysis. In 
conducting the escrow account analysis, servicers shall use ``month-
end'' accounting. Under month-end accounting, the timing of the 
disbursements and payments within the month is irrelevant.
    (5) Cushion. For post-rule accounts, the cushion shall be no 
greater than one-sixth (\1/6\) of the estimated total annual 
disbursements from the escrow account using aggregate analysis 
accounting. For pre-rule accounts, the cushion may not exceed the total 
of one-sixth of the estimated annual disbursements for each escrow 
account item using single-item analysis accounting. In determining the 
cushion using single-item analysis, a servicer shall not divide an 
escrow account item into sub-accounts, even if the payee requires 
installment payments.
    (6) Restrictions on pre-accrual. For pre-rule accounts, a servicer 
shall not require any pre-accrual that results in the escrow account 
balance exceeding the limits of paragraph (c)(1) of this section. In 
addition, if the mortgage documents in a pre-rule account are silent 
about the amount of pre-accrual, the servicer shall not require in 
excess of one month of pre-accrual, subject to the additional 
limitations provided in paragraph (c)(8) of this section. For post-rule 
accounts, a servicer shall not practice pre-accrual.
    (7) Servicer estimates of disbursement amounts. To conduct an 
escrow account analysis, the servicer shall estimate the amount of 
escrow account items to be disbursed. If the servicer knows the charge 
for an escrow item in the next computation year, then the servicer 
shall use that amount in estimating disbursement amounts. If the charge 
is unknown to the servicer, the servicer may base the estimate on the 
preceding year's charge, or the preceding year's charge as modified by 
an amount not exceeding the most recent year's change in the national 
Consumer Price Index for all urban consumers (CPI, all items). In cases 
of unassessed new construction, the servicer may base an estimate on 
the assessment of comparable residential property in the market area.
    (8) Provisions in mortgage documents. The servicer shall examine 
the mortgage loan documents to determine the applicable cushion and 
limitations on pre-accrual for each escrow account. If the mortgage 
loan documents provide for lower cushion limits or less pre-accrual 
than this section, then the terms of the loan documents apply. Where 
the terms of any mortgage loan document allow greater payments to an 
escrow account than allowed by this section, then this section controls 
the applicable limits. Where the mortgage loan documents do not 
specifically establish an escrow account, whether a servicer may 
establish an escrow account for the loan is a matter for determination 
by State law. If the mortgage loan document is silent on the escrow 
account limits (for cushion or pre-accrual) and a servicer establishes 
an escrow account under State law, then the limitations of this section 
apply unless State law provides for a lower amount. If the loan 
documents provide for escrow accounts up to the RESPA limits, then the 
servicer may require the maximum amounts consistent with this section, 
unless an applicable State law sets a lesser amount.
    (9) Assessments for periods longer than one year. Some escrow 
account items may be billed for periods longer than one year. For 
example, servicers may need to collect flood insurance or water 
purification escrow funds for payment every three years. In such cases, 
the servicer shall estimate the borrower's payments for a full cycle of 
disbursements. For a flood insurance premium payable every 3 years, the 
servicer shall collect the payments reflecting 36 equal monthly 
amounts. For two out of the three years, however, the account balance 
may not reach its low monthly balance because the low point will be on 
a three-year cycle, as compared to an annual one. The annual escrow 
account statement shall explain this situation (see example in the HUD 
Public Guidance Document entitled ``Annual Escrow Account Disclosure 
Statement--Example'', available in accordance with Sec. 3500.3).
    (d) Methods of escrow account analysis. Paragraph (c) of this 
section prescribes acceptable accounting methods. The following sets 
forth the steps servicers shall use to determine whether their use of 
an acceptable accounting method conforms with the limitations in 
Sec. 3500.17(c)(1). The steps set forth in this section derive maximum 
limits. Servicers may use accounting procedures that result in lower 
target balances. In particular, servicers may use a cushion less than 
the permissible cushion or no cushion at all. This section does not 
require the use of a cushion.
    (1) Aggregate analysis. (i) When a servicer uses aggregate analysis 
in conducting the escrow account analysis, the target balances may not 
exceed the balances computed according to the following arithmetic 
operations:
    (A) The servicer first projects a trial balance for the account as 
a whole over the next computation year (a trial running balance). In 
doing so the servicer assumes that it will make estimated disbursements 
on or before the earlier of the deadline to take advantage of 
discounts, if available, or the deadline to avoid a penalty. The 
servicer does not use pre-accrual on these disbursement dates. The 
servicer also assumes that the borrower will make monthly payments 
equal to one-twelfth of the estimated total annual escrow account 
disbursements.
    (B) The servicer then examines the monthly trial balances and adds 
to the first monthly balance an amount just sufficient to bring the 
lowest monthly trial balance to zero, and adjusts all other monthly 
balances accordingly.

[[Page 13244]]

    (C) The servicer then adds to the monthly balances the permissible 
cushion. The cushion is two months of the borrower's escrow payments to 
the servicer or a lesser amount specified by State law or the mortgage 
document (net of any increases or decreases because of prior year 
shortages or surpluses, respectively).
    (ii) Lowest monthly balance. Under aggregate analysis, the lowest 
monthly target balance for the account shall be less than or equal to 
one-sixth of the estimated total annual escrow account disbursements or 
a lesser amount specified by State law or the mortgage document. The 
target balances that the servicer derives using these steps yield the 
maximum limit for the escrow account. Appendix F to this part 
illustrates these steps.
    (2) Single-item or other non-aggregate analysis method. (i) When a 
servicer uses single-item analysis or any hybrid accounting method in 
conducting an escrow account analysis during the phase-in period, the 
target balances may not exceed the balances computed according to the 
following arithmetic operations:
    (A) The servicer first projects a trial balance for each item over 
the next computation year (a trial running balance). In doing so the 
servicer assumes that it will make estimated disbursements on or before 
the earlier of the deadline to take advantage of discounts, if 
available, or the deadline to avoid a penalty. The servicer does not 
use pre-accrual on these disbursement dates. The servicer also assumes 
that the borrower will make periodic payments equal to one-twelfth of 
the estimated total annual escrow account disbursements.
    (B) The servicer then examines the monthly trial balance for each 
escrow account item and adds to the first monthly balance for each 
separate item an amount just sufficient to bring the lowest monthly 
trial balance for that item to zero, and then adjusts all other monthly 
balances accordingly.
    (C) The servicer then adds the permissible cushion, if any, to the 
monthly balance for the separate escrow account item. The permissible 
cushion is two months of escrow payments for the escrow account item 
(net of any increases or decreases because of prior year shortages or 
surpluses, respectively) or a lesser amount specified by State law or 
the mortgage document.
    (D) The servicer then examines the balances for each item to make 
certain that the lowest monthly balance for that item is less than or 
equal to one-sixth of the estimated total annual escrow account 
disbursements for that item or a lesser amount specified by State law 
or the mortgage document.
    (ii) In performing an escrow account analysis using single-item 
analysis, servicers may account for each escrow account item 
separately, but servicers shall not further divide accounts into sub-
accounts, even if the payee of a disbursement requires installment 
payments. The target balances that the servicer derives using these 
steps yield the maximum limit for the escrow account. Appendix F to 
this part illustrates these steps.
    (e) Transfer of servicing. (1) If the new servicer changes either 
the monthly payment amount or the accounting method used by the 
transferor (old) servicer, then the new servicer shall provide the 
borrower with an initial escrow account statement within 60 days of the 
date of servicing transfer.
    (i) Where a new servicer provides an initial escrow account 
statement upon the transfer of servicing, the new servicer shall use 
the effective date of the transfer of servicing to establish the new 
escrow account computation year.
    (ii) Where the new servicer retains the monthly payments and 
accounting method used by the transferor servicer, then the new 
servicer may continue to use the escrow account computation year 
established by the transferor servicer or may choose to establish a 
different computation year using a short-year statement. At the 
completion of the escrow account computation year or any short year, 
the new servicer shall perform an escrow analysis and provide the 
borrower with an annual escrow account statement.
    (2) The new servicer shall treat shortages, surpluses and 
deficiencies in the transferred escrow account according to the 
procedures set forth in Sec. 3500.17(f).
    (3) A pre-rule account remains a pre-rule account upon the transfer 
of servicing to a new servicer so long as the transfer occurs before 
the conversion date.
    (f) Shortages, surpluses, and deficiencies requirements. (1) Escrow 
account analysis. For each escrow account, the servicer shall conduct 
an escrow account analysis to determine whether a surplus, shortage or 
deficiency exists.
    (i) As noted in Sec. 3500.17(c) (2) and (3), the servicer shall 
conduct an escrow account analysis upon establishing an escrow account 
and at completion of the escrow account computation year.
    (ii) The servicer may conduct an escrow account analysis at other 
times during the escrow computation year. If a servicer advances funds 
in paying a disbursement, which is not the result of a borrower's 
payment default under the underlying mortgage document, then the 
servicer shall conduct an escrow account analysis to determine the 
extent of the deficiency before seeking repayment of the funds from the 
borrower under this paragraph (f).
    (2) Surpluses. (i) If an escrow account analysis discloses a 
surplus, the servicer shall, within 30 days from the date of the 
analysis, refund the surplus to the borrower if the surplus is greater 
than or equal to 50 dollars ($50). If the surplus is less than 50 
dollars ($50), the servicer may refund such amount to the borrower, or 
credit such amount against the next year's escrow payments.
    (ii) These provisions regarding surpluses apply if the borrower is 
current at the time of the escrow account analysis. A borrower is 
current if the servicer receives the borrower's payments within 30 days 
of the payment due date. If the servicer does not receive the 
borrower's payment within 30 days of the payment due date, then the 
servicer may retain the surplus in the escrow account pursuant to the 
terms of the mortgage loan documents.
    (3) Shortages. (i) If an escrow account analysis discloses a 
shortage of less than one month's escrow account payment, then the 
servicer has three possible courses of action:
    (A) The servicer may allow a shortage to exist and do nothing to 
change it;
    (B) The servicer may require the borrower to repay the shortage 
amount within 30 days; or
    (C) The servicer may require the borrower to repay the shortage 
amount in equal monthly payments over at least a 12-month period.
    (ii) If an escrow account analysis discloses a shortage that is 
greater than or equal to one month's escrow account payment, then the 
servicer has two possible courses of action:
    (A) The servicer may allow a shortage to exist and do nothing to 
change it; or
    (B) The servicer may require the borrower to repay the shortage in 
equal monthly payments over at least a 12-month period.
    (4) Deficiency. If the escrow account analysis confirms a 
deficiency, then the servicer may require the borrower to pay 
additional monthly deposits to the account to eliminate the deficiency.
    (i) If the deficiency is less than one month's escrow account 
payment, then the servicer:
    (A) May allow the deficiency to exist and do nothing to change it;
    (B) May require the borrower to repay the deficiency within 30 
days; or

[[Page 13245]]

    (C) May require the borrower to repay the deficiency in 2 or more 
equal monthly payments.
    (ii) If the deficiency is greater than or equal to 1 month's escrow 
payment, the servicer may allow the deficiency to exist and do nothing 
to change it or may require the borrower to repay the deficiency in two 
or more equal monthly payments.
    (iii) These provisions regarding deficiencies apply if the borrower 
is current at the time of the escrow account analysis. A borrower is 
current if the servicer receives the borrower's payments within 30 days 
of the payment due date. If the servicer does not receive the 
borrower's payment within 30 days of the payment due date, then the 
servicer may recover the deficiency pursuant to the terms of the 
mortgage loan documents.
    (5) Notice of Shortage or Deficiency in Escrow Account. The 
servicer shall notify the borrower at least once during the escrow 
account computation year if there is a shortage or deficiency in the 
escrow account. The notice may be part of the annual escrow account 
statement or it may be a separate document.
    (g) Initial Escrow Account Statement. (1) Submission at settlement, 
or within 45 calendar days of settlement. As noted in 
Sec. 3500.17(c)(2), the servicer shall conduct an escrow account 
analysis before establishing an escrow account to determine the amount 
the borrower shall deposit into the escrow account, subject to the 
limitations of Sec. 3500.17(c)(1)(i). After conducting the escrow 
account analysis for each escrow account, the servicer shall submit an 
initial escrow account statement to the borrower at settlement or 
within 45 calendar days of settlement for escrow accounts that are 
established as a condition of the loan.
    (i) The initial escrow account statement shall include the amount 
of the borrower's monthly mortgage payment and the portion of the 
monthly payment going into the escrow account and shall itemize the 
estimated taxes, insurance premiums, and other charges that the 
servicer reasonably anticipates to be paid from the escrow account 
during the escrow account computation year and the anticipated 
disbursement dates of those charges. The initial escrow account 
statement shall indicate the amount that the servicer selects as a 
cushion. The statement shall include a trial running balance for the 
account.
    (ii) Pursuant to Sec. 3500.17(h)(2), the servicer may incorporate 
the initial escrow account statement into the HUD-1 or HUD-1A 
settlement statement. If the servicer does not incorporate the initial 
escrow account statement into the HUD-1 or HUD-1A settlement statement, 
then the servicer shall submit the initial escrow account statement to 
the borrower as a separate document.
    (2) Time of submission of initial escrow account statement for an 
escrow account established after settlement. For escrow accounts 
established after settlement (and which are not a condition of the 
loan), a servicer shall submit an initial escrow account statement to a 
borrower within 45 calendar days of the date of establishment of the 
escrow account.
    (h) Format for initial escrow account statement. (1) The format and 
a completed example for an initial escrow account statement are set out 
in HUD Public Guidance Documents entitled ``Initial Escrow Account 
Disclosure Statement--Format'' and ``Initial Escrow Account Disclosure 
Statement--Example'', available in accordance with Sec. 3500.3.
    (2) Incorporation of Initial Escrow Account Statement Into HUD-1 or 
HUD-1A Settlement Statement. Pursuant to Sec. 3500.9(a)(11), a servicer 
may add the initial escrow account statement to the HUD-1 or HUD-1A 
settlement statement. The servicer may include the initial escrow 
account statement in the basic text or may attach the initial escrow 
account statement as an additional page to the HUD-1 or HUD-1A 
settlement statement.
    (3) Identification of Payees. The initial escrow account statement 
need not identify a specific payee by name if it provides sufficient 
information to identify the use of the funds. For example, appropriate 
entries include: county taxes, hazard insurance, condominium dues, etc. 
If a particular payee, such as a taxing body, receives more than one 
payment during the escrow account computation year, the statement shall 
indicate each payment and disbursement date. If there are several 
taxing authorities or insurers, the statement shall identify each 
taxing body or insurer (e.g., ``City Taxes'', ``School Taxes'', 
``Hazard Insurance'', or ``Flood Insurance,'' etc.).
    (i) Annual Escrow Account Statements. For each escrow account, a 
servicer shall submit an annual escrow account statement to the 
borrower within 30 days of the completion of the escrow account 
computation year. The servicer shall also submit to the borrower the 
previous year's projection or initial escrow account statement. The 
servicer shall conduct an escrow account analysis before submitting an 
annual escrow account statement to the borrower.
    (1) Contents of Annual Escrow Account Statement. The annual escrow 
account statement shall provide an account history, reflecting the 
activity in the escrow account during the escrow account computation 
year, and a projection of the activity in the account for the next 
year. In preparing the statement, the servicer may assume scheduled 
payments and disbursements will be made for the final 2 months of the 
escrow account computation year. The annual escrow account statement 
shall include, at a minimum, the following:
    (i) The amount of the borrower's current monthly mortgage payment 
and the portion of the monthly payment going into the escrow account;
    (ii) The amount of the past year's monthly mortgage payment and the 
portion of the monthly payment that went into the escrow account;
    (iii) The total amount paid into the escrow account during the past 
computation year;
    (iv) The total amount paid out of the escrow account during the 
same period for taxes, insurance premiums, and other charges;
    (v) The balance in the escrow account at the end of the period;
    (vi) An explanation of how any surplus is being handled by the 
servicer;
    (vii) An explanation of how any shortage or deficiency is to be 
paid by the borrower; and
    (viii) If applicable, the reason(s) why the estimated low monthly 
balance was not reached, as indicated by noting differences between the 
most recent account history and last year's projection. HUD Public 
Guidance Documents entitled ``Annual Escrow Account Disclosure 
Statement--Format'' and ``Annual Escrow Account Disclosure Statement--
Example'' set forth an acceptable format and methodology for conveying 
this information.
    (2) No annual statements in the case of default, foreclosure, or 
bankruptcy. This paragraph (i)(2) contains an exemption from the 
provisions of Sec. 3500.17(i)(1). If at the time the servicer conducts 
the escrow account analysis the borrower is more than 30 days overdue, 
then the servicer is exempt from the requirements of submitting an 
annual escrow account statement to the borrower under Sec. 3500.17(i). 
This exemption also applies in situations where the servicer has 
brought an action for foreclosure under the underlying mortgage loan, 
or where the borrower is in bankruptcy proceedings. If the servicer 
does not issue an annual statement pursuant to this exemption and the 
loan subsequently is reinstated

[[Page 13246]]
or otherwise becomes current, the servicer shall provide a history of 
the account since the last annual statement (which may be longer than 1 
year) within 90 days of the date the account became current.
    (3) Delivery with other material. The servicer may deliver the 
annual escrow account statement to the borrower with other statements 
or materials, including the Substitute 1098, which is provided for 
federal income tax purposes.
    (4) Short year statements. A servicer may issue a short year annual 
escrow account statement (``short year statement'') to change one 
escrow account computation year to another. By using a short year 
statement a servicer may adjust its production schedule or alter the 
escrow account computation year for the escrow account.
    (i) Effect of short year statement. The short year statement shall 
end the ``escrow account computation year'' for the escrow account and 
establish the beginning date of the new escrow account computation 
year. The servicer shall deliver the short year statement to the 
borrower within 60 days from the end of the short year.
    (ii) Short year statement upon servicing transfer. Upon the 
transfer of servicing, the transferor (old) servicer shall submit a 
short year statement to the borrower within 60 days of the effective 
date of transfer.
    (iii) Short year statement upon loan payoff. If a borrower pays off 
a mortgage loan during the escrow account computation year, the 
servicer shall submit a short year statement to the borrower within 60 
days after receiving the pay-off funds.
    (j) Formats for annual escrow account statement. The formats and 
completed examples for annual escrow account statements using single-
item analysis (pre-rule accounts) and aggregate analysis are set out in 
HUD Public Guidance Documents entitled ``Annual Escrow Account 
Disclosure Statement--Format'' and ``Annual Escrow Account Disclosure 
Statement--Example''.
    (k) Timely payments. (1) If the terms of any federally related 
mortgage loan require the borrower to make payments to an escrow 
account, the servicer shall pay the disbursements in a timely manner, 
that is, by the disbursement date, so long as the borrower's payment is 
not more than 30 days overdue. In calculating the disbursement date, 
the servicer shall use a date on or before the earlier of the deadline 
to take advantage of discounts, if available, or the deadline to avoid 
a penalty.
    (2) The servicer shall advance funds to make disbursements in a 
timely manner so long as the borrower's payment is not more than 30 
days overdue. Upon advancing funds to pay a disbursement, the servicer 
may seek repayment from the borrower for the deficiency pursuant to 
Sec. 3500.17(f).
    (l) System of recordkeeping. (1) Each servicer shall keep records, 
which may involve electronic storage, microfiche storage, or any method 
of computerized storage, so long as the information is easily 
retrievable, reflecting the servicer's handling of each borrower's 
escrow account. The servicer's records shall include, but not be 
limited to, the payment of amounts into and from the escrow account and 
the submission of initial and annual escrow account statements to the 
borrower.
    (2) The servicer responsible for servicing the borrower's escrow 
account shall maintain the records for that account for a period of at 
least five years after the servicer last serviced the escrow account.
    (3) A servicer shall provide the Secretary with information 
contained in the servicer's records for a specific escrow account, or 
for a number or class of escrow accounts, within 30 days of the 
Secretary's written request for the information. The servicer shall 
convert any information contained in electronic storage, microfiche or 
computerized storage to paper copies for review by the Secretary.
    (i) To aid in investigations, the Secretary may also issue an 
administrative subpoena for the production of documents, and for the 
testimony of such witnesses as the Secretary deems advisable.
    (ii) If the subpoenaed party refuses to obey the Secretary's 
administrative subpoena, the Secretary is authorized to seek a court 
order requiring compliance with the subpoena from any United States 
district court. Failure to obey such an order of the court may be 
punished as contempt of court.
    (4) Borrowers may seek information contained in the servicer's 
records by complying with the provisions set forth in 12 U.S.C. 2605(e) 
and Sec. 3500.21(f).
    (5) After receiving a request (by letter or subpoena) from the 
Department for information relating to whether a servicer submitted an 
escrow account statement to the borrower, the servicer shall respond 
within 30 days. If the servicer is unable to provide the Department 
with such information, the Secretary shall deem that lack of 
information to be evidence of the servicer's failure to submit the 
statement to the borrower.
    (m) Penalties. A servicer's failure to submit to a borrower an 
initial or annual escrow account statement meeting the requirements of 
this part shall constitute a violation of section 10(d) of RESPA (12 
U.S.C. 2609(d)) and this section. For each such violation, the 
Secretary shall assess a civil penalty in accordance with section 10(d) 
of RESPA.
    (n) Civil penalties procedures. The following procedures shall 
apply whenever the Department seeks to impose a civil money penalty for 
violation of section 10(c) of RESPA (12 U.S.C. 2609(c)):
    (1) Purpose and scope. This paragraph (n) explains the procedures 
by which the Secretary may impose penalties under 12 U.S.C. 2609(d). 
These procedures include administrative hearings, judicial review, and 
collection of penalties. This paragraph (n) governs penalties imposed 
under 12 U.S.C. 2609(d) and, when noted, adopts those portions of 24 
CFR part 30, subpart E, that apply to all other civil penalty 
proceedings initiated by the Secretary.
    (2) Authority. The Secretary has the authority to impose civil 
penalties under section 10(d) of RESPA (12 U.S.C. 2609(d)).
    (3) Notice of intent to impose civil money penalties. Whenever the 
Secretary intends to impose a civil money penalty for violations of 
section 10(c) of RESPA (12 U.S.C. 2609(c)), the responsible program 
official, or his or her designee, shall serve a written Notice of 
Intent to Impose Civil Money Penalties (Notice of Intent) upon any 
servicer on which the Secretary intends to impose the penalty. A copy 
of the Notice of Intent must be filed with the Chief Docket Clerk, 
Office of Administrative Law Judges, at the address provided in the 
Notice of Intent. The Notice of Intent will provide:
    (i) A short, plain statement of the facts upon which the Secretary 
has determined that a civil money penalty should be imposed, including 
a brief description of the specific violations under 12 U.S.C. 2609(c) 
with which the servicer is charged and whether such violations are 
believed to be intentional or unintentional in nature, or a combination 
thereof;
    (ii) The amount of the civil money penalty that the Secretary 
intends to impose and whether the limitations in 12 U.S.C. 2609(d)(1), 
apply;
    (iii) The right of the servicer to a hearing on the record to 
appeal the Secretary's preliminary determination to impose a civil 
penalty;
    (iv) The procedures to appeal the penalty;
    (v) The consequences of failure to appeal the penalty; and
    (vi) The name, address, and telephone number of the representative 
of the Department, and the address of the Chief Docket Clerk, Office of

[[Page 13247]]
Administrative Law Judges, should the servicer decide to appeal the 
penalty.
    (4) Appeal procedures. (i) Answer. To appeal the imposition of a 
penalty, a servicer shall, within 30 days after receiving service of 
the Notice of Intent, file a written Answer with the Chief Docket 
Clerk, Office of Administrative Law Judges, Department of Housing and 
Urban Development, at the address provided in the Notice of Intent. The 
Answer shall include a statement that the servicer admits, denies, or 
does not have (and is unable to obtain) sufficient information to admit 
or deny each allegation made in the Notice of Intent. A statement of 
lack of information shall have the effect of a denial. Any allegation 
that is not denied shall be deemed admitted. Failure to submit an 
Answer within the required period of time will result in a decision by 
the Administrative Law Judge based upon the Department's submission of 
evidence in the Notice of Intent.
    (ii) Submission of evidence. A servicer that receives the Notice of 
Intent has a right to present evidence. Evidence must be submitted 
within 45 calendar days from the date of service of the Notice of 
Intent, or by such other time as may be established by the 
Administrative Law Judge (ALJ). The servicer's failure to submit 
evidence within the required period of time will result in a decision 
by the Administrative Law Judge based upon the Department's submission 
of evidence in the Notice of Intent. The servicer may present evidence 
of the following:
    (A) The servicer did submit the required escrow account 
statement(s) to the borrower(s); or
    (B) Even if the servicer did not submit the required statement(s), 
that the failure was not the result of an intentional disregard of the 
requirements of RESPA (for purposes of determining the penalty).
    (iii) Review of the record. The Administrative Law Judge will 
review the evidence submitted by the servicer, if any, and that 
submitted by the Department. The Administrative Law Judge shall make a 
determination based upon a review of the written record, except that 
the Administrative Law Judge may order an oral hearing if he or she 
finds that the determination turns on the credibility or veracity of a 
witness, or that the matter cannot be resolved by review of the 
documentary evidence. If the Administrative Law Judge decides that an 
oral hearing is appropriate, then the procedural rules set forth at 24 
CFR part 30, subpart E, shall apply, to the extent that they are not 
inconsistent with this section.
    (iv) Burden of Proof. The burden of proof or the burden of going 
forward with the evidence shall be upon the proponent of an action. The 
Department's submission of evidence that the servicer's system of 
records lacks information that the servicer submitted the escrow 
account statement(s) to the borrower(s) shall satisfy the Department's 
burden. Upon the Department's presentation of evidence of this lack of 
information in the servicer's system of records, the burden of proof 
shifts from the Secretary to the servicer to provide evidence that it 
submitted the statement(s) to the borrower.
    (v) Standard of Proof. The standard of proof shall be the 
preponderance of the evidence.
    (5) Determination of the Administrative Law Judge.
    (i) Following the hearing or the review of the written record, the 
Administrative Law Judge shall issue a decision that shall contain 
findings of fact, conclusions of law, and the amount of any penalties 
imposed. The decision shall include a determination of whether the 
servicer has failed to submit any required statements and, if so, 
whether the servicer's failure was the result of an intentional 
disregard for the law's requirements.
    (ii) The Administrative Law Judge shall issue the decision to all 
parties within 30 days of the submission of the evidence or the post-
hearing briefs, whichever is the last to occur.
    (iii) The decision of the Administrative Law Judge shall constitute 
the final decision of the Department and shall be final and binding on 
the parties.
    (6) Judicial review. (i) A person against whom the Department has 
imposed a civil money penalty under this part may obtain a review of 
the Department's final decision by filing a written petition for a 
review of the record with the appropriate United States district court.
    (ii) The petition must be filed within 30 days after the decision 
is filed with the Chief Docket Clerk, Office of Administrative Law 
Judges.
    (7) Collection of penalties. (i) If any person fails to comply with 
the Department's final decision imposing a civil money penalty, the 
Secretary, if the time for judicial review of the decision has expired, 
may request the Attorney General to bring an action in an appropriate 
United States district court to obtain a judgment against the person 
that has failed to comply with the Department's final decision.
    (ii) In any such collection action, the validity and 
appropriateness of the Department's final decision imposing the civil 
penalty shall not be subject to review in the district court.
    (iii) The Secretary may obtain such other relief as may be 
available, including attorney fees and other expenses in connection 
with the collection action.
    (iv) Interest on and other charges for any unpaid penalty may be 
assessed in accordance with 31 U.S.C. 3717.
    (8) Offset. In addition to any other rights as a creditor, the 
Secretary may seek to collect a civil money penalty through 
administrative offset.
    (9) At any time before the decision of the Administrative Law 
Judge, the Secretary and the servicer may enter into an administrative 
settlement. The settlement may include provisions for interest, 
attorney's fees, and costs related to the proceeding. Such settlement 
will terminate the appearance before the Administrative Law Judge.
    (o) Discretionary payments. Any borrower's discretionary payment 
(such as credit life or disability insurance) made as part of a monthly 
mortgage payment is to be noted on the initial and annual statements. 
If a discretionary payment is established or terminated during the 
escrow account computation year, this change should be noted on the 
next annual statement. A discretionary payment is not part of the 
escrow account unless the payment is required by the lender, in 
accordance with the definition of ``settlement service'' in 
Sec. 3500.2, or the servicer chooses to place the discretionary payment 
in the escrow account. If a servicer has not established an escrow 
account for a federally related mortgage loan and only receives 
payments for discretionary items, this section is not applicable.

(Approved by the Office of Management and Budget under control 
number 2502-0501)


Sec. 3500.18  Validity of contracts and liens.

    Section 17 of RESPA (12 U.S.C. 2615) governs the validity of 
contracts and liens under RESPA.


Sec. 3500.19  Enforcement.

    (a) Enforcement Policy. It is the policy of the Secretary regarding 
RESPA enforcement matters to cooperate with Federal, State or local 
agencies having supervisory powers over lenders or other persons with 
responsibilities under RESPA. Federal agencies with supervisory powers 
over lenders may use their powers to require compliance with RESPA. In 
addition, failure to comply with RESPA may be grounds for 
administrative action by the Secretary under part 24 of this title 
concerning debarment, suspension, ineligibility of

[[Page 13248]]
contractors and grantees, or under part 25 of this title concerning the 
HUD Mortgagee Review Board. Nothing in this paragraph is a limitation 
on any other form of enforcement which may be legally available.
    (b) Violations of section 8 of RESPA (12 U.S.C. 2607), 
Sec. 3500.14, or Sec. 3500.15. Any person who violates Secs. 3500.14 or 
3500.15 shall be deemed to violate Section 8 of RESPA and shall be 
sanctioned accordingly.
    (c) Violations of section 9 of RESPA (12 U.S.C. 2608) or 
Sec. 3500.16. Any person who violates Section 3500.16 of this part 
shall be deemed to violate Section 9 of RESPA and shall be sanctioned 
accordingly.
    (d) Investigations. The procedures for investigations and 
investigational proceedings are set forth in 24 CFR part 3800.


Sec. 3500.21  Mortgage servicing transfers.

    (a) Definitions. As used in this section:
    Master servicer means the owner of the right to perform servicing, 
which may actually perform the servicing itself or may do so through a 
subservicer.
    Mortgage servicing loan means a federally related mortgage loan, as 
that term is defined in Sec. 3500.2, subject to the exemptions in 
Sec. 3500.5, when the mortgage loan is secured by a first lien. The 
definition does not include subordinate lien loans or open-end lines of 
credit (home equity plans) covered by the Truth in Lending Act and 
Regulation Z, including open-end lines of credit secured by a first 
lien.
    Qualified written request means a written correspondence from the 
borrower to the servicer prepared in accordance with paragraph (e)(2) 
of this section.
    Subservicer means a servicer who does not own the right to perform 
servicing, but who does so on behalf of the master servicer.
    Transferee servicer means a servicer who obtains or who will obtain 
the right to perform servicing functions pursuant to an agreement or 
understanding.
    Transferor servicer means a servicer, including a table funding 
mortgage broker or dealer on a first lien dealer loan, who transfers or 
will transfer the right to perform servicing functions pursuant to an 
agreement or understanding.
    (b) Servicing Disclosure Statement and Applicant Acknowledgement; 
requirements. (1) At the time an application for a mortgage servicing 
loan is submitted, or within 3 business days after submission of the 
application, the lender, mortgage broker who anticipates using table 
funding, or dealer who anticipates a first lien dealer loan shall 
provide to each person who applies for such a loan a Servicing 
Disclosure Statement. This requirement shall not apply when the 
application for credit is turned down within three business days after 
receipt of the application. A format for the Servicing Disclosure 
Statement appears as Appendix MS-1 to this part. Except as provided in 
paragraph (b)(2) of this section, the specific language of the 
Servicing Disclosure Statement is not required to be used, but the 
Servicing Disclosure Statement must include the information set out in 
paragraph (b)(3) of this section, including the statement of the 
borrower's rights in connection with complaint resolution. The 
information set forth in Instructions to Preparer on the Servicing 
Disclosure Statement need not be included on the form given to 
applicants, and material in square brackets is optional or alternative 
language.
    (2) The Applicant's Acknowledgement portion of the Servicing 
Disclosure Statement in the format stated is mandatory. Additional 
lines may be added to accommodate more than two applicants.
    (3) The Servicing Disclosure Statement must contain the following 
information, except as provided in paragraph (b)(3)(ii) of this 
section:
    (i) Whether the servicing of the loan may be assigned, sold or 
transferred to any other person at any time while the loan is 
outstanding. If the lender, table funding mortgage broker, or dealer in 
a first lien dealer loan does not engage in the servicing of any 
mortgage servicing loans, the disclosure may consist of a statement to 
the effect that there is a current intention to assign, sell, or 
transfer servicing of the loan.
    (ii) The percentages (rounded to the nearest quartile (25%)) of 
mortgage servicing loans originated by the lender in each calendar year 
for which servicing has been assigned, sold, or transferred for such 
calendar year. Compliance with this paragraph (b)(3)(ii) is not 
required if the lender, table funding mortgage broker, or dealer on a 
first lien dealer loan chooses option B in the model format in 
paragraph (b)(4) of this section, including in square brackets the 
language ``[and have not serviced mortgage loans in the last three 
years.]''. The percentages shall be provided as follows:
    (A) This information shall be set out for the most recent three 
calendar years completed, with percentages as of the end of each year. 
This information shall be updated in the disclosure no later than March 
31 of the next calendar year. Each percentage should be obtained by 
using as the numerator the number of mortgage servicing loans 
originated during the calendar year for which servicing is transferred 
within the calendar year and, as the denominator, the total number of 
mortgage servicing loans originated in the calendar year. If the volume 
of transfers is less than 12.5 percent, the word ``nominal'' or the 
actual percentage amount of servicing transfers may be used.
    (B) This statistical information does not have to include the 
assignment, sale, or transfer of mortgage loan servicing by the lender 
to an affiliate or subsidiary of the lender. However, lenders may 
voluntarily include transfers to an affiliate or subsidiary. The lender 
should indicate whether the percentages provided include assignments, 
sales, or transfers to affiliates or subsidiaries.
    (C) In the alternative, if applicable, the following statement may 
be substituted for the statistical information required to be provided 
in accordance with paragraph (b)(3)(ii) of this section: ``We have 
previously assigned, sold, or transferred the servicing of federally 
related mortgage loans.''
    (iii) The best available estimate of the percentage (0 to 25 
percent, 26 to 50 percent, 51 to 75 percent, or 76 to 100 percent) of 
all loans to be made during the 12-month period beginning on the date 
of origination for which the servicing may be assigned, sold, or 
transferred. Each percentage should be obtained by using as the 
numerator the estimated number of mortgage servicing loans that will be 
originated for which servicing may be transferred within the 12-month 
period and, as the denominator, the estimated total number of mortgage 
servicing loans that will be originated in the 12-month period.
    (A) If the lender, mortgage broker, or dealer anticipates that no 
loan servicing will be sold during the calendar year, the word ``none'' 
may be substituted for ``0 to 25 percent.'' If it is anticipated that 
all loan servicing will be sold during the calendar year, the word 
``all'' may be substituted for ``76 to 100 percent.''
    (B) This statistical information does not have to include the 
estimated assignment, sale, or transfer of mortgage loan servicing to 
an affiliate or subsidiary of that person. However, this information 
may be provided voluntarily. The Servicing Disclosure Statements should 
indicate whether the percentages provided include assignments, sales or 
transfers to affiliates or subsidiaries.
    (iv) The information set out in paragraphs (d) and (e) of this 
section.

[[Page 13249]]

    (v) A written acknowledgement that the applicant (and any co-
applicant) has/have read and understood the disclosure, and understand 
that the disclosure is a required part of the mortgage application. 
This acknowledgement shall be evidenced by the signature of the 
applicant and any co-applicant.
    (4) The following is a model format, which includes several 
options, for complying with the requirements of paragraph (b)(3) of 
this section. The model format may be annotated with additional 
information that clarifies or enhances the model language. The lender 
or table funding mortgage broker (or dealer) should use the language 
that best describes the particular circumstances.
    (i) Model Format: The following is the best estimate of what will 
happen to the servicing of your mortgage loan:
    (A) Option A. We may assign, sell, or transfer the servicing of 
your loan while the loan is outstanding. [We are able to service your 
loan[.][,] and we [will] [will not] [haven't decided whether to] 
service your loan.]; or
    (B) Option B. We do not service mortgage loans[.][,] [and have not 
serviced mortgage loans in the past three years.] We presently intend 
to assign, sell, or transfer the servicing of your mortgage loan. You 
will be informed about your servicer.
    (C) As appropriate, the following paragraph may be used:
    We assign, sell, or transfer the servicing of some of our loans 
while the loans are outstanding, depending on the type of loan and 
other factors. For the program for which you have applied, we expect to 
[assign, sell, or transfer all of the mortgage servicing][retain all of 
the mortgage servicing] [assign, sell, or transfer ________% of the 
mortgage servicing].
    (ii) [Reserved]
    (c) Servicing Disclosure Statement and Applicant Acknowledgement; 
delivery. The lender, table funding mortgage broker, or dealer that 
anticipates a first lien dealer loan shall deliver Servicing Disclosure 
Statements to each applicant for mortgage servicing loans. Each 
applicant or co-applicant must sign an Acknowledgement of receipt of 
the Servicing Disclosure Statement before settlement.
    (1) In the case of a face-to-face interview with one or more 
applicants, the Servicing Disclosure Statement shall be delivered at 
the time of application. An applicant present at the interview may sign 
the Acknowledgment on his or her own behalf at that time. An applicant 
present at the interview also may accept delivery of the Servicing 
Disclosure Statement on behalf of the other applicants.
    (2) If there is no face-to-face interview, the Servicing Disclosure 
Statement shall be delivered by placing it in the mail, with prepaid 
first-class postage, within 3 business days from receipt of the 
application. If co-applicants indicate the same address on their 
application, one copy delivered to that address is sufficient. If 
different addresses are shown by co-applicants on the application, a 
copy must be delivered to each of the co-applicants.
    (3) The signed Applicant Acknowledgment(s) shall be retained for a 
period of 5 years after the date of settlement as part of the loan file 
for every settled loan. There is no requirement for retention of 
Applicant Acknowledgment(s) if the loan is not settled.
    (d) Notices of Transfer; loan servicing. (1) Requirement for 
notice. (i) Except as provided in this paragraph (d)(1)(i) or paragraph 
(d)(1)(ii) of this section, each transferor servicer and transferee 
servicer of any mortgage servicing loan shall deliver to the borrower a 
written Notice of Transfer, containing the information described in 
paragraph (d)(3) of this section, of any assignment, sale, or transfer 
of the servicing of the loan. The following transfers are not 
considered an assignment, sale, or transfer of mortgage loan servicing 
for purposes of this requirement if there is no change in the payee, 
address to which payment must be delivered, account number, or amount 
of payment due:
    (A) Transfers between affiliates;
    (B) Transfers resulting from mergers or acquisitions of servicers 
or subservicers; and
    (C) Transfers between master servicers, where the subservicer 
remains the same.
    (ii) The Federal Housing Administration (FHA) is not required under 
paragraph (d) of this section to submit to the borrower a Notice of 
Transfer in cases where a mortgage insured under the National Housing 
Act is assigned to FHA.
    (2) Time of notice. (i) Except as provided in paragraph (d)(2)(ii) 
of this section:
    (A) The transferor servicer shall deliver the Notice of Transfer to 
the borrower not less than 15 days before the effective date of the 
transfer of the servicing of the mortgage servicing loan;
    (B) The transferee servicer shall deliver the Notice of Transfer to 
the borrower not more than 15 days after the effective date of the 
transfer; and
    (C) The transferor and transferee servicers may combine their 
notices into one notice, which shall be delivered to the borrower not 
less than 15 days before the effective date of the transfer of the 
servicing of the mortgage servicing loan.
    (ii) The Notice of Transfer shall be delivered to the borrower by 
the transferor servicer or the transferee servicer not more than 30 
days after the effective date of the transfer of the servicing of the 
mortgage servicing loan in any case in which the transfer of servicing 
is preceded by:
    (A) Termination of the contract for servicing the loan for cause;
    (B) Commencement of proceedings for bankruptcy of the servicer; or
    (C) Commencement of proceedings by the Federal Deposit Insurance 
Corporation (FDIC) or the Resolution Trust Corporation (RTC) for 
conservatorship or receivership of the servicer or an entity that owns 
or controls the servicer.
    (iii) Notices of Transfer delivered at settlement by the transferor 
servicer and transferee servicer, whether as separate notices or as a 
combined notice, will satisfy the timing requirements of paragraph 
(d)(2) of this section.
    (3) Notices of Transfer; contents. The Notices of Transfer required 
under paragraph (d) of this section shall include the following 
information:
    (i) The effective date of the transfer of servicing;
    (ii) The name, consumer inquiry addresses (including, at the option 
of the servicer, a separate address where qualified written requests 
must be sent), and a toll-free or collect-call telephone number for an 
employee or department of the transferee servicer;
    (iii) A toll-free or collect-call telephone number for an employee 
or department of the transferor servicer that can be contacted by the 
borrower for answers to servicing transfer inquiries;
    (iv) The date on which the transferor servicer will cease to accept 
payments relating to the loan and the date on which the transferee 
servicer will begin to accept such payments. These dates shall either 
be the same or consecutive days;
    (v) Information concerning any effect the transfer may have on the 
terms or the continued availability of mortgage life or disability 
insurance, or any other type of optional insurance, and any action the 
borrower must take to maintain coverage;
    (vi) A statement that the transfer of servicing does not affect any 
other term or condition of the mortgage documents, other than terms 
directly related to the servicing of the loan; and

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    (vii) A statement of the borrower's rights in connection with 
complaint resolution, including the information set forth in paragraph 
(e) of this section. Appendix MS-2 of this part illustrates a statement 
satisfactory to the Secretary.
    (4) Notices of Transfer; sample notice. Sample language that may be 
used to comply with the requirements of paragraph (d) of this section 
is set out in Appendix MS-2 of this part. Minor modifications to the 
sample language may be made to meet the particular circumstances of the 
servicer, but the substance of the sample language shall not be omitted 
or substantially altered.
    (5) Consumer protection during transfer of servicing. During the 
60-day period beginning on the effective date of transfer of the 
servicing of any mortgage servicing loan, if the transferor servicer 
(rather than the transferee servicer that should properly receive 
payment on the loan) receives payment on or before the applicable due 
date (including any grace period allowed under the loan documents), a 
late fee may not be imposed on the borrower with respect to that 
payment and the payment may not be treated as late for any other 
purposes.
    (e) Duty of loan servicer to respond to borrower inquiries.
    (1) Notice of receipt of inquiry. Within 20 business days of a 
servicer of a mortgage servicing loan receiving a qualified written 
request from the borrower for information relating to the servicing of 
the loan, the servicer shall provide to the borrower a written response 
acknowledging receipt of the qualified written response. This 
requirement shall not apply if the action requested by the borrower is 
taken within that period and the borrower is notified of that action in 
accordance with the paragraph (f)(3) of this section. By notice either 
included in the Notice of Transfer or separately delivered by first-
class mail, postage prepaid, a servicer may establish a separate and 
exclusive office and address for the receipt and handling of qualified 
written requests.
    (2) Qualified written request; defined. (i) For purposes of 
paragraph (e) of this section, a qualified written request means a 
written correspondence (other than notice on a payment coupon or other 
payment medium supplied by the servicer) that includes, or otherwise 
enables the servicer to identify, the name and account of the borrower, 
and includes a statement of the reasons that the borrower believes the 
account is in error, if applicable, or that provides sufficient detail 
to the servicer regarding information relating to the servicing of the 
loan sought by the borrower.
    (ii) A written request does not constitute a qualified written 
request if it is delivered to a servicer more than 1 year after either 
the date of transfer of servicing or the date that the mortgage 
servicing loan amount was paid in full, whichever date is applicable.
    (3) Action with respect to the inquiry. Not later than 60 business 
days after receiving a qualified written request from the borrower, 
and, if applicable, before taking any action with respect to the 
inquiry, the servicer shall:
    (i) Make appropriate corrections in the account of the borrower, 
including the crediting of any late charges or penalties, and transmit 
to the borrower a written notification of the correction. This written 
notification shall include the name and telephone number of a 
representative of the servicer who can provide assistance to the 
borrower; or
    (ii) After conducting an investigation, provide the borrower with a 
written explanation or clarification that includes:
    (A) To the extent applicable, a statement of the servicer's reasons 
for concluding the account is correct and the name and telephone number 
of an employee, office, or department of the servicer that can provide 
assistance to the borrower; or
    (B) Information requested by the borrower, or an explanation of why 
the information requested is unavailable or cannot be obtained by the 
servicer, and the name and telephone number of an employee, office, or 
department of the servicer that can provide assistance to the borrower.
    (4) Protection of credit rating. (i) During the 60-business day 
period beginning on the date of the servicer receiving from a borrower 
a qualified written request relating to a dispute on the borrower's 
payments, a servicer may not provide adverse information regarding any 
payment that is the subject of the qualified written request to any 
consumer reporting agency (as that term is defined in section 603 of 
the Fair Credit Reporting Act, 15 U.S.C. 1681a).
    (ii) In accordance with section 17 of RESPA (12 U.S.C. 2615), the 
protection of credit rating provision of paragraph (e)(4)(i) of this 
section does not impede a lender or servicer from pursuing any of its 
remedies, including initiating foreclosure, allowed by the underlying 
mortgage loan instruments.
    (f) Damages and costs. (1) Whoever fails to comply with any 
provision of this section shall be liable to the borrower for each 
failure in the following amounts:
    (i) Individuals. In the case of any action by an individual, an 
amount equal to the sum of any actual damages sustained by the 
individual as the result of the failure and, when there is a pattern or 
practice of noncompliance with the requirements of this section, any 
additional damages in an amount not to exceed $1,000.
    (ii) Class Actions. In the case of a class action, an amount equal 
to the sum of any actual damages to each borrower in the class that 
result from the failure and, when there is a pattern or practice of 
noncompliance with the requirements of this section, any additional 
damages in an amount not greater than $1,000 for each class member. 
However, the total amount of any additional damages in a class action 
may not exceed the lesser of Sec. 500,000 or 1 percent of the net worth 
of the servicer.
    (iii) Costs. In addition, in the case of any successful action 
under paragraph (f) of this section, the costs of the action and any 
reasonable attorneys' fees incurred in connection with the action.
    (2) Nonliability. A transferor or transferee servicer shall not be 
liable for any failure to comply with the requirements of this section, 
if within 60 days after discovering an error (whether pursuant to a 
final written examination report or the servicer's own procedures) and 
before commencement of an action under this section and the receipt of 
written notice of the error from the borrower, the servicer notifies 
the person concerned of the error and makes whatever adjustments are 
necessary in the appropriate account to ensure that the person will not 
be required to pay an amount in excess of any amount that the person 
otherwise would have paid.
    (g) Timely payments by servicer. If the terms of any mortgage 
servicing loan require the borrower to make payments to the servicer of 
the loan for deposit into an escrow account for the purpose of assuring 
payment of taxes, insurance premiums, and other charges with respect to 
the mortgaged property, the servicer shall make payments from the 
escrow account in a timely manner for the taxes, insurance premiums, 
and other charges as the payments become due, as governed by the 
requirements in Sec. 3500.17(k).
    (h) Preemption of State laws. A lender who makes a mortgage 
servicing loan or a servicer shall be considered to have complied with 
the provisions of any State law or regulation requiring notice to a 
borrower at the time of application for a loan or transfer of servicing 
of a loan if the lender or servicer complies with the requirements of 
this section. Any State law requiring notice to the borrower at the 
time of application or at

[[Page 13251]]
the time of transfer of servicing of the loan is preempted, and there 
shall be no additional borrower disclosure requirements. Provisions of 
State law, such as those requiring additional notices to insurance 
companies or taxing authorities, are not preempted by section 6 of 
RESPA or this section, and this additional information may be added to 
a notice prepared under this section, if the procedure is allowable 
under State law.

(Approved by the Office of Management and Budget under control 
number 2502-0458)

    3. Appendix A is amended by revising the heading of the appendix to 
read as follows:

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

    4. Appendix B is amended in Illustration 11, in the paragraph 
headed ``Comments,'' by substituting the reference ``section 
3500.14(g)(1)'' for the reference ``Section 3500.14(g)(2)''.
    5. Appendix MS-2 is revised to read as follows:

BILLING CODE 4210-27-P
      

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    Dated: March 6, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner,
[FR Doc. 96-6511 Filed 3-25-96; 8:45 am]
BILLING CODE 4210-27-C