[Federal Register Volume 61, Number 222 (Friday, November 15, 1996)]
[Rules and Regulations]
[Pages 58472-58479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29278]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR 4148-F-01]


Amendments to Regulation X, the Real Estate Settlement Procedures 
Act Regulation (Withdrawal of Employer-Employee and Computer Loan 
Origination Systems (CLOs) Exemptions); Final Rule

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


[[Page 58473]]


ACTION: Final rule.

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SUMMARY: In this final rule, the Department is implementing portions of 
a final rule revising Regulation X that was published June 7, 1996, and 
corrected and revised on August 12, 1996. The Department had delayed 
the effectiveness of that rule based on the requirements of recent 
legislation. After carefully reviewing the legislation, however, the 
Department has determined that several portions of that rule are not 
affected by the legislative delay. Therefore, this final rule 
implements those portions of the previous rule. This rule also makes 
several technical revisions to Regulations X, some of which implement 
various provisions in the recent legislation.

EFFECTIVE DATE: January 14, 1997.

FOR FURTHER INFORMATION CONTACT: David Williamson, Director, Office of 
Consumer and Regulatory Affairs, Room 9146, telephone (202) 708-4560; 
or, for legal questions, Kenneth A. Markison, Assistant General Counsel 
for GSE/RESPA, Grant E. Mitchell, Senior Attorney for RESPA, or Richard 
S. Bennett, Attorney, Office of General Counsel, Room 9262, telephone 
(202) 708-1550. (The telephone numbers are not toll-free.) For hearing- 
or speech-impaired persons, these numbers may be accessed via TTY (text 
telephone) by calling the Federal Information Relay Service at 1-800-
877-8339. The address for the above-listed persons is: Department of 
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC 
20410.

SUPPLEMENTARY INFORMATION:

Background

    In the final rule published on June 7, 1996 (61 FR 29238) entitled 
``Amendments to Regulation X, the Real Estate Settlement Procedures 
Act: Withdrawal of Employer-Employee and Computer Loan Origination 
Systems (CLOs) Exemptions,'' the Department established an effective 
date for the rule of 120 days from publication: October 7, 1996. 
Subsequently, on August 12, 1996 (61 FR 41944), the Department 
published a revision to a document associated with that rule--Appendix 
D, the Controlled Business Arrangement (CBA) Disclosure Statement 
Format--in order to clarify the directions on completing the format.
    Section 2103 of the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 (Title II of the Omnibus Consolidated 
Appropriations Act, 1997, Pub. L. 104-208; approved September 30, 1996) 
(the Act) was signed by the President on September 30, 1996. The Act 
delays the effective date of the provisions of the June 7, 1996 final 
rule under the Real Estate Settlement Procedures Act (RESPA) (Pub. L. 
92-533; 12 U.S.C. 2601 et seq.) concerning payments to employees by 
their employers. One such provision of the June 7 rule would have 
eliminated 24 CFR 3500.14(g)(1)(vii), which permits ``[a]n employer's 
payment to its own employees for any referral activities.'' Section 
2103 of the Act provides that this provision of the June 7 rule shall 
not take effect before July 31, 1997. The Act provides that the 
following provisions also shall not take effect before July 31, 1997: 
(1) The exemption for employer payments to managerial employees 
(Sec. 3500.14(g)(1)(viii) of the June 7 rule); (2) The exemption for 
employer payments to employees who do not perform settlement services 
in any transaction (Sec. 3500.14(g)(1)(ix) of the June 7 rule); and (3) 
The provision clarifying that ``[a] payment by an employer to its own 
bona fide employee for generating business for that employer'' is 
permissible (Sec. 3500.14(g)(1)(vii) of the June 7 rule).
    Although not required by the Act, on October 4, 1996 (61 FR 51782), 
the Department announced its determination to delay temporarily the 
effective date of the entire June 7 final rule, as corrected and 
revised on August 12, and to continue the prior provisions relating to 
employer-employee payments (as in effect on May 1, 1996, as required by 
the Act). The reason for the delay was to provide the Department with 
an opportunity to analyze the Act and develop an appropriate time 
schedule for establishing the effective dates of the various provisions 
of the June 7 rule, as revised August 12. The October 4 notice stated 
that within 30 days of publication of that notice, the Department would 
publish further information on this time schedule. That notice was 
published in the Federal Register on November 4, 1996 (61 FR 56624).
    The Department has reviewed the Act and has determined that certain 
portions of the June 7 final rule and the August 12 technical revisions 
to Appendix D that are not delayed by the Act should be made effective, 
subject to further technical revisions. The Department is issuing this 
final rule to make these provisions effective on January 14, 1997, for 
the reasons stated in the preambles to the June 7 final rule and August 
12 technical revision, to the extent applicable. With respect to the 
other provisions of the June 7 final rule, the Department intends to 
act in accordance with the notice published November 4, 1996.

Provisions Made Effective by This Final Rule

    One portion of the June 7 final rule that this rule puts into 
effect deals with Computer Loan Origination (CLO) Systems. 
Specifically, this rule makes effective the withdrawal of the CLO 
exemption at 24 CFR 3500.14(g)(1)(viii). It also makes effective the 
elimination of the CLO Fee Disclosure form, which previously was 
codified as Appendix E to 24 CFR part 3500. By making these provisions 
of the June 7 rule effective, the guidance contained in ``Statement of 
Policy 1996-1, Computer Loan Origination Systems (CLOs),'' concerning 
the applicability of RESPA to CLOs, that was also published June 7, 
1996 (61 FR 29255), is more fully effective. The guidance in that 
statement of policy is effective except to the limited extent that it 
interprets provisions that are not yet effective, such as those 
provisions in the June 7 final rule changing the employer-employee 
exemption.
    Today's rule also puts into effect the revised Appendix D to part 
3500 as published August 12, 1996. Appendix D contains what was 
formerly known as the ``Controlled Business Arrangement Disclosure 
Statement Format,'' and which, for the reasons explained below, is 
redesignated by this rule as the ``Affiliated Business Arrangement 
Disclosure Statement Format.'' Persons should refer to the preamble of 
the August 12 technical revision for general guidance and background 
information. Finally, today's rule will make effective conforming 
changes to Sec. 3500.17 that are necessary because of the redesignation 
of Appendix F as Appendix E.

Technical Revisions and Corrections

    This final rule also makes several technical revisions and 
corrections to Regulation X. The first revision is required by an 
amendment to RESPA in section 2103(c) of the Act. Section 2103(c) 
redesignated ``Controlled Business Arrangements'' as ``Affiliated 
Business Arrangements'' or ``AfBAs.'' This rule makes conforming 
revisions throughout the RESPA regulations and appendices in part 3500, 
wherever the term ``Controlled Business Arrangement'' appears, 
including in Appendix D, which is redesignated by this rule as the 
``Affiliated Business Arrangement Disclosure Statement Format.''
    The second revision also conforms the regulation to the Act. 
Section 2103(b) of the Act requires the Department, in

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prescribing regulations under RESPA, to conform the exemption of 
business, commercial, or agricultural loans under RESPA to the 
exemption of such loans under the Truth In Lending Act (TILA) (15 
U.S.C. 1601 et seq.). The primary effect of this legislative 
requirement is to eliminate RESPA coverage for 1- to 4-family 
residential properties used by individuals for rental purposes. 
Accordingly, this final rule amends Sec. 3500.5(b) to delete the 
sentence providing that the exemption to RESPA 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.'' By deleting this sentence, Regulation X, with 
respect to the coverage of business, commercial, or agricultural loans 
under RESPA now conforms to the coverage of such loans under TILA, as 
required. Section 3500.5(b), as revised by this rule, defers to TILA 
for interpretation of the coverage of business purpose loans.
    This final rule also withdraws RESPA Interpretive Rule 1995-1, 
published in the Federal Register on February 27, 1995 (60 FR 10762). 
That interpretive rule had reaffirmed the determination set forth in 
the Department's RESPA rule, published on February 10, 1994 (59 FR 
6505), and amended on March 30, 1994 (59 FR 14748), that transactions 
by individuals involving 1- to 4-family residential rental properties 
are covered by RESPA. This interpretation does not survive the 
statutory amendment and no longer represents the Department's position.
    The third revision also relates to the Act. It revises 
Sec. 3500.15(b)(1) to make reference to section 8(c)(4)(A) of RESPA, 
which was amended by section 2103(d) of the Act. Section 2103(d) of the 
Act amends section 8(c)(4)(A) to establish special procedures for 
disclosures of affiliated business arrangements in conjunction with 
referrals where the telephone or electronic media are used in 
marketing. This rule makes clear that the provisions of 
Sec. 3500.15(b)(1) shall not apply to the extent they are inconsistent 
with the legislative amendment. The Department will conduct further 
rulemaking to implement section 2103(d) of the Act.
    This rule also makes two technical revisions and corrections that 
are unrelated to the June 7 rule and the new Act. This rule revises the 
definition of ``Federally related mortgage loan'' in Sec. 3500.2. In 
the March 26, 1996 streamlining rule (61 FR 29238), the Department 
promulgated a streamlined definition of this term that incorporated the 
statutory language in section 3(1) of RESPA (Pub. L. 93-533; 12 U.S.C. 
2602(1)). Consistent with the preamble of the March 26 rule, the 
Department had not intended to make any substantive change in the 
definition. Nonetheless, adoption of the streamlined definition caused 
some confusion about RESPA's applicability. Since the former definition 
had pertained for decades, the Department has determined that the best 
way to eliminate the confusion is to revert to the definition that 
applied under Regulation X prior to the streamlining rule, with minor 
technical clarifications, most notably, indicating that the term is 
used interchangeably with the term ``mortgage loan'' in the regulation.
    The other technical correction removes Appendix N. The preamble of 
the March 26 streamlining rule explained that, as part of that 
streamlining, the Department was removing certain appendices from 
codification. The appendices to be removed included Appendix N, ``HUD-1 
Aggregate Accounting Adjustment Example.'' Because of an error in the 
amendatory instructions of that rule and the April 29, 1996 correction 
to that rule (61 FR 18674), the instruction to remove Appendix N, as 
specified in the preamble to the March 26 rule, was omitted. This final 
rule includes those instructions and removes Appendix N from 
codification. The appendices that have been removed, including Appendix 
N, are available from the Department as Public Guidance Documents.
    Persons should refer to the preamble of the June 7 rule and August 
12 technical revision, both for general guidance and for additional 
background on provisions that are being made effective by today's rule. 
The only portions of the June 7 rule that are affected by the Act 
concerning a delay in the effective date are those provisions 
identified as Sec. 3500.14(g)(1) (vii)-(ix), for which the effective 
date has been delayed.

Justification for Final Rulemaking

    The Department generally publishes a rule for public comment before 
issuing a rule for effect, in accordance with its regulations on 
rulemaking in 24 CFR part 10. Part 10 provides for exceptions from this 
general rule, however, when 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).
    This final rule establishes the effective date for certain 
provisions in the June 7, 1996 final rule, for which the Department has 
already solicited public comments. This rule also makes several 
technical revisions or clarifications to the RESPA regulations that 
strictly conform with the requirements of the Act; the Department is 
not exercising any new regulatory discretion. Therefore, the Department 
finds that good cause exists to publish this rule for effect without 
first soliciting public comments, in that prior public procedure would 
be unnecessary.

Findings and Certifications

Paperwork Reduction Act

    The regulations implementing the statutory requirement for a 
disclosure regarding ``affiliated'' business arrangements are in 24 CFR 
3500.15(b). In accordance with the emergency processing procedures in 5 
CFR 1320.13, the information collection requirements in Sec. 3500.15(b) 
have been approved by the Office of Management and Budget (OMB) under 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), and assigned 
OMB control number 2502-0516. The Department provided notice of the 
estimate of the average burden of the collection, and solicited public 
comments on this estimate, on August 12, 1996 (61 FR 44990). The 
Department is in the process of seeking OMB approval of the information 
collection requirements through the regular processing procedures in 5 
CFR part 1320; the regular approval number, when assigned, will be 
announced by separate notice in the Federal Register. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection displays a valid 
control number.
    This final rule does not impose additional information collection 
requirements, nor does it substantively change the information 
collection requirements in Sec. 3500.15(b) issued in the June 7, 1996 
final rule (61 FR 29238), and corrected and revised on August 12, 1996 
(61 FR 41944). The only effect of this rule upon the information 
collection requirements is to redesignate the term ``controlled 
business arrangements'' as ``affiliated business arrangements,'' in 
accordance with section 2103(c) of the Act.

Environmental Impact

    A finding of no significant impact with respect to the environment 
was made at the time of the development of the June 7, 1996 final rule 
(61 FR 29238), in accordance with HUD regulations in 24 CFR part 50

[[Page 58475]]

implementing section 102(2)(C) of the National Environmental Policy Act 
of 1969 (42 U.S.C. 4332). That finding continues to apply to this final 
rule, and is available for public inspection during regular business 
hours in the Office of General Counsel, the Rules Docket Clerk, room 
10276, 451 Seventh Street, SW, Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule does not have a significant 
economic impact on a substantial number of small entities, other than 
those impacts specifically required to be applied universally by the 
RESPA statute.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this final rule will not have substantial direct effects 
on States or their political subdivisions, or the relationship between 
the Federal government and the States, or on the distribution of power 
and responsibilities among the various levels of government. As a 
result, the rule is not subject to review under the Order. Promulgation 
of this rule amends the applicable regulatory requirements pursuant to 
statutory direction.

Executive Order 12606, the Family

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

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on State, 
local, and tribal governments, and the private sector. This rule does 
not impose any Federal mandates on any State, local, or tribal 
governments, or on the private sector, within the meaning of the UMRA.

List of Subjects in 24 CFR Part 3500

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

    Accordingly, for the reasons set out in the preamble, Interpretive 
Rule 1995-1, published in the Federal Register on February 27, 1995 (60 
FR 10762), is removed; and 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 24 CFR part 3500 is revised to read 
as follows:

    Authority: 12 U.S.C. 2601 et seq.; 28 U.S.C. 2461 note; 42 
U.S.C. 3535(d).

    2. In Sec. 3500.2, paragraph (b) is amended by revising the 
definition of ``Federally related mortgage loan'' to read as follows:


Sec. 3500.2  Definitions.

* * * * *
    Federally related mortgage loan or mortgage loan means as follows:
    (1) Any loan (other than temporary financing, such as a 
construction loan):
    (i) That is secured by a first or subordinate lien on residential 
real property, including a refinancing of any secured loan on 
residential real property upon which there is either:
    (A) Located or, following settlement, will be constructed using 
proceeds of the loan, a structure or structures designed principally 
for occupancy of from one to four families (including individual units 
of condominiums and cooperatives and including any related interests, 
such as a share in the cooperative or right to occupancy of the unit); 
or
    (B) Located or, following settlement, will be placed using proceeds 
of the loan, a manufactured home; and
    (ii) For which one of the following paragraphs applies. The loan:
    (A) Is made in whole or in part by any lender that is either 
regulated by or whose deposits or accounts are insured by any agency of 
the Federal Government;
    (B) Is made in whole or in part, or is insured, guaranteed, 
supplemented, or assisted in any way:
    (1) By the Secretary or any other officer or agency of the Federal 
Government; or
    (2) Under or in connection with a housing or urban development 
program administered by the Secretary or a housing or related program 
administered by any other officer or agency of the Federal Government;
    (C) Is intended to be sold by the originating lender to the Federal 
National Mortgage Association, the Government National Mortgage 
Association, the Federal Home Loan Mortgage Corporation (or its 
successors), or a financial institution from which the loan is to be 
purchased by the Federal Home Loan Mortgage Corporation (or its 
successors);
    (D) Is made in whole or in part by a ``creditor'', as defined in 
section 103(f) of the Consumer Credit Protection Act (15 U.S.C. 
1602(f)), that makes or invests in residential real estate loans 
aggregating more than $1,000,000 per year. For purposes of this 
definition, the term ``creditor'' does not include any agency or 
instrumentality of any State, and the term ``residential real estate 
loan'' means any loan secured by residential real property, including 
single-family and multifamily residential property;
    (E) Is originated either by a dealer or, if the obligation is to be 
assigned to any maker of mortgage loans specified in paragraphs (1)(ii) 
(A) through (D) of this definition, by a mortgage broker; or
    (F) Is the subject of a home equity conversion mortgage, also 
frequently called a ``reverse mortgage,'' issued by any maker of 
mortgage loans specified in paragraphs (1)(ii) (A) through (D) of this 
definition.
    (2) Any installment sales contract, land contract, or contract for 
deed on otherwise qualifying residential property is a federally 
related mortgage loan if the contract is funded in whole or in part by 
proceeds of a loan made by any maker of mortgage loans specified in 
paragraphs (1)(ii) (A) through (D) of this definition.
    (3) If the residential real property securing a mortgage loan is 
not located in a State, the loan is not a federally related mortgage 
loan.
* * * * *


Sec. 3500.5  [Amended]

    3. Section 3500.5 is amended by revising paragraph (b)(2) to read 
as follows:


Sec. 3500.5  Coverage of RESPA.

* * * * *
    (b) * * *
    (2) Business purpose loans. An extension of credit primarily for a 
business, commercial, or agricultural purpose, as defined by Regulation 
Z, 12 CFR 226.3(a)(1). Persons may rely on Regulation Z in determining 
whether the exemption applies.
* * * * *

[[Page 58476]]

Sec. 3500.7  [Amended]

    4. In Sec. 3500.7, paragraph (e)(3) is amended by removing the 
phrase ``a controlled'', and by adding in its place the phrase ``an 
affiliated''.


Sec. 3500.8  [Amended]

    5. In Sec. 3500.8, the fourth sentence of paragraph (c)(2) is 
amended by removing the reference ``Appendix F'', and by adding in its 
place the reference ``Appendix E''.


Sec. 3500.13  [Amended]

    6. In Sec. 3500.13, paragraph (b)(2) is amended by removing the 
word ``controlled'' wherever it appears, and by adding in its place the 
word ``affiliated''.


Sec. 3500.14  [Amended]

    7. In Sec. 3500.14, paragraph (g) is amended by removing paragraph 
(g)(1)(viii); by adding the word ``or'' at the end of paragraph 
(g)(1)(vi); and by removing the phrase ``; or'' at the end of paragraph 
(g)(1)(vii), and by adding in its place a period.
    8. Section 3500.15 is amended as follows:
    a. The section heading is revised as set forth below;
    b. Paragraph (a) is amended by removing the phrase ``A 
controlled'', and by adding in its place the phrase ``An affiliated'';
    c. The first sentence of the introductory text of paragraph (b)(1) 
is amended by removing the word ``Controlled'', and by adding in its 
place the word ``Affiliated'';
    d. Paragraph (b)(3)(i) is amended by removing the phrase ``a 
controlled'' and adding in its place the phrase ``an affiliated''; and
    e. The introductory text of paragraph (b) is amended by removing 
the phrase ``A controlled'', and by adding in its place the phrase ``An 
affiliated''; and is further amended by adding a new sentence at the 
end of the introductory text, to read as follows:


Sec. 3500.15  Affiliated business arrangements.

* * * * *
    (b) * * * Paragraph (b)(1) of this section shall not apply to the 
extent it is inconsistent with section 8(c)(4)(A) of RESPA (12 U.S.C. 
2607(c)(4)(A)).
* * * * *


Sec. 3500.17  [Amended]

    9. Section 3500.17 is amended as follows:
    a. In paragraph (b), the last sentence of the definition of 
``Aggregate (or) composite analysis'' and the last sentence of the 
definition of ``Single-item analysis'' are amended by removing the 
references ``Appendix F'', and by adding in their place the references 
``Appendix E'';
    b. In paragraph (c)(1)(i), the second sentence is amended by 
removing the reference ``appendix F'', and by adding in its place the 
reference ``Appendix E''; and
    c. In paragraph (d)(1)(ii), the last sentence is amended by 
removing the reference ``Appendix F'', and by adding in its place the 
reference ``Appendix E''.


Appendix B to Part 3500  [Amended]

    10. Appendix B to part 3500 is amended as follows:
    a. In Illustration 7, ``Comments'', the first sentence is amended 
by removing the phrase ``a controlled,'' and by adding in its place the 
phrase ``an affiliated''; and the third and last sentences are amended 
by removing the word ``controlled'', and by adding in its place the 
word ``affiliated'';
    b. In Illustration 8, ``Comments'', the first sentence is amended 
by removing the word ``CBA'', and by adding in its place the phrase 
``affiliated business arrangement'';
    c. In Illustration 9, ``Comments'', the first sentence is amended 
by removing the phrase ``a controlled'', and by adding in its place the 
phrase ``an affiliated'';
    d. In Illustration 10, ``Comments'', the first and second sentences 
are amended by removing the phrase ``a controlled'', and by adding in 
its place the phrase ``an affiliated''; and the second sentence is 
further amended by removing the phrase ``the controlled'', and by 
adding in its place the phrase ``the affiliated''; and
    e. In Illustration 11, ``Facts'', the last sentence is amended by 
removing the phrase ``a controlled'', and by adding in its place the 
phrase ``an affiliated''; and in Illustration 11, ``Comments'', the 
second sentence is amended by removing the word ``controlled'', and by 
adding in its place the word ``affiliated''.
    11. Appendix D to part 3500 is revised to read as follows:

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Appendix E to part 3500  [Removed]

    12. Appendix E to part 3500 is removed.


Appendix F to part 3500  [Redesignated]

    13. Appendix F to part 3500 is redesignated as Appendix E to part 
3500.


Appendix N to part 3500  [Removed]

    14. Appendix N to part 3500 is removed.

    Dated: November 8, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner
[FR Doc. 96-29278 Filed 11-14-96; 8:45 am]
BILLING CODE 4210-27-M