[Federal Register Volume 62, Number 90 (Friday, May 9, 1997)]
[Proposed Rules]
[Pages 25740-25749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12081]



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Part V





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 3500



Amendments to Real Estate Settlement Procedures Act Regulation: 
Exemption for Employer Payments to Employees Who Make Like-Provider 
Referrals and Other Amendments; Proposed Rule

  Federal Register / Vol. 62, No. 90 / Friday, May 9, 1997 / Proposed 
Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-4173-P-01]
RIN 2502-AG88


Amendments to Real Estate Settlement Procedures Act Regulation: 
Exemption for Employer Payments to Employees Who Make Like-Provider 
Referrals and Other Amendments; Proposed Rule

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

ACTION: Proposed rule.

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SUMMARY: In this proposed rule, the Department is seeking comments on a 
new exemption under Regulation X, its regulation implementing the Real 
Estate Settlement Procedures Act of 1974 (RESPA). The exemption would 
allow payments by an employer to its own bona fide employees for the 
referral of settlement service business to an affiliated settlement 
service provider, provided that the settlement service business that is 
referred is the same category of settlement service as provided by the 
employer of the employee making the referral, the employee makes the 
affiliated business arrangement disclosure as provided in 24 CFR 
3500.15, and the employee making the referral does not perform any 
other category of settlement service in the same transaction.
    This rule also proposes to implement two amendments to RESPA in 
recent legislation. One concerns referrals of settlement service 
business through telemarketing, in writing, or through electronic 
media. The other concerns mortgage servicing sales or transfers. The 
rule also describes additional technical corrections and clarifications 
the Department intends to make at a later date.

DATES: Comment due date: July 8, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Rules Docket Clerk, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, SW., Washington, DC 20410-0500. Communications should 
refer to the above docket number and title. Facsimile (FAX) comments 
are not acceptable. A copy of each communication submitted will be 
available for public inspection and copying between 7:30 a.m. and 5:30 
p.m. weekdays at the above address.
    The Department also invites interested persons to submit comments 
on the proposed information collection requirements in Sec. 3500.15(b) 
of this proposed rule. Comments should refer to the above docket number 
and title, and should be sent to the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Attention: Desk 
Officer for HUD, Washington, DC 20503.

FOR FURTHER INFORMATION CONTACT: David R. 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- 
and 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:

I. 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 withdrew a broad exemption 
for payments by employers to their own employees for any referral 
activities (24 CFR 3500.14(g)(1)(vii)). In its place, the rule 
established three narrower exemptions for employer payments to 
employees: (1) One for managerial employees (Sec. 3500.14(g)(1)(viii) 
of the June 7 rule); (2) One for employees who do not perform 
settlement services in any transaction (Sec. 3500.14(g)(1)(ix) of the 
June 7 rule); and (3) A 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). 
The rule was to have become effective on October 7, 1996, 120 days from 
publication. (Note: The June 7 rule was corrected and revised on August 
12, 1996 (61 FR 41944).)
    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 delayed the effective date of the provisions of the Department's 
June 7, 1996 final RESPA rule concerning payments to employees by their 
employers to no earlier than July 31, 1997.
    Although not required by the Act, on October 4, 1996 (61 FR 51782), 
the Department delayed temporarily the effective date of the entire 
June 7 final rule, as corrected and revised on August 12, 1996. 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.
    On November 4, 1996 (61 FR 56624), the Department published another 
notice in the Federal Register announcing that, consistent with the 
Act, the Department would shortly publish a revised final rule that 
would make effective those provisions of the June 7 final rule that are 
unaffected by the delay provisions of the legislation. On November 15, 
1996 (61 FR 58472), the Department published a final rule in the 
Federal Register making effective certain portions of the June 7 final 
rule and August 12 technical revisions that were not delayed by the 
Act. The November 15, 1996 final rule put into effect those portions of 
the June 7 final rule dealing with Computer Loan Origination (CLO) 
Systems. The November 15 final rule thereby effectuated the withdrawal 
of the CLO exemption and the elimination of the CLO Fee Disclosure 
form. It also put into effect the revised Appendix D to part 3500 as 
published August 12, 1996. Further, it made several technical revisions 
and corrections to Regulation X.
    This proposed rule furthers the plans indicated in the November 4, 
1996 notice to move forward as expeditiously as possible, subject to 
the requirements of the Act, to establish new rules addressing employer 
payments to employees in lieu of the former broad exemption. It also 
proposes, in conjunction with putting into effect the revisions in the 
June 7 rule concerning employer payments to employees, to establish a 
new exemption. This exemption would allow payments by an employer to 
its own bona fide employees for the referral of settlement service 
business to an affiliated settlement service provider, under the 
following conditions: (1) The settlement service business that is 
referred is the same category of settlement service as provided by the 
employer of the employee making the referral; (2) The employee makes 
the affiliated business

[[Page 25741]]

arrangement disclosure in accordance with 24 CFR 3500.15; and (3) The 
employee does not perform any other category of settlement service in 
the same transaction. The Department anticipates that this new 
exemption will become effective at the same time as the Department 
makes the changes that were delayed by the Act (i.e., eliminating the 
exemption for payments by an employer to its employees for referral 
activities, currently codified as 24 CFR 3500.14(g)(1)(vii), and 
substituting the more limited exemptions that the June 7 rule would 
have codified as 24 CFR 3500.14(g)(1)(vii)-(ix))). The Act does not 
permit the Department to make those changes before July 31, 1997, or to 
announce an effective date for those provisions more than 180 days 
before the effective date.
    The Department also anticipates making the following technical 
clarifications and corrections to those provisions of the June 7 rule, 
as part of the final rule that will make those provisions effective 
subject to the requirements of the Act:
    (1) A technical clarification indicating that under the managerial 
exemption (Sec. 3500.14(g)(1)(viii) of the June 7 rule), a manager not 
routinely performing settlement services may still receive compensation 
under the exemption if either: (1) The total value of the services 
provided by the manager does not exceed 5 percent of the annual income 
to the office or unit for which the manager is responsible attributable 
to RESPA-covered transactions, or (2) the manager performs settlement 
services in no more than three RESPA-covered transactions.
    (2) A technical clarification indicating that in using the term 
``in any transaction'' in the exemption for employees who do not 
perform settlement services (Sec. 3500.14(g)(1)(ix) of the June 7 
rule), the Department did not intend that an employee who has stopped 
providing settlement services, an employee who changes jobs and no 
longer provides settlement services, or a new employee is forever 
prohibited from receiving compensation for referrals.
    (3) A technical correction redesignating ``Controlled Business 
Arrangements'' as ``Affiliated Business Arrangements'' or ``AfBAs,'' 
reflecting the change in terminology in section 2103(c) of the Act.
    (4) A technical correction relating to the timing of providing the 
AfBA disclosure, to conform the language of the regulation and Appendix 
B more closely to the statutory language as revised in section 2103(d) 
of the Act, to provide consistently that the AfBA disclosure statement 
must be provided in accordance with Sec. 3500.15(b).
    This proposed rule also proposes to implement amendments to RESPA 
contained in the Act. One amendment concerns referrals through 
telemarketing and electronic media. The other amendment concerns 
mortgage servicing sales, assignments, or transfers under section 6 of 
RESPA.
    Finally, the proposed rule proposes some changes in response to 
section 2101 of the Act. In that section, Congress mandated that the 
Department and the Federal Reserve Board (the Board) work together to 
``simplify and improve'' the disclosures given in a mortgage 
transaction subject to the Truth in Lending Act (TILA) and RESPA, and 
to create a unified format to satisfy the requirements of both 
statutes. On December 31, 1996, the Department and the Board published 
an Advance Notice of Proposed Rulemaking (ANPR) on Improvement of 
Disclosures Under RESPA and TILA (61 FR 69055), in order to solicit 
suggestions from the public regarding possible ways to simplify and 
improve disclosures required under the statutes. The Department 
received 82 comments from all sectors of the industry in response to 
the ANPR. The preamble of this rule describes how the Department 
proposes to incorporate some of the suggestions and recommendations 
generated by the ANPR into this proposed rule. The Department 
anticipates that other suggestions could be incorporated into 
subsequent rulemaking.
    The Department believes, however, that significant simplification 
may only be possible through legislative changes and will work with the 
Board in making recommendations towards that end. Under the Act, 
Congress has required that the Department and the Board recommend any 
legislation that would be necessary to accomplish the objectives of 
simplifying and improving the disclosures subject to TILA and RESPA. 
Both agencies are currently considering several approaches to 
streamlining the disclosure requirements.

II. Proposed Exemption for Like-Provider Referrals

A. Description of Problem

    The Department published a proposed rule on July 21, 1994 (59 FR 
37360) to revise Regulation X. During the comment period on the 
Department's July 21, 1994 proposed rule, some commenters raised 
concern that the Department's proposed withdrawal of the broad 
exemption for employer payments to employees for referrals and its 
replacement with narrower exemptions would unduly restrict compensation 
of bank employees for making referrals to mortgage banking affiliates. 
A major trade association for the banking industry, for example, raised 
concern that while a banker could compensate its employee for the 
referral of mortgage loan business to a mortgage lending division 
within the bank, a banker would be prohibited from compensating an 
employee for the referral of a bank customer to a mortgage banking 
affiliate of the bank or a mortgage banking subsidiary of the parent 
holding company.
    The trade association urged the Department to reconsider making 
such a distinction in its final rule, arguing that the distinction 
lacked justification or merit and, in essence, was solely based on the 
structure of the bank and the location of the mortgage lending function 
within the banking institution. The trade association explained that 
the proposed rule would penalize banks, their affiliates, holding 
companies, boards of directors, officers, and employees solely because 
of their corporate structures, which ``are specifically authorized by 
statute, implemented by state or Federal bank regulatory authorities 
and constantly monitored and examined for safety and soundness and 
compliance purposes.'' The trade association argued:

    From the consumer's perspective, the location of this mortgage 
lending activity within the banking institution's family of 
companies is irrelevant. The consumer's objective is to obtain a 
mortgage loan. To the consumer and the bank, this is the business of 
banking whether it takes place within the bank or as part of the 
banking institution's corporate family.

    Since the Department's promulgation of its final rule on June 7, 
1996, withdrawing the broader exemption and establishing more limited 
exemptions, similar concerns have been echoed by others. A mortgage 
lending subsidiary of a diversified financial services company 
indicated that for various business and regulatory reasons, it offers 
its services through more than one corporate entity. It argued that 
bank branch personnel should be able to receive compensation for 
referring customers who enter the branch and inquire about a first 
mortgage loan to the mortgage lending subsidiary. It pointed out that 
there is no danger of adverse steering since the customer is provided 
the controlled business disclosure (now referred to as the Affiliated 
Business Arrangement Disclosure Statement or AfBA Disclosure 
Statement), which alerts the

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customer that he or she is dealing with the mortgage lending 
subsidiary; from the customer's perspective, the loan is still from the 
bank.
    A major bank made essentially the same arguments. It faulted the 
June 7 rule for failing to accommodate the practice of referral of loan 
business by a lender to its affiliate. In a letter to the Department, 
the bank stated:
    We believe that when a consumer comes to [the bank] to inquire 
about mortgage financing, whether to purchase a home or refinance an 
existing mortgage, the consumer has come to us because of our name 
and reputation. Whether contact is made in person at a branch 
office, by phone, or over the Internet, the consumer expects to 
learn about [bank] loan products that meet his or her financing 
needs, regardless of whether such loans are marketed, originated or 
serviced by different * * * legal entities. It makes little or no 
difference to our borrowers which * * * subsidiary originates their 
loans or whether their original contact was a loan officer employed 
by a different subsidiary. * * *
    Without a change to the final rule, we will be forced into a 
costly reorganization to create a permissible compensation 
structure. We would either have to staff each branch with one or 
more mortgage lending division loan officers, or originate and book 
mortgage loans in each branch where the initial inquiry was made. In 
either case, any potential economies would be eliminated without 
adding value or convenience for our customers.

B. Proposed Solution

    Under the June 7 rule, if a bank customer asks a loan officer who 
provides settlement services in any transaction about a type of loan 
that the bank does not make, but which the bank's affiliate does make, 
the bank would have been precluded from compensating the loan officer 
for making the referral to the appropriate affiliate. However, the June 
7 rule would have created an exemption to the prohibition against 
referral fees for employer payments to employees who do not perform 
settlement services in any transaction and who refer settlement service 
business to an affiliate, so long as the controlled business 
arrangement disclosure is provided. Thus, an employee of a bank could 
have referred a bank customer to a mortgage banking affiliate of the 
bank or a mortgage banking subsidiary of the parent holding company and 
could have received referral-based compensation. The only restrictions 
would have been that the controlled business arrangement disclosure 
would have to be provided, and, if the employee was to be compensated 
for the referral, the employee could not be one who performed 
settlement services in any residential real estate transaction covered 
by RESPA. (Part V(B) of this preamble discusses the meaning of ``in any 
transaction.'')
    In light of certain of the expressed concerns, the Department is 
proposing to exercise its exemption authority under RESPA, to add a new 
exemption to section 8 of RESPA's prohibition against kickbacks and 
unearned fees. The Secretary has authority to create exemptions under 
section 19(a) of RESPA for classes of transactions as may be necessary 
to achieve the purposes of RESPA (12 U.S.C. 2617(a)). In addition, 
under section 8(c)(5) of RESPA, the Secretary may create regulatory 
exemptions for ``such other payments or classes of payments,'' after 
consulting with various Federal agencies (12 U.S.C. 2607(c)(5)). The 
exemption to be created under this proposed rule, like the exemptions 
promulgated June 7, would be issued pursuant to the Secretary's clear 
authority to create reasonable exemptions to further the purposes of 
RESPA.
    Under the proposed exemption, Sec. 3500.14(g)(1) would be amended 
by adding an exemption for a payment by an employer to its bona fide 
employee for referring settlement service business to a settlement 
service provider that has an affiliate relationship with the employer, 
or in which the employer has a direct or beneficial ownership interest 
of more than 1 percent, if the following conditions are met:
    1. The settlement service business that is referred is the same 
category of settlement service that the employer of the employee making 
the referral provides;
    2. The employee provides to the person being referred the 
affiliated business arrangement disclosure in accordance with 
Sec. 3500.15(b); and
    3. The employee making the referral does not perform any other 
category of settlement service in the same transaction.
    The rule would specify that, for purposes of this exemption, each 
paragraph in the definition of ``settlement service'' provided in 24 
CFR 3500.2(b) (excluding paragraphs (b)(15) and (b)(16) of that 
definition), as it is proposed to be revised, constitutes a separate 
``category of settlement service.'' Some ``categories of settlement 
services'' to which this exemption might commonly apply would include 
originating mortgage loans, providing services involving hazard 
insurance, and providing title services.
    While the rendering of services by a real estate agent or real 
estate broker is a settlement service (see paragraph (b)(15) of the 
definition of ``settlement service'' in Sec. 3500.2 as proposed to be 
revised), referrals from one real estate agent or broker to another are 
generally exempt pursuant to section 8(c)(3) of RESPA (12 U.S.C. 
2607(c)(3)) and 24 CFR 3500.14(g)(1)(v) of the RESPA regulations. 
Because the section 8(c)(3) exemption already exists, the referral of 
services by a real estate agent or real estate broker to another real 
estate agent or real estate broker is not included under the new 
exemption. In addition, real estate agents are usually independent 
contractors, and thus would not be considered ``employees'' eligible 
for this exemption for employer payments to employees.
    In addition, paragraph (b)(16) of the definition of ``settlement 
service'' in Sec. 3500.2 as proposed to be revised includes as a 
settlement service ``other services for which a settlement service 
provider requires a borrower or seller to pay.'' This catchall, 
however, is too open-ended to apply to the new exemption proposed. 
Commenters are encouraged to provide examples of other settlement 
services that would qualify under paragraph (b)(16). The Department 
will consider the examples submitted and possibly add them to the list 
of categories of settlement services enumerated in the definition so 
that referrals of such services may qualify for the new exemption 
proposed.
    As with the exemptions contained in the June 7 rule, this 
additional exemption only pertains to bona fide employees. Individuals 
may not be hired on a part-time basis to make referrals because of 
their access to consumers as settlement service providers and then be 
compensated for such referrals. Sham employment arrangements are also 
prohibited. See 61 FR 29243 (column 3). Moreover, the exemption does 
not affect the prohibition in 24 CFR 3500.14(b) against the entity to 
which business is referred from compensating the affiliate or the 
employee of the affiliate making the referral.
    It is anticipated that when the Department makes this proposed rule 
final, it will do so in a rule that will also make effective the 
changes to the exemptions for employer payments to employees as 
contained in the June 7 rule, subject to any further technical 
corrections or clarifications to such exemptions that the Department 
may announce. The language of the June 7 rule and the technical 
corrections and clarifications are not republished here, since the 
Department is not requesting comments on them.

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C. Questions for Commenters

    The Department is particularly interested in comments on the 
following issues:
    1. What potential disadvantages or dangers, if any, would the 
exemption for employer payments to employees who make like-provider 
referrals pose for consumers? As summarized above, it has been argued 
by members of the settlement service industry that in the types of 
referrals covered by the proposed rule, there is little danger of 
adverse steering or adverse consequences to customers. However, the 
Department would like to hear from those with other views, including 
those with additional bases in support of such an exemption.
    2. The Department seeks comments on whether a potential danger is 
created for consumers that, through the design of compensation systems, 
the exemption could cause greater steering of consumers to products 
that are more profitable for the entity making or receiving the 
referral, but that are not necessarily in the consumer's best interest. 
For example, a loan officer of a lender that makes home equity loans 
might receive a $50 bonus for every home equity loan closed. In 
contrast, the same loan officer might receive a $100 bonus for 
referring a customer who inquires about a home equity loan to an 
affiliate of the lender that will refinance the primary mortgage, or 
$150 if he or she could originate the refinance of the primary mortgage 
in the name of the affiliate (and do only a minimum of work regarding 
origination of the loan). Please comment on whether this exemption 
would create a danger that consumers will be steered for reasons other 
than what is in their best interest, and if so, how this danger may be 
lessened or eliminated. Also comment on whether not creating this 
exemption would create different dangers for consumers, such as 
situations in which consumers who would benefit from referrals will not 
be referred because some employees who would be in a position to make 
referrals would not be compensated for doing so.
    3. What are the advantages and disadvantages of limiting the 
exemption to those employees who do not perform any other category of 
settlement service in the same transaction, as proposed? Should the 
Department narrow the exemption by limiting it to those employees who 
do not perform any settlement service in the same transaction?
    4. The Department recognizes that there could be some overlap among 
the 16 categories in the proposed rule. What refinements of the 
categories would ensure that the purposes of the exemption are 
fulfilled? Does the Department's proposal provide adequate guidance as 
to what is the ``same category of settlement service?'' How could this 
point be clarified further? What specific categories of settlement 
services would fall under paragraph (b)(16) of the definition of 
``settlement service'' in Sec. 3500.2 (``provision of any other 
services for which a settlement service provider requires a borrower or 
seller to pay''), as it is proposed to be revised?
    5. Since the concerns which resulted in this proposed new exemption 
came mainly from lenders, should the Department narrow the scope of the 
exemption being proposed to apply only to lenders? What problems would 
other settlement service providers face if the exemption were limited 
in this fashion?
    6. The exemption, as proposed, would not apply in situations in 
which a bank that does not originate any mortgage loans refers 
customers seeking mortgage loans to the bank's mortgage lending 
subsidiary. In such cases, the referring bank does not originate 
mortgage loans, and thus does not perform settlement service business 
in the same category as the business being referred. Should the 
exemption be expanded to allow compensation for such referrals?

III. Referrals Involving Telemarketing and Electronic Media

    This proposed rule would revise Sec. 3500.15(b)(1) of the RESPA 
regulations to conform to changes to RESPA made in section 2103(d) of 
the Act. Section 2103(d) of the Act primarily amended section 
8(c)(4)(A) of RESPA (12 U.S.C. 2607(c)(4)(A)) to establish special 
procedures for disclosures of affiliated business arrangements in 
conjunction with referrals in which the telephone or electronic media 
are used in marketing. The proposed rule would set forth the new 
provisions regarding the timing of providing the disclosure, the 
methods of providing the disclosure, and the evidence needed to 
substantiate that the disclosure was provided.
    The proposed rule would, consistent with the Department's prior 
rules, require that the Affiliated Business Arrangement Disclosure 
Statement be provided in writing on a separate piece of paper, and in 
the format set forth in Appendix D to part 3500. In proposing to revise 
Sec. 3500.15(b)(1) to be consistent with the Act, the Department is 
also proposing to clarify the required elements of a proper affiliated 
business disclosure, as provided in Appendix D, which specifically 
includes the requirement that the disclosure contain an acknowledgement 
for the person being referred to sign. It also specifies that the 
person making the referral must request that the person being referred 
sign the disclosure promptly and return it to the affiliate making the 
referral or a designated addressee, and must provide information on 
where to send the signed disclosure.
    Consistent with the Act, the proposed rule provides that, in the 
case of a face-to-face referral or a referral made in writing or by 
electronic media, the written disclosure must be provided at or before 
the time of the referral. In the case of a referral made by telephone, 
an abbreviated verbal disclosure also must be made during the telephone 
referral that, in clear and understandable language: (1) Specifies the 
nature of the relationship (explaining the ownership and financial 
interest) between the entity making the referral and the entity 
performing settlement services (or business incident thereto); (2) 
explains that because of this relationship, this referral may provide a 
financial or other benefit to the referring party; (3) states that the 
existence of this relationship does not require that the person being 
referred use the provider to whom he or she is being referred as a 
condition of settlement of the loan, or purchase, sale, or refinance of 
the property, as applicable; and (4) advises that a written disclosure 
will be provided within 3 business days. Different timing provisions 
for providing the written disclosure are contained in 
Sec. 3500.15(b)(2) (iii)-(iv) of this proposed rule. These exceptions, 
which are simply a continuation of exceptions contained in prior rules 
regarding provision of such disclosure, involve referrals by a lender 
and situations involving an attorney or law firm that requires a client 
to use a particular title insurance agent or company.
    Consistent with the Act, in all cases the person being referred 
must sign the disclosure. The person being referred should sign the 
disclosure at the time that the disclosure is provided. If the person 
being referred chooses not to sign the disclosure at the time that the 
disclosure is provided, the signature of the person being referred must 
be obtained at or before closing or settlement.
    The proposed rule also provides that if a notation was made at the 
time that the disclosure was provided, in a written, electronic, or 
similar system of records maintained in the regular course of business, 
that notation may be used as evidence that the disclosure was provided 
at the time of the referral. Such a notation is to include a statement 
that the person being referred

[[Page 25744]]

chose not to sign the disclosure at the time that it was provided. The 
existence of such a notation, however, does not substitute for 
obtaining a signature at or before closing or settlement. In the case 
of a face-to-face referral, if the person being referred chooses not to 
sign the disclosure at the time that the disclosure is provided, such 
notation is mandatory.

IV. Sales or Transfers of Mortgage Servicing

    This proposed rule also proposes to revise the RESPA regulations to 
reflect an amendment to section 6 of RESPA, set forth in section 
2103(a) of the Act. Section 6(a), as amended, requires disclosure to 
applicants regarding the possibility of the assignment, sale, or 
transfer of the rights to service the applicant's federally related 
mortgage loan. Prior to the amendment, section 6 also provided that an 
applicant for a mortgage loan had to be provided a disclosure of the 
lender's historical practice in assigning, selling, and transferring 
servicing of loans, or, as an alternative to providing the historical 
data, a statement that the lender had previously sold servicing. A 
signed acknowledgment of receipt of the disclosure statement was also 
required in the applicant's loan file. The Act eliminates the 
historical data provisions and the acknowledgment requirement.
    This proposed rule would implement the statutory amendment by 
striking language in Sec. 3500.21 to make it consistent with the 
statutory amendment. The rule proposes to revise Appendix MS-1 to part 
3500, the model Servicing Disclosure Statement format, to conform to 
the amendment. This proposed rule recognizes that certain entities do 
not undertake loan servicing and, therefore, transfer servicing before 
the first payment is due; the disclosure format may so state. The 
disclosure format in its revised form would be published in the Code of 
Federal Regulations for the convenience of compliance by affected 
parties. In response to comments received pursuant to the ANPR urging 
the Department to consolidate the Mortgage Servicing Disclosure with 
other RESPA forms, the proposed rule furthers section 2101 of the Act 
by proposing to clarify that the format language may also be included 
as part of the Good Faith Estimate.
    The Department is interested in comments addressing alternative 
approaches to implementing the statutory language while protecting 
consumers. In connection with the report to Congress which the 
Department is developing pursuant to section 2101 of the Act, which 
will contain the Department's recommendations for statutory amendments, 
the Department is also considering whether the disclosure might be 
combined with other RESPA or Truth In Lending Act (TILA) disclosures, 
consistent with section 2101 of the Act. In addition, if commenters 
propose that the Department should continue to require more information 
in the disclosure than in the format proposed, they should address what 
the Department's authority to do so would be in light of the statutory 
amendment in section 2103(a) of the Act.
    In a related matter, section 2103(e) establishes a 3-year 
limitation on the time aggrieved borrowers or classes of borrowers 
could bring actions under section 6 of RESPA. Inasmuch as this 
limitation is longer than the statute of limitations for other actions 
by individuals under RESPA (1 year), a new paragraph (f)(1)(iv) would 
be added to Sec. 3500.21 of the regulations to highlight this 
provision.

V. Additional Technical Corrections and Clarifications Contemplated

    In addition to the proposed revisions described in the preceding 
portions of this preamble, the Department intends that when it makes 
effective the provisions of the June 7 rule amending RESPA regulations 
concerning employer payments to employees, the Department will make 
further technical corrections and clarifications to the June 7 rule. 
While these technical corrections and clarifications are described 
below for informational purposes, the text is not published here, since 
the Department is not requesting comments on them.

A. Routine Dealing

    The Department has been asked about language in the preamble and in 
Appendix B, ``Illustrations of the Requirements of RESPA,'' regarding 
the definition of a managerial employee as an ``employee * * * who does 
not routinely deal directly with consumers * * *.'' This definition 
applies to the exemption for employer payments to managerial employees 
(Sec. 3500.14(g)(1)(viii) of the June 7 rule). In the preamble to the 
Department's June 7, 1996 rule (61 FR 29245; bottom of middle column) 
the Department stated, ``HUD intends this phrase (`does not routinely') 
to allow a managerial employee who performs and is compensated for 
occasional settlement services (not more than three transactions a 
year) to be eligible for the exemption.'' The last sentence of Appendix 
B, illustration 12 of the June 7 rule also contained a statement 
referring to this three-transaction guideline.
    Following publication of the June 7 rule, the Department has found 
that setting as a guide a fixed, maximum number of transactions for all 
managers under the Department's rule would unduly interfere with the 
functioning of offices. Roles and functions are not rigidly specified 
and because of departures, absences for illnesses, or other reasons, a 
manager may be called upon to complete transactions in process or 
otherwise become involved in troublesome transactions, in addition to 
any personal transactions the manager might otherwise undertake. 
Accordingly, the Department agrees that a manager who does not 
routinely deal with the public may perform greater than three 
transactions and still remain eligible for the managerial exemption. A 
more appropriate guideline is that a manager not routinely performing 
settlement services may still receive compensation under the exemption 
if either: (1) the total value of the services provided by the manager 
does not exceed 5 percent of the annual income to the office or unit 
for which the manager is responsible attributable to RESPA-covered 
transactions, or (2) the manager performs settlement services in no 
more than three RESPA-covered transactions.
    In publishing the final rule, the Department will clarify this 
point.

B. In Any Transaction

    The final rule will put into effect the exemption promulgated in 
the June 7 rule to the otherwise applicable prohibition against 
kickbacks and unearned fees. The exemption applies in affiliate 
relationships and allows payments made to employees who do not perform 
settlement services ``in any transaction'' and who provide the 
disclosure statement (24 CFR 3500.14(g)(1)(ix)). The use of the term 
``in any transaction'' has created concern for some affiliated 
settlement service providers regarding the breadth of the restriction.
    The Department sought to provide this exemption to those who were 
not currently involved in the provision of settlement services. 
Therefore, when the Department puts this exemption into effect in the 
final rule, it will clarify that it does not intend, by the use of the 
term ``in any transaction,'' that if an employee performs settlement 
services one time in his or her life, he or she shall forever lose the 
ability to receive payments pursuant to this exemption. Rather, in 
publishing the final rule the Department will clarify that it intends 
the ``in any transaction'' language to

[[Page 25745]]

allow an employee who has performed settlement services in the past to 
qualify for the exemption in any of the following types of 
circumstances:
    1. No longer providing settlement services. This type of 
circumstance involves an employee who has not performed settlement 
services for his or her current employer (in the same job position) in 
any transaction for 1 year or more. OR
    2. An employee who changes jobs. This type of circumstance involves 
an employee who performed settlement services for his or her employer 
in the past but, although still employed by the same employer, changes 
jobs so that he or she no longer holds the former position and does not 
perform settlement services in the new position. OR
    3. A new employee. This type of circumstance involves an employee 
who performed settlement services for another employer on a past job, 
but no longer holds that job or works for that employer, and does not 
perform settlement services on his or her current job for the new 
employer.
    In publishing the final rule the Department also will clarify that, 
as explained in the preamble to the June 7 rule (61 FR 29243), under 
all these circumstances, the employment relationship must be bona fide 
and not a sham designed to facilitate kickbacks among affiliated 
companies. Otherwise, the exemption will not apply.

C. ``Affiliated Business Arrangement''

    The Department will make a technical correction required by an 
amendment to RESPA in section 2103(c) of the Act. That legislation 
redesignated ``Controlled Business Arrangements'' as ``Affiliated 
Business Arrangements'' or ``AfBAs.'' The final rule will incorporate 
into the RESPA rules the term ``affiliated business arrangement'' 
instead of the term ``controlled business arrangement'' used in the 
June 7 rule, completing the process of changing the terminology begun 
in the November 15, 1996 rule (61 FR 58472).

D. Timing of Affiliated Business Arrangement Disclosure

    The Department will make a technical correction relating to the 
timing of providing the AfBA disclosure. The June 7 rule used 
inconsistent language to describe when the disclosure was to be 
provided. (See 24 CFR 3500.14(g)(1)(ix)(A)(2) (``before the 
referral''); 24 CFR 3500.15(b)(1) (``prior to the referral,'' ``no 
later than the time of each referral,''); Appendix B, illustration 11 
(``at or before the time that the referral is made''); Appendix B, 
illustration 12 (``at the time of the referral'').) The Department will 
conform the language of the regulation and Appendix B more closely to 
the statutory language as revised in section 2103(d) of the Act, to 
provide consistently that the AfBA disclosure statement must be 
provided in accordance with Sec. 3500.15(b).
    Section 3500.15(b) sets forth the applicable time frames for 
providing the disclosure. This provision requires, in the case of a 
face-to-face referral or a referral made in writing or by electronic 
media, providing a written disclosure at or before the time of the 
referral, except in cases of a referral by a lender or situations 
involving an attorney or law firm that requires a client to use a 
particular title insurance agent. In the case of a telephone referral, 
a written disclosure must be provided within 3 business days after the 
referral by telephone and an abbreviated verbal disclosure must be made 
during the telephone referral. The change that will be included in the 
final rule will eliminate the use of inconsistent terminology and will 
conform the description of the timing for providing the disclosure to 
be consistent with section 8(c)(4) of RESPA, as amended by section 
2103(d) of the Act.

Findings and Certifications

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866, Regulatory Planning and Review, 
issued by the President on September 30, 1993. OMB determined that this 
rule is a ``significant regulatory action,'' as defined in section 3(f) 
of the Order (although not economically significant, as provided in 
section 3(f)(1) of the Order). Any changes made in this rule subsequent 
to its submission to OMB are identified in the docket file, which is 
available for public inspection between 7:30 a.m. and 5:30 p.m. 
weekdays in the Office of the Rules Docket Clerk, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC.

Paperwork Reduction Act

    The information collection requirements contained in 
Sec. 3500.15(b) prior to this proposed rule 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. In securing that approval, the Department had estimated that the 
annual reporting and recordkeeping hour burden would be 240,000 hours 
(2.4 million annual responses at 6 minutes per response). The 
provisions of Sec. 3500.15(b) of this proposed rule regarding the 
Affiliated Business Arrangement Disclosure would simply clarify the 
timing and the methods of providing the disclosure, and the evidence 
needed to substantiate that the disclosure was provided, in 
circumstances in which the referral is made over the telephone or 
through electronic media. The Department does not anticipate that the 
provisions of Sec. 3500.15(b) of this proposed rule will increase the 
number of annual burden hours described above. The Department has, 
however, submitted the information collection requirements in 
Sec. 3500.15(b) of this proposed rule to OMB for review under the 
Paperwork Reduction Act and the procedures set forth in 5 CFR part 
1320. As required by the Paperwork Reduction Act, interested persons 
are invited to submit comments according to the instructions in the 
DATES and ADDRESSES sections in the preamble of this proposed rule. The 
Department specifically requests comments on the following:
    (1) Whether the proposed collection of information is necessary for 
the proper performance of the functions of the Department, including 
whether the information will have practical utility;
    (2) The accuracy of the Department's estimate of the burden of the 
proposed collection of information;
    (3) How to enhance the quality, utility, and clarity of the 
information to be collected; and
    (4) How to minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    The information collection requirements in Sec. 3500.21 of this 
proposed rule also have been approved by OMB, and assigned OMB control 
number 2502-0458. The rule does not propose to make changes to the 
information collection requirements set forth in Sec. 3500.21. The rule 
proposes to make changes to the Servicing Disclosure Statement format 
described in this section, but this format is a model format and is not 
required to be used. The OMB approval number for this section is also 
in the process of being renewed in accordance with the procedures set 
forth in OMB's regulations implementing the Paperwork Reduction Act of 
1995 and codified at 5 CFR part 1320.

[[Page 25746]]

Environmental Impact

    In accordance with 24 CFR 50.19(c)(1) of the Department's 
regulations, published in a final rule on September 27, 1996 (61 FR 
50914), this proposed rule does not direct, provide for assistance or 
loan and mortgage insurance for, or otherwise govern or regulate 
property acquisition, disposition, lease, rehabilitation, alteration, 
demolition, or new construction, or set out or provide for standards 
for construction or construction materials, manufactured housing, or 
occupancy. Therefore, this proposed rule is categorically excluded from 
the requirements of the National Environmental Policy Act.

Regulatory Flexibility Act

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

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 proposed rule would 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 proposed rule is not subject to review under the 
Order.

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

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

    Accordingly, for the reasons set out in the preamble, part 3500 of 
Title 24 of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

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

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

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


Sec. 3500.2  Definitions.

* * * * *
    (b) * * *
    Settlement service means any service provided in connection with a 
prospective or actual settlement, including any one or more of the 
following:
    (1) Origination of a federally related mortgage loan (including, 
but not limited to, the taking of loan applications, loan processing, 
and the underwriting and funding of such loans), or 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);
    (2) Provision of title services, including title searches, title 
examinations, abstract preparation, insurability determinations, and 
the issuance of title commitments and title insurance policies;
    (3) Rendering of services by an attorney;
    (4) Preparation of documents, including notarization, delivery, and 
recordation;
    (5) Rendering of credit reports;
    (6) Rendering of appraisals;
    (7) 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;
    (8) Conducting of settlement by a settlement agent and any related 
services;
    (9) Provision of services involving mortgage insurance;
    (10) Provision of services involving hazard or other casualty 
insurance;
    (11) Provision of services involving flood insurance;
    (12) Provision of services involving homeowner's warranties;
    (13) 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;
    (14) Provision of services involving real property taxes or any 
other assessments or charges on the real property;
    (15) Rendering of services by a real estate agent or real estate 
broker; and
    (16) Provision of any other services for which a settlement service 
provider requires a borrower or seller to pay.
* * * * *
    3. Section 3500.14 is amended by adding and reserving new 
paragraphs (g)(1)(viii) and (g)(1)(ix), and by adding a new paragraph 
(g)(1)(x), to read as follows:


Sec. 3500.14  Prohibition against kickbacks and unearned fees.

* * * * *
    (g) * * *
    (1) * * *
    (viii) [Reserved]
    (ix) [Reserved]
    (x)(A) A payment by an employer to its bona fide employee for the 
referral of settlement service business to a settlement service 
provider that has an affiliate relationship with the employer or in 
which the employer has a direct or beneficial ownership interest of 
more than 1 percent, if the following conditions are met:
    (1) The settlement service business that is referred is the same 
category of settlement service that the employer of the employee making 
the referral provides;
    (2) The employee provides to the person being referred the 
affiliated business arrangement disclosure in accordance with 
Sec. 3500.15; and
    (3) The employee making the referral does not perform any other 
category of settlement service (including a service described by 
paragraph (b)(15) or (b)(16) of the definition of ``Settlement 
service'' in Sec. 3500.2(b)) in the same transaction.
    (B) For purposes of this paragraph (g)(1)(x), each service 
described in the definition of ``Settlement service'' in Sec. 3500.2 
(b)(1) through (b)(15) constitutes a different category of settlement 
service that may qualify for this exemption.
* * * * *
    4. Section 3500.15 is amended by revising paragraph (b)(1); by 
redesignating paragraphs (b)(2) and (b)(3) as paragraphs (b)(5) and 
(b)(6), respectively; and by adding new paragraphs (b)(2) through 
(b)(4); to read as follows:


Sec. 3500.15  Affiliated business arrangements.

* * * * *

[[Page 25747]]

    (b) * * *
    (1) The person making a referral provides to each person being 
referred a written disclosure on a separate piece of paper, in the 
format of the Affiliated Business Arrangement Disclosure Statement set 
forth in Appendix D to this part. The person making the referral must 
request that the person being referred sign the disclosure promptly and 
return it to the affiliate making the referral or a designated 
addressee, and must provide information on where to send the signed 
disclosure. The disclosure shall:
    (i) Specify the nature of the relationship (explaining the 
ownership and financial interest) between the person performing 
settlement services (or business incident thereto) and the person 
making the referral;
    (ii) Describe the estimated charge or range of charges (using the 
same terminology, as far as practical, as Section L of the HUD-1 or 
HUD-1A settlement statement) generally made by the provider of 
settlement services; and
    (iii) Include an acknowledgement for the person being referred to 
sign.
    (2) The person making the referral shall provide the disclosure in 
accordance with the following timetable:
    (i) In the case of a face-to-face referral or a referral made in 
writing or by electronic media, at or before the time of the referral, 
except as provided in paragraph (b)(2)(iii) or (b)(2)(iv) of this 
section;
    (ii) In the case of a referral made by telephone, within 3 business 
days after the referral by telephone, except as provided in paragraph 
(b)(2)(iii) or (b)(2)(iv) of this section. In the case of a referral 
made by telephone, an abbreviated verbal disclosure also must be made 
during the telephone referral that, in clear and understandable 
language:
    (A) Specifies the nature of the relationship (explaining the 
ownership and financial interest) between the entity making the 
referral and the entity performing settlement services (or business 
incident thereto);
    (B) Explains that because of this relationship, this referral may 
provide a financial or other benefit to the referring party;
    (C) States that the existence of this relationship does not mean 
that the person being referred must use the provider to whom he or she 
is being referred as a condition of settlement of the loan, or 
purchase, sale, or refinance of the property, as applicable; and
    (D) Advises that a written disclosure will be provided within 3 
business days.
    (iii) In the case of a referral by a lender (including a referral 
by a lender to an affiliated lender) the disclosure may be provided at 
the time that the good faith estimate required under section 5(c) of 
RESPA (12 U.S.C. 2604) is provided.
    (iv) In the case of an attorney or law firm that requires a client 
to use a particular title insurance agent, the attorney or law firm 
shall provide the written disclosure no later than the time the 
attorney or law firm is engaged by the client.
    (3)(i) Signature. In all cases, the person being referred must sign 
the disclosure. The person being referred should sign the disclosure at 
the time that the disclosure is provided. If the person being referred 
chooses not to sign the disclosure at the time that the disclosure is 
provided, the signature of the person being referred must be obtained 
at or before closing or settlement.
    (ii) Other evidence of compliance. The existence of a notation 
having been made, at the time that the disclosure was provided, in a 
written, electronic, or similar system of records maintained in the 
regular course of business, which includes a notation of the fact that 
the person being referred chose not to sign the disclosure at the time 
that it was provided, may be used as evidence that the disclosure was 
provided at the time of the referral, but does not substitute for 
obtaining a signature in accordance with paragraph (b)(3)(i) of this 
section. In the case of a face-to-face referral, if the person being 
referred chooses not to sign the disclosure at the time that the 
disclosure is provided, such notation is mandatory.
    (4) 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 (15 U.S.C. 1640(c)) shall not be binding 
interpretations of the preceding sentence or section 8(d)(3) of RESPA 
(12 U.S.C. 2607(d)(3)).
* * * * *
    5. Section 3500.21 is amended by revising paragraphs (b) and (c); 
and by adding a new paragraph (f)(1)(iv); to read as follows:


Sec. 3500.21  Mortgage servicing transfers.

* * * * *
    (b) Servicing Disclosure Statement; 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. A format for the 
Servicing Disclosure Statement appears as Appendix MS-1 to this part. 
The specific language of the Servicing Disclosure Statement is not 
required to be used, and the statement may be included in the Good 
Faith Estimate required under Sec. 3500.7(a), so long as the title 
``SERVICING DISCLOSURE STATEMENT'' is used. The information set forth 
in ``Instructions to Preparer'' on the Servicing Disclosure Statement 
need not be included with the information given to applicants, and 
material in square brackets is optional or alternative language. The 
model format may be annotated with additional information that 
clarifies or enhances the model language. The lender, table funding 
mortgage broker, or dealer should use the language that best describes 
the particular circumstances.
    (2) The Servicing Disclosure Statement must indicate 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 loans, the disclosure 
may consist of a statement that such entity intends to assign, sell, or 
transfer servicing of the loan before the first loan payment is due.
    (c) Servicing Disclosure Statement; 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 a mortgage servicing loan at the time of application, or by placing 
it in the mail with prepaid first-class postage within 3 business days 
from receipt of the application. In the event the borrower is denied 
credit within the 3-business day period, no servicing disclosure 
statement is required to be delivered. 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.
* * * * *

[[Page 25748]]

    (f) * * *
    (1) * * *
    (iv) Limitation on time of action. Any action pursuant to this 
section must be brought within 3 years from the date of the occurrence 
of the violation.
* * * * *
    6. Appendix B to part 3500 is amended by adding a new illustration 
15 at the end of the appendix, to read as follows:

Appendix B to Part 3500--Illustrations of Requirements of RESPA

* * * * *
    15. Facts: A, a bank, is affiliated with, B, a mortgage banking 
company. A customer walks into the bank, A, and asks F, A's loan 
officer, about getting a mortgage loan to purchase a house. While A 
makes home equity loans, A does not make first mortgage loans. Thus, 
F refers the customer to B, the mortgage banking affiliate, takes an 
application, and provides the customer with the affiliated business 
arrangement disclosure statement. F receives a payment from his 
employer, A, for making the referral. F does not perform any other 
category of settlement service in this transaction.
    Comments: Under Sec. 3500.14(g)(1)(x), employers may pay their 
own bona fide employees for the referral of settlement service 
business to a settlement service provider that has an affiliate 
relationship with the employer or in which the employer has a direct 
or beneficial ownership interest of more than 1 percent, if the 
following conditions are met:
    (1) The settlement service business that is referred is the same 
category of settlement service that the employer of the employee 
making the referral provides;
    (2) The employee provides to the person being referred the 
affiliated business arrangement disclosure in accordance with 
Sec. 3500.15; and
    (3) The employee making the referral does not perform any other 
category of settlement service in the same transaction.
    Employees who perform settlement services in other transactions 
may still qualify for the exemption.
    In this case, the settlement service business that is referred 
is originating a mortgage loan, and the business entity for which 
the employee works also provides this service. Thus, the same 
category of settlement service is being referred as is performed by 
the employer of the employee making the referral. (Categories of 
settlement services that may qualify for this exemption are listed 
in the definition of ``Settlement services'' in Sec. 3500.2 (b)(1) 
through (b)(15).) Also, the employee provides the affiliated 
business disclosure in accordance with Sec. 3500.15. While this 
particular employee takes an application, he does not perform any 
other category of settlement service in this transaction.
    Thus, in the circumstances described, the employee may receive 
the referral fee for making the referral without violating RESPA.

    7. Appendix MS-1 to part 3500 is revised to read as follows:

BILLING CODE 4210-27-P

[[Page 25749]]

[GRAPHIC] [TIFF OMITTED] TP09MY97.003


    Dated: February 13, 1997.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.

[FR Doc. 97-12081 Filed 5-8-97; 8:45 am]
BILLING CODE 4210-27-C