13232 Federal Register /Vol. 61, No. 59/Tuesday, … · 13232 Federal Register/Vol. 61, No. 59/Tuesday, March 26, 1996/Rules and Regulations ... Account Disclosure Statement

13232 Federal Register / Vol. 61, No. 59 / Tuesday, March 26, 1996 / Rules and Regulations

DEPARTMENT OF HOUSING ANDURBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR–4023–F–01]

RIN 2502–AG69

Office of the Assistant Secretary forHousing—Federal HousingCommissioner; Real Estate SettlementProcedures Act; Streamlining FinalRule

AGENCY: Office of the AssistantSecretary for Housing-Federal HousingCommissioner, HUD.ACTION: Final rule.

SUMMARY: This final rule amends HUD’sregulations under the Real EstateSettlement Procedures Act (RESPA). Inan effort to comply with the President’sregulatory reform initiatives, this rulestreamlines the RESPA regulations byeliminating provisions that repeatstatutes or are otherwise unnecessary. Anumber of the appendices that wereintended to be illustrative, rather thanregulatory, have been removed fromcodification, but will be made availableby the Department as Public GuidanceDocuments. Therefore, this final rulemakes the RESPA regulations clearerand more concise.EFFECTIVE DATE: April 25, 1996.FOR FURTHER INFORMATION CONTACT:David R. Williamson, Director, Office ofConsumer and Regulatory Affairs, Room5241, Department of Housing and UrbanDevelopment, 451 Seventh Street SW.,Washington, DC 20410, telephonenumber (202) 708–4560 (this is not atoll-free number); or for legal questions:Kenneth A. Markison, Assistant GeneralCounsel for GSE/RESPA, or Grant E.Mitchell, Senior Attorney for RESPA,Room 9262, Department of Housing andUrban Development, 451 Seventh StreetSW., Washington, DC 20410, telephonenumber (202) 708–1550 (this is not atoll-free number). For hearing- orspeech-impaired persons, this numbermay be accessed via TDD by calling theFederal Information Relay Service at 1–800–877–8339.SUPPLEMENTARY INFORMATION: On March4, 1995, President Clinton issued amemorandum to all Federaldepartments and agencies regardingregulatory reinvention. In response tothis memorandum, the Department ofHousing and Urban Developmentconducted a page-by-page review of itsregulations to determine which could beeliminated, consolidated, or otherwiseimproved. HUD has determined that theregulations for implementing RESPA

can be improved and streamlined byeliminating unnecessary provisions.

Several provisions in the regulationsrepeat statutory language from the RealEstate Settlement Procedures Act of1974, 12 U.S.C. 2601 et seq. It isunnecessary to maintain statutoryrequirements in the Code of FederalRegulations (CFR), since thoserequirements are otherwise fullyaccessible and binding. Furthermore, ifregulations contain statutory language,HUD must amend the regulationswhenever Congress amends the statute.Therefore, this final rule will removerepetitious statutory language andreplace it with a citation to the specificstatutory section for easy reference. Forexample, § 3500.19(a) has beensubstantially streamlined to deleteprovisions that simply repeatedstatutory provisions that do not need tobe implemented by regulation.

This final rule also removes fromcodification several of the appendicesthat previously accompanied part 3500.The Department intends to preserve thematerial contained in the appendices tobe removed, but will no longer codifythat material. Instead, that material willbe available as Public GuidanceDocuments, as defined in this rule.Although not codified, Public GuidanceDocuments have been or will bepublished in the Federal Register andany amendments to the documents willbe published in the Federal Register, aswell. In addition, the rule specifies thatthese documents are available fromHUD at the address provided. Theappendices being removed fromcodification are as follows:

• Appendix G—consisting of: (1)Appendix G–1 entitled ‘‘Initial EscrowAccount Disclosure Statement—Format,’’ published at 60 FR 24736(May 9, 1995); and (2) Appendix G–2entitled ‘‘Initial Escrow AccountDisclosure Statement—Example,’’published at 60 FR 8819 (Feb. 15, 1995),but amended at 60 FR 24735 (May 9,1995).

• Appendix H—consisting ofAppendix H–1 and Appendix H–2, eachentitled ‘‘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, eachentitled ‘‘Annual Escrow AccountDisclosure Statement—Format,’’published at 60 FR 24737–24740 (May9, 1995); and (2) Appendices I–3, I–4, I–7, and I–8, each entitled ‘‘AnnualEscrow Account Disclosure Statement—Example,’’ published at 60 FR 8824,8825, 8828, and 8829 (Feb. 15, 1995).

• Appendix J—consisting ofAppendices J–1 and J–2, each entitled

‘‘Annual Escrow Account DisclosureStatement—Example,’’ published at 60FR 8830–8831 (Feb. 15, 1995).

• Appendix K—consisting ofAppendices K–1 through K–4, eachentitled ‘‘Short Year Statements—Example,’’ published at 60 FR 8832–8835 (Feb. 15, 1995).

• Appendix L—‘‘Side-by-SidePresentation of Old Projection andHistory,’’ published at 60 FR 8836 (Feb.15, 1995).

• Appendix M—‘‘Illustration ofOption of Identifying SimultaneousDeficiency and Shortage,’’ published at60 FR 8837 (Feb. 15, 1995).

• Appendix N—‘‘HUD–1 AggregateAccounting Adjustment Example,’’published at 60 FR 8838 (Feb. 15, 1995).

Aside from having been publishedpreviously in the Federal Register asindicated above, these appendices werealso published in the 1995 edition of theCFR (though after publication of the1995 edition further revisions toAppendices G and I were made at 60 FR24735–24740 (May 9, 1995)). While theguidance in these appendices remainsapplicable and the examples andexplanations are very helpful to users, itis not necessary that it be published inthe CFR. HUD will more appropriatelyprovide this information through otherpublic guidance materials rather thanmaintain it in the CFR. HUD mayupdate this information from time totime by publication in the FederalRegister. The information is alsoavailable from HUD at the addressindicated in 24 CFR 3500.3.

The investigation provisions formerlyat § 3500.20 previously were removedfrom this Part and consolidated in a newpart 3800 with similar provisions formanufactured housing (part 3282) andinterstate land sales (part 1720) (see FR–4026, a reinvention rule publishedshortly before this rule).

Justification for Final RulemakingHUD generally publishes a rule for

public comment before issuing a rule foreffect, in accordance with its ownregulations on rulemaking in 24 CFRpart 10. However, part 10 provides forexceptions to the general rule if theagency finds good cause to omitadvance notice and public participation.The good cause requirement is satisfiedwhen prior public procedure is‘‘impracticable, unnecessary, or contraryto the public interest’’ (24 CFR 10.1).HUD finds that good cause exists topublish this rule for effect without firstsoliciting public comment. This ruleremoves unnecessary regulatoryprovisions and nonbinding guidancematerial and corrects minor,nonsubstantive editorial errors in the

13233Federal Register / Vol. 61, No. 59 / Tuesday, March 26, 1996 / Rules and Regulations

text of the current regulations. Becauseof the nature of the changes, priorpublic comment is unnecessary.

Other Matters

Regulatory Flexibility ActThe Secretary, in accordance with the

Regulatory Flexibility Act (5 U.S.C.605(b)), has reviewed and approved thisfinal rule, and in so doing certifies thatthis rule will not have a significanteconomic impact on a substantialnumber of small entities. This rulemerely streamlines regulations byremoving unnecessary provisions. Therule will have no adverse ordisproportionate economic impact onsmall businesses.

Environmental ImpactThis rulemaking does not have an

environmental impact. This rulemakingsimply amends an existing regulation byconsolidating and streamliningprovisions and does not alter theenvironmental effect of the regulationsbeing amended. Findings of NoSignificant Impact with respect to theenvironment were made in accordancewith HUD regulations in 24 CFR part 50that implement section 102(2)(C) of theNational Environmental Policy Act of1969 (42 U.S.C. 4332) at the time ofdevelopment of regulationsimplementing RESPA. Those findingsremain applicable to this rule, and areavailable for public inspection between7:30 a.m. and 5:30 p.m. weekdays in theOffice of the Rules Docket Clerk, Officeof General Counsel, Room 10276,Department of Housing and UrbanDevelopment, 451 Seventh Street, SW,Washington, DC.

Executive Order 12612, FederalismThe General Counsel, as the

Designated Official under section 6(a) ofExecutive Order 12612, Federalism, hasdetermined that this rule will not havesubstantial direct effects on States ortheir political subdivisions, or therelationship between the Federalgovernment and the States, or on thedistribution of power andresponsibilities among the variouslevels of government. No programmaticor policy changes will result from thisrule that would affect the relationshipbetween the Federal Government andState and local governments.

Executive Order 12606, The FamilyThe General Counsel, as the

Designated Official under ExecutiveOrder 12606, The Family, hasdetermined that this rule will not havethe potential for significant impact onfamily formation, maintenance, orgeneral well-being, and thus is not

subject to review under the Order. Nosignificant change in existing HUDpolicies or programs will result frompromulgation of this rule.

List of Subjects in 24 CFR Part 3500Consumer protection, Condominiums,

Housing, Mortgages, Mortgage servicing,Reporting and recordkeepingrequirements.

Accordingly, part 3500 of title 24 ofthe Code of Federal Regulations isamended as follows:

PART 3500—REAL ESTATESETTLEMENT PROCEDURES ACT

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

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

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

§ 3500.1 Designation.This part may be referred to as

Regulation X.

§ 3500.2 Definitions.(a) Statutory terms. All terms defined

in RESPA (12 U.S.C. 2602) are used inaccordance with their statutory meaningunless otherwise defined in paragraph(b) of this section or elsewhere in thispart.

(b) Other terms. As used in this part:Application means the submission of

a borrower’s financial information inanticipation of a credit decision,whether written or computer-generated,relating to a federally related mortgageloan. If the submission does not state oridentify a specific property, thesubmission is an application for a pre-qualification and not an application fora federally related mortgage loan underthis part. The subsequent addition of anidentified property to the submissionconverts the submission to anapplication for a federally relatedmortgage loan.

Business day means a day on whichthe offices of the business entity areopen to the public for carrying onsubstantially all of the entity’s businessfunctions.

Dealer means, in the case of propertyimprovement loans, a seller, contractor,or supplier of goods or services. In thecase of manufactured home loans,‘‘dealer’’ means one who engages in thebusiness of manufactured home retailsales.

Dealer loan or dealer consumer creditcontract means, generally, anyarrangement in which a dealer assiststhe borrower in obtaining a federallyrelated mortgage loan from the funding

lender and then assigns the dealer’slegal interests to the funding lender andreceives the net proceeds of the loan.The funding lender is the lender for thepurposes of the disclosure requirementsof this part. If a dealer is a ‘‘creditor’’ asdefined under the definition of‘‘federally related mortgage loan’’ in thispart, the dealer is the lender forpurposes of this part.

Effective date of transfer is defined insection 6(i)(1) of RESPA (12 U.S.C.2605(i)(1)). In the case of a home equityconversion mortgage or reversemortgage as referenced in this section,the effective date of transfer is thetransfer date agreed upon by thetransferee servicer and the transferorservicer.

Federally related mortgage loan, alsoreferred to in this rule as a ‘‘mortgageloan,’’ is defined in section 3(1) ofRESPA (12 U.S.C. 2602(1)). If theresidential property securing a mortgageloan is not located in a State, it is nota federally related mortgage loan. Afederally related mortgage loan alsoincludes:

(1) Any loan (other than temporaryfinancing such as a construction loan)which meets the requirements in section3(1)(A) of RESPA (12 U.S.C. 2602(1)(A))and which is either:

(i) Originated by a dealer or, if theobligation is to be assigned to any makerof mortgage loans specified in section3(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 equityconversion mortgage, also frequentlycalled a ‘‘reverse mortgage,’’ issued byany maker of mortgage loans specifiedin section 3(1)(B)(i)–(iv) of RESPA (12U.S.C. 2602(1)(B)(i)–(iv)).

(2) Any installment sales contract,land contract, or contract for deed onotherwise qualifying residentialproperty is a federally related mortgageloan if the contract is funded in wholeor in part by proceeds of a loan madeby any maker of mortgage loansspecified in section 3(1)(B)(i)–(iv) ofRESPA (12 U.S.C. 2602(1)(B)(i)–(iv)).

Good faith estimate means anestimate, prepared in accordance withsection 5 of RESPA (12 U.S.C. 2604), ofcharges that a borrower is likely to incurin connection with a settlement.

HUD–1 or HUD–1A settlementstatement (also HUD–1 or HUD–1A)means the statement that is prescribedby the Secretary in this part for settingforth settlement charges in connectionwith either the purchase or therefinancing (or other subordinate lientransaction) of 1- to 4-family residentialproperty.


Lender means, generally, the securedcreditor or creditors named in the debtobligation and document creating thelien. For loans originated by a mortgagebroker that closes a federally relatedmortgage loan in its own name in a tablefunding transaction, the lender is theperson to whom the obligation isinitially assigned at or after settlement.A lender, in connection with dealerloans, is the lender to whom the loan isassigned, unless the dealer meets thedefinition of creditor as defined under‘‘federally related mortgage loan’’ in thissection. See also § 3500.5(b)(7),secondary market transactions.

Manufactured home is defined in§ 3280.2 of this title.

Mortgage broker means a person (notan employee or exclusive agent of alender) who brings a borrower andlender together to obtain a federallyrelated mortgage loan, and who rendersservices as described in the definition of‘‘settlement services’’ in this section. Aloan correspondent meeting therequirements of the Federal HousingAdministration under § 202.2(b) or§ 202.15(a) of this title is a mortgagebroker for purposes of this part.

Mortgaged property means the realproperty that is security for the federallyrelated mortgage loan.

Person is defined in section 3(5) ofRESPA (12 U.S.C. 2602(5)).

Public Guidance Documents meansdocuments that HUD has published inthe Federal Register, and that it mayamend from time-to-time by publicationin the Federal Register. Thesedocuments are also available from HUDat the address indicated in 24 CFR3500.3.

Refinancing means a transaction inwhich an existing obligation that wassubject to a secured lien on residentialreal property is satisfied and replacedby a new obligation undertaken by thesame borrower and with the same or anew lender. The following shall not betreated as a refinancing, even when theexisting obligation is satisfied andreplaced by a new obligation with thesame lender (this definition of‘‘refinancing’’ as to transactions with thesame lender is similar to Regulation Z,12 CFR 226.20(a)):

(1) A renewal of a single paymentobligation with no change in theoriginal terms;

(2) A reduction in the annualpercentage rate as computed under theTruth in Lending Act with acorresponding change in the paymentschedule;

(3) An agreement involving a courtproceeding;

(4) A workout agreement, in which achange in the payment schedule or

change in collateral requirements isagreed to as a result of the consumer’sdefault or delinquency, unless the rateis increased or the new amount financedexceeds the unpaid balance plus earnedfinance charges and premiums forcontinuation of allowable insurance;and

(5) The renewal of optional insurancepurchased by the consumer that isadded to an existing transaction, ifdisclosures relating to the initialpurchase were provided.

Regulation Z means the regulationsissued by the Board of Governors of theFederal Reserve System (12 CFR part226) to implement the Federal Truth inLending Act (15 U.S.C. 1601 et seq.),and includes the Commentary onRegulation Z.

Required use means a situation inwhich a person must use a particularprovider of a settlement service in orderto have access to some distinct serviceor property, and the person will pay forthe settlement service of the particularprovider or will pay a chargeattributable, in whole or in part, to thesettlement service. However, theoffering of a package (or combination ofsettlement services) or the offering ofdiscounts or rebates to consumers forthe purchase of multiple settlementservices does not constitute a requireduse. Any package or discount must beoptional to the purchaser. The discountmust be a true discount below the pricesthat are otherwise generally available,and must not be made up by highercosts elsewhere in the settlementprocess.

RESPA means the Real EstateSettlement Procedures Act of 1974, 12U.S.C. 2601 et seq.

Servicer means the person responsiblefor the servicing of a mortgage loan(including the person who makes orholds a mortgage loan if such personalso services the mortgage loan). Theterm does not include:

(1) The Federal Deposit InsuranceCorporation (FDIC) or the ResolutionTrust Corporation (RTC), in connectionwith assets acquired, assigned, sold, ortransferred pursuant to section 13(c) ofthe Federal Deposit Insurance Act or asreceiver or conservator of an insureddepository institution; and

(2) The Federal National MortgageCorporation (FNMA); the Federal HomeLoan Mortgage Corporation (FreddieMac); the RTC; the FDIC; HUD,including the Government NationalMortgage Association (GNMA) and theFederal Housing Administration (FHA)(including cases in which a mortgageinsured under the National Housing Act(12 U.S.C. 1701 et seq.) is assigned toHUD); the National Credit Union

Administration (NCUA); the FarmersHome Administration or its successoragency under Public Law 103–354(FmHA); and the Department ofVeterans Affairs (VA), in any case inwhich the assignment, sale, or transferof the servicing of the mortgage loan ispreceded by termination of the contractfor servicing the loan for cause,commencement of proceedings forbankruptcy of the servicer, orcommencement of proceedings by theFDIC or RTC for conservatorship orreceivership of the servicer (or an entityby which the servicer is owned orcontrolled).

Servicing means receiving anyscheduled periodic payments from aborrower pursuant to the terms of anymortgage loan, including amounts forescrow accounts under section 10 ofRESPA (12 U.S.C. 2609), and making thepayments to the owner of the loan orother third parties of principal andinterest and such other payments withrespect to the amounts received fromthe borrower as may be requiredpursuant to the terms of the mortgageservicing loan documents or servicingcontract. In the case of a home equityconversion mortgage or reversemortgage as referenced in this section,servicing includes making payments tothe borrower.

Settlement means the process ofexecuting legally binding documentsregarding a lien on property that issubject to a federally related mortgageloan. This process may also be called‘‘closing’’ or ‘‘escrow’’ in differentjurisdictions.

Settlement service means any serviceprovided in connection with aprospective or actual settlement,including, but not limited to, any one ormore of the following:

(1) Origination of a federally relatedmortgage loan (including, but notlimited to, the taking of loanapplications, loan processing, and theunderwriting and funding of suchloans);

(2) Rendering of services by amortgage broker (including counseling,taking of applications, obtainingverifications and appraisals, and otherloan processing and originationservices, and communicating with theborrower and lender);

(3) Provision of any services related tothe origination, processing or funding ofa federally related mortgage loan;

(4) Provision of title services,including title searches, titleexaminations, abstract preparation,insurability determinations, and theissuance of title commitments and titleinsurance policies;


(5) Rendering of services by anattorney;

(6) Preparation of documents,including notarization, delivery, andrecordation;

(7) Rendering of credit reports andappraisals;

(8) Rendering of inspections,including inspections required byapplicable law or any inspectionsrequired by the sales contract ormortgage documents prior to transfer oftitle;

(9) Conducting of settlement by asettlement agent and any relatedservices;

(10) Provision of services involvingmortgage insurance;

(11) Provision of services involvinghazard, flood, or other casualtyinsurance or homeowner’s warranties;

(12) Provision of services involvingmortgage life, disability, or similarinsurance designed to pay a mortgageloan upon disability or death of aborrower, but only if such insurance isrequired by the lender as a condition ofthe loan;

(13) Provision of services involvingreal property taxes or any otherassessments or charges on the realproperty;

(14) Rendering of services by a realestate agent or real estate broker; and

(15) Provision of any other servicesfor which a settlement service providerrequires a borrower or seller to pay.

Special information booklet meansthe booklet prepared by the Secretarypursuant to section 5 of RESPA (12U.S.C. 2604) to help persons understandthe nature and costs of settlementservices. The Secretary publishes theform of the special information bookletin the Federal Register. The Secretarymay issue or approve additionalbooklets or alternative booklets bypublication of a Notice in the FederalRegister.

State means any State of the UnitedStates, the District of Columbia, theCommonwealth of Puerto Rico, and anyterritory or possession of the UnitedStates.

Table funding means a settlement atwhich a loan is funded by acontemporaneous advance of loan fundsand an assignment of the loan to theperson advancing the funds. A table-funded transaction is not a secondarymarket transaction (see § 3500.5(b)(7)).

Title company means any institution,or its duly authorized agent, that isqualified to issue title insurance.

§ 3500.3 Questions or suggestions frompublic and copies of public guidancedocuments.

Any questions or suggestions from thepublic regarding RESPA, or requests for

copies of HUD Public GuidanceDocuments, should be directed to theDirector, Office of Consumer andRegulatory Affairs, Department ofHousing and Urban Development, 4517th Street SW., Washington, DC 20410–8000, rather than to HUD field offices.Legal questions may be directed to theAssistant General Counsel, GSE/RESPADivision, at this address.

§ 3500.4 Reliance upon rule, regulation orinterpretation by HUD.

(a) Rule, regulation orinterpretation.—(1) For purposes ofsections 19 (a) and (b) of RESPA (12U.S.C. 2617 (a) and (b)) only thefollowing constitute a rule, regulation orinterpretation of the Secretary:

(i) All provisions, includingappendices, of this part. Any otherdocument referred to in this part is notincorporated in this part unless it isspecifically set out in this part;

(ii) Any other document that ispublished in the Federal Register by theSecretary and states that it is an‘‘interpretation,’’ ‘‘interpretive rule,’’‘‘commentary,’’ or a ‘‘statement ofpolicy’’ for purposes of section 19(a) ofRESPA. Such documents will beprepared by HUD staff and counsel.Such documents may be revoked oramended by a subsequent documentpublished in the Federal Register by theSecretary.

(2) A ‘‘rule, regulation, orinterpretation thereof by the Secretary’’for purposes of section 19(b) of RESPA(12 U.S.C. 2617(b)) shall not include thespecial information booklet prescribedby the Secretary or any other statementor issuance, whether oral or written, byan officer or representative of theDepartment of Housing and UrbanDevelopment (HUD), letter ormemorandum by the Secretary, GeneralCounsel, any Assistant Secretary orother officer or employee of HUD,preamble to a regulation or otherissuance of HUD, Public GuidanceDocument, report to Congress, pleading,affidavit or other document in litigation,pamphlet, handbook, guide, telegraphiccommunication, explanation,instructions to forms, speech or othermaterial of any nature which is notspecifically included in paragraph (a)(1)of this section.

(b) Unofficial interpretations; staffdiscretion. In response to requests forinterpretation of matters not adequatelycovered by this part or by an officialinterpretation issued under paragraph(a)(1)(ii) of this section, unofficial staffinterpretations may be provided at thediscretion of HUD staff or counsel.Written requests for such interpretationsshould be directed to the address

indicated in § 3500.3. Suchinterpretations provide no protectionunder section 19(b) of RESPA (12 U.S.C.2617(b)). Ordinarily, staff or counselwill not issue unofficial interpretationson matters adequately covered by thisPart or by official interpretations orcommentaries issued under paragraph(a)(1)(ii) of this section.

(c) All informal counsel’s opinionsand staff interpretations issued beforeNovember 2, 1992, were withdrawn asof that date. Courts and administrativeagencies, however, may use previousopinions to determine the validity ofconduct under the previous RegulationX.

§ 3500.5 Coverage of RESPA.(a) Applicability. RESPA and this part

apply to all federally related mortgageloans, except for the exemptionsprovided in paragraph (b) of thissection.

(b) Exemptions. (1) A loan onproperty of 25 acres or more.

(2) Business purpose loans. Anextension of credit primarily for abusiness, commercial, or agriculturalpurpose. The definition of such anextension of credit for purposes of thisexemption generally parallelsRegulation Z, 12 CFR 226.3(a)(1), andpersons may rely on Regulation Z indetermining whether the exemptionapplies. Notwithstanding the foregoing,the exemption in this section forbusiness purpose loans does not includeany loan to one or more persons actingin an individual capacity (naturalpersons) to acquire, refinance, improve,or maintain 1- to 4-family residentialproperty used, or to be used, to rent toother persons. An individual whovoluntarily chooses to act as a soleproprietorship is not considered to beacting in an individual capacity forpurposes of this part.

(3) Temporary financing. Temporaryfinancing, such as a construction loan.The exemption for temporary financingdoes not apply to a loan made to financeconstruction of 1- to 4-family residentialproperty if the loan is used as, or maybe converted to, permanent financing bythe same lender or is used to financetransfer of title to the first user. If alender issues a commitment forpermanent financing, with or withoutconditions, the loan is covered by thispart. Any construction loan for new orrehabilitated 1- to 4-family residentialproperty, other than a loan to a bonafide builder (a person who regularlyconstructs 1- to 4-family residentialstructures for sale or lease), is subject tothis part if its term is for two years ormore. A ‘‘bridge loan’’ or ‘‘swing loan’’in which a lender takes a security


interest in otherwise covered 1- to 4-family residential property is notcovered by RESPA and this part.

(4) Vacant land. Any loan secured byvacant or unimproved property, unlesswithin two years from the date of thesettlement of the loan, a structure or amanufactured home will be constructedor placed on the real property using theloan proceeds. If a loan for a structureor manufactured home to be placed onvacant or unimproved property will besecured by a lien on that property, thetransaction is covered by this part.

(5) Assumption without lenderapproval. Any assumption in which thelender does not have the right expresslyto approve a subsequent person as theborrower on an existing federally relatedmortgage loan. Any assumption inwhich the lender’s permission is bothrequired and obtained is covered byRESPA and this part, whether or not thelender charges a fee for the assumption.

(6) Loan conversions. Any conversionof a federally related mortgage loan todifferent terms that are consistent withprovisions of the original mortgageinstrument, as long as a new note is notrequired, even if the lender charges anadditional fee for the conversion.

(7) Secondary market transactions. Abona fide transfer of a loan obligation inthe secondary market is not covered byRESPA and this part, except as set forthin section 6 of RESPA (12 U.S.C. 2605)and § 3500.21. In determining whatconstitutes a bona fide transfer, HUDwill consider the real source of fundingand the real interest of the fundinglender. Mortgage broker transactionsthat are table-funded are not secondarymarket transactions. Neither thecreation of a dealer loan or dealerconsumer credit contract, nor the firstassignment of such loan or contract toa lender, is a secondary markettransaction (see § 3500.2.)

§ 3500.6 Special information booklet attime of loan application.

(a) Lender to provide specialinformation booklet. Subject to theexceptions set forth in this paragraph,the lender shall provide a copy of thespecial information booklet to a personfrom whom the lender receives, or forwhom the lender prepares, a writtenapplication for a federally relatedmortgage loan. When two or morepersons apply together for a loan, thelender is in compliance if the lenderprovides a copy of the booklet to one ofthe persons applying.

(1) The lender shall provide thespecial information booklet bydelivering it or placing it in the mail tothe applicant not later than threebusiness days (as that term is defined in

§ 3500.2) after the application isreceived or prepared. However, if thelender denies the borrower’s applicationfor credit before the end of the three-business-day period, then the lenderneed not provide the booklet to theborrower. If a borrower uses a mortgagebroker, the mortgage broker shalldistribute the special informationbooklet and the lender need not do so.The intent of this provision is that theapplicant receive the specialinformation booklet at the earliestpossible date.

(2) In the case of a federally relatedmortgage loan involving an open-endedcredit plan, as defined in § 226.2(a)(20)of Regulation Z (12 CFR), a lender ormortgage broker that provides theborrower with a copy of the brochureentitled ‘‘When Your Home is On theLine: What You Should Know AboutHome Equity Lines of Credit’’, or anysuccessor brochure issued by the Boardof Governors of the Federal ReserveSystem, is deemed to be in compliancewith this section.

(3) In the categories of transactions setforth at the end of this paragraph, thelender or mortgage broker does not haveto provide the booklet to the borrower.Under the authority of section 19(a) ofRESPA (12 U.S.C. 2617(a)), theSecretary may issue a revised orseparate special information bookletthat deals with these transactions, or theSecretary may chose to endorse theforms or booklets of other Federalagencies. In such an event, therequirements for delivery by lendersand the availability of the booklet oralternate materials for these transactionswill be set forth in a Notice in theFederal Register. This paragraph shallapply to the following transactions:

(i) Refinancing transactions;(ii) Closed-end loans, as defined in 12

CFR 226.2(a)(10) of Regulation Z, whenthe lender takes a subordinate lien;

(iii) Reverse mortgages; and(iv) Any other federally related

mortgage loan whose purpose is not thepurchase of a 1- to 4-family residentialproperty.

(b) Revision. The Secretary may fromtime to time revise the specialinformation booklet by publishing anotice in the Federal Register.

(c) Reproduction. The specialinformation booklet may be reproducedin any form, provided that no change ismade other than as provided underparagraph (d) of this section. Thespecial information booklet may not bemade a part of a larger document forpurposes of distribution under RESPAand this section. Any color, size andquality of paper, type of print, and

method of reproduction may be used solong as the booklet is clearly legible.

(d) Permissible changes. (1) Nochanges to, deletions from, or additionsto the special information bookletcurrently prescribed by the Secretaryshall be made other than those specifiedin this paragraph (d) or any othersapproved in writing by the Secretary. Arequest to the Secretary for approval ofany changes shall be submitted inwriting to the address indicated in§ 3500.3, stating the reasons why theapplicant believes such changes,deletions or additions are necessary.

(2) The cover of the booklet may bein any form and may contain anydrawings, pictures or artwork, providedthat the words ‘‘settlement costs’’ areused in the title. Names, addresses andtelephone numbers of the lender orothers and similar information mayappear on the cover, but no discussionof the matters covered in the bookletshall appear on the cover.

(3) The special information bookletmay be translated into languages otherthan English.

§ 3500.7 Good faith estimate.(a) Lender to provide. Except as

provided in this paragraph (a) orparagraph (f) of this section, the lendershall provide all applicants for afederally related mortgage loan with agood faith estimate of the amount of orrange of charges for the specificsettlement services the borrower islikely to incur in connection with thesettlement. The lender shall provide thegood faith estimate required under thissection (a suggested format is set forthin Appendix C of this part) either bydelivering the good faith estimate or byplacing it in the mail to the loanapplicant, not later than three businessdays after the application is received orprepared.

(1) If the lender denies the applicationfor a federally related mortgage loanbefore the end of the three-business-dayperiod, the lender need not provide thedenied borrower with a good faithestimate.

(2) For ‘‘no cost’’ or ‘‘no point’’ loans,the charges to be shown on the goodfaith estimate include any payments tobe made to affiliated or independentsettlement service providers. Thesepayments should be shown as P.O.C.(Paid Outside of Closing) on the GoodFaith Estimate and the HUD–1 or HUD–1A.

(3) In the case of dealer loans, thelender is responsible for provision of thegood faith estimate, either directly or bythe dealer.

(4) If a mortgage broker is theexclusive agent of the lender, either the


lender or the mortgage broker shallprovide the good faith estimate withinthree business days after the mortgagebroker receives or prepares theapplication.

(b) Mortgage broker to provide. In theevent an application is received by amortgage broker who is not an exclusiveagent of the lender, the mortgage brokermust provide a good faith estimatewithin three days of receiving a loanapplication based on his or herknowledge of the range of costs (asuggested format is set forth inAppendix C of this part). As long as themortgage broker has provided the goodfaith estimate, the funding lender is notrequired to provide an additional goodfaith estimate, but the funding lender isresponsible for ascertaining that thegood faith estimate has been delivered.If the application for mortgage credit isdenied before the end of the three-business-day period, the mortgagebroker need not provide the deniedborrower with a good faith estimate.

(c) Content of good faith estimate. Agood faith estimate consists of anestimate, as a dollar amount or range, ofeach charge which:

(1) Will be listed in section L of theHUD–1 or HUD–1A in accordance withthe instructions set forth in Appendix Ato this part; and

(2) That the borrower will normallypay or incur at or before settlementbased upon common practice in thelocality of the mortgaged property. Eachsuch estimate must be made in goodfaith and bear a reasonable relationshipto the charge a borrower is likely to berequired to pay at settlement, and mustbe based upon experience in the localityof the mortgaged property. As to eachcharge with respect to which the lenderrequires a particular settlement serviceprovider to be used, the lender shallmake its estimate based upon thelender’s knowledge of the amountscharged by such provider.

(d) Form of good faith estimate. Asuggested good faith estimate form is setforth in Appendix C to this part and isin compliance with the requirements ofthe Act except for any additionalrequirements of paragraph (e) of thissection. The good faith estimate may beprovided together with disclosuresrequired by the Truth in Lending Act,15 U.S.C. 1601 et seq., so long as allrequired material for the good faithestimate is grouped together. The lendermay include additional relevantinformation, such as the name/signatureof the applicant and loan officer, date,and information identifying the loanapplication and property, as long as theform remains clear and concise and the

additional information is not moreprominent than the required material.

(e) Particular providers required bylender. (1) If the lender requires the use(see § 3500.2, ‘‘required use’’) of aparticular provider of a settlementservice, other than the lender’s ownemployees, and also requires theborrower to pay any portion of the costof such service, then the good faithestimate must:

(i) Clearly state that use of theparticular provider is required and thatthe estimate is based on the charges ofthe designated provider;

(ii) Give the name, address, andtelephone number of each provider; and

(iii) Describe the nature of anyrelationship between each suchprovider and the lender. Plain Englishreferences to the relationship should beutilized, e.g., ‘‘X is a depositor of thelender,’’ ‘‘X is a borrower from thelender,’’ ‘‘X has performed 60% of thelender’s settlements in the past year.’’(The lender is not required to keepdetailed records of the percentages ofuse. Similar language, such as ‘‘X wasused [regularly] [frequently] in oursettlements the past year’’ is alsosufficient for the purposes of thisparagraph.) In the event that more thanone relationship exists, each should bedisclosed.

(2) For purposes of paragraph (e)(1) ofthis section, a ‘‘relationship’’ exists if:

(i) The provider is an associate of thelender, as that term is defined in 12U.S.C. 2602(8);

(ii) Within the last 12 months, theprovider has maintained an accountwith the lender or had an outstandingloan or credit arrangement with thelender; or

(iii) The lender has repeatedly used orrequired borrowers to use the services ofthe provider within the last 12 months.

(3) Except for a provider that is thelender’s chosen attorney, creditreporting agency, or appraiser, if thelender is in a controlled businessrelationship (see § 3500.15) with aprovider, the lender may not require theuse of that provider.

(4) If the lender maintains acontrolled 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 lenderhas not yet decided which provider willbe selected from that list, then thelender may satisfy the requirements ofthis section if the lender:

(i) Provides the borrower with awritten statement that the lender willrequire a particular provider from alender-controlled or -approved list; and

(ii) Provides the borrower in the GoodFaith Estimate the range of costs for the

required provider(s), and provides thename of the specific provider and theactual cost on the HUD–1 or HUD–1A.

(f) Open-end lines of credit (home-equity plans) under Truth in LendingAct. In the case of a federally relatedmortgage loan involving an open-endline of credit (home-equity plan)covered under the Truth in Lending Actand Regulation Z, a lender or mortgagebroker that provides the borrower withthe disclosures required by 12 CFR226.5b of Regulation Z at the time theborrower applies for such loan shall bedeemed to satisfy the requirements ofthis section.(Approved by the Office of Management andBudget under control number 2502–0265)

§ 3500.8 Use of HUD–1 or HUD–1Asettlement statements.

(a) Use by settlement agent. Thesettlement agent shall use the HUD–1settlement statement in every settlementinvolving a federally related mortgageloan in which there is a borrower anda seller. For transactions in which thereis a borrower and no seller, such asrefinancing loans or subordinate lienloans, the HUD–1 may be utilized byusing the borrower’s side of the HUD–1 statement. Alternatively, the formHUD–1A may be used for thesetransactions. Either the HUD–1 or theHUD–1A, as appropriate, shall be usedfor every RESPA-covered transaction,unless its use is specifically exempted,but the HUD–1 or HUD–1A may bemodified as permitted under this part.The use of the HUD–1 or HUD–1A isexempted for open-end lines of credit(home-equity plans) covered by theTruth in Lending Act and Regulation Z.

(b) Charges to be stated. Thesettlement agent shall complete theHUD–1 or HUD–1A in accordance withthe instructions set forth in Appendix Ato this part.

(c) Aggregate Accounting AtSettlement. (1) After itemizingindividual deposits in the 1000 seriesusing single-item accounting, theservicer shall make an adjustment basedon aggregate accounting. Thisadjustment equals the difference in thedeposit required under aggregateaccounting and the sum of the depositsrequired under single-item accounting.The computation steps for bothaccounting methods are set out in§ 3500.17(d). The adjustment willalways be a negative number or zero (–0–). The settlement agent shall enter theaggregate adjustment amount on a finalline in the 1000 series of the HUD–1 orHUD–1A statement.

(2) During the phase-in period, asdefined in § 3500.17(b), an alternativeprocedure is available. The settlement


agent may initially calculate the 1000series deposits for the HUD–1 andHUD–1A settlement statement usingsingle-item analysis with only a one-month cushion (unless the mortgageloan documents indicate a smalleramount). In the escrow account analysisconducted within 45 days of settlement,however, the servicer shall adjust theescrow account to reflect the aggregateaccounting balance. Appendix F to thispart sets out examples of aggregateanalysis. Appendix A to this partcontains instructions for completing theHUD–1 or HUD–1A settlementstatements using an aggregate analysisadjustment and the alternative processduring the phase-in period.(Approved by the Office of Management andBudget under control numbers 2502–0265and 2502–0491)

§ 3500.9 Reproduction of settlementstatements.

(a) Permissible changes—HUD–1. Thefollowing changes and insertions arepermitted when the HUD–1 settlementstatement is reproduced:

(1) The person reproducing the HUD–1 may insert its business name andlogotype in Section A and mayrearrange, but not delete, the otherinformation that appears in Section A.

(2) The name, address, and otherinformation regarding the lender andsettlement agent may be printed inSections F and H, respectively.

(3) Reproduction of the HUD–1 mustconform to the terminology, sequence,and numbering of line items aspresented in lines 100–1400. However,blank lines or items listed in lines 100–1400 that are not used locally or inconnection with mortgages by thelender may be deleted, except for thefollowing: 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 beshortened correspondingly. The numberof a deleted item shall not be used fora substitute or new item, but the numberof a blank space on the HUD–1 may beused for a substitute or new item.

(4) Charges not listed on the HUD–1,but that are customary locally orpursuant to the lender’s practice, maybe inserted in blank spaces. Whereexisting blank spaces on the HUD–1 areinsufficient, additional lines and spacesmay be added and numbered insequence with spaces on the HUD–1.

(5) The following variations in layoutand format are within the discretion ofpersons reproducing the HUD–1 and donot require prior HUD approval: size ofpages; tint or color of pages; size andstyle of type or print; vertical spacingbetween lines or provision for

additional horizontal space on lines (forexample, to provide sufficient space forrecording time periods used inprorations); printing of the HUD–1contents on separate pages, on the frontand back of a single page, or on onecontinuous page; use of multicopy tear-out sets; printing on rolls for computerpurposes; reorganization of Sections Bthrough I, when necessary toaccommodate computer printing; andmanner of placement of the HUDnumber, but not the OMB approvalnumber, neither of which may bedeleted. The designation of theexpiration date of the OMB number maybe deleted. Any changes in the HUDnumber or OMB approval number maybe announced by notice in the FederalRegister, rather than by amendment ofthis part.

(6) The borrower’s information andthe seller’s information may be providedon 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 purposeof including customary recitals andinformation used locally in real estatesettlements; for example, breakdown ofpayoff figures, a breakdown of theborrower’s total monthly mortgagepayments, check disbursements, astatement indicating receipt of funds,applicable special stipulations betweenbuyer and seller, and the date funds aretransferred. If space permits, suchinformation may be added at the end ofthe HUD–1.

(10) As required by HUD/FHA inFHA-insured loans.

(11) As allowed by § 3500.17, relatingto an initial escrow account statement.

(b) Permissible changes—HUD–1A.The changes and insertions on theHUD–1 permitted under paragraph (a) ofthis section are also permitted when theHUD–1A settlement statement isreproduced, except the changesdescribed in paragraphs (a) (3) and (6)of this section.

(c) Written approval. Any otherdeviation in the HUD–1 or HUD–1Aforms is permissible only upon receiptof written approval of the Secretary. Arequest to the Secretary for approvalshall be submitted in writing to theaddress indicated in § 3500.3 and shallstate the reasons why the applicantbelieves such deviation is needed. Theprescribed form(s) must be used untilapproval is received.(Approved by the Office of Management andBudget under control numbers 2502–0265and 2502–0491)

§ 3500.10 One-day advance inspection ofHUD–1 or HUD–1A settlement statement;delivery; recordkeeping.

(a) Inspection one day prior tosettlement upon request by theborrower. The settlement agent shallpermit the borrower to inspect theHUD–1 or HUD–1A settlementstatement, completed to set forth thoseitems that are known to the settlementagent at the time of inspection, duringthe business day immediately precedingsettlement. Items related only to theseller’s transaction may be omitted fromthe HUD–1.

(b) Delivery. The settlement agentshall provide a completed HUD–1 orHUD–1A to the borrower, the seller (ifthere is one), the lender (if the lender isnot the settlement agent), and/or theiragents. When the borrower’s and seller’scopies of the HUD–1 or HUD–1A differas permitted by the instructions inAppendix A to this part, both copiesshall be provided to the lender (if thelender is not the settlement agent). Thesettlement agent shall deliver thecompleted HUD–1 or HUD–1A at orbefore the settlement, except asprovided in paragraphs (c) and (d) ofthis section.

(c) Waiver. The borrower may waivethe right to delivery of the completedHUD–1 or HUD–1A no later than atsettlement by executing a written waiverat or before settlement. In such case, thecompleted HUD–1 or HUD–1A shall bemailed or delivered to the borrower,seller, and lender (if the lender is notthe settlement agent) as soon aspracticable after settlement.

(d) Exempt transactions. When theborrower or the borrower’s agent doesnot attend the settlement, or when thesettlement agent does not conduct ameeting of the parties for that purpose,the transaction shall be exempt from therequirements of paragraphs (a) and (b) ofthis section, except that the HUD–1 orHUD–1A shall be mailed or delivered assoon as practicable after settlement.

(e) Recordkeeping. The lender shallretain each completed HUD–1 or HUD–1A and related documents for five yearsafter settlement, unless the lenderdisposes of its interest in the mortgageand does not service the mortgage. Inthat case, the lender shall provide itscopy of the HUD–1 or HUD–1A to theowner or servicer of the mortgage as apart of the transfer of the loan file. Suchowner or servicer shall retain the HUD–1 or HUD–1A for the remainder of thefive-year period. The Secretary shallhave the right to inspect or requirecopies of records covered by thisparagraph (e).(Approved by the Office of Management andBudget under control number 2502–0265)


§ 3500.11 Mailing.The provisions of this part requiring

or permitting mailing of documentsshall be deemed to be satisfied byplacing the document in the mail(whether or not received by theaddressee) addressed to the addressesstated in the loan application or in otherinformation submitted to or obtained bythe lender at the time of loanapplication or submitted or obtained bythe lender or settlement agent, exceptthat a revised address shall be usedwhere the lender or settlement agent hasbeen expressly informed in writing of achange in address.

§ 3500.12 No fee.No fee shall be imposed or charge

made upon any other person, as a partof settlement costs or otherwise, by alender in connection with a federallyrelated mortgage loan made by it (or aloan for the purchase of a manufacturedhome), or by a servicer (as that term isdefined under 12 U.S.C. 2605(i)(2)) foror on account of the preparation anddistribution of the HUD–1 or HUD–1Asettlement statement, escrow accountstatements required pursuant to section10 of RESPA (12 U.S.C. 2609), orstatements required by the Truth inLending Act, 15 U.S.C. 1601 et seq.

§ 3500.13 Relation to State laws.(a) State laws that are inconsistent

with RESPA or this part are preemptedto the extent of the inconsistency.However, RESPA and these regulationsdo not annul, alter, affect, or exempt anyperson subject to their provisions fromcomplying with the laws of any Statewith respect to settlement practices,except to the extent of theinconsistency.

(b) Upon request by any person, theSecretary is authorized to determine ifinconsistencies with State law exist; indoing so, the Secretary shall consultwith appropriate Federal agencies.

(1) The Secretary may not determinethat a State law or regulation isinconsistent with any provision ofRESPA or this part, if the Secretarydetermines that such law or regulationgives greater protection to the consumer.

(2) In determining whether provisionsof State law or regulations concerningcontrolled business arrangements areinconsistent with RESPA or this part,the Secretary may not construe thoseprovisions that impose more stringentlimitations on controlled businessarrangements as inconsistent withRESPA so long as they give moreprotection to consumers and/orcompetition.

(c) Any person may request theSecretary to determine whether an

inconsistency exists by submitting tothe address indicated in § 3500.3, a copyof the State law in question, any otherlaw or judicial or administrativeopinion that implements, interprets orapplies the relevant provision, and anexplanation of the possibleinconsistency. A determination by theSecretary that an inconsistency withState law exists will be made bypublication of a notice in the FederalRegister. ‘‘Law’’ as used in this sectionincludes regulations and any enactmentwhich has the force and effect of lawand is issued by a State or any politicalsubdivision of a State.

(d) A specific preemption ofconflicting State laws regarding noticesand disclosures of mortgage servicingtransfers is set forth in § 3500.21(h).

§ 3500.14 Prohibition against kickbacksand unearned fees.

(a) Section 8 violation. Any violationof this section is a violation of section8 of RESPA (12 U.S.C. 2607) and issubject to enforcement as such under§ 3500.19.

(b) No referral fees. No person shallgive and no person shall accept any fee,kickback or other thing of valuepursuant to any agreement orunderstanding, oral or otherwise, thatbusiness incident to or part of asettlement service involving a federallyrelated mortgage loan shall be referredto any person. Any referral of asettlement service is not a compensableservice, except as set forth in§ 3500.14(g)(1). A company may not payany other company or the employees ofany other company for the referral ofsettlement service business.

(c) No split of charges except foractual services performed. No personshall give and no person shall acceptany portion, split, or percentage of anycharge made or received for therendering of a settlement service inconnection with a transaction involvinga federally related mortgage loan otherthan for services actually performed. Acharge by a person for which no ornominal services are performed or forwhich duplicative fees are charged is anunearned fee and violates this section.The source of the payment does notdetermine whether or not a service iscompensable. Nor may the prohibitionsof this Part be avoided by creating anarrangement wherein the purchaser ofservices splits the fee.

(d) Thing of value. This term isbroadly defined in section 3(2) ofRESPA (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, creditsrepresenting monies that may be paid ata future date, the opportunity toparticipate in a money-making program,retained or increased earnings,increased equity in a parent orsubsidiary entity, special bank depositsor accounts, special or unusual bankingterms, services of all types at special orfree rates, sales or rentals at specialprices or rates, lease or rental paymentsbased in whole or in part on the amountof business referred, trips and paymentof another person’s expenses, orreduction in credit against an existingobligation. The term ‘‘payment’’ is usedthroughout §§ 3500.14 and 3500.15 assynonymous with the giving orreceiving any ‘‘thing of value’’ and doesnot require transfer of money.

(e) Agreement or understanding. Anagreement or understanding for thereferral of business incident to or part ofa settlement service need not be writtenor verbalized but may be established bya practice, pattern or course of conduct.When a thing of value is receivedrepeatedly and is connected in any waywith the volume or value of the businessreferred, the receipt of the thing of valueis evidence that it is made pursuant toan agreement or understanding for thereferral of business.

(f) Referral—(1) A referral includesany oral or written action directed to aperson which has the effect ofaffirmatively influencing the selectionby any person of a provider of asettlement service or business incidentto or part of a settlement service whensuch person will pay for such settlementservice or business incident thereto orpay a charge attributable in whole or inpart to such settlement service orbusiness.

(2) A referral also occurs whenever aperson paying for a settlement service orbusiness incident thereto is required touse (see § 3500.2, ‘‘required use’’) aparticular provider of a settlementservice or business incident thereto.

(g) Fees, salaries, compensation, orother payments. (1) Section 8 of RESPApermits:

(i) A payment to an attorney at law forservices actually rendered;

(ii) A payment by a title company toits duly appointed agent for servicesactually performed in the issuance of apolicy of title insurance;

(iii) A payment by a lender to its dulyappointed agent or contractor forservices actually performed in theorigination, processing, or funding of aloan;

(iv) A payment to any person of abona fide salary or compensation orother payment for goods or facilities


actually furnished or for servicesactually performed;

(v) A payment pursuant tocooperative brokerage and referralarrangements or agreements betweenreal estate agents and real estate brokers.(The statutory exemption restated inthis paragraph refers only to feedivisions within real estate brokeragearrangements when all parties are actingin a real estate brokerage capacity, andhas no applicability to any feearrangements between real estatebrokers and mortgage brokers orbetween mortgage brokers.);

(vi) Normal promotional andeducational activities that are notconditioned on the referral of businessand that do not involve the defraying ofexpenses that otherwise would beincurred by persons in a position torefer settlement services or businessincident thereto;

(vii) An employer’s payment to itsown employees for any referralactivities; or

(viii) Any payment by a borrower forcomputer loan origination services, solong as the disclosure set forth inAppendix E of this part is provided theborrower.

(2) The Department may investigatehigh prices to see if they are the resultof a referral fee or a split of a fee. If thepayment of a thing of value bears noreasonable relationship to the marketvalue of the goods or services provided,then the excess is not for services orgoods actually performed or provided.These facts may be used as evidence ofa violation of section 8 and may serveas a basis for a RESPA investigation.High prices standing alone are not proofof a RESPA violation. The value of areferral (i.e., the value of any additionalbusiness obtained thereby) is not to betaken into account in determiningwhether the payment exceeds thereasonable value of such goods,facilities or services. The fact that thetransfer of the thing of value does notresult in an increase in any charge madeby the person giving the thing of valueis irrelevant in determining whether theact is prohibited.

(3) Multiple services. When a personin a position to refer settlement servicebusiness, such as an attorney, mortgagelender, real estate broker or agent, ordeveloper or builder, receives apayment for providing additionalsettlement services as part of a realestate transaction, such payment mustbe for services that are actual, necessaryand distinct from the primary servicesprovided by such person. For example,for an attorney of the buyer or seller toreceive 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 titlesearch to determine the insurability ofthe title, the clearance of underwritingobjections, the actual issuance of thepolicy or policies on behalf of the titleinsurance company, and, wherecustomary, issuance of the titlecommitment, and the conducting of thetitle search and closing.

(h) Recordkeeping. Any documentsprovided pursuant to this section shallbe retained for five (5) years from thedate of execution.

(i) Appendix B of this part.Illustrations in Appendix B of this partdemonstrate some of the requirementsof this section.

§ 3500.15 Controlled businessarrangements.

(a) General. A controlled businessarrangement is defined in section 3(7) ofRESPA (12 U.S.C. 2602(7)).

(b) Violation and exemption. Acontrolled business arrangement is not aviolation of section 8 of RESPA (12U.S.C. 2607) and of § 3500.14 if theconditions set forth in this section aresatisfied.

(1) The person making each referralhas provided to each person whosebusiness is referred a written disclosure,in the format of the Controlled BusinessArrangement Disclosure Statement setforth in Appendix D of this part, of thenature of the relationship (explainingthe ownership and financial interest)between the provider of settlementservices (or business incident thereto)and the person making the referral andof an estimated charge or range ofcharges generally made by suchprovider (which describes the chargeusing the same terminology, as far aspractical, as section L of the HUD–1settlement statement). The disclosuresmust be provided on a separate piece ofpaper no later than the time of eachreferral or, if the lender requires use ofa particular provider, the time of loanapplication, except that:

(i) Where a lender makes the referralto a borrower, the condition containedin paragraph (b)(1) of this section maybe satisfied at the time that the goodfaith estimate or a statement under§ 3500.7(d) is provided; and

(ii) Whenever an attorney or law firmrequires a client to use a particular titleinsurance agent, the attorney or law firmshall provide the disclosures no laterthan the time the attorney or law firmis engaged by the client. Failure tocomply with the disclosurerequirements of this section may beovercome if the person making a referralcan prove by a preponderance of the

evidence that procedures reasonablyadopted to result in compliance withthese conditions have been maintainedand that any failure to comply withthese conditions was unintentional andthe result of a bona fide error. An errorof legal judgment with respect to aperson’s obligations under RESPA is nota bona fide error. Administrative andjudicial interpretations of section 130(c)of the Truth in Lending Act shall not bebinding interpretations of the precedingsentence or section 8(d)(3) of RESPA (12U.S.C. 2607(d)(3)).

(2) No person making a referral hasrequired (as defined in § 3500.2,‘‘required use’’) any person to use anyparticular provider of settlementservices or business incident thereto,except if such person is a lender, forrequiring a buyer, borrower or seller topay for the services of an attorney,credit reporting agency, or real estateappraiser chosen by the lender torepresent the lender’s interest in a realestate transaction, or except if suchperson is an attorney or law firm forarranging for issuance of a titleinsurance policy for a client, directly asagent or through a separate corporatetitle insurance agency that may beoperated as an adjunct to the lawpractice of the attorney or law firm, aspart of representation of that client in areal estate transaction.

(3) The only thing of value that isreceived from the arrangement otherthan payments listed in § 3500.14(g) isa return on an ownership interest orfranchise relationship.

(i) In a controlled businessarrangement:

(A) Bona fide dividends, and capitalor equity distributions, related toownership interest or franchiserelationship, between entities in anaffiliate relationship, are permissible;and

(B) Bona fide business loans,advances, and capital or equitycontributions between entities in anaffiliate relationship (in any direction),are not prohibited—so long as they arefor ordinary business purposes and arenot fees for the referral of settlementservice business or unearned fees.

(ii) A return on an ownership interestdoes not include:

(A) Any payment which has as a basisof calculation no apparent businessmotive other than distinguishing amongrecipients of payments on the basis ofthe amount of their actual, estimated oranticipated referrals;

(B) Any payment which variesaccording to the relative amount ofreferrals by the different recipients ofsimilar payments; or


(C) A payment based on anownership, partnership or joint ventureshare which has been adjusted on thebasis of previous relative referrals byrecipients of similar payments.

(iii) Neither the mere labelling of athing of value, nor the fact that it maybe calculated pursuant to a corporate orpartnership organizational document ora franchise agreement, will determinewhether it is a bona fide return on anownership interest or franchiserelationship. Whether a thing of value issuch a return will be determined byanalyzing facts and circumstances on acase by case basis.

(iv) A return on franchise relationshipmay be a payment to or from afranchisee but it does not include anypayment which is not based on thefranchise agreement, nor any paymentwhich varies according to the number oramount of referrals by the franchisor orfranchisee or which is based on afranchise agreement which has beenadjusted on the basis of a previousnumber or amount of referrals by thefranchiser or franchisees. A franchiseagreement may not be constructed toinsulate against kickbacks or referralfees.

(c) Definitions. As used in thissection:

(1) Associate is defined in section 3(8)of RESPA (12 U.S.C. 2602(8)).

(2) Affiliate relationship means therelationship among business entitieswhere one entity has effective controlover the other by virtue of a partnershipor other agreement or is under commoncontrol with the other by a third entityor where an entity is a corporationrelated to another corporation as parentto subsidiary by an identity of stockownership.

(3) Beneficial ownership means theeffective ownership of an interest in aprovider of settlement services or theright to use and control the ownershipinterest involved even though legalownership or title may be held inanother person’s name.

(4) Control, as used in the definitionsof ‘‘associate’’ and ‘‘affiliaterelationship,’’ means that a person:

(i) Is a general partner, officer,director, or employer of another person;

(ii) Directly or indirectly or acting inconcert with others, or through one ormore subsidiaries, owns, holds withpower to vote, or holds proxiesrepresenting, more than 20 percent ofthe voting interests of another person;

(iii) Affirmatively influences in anymanner the election of a majority of thedirectors of another person; or

(iv) Has contributed more than 20percent of the capital of the otherperson.

(5) Direct ownership means theholding of legal title to an interest in aprovider of settlement service exceptwhere title is being held for thebeneficial owner.

(6) Franchise is defined in 16 CFR436.2(a).

(7) Franchisor is defined in 16 CFR436.2(c).

(8) Franchisee is defined in 16 CFR436.2(d).

(9) Person who is in a position to refersettlement service business means anyreal estate broker or agent, lender,mortgage broker, builder or developer,attorney, title company, title agent, orother person deriving a significantportion of his or her gross income fromproviding settlement services.

(d) Recordkeeping. Any documentsprovided pursuant to this section shallbe retained for 5 years after the date ofexecution.

(e) Appendix B of this part.Illustrations in Appendix B of this partdemonstrate some of the requirementsof this section.

§ 3500.16 Title companies.No seller of property that will be

purchased with the assistance of afederally related mortgage loan shallviolate section 9 of RESPA (12 U.S.C.2608). Section 3500.2 defines ‘‘requireduse’’ of a provider of a settlementservice. Section 3500.19(c) explains theliability of a seller for a violation of thissection.

§ 3500.17 Escrow accounts.(a) General. This section sets out the

requirements for an escrow account thata lender establishes in connection witha federally related mortgage loan. It setslimits for escrow accounts usingcalculations based on monthlypayments and disbursements within acalendar year. If an escrow accountinvolves biweekly or any other paymentperiod, the requirements in this sectionshall be modified accordingly. A HUDPublic Guidance Document entitled‘‘Biweekly Payments—Example’’provides examples of biweeklyaccounting and a HUD Public GuidanceDocument entitled ‘‘Annual EscrowAccount Disclosure Statement—Example’’ provides examples of a 3-yearaccounting cycle that may be used inaccordance with paragraph (c)(9) of thissection.

(b) Definitions. As used in thissection:

Acceptable accounting method meansan accounting method that a serviceruses to conduct an escrow accountanalysis for an escrow account subjectto the provisions of § 3500.17(c).

Aggregate (or) composite analysis,hereafter called aggregate analysis,

means an accounting method a serviceruses in conducting an escrow accountanalysis by computing the sufficiency ofescrow account funds by analyzing theaccount as a whole. Appendix F to thispart sets forth examples of aggregateescrow account analyses.

Annual Escrow Account Statementmeans a statement containing all of theinformation set forth in § 3500.17(i). Asnoted in § 3500.17(i), a servicer shallsubmit an annual escrow accountstatement to the borrower within 30calendar days of the end of the escrowaccount computation year, afterconducting an escrow account analysis.

Conversion date means the date threeyears after the publication date of therule adding this section (i.e., October 27,1997) by which date all servicers shalluse aggregate analysis.

Cushion or reserve (hereafter cushion)means funds that a servicer may requirea borrower to pay into an escrowaccount to cover unanticipateddisbursements or disbursements madebefore the borrower’s payments areavailable in the account, as limited by§ 3500.17(c).

Deficiency is the amount of a negativebalance in an escrow account. As notedin § 3500.17(f), if a servicer advancesfunds for a borrower, then the servicermust perform an escrow accountanalysis before seeking repayment of thedeficiency.

Delivery means the placing of adocument in the United States mail,first-class postage paid, addressed to thelast known address of the recipient.Hand delivery also constitutes delivery.

Disbursement date means the date onwhich the servicer actually pays anescrow item from the escrow account.Section 3500.17(k) provides that theservicer shall use as the disbursementdate a date on or before the earlier of thedeadline to take advantage of discounts,if available, or the deadline to avoid apenalty.

Escrow account means any accountthat a servicer establishes or controls onbehalf of a borrower to pay taxes,insurance premiums (including floodinsurance), or other charges with respectto a federally related mortgage loan,including charges that the borrower andservicer have voluntarily agreed that theservicer should collect and pay. Thedefinition encompasses any accountestablished for this purpose, including a‘‘trust account’’, ‘‘reserve account’’,‘‘impound account’’, or other term indifferent localities. An ‘‘escrowaccount’’ includes any arrangementwhere the servicer adds a portion of theborrower’s payments to principal andsubsequently deducts from principal thedisbursements for escrow account items.


For purposes of this section, the term‘‘escrow account’’ excludes any accountthat is under the borrower’s totalcontrol.

Escrow account analysis means theaccounting that a servicer conducts inthe form of a trial running balance foran escrow account to:

(1) Determine the appropriate targetbalances;

(2) Compute the borrower’s monthlypayments for the next escrow accountcomputation year and any depositsneeded to establish or maintain theaccount; and

(3) Determine whether shortages,surpluses or deficiencies exist.

Escrow account computation year is a12-month period that a servicerestablishes for the escrow accountbeginning with the borrower’s initialpayment date. The term includes each12-month period thereafter, unless aservicer chooses to issue a short yearstatement under the conditions stated in§ 3500.17(i)(4).

Escrow account item or separate itemmeans any separate expenditurecategory, such as ‘‘taxes’’ or‘‘insurance’’, for which funds arecollected in the escrow account fordisbursement. An escrow account itemwith installment payments, such aslocal property taxes, remains oneescrow account item regardless ofmultiple disbursement dates to the taxauthority.

Initial escrow account statementmeans the first disclosure statement thatthe servicer delivers to the borrowerconcerning the borrower’s escrowaccount. The initial escrow accountstatement shall meet the requirements of§ 3500.17(g) and be in substantially theformat set forth in § 3500.17(h).

Installment payment means one oftwo or more payments payable on anescrow account item during an escrowaccount computation year. An exampleof an installment payment is where ajurisdiction bills quarterly for taxes.

Payment due date means the dateeach month when the borrower’smonthly payment to an escrow accountis due to the servicer. The initialpayment date is the borrower’s firstpayment due date to an escrow account.

Phase-in period means the periodbeginning on the effective date of thisfinal rule and ending on the conversiondate, i.e., October 27, 1997, by whichdate all servicers shall use the aggregateaccounting method in conductingescrow account analyses.

Post-rule account means an escrowaccount established in connection witha federally related mortgage loan whosesettlement date is on or after theeffective date of this section.

Pre-accrual is a practice someservicers use to require borrowers todeposit funds, needed for disbursementand maintenance of a cushion, in theescrow account some period before thedisbursement date. Pre-accrual issubject to the limitations of § 3500.17(c).

Pre-rule account is an escrow accountestablished in connection with afederally related mortgage loan whosesettlement date is before the effectivedate of this rule.

Shortage means an amount by whicha current escrow account balance fallsshort of the target balance at the time ofescrow analysis.

Single-item analysis means anaccounting method servicers use inconducting an escrow account analysisby computing the sufficiency of escrowaccount funds by considering eachescrow item separately. Appendix F tothis part sets forth examples of single-item analysis.

Submission (of an escrow accountstatement) means the delivery of thestatement.

Surplus means an amount by whichthe current escrow account balanceexceeds the target balance for theaccount.

System of recordkeeping means theservicer’s method of keepinginformation that reflects the factsrelating to that servicer’s handling of theborrower’s escrow account, including,but not limited to, the payment ofamounts from the escrow account andthe submission of initial and annualescrow account statements to borrowers.

Target balance means the estimatedmonth end balance in an escrowaccount that is just sufficient to coverthe remaining disbursements from theescrow account in the escrow accountcomputation year, taking into accountthe remaining scheduled periodicpayments, and a cushion, if any.

Trial running balance means theaccounting process that derives thetarget balances over the course of anescrow account computation year.Section 3500.17(d) provides adescription of the steps involved inperforming a trial running balance.

(c) Limits on payments to escrowaccounts; acceptable accountingmethods to determine limits.

(1) A lender or servicer (hereafterservicer) shall not require a borrower todeposit into any escrow account,created in connection with a federallyrelated mortgage loan, more than thefollowing amounts:

(i) Charges at settlement or uponcreation of an escrow account. At thetime a servicer creates an escrowaccount for a borrower, the servicer maycharge the borrower an amount

sufficient to pay the charges respectingthe mortgaged property, such as taxesand insurance, which are attributable tothe period from the date suchpayment(s) were last paid until theinitial payment date. The ‘‘amountsufficient to pay’’ is computed so thatthe lowest month end target balanceprojected for the escrow accountcomputation year is zero (–0–) (see Step2 in Appendix F to this part). Inaddition, the servicer may charge theborrower a cushion that shall be nogreater than one-sixth (1⁄6) of theestimated total annual payments fromthe escrow account.

(ii) Charges during the life of theescrow account. Throughout the life ofan escrow account, the servicer maycharge the borrower a monthly sumequal to one-twelfth (1⁄12) of the totalannual escrow payments which theservicer reasonably anticipates payingfrom the account. In addition, theservicer may add an amount to maintaina cushion no greater than one-sixth (1⁄6)of the estimated total annual paymentsfrom the account. However, if a servicerdetermines through an escrow accountanalysis that there is a shortage ordeficiency, the servicer may require theborrower to pay additional deposits tomake up the shortage or eliminate thedeficiency, subject to the limitations setforth in § 3500.17(f).

(2) Escrow analysis at creation ofescrow account. Before establishing anescrow account, the servicer shallconduct an escrow account analysis todetermine the amount the borrowershall deposit into the escrow account,subject to the limitations of§ 3500.17(c)(1)(i) and the amount of theborrower’s periodic payments into theescrow account, subject to thelimitations of § 3500.17(c)(1)(ii). Inconducting the escrow account analysis,the servicer shall estimate thedisbursement amounts according to§ 3500.17(c)(7). Pursuant to § 3500.17(k),the servicer shall use a date on or beforethe earlier of the deadline to takeadvantage of discounts, if available, orthe deadline to avoid a penalty as thedisbursement date for the escrow item.Upon completing the initial escrowaccount analysis, the servicer shallprepare and deliver an initial escrowaccount statement to the borrower, asset forth in § 3500.17(g). The servicershall use the escrow account analysis todetermine whether a surplus, shortageor deficiency exists since settlement andshall make any adjustments to theaccount pursuant to § 3500.17(f).

(3) Subsequent escrow accountanalyses. For each escrow account, theservicer shall conduct an escrowaccount analysis at the completion of


the escrow account computation year todetermine the borrower’s monthlyescrow account payments for the nextcomputation year, subject to thelimitations of § 3500.17(c)(1)(ii). Inconducting the escrow account analysis,the servicer shall estimate thedisbursement amounts according to§ 3500.17(c)(7). Pursuant to § 3500.17(k),the servicer shall use a date on or beforethe earlier of the deadline to takeadvantage of discounts, if available, orthe deadline to avoid a penalty as thedisbursement date for the escrow item.The servicer shall use the escrowaccount analysis to determine whether asurplus, shortage or deficiency existsand shall make any adjustments to theaccount pursuant to § 3500.17(f). Uponcompleting an escrow account analysis,the servicer shall prepare and submit anannual escrow account statement to theborrower, as set forth in § 3500.17(i).

(4) Acceptable accounting methods todetermine escrow limits. The followingare acceptable accounting methods thatservicers may use in conducting anescrow account analysis.

(i) Pre-rule accounts. For pre-ruleaccounts, servicers may use eithersingle-item analysis or aggregate-analysis during the phase-in period. Inconducting the escrow account analysis,servicers shall use ‘‘month-end’’accounting. Under month-endaccounting, the timing of thedisbursements and payments within themonth is irrelevant. As of theconversion date, all pre-rule accountsshall comply with the requirements forpost-rule accounts in paragraph (c)(4)(ii)of this section. During the phase-inperiod, the transfer of servicing of a pre-rule account to another servicer doesnot convert the account to a post-ruleaccount. After the effective date of thisrule, refinancing transactions (asdefined in § 3500.2) shall comply withthe requirements for post-rule accounts.

(ii) Post-rule accounts. For post-ruleaccounts, servicers shall use aggregateaccounting to conduct an escrowaccount analysis. In conducting theescrow account analysis, servicers shalluse ‘‘month-end’’ accounting. Undermonth-end accounting, the timing of thedisbursements and payments within themonth is irrelevant.

(5) Cushion. For post-rule accounts,the cushion shall be no greater than one-sixth (1⁄6) of the estimated total annualdisbursements from the escrow accountusing aggregate analysis accounting. Forpre-rule accounts, the cushion may notexceed the total of one-sixth of theestimated annual disbursements foreach escrow account item using single-item analysis accounting. Indetermining the cushion using single-

item analysis, a servicer shall not dividean escrow account item into sub-accounts, even if the payee requiresinstallment payments.

(6) Restrictions on pre-accrual. Forpre-rule accounts, a servicer shall notrequire any pre-accrual that results inthe escrow account balance exceedingthe limits of paragraph (c)(1) of thissection. In addition, if the mortgagedocuments in a pre-rule account aresilent about the amount of pre-accrual,the servicer shall not require in excessof one month of pre-accrual, subject tothe additional limitations provided inparagraph (c)(8) of this section. For post-rule accounts, a servicer shall notpractice pre-accrual.

(7) Servicer estimates of disbursementamounts. To conduct an escrow accountanalysis, the servicer shall estimate theamount of escrow account items to bedisbursed. If the servicer knows thecharge for an escrow item in the nextcomputation year, then the servicershall use that amount in estimatingdisbursement amounts. If the charge isunknown to the servicer, the servicermay base the estimate on the precedingyear’s charge, or the preceding year’scharge as modified by an amount notexceeding the most recent year’s changein the national Consumer Price Indexfor all urban consumers (CPI, all items).In cases of unassessed newconstruction, the servicer may base anestimate on the assessment ofcomparable residential property in themarket area.

(8) Provisions in mortgage documents.The servicer shall examine the mortgageloan documents to determine theapplicable cushion and limitations onpre-accrual for each escrow account. Ifthe mortgage loan documents providefor lower cushion limits or less pre-accrual than this section, then the termsof the loan documents apply. Where theterms of any mortgage loan documentallow greater payments to an escrowaccount than allowed by this section,then this section controls the applicablelimits. Where the mortgage loandocuments do not specifically establishan escrow account, whether a servicermay establish an escrow account for theloan is a matter for determination byState law. If the mortgage loandocument is silent on the escrowaccount limits (for cushion or pre-accrual) and a servicer establishes anescrow account under State law, thenthe limitations of this section applyunless State law provides for a loweramount. If the loan documents providefor escrow accounts up to the RESPAlimits, then the servicer may require themaximum amounts consistent with this

section, unless an applicable State lawsets a lesser amount.

(9) Assessments for periods longerthan one year. Some escrow accountitems may be billed for periods longerthan one year. For example, servicersmay need to collect flood insurance orwater purification escrow funds forpayment every three years. In suchcases, the servicer shall estimate theborrower’s payments for a full cycle ofdisbursements. For a flood insurancepremium payable every 3 years, theservicer shall collect the paymentsreflecting 36 equal monthly amounts.For two out of the three years, however,the account balance may not reach itslow monthly balance because the lowpoint will be on a three-year cycle, ascompared to an annual one. The annualescrow account statement shall explainthis situation (see example in the HUDPublic Guidance Document entitled‘‘Annual Escrow Account DisclosureStatement—Example’’, available inaccordance with § 3500.3).

(d) Methods of escrow accountanalysis. Paragraph (c) of this sectionprescribes acceptable accountingmethods. The following sets forth thesteps servicers shall use to determinewhether their use of an acceptableaccounting method conforms with thelimitations in § 3500.17(c)(1). The stepsset forth in this section derive maximumlimits. Servicers may use accountingprocedures that result in lower targetbalances. In particular, servicers mayuse a cushion less than the permissiblecushion or no cushion at all. Thissection does not require the use of acushion.

(1) Aggregate analysis. (i) When aservicer uses aggregate analysis inconducting the escrow account analysis,the target balances may not exceed thebalances computed according to thefollowing arithmetic operations:

(A) The servicer first projects a trialbalance for the account as a whole overthe next computation year (a trialrunning balance). In doing so theservicer assumes that it will makeestimated disbursements on or beforethe earlier of the deadline to takeadvantage of discounts, if available, orthe deadline to avoid a penalty. Theservicer does not use pre-accrual onthese disbursement dates. The serviceralso assumes that the borrower willmake monthly payments equal to one-twelfth of the estimated total annualescrow account disbursements.

(B) The servicer then examines themonthly trial balances and adds to thefirst monthly balance an amount justsufficient to bring the lowest monthlytrial balance to zero, and adjusts allother monthly balances accordingly.


(C) The servicer then adds to themonthly balances the permissiblecushion. The cushion is two months ofthe borrower’s escrow payments to theservicer or a lesser amount specified byState law or the mortgage document (netof any increases or decreases because ofprior year shortages or surpluses,respectively).

(ii) Lowest monthly balance. Underaggregate analysis, the lowest monthlytarget balance for the account shall beless than or equal to one-sixth of theestimated total annual escrow accountdisbursements or a lesser amountspecified by State law or the mortgagedocument. The target balances that theservicer derives using these steps yieldthe maximum limit for the escrowaccount. Appendix F to this partillustrates these steps.

(2) Single-item or other non-aggregateanalysis method. (i) When a serviceruses single-item analysis or any hybridaccounting method in conducting anescrow account analysis during thephase-in period, the target balances maynot exceed the balances computedaccording to the following arithmeticoperations:

(A) The servicer first projects a trialbalance for each item over the nextcomputation year (a trial runningbalance). In doing so the servicerassumes that it will make estimateddisbursements on or before the earlier ofthe deadline to take advantage ofdiscounts, if available, or the deadlineto avoid a penalty. The servicer does notuse pre-accrual on these disbursementdates. The servicer also assumes that theborrower will make periodic paymentsequal to one-twelfth of the estimatedtotal annual escrow accountdisbursements.

(B) The servicer then examines themonthly trial balance for each escrowaccount item and adds to the firstmonthly balance for each separate iteman amount just sufficient to bring thelowest monthly trial balance for thatitem to zero, and then adjusts all othermonthly balances accordingly.

(C) The servicer then adds thepermissible cushion, if any, to themonthly balance for the separate escrowaccount item. The permissible cushionis two months of escrow payments forthe escrow account item (net of anyincreases or decreases because of prioryear shortages or surpluses,respectively) or a lesser amountspecified by State law or the mortgagedocument.

(D) The servicer then examines thebalances for each item to make certainthat the lowest monthly balance for thatitem is less than or equal to one-sixth ofthe estimated total annual escrow

account disbursements for that item ora lesser amount specified by State lawor the mortgage document.

(ii) In performing an escrow accountanalysis using single-item analysis,servicers may account for each escrowaccount item separately, but servicersshall not further divide accounts intosub-accounts, even if the payee of adisbursement requires installmentpayments. The target balances that theservicer derives using these steps yieldthe maximum limit for the escrowaccount. Appendix F to this partillustrates these steps.

(e) Transfer of servicing. (1) If the newservicer changes either the monthlypayment amount or the accountingmethod used by the transferor (old)servicer, then the new servicer shallprovide the borrower with an initialescrow account statement within 60days of the date of servicing transfer.

(i) Where a new servicer provides aninitial escrow account statement uponthe transfer of servicing, the newservicer shall use the effective date ofthe transfer of servicing to establish thenew escrow account computation year.

(ii) Where the new servicer retains themonthly payments and accountingmethod used by the transferor servicer,then the new servicer may continue touse the escrow account computationyear established by the transferorservicer or may choose to establish adifferent computation year using ashort-year statement. At the completionof the escrow account computation yearor any short year, the new servicer shallperform an escrow analysis and providethe borrower with an annual escrowaccount statement.

(2) The new servicer shall treatshortages, surpluses and deficiencies inthe transferred escrow accountaccording to the procedures set forth in§ 3500.17(f).

(3) A pre-rule account remains a pre-rule account upon the transfer ofservicing to a new servicer so long asthe transfer occurs before the conversiondate.

(f) Shortages, surpluses, anddeficiencies requirements. (1) Escrowaccount analysis. For each escrowaccount, the servicer shall conduct anescrow account analysis to determinewhether a surplus, shortage ordeficiency exists.

(i) As noted in § 3500.17(c) (2) and (3),the servicer shall conduct an escrowaccount analysis upon establishing anescrow account and at completion of theescrow account computation year.

(ii) The servicer may conduct anescrow account analysis at other timesduring the escrow computation year. Ifa servicer advances funds in paying a

disbursement, which is not the result ofa borrower’s payment default under theunderlying mortgage document, thenthe servicer shall conduct an escrowaccount analysis to determine the extentof the deficiency before seekingrepayment of the funds from theborrower under this paragraph (f).

(2) Surpluses. (i) If an escrow accountanalysis discloses a surplus, the servicershall, within 30 days from the date ofthe analysis, refund the surplus to theborrower if the surplus is greater than orequal to 50 dollars ($50). If the surplusis less than 50 dollars ($50), the servicermay refund such amount to theborrower, or credit such amount againstthe next year’s escrow payments.

(ii) These provisions regardingsurpluses apply if the borrower iscurrent at the time of the escrowaccount analysis. A borrower is currentif the servicer receives the borrower’spayments within 30 days of thepayment due date. If the servicer doesnot receive the borrower’s paymentwithin 30 days of the payment due date,then the servicer may retain the surplusin the escrow account pursuant to theterms of the mortgage loan documents.

(3) Shortages. (i) If an escrow accountanalysis discloses a shortage of less thanone month’s escrow account payment,then the servicer has three possiblecourses of action:

(A) The servicer may allow a shortageto exist and do nothing to change it;

(B) The servicer may require theborrower to repay the shortage amountwithin 30 days; or

(C) The servicer may require theborrower to repay the shortage amountin equal monthly payments over at leasta 12-month period.

(ii) If an escrow account analysisdiscloses a shortage that is greater thanor equal to one month’s escrow accountpayment, then the servicer has twopossible courses of action:

(A) The servicer may allow a shortageto exist and do nothing to change it; or

(B) The servicer may require theborrower to repay the shortage in equalmonthly payments over at least a 12-month period.

(4) Deficiency. If the escrow accountanalysis confirms a deficiency, then theservicer may require the borrower to payadditional monthly deposits to theaccount to eliminate the deficiency.

(i) If the deficiency is less than onemonth’s escrow account payment, thenthe servicer:

(A) May allow the deficiency to existand do nothing to change it;

(B) May require the borrower to repaythe deficiency within 30 days; or


(C) May require the borrower to repaythe deficiency in 2 or more equalmonthly payments.

(ii) If the deficiency is greater than orequal to 1 month’s escrow payment, theservicer may allow the deficiency toexist and do nothing to change it or mayrequire the borrower to repay thedeficiency in two or more equalmonthly payments.

(iii) These provisions regardingdeficiencies apply if the borrower iscurrent at the time of the escrowaccount analysis. A borrower is currentif the servicer receives the borrower’spayments within 30 days of thepayment due date. If the servicer doesnot receive the borrower’s paymentwithin 30 days of the payment due date,then the servicer may recover thedeficiency pursuant to the terms of themortgage loan documents.

(5) Notice of Shortage or Deficiency inEscrow Account. The servicer shallnotify the borrower at least once duringthe escrow account computation year ifthere is a shortage or deficiency in theescrow account. The notice may be partof the annual escrow account statementor it may be a separate document.

(g) Initial Escrow Account Statement.(1) Submission at settlement, or within45 calendar days of settlement. As notedin § 3500.17(c)(2), the servicer shallconduct an escrow account analysisbefore establishing an escrow account todetermine the amount the borrowershall deposit into the escrow account,subject to the limitations of§ 3500.17(c)(1)(i). After conducting theescrow account analysis for each escrowaccount, the servicer shall submit aninitial escrow account statement to theborrower at settlement or within 45calendar days of settlement for escrowaccounts that are established as acondition of the loan.

(i) The initial escrow accountstatement shall include the amount ofthe borrower’s monthly mortgagepayment and the portion of the monthlypayment going into the escrow accountand shall itemize the estimated taxes,insurance premiums, and other chargesthat the servicer reasonably anticipatesto be paid from the escrow accountduring the escrow account computationyear and the anticipated disbursementdates of those charges. The initialescrow account statement shall indicatethe amount that the servicer selects asa cushion. The statement shall includea trial running balance for the account.

(ii) Pursuant to § 3500.17(h)(2), theservicer may incorporate the initialescrow account statement into theHUD–1 or HUD–1A settlementstatement. If the servicer does notincorporate the initial escrow account

statement into the HUD–1 or HUD–1Asettlement statement, then the servicershall submit the initial escrow accountstatement to the borrower as a separatedocument.

(2) Time of submission of initialescrow account statement for an escrowaccount established after settlement. Forescrow accounts established aftersettlement (and which are not acondition of the loan), a servicer shallsubmit an initial escrow accountstatement to a borrower within 45calendar days of the date ofestablishment of the escrow account.

(h) Format for initial escrow accountstatement. (1) The format and acompleted example for an initial escrowaccount statement are set out in HUDPublic Guidance Documents entitled‘‘Initial Escrow Account DisclosureStatement—Format’’ and ‘‘Initial EscrowAccount Disclosure Statement—Example’’, available in accordance with§ 3500.3.

(2) Incorporation of Initial EscrowAccount Statement Into HUD–1 orHUD–1A Settlement Statement.Pursuant to § 3500.9(a)(11), a servicermay add the initial escrow accountstatement to the HUD–1 or HUD–1Asettlement statement. The servicer mayinclude the initial escrow accountstatement in the basic text or may attachthe initial escrow account statement asan additional page to the HUD–1 orHUD–1A settlement statement.

(3) Identification of Payees. The initialescrow account statement need notidentify a specific payee by name if itprovides sufficient information toidentify the use of the funds. Forexample, appropriate entries include:county taxes, hazard insurance,condominium dues, etc. If a particularpayee, such as a taxing body, receivesmore than one payment during theescrow account computation year, thestatement shall indicate each paymentand disbursement date. If there areseveral taxing authorities or insurers,the statement shall identify each taxingbody or insurer (e.g., ‘‘City Taxes’’,‘‘School Taxes’’, ‘‘Hazard Insurance’’, or‘‘Flood Insurance,’’ etc.).

(i) Annual Escrow AccountStatements. For each escrow account, aservicer shall submit an annual escrowaccount statement to the borrowerwithin 30 days of the completion of theescrow account computation year. Theservicer shall also submit to theborrower the previous year’s projectionor initial escrow account statement. Theservicer shall conduct an escrowaccount analysis before submitting anannual escrow account statement to theborrower.

(1) Contents of Annual EscrowAccount Statement. The annual escrowaccount statement shall provide anaccount history, reflecting the activity inthe escrow account during the escrowaccount computation year, and aprojection of the activity in the accountfor the next year. In preparing thestatement, the servicer may assumescheduled payments and disbursementswill be made for the final 2 months ofthe escrow account computation year.The annual escrow account statementshall include, at a minimum, thefollowing:

(i) The amount of the borrower’scurrent monthly mortgage payment andthe portion of the monthly paymentgoing into the escrow account;

(ii) The amount of the past year’smonthly mortgage payment and theportion of the monthly payment thatwent into the escrow account;

(iii) The total amount paid into theescrow account during the pastcomputation year;

(iv) The total amount paid out of theescrow account during the same periodfor taxes, insurance premiums, andother charges;

(v) The balance in the escrow accountat the end of the period;

(vi) An explanation of how anysurplus is being handled by the servicer;

(vii) An explanation of how anyshortage or deficiency is to be paid bythe borrower; and

(viii) If applicable, the reason(s) whythe estimated low monthly balance wasnot reached, as indicated by notingdifferences between the most recentaccount history and last year’sprojection. HUD Public GuidanceDocuments entitled ‘‘Annual EscrowAccount Disclosure Statement—Format’’ and ‘‘Annual Escrow AccountDisclosure Statement—Example’’ setforth an acceptable format andmethodology for conveying thisinformation.

(2) No annual statements in the caseof default, foreclosure, or bankruptcy.This paragraph (i)(2) contains anexemption from the provisions of§ 3500.17(i)(1). If at the time the servicerconducts the escrow account analysisthe borrower is more than 30 daysoverdue, then the servicer is exemptfrom the requirements of submitting anannual escrow account statement to theborrower under § 3500.17(i). Thisexemption also applies in situationswhere the servicer has brought an actionfor foreclosure under the underlyingmortgage loan, or where the borrower isin bankruptcy proceedings. If theservicer does not issue an annualstatement pursuant to this exemptionand the loan subsequently is reinstated


or otherwise becomes current, theservicer shall provide a history of theaccount since the last annual statement(which may be longer than 1 year)within 90 days of the date the accountbecame current.

(3) Delivery with other material. Theservicer may deliver the annual escrowaccount statement to the borrower withother statements or materials, includingthe Substitute 1098, which is providedfor federal income tax purposes.

(4) Short year statements. A servicermay issue a short year annual escrowaccount statement (‘‘short yearstatement’’) to change one escrowaccount computation year to another. Byusing a short year statement a servicermay adjust its production schedule oralter the escrow account computationyear for the escrow account.

(i) Effect of short year statement. Theshort year statement shall end the‘‘escrow account computation year’’ forthe escrow account and establish thebeginning date of the new escrowaccount computation year. The servicershall deliver the short year statement tothe borrower within 60 days from theend of the short year.

(ii) Short year statement uponservicing transfer. Upon the transfer ofservicing, the transferor (old) servicershall submit a short year statement tothe borrower within 60 days of theeffective date of transfer.

(iii) Short year statement upon loanpayoff. If a borrower pays off a mortgageloan during the escrow accountcomputation year, the servicer shallsubmit a short year statement to theborrower within 60 days after receivingthe pay-off funds.

(j) Formats for annual escrow accountstatement. The formats and completedexamples for annual escrow accountstatements using single-item analysis(pre-rule accounts) and aggregateanalysis are set out in HUD PublicGuidance Documents entitled ‘‘AnnualEscrow Account Disclosure Statement—Format’’ and ‘‘Annual Escrow AccountDisclosure Statement—Example’’.

(k) Timely payments. (1) If the termsof any federally related mortgage loanrequire the borrower to make paymentsto an escrow account, the servicer shallpay the disbursements in a timelymanner, that is, by the disbursementdate, so long as the borrower’s paymentis not more than 30 days overdue. Incalculating the disbursement date, theservicer shall use a date on or before theearlier of the deadline to take advantageof discounts, if available, or thedeadline to avoid a penalty.

(2) The servicer shall advance fundsto make disbursements in a timelymanner so long as the borrower’s

payment is not more than 30 daysoverdue. Upon advancing funds to paya disbursement, the servicer may seekrepayment from the borrower for thedeficiency pursuant to § 3500.17(f).

(l) System of recordkeeping. (1) Eachservicer shall keep records, which mayinvolve electronic storage, microfichestorage, or any method of computerizedstorage, so long as the information iseasily retrievable, reflecting theservicer’s handling of each borrower’sescrow account. The servicer’s recordsshall include, but not be limited to, thepayment of amounts into and from theescrow account and the submission ofinitial and annual escrow accountstatements to the borrower.

(2) The servicer responsible forservicing the borrower’s escrow accountshall maintain the records for thataccount for a period of at least five yearsafter the servicer last serviced theescrow account.

(3) A servicer shall provide theSecretary with information contained inthe servicer’s records for a specificescrow account, or for a number or classof escrow accounts, within 30 days ofthe Secretary’s written request for theinformation. The servicer shall convertany information contained in electronicstorage, microfiche or computerizedstorage to paper copies for review by theSecretary.

(i) To aid in investigations, theSecretary may also issue anadministrative subpoena for theproduction of documents, and for thetestimony of such witnesses as theSecretary deems advisable.

(ii) If the subpoenaed party refuses toobey the Secretary’s administrativesubpoena, the Secretary is authorized toseek a court order requiring compliancewith the subpoena from any UnitedStates district court. Failure to obeysuch an order of the court may bepunished as contempt of court.

(4) Borrowers may seek informationcontained in the servicer’s records bycomplying with the provisions set forthin 12 U.S.C. 2605(e) and § 3500.21(f).

(5) After receiving a request (by letteror subpoena) from the Department forinformation relating to whether aservicer submitted an escrow accountstatement to the borrower, the servicershall respond within 30 days. If theservicer is unable to provide theDepartment with such information, theSecretary shall deem that lack ofinformation to be evidence of theservicer’s failure to submit the statementto the borrower.

(m) Penalties. A servicer’s failure tosubmit to a borrower an initial or annualescrow account statement meeting therequirements of this part shall constitute

a violation of section 10(d) of RESPA(12 U.S.C. 2609(d)) and this section. Foreach such violation, the Secretary shallassess a civil penalty in accordance withsection 10(d) of RESPA.

(n) Civil penalties procedures. Thefollowing procedures shall applywhenever the Department seeks toimpose a civil money penalty forviolation of section 10(c) of RESPA (12U.S.C. 2609(c)):

(1) Purpose and scope. This paragraph(n) explains the procedures by whichthe Secretary may impose penaltiesunder 12 U.S.C. 2609(d). Theseprocedures include administrativehearings, judicial review, and collectionof penalties. This paragraph (n) governspenalties imposed under 12 U.S.C.2609(d) and, when noted, adopts thoseportions of 24 CFR part 30, subpart E,that apply to all other civil penaltyproceedings initiated by the Secretary.

(2) Authority. The Secretary has theauthority to impose civil penaltiesunder section 10(d) of RESPA (12 U.S.C.2609(d)).

(3) Notice of intent to impose civilmoney penalties. Whenever theSecretary intends to impose a civilmoney penalty for violations of section10(c) of RESPA (12 U.S.C. 2609(c)), theresponsible program official, or his orher designee, shall serve a writtenNotice of Intent to Impose Civil MoneyPenalties (Notice of Intent) upon anyservicer on which the Secretary intendsto impose the penalty. A copy of theNotice of Intent must be filed with theChief Docket Clerk, Office ofAdministrative Law Judges, at theaddress provided in the Notice of Intent.The Notice of Intent will provide:

(i) A short, plain statement of the factsupon which the Secretary hasdetermined that a civil money penaltyshould be imposed, including a briefdescription of the specific violationsunder 12 U.S.C. 2609(c) with which theservicer is charged and whether suchviolations are believed to be intentionalor unintentional in nature, or acombination thereof;

(ii) The amount of the civil moneypenalty that the Secretary intends toimpose and whether the limitations in12 U.S.C. 2609(d)(1), apply;

(iii) The right of the servicer to ahearing on the record to appeal theSecretary’s preliminary determination toimpose a civil penalty;

(iv) The procedures to appeal thepenalty;

(v) The consequences of failure toappeal the penalty; and

(vi) The name, address, and telephonenumber of the representative of theDepartment, and the address of theChief Docket Clerk, Office of


Administrative Law Judges, should theservicer decide to appeal the penalty.

(4) Appeal procedures. (i) Answer. Toappeal the imposition of a penalty, aservicer shall, within 30 days afterreceiving service of the Notice of Intent,file a written Answer with the ChiefDocket Clerk, Office of AdministrativeLaw Judges, Department of Housing andUrban Development, at the addressprovided in the Notice of Intent. TheAnswer shall include a statement thatthe servicer admits, denies, or does nothave (and is unable to obtain) sufficientinformation to admit or deny eachallegation made in the Notice of Intent.A statement of lack of information shallhave the effect of a denial. Anyallegation that is not denied shall bedeemed admitted. Failure to submit anAnswer within the required period oftime will result in a decision by theAdministrative Law Judge based uponthe Department’s submission ofevidence in the Notice of Intent.

(ii) Submission of evidence. A servicerthat receives the Notice of Intent has aright to present evidence. Evidencemust be submitted within 45 calendardays from the date of service of theNotice of Intent, or by such other timeas may be established by theAdministrative Law Judge (ALJ). Theservicer’s failure to submit evidencewithin the required period of time willresult in a decision by theAdministrative Law Judge based uponthe Department’s submission ofevidence in the Notice of Intent. Theservicer may present evidence of thefollowing:

(A) The servicer did submit therequired escrow account statement(s) tothe borrower(s); or

(B) Even if the servicer did not submitthe required statement(s), that thefailure was not the result of anintentional disregard of therequirements of RESPA (for purposes ofdetermining the penalty).

(iii) Review of the record. TheAdministrative Law Judge will reviewthe evidence submitted by the servicer,if any, and that submitted by theDepartment. The Administrative LawJudge shall make a determination basedupon a review of the written record,except that the Administrative LawJudge may order an oral hearing if he orshe finds that the determination turnson the credibility or veracity of awitness, or that the matter cannot beresolved by review of the documentaryevidence. If the Administrative LawJudge decides that an oral hearing isappropriate, then the procedural rulesset forth at 24 CFR part 30, subpart E,shall apply, to the extent that they arenot inconsistent with this section.

(iv) Burden of Proof. The burden ofproof or the burden of going forwardwith the evidence shall be upon theproponent of an action. TheDepartment’s submission of evidencethat the servicer’s system of recordslacks information that the servicersubmitted the escrow accountstatement(s) to the borrower(s) shallsatisfy the Department’s burden. Uponthe Department’s presentation ofevidence of this lack of information inthe servicer’s system of records, theburden of proof shifts from the Secretaryto the servicer to provide evidence thatit submitted the statement(s) to theborrower.

(v) Standard of Proof. The standard ofproof shall be the preponderance of theevidence.

(5) Determination of theAdministrative Law Judge.

(i) Following the hearing or thereview of the written record, theAdministrative Law Judge shall issue adecision that shall contain findings offact, conclusions of law, and the amountof any penalties imposed. The decisionshall include a determination ofwhether the servicer has failed tosubmit any required statements and, ifso, whether the servicer’s failure wasthe result of an intentional disregard forthe law’s requirements.

(ii) The Administrative Law Judgeshall issue the decision to all partieswithin 30 days of the submission of theevidence or the post-hearing briefs,whichever is the last to occur.

(iii) The decision of theAdministrative Law Judge shallconstitute the final decision of theDepartment and shall be final andbinding on the parties.

(6) Judicial review. (i) A personagainst whom the Department hasimposed a civil money penalty underthis part may obtain a review of theDepartment’s final decision by filing awritten petition for a review of therecord with the appropriate UnitedStates district court.

(ii) The petition must be filed within30 days after the decision is filed withthe Chief Docket Clerk, Office ofAdministrative Law Judges.

(7) Collection of penalties. (i) If anyperson fails to comply with theDepartment’s final decision imposing acivil money penalty, the Secretary, if thetime for judicial review of the decisionhas expired, may request the AttorneyGeneral to bring an action in anappropriate United States district courtto obtain a judgment against the personthat has failed to comply with theDepartment’s final decision.

(ii) In any such collection action, thevalidity and appropriateness of the

Department’s final decision imposingthe civil penalty shall not be subject toreview in the district court.

(iii) The Secretary may obtain suchother relief as may be available,including attorney fees and otherexpenses in connection with thecollection action.

(iv) Interest on and other charges forany unpaid penalty may be assessed inaccordance with 31 U.S.C. 3717.

(8) Offset. In addition to any otherrights as a creditor, the Secretary mayseek to collect a civil money penaltythrough administrative offset.

(9) At any time before the decision ofthe Administrative Law Judge, theSecretary and the servicer may enterinto an administrative settlement. Thesettlement may include provisions forinterest, attorney’s fees, and costsrelated to the proceeding. Suchsettlement will terminate theappearance before the AdministrativeLaw Judge.

(o) Discretionary payments. Anyborrower’s discretionary payment (suchas credit life or disability insurance)made as part of a monthly mortgagepayment is to be noted on the initial andannual statements. If a discretionarypayment is established or terminatedduring the escrow account computationyear, this change should be noted on thenext annual statement. A discretionarypayment is not part of the escrowaccount unless the payment is requiredby the lender, in accordance with thedefinition of ‘‘settlement service’’ in§ 3500.2, or the servicer chooses to placethe discretionary payment in the escrowaccount. If a servicer has not establishedan escrow account for a federally relatedmortgage loan and only receivespayments for discretionary items, thissection is not applicable.(Approved by the Office of Management andBudget under control number 2502–0501)

§ 3500.18 Validity of contracts and liens.Section 17 of RESPA (12 U.S.C. 2615)

governs the validity of contracts andliens under RESPA.

§ 3500.19 Enforcement.(a) Enforcement Policy. It is the policy

of the Secretary regarding RESPAenforcement matters to cooperate withFederal, State or local agencies havingsupervisory powers over lenders orother persons with responsibilitiesunder RESPA. Federal agencies withsupervisory powers over lenders mayuse their powers to require compliancewith RESPA. In addition, failure tocomply with RESPA may be grounds foradministrative action by the Secretaryunder part 24 of this title concerningdebarment, suspension, ineligibility of


contractors and grantees, or under part25 of this title concerning the HUDMortgagee Review Board. Nothing inthis paragraph is a limitation on anyother form of enforcement which maybe legally available.

(b) Violations of section 8 of RESPA(12 U.S.C. 2607), § 3500.14, or§ 3500.15. Any person who violates§§ 3500.14 or 3500.15 shall be deemedto violate Section 8 of RESPA and shallbe sanctioned accordingly.

(c) Violations of section 9 of RESPA(12 U.S.C. 2608) or § 3500.16. Anyperson who violates Section 3500.16 ofthis part shall be deemed to violateSection 9 of RESPA and shall besanctioned accordingly.

(d) Investigations. The procedures forinvestigations and investigationalproceedings are set forth in 24 CFR part3800.

§ 3500.21 Mortgage servicing transfers.(a) Definitions. As used in this

section:Master servicer means the owner of

the right to perform servicing, whichmay actually perform the servicing itselfor may do so through a subservicer.

Mortgage servicing loan means afederally related mortgage loan, as thatterm is defined in § 3500.2, subject tothe exemptions in § 3500.5, when themortgage loan is secured by a first lien.The definition does not includesubordinate lien loans or open-end linesof credit (home equity plans) covered bythe Truth in Lending Act andRegulation Z, including open-end linesof credit secured by a first lien.

Qualified written request means awritten correspondence from theborrower to the servicer prepared inaccordance with paragraph (e)(2) of thissection.

Subservicer means a servicer whodoes not own the right to performservicing, but who does so on behalf ofthe master servicer.

Transferee servicer means a servicerwho obtains or who will obtain the rightto perform servicing functions pursuantto an agreement or understanding.

Transferor servicer means a servicer,including a table funding mortgagebroker or dealer on a first lien dealerloan, who transfers or will transfer theright to perform servicing functionspursuant to an agreement orunderstanding.

(b) Servicing Disclosure Statementand Applicant Acknowledgement;requirements. (1) At the time anapplication for a mortgage servicingloan is submitted, or within 3 businessdays after submission of the application,the lender, mortgage broker whoanticipates using table funding, or

dealer who anticipates a first lien dealerloan shall provide to each person whoapplies for such a loan a ServicingDisclosure Statement. This requirementshall not apply when the application forcredit is turned down within threebusiness days after receipt of theapplication. A format for the ServicingDisclosure Statement appears asAppendix MS–1 to this part. Except asprovided in paragraph (b)(2) of thissection, the specific language of theServicing Disclosure Statement is notrequired to be used, but the ServicingDisclosure Statement must include theinformation set out in paragraph (b)(3)of this section, including the statementof the borrower’s rights in connectionwith complaint resolution. Theinformation set forth in Instructions toPreparer on the Servicing DisclosureStatement need not be included on theform given to applicants, and materialin square brackets is optional oralternative language.

(2) The Applicant’sAcknowledgement portion of theServicing Disclosure Statement in theformat stated is mandatory. Additionallines may be added to accommodatemore than two applicants.

(3) The Servicing DisclosureStatement must contain the followinginformation, except as provided inparagraph (b)(3)(ii) of this section:

(i) Whether the servicing of the loanmay be assigned, sold or transferred toany other person at any time while theloan is outstanding. If the lender, tablefunding mortgage broker, or dealer in afirst lien dealer loan does not engage inthe servicing of any mortgage servicingloans, the disclosure may consist of astatement to the effect that there is acurrent intention to assign, sell, ortransfer servicing of the loan.

(ii) The percentages (rounded to thenearest quartile (25%)) of mortgageservicing loans originated by the lenderin each calendar year for whichservicing has been assigned, sold, ortransferred for such calendar year.Compliance with this paragraph(b)(3)(ii) is not required if the lender,table funding mortgage broker, or dealeron a first lien dealer loan chooses optionB in the model format in paragraph(b)(4) of this section, including in squarebrackets the language ‘‘[and have notserviced mortgage loans in the last threeyears.]’’. The percentages shall beprovided as follows:

(A) This information shall be set outfor the most recent three calendar yearscompleted, with percentages as of theend of each year. This information shallbe updated in the disclosure no laterthan March 31 of the next calendar year.Each percentage should be obtained by

using as the numerator the number ofmortgage servicing loans originatedduring the calendar year for whichservicing is transferred within thecalendar year and, as the denominator,the total number of mortgage servicingloans originated in the calendar year. Ifthe volume of transfers is less than 12.5percent, the word ‘‘nominal’’ or theactual percentage amount of servicingtransfers may be used.

(B) This statistical information doesnot have to include the assignment, sale,or transfer of mortgage loan servicing bythe lender to an affiliate or subsidiary ofthe lender. However, lenders mayvoluntarily include transfers to anaffiliate or subsidiary. The lendershould indicate whether the percentagesprovided include assignments, sales, ortransfers to affiliates or subsidiaries.

(C) In the alternative, if applicable,the following statement may besubstituted for the statisticalinformation required to be provided inaccordance with paragraph (b)(3)(ii) ofthis section: ‘‘We have previouslyassigned, sold, or transferred theservicing of federally related mortgageloans.’’

(iii) The best available estimate of thepercentage (0 to 25 percent, 26 to 50percent, 51 to 75 percent, or 76 to 100percent) of all loans to be made duringthe 12-month period beginning on thedate of origination for which theservicing may be assigned, sold, ortransferred. Each percentage should beobtained by using as the numerator theestimated number of mortgage servicingloans that will be originated for whichservicing may be transferred within the12-month period and, as thedenominator, the estimated totalnumber of mortgage servicing loans thatwill be originated in the 12-monthperiod.

(A) If the lender, mortgage broker, ordealer anticipates that no loan servicingwill be sold during the calendar year,the word ‘‘none’’ may be substituted for‘‘0 to 25 percent.’’ If it is anticipated thatall loan servicing will be sold during thecalendar year, the word ‘‘all’’ may besubstituted for ‘‘76 to 100 percent.’’

(B) This statistical information doesnot have to include the estimatedassignment, sale, or transfer of mortgageloan servicing to an affiliate orsubsidiary of that person. However, thisinformation may be providedvoluntarily. The Servicing DisclosureStatements should indicate whether thepercentages provided includeassignments, sales or transfers toaffiliates or subsidiaries.

(iv) The information set out inparagraphs (d) and (e) of this section.


(v) A written acknowledgement thatthe applicant (and any co-applicant)has/have read and understood thedisclosure, and understand that thedisclosure is a required part of themortgage application. Thisacknowledgement shall be evidenced bythe signature of the applicant and anyco-applicant.

(4) The following is a model format,which includes several options, forcomplying with the requirements ofparagraph (b)(3) of this section. Themodel format may be annotated withadditional information that clarifies orenhances the model language. Thelender or table funding mortgage broker(or dealer) should use the language thatbest describes the particularcircumstances.

(i) Model Format: The following is thebest estimate of what will happen to theservicing of your mortgage loan:

(A) Option A. We may assign, sell, ortransfer the servicing of your loan whilethe loan is outstanding. [We are able toservice your loan[.][,] and we [will] [willnot] [haven’t decided whether to]service your loan.]; or

(B) Option B. We do not servicemortgage loans[.][,] [and have notserviced mortgage loans in the pastthree years.] We presently intend toassign, sell, or transfer the servicing ofyour mortgage loan. You will beinformed about your servicer.

(C) As appropriate, the followingparagraph may be used:

We assign, sell, or transfer theservicing of some of our loans while theloans are outstanding, depending on thetype of loan and other factors. For theprogram for which you have applied, weexpect to [assign, sell, or transfer all ofthe mortgage servicing][retain all of themortgage servicing] [assign, sell, ortransfer llll% of the mortgageservicing].

(ii) [Reserved](c) Servicing Disclosure Statement

and Applicant Acknowledgement;delivery. The lender, table fundingmortgage broker, or dealer thatanticipates a first lien dealer loan shalldeliver Servicing Disclosure Statementsto each applicant for mortgage servicingloans. Each applicant or co-applicantmust sign an Acknowledgement ofreceipt of the Servicing DisclosureStatement before settlement.

(1) In the case of a face-to-faceinterview with one or more applicants,the Servicing Disclosure Statement shallbe delivered at the time of application.An applicant present at the interviewmay sign the Acknowledgment on his orher own behalf at that time. Anapplicant present at the interview alsomay accept delivery of the Servicing

Disclosure Statement on behalf of theother applicants.

(2) If there is no face-to-faceinterview, the Servicing DisclosureStatement shall be delivered by placingit in the mail, with prepaid first-classpostage, within 3 business days fromreceipt of the application. If co-applicants indicate the same address ontheir application, one copy delivered tothat address is sufficient. If differentaddresses are shown by co-applicantson the application, a copy must bedelivered to each of the co-applicants.

(3) The signed ApplicantAcknowledgment(s) shall be retained fora period of 5 years after the date ofsettlement as part of the loan file forevery settled loan. There is norequirement for retention of ApplicantAcknowledgment(s) if the loan is notsettled.

(d) Notices of Transfer; loan servicing.(1) Requirement for notice. (i) Except asprovided in this paragraph (d)(1)(i) orparagraph (d)(1)(ii) of this section, eachtransferor servicer and transfereeservicer of any mortgage servicing loanshall deliver to the borrower a writtenNotice of Transfer, containing theinformation described in paragraph(d)(3) of this section, of any assignment,sale, or transfer of the servicing of theloan. The following transfers are notconsidered an assignment, sale, ortransfer of mortgage loan servicing forpurposes of this requirement if there isno change in the payee, address towhich payment must be delivered,account number, or amount of paymentdue:

(A) Transfers between affiliates;(B) Transfers resulting from mergers

or acquisitions of servicers orsubservicers; and

(C) Transfers between masterservicers, where the subservicer remainsthe same.

(ii) The Federal HousingAdministration (FHA) is not requiredunder paragraph (d) of this section tosubmit to the borrower a Notice ofTransfer in cases where a mortgageinsured under the National Housing Actis assigned to FHA.

(2) Time of notice. (i) Except asprovided in paragraph (d)(2)(ii) of thissection:

(A) The transferor servicer shalldeliver the Notice of Transfer to theborrower not less than 15 days beforethe effective date of the transfer of theservicing of the mortgage servicing loan;

(B) The transferee servicer shalldeliver the Notice of Transfer to theborrower not more than 15 days afterthe effective date of the transfer; and

(C) The transferor and transfereeservicers may combine their notices into

one notice, which shall be delivered tothe borrower not less than 15 daysbefore the effective date of the transferof the servicing of the mortgageservicing loan.

(ii) The Notice of Transfer shall bedelivered to the borrower by thetransferor servicer or the transfereeservicer not more than 30 days after theeffective date of the transfer of theservicing of the mortgage servicing loanin any case in which the transfer ofservicing is preceded by:

(A) Termination of the contract forservicing the loan for cause;

(B) Commencement of proceedings forbankruptcy of the servicer; or

(C) Commencement of proceedings bythe Federal Deposit InsuranceCorporation (FDIC) or the ResolutionTrust Corporation (RTC) forconservatorship or receivership of theservicer or an entity that owns orcontrols the servicer.

(iii) Notices of Transfer delivered atsettlement by the transferor servicer andtransferee servicer, whether as separatenotices or as a combined notice, willsatisfy the timing requirements ofparagraph (d)(2) of this section.

(3) Notices of Transfer; contents. TheNotices of Transfer required underparagraph (d) of this section shallinclude the following information:

(i) The effective date of the transfer ofservicing;

(ii) The name, consumer inquiryaddresses (including, at the option ofthe servicer, a separate address wherequalified written requests must be sent),and a toll-free or collect-call telephonenumber for an employee or departmentof the transferee servicer;

(iii) A toll-free or collect-calltelephone number for an employee ordepartment of the transferor servicerthat can be contacted by the borrowerfor answers to servicing transferinquiries;

(iv) The date on which the transferorservicer will cease to accept paymentsrelating to the loan and the date onwhich the transferee servicer will beginto accept such payments. These datesshall either be the same or consecutivedays;

(v) Information concerning any effectthe transfer may have on the terms orthe continued availability of mortgagelife or disability insurance, or any othertype of optional insurance, and anyaction the borrower must take tomaintain coverage;

(vi) A statement that the transfer ofservicing does not affect any other termor condition of the mortgage documents,other than terms directly related to theservicing of the loan; and


(vii) A statement of the borrower’srights in connection with complaintresolution, including the information setforth in paragraph (e) of this section.Appendix MS–2 of this part illustratesa statement satisfactory to the Secretary.

(4) Notices of Transfer; sample notice.Sample language that may be used tocomply with the requirements ofparagraph (d) of this section is set outin Appendix MS–2 of this part. Minormodifications to the sample languagemay be made to meet the particularcircumstances of the servicer, but thesubstance of the sample language shallnot be omitted or substantially altered.

(5) Consumer protection duringtransfer of servicing. During the 60-dayperiod beginning on the effective date oftransfer of the servicing of any mortgageservicing loan, if the transferor servicer(rather than the transferee servicer thatshould properly receive payment on theloan) receives payment on or before theapplicable due date (including any graceperiod allowed under the loandocuments), a late fee may not beimposed on the borrower with respect tothat payment and the payment may notbe treated as late for any other purposes.

(e) Duty of loan servicer to respond toborrower inquiries.

(1) Notice of receipt of inquiry. Within20 business days of a servicer of amortgage servicing loan receiving aqualified written request from theborrower for information relating to theservicing of the loan, the servicer shallprovide to the borrower a writtenresponse acknowledging receipt of thequalified written response. Thisrequirement shall not apply if the actionrequested by the borrower is takenwithin that period and the borrower isnotified of that action in accordancewith the paragraph (f)(3) of this section.By notice either included in the Noticeof Transfer or separately delivered byfirst-class mail, postage prepaid, aservicer may establish a separate andexclusive office and address for thereceipt and handling of qualifiedwritten requests.

(2) Qualified written request; defined.(i) For purposes of paragraph (e) of thissection, a qualified written requestmeans a written correspondence (otherthan notice on a payment coupon orother payment medium supplied by theservicer) that includes, or otherwiseenables the servicer to identify, thename and account of the borrower, andincludes a statement of the reasons thatthe borrower believes the account is inerror, if applicable, or that providessufficient detail to the servicer regardinginformation relating to the servicing ofthe loan sought by the borrower.

(ii) A written request does notconstitute a qualified written request ifit is delivered to a servicer more than 1year after either the date of transfer ofservicing or the date that the mortgageservicing loan amount was paid in full,whichever date is applicable.

(3) Action with respect to the inquiry.Not later than 60 business days afterreceiving a qualified written requestfrom the borrower, and, if applicable,before taking any action with respect tothe inquiry, the servicer shall:

(i) Make appropriate corrections inthe account of the borrower, includingthe crediting of any late charges orpenalties, and transmit to the borrowera written notification of the correction.This written notification shall includethe name and telephone number of arepresentative of the servicer who canprovide assistance to the borrower; or

(ii) After conducting an investigation,provide the borrower with a writtenexplanation or clarification thatincludes:

(A) To the extent applicable, astatement of the servicer’s reasons forconcluding the account is correct andthe name and telephone number of anemployee, office, or department of theservicer that can provide assistance tothe borrower; or

(B) Information requested by theborrower, or an explanation of why theinformation requested is unavailable orcannot be obtained by the servicer, andthe name and telephone number of anemployee, office, or department of theservicer that can provide assistance tothe borrower.

(4) Protection of credit rating. (i)During the 60-business day periodbeginning on the date of the servicerreceiving from a borrower a qualifiedwritten request relating to a dispute onthe borrower’s payments, a servicer maynot provide adverse informationregarding any payment that is thesubject of the qualified written requestto any consumer reporting agency (asthat term is defined in section 603 of theFair Credit Reporting Act, 15 U.S.C.1681a).

(ii) In accordance with section 17 ofRESPA (12 U.S.C. 2615), the protectionof credit rating provision of paragraph(e)(4)(i) of this section does not impedea lender or servicer from pursuing anyof its remedies, including initiatingforeclosure, allowed by the underlyingmortgage loan instruments.

(f) Damages and costs. (1) Whoeverfails to comply with any provision ofthis section shall be liable to theborrower for each failure in thefollowing amounts:

(i) Individuals. In the case of anyaction by an individual, an amount

equal to the sum of any actual damagessustained by the individual as the resultof the failure and, when there is apattern or practice of noncompliancewith the requirements of this section,any additional damages in an amountnot to exceed $1,000.

(ii) Class Actions. In the case of aclass action, an amount equal to the sumof any actual damages to each borrowerin the class that result from the failureand, when there is a pattern or practiceof noncompliance with therequirements of this section, anyadditional damages in an amount notgreater than $1,000 for each classmember. However, the total amount ofany additional damages in a class actionmay not exceed the lesser of § 500,000or 1 percent of the net worth of theservicer.

(iii) Costs. In addition, in the case ofany successful action under paragraph(f) of this section, the costs of the actionand any reasonable attorneys’ feesincurred in connection with the action.

(2) Nonliability. A transferor ortransferee servicer shall not be liable forany failure to comply with therequirements of this section, if within60 days after discovering an error(whether pursuant to a final writtenexamination report or the servicer’s ownprocedures) and before commencementof an action under this section and thereceipt of written notice of the errorfrom the borrower, the servicer notifiesthe person concerned of the error andmakes whatever adjustments arenecessary in the appropriate account toensure that the person will not berequired to pay an amount in excess ofany amount that the person otherwisewould have paid.

(g) Timely payments by servicer. If theterms of any mortgage servicing loanrequire the borrower to make paymentsto the servicer of the loan for depositinto an escrow account for the purposeof assuring payment of taxes, insurancepremiums, and other charges withrespect to the mortgaged property, theservicer shall make payments from theescrow account in a timely manner forthe taxes, insurance premiums, andother charges as the payments becomedue, as governed by the requirements in§ 3500.17(k).

(h) Preemption of State laws. A lenderwho makes a mortgage servicing loan ora servicer shall be considered to havecomplied with the provisions of anyState law or regulation requiring noticeto a borrower at the time of applicationfor a loan or transfer of servicing of aloan if the lender or servicer complieswith the requirements of this section.Any State law requiring notice to theborrower at the time of application or at


the time of transfer of servicing of theloan is preempted, and there shall be noadditional borrower disclosurerequirements. Provisions of State law,such as those requiring additionalnotices to insurance companies ortaxing authorities, are not preempted bysection 6 of RESPA or this section, andthis additional information may beadded to a notice prepared under thissection, if the procedure is allowableunder State law.(Approved by the Office of Management andBudget under control number 2502–0458)

3. Appendix A is amended by revisingthe heading of the appendix to read asfollows:

Appendix A to Part 3500—Instructionsfor Completing HUD–1 and HUD–1ASettlement Statements; Sample HUD 1and HUD 1A Statements

4. Appendix B is amended inIllustration 11, in the paragraph headed‘‘Comments,’’ by substituting thereference ‘‘section 3500.14(g)(1)’’ for thereference ‘‘Section 3500.14(g)(2)’’.

5. Appendix MS–2 is revised to readas follows:BILLING CODE 4210–27–P





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