I. GENERAL REQUIREMENTS
The Real Estate Settlement Procedures Act (RESPA) contains disclosure requirements and restrictions for settlements involving “federally-related mortgage loans” which include most lien transactions involving one-to-four-family residential structures. RESPA is implemented by regulations issued by the Department of Housing and Urban Development (HUD), commonly referred to as Regulation X (12 C.F.R. pt 3500).
For RESPA-covered transactions, a loan applicant must be provided with a “special information booklet” and a “good faith estimate” of settlement charges. One day prior to settlement, the person conducting the settlement must, if requested, provide the borrower with a HUD-prescribed now called the HUD-1 or HUD-1A settlement statement, completed with information on settlement costs known at that time. At settlement, a fully completed HUD-1 or HUD-1A settlement statement showing actual settlement costs must be made available to the borrower and the seller.
RESPA prohibits kickbacks for referral of business incident to or part of a settlement service and also prohibits the splitting of a charge for a settlement service, other than for services already performed (i.e., no payment of unearned fees). RESPA also prohibits a seller from requiring a buyer to use a particular title company, limits the size of escrow accounts for taxes, insurance and other charges, contains notice requirements concerning mortgage servicing transfers and requires certain escrow account statements to be delivered to a borrower.
II. COVERAGE – § 3500.2
RESPA requirements apply to all “federally-related mortgage loans.” A “federally-related mortgage loan” means (i) any loan (other than temporary financing, such as a construction loan) which is secured by a first or subordinate lien on residential property, including a refinancing of any loan secured by residential real property upon which there is either:
A. located, or following settlement, will be constructed following settlement using proceeds of the loan, a structure or structures designed principally for the occupancy of from one to four families; or
B. located, or following settlement, will be placed following settlement using proceeds of the loan, a manufactured home; and
(ii) for which one of the following paragraphs applies. The loan:
A. is made in whole or in part by a lender regulated by or whose deposits are insured by an agency of the Federal Government;
B. is made in whole or in part, or is insured, guaranteed, supplemented, or assisted in anyway: (1) by a federal agency or (2) by a federal agency-administered program;
C. is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association or the Federal Home Loan Mortgage Corporation, or a financial institution from which the loan is to be purchased by the Federal Home Loan Mortgage Corporation;
D. is made in whole or in part by a “creditor” that makes or invests in residential real estate loans aggregating more than one million dollars per year;
E. is originated either by a dealer or, if the obligation is to be assigned to a mortgage loan maker by a mortgage broker; or
F. is the subject of a “home equity conversion mortgage” or “reverse mortgage” issued by a maker of mortgage loans specified in paragraphs B. through D. above.
NOTE: Any installment sales contract, land contract, or contract for deed on otherwise qualifying residential property is a federally related mortgage loan if the contract is funded in whole or in part by proceeds of a loan made by any maker of mortgage loans cited in paragraphs A through D above.
III. EXEMPT TRANSACTIONS – § 3500.5
There are exemptions from RESPA coverage for both first lien and subordinate lien transactions. These exemptions, set forth in § 3500.5(b) of Regulation X, are summarized below.
A. Loans on Property of 25 Acres or More
The regulation provides for a 25 acre or more exemption from RESPA coverage, applicable for all properties, regardless of whether the land is vacant, the land contains a residential structure and of the type or the purpose of the loan. This exemption is absolute for property of 25 acres or more in a single transaction.
B. Business Purpose Loans
The regulation contains a “business purpose” exemption, the definition of which parallels Regulation Z’s “business purpose” definition [12 C.F.R. § 226.3(a)(1)]. To constitute a “business purpose” loan, the extension of credit must be primarily for a business, commercial, or agricultural purpose.
This “business purpose” loan exemption does not include the placing of a first or subordinate lien on a 1-to-4 family residential property held by one or more persons, acting in an individual (as a “natural person”) capacity, whether used for investment or occupancy. Thus, loans securing 1-to-4 family residential property and made to corporations, associations, partnerships, and trusts (entities that fall within the definition of “person” under RESPA’s § 3) are not covered. However, such loans made where both an individual and a living trust, or a corporation, association or partnership are named on the note or deed, means that the transaction is covered by RESPA. HUD has determined that the disclosure and anti-kickback provisions of RESPA should apply to all individual consumer transactions, not otherwise exempt.
C. Temporary Financing
Temporary financing (e.g., construction loan) in which a lender takes a security interest on a 1-to-4 family residential property is exempt from RESPA. The exemption does not apply to a loan for construction or rehabilitation of a 1-to-4 family structure that is used or may be converted to permanent financing by the same lender. If a lender has issued a commitment to provide permanent funding, with or without conditions, the transaction is not RESPA exempt. Any construction loan for a new or rehabilitated 1-to-4 family residential structure, other than a loan to a bona fide builder (a person who regularly engages in the construction of residential properties for sale or lease), is a RESPA-covered loan if its term is for two or more years. So-called “bridge” or “swing” loans, which are short-term loans to facilitate a person who is selling a property and buying another to cover interim obligations, are not covered RESPA transactions.
D. Vacant Land
There is a RESPA exemption for loans on vacant land or unimproved property, unless it will be improved by a residential structure purchased using the loan proceeds within two years from the date of loan settlement. Lenders must assure themselves that the purpose of the loan on vacant or unimproved property is not to add or construct a 1-to-4 family residential structure out of loan proceeds on the property within two years from settlement of the loan.
E. Assumptions Without Lender Approval
The regulation has adopted the following test: assumptions are covered transactions if lender approval of the assumption is required by the mortgage instruments and is obtained, whether or not a fee is charged for the assumption. If lender approval is not required, the transaction is exempt from RESPA coverage.
F. Loan Conversions
A conversion of a federally-related mortgage loan to different terms that are consistent with provisions of the original instrument is exempt from RESPA coverage so long as a new note is note required, even if the lender charges an additional fee for the conversion.
G. Secondary Market Transactions
A bona fide transfer of a loan obligation in the secondary market will be exempt from RESPA coverage, except as set forth in § 6 of RESPA (relating to servicing of mortgage loans and administration of escrow accounts) and § 3500.21 of Regulation X (relating to mortgage-servicing transfers). To determine what is a bona fide transfer, HUD will consider the real source of funding and the real interest of the funder-lender. Mortgage broker transactions which are “table-funded” are not secondary market transactions. (Note: Regulation X defines “table funding” to mean a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds.) The creation of a dealer loan or dealer consumer credit contract or the first assignment of such loan or contract to a lender is not a secondary market transaction.
IV. LENDER RESPONSIBILITIES – § 3500.6
A. Use of Special Information Booklet -- § 3500.6
1. The lender must provide a copy of the special information booklet to any person from whom the lender receives or for whom it prepares a written application for a federally related mortgage loan.
2. If more than one person applies together for a loan, the lender is only required to supply one copy of the booklet to one of the individuals applying to be in compliance, but may supply additional booklets to other applicants or guarantors.
3. The booklet must be supplied by the lender by delivering it or placing it in the mail to the applicant not later than three “business days” after the application is received or prepared, unless the lender denies the borrower’s application for credit before the end of the three-business day period. Business day is defined as any day on which the offices of the lender are open to the public for carrying on substantially all of its business functions.
4. If a borrower uses a mortgage broker, the mortgage broker shall distribute the booklet and the lender need not do so.
5. If the loan involves an open-end credit plan as defined by Regulation Z [12 C.F.R. § 226.2(a)(20)], a lender providing the borrower with a copy of the brochure entitled “When Your Home is On the Line: What You Should Know About Home Equity Lines of Credit” or successor brochure issued by the Federal Reserve Board, is in compliance with this special information requirement.
6. The special information booklet is not applicable to the following transactions: refinancings; closed-end loans [defined in Reg. Z, 12 C.F.R. § 226.2(a)(10)] when the lender takes a subordinate lien; reverse mortgages; and any other federally related mortgage loan whose purpose is not the purchase of a 1-to-4 family residential property.
B. Good Faith Estimate -- § 3500.7
1. Lender/Mortgage Broker to Provide GFE
The lender or mortgage broker must provide a “good faith estimate” (GFE) (See, RESPA, Appendix C for suggested format) by delivering it or placing it in the mail to the loan applicant or, if the applicant agrees, by fax, e-mail, or other electronic means, not later than three business days after the application or information sufficient to complete an application is received. The lender is responsible for ascertaining whether the GFE has been provided. There is an exemption from providing a good faith estimate if a mortgage loan application is denied, or the applicant withdraws the application, prior to the end of the three business day period.
2. Application Process
The new rules set forth a new definition and amended requirements for the mortgage loan application and shopping process. Application means the submission of a borrower’s financial information in anticipation of a credit decision. An application may either be in writing or electronically submitted, including a written record of an oral application.
a. Content
The application must contain six items of information - the borrower’s name, monthly income, social security number to obtain a credit report, the property address, an estimate of the value of the property, the loan amount sought, and any other information deemed necessary by the originator. (Loan originators would be free to determine what they need to issue a GFE. HUD specifically states that originators may ask for additional information beyond these six items.)
b. Timing Requirement
Once the applicant submits all information to the loan originator deemed necessary by the originator to process the GFE, the originator is required to deliver or mail a GFE to the applicant within 3 business days.
c. Application and Other Fees
HUD is limiting the fee that maybe charged for providing the GFE. Under the final rule, HUD restricts creditors from imposing a fee on a consumer in connection with the application before the consumer has received the TILA disclosure. HUD makes an exception that allows imposition of a fee that is “bona fide and reasonable” in amount for obtaining the consumer’s credit history. Loan originators are expressly prohibited from charging, as a condition of providing a GFE, any fee for an appraisal, inspection, or similar settlement service.
d. Post-GFE Fees
After the GFE has been given to applicant, the loan originator may collect additional fees needed to proceed to final underwriting for borrowers who decide to proceed with a loan from that originator.
3. Revised GFEs
HUD is imposing tolerances and disclosure guarantee requirements that mandate much greater precision for disclosures of costs associated with federally-related residential mortgage loans. These revisions are designed to ensure that figures disclosed in the GFE remain valid for a period of time in order to enable consumers to adequately shop the market.
a. 10-Day Guarantee
The final rule requires that settlement costs disclosed in the GFE be valid for a full 10 days from when the GFE is provided, or longer if the loan originator extends the period. Estimates for the following charges are excepted from this requirement: the interest rate, charges and terms dependent upon the interest rate (which includes the charge or credit for the interest rate chosen), the adjusted origination charges, and per diem interest. (By implication, therefore, the costs included in this 10-day guarantee would include the following: required services selected by lender or borrower, title services and lender’s title insurance, owner’s title insurance, government recording charges, transfer taxes, initial escrow deposits, and homeowners’ insurance.)
The final rule provides that the interest rate stated on the GFE will be available until a date set by the loan originator for the loan. The final rule provides that the loan originator indicate on the GFE the period during which the interest rate is available. After that time period, the interest rate, the interest rate related charges, and loan terms, including some of the loan originator charges, the perdiem interest, and the monthly payment estimate for the loan, can change until the interest rate is locked. HUD is not requiring the interest rate to be available for any specific length of time.
4. Tolerances
Loan originators will be prohibited from exceeding at settlement certain amounts listed on the GFE, absent “changed circumstances.” Under the final rule, the tolerances vary in accordance to classes of fees or payments.
a. Zero Tolerance
Actual charges at settlement may not exceed the amounts included on the GFE for: (i) origination charges; (ii) the credit or charges for the interest rate chosen, while the borrower’s interest rate is locked; (iii)adjusted origination charges,while the borrower’s interest rate is locked; and (iv) transfer taxes.
b. Ten Percent Tolerance
The sum of the charges at settlement for the following services may not be greater than 10 percent above the sum of the amounts listed on the GFE: (i) lender-required settlement services, where the lender selects the third party settlement service provider; (ii) lender-required services, title services and required title insurance, and owner‘s title insurance, when the borrower uses a settlement service provider identified by the loan originator; and (iii) government recording charges.
c. No Tolerance
The amounts charged for all other settlement services included on the GFE may change at settlement.
5. Binding GFEs
The final rule allows originators to revise a GFE and avoid the strictures of the tolerances in certain instances of “changed circumstances.” The term “changed circumstances” means: (i) acts of God, war, disaster, or other emergency; (ii) information particular to the borrower or transaction that was relied on in providing the GFE and that changes or is found to be inaccurate after the GFE has been provided. This may include information about the credit quality of the borrower, the amount of the loan, the estimated value of the property, or any other information that was used in providing the GFE; (iii) new information particular to the borrower or transaction that was not relied on in providing the GFE; or (iv) other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems. The rules clarify, however, that “changed circumstances” does not include market price fluctuations by themselves
Under each instance listed below, the loan originator must provide a revised GFE within three business days of the changes, and must document the reason that a new GFE was provided. Loan originators must also retain documentation of reasons for providing a new GFE for no less than three years after settlement.
i. Changed circumstances affecting settlement costs. If changed circumstances result in increased costs for any settlement services such that the charges at settlement would exceed the tolerances for those charges, the loan originator may provide a revised GFE to the borrower.
ii. Changed circumstances affecting loan. If changed circumstances result in a change in the borrower’s eligibility for the specific loan terms identified in the GFE.
iii. Borrower-requested changes. If a borrower requests changes to the mortgage loan identified in the GFE that change the settlement charges or the terms of the loan.
a. Transactions Involving New Home Purchases
The final rule recognizes that in cases of new construction, the original GFE maybe provided long before settlement is anticipated to occur. In such cases, the originator may provide a clear and conspicuous disclosure to the borrower that a revised GFE may be provided at anytime up until 60 calendar days prior to closing. If no such disclosure is provided,or if no revised GFE is actually given, then the normal rules defined herein would apply.
b. Expiration of Original GFE
If a borrower does not express an intent to continue with an application within 10 business days after the GFE is provided, or such longer time specified by the loan originator, the loan originator is no longer bound by the GFE.
c. Opportunity to Cure
The final rule provides that originators that violate the GFE requirements shall be deemed to have violated Section 5 of RESPA. However, the final rule also provides a loan originator with an opportunity to cure any violation of the tolerance by reimbursing the borrower any amount by which the tolerances were exceeded.
i. Reimbursement may be made at settlement or within 30 calendar days after settlement.
ii. HUD will deem a payment to have been provided in a timely fashion if it is placed in the mail by the loan originator within 30 calendar days after settlement.
6. Required Use of a Particular Provider
a. If the lender requires the use of a particular provider of a settlement service, other than then lender’s own employees, and also requires the borrower to pay any portion of the cost of such service, then the good faith estimate must clearly state that use of the particular provider is required and that the estimate is based on charges of the designated provider, give the name, address and telephone number of each such provider, and describe the nature of any relationship between each such provider and the lender.
b. A lender is deemed to have “required” the use of a particular provider of a settlement service whenever use of such provider is a condition of the availability to such person of some distinct service or property and the person will pay (in whole or in part) for the settlement service of such provider. Note: Offering a settlement services “package” or offering discounts or rebates for purchasing multiple settlement services is not a requires use if the package, discount or rebate is optional to the purchaser and such discount is below generally available prices and not made up by the passing on of higher costs elsewhere in settlement.
7. Mortgage Broker Fees
a. Mortgage Broker
A “mortgage broker” is a person (not an employee of the lender) or entity that serves as an intermediary between a borrower and a lender in a transaction involving a federally related mortgage loan, including such a person or entity that closes the loan in its own name in a table funded transaction.
b. Broker Fee Disclosure
In the final rule, HUD is modifying the manner in which mortgage broker compensation is disclosed to consumers. HUD is requiring that moneys paid to mortgage brokers be disclosed in two alternative ways. First, there is to be full disclosure of the total payments to the mortgage broker, set forth on page two of the revised GFE form. Second, a “tradeoff table” on page three of the GFE would divulge to the consumer the trade-off between upfront fees and higher interest rates.
C. HUD-1 or HUD-1A Settlement Statements -- §§ 3500.8 - .12
The HUD-1 Settlement Statement form is used in every settlement involving a RESPA covered transaction, unless its use is specifically exempted, in which there is a borrower and a seller. When there is a borrower and no seller (e.g., a refinancing or a subordinate lien loan), the HUD-1 may be used by filling in the borrower’s side of the form or alternatively, the HUD-1A from may be used. The use of the HUD-1 or HUD-1A form is exempted for open-end lines of credit (home equity plans) that are covered by Regulation Z (Truth-in-Lending). The form must be completed by the settlement agent.
1. GFE/HUD-1 Comparison
HUD’s final rule completely modifies the HUD-1/1A forms to include a new arrangement, different classifications, and a number of modifications to ensure, for comparison purposes, that classes of charges are congruent with their corresponding “blocks” on the GFE. To facilitate comparison between the HUD-1 and the GFE, each designated line in Section L on the final HUD-1 includes a reference to the relevant line from the GFE. A copy of the new HUD-1 Model Form is attached at Exhibit B. Accompanying the new Settlement Form is a modified set of “instructions” for the HUD-1, meant to clarify the specific methodology for itemizing the settlement fees.
a. Origination Services
Generally, the broad requirements for HUD-1 itemizations remain the same - the HUD-1 must separately itemize every service provided by a third party (i.e., other than the loan originator) to show the name of the party ultimately receiving the payment, along with the total amount received.
b. Title Services
The HUD–1 must separately identify each service provider performing title services, along with total amount received. If a party other than the title company listed on line 1101 of the HUD–1 provides services that are separate from providing title insurance (attorney and settlement or escrow agent services), the title company should separately itemize those services with the total amount paid to that provider.
To further facilitate comparability between the GFE and HUD-1, HUD has determined to incorporate a third page to the HUD-1 that includes a chart that (1) compares the amounts listed for particular settlement costs on the GFE with the total costs listed for those charges on the HUD-1, and (2) summarizes the final loan terms of the borrower’s loan.
2. Average Cost Pricing
Charges for third party services may be computed through average cost pricing mechanisms, and may be disclosed as such on the HUD-1, in accordance with the specific computation methods provided in the rule.
The final rule provides that an average charge may be used to disclose charges relating to any settlement service, provided that the total amounts received from borrowers for that service for a particular class of transactions do not exceed the total amounts paid to the providers of that service for that class of transactions.
A settlement service provider may define a “class of transactions” based on the period of time, type of loan, and geographic area. The preamble sets forth two examples for such determinations -
The settlement service provider must recalculate the average charge at least every 6 months. In order to prevent selective use of an average charge, the final rule provides that if an average charge is used in any class of transactions defined by the settlement service provider, then that provider must use the same average charge for every transaction within that class.
a. Restriction:
The final rule prohibits the use of average charges for settlement services where the charge is based on the loan amount or the value of the property.
b. Enforcement:
The final rule requires that originators retain all documentation showing that average pricing is accurate in a given time period. Such records must be retained for three years. In the event that a violation of Section 8 of RESPA is alleged, the final rule “places the burden on the targeted settlement service provider to demonstrate compliance with a permissible pricing method through the production of relevant records.”
The settlement agent must retain all documentation used to calculate the average charge for a particular class of transactions for at least three years after any settlement for which that average charge was used.
V. SETTLEMENT SERVICES DEFINED – § 3500.2
The term “settlement service” is defined in § 3500.2 to mean any service provided in connection with a prospective or actual settlement including, but not limited to, any one or more of the following:
A. The origination, processing, or funding of a federally-related mortgage loan;
B. The rendering of services by a mortgage broker (including counseling, taking of applications, obtaining verifications and appraisals, and other loan processing and origination services, and communicating with the borrower and lender);
C. The providing of any services related to the origination, processing, or funding of a federally-related mortgage loan;
D. The providing of title services, including title searches, title examinations, abstract preparation, insurability determinations, and the issuance of title commitments and title insurance policies;
E. The rendering of services by an attorney;
F. The preparing of documents, including notarization, delivery and recordation;
G. The rendering of credit reports and appraisals;
H. The rendering of inspections, including inspections required by applicable law, or any inspections required by the sales contract or mortgage documents prior to transfer of title;
I. The conducting of settlement by a settlement agent any related services;
J. The providing of services involving mortgage insurance;
K. The providing of services involving hazard, flood or other casualty insurance or homeowners warranties;
L. The providing of services involving mortgage life, disability or similar insurance designed to pay a mortgage loan upon disability or death of a borrower, if required by the lender as a condition of the loan;
M. The providing of services involving real property taxes or any other assessments or charges on the real property;
N. The rendering of services by a real estate agent or broker; and
O. The providing of any other services for which a settlement service provider requires a borrower or seller to pay.
VI. MORTGAGE SERVICING TRANSFER DISCLOSURES – § 3500.21
Section 6 of RESPA sets forth additional notice requirements and other rights for borrowers and provides for the collection of damages and costs by borrowers from servicers in the event of noncompliance. The mortgage servicing transfer regulations are found in § 3500.21 of Regulation X.
A. Disclosure and Notice Requirements for Mortgage Lenders
The “mortgage servicing loan” disclosure provisions require originators of “federally related mortgage loans” to comply with additional disclosure and notice requirements. A “mortgage servicing loan” is defined under this section of RESPA as a “federally related mortgage loan” as that term is defined in § 3500.2 of the regulation, subject to the exemptions in § 3500.5, when the loan is secured by a first lien. The definition does not apply to subordinate lien loans or open-end lines of credit (home equity plans) covered by Regulation Z (Truth-in-Lending), including open-end lines of credit secured by a first lien.
B. Servicing Disclosure Statement
At the time an application for a covered loan is submitted or within three business days after submission of the application, the lender must disclose certain general information regarding the lender’s policy on servicing the loan. The lender must provide a Servicing Disclosure Statement (the “Statement”) to each applicant for a mortgage loan covered by the rules. The statement must be provided at the time the application is submitted, or within three business days after submission of the application. Each applicant or co-applicant must sign an “Acknowledgment of Receipt of the Servicing Disclosure Statement” (the “Acknowledgment”) before settlement.
In the case of a face-to-face interview with one or more applicants, the Statement must be delivered at the time of application. An applicant present at the interview may sign the Acknowledgment at that time and may also accept delivery of the Statement on behalf of the other applicants.
If there is no face-to-face interview with an applicant, the lender must deliver the Statement by mail with prepaid first-class postage within three business days from receipt of the application. Co-applicants residing at the same address need only be provided with one copy of the Statement, but if the applicants reside at different addresses, each co-applicant must receive a copy of the Statement. The lender is relieved of the requirement to provide a Statement if the application is turned down within three business days after receipt of the application.
The Statement is required to contain the following information:
1. The effective date of the transfer of servicing;
2. The name, consumer inquiry address (including, at the option of the servicer, a separate address where qualified written requests must be sent), and a toll-free or collect-call telephone number for an employee or a department of the transferee servicer;
3. A toll-free or collect-call telephone number for an employee or department of the transferor servicer that can be contacted by the borrower for answers to servicing transfer inquiries;
4. The date on which the transfer or servicer will cease to accept payments relating to the loan and the date on which the transferee servicer will begin to accept such payments. These dates shall either be the same or consecutive days;
5. Information concerning any effect the transfer may have on the terms or the continued availability of mortgage life or disability insurance, or any other type of optional insurance, and any action the borrower must take to maintain coverage;
6. A statement that the transfer of servicing does not effect any other term or condition of the mortgage documents, other than terms directly related to the servicing of the loan; and
7. A statement of the borrowers rights in connection with compliant resolution, including the information relating to the duty of a loan servicer to respond to borrower in queries.
Timing of Notice
1. The transfer or servicer shall deliver the notice of transfer to the borrower not less than 15 days before the effective date of the transfer of the servicing of the mortgage servicing loan;
2. The transferee servicer shall deliver the notice of transfer to the borrower not more than 15 days after the effective date of the transfer; and
3. The transferor and transferee servicers may combine their notices into one notice, which shall be delivered to the borrower not less than 15 days before the effective date of the transfer of the servicing of the mortgage servicing loan.
There is a model format for complying with the mortgage servicing disclosure notice requirements. Several options are provided and additional information may be added by the lender if necessary to enhance or clarify the model language. The model format provides the following options:
You are applying for a mortgage loan covered by the Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. 2601 et.seq.). RESPA gives you certain rights under Federal law. This statement describes whether the servicing for this loan may be transferred to a different loan servicer. “Servicing” refers to collecting your principal, interest, and escrow payments, if any, as well as sending any monthly or annual statements, tracking account balances, and handling other aspects of your loan. You will be given advance notice before a transfer occurs.
Servicing Transfer Information
1. Option A. We may assign, sell, or transfer the servicing of your loan while the loan is outstanding; or
2. Option B. We do not service mortgage loans of the type for which you applied. We intend to assign, sell, or transfer the servicing of your mortgage loan before the first payment is due.
3. The loan for which you have applied will be serviced at this financial institution and we do not intend to sell, transfer, or assign the servicing of the loan.
C. Treatment of Loan Payments After Transfer
During the first 60 days after the effective date of the transfer, borrowers are permitted to continue making payments to the old servicer without risk of being delinquent under the loan documents. Therefore, no late fee may be assessed against the borrower for 60 days after servicing is transferred if payment is delivered to either the old servicer or the new servicer and, if they are received by either servicer on a timely basis.
D. Duty of Loan Servicer to Respond to Borrower Inquiries
There are specific procedures that servicers must follow when borrowers contact them in writing to request information about the loan account or claim that an error has been made in their account. If a borrower submits a written request to the servicer, identifying the borrower’s name and account number and the nature of the request (a “qualified written request”), the servicer has 20 business days after receipt of the borrower’s request to acknowledge receipt of the request. However, the receipt is not necessary if the action requested by the borrower is taken within the 20 business day period and the borrower is notified of that action.
A qualified written request from a borrower means a written correspondence (other than notice on a payment coupon or other payment medium supplied by the servicer), that enables the servicer to identify the name and account of the borrower, and includes a statement of the reasons that the borrower believes the account is in error, if applicable, or that provides sufficient detail to the servicer regarding the information sought by the borrower. A written request does not constitute a qualified written request if it is delivered to a servicer more than one year after either the date of transfer of servicing or the date that the mortgage servicing loan amount was paid in full, whichever date is applicable.
Within 60 business days after receipt of the request, the servicer must:
1. Make appropriate corrections in the account of the borrower, including the crediting of any late charges or penalties, and transmit to the borrower a written notification of the correction; or
2. After conducting an investigation, provide the borrower with a written explanation or clarification that includes: (a) to the extent applicable, a statement of the servicer’s reasons for concluding the account is correct; or (b) information requested by the borrower, or an explanation of why the information requested is unavailable or cannot be obtained by the servicer.
In each case, the servicer’s response must include the name and telephone number of an employee, officer or department of the servicer that can provide assistance to the borrower. In addition, the servicer may not provide adverse information regarding any payment that is the subject of the request to any consumer reporting agency during the 60-business day period. This limitation does not prevent a servicer or lender from pursuing any of its legal remedies.
The final rule made technical amendments to formally conform RESPA’s transfer of servicing regulations to statutory provisions by eliminating the requirement that applicants for federally related mortgage loans be provided a disclosure describing the lender’s historical practice regarding the sale or transfer of servicing rights, and the requirement that loan applications contain signed statements from applicants acknowledging that they have read and understood the disclosure provided.
VII. RESPA MARKETING SERVICE AGREEMENTS FAQS
The Consumer Financial Protection Bureau (CFPB) has published guidance in the form of Frequently Asked Questions (FAQs) on the Real Estate Settlement Procedures Act (RESPA) Section 8 topics. The FAQs, which may be viewed at (https://www.consumerfinance.gov/policy-compliance/guidance/mortgage-resources/real-estate-settlement-procedures-act/real-estate-settlement-procedures-act-faqs/) provide an overview of the provisions of RESPA Section 8 and respective Regulation X sections, and address the application of certain provisions to common scenarios described in CFPB inquiries involving gifts and promotional activities, and marketing services agreements (MSAs).
Additionally, CFPB determined that Compliance Bulletin 2015-05, RESPA Compliance and Marketing Services Agreements, does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X and therefore is rescinding it. The Bureau’s rescission of the Bulletin does not mean that MSAs are per se or presumptively legal. Whether a particular MSA violates RESPA Section 8 will depend on specific facts and circumstances, including the details of how the MSA is structured and implemented.
VIII. PROHIBITION AGAINST KICKBACKS, UNEARNED FEES OR OTHER THINGS OF VALUE
A. Any person who gives or accepts any fee, kickback (payment in excess of the reasonable value of goods provided or services rendered) or other thing of value (any payment, advance, fund, loan, service or other consideration) pursuant to any agreement or understanding, oral or otherwise, for the referral of settlement business is in violation of § 8 of RESPA.
B. No person shall give or accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally-related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and also violates § 8 of RESPA.
C. A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such a person will pay for such settlement service or business. A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use a particular provider of a settlement service or business.
D. Regulation X, § 3500.14 and Appendix B define terms and provide examples of the meaning and coverage of the prohibition against kickbacks and unearned fees.
E. Yield spread premiums: Section 8(a) of RESPA prohibits any person from giving and any person from accepting “any fee, kickback, or thing of value pursuant to an agreement or understanding, oral or otherwise” that real estate settlement service business shall be referred to any person. Section 8(b) prohibits anyone from giving or accepting “any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service…other than for services actually performed.” Section 8(c) of RESPA provides, “Nothing in ‘Section 8’ shall be construed as prohibiting…(2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed….” In 2001, the Department of Housing and Urban Development (HUD) issued a Statement of Policy clarifying its position on yield spread premiums (payments made to brokers and lenders that act as brokers for loans with higher interest rates) and reiterating its long-standing interpretation of RESPA’s § 8(b) prohibitions. HUD’s clarification is in response to court decisions: (1) that would have made it easier to file class action suits against lenders; and (2) regarding overcharges by settlement service providers. The Statement of Policy reiterates the importance of disclosures to allow borrowers to choose the best loans for themselves and describes disclosures HUD considers to constitute “best practices.”
HUD’s 1999 Statement of Policy established a two-part test for determining the legality of lender payments to mortgage brokers for table funded transactions and intermediary transactions under RESPA: (1) whether goods or facilities were actually furnished or services were actually performed for the compensation paid; and (2) whether the payments were reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed. In applying this test, HUD believes that total compensation should be scrutinized to assure that it is reasonably related to the goods, facilities, or services furnished or performed to determine whether it is legal under RESPA. In the determination of whether payments from lenders to mortgage brokers are permissible under § 8 of RESPA, the threshold question is whether there were goods or facilities actually furnished or services actually performed for the total compensation paid to the mortgage broker. Where a lender payment to a mortgage broker comprises a portion of total broker compensation, the amount of the payment is not, under the HUD test, scrutinized separately and apart from total broker compensation. Yield spread premiums permit home buyers to pay some or all of the up front settlement costs over the life of the mortgage through a higher interest rate. Since the mortgage carries a higher interest rate, the lender is able to sell it to an investor at a higher price. In turn, the lender pays the broker an amount reflective of this price difference, allowing the broker to recoup the up-front cost incurred on the borrower’s behalf in originating the loan. Payments from lenders to brokers based on the rates of borrowers’ loans are characterized as “indirect” fees and are commonly referred to “yield spread premiums.”
HUD states that it has always been its position that yield spread premiums serve an important purpose in the housing market. Many potential home buyers do not have the cash to pay the up front costs of buying a home. Yield spread premiums help these potential home buyers become home owners by letting them pay less at the time of settlement and instead pay a higher interest rate and monthly payment over the life of the mortgage to cover the settlement costs. HUD also noted that yield spread premiums are a legitimate tool to help families become home owners, but abuses occur when a broker persuades the home buyer to accept a higher interest rate without enjoying lower up front costs. The Statement of Policy reiterates HUD’s position that yield spread premiums are neither per se legal or illegal, and clarifies the test for the legality of such payments. HUD reiterated its policy that yield spread premiums are legal if the broker actually performs services for the borrower and if the total compensation the broker receives is reasonably related to the total value of the services the broker performs. The Policy states that disclosure is especially important when borrowers may be paying yield spread premiums, since they should know as early as possible what their settlement costs will be so they can shop for the best option.
Coverage of the Statement of Policy is restricted to payments to mortgage brokers in table funded and intermediary broker transactions. Lender payments to mortgage brokers (whose mortgage brokers initially fund the loan and then sell the loan after settlement) fall outside the coverage of this Policy, as exempt from RESPA under the secondary market exception.
The HUD Statement of Policy also reiterated the importance of disclosures to allow borrowers to choose the best loan for themselves and describes disclosures that HUD considers to constitute “best practices.” HUD emphasized the importance of disclosing broker fees, including yield spread premiums. In HUD’s view, meaningful disclosure includes many types of information: what services a mortgage broker will perform; the amount of the broker’s total compensation for performing those services (including any yield spread premium paid by the lender); and whether or not the broker has an agency or fiduciary relationship with the borrower.
The disclosure should also make the borrower aware that he or she may pay higher up front costs for a mortgage with a lower interest rate or conversely pay a higher interest rate in return for lower up front costs, and should identify the specific trade-off between the amount of the increase in the borrower’s monthly payment (and also the increase in the interest rate) and the amount by which up front costs are reduced. HUD believes the disclosure of the information and written acknowledgement by the borrower that he or she has received the information should be provided early in the transaction. Such disclosure facilitates comparison shopping by the borrower, to choose the best combination of up front costs and mortgage terms from his or her individual standpoint. HUD regards full disclosure and written acknowledgment by the borrower, at the earliest possible time, as a best practice. HUD believes that improved earlier disclosures regarding mortgage broker compensation and the entry of yield spread premiums as credits to borrowers on the GFE and the HUD-1 settlement statement (in the “200” series of the HUD-1 form, among the “amounts paid by or on behalf of borrowers”) are both useful and complementary forms of disclosure. HUD also believes that used together these disclosure methods offer greater assurance that lender payments to mortgage brokers serve borrowers’ best interests.
While the Statement of Policy only covers certain lender payments to mortgage brokers, HUD also believes that similar information on the trade-off between lower up front costs and higher interest rates and monthly payments should be disclosed to borrowers on all mortgage loan originations, not merely those originated by brokers. HUD is aware that while yield spread premiums are not used in loans originated by lenders, lenders are able to offer loans with low or no up front cost required at closing by charging higher interest rates and recouping the costs by selling the loans into the secondary market for a price representing the difference between the interest rate on the loan and the “par” (market) interest rate as the yield spread premium does on a loan originated by a broker. HUD believes that all lenders and brokers should provide the level of consumer disclosures that the purposes of RESPA intend and that fair business practices demand.
F. Overcharges by settlement service providers (unearned fees): HUD reiterated its long-standing position that it may violate § 8(b) and the Department’s implementing regulations for: (1) two or more persons to split a fee for settlement services, any portion of which is unearned; (2) one settlement service provider to mark-up the cost of the services performed or goods provided by another settlement service provider without providing additional actual, necessary and distinct services, goods or facilities to justify the additional charge; or (3) one settlement service provider to charge the consumer a fee where no work, nominal work or duplicity of work is done or the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed.
A settlement service provider may not levy an additional charge upon a borrower for another settlement service provider’s services without providing additional services that are bona fide and justify the increased charge. Accordingly, a settlement service provider may not mark-up the cost of another provider’s services without providing additional settlement services. Such payment must be for services that are actual, necessary and distinct services provided to justify the charge. This portion of the Statement of Policy was designed to clarify that “unearned fees” need not be passed from one settlement provider to another in order for such fees to violate § 8(b).
G. Disclosures – Best Practices: The Policy Statement reiterated the importance of disclosures to allow borrowers to choose the best loan for themselves and describes disclosures that HUD considers to constitute “best practices.” HUD emphasized the importance of disclosing broker fees, including yield spread premiums. In HUD’s view, meaningful disclosure includes many types of information: what services a mortgage broker will perform; the amount of the broker’s total compensation for performing those services (including any yield spread premium paid by the lender); and whether or not the broker has an agency or fiduciary relationship with the borrower.
The disclosure should also make the borrower aware that he or she may pay higher up front costs for a mortgage with a lower interest rate or conversely pay a higher interest rate in return for lower up front costs, and should identify the specific trade-off between the amount of the increase in the borrower’s monthly payment (and also the increase in the interest rate) and the amount by which up front costs are reduced. HUD believes the disclosure of the information and written acknowledgement by the borrower that he or she has received the information should be provided early in the transaction. Such disclosure facilitates comparison shopping by the borrower, to choose the best combination of up front costs and mortgage terms from his or her individual standpoint. HUD regards full disclosure and written acknowledgment by the borrower, at the earliest possible time, as a best practice.
HUD believes that improved earlier disclosures regarding mortgage broker compensation and the entry of yield spread premiums as credits to borrowers on the GFE and the HUD-1 settlement statement (in the “200” series of the HUD-1 form, among the “amounts paid by or on behalf of borrowers”) are both useful and complementary forms of disclosure. HUD also believes that used together these disclosure methods offer greater assurance that lender payments to mortgage brokers serve borrowers’ best interests.
A CFPB (Consumer Financial Protection Bureau) Advisory Opinion on Digital Mortgage Comparison Shopping Platforms addressed the potential for RESPA Section 8 issues. At issue are the ways in which these platforms may favor one lender or another when displaying search results to consumers searching for mortgages and real estate settlement services.
One of the prohibitions in RESPA Section 8, today found in Regulation X at 12 CFR § 1024.14, is the prohibition against any fees, kickbacks, or things of value for referring settlement services in connection with a federally related mortgage loan. This has become a concern in relation to “Digital Mortgage Comparison Shopping Platforms” (online marketplaces) which allow consumers to search for and compare options for mortgages or other settlement services, which in turn create potential leads for the providers that participate in the platform’s services.
The Advisory Opinion focuses on instances in which online marketplaces appear to consumers as if they provide objective comparisons between lenders and settlement service providers but are actually displaying results influenced by the fees paid by the lenders or providers. This could either take the form of some lenders paying one rate and other lenders paying another rate (with the higher presumed to be for enhanced placement), or some lenders not paying for advertising and other lenders paying for advertising. While the Advisory Opinion focuses on the operator of the online marketplace, RESPA works both ways (paying or receiving) so if the operator is violating RESPA in receiving payment for these referrals, the bank could easily also be found to be in violation by virtue of making the payments.
The bank must be highly aware that when paying for “advertising space” such as a listing with an online marketplace that the payments can only be for “neutral” placement on the website. To the extent that the payment is for non-neutral placement, that can constitute “referral activity,” and so if even part of the payment is interpreted as attributable to the “enhanced placement,” that can be at least a RESPA Section 8 violation – to the platform operator and/or the bank, if not also an Unfair, Deceptive, or Abusive Acts or Practices concern.
IX. AFFILIATED BUSINESS ARRANGEMENT – REGULATION X, § 3500.15
An “affiliated business arrangement” (ABA) is an arrangement in which:
An ABA does not violate RESPA § 8 (See, Regulation X, § 3500.14 and 12 U.S.C. 2607) as long as the following three elements of the § 8(c)(4) exemption are met:
The ABA disclosure must be provided on a separate piece of paper no later than at the time of the referral, however, lenders making such referrals may provide the disclosure with the good faith estimate. Both § 3500.15 and Regulation X, Appendix B define terms and provide specific examples of affiliated business situations.
COMPLIANCE NOTE: HUD issued a policy statement on “Sham Controlled Business Arrangements” (1996), now referred to as ABAs. While the name of such arrangements changed since 1996, HUD’s interpretation has not changed. The policy statement:
The Office of the Comptroller of the Currency (OCC) issued OCC Bulletin OCC 2005-270 (August 4, 2005) regarding “Sham Controlled Business Arrangements”, noting that third parties have approached some national banks to form ABAs for the purpose of offering real estate settlement services. The OCC warns that national banks choosing to enter into ABAs with third parties must ensure that such arrangements comply with § 8 (12 U.S.C. 2607). A previous warning was issued by the OCC as an attachment to OCC Bulletin 96-41 (1996).
Since RESPA’s § 8’s underlying federal statute provides for substantial penalties and liabilities [See, 12 U.S.C. 2607(d)], national banks that have formed or plan to form ABAs with third parties to perform real estate settlement services should be aware of and review HUD's policy statement to make certain that the structure, operating agreement and activities of ABAs do not violate RESPA § 8. The Bulletin also advises that banks seeking to provide real estate settlement services through operating subsidiaries or noncontrolling investments should also review the guidance found in the OCC’s Licensing Manual, Investment in Subsidiaries and Equities [12 C.F.R. 5.34(e)(5)(v)(V)].
X. TITLE COMPANIES – § 3500.16
Section 3500.16 prohibits any seller of property to be purchased with the assistance of a “federally-related mortgage loan” from requiring, directly or indirectly, as a condition of selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.
XI. ESCROW ACCOUNTS
A. Limitations
RESPA § 10 establishes statutory limits on the amount that lenders may legally require borrowers to deposit in escrow accounts. These provisions limit the amounts that a lender may charge a borrower at the creation of an escrow account and during the lifetime of the account.
At the time a lender creates an escrow account, the lender may only charge the borrower an amount sufficient to pay the charges respecting the mortgaged property, such as taxes and insurance that are attributable to the period from the date such payment(s) were last paid until the first full installment payment under the mortgage. In addition, the lender may charge the borrower a cushion to cover unanticipated expenses. The statute limits the cushion to one-sixth of the estimated total annual payments from the account.
This section also sets limits on charges to a borrower over the rest of the lifetime of the account. It provides that a lender may charge a borrower a monthly sum equal to one-twelfth of the total annual escrow payments that the lender reasonably anticipates paying from the account. In addition, the lender may add an amount to maintain a cushion equal to one-sixth of the estimated total annual payments from the account.
B. Escrow Account Procedures - Aggregate Accounting
The HUD rule governing the creation and administration of escrow accounts under Section 10 of RESPA establishes a nationwide standard accounting method known as “aggregate accounting”. Under this rule, mortgage servicers are required to use the aggregate accounting method for escrow accounts involving federally related mortgage loans.
The rules apply to servicers of RESPA loans. A servicer is the person responsible for the servicing of a loan, and includes the person who makes or holds the loan if that person also services the loan. Servicing a loan means the process of receiving scheduled payments from a borrower, including amounts for escrow accounts, and making payments to the owner of the loan or other third parties. These rules are applicable to banks making and servicing RESPA loans and to subsequent servicers for those loans.
An escrow account for purposes of the rules means any account that a lender or servicer establishes or controls on behalf of a borrower to pay taxes, insurance or other charges with respect to a RESPA loan. The rules apply to voluntary and required escrow accounts. However, escrow accounts that are under the borrower’s total control are not subject to the rules.
The servicer must examine the mortgage loan documents to determine the applicable cushion for each escrow account. If the mortgage loan documents provide for lower cushion limits, then the terms of the loan documents apply. When the terms of any mortgage loan document allow greater payments to an escrow account than allowed by RESPA, the provisions of RESPA control the applicable limits.
C. Aggregate Accounting Escrow Method
Effective May 24, 1995, lenders and servicers became required to use the aggregate method to determine escrow requirements on new loans. Specifically, the rule requires use of the aggregate method for all escrow accounts established in connection with loans originated after May 24, 1995 (“post-rule accounts”). Under the aggregate method, the amounts that a lender or servicer may require to be placed in an escrow account are determined by looking at the account as a whole (as opposed to setting up separate accounts for individual items) and the total amount in the account must fall, at least once during the escrow year, to an amount which is less than or equal to the permitted cushion (one-sixth of the annual estimated disbursements from the account, i.e., two months of the borrower’s escrow payments or a lesser amount specified by state law or by the mortgage documents).
To conduct an analysis under this method, the lender or servicer must project a trial balance for the account as a whole over the upcoming year, assuming that it will make the estimated disbursements on the relevant disbursement dates and that the borrower will make payments into the account on the relevant payment due dates. Once the trial running balance has been projected, an adjustment to the initial balance can be made to assure that the aggregate amount in the account falls to the required minimum at least once during the escrow year.
D. Escrow Accounts and State Law
Many questions have been raised regarding whether, notwithstanding RESPA, the terms of applicable mortgage documents or state law authorize servicers to establish escrow accounts and, if so, the level of cushions that may be required. The final rule clarifies this issue as follows:
1. If the mortgage documents provide for lower cushion limits or less pre-accrual than the rule, then the terms of the loan documents apply.
2. Where the terms of any mortgage document allow greater payments to an escrow account than allowed by the rule, then the rule controls the applicable limits.
3. Where the mortgage loan documents do not specifically establish an escrow account, HUD states that whether a servicer may establish an escrow account for the loan is a matter for determination by State law.
4. If the mortgage loan document is silent on the escrow account limits (for cushion or per-accrual) and a servicer establishes an escrow account under State law, then the limitations of the rule apply unless State law provides for a lower amount. If the loan documents provide for escrow accounts up to the RESPA limits, then the servicer may require the maximum amounts consistent with the rule, unless a State law sets a lesser amount.
In this regard, Nebraska Revised Statutes Section 45-101.05, provides as follows:
45-101.05. No lender, in connection with a mortgage loan, shall require the borrower or prospective borrower to deposit in any escrow account which may be established in connection with such loan for the purpose of assuring payment of taxes, insurance premiums or other charges with respect to the property, prior to or upon the date of settlement, an aggregate sum in excess of the total amount of such taxes, insurance premiums and other charges which are attributable to the period beginning on the last date on which each such charge would have been paid under the normal lending practice of the lender if the selection of each such date constitutes prudent lending practice and ending on the due date of its first full installment payment under the mortgage plus a cushion that shall be no greater than one-sixth of the estimated total annual payments to be made from the escrow account for such taxes, insurance premiums, and other charges during the twelve-month period beginning on the date of settlement; or
To deposit in any such escrow account in any month beginning after the date of settlement a sum for the purpose of assuring payment of taxes, insurance premiums or other charges with respect to the property in excess of one-twelfth of the total annual escrow account payments which the lender reasonably anticipates paying from the escrow account for such taxes, insurance premiums, and other charges plus a cushion that shall be no greater than one-sixth of the estimated total annual payments to be made from the escrow account for such taxes, insurance premiums, and other charges, except that if the lender determines that a shortage exists or that there will be a deficiency on the due date the lender shall not be prohibited from requiring additional monthly deposits in such escrow account of pro rata portions of the shortage or deficiency corresponding to the number of months from the date of the lender’s determination of such shortage or deficiency to the date upon which such taxes, insurance premiums and other charges would be paid under the normal lending practice of the lender if the selection of each such date constitutes prudent lending practice.
NOTE: Under Nebraska law, a lender may charge a borrower a monthly sum equal to one-twelfth of the total annual escrow payments that the lender reasonably anticipates paying from the account. In addition, the lender may add an amount to maintain a cushion equal to one-sixth of the estimated total annual payments from the account.
“Payment Shock” Issue. What should a mortgage servicer do to address the borrower’s lack of warning or preparedness for the fact that a significant increase in escrow payments (“payment shock”) is likely to occur in a following year for items such as property taxes? HUD’s response is in the form of a guidance effective February 20, 1998.
The “payment shock” issue concerns what should be the proper accounting method to calculate escrow payments where the lender or servicer anticipates the disbursements for items such as property taxes will increase substantially in the second year of the escrow account and the consumer will experience a substantial increase in escrow payments as a result.
“Payment shock” involving a substantial increase in property taxes may occur in the second year following new construction. In these cases, the charges for the first year taxes are based on the assessed value of the unimproved property, while the second year’s taxes are based on the improved value of the property. A substantial increase in payments may also occur when a tax disbursement that would normally appear on the projection for the coming year is paid prior to the borrower’s first regular payment (i.e. these regularly occurring taxes do not appear in the projection). Reassessments after a property is sold may also cause a substantial second-year increase.
HUD’s current escrow rule provides for calculating escrow payments based on the projection of escrow disbursements for a twelve-month period. The installment payment amount disclosed by a lender at closing cannot require over-escrowing (an amount greater than RESPA permits), during the first twelve-month period of a loan even if that would help the borrower build up an advance for a large expected increase in property taxes in the second year. When disbursements from the escrow account increase substantially after the initial twelve-month period, the result is likely to be a substantial increase in the borrower’s monthly payments (payment shock), including possibly even a required lump-sum payment to make up for a shortfall in the escrow account.
While HUD considered a number of alternatives to address the “payment shock” situation, under its final rule, an election has been made to “make no change in the current requirements.” However, HUD has chosen to provide guidance regarding “best practices,” that servicers are encouraged to follow. Under the final rule, as in the past, servicers may disclose the (payment shock) problem to borrowers, and borrowers may make voluntary overpayments to escrow accounts. Servicers may also calculate short-year statements (in order to start charging increased escrow payments at an earlier time).
Sample Form Addressing the “Payment Shock” Issue. HUD has provided a sample form of written disclosure that can be given to borrowers when the lender or servicer expects a substantial increase in escrow payments in the second year. The disclosure format, which is published as an appendix to the final rule and available from HUD as a “public guidance document,” contains the following information:
The bills paid out of your escrow account are expected to increase substantially after the first year[.] [because __________.] Under normal escrow practices, your monthly escrow payments in the second year could be much higher than in the first.
You may voluntarily choose to make higher payments during the first year to reduce or eliminate the monthly payment increase in the second year. If you are interested in doing this, contact: ___________.
[INSTRUCTIONS TO PREPARER]: You are encouraged to provide this document to borrowers when you anticipate a substantial increase in bills paid out of the escrow account after the first year of the loan. Explanation of the reason for the increase is recommended. The document may be delivered separately or combined with the Initial Escrow Account Statement. In the blank provided, insert the contact for further information, including the mailing address, fax number, e-mail address and/or telephone number of the contact who will provide further information on making voluntary overpayments during the first year. The terms “reserve” or “impound” may be substituted for the terms “escrow account” or “escrow” to reflect local usage. These INSTRUCTIONS TO PREPARER should not appear on the form.
The foregoing format, entitled “Consumer Disclosure for Voluntary Escrow Account Payments,” is designed to clarify that when the originator or servicer provides a disclosure, the consumer may choose whether to make higher payments during the first year to reduce or eliminate the monthly payment increase in the second year. Please note that a lender is not required to give any disclosure (although HUD believes that giving written advice of anticipated increased payments is a “best practice”) and if a disclosure is given, no particular form of disclosure is required (although HUD recommends use of its own form).
E. Escrow Account Analysis
Before establishing an escrow account, the rule requires the servicer to conduct an escrow account analysis to determine the amount the borrower will be required to deposit into the account. For this purpose, the servicer must estimate the disbursements to be paid from the account in the next year and must designate the “disbursement date” for each item to be paid from the account which is the date on which the servicer will actually pay the escrow item from the account. Under the rule, the servicer must use as a disbursement date a date on or before the earlier of the deadline to take advantage of discounts, if available, or the deadline to avoid a penalty. An escrow account analysis must also be performed at the completion of each escrow account computation year to determine the borrower’s monthly escrow account payments in the next computation year.
In conducting an escrow account analysis, the servicer must estimate the amount of escrow account items to be disbursed from the account. If the servicer knows the charge for an item in the next computation year, that amount must be used in estimating the disbursement amounts. If the charge is unknown, the servicer may base the estimate on the preceding year’s charge, or the preceding year’s charge modified by an amount not exceeding the most recent year’s change in the national Consumer Price Index for all urban consumers.
F. Surpluses, Shortages and Deficiencies
1. Surpluses
As indicated above, all servicers must perform an escrow account analysis at the completion of the escrow account computation year. If the analysis discloses a surplus (an amount by which the balance exceeds the target balance under an allowable escrow analysis method) the servicer must refund the surplus to the borrower (if greater than $50) within 30 days from the date of the analysis. Any surplus less than $50 may either be refunded or credited against the next year’s escrow payments. The refund requirements do not apply if the servicer does not receive the borrowers payment within 30 days of the payment due date provided the mortgage documents contain authority to retain escrow monies in a delinquency situation.
2. Shortages
If the analysis discloses a shortage (an amount by which the escrow account contains less than the target balance), the servicer’s options depend upon whether the shortage is less than or greater than one month’s escrow payment. If the shortage is less than one month’s escrow payment, the servicer may require the borrower to pay into the account the amount of the shortage within 30 days or require the borrower to repay the shortage in equal payments over a 12 month period. If the shortage is equal to or greater than one month’s required escrow payment, the servicer, if it does anything, has no choice but to collect the shortage in equal monthly payments over a 12 month period.
3. Deficiencies
When the servicer determines that there is a deficiency in the account (such that the servicer has to advance from its own funds to pay a disbursement from the account), the servicer may require additional monthly deposits to the account to eliminate such deficiency. If the deficiency is less than one months’ escrow payment, the servicer may require the borrower to repay the deficiency within 30 days or require the borrower to repay the deficiency in two or more equal payments over a period of up to 12 months. If the deficiency is equal to or greater than one months’ escrow payment, the servicer may not collect the deficiency in 30 days, but it may still collect it in two or more equal monthly payments over a period of up to 12 months. If the servicer advances funds for the borrower which would cause a deficiency, the servicer must perform an escrow account analysis before seeking repayment of the deficiency from the borrower. The servicer must notify the borrower at least once during the escrow account computation year if there is a shortage or deficiency in the account. A notice may be part of the annual account statement or a separate document.
G. Restrictions on “Pre-Accrual”
Some servicers employ the practice of “pre-accrual,” under which funds needed for disbursement from an escrow account are required to be on deposit in the account at a date prior to the disbursement date. An example would be to require the total amount of funds necessary to pay an escrow charge to be in the account on the first day of the month preceding the month in which the charge will be paid.
The final rule eliminates the use of “pre-accrual” on all new accounts established in connection with mortgage loans originated after May 25, 1995. That is, aside from the unavoidable “pre-accrual” that occurs when a mortgage payment is made by the borrower before the escrow item is paid within the same month, servicers will only be able to use the escrow cushion amount, if necessary, to assure that sufficient funds are available to pay disbursement items. This is particularly true for disbursement items that are paid early in the month. As many borrowers take advantage of any grace period for making their mortgage payment, it will not be uncommon for disbursements made early in the month to precede the receipt of the mortgage and escrow payment from the borrower.
For existing escrow accounts that continue to be analyzed under the single item analysis method during the three year phase-in period, servicers may continue to employ pre-accrual requirements as long as such requirements do not result in escrow balances that exceed the “two month” limit on escrow cushions (or a lower cushion permitted by the mortgage documents or state law). In addition, if the mortgage documents in a pre-accrual account are silent about the amount of pre-accrual, the servicers may not require in excess of one month of pre-accrual.
H. Treatment of Credit Life Insurance Premiums
HUD has clarified that under certain circumstances credit life insurance and similar products are not subject to the escrow account rules. There are only two situations in which these types of payments would be considered for escrow account treatment. These are instances in which the “payment is for insurance required by the lender as a condition of the loan (and therefore is within the definition of “settlement service” in (RESPA)); or when the servicer chooses to place the discretionary payment into the escrow account and pays the item from such account.” In all other instances “discretionary” payments will not be considered escrow items.
I. Escrow Account Statements
In addition to the mortgage servicing disclosure requirements outlined at Section V above, the “Cranston-Gonzales National Affordable Housing Act” (the Act) also amended Section 10(c)(1) of RESPA to require a loan servicer, to provide an itemized statement of estimated taxes, insurance premiums, and other charges that are reasonably anticipated to be paid from the escrow account during the first year following opening of the account, together with the anticipated dates of such payments. Section 10(c)(2) of RESPA further requires loan servicers to provide an annual statement to the borrower no later than thirty days after completion of the escrow account computation year. (The 12-month period that a servicer establishes for the escrow account beginning with the borrower’s initial payment date.) Note that the escrow account estimated payment disclosures apply only to transactions subject to RESPA. Most refinancings and home equity loans are exempt under RESPA in that they do not involve a transfer of title of the real estate.
1. Initial Escrow Account Statement
After completing the initial escrow account analysis, the servicer must deliver an initial escrow account statement to the borrower. The statement may either be included in the HUD-1 or HUD-1A Settlement Statement or given as a separate document within 45 calendar days after settlement. This 45 day delay permits the servicer who is likely to perform the escrow account analysis, rather than the closing agent, to prepare the initial account disclosures. For escrow accounts established after settlement and which are not a condition of the loan, the initial escrow account statement must be provided within 45 days after establishment of the account.
The initial escrow statement must include the following:
a. The amount of the borrower’s monthly mortgage payment and the portion of the monthly payment going into the escrow account;
b. An itemization of the estimated disbursement items (e.g., estimated taxes and insurance premiums) that are reasonably anticipated to be paid from the account (the specific payee of such disbursements is not required if the statement provides sufficient information to identify the use of the funds);
c. The anticipated disbursement dates of those charges;
d. The amount that the servicer selects as a cushion; and
e. A trial running balance for the account.
The format and a completed example for an initial escrow account statement is set forth in Appendixes G1 and G2 to Part 3500.
2. Annual Escrow Account Statement
For each escrow account, the servicer must also deliver an annual escrow account statement to the borrower within 30 days of the completion of the escrow account computation year. The servicer must conduct an escrow account analysis using the accounting methods described above, before submitting the statement to the borrower. The escrow account computation year begins with the borrower’s initial payment date. However, the servicer may use a “short year” statement to level its production load and reestablish an escrow account computation year that best meets its business cycle. An annual statement is not required (1) if the loan is in default (borrower is 30 days or more overdue); (2) if the servicer has brought an action for foreclosure under the underlying mortgage loan; or (3) where the borrower is in bankruptcy proceedings.
The annual escrow account statement must include, at a minimum, the following:
a. An account history, reflecting the activity in the escrow account during the escrow account computation year;
b. A projection of the activity in the account for the next year;
c. The amount of the borrower’s current monthly mortgage payment and the portion of the monthly payment going into the escrow account;
d. The amount of the past year’s monthly mortgage payment and the portion of the monthly payment that went into the escrow account;
e. The total amount paid into the escrow account during the past computation year;
f. The total amount paid out of the escrow account during the same period for taxes, insurance premiums, and other charges;
g. The balance in the escrow account at the end of the period;
h. An explanation of how any surplus is being handled by the servicer;
i. An explanation of how any shortage or deficiency is to be paid by the borrower; and
j. If applicable, the reason(s) why the estimated low monthly balance was not reached, as indicated by noting differences between the most recent account history and last year’s projection.
The model format for an annual escrow account statement is set forth at Appendix I to Part 3500. Appendices I-1 and I-3 contain the format and an example of the Annual Escrow Account Disclosure Statement (account history of pre-rule accounts computed using single-item analysis). Appendices I-2 and I-4 contain the format and an example of the Annual Escrow Account Disclosure Statement (projections for pre-rule accounts computed using single-item analysis). Appendices I-5 and I-7 contain the format and an example of the Annual Escrow Account Disclosure Statement (account history of pre-rule and post-rule accounts computed using aggregate analysis). Appendices I-6 and I-8 contain the format and an example of the Annual Escrow Account Disclosure Statement (projections for pre-rule and post-rule accounts computed using aggregate analysis).
3. Timely Payments From the Escrow Account
If the loan documents require the borrower to make payments to an escrow account, the servicer must make disbursements from the account in a timely manner so long as the borrower’s payment is not more than 30 days overdue. The servicer must also advance funds to make the disbursement so long as the borrower’s payment is not more than 30 days overdue. The servicer may obtain repayment from the borrower for the deficiency in accordance with the deficiency provisions described above.
Property Tax Payment Considerations. HUD amended Section 3500.17(k), effective February 20, 1998,to address a problem in applying escrow accounting requirements, clarifying those circumstances by which property taxes should be disbursed from an escrow account on an annual (lump-sum) or installment basis information and contains procedures for voluntary overpayments. The problem, designated as “annual v. installment disbursements,” involves whether disbursements from mortgage escrow accounts must be made on an annual or installment basis when the payee offers a choice.
In Nebraska, property owners who directly pay their own real estate tax have the option to pay the tax in two equal installments. Property taxes are not delinquent if at least the first half is paid by May 1 and the balance is paid by September 1. In Lancaster County and Douglas County the due dates for real estate taxes are April 1 (1st half) and August 1 (2nd half) respectively. Nebraska law does not require that all property taxes be paid in a single lump sum nor do taxpayers receive a discount for paying such taxes in a single lump sum. There is no penalty or service charge for paying property taxes in equal installments, provided they are paid timely.
Section 3500.17(k)(3) and (4) provides guidance applicable to those circumstances that mortgage servicers face in different states, by requiring property taxes to be paid from the escrow account in installments (rather than in a lump sum) if such may be done without penalty and since such payment require lower up-front payments (closing costs) from the borrower. Servicers must make timely payments, on or before the deadline to avoid a penalty, and advance funds as necessary, so long as the borrower’s payment is not more than thirty days overdue. If the taxing jurisdiction (as is the case in Nebraska) neither offers a discount for disbursements on a lump-sum annual basis nor imposes any additional charge or fee for making installment disbursements, the servicer must make disbursements on an installment basis, unless the servicer and borrower agree otherwise.
The rule allows the servicer and borrower to mutually agree, on an individual case basis, to a different disbursement basis (installment or annual) or disbursement dates. Such agreements must be completely voluntary and neither loan approval nor any term of the loan may be conditioned on the borrower’s agreeing to a different disbursement basis or disbursement date for property taxes. Such agreements may be made prior to settlement, thereby avoiding the need to make post-settlement changes in the disbursement basis or dates when such an agreement is reached before settlement. The rule provides that the borrower and servicer agreement must avoid a penalty, comply with normal lending practice of the lender and local custom, and constitute prudent lending practice (e.g., parties may agree to annual disbursements of property taxes even if there is no discount where an installment option is offered).
In sum, for property tax purposes, the servicer should add up the total payments associated with disbursing annually and compare that amount to the total payments associated with disbursing in installments. In making those calculations, the servicer should take into account any applicable discounts or service charges. If the total amount associated with disbursing property taxes annually is greater than or equal to the total amount associated with disbursing in installments, the servicer must disburse the property taxes in installments, except when the servicer and borrower mutually agree otherwise. If, however, the total amount for disbursing the property taxes in installments is greater than the total amount for disbursing them annually, the servicer may, but is not required by RESPA to, disburse them annually. The servicer is encouraged, but not required, to follow the preference of the borrower.
XII. IMPLEMENTATION DATES
The final rule provides that “the new GFE and HUD-1 would not be required until January 1, 2010.” All other provisions of the rule took effect on January 16, 2009. For a summary of frequently asked questions regarding the new RESPA rules, please link to the following Web site: https://www.hud.gov/sites/documents/DOC_12618.PDF.