94-26583. Real Estate Settlement Procedures Act (Regulation X): Escrow Accounting Procedures; Final Rule DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 59, Number 206 (Wednesday, October 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26583]


[[Page Unknown]]

[Federal Register: October 26, 1994]


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Part V





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner



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24 CFR Parts 203, 234, and 3500




Real Estate Settlement Procedures Act (Regulation X): Escrow Accounting 
Procedures; Final Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Parts 203, 234, and 3500

[Docket No. R-94-1688; FR-3255-F-03]
RIN 2502-AF77

 
Real Estate Settlement Procedures Act (Regulation X): Escrow 
Accounting Procedures

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

ACTION: Final rule.

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SUMMARY: This final rule establishes escrow accounting procedures under 
Sections 6(g) and 10 of the Real Estate Settlement Procedures Act, 12 
U.S.C. 2605(g) and 2609 (RESPA). It establishes a nationwide standard 
accounting method known as aggregate accounting. The rule requires 
servicers to use the aggregate accounting method for escrow accounts 
involving federally related mortgage loans that are settled on or after 
the effective date of this rule. It provides a three-year phase-in 
period for existing escrow accounts to convert to the aggregate 
accounting method. In addition, the final rule establishes formats and 
procedures for initial and annual escrow account statements. By this 
rulemaking, the Department is implementing the Section 10 amendments 
made in section 942 of the Cranston-Gonzalez National Affordable 
Housing Act. Conforming changes are also made to appropriate Federal 
Housing Administration (FHA) provisions in parts 203 and 234.

EFFECTIVE DATE: April 24, 1995.

FOR FURTHER INFORMATION CONTACT: William Reid, Research Economist, 
Office of Policy Development and Research, Room 8212, phone (202) 708-
0421 or [phone] (TDD). For legal questions, contact Grant E. 
Mitchell, Senior Attorney for RESPA, Room 10252, phone [phone]), 
or Kenneth A. Markison, Assistant General Counsel for GSE/RESPA, Room 
10252, phone [phone]) (these are not toll-free numbers). The 
address for the above-listed persons is: Department of Housing and 
Urban Development, 451 Seventh Street, SW, Washington, DC 20410-0500.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Statement

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget (OMB), under 
section 3504(h) of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-
3520), and assigned OMB control number 2502-0501.

I. Background

    Section 10 of the Real Estate Settlement Procedures Act of 1974 
(RESPA) (12 U.S.C. 2609) sets out the statutory limits on the amounts 
that lenders may legally require borrowers to deposit in escrow 
accounts. The statutory language of Section 10 is complex. It has been 
subject to increasing controversy. At times the statute uses the term 
``lender'' and at other times it uses the term ``servicer.'' A lender 
creates a loan obligation but may or may not service the loan. Within 
this rule, HUD uses the term servicer to include the lender when the 
lender performs the servicing function.
    Section 10(a) of RESPA limits the amounts that a lender may charge 
a borrower at the creation of an escrow account and during the lifetime 
of the account. Section 10(a)(1) sets limits on charges to a borrower 
when a lender creates an escrow account. At the time the 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.
    Section 10(a)(2) sets limits on charges to a borrower over the rest 
of the lifetime of the escrow 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, a lender may add an amount to maintain a 
cushion equal to one-sixth of the estimated total annual payments from 
the account.
    Section 10(c) of RESPA requires a servicer to provide a borrower 
with initial and annual escrow account statements. Section 10(d) sets 
forth the penalty provisions for a servicer's failure to provide the 
required statements. Section 6(g) of RESPA provides that if the 
servicer has required an escrow account, then the servicer shall make 
disbursement payments for the escrow account items in a timely manner 
as such payments become due.
    Historically, HUD had only interpreted the escrow accounting 
portions of Section 10 by informal opinion and one Interpretive Rule, 
dated January 21, 1993 (58 FR 5520). Litigation initiated by various 
State Attorneys General and private class-action plaintiffs raised 
serious questions about what RESPA permitted in this regard and fueled 
a debate about the extent of ``overescrowing'' in the industry. The 
Secretary decided that HUD needed to fulfill its responsibility to 
protect consumers by setting forth clear, specific guidance on escrow 
practices. Therefore, the Department initiated this rulemaking process.
    On December 3, 1993 (58 FR 64065), the Department published its 
proposed rule seeking public comments. After reviewing the comments, 
the Department developed this final rule, which is consistent with the 
consumer-oriented approach announced by the Secretary in the proposed 
rule. This final rule will:
    (1) Reduce the cost of homeownership, by ensuring that funds are 
not held in escrow accounts in excess of the amounts necessary to 
protect the lenders' interests in preserving the collateral;
    (2) Establish reasonable, uniform practices for escrow accounting; 
and
    (3) Provide servicers with clear, specific guidance on the 
requirements of Section 10.
    In the proposed rule, new Sec. 3500.17 set out HUD's regulations 
for escrow accounts subject to RESPA. The proposed rule covered any 
escrow account established in connection with a federally related 
mortgage loan. It provided HUD's interpretation of what was a 
permissible cushion and what was an overcharge to the borrower's escrow 
accounts. The proposed rule articulated HUD's new policy requiring 
aggregate accounting analysis on all new escrow accounts. The proposed 
rule set out the requirements for initial and annual escrow account 
statements. The rule also proposed a delayed effective date to provide 
sufficient time for servicers to implement the regulatory requirements.
    When issuing the proposed rule, HUD reviewed existing escrow 
accounting procedures. A prevalent practice exists, called single-item 
analysis, where a lender accounts for each escrow item separately. The 
lender may collect more money under a single-item analysis accounting 
than under aggregate analysis accounting. An aggregate accounting 
method is one in which the sufficiency of the funds is determined by 
analyzing the escrow account as a whole. Attorneys General of numerous 
States have claimed that single-item analysis has resulted in 
substantial over-escrowing of consumers' money. The Attorneys Generals 
interpreted Section 10 as requiring aggregate accounting practices to 
determine the maximum account balances.
    HUD's own escrow study found that too many accounts were over-
escrowed and too much of consumers' funds was being held by mortgage 
servicers. In the proposed rule, HUD announced its determination that 
servicers should be required to analyze all new escrow accounts on an 
aggregate accounting basis. HUD proposed to provide a three-year phase-
in period after the rule's publication date for existing accounts to be 
converted to an aggregate accounting methodology. HUD requested 
comments on its proposed rule and received 142 comments through the 
February 1, 1994, due date.

Discussion of the Comments HUD Received

General
    Five commenters specifically supported the proposed rule (two 
mortgage companies, one attorney, one bank, and a government agency). 
Seven comments supported the rule, but with recommended clarifications 
or revisions. Twenty commenters supported industry standardization. 
Fifteen flatly opposed the proposed rule for various reasons. Some 
argued that HUD was overly interfering in escrow industry practices.
    HUD believes that the final rule will end uncertainty that now 
exists within the industry. HUD is providing clear standards for the 
servicing industry to follow. Congress explicitly provided HUD with 
regulatory authority to interpret the Act to further its purpose. This 
regulation is well within HUD's rulemaking authority.
    Eighteen commenters requested an additional comment period or the 
opportunity to participate in hearings. Although the Department 
considered requests for additional time for comments and hearings, it 
concludes that it has sufficient information to complete rulemaking 
without more input.
Costs of Implementation
    Forty-four commenters (19 mortgage companies, 16 banks, 4 
attorneys, 4 associations, and 1 government agency) expressed concern 
about the cost of redesigning software systems to perform the aggregate 
analysis and to complete the required statements. Many commenters 
indicated that the expense of systems design and implementation, staff 
training, and additional administrative efforts would far outweigh any 
potential benefit provided to consumers. In reviewing these comments, 
the Department balanced the short-term cost considerations against the 
long-term advantages of standardized nationwide requirements for escrow 
accounts and consumer savings. The Department concludes that the long-
term benefits outweigh the short-term costs.
Phase-in and Implementation Periods
    The proposed rule provided a 180-day period for persons to 
implement its provisions concerning aggregate accounting practices for 
new escrow accounts. Sixty-seven commenters (33 mortgage companies, 20 
banks, 7 associations, 5 attorneys, and 2 government agencies) 
requested that the 180-day period be extended to 12 or 18 months. They 
cited changes in software, staff training, and other administrative 
burdens as reasons for the implementation extension. Several commenters 
also stated that there would be no incentive to maintain dual systems 
for pre- and post-rule accounts because dual systems would be too 
costly and difficult to administer. Sixteen commenters observed that if 
the implementation period was extended to at least one year, the phase-
in period for pre-rule activity should be eliminated. Three commenters 
supporting the phase-in of pre-rule escrow accounts suggested that HUD 
should not require the disclosures proposed in the rule during the 
phase-in period. Four commenters requested that the implementation date 
be extended to two to three years.
    While recognizing that a 180-day implementation period for new 
accounts is demanding, the Secretary concludes that this rule will save 
consumers money and that it should be implemented as quickly as 
possible. Moreover, HUD alerted the mortgage servicing and software 
industry in December 1993 of its intention to implement aggregate 
accounting requirements. The Secretary believes the affected industries 
are capable of developing the necessary systems within the 180-day 
implementation period. This final rule therefore carries forward the 
180-day implementation period.
    The Department further believes that permitting a three year phase-
in period for existing accounts is appropriate.1 It is a fair way 
to apply aggregate accounting requirements to existing escrow accounts. 
During the three year phase-in period, a considerable number of 
existing escrow accounts will likely be terminated as residential 
property is sold or mortgages are refinanced and new escrow accounts 
established. The three-year requirement sets an appropriate balance 
between sensitivity to servicer expectations regarding the price of 
servicing and concern that the desired policy is implemented for 
consumers as quickly as reasonable. The three year phase-in period 
provides a specific date when all escrow accounts are subject to 
aggregate accounting requirements. HUD acknowledges that servicers may 
have purchased servicing rights at premiums based, among other things, 
on the expectation of doing single-item accounting. However, because 
HUD has provided notice nearly four years in advance of the conversion 
date, the pricing of servicing will adjust accordingly (if it has not 
already).
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    \1\ Until the conversion date for pre-rule accounts, both 
single-item (individual-item) analysis and aggregate analysis 
methods are acceptable accounting methods, as are accounting methods 
that combine characteristics of both the foregoing methods 
(sometimes termed ``hybrid accounting methods''), as long as use of 
any such method does not result in payments or cushions in excess of 
those that result from escrow account analysis using the single-item 
analysis method. For post-rule accounts, aggregate analysis is the 
only acceptable accounting method to conduct escrow account analysis 
to ensure compliance with the limits imposed by this regulation.
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Interest on Escrow Accounts and Single-Item Escrow Accounts
    Commenters asked whether the final rule would address interest on 
escrow accounts. Seven commenters suggested that the rule specifically 
exempt servicers that either pay interest on escrow accounts or service 
only one escrow item. These commenters believed that a required 
interest payment on escrow account balances would create a disincentive 
to servicers to over-escrow.
    After considering the comments, the Department determines that it 
will not create the requested exemptions. The Department does not 
interpret Section 10 of RESPA as providing the Department with legal 
authority to require payment of interest on escrow accounts. Where 
interest is required, it is a matter of State law, with fourteen States 
requiring that some amount of interest be paid on escrow account funds.
    Where there is only one escrow account item in the escrow account, 
there is no difference in the outcome between these two accounting 
methods. Nonetheless, HUD believes it appropriate for escrow accounts 
with only one escrow item to conform to the rule requirements. To 
enhance industry standardization, HUD applies the final rule to all 
escrow accounts involving a federally related mortgage loan, regardless 
of the number of escrow account items within the escrow account.
Termination of Escrow Accounts
    Two commenters asked HUD to address whether a borrower could 
terminate his/her escrow account when the loan was paid down to a 
certain amount (similar to provisions included in a proposed escrow 
account reform bill introduced in Congress). The Department believes it 
has no authority under Section 10 to regulate when a borrower may 
terminate an escrow account based on a loan-to-value ratio or 
otherwise. HUD encourages borrowers to turn to the mortgage documents 
for guidance. Additionally, major secondary market purchasers have 
established standards for termination of escrow accounts. Also, a 
borrower may simply ask the servicer to exercise discretion in 
terminating an escrow account.

Definitions

Annual Escrow Account Statement

    Many commenters requested that HUD clarify its terms or definitions 
to be consistent with industry terminology, the National Affordable 
Housing Act (Pub. L. 101-625, approved November 28, 1990) (NAHA), or 
terms used by other Federal agencies. Thirteen commenters requested 
clarification of the term ``annual escrow account statement''. Many 
commenters thought that the Department had commingled the requirements 
for the annual escrow account statement, as set forth in NAHA, with the 
requirements for an annual escrow analysis. The Mortgage Bankers 
Association (MBA) recommended that ``HUD retain the definition of 
annual escrow account statement as defined in the proposed rule for 
escrow account statements published in the Federal Register on December 
9, 1991.'' (56 FR 64445.) The MBA argued that the previous definition 
would alleviate any confusion about the timing of the annual escrow 
account statements and annual escrow analysis. In addition, the MBA 
stated that the previous definition of ``annual escrow account 
statement'' took into account the industry practice of generally 
performing escrow analyses after the largest escrow account item was 
paid.
    HUD defines an annual escrow account statement as a statement 
containing the information required in Sec. 3500.17(i) that a servicer 
must submit to the borrower within 30 days of the end of the escrow 
account computation year. This definition comports with the MBA 
recommendation. The comments correctly observed that the annual 
statements and the escrow account analysis are ``commingled.'' HUD 
considers an escrow account analysis necessary to make the annual 
escrow account statement meaningful. Thus, the rule clearly requires 
the servicer to conduct an escrow account analysis at the end of the 
escrow account computation year. However, the final rule provides 
servicers with flexibility in setting the escrow account computation 
year. HUD's rule therefore allows the industry to continue the practice 
of conducting the escrow analysis after paying the largest escrow 
account item.

Cushion and Pre-Accrual

    Nine commenters requested clarification of the definitions of 
cushion and pre-accrual. The proposed rule defined the cushion to mean 
funds that a servicer could require a borrower to pay into an escrow 
account to cover unanticipated disbursements or to cover disbursements 
made before the borrower's payments are available in the account. The 
proposed rule defined ``pre-accrual'' to be a practice that some 
servicers employed 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. Both terms were subject to the 
limitations of paragraph (c) of the section. Paragraph (c)(6) of the 
proposed rule prohibited the use of pre-accrual on post-rule accounts 
and limited its use on pre-rule accounts to within the limits set in 
paragraph (c)(4). Commenters stated that the pre-accrual disallowance 
language in the proposed Sec. 3500.17(c)(6) effectively modified 
previously allowable cushions. This was HUD's intent.
    HUD received 30 comments questioning HUD's prohibition of pre-
accrual practices for post-rule accounts. Many commented that HUD had 
long accepted pre-accrual as a legal methodology for analyzing escrow 
balances. Seventeen commented that servicers may be discouraged from 
establishing escrow accounts because of the increased costs and 
prohibitions against pre-accrual practices. They stated that if 
servicers ceased handling escrow accounts, some borrowers would be 
delinquent in their tax payments and the taxing authorities would 
experience greater administrative expenses.
    The Department believes that pre-accrual practices allow servicers 
to acquire the equivalent of up to another month of cushion in the 
escrow account. Coupled with a cushion of greater than one month, a 
pre-accrual practice could result in escrow account balances that 
exceed RESPA's limits. HUD believes that the cushion provides 
sufficient extra funds to cover unanticipated disbursements or 
disbursements made before the borrower's payments are available in the 
account. Therefore, pre-accrual is unnecessary.
    The final rule eliminates the use of pre-accrual on all new 
accounts. Generally, for existing escrow accounts, a servicer may not 
require any pre-accrual that exceeds one month or that results in an 
account balance larger than the limits set forth in Sec. 3500.17(c). In 
addition, the Department considered the arguments of servicers who 
claimed they would discontinue handling escrow accounts under the 
proposed rule. The Department concludes that servicers are unlikely to 
abandon the practice of handling escrow accounts.

Disbursement Date

    Forty-two commenters (25 mortgage companies, 11 banks, 2 
associations, 3 attorneys, and Fannie Mae) requested clarification of 
the definition of disbursement date. Fannie Mae's response noted that 
the proposed disbursement date definition permits the payment to occur 
``* * * without regard to the lender's normal lending practice or local 
custom or prudent lending practice.'' Further, several commenters 
suggested that the proposed definition does not reflect that the 
disbursement date may be in a month or in a period prior to the month 
it is due, in order to take advantage of discounts. GE Capital Mortgage 
Services, Inc. stated that ``although HUD may not have intended to 
require a disbursement date to always be in the same calendar month as 
the due date, the language could be read to require this.''
    In its proposed definition, HUD intended to define the disbursement 
date as the date the servicer actually pays the escrow item. HUD 
intended to apply a standard that conformed with prudent lending 
practices to pay escrow account items promptly and to take advantage of 
discounts, when available, and avoid penalties. The proposed definition 
required a servicer to pay an escrow item in time to take advantage of 
available discounts, or at least in time to avoid a penalty. In the 
final rule, HUD defines the disbursement date as the date the servicer 
actually pays an escrow item. In Sec. 3500.17(k), HUD provides that in 
calculating the disbursement date, the servicer must pay the 
disbursement on or before the earlier of the deadline to take advantage 
of discounts, if available, or the deadline to avoid a penalty. The 
disbursement date may be in a month other than the due date established 
by the payee. In cases of payments to obtain a discount, the 
disbursement date may be in a month before the payee's due date. In 
cases of payments to avoid a penalty, the disbursement date may be in a 
month after the payee's due date, but before the penalty would be 
assessed.

Escrow Account

    Eight commenters requested clarification of the proposed ``escrow 
account'' definition. Commenters stated that the final rule definition 
should exclude voluntarily escrowed funds. They believed that such 
payments should be excluded from the trial running balance calculations 
of an escrow account. The Department rejects this argument.
    The term escrow account encompasses all escrow accounts, including 
those that are ``voluntarily'' agreed to by borrowers and under the 
control of servicers. Because most borrowers are anxious to obtain a 
loan, they are likely to agree to a lender's request for a voluntary 
escrow account that is under the lender's control. Arguably all escrow 
accounts are voluntarily entered into when the parties agree to the 
mortgage loan. Thus, an exemption for servicer controlled accounts 
involving ``voluntarily'' escrowed funds would nullify the statute's 
purpose of protecting consumers. Therefore, the final rule provides a 
uniform standard for all servicers who control escrow accounts. In the 
final rule, the term ``escrow account'' excludes any account that is 
totally under the borrower's control.

Escrow Account Analysis

    Twenty-one commenters requested clarification of the ``escrow 
account analysis'' definition (14 mortgage companies, 4 banks, 2 
attorneys, and the MBA). These comments complained that the proposed 
definition of ``escrow analysis'' required that an analysis be done to 
prepare the initial and annual escrow account statements. The 
commenters viewed these functions as completely separate. They argued 
against the linkage of the analysis with the preparation of the escrow 
account statements.
    The Department considered these comments but concludes that an 
escrow analysis is ordinarily needed to provide an initial and annual 
escrow account statement. Otherwise, the statements may be meaningless. 
In the final rule, however, the Department no longer requires the 
servicer to provide the initial escrow account statement at settlement. 
Section 3500.17(g) now permits servicers to submit the initial escrow 
account statement to the borrower within 45 calendar days after 
settlement. In this way the servicer, rather than the closing agent, is 
likely to perform the escrow account analysis, and the initial escrow 
account statement will more accurately reflect the first year's 
projections.

Escrow Account Computation Year

    Twenty-eight commenters sought clarification of the term ``escrow 
account computation year'' (17 mortgage companies, 6 banks, 3 
attorneys, and 2 associations). Twenty comments asked for clarification 
of the term ``escrow account computation year'' as HUD used it in the 
definition of ``trial running balance.'' Several commenters requested 
that HUD revise the final definition to be consistent with HUD's 
definition in an earlier proposed rule of December 9, 1991. There, HUD 
defined ``escrow account computation year'' to mean ``any escrow 
account year whose date of establishment begins on or after January 1, 
1991.'' (56 FR 64445, Sec. 3500.17(a)(1).) January 1, 1991, was the 
statutory initiation date. In HUD's December 3, 1993, proposed rule, 
the definition of ``escrow account computation year'' is a 12-month 
period starting on the initial payment date (58 FR at 64071). Several 
commenters argued for greater flexibility to set the escrow account 
computation year, rather than have it established by the initial 
payment date.
    HUD is aware that servicers may need to spread out their workload 
throughout the year. The final rule permits the servicer to have some 
flexibility in setting the computation year by allowing for ``short 
year'' statements. In the final rule, an escrow account computation 
year begins at the 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.

Installment Payment

    Four commenters requested clarification of the ``installment 
payment'' definition. They stated that HUD's proposed definition lacked 
clarity regarding tax or insurance statements that are payable on a 
quarterly or semi-annual basis, but are actually paid by the servicers 
annually.
    The Department believed the proposed definition adequately 
described installment payments, but has given an example to clarify its 
usage in the final rule. Unless there is a discount to the borrower for 
early payments, the regulation does not allow servicers to pay 
installment payments on an annual or other prepayment basis.

Payment Date and Payments Other Than Monthly

    Six commenters suggested the definition of ``payment date'' be 
changed to ``payment due date'' to distinguish the term from the 
disbursement date. In response to these comments, the Department uses 
the phrase ``payment due date'' in the final rule. These commenters 
also suggested that the reference to monthly payments be revised to 
``periodic payments.'' HUD makes this change when appropriate. Four 
commenters requested detailed guidance on escrow accounts when payments 
are made biweekly or for periods other than monthly. The proposed rule 
did not explicitly address this issue. It used monthly and yearly 
phrases because those terms follow the statute's language. The final 
rule, however, provides illustrations of biweekly accounting in 
Appendix H.

Refinancing Loans

    The proposed rule stated that the refinancing of a pre-rule escrow 
account would turn it into a post-rule account. One commenter indicated 
that a refinancing between the same lender and borrower should not 
change the account from a pre-rule to post-rule status. Four commenters 
questioned whether modifications or assumptions of pre-rule escrow 
accounts would result in a pre- or post-rule escrow account.
    Congress amended RESPA in Section 908 of the Housing and Community 
Development Act of 1992 specifically to change the definition of 
``federally related mortgage loan'' to include ``any such secured loan, 
the proceeds of which are used to prepay or pay off an existing loan 
secured by the same property.'' 12 U.S.C. 2602(1)(A). This amendment 
became effective on October 28, 1992, its enactment date. As of 
December 2, 1992 (57 FR 49600), HUD's regulations withdrew the previous 
exemption for refinancing transactions from RESPA coverage.
    Thus, when HUD issued the proposed escrow accounting rule of 
December 3, 1993, refinancing transactions were covered by RESPA. HUD 
issued a final rule implementing the section 908 amendments of RESPA on 
February 10, 1994. In that final rule, the Department defined a 
refinancing to mean ``a transaction in which an existing obligation 
that was subject to a secured lien on residential real property is 
satisfied and replaced by a new obligation undertaken by the same 
borrower and with the same or a new lender.'' (59 FR 6506, at 6512.) 
HUD also adopted certain Regulation Z requirements for refinancing 
transactions with the same lender. This final rule uses the Sec. 3500.2 
definition to determine whether a transaction is a refinancing that 
requires post-rule treatment. If the transaction involves only a 
modification or other change to existing terms of a mortgage document, 
then it will remain a pre-rule account during the three-year 
implementation period.

Fees for Escrow Accounts

    Several States Attorneys General commented that they were concerned 
that ``lenders, in the absence of * * * an express provision will try 
to circumvent the express limits on profiteering contained in the 
proposed rule by charging consumers annual maintenance fees.'' In 
response, the Department considered whether servicers would charge 
borrowers escrow account maintenance fees or document storage fees to 
defray lost revenue resulting from changes in accounting practices 
required by this final rule. An examination of the standard Fannie Mae-
Freddie Mac Uniform Instrument (Section 2 of the Uniform Covenants) 
indicates that such fees are prohibited in most circumstances (except 
where interest is paid on escrow accounts and state law allows such 
charges).
    The Department has not seen evidence that servicers, as a common 
practice, currently charge maintenance or storage fees in conjunction 
with escrow accounts. HUD's existing regulations for FHA insured loans 
already prohibit the FHA mortgagee or servicer from charging the 
borrower for servicing activities. 24 CFR 203.552(a)(12)(i). If the 
Department sees such fees develop with respect to any other loans to 
thwart the statutory and regulatory limitations, then HUD is likely to 
reconsider this issue in conjunction with applicable State law 
provisions. At this time, the Department intends to monitor the 
servicing industry carefully to insure compliance with Sections 8 and 
10 of RESPA.

Servicer Estimates of Disbursement Amounts

    Twenty-nine comments sought guidance on how to estimate 
disbursement amounts for the next year. They specifically questioned 
how to determine whether increases or decreases in amounts ``are known 
or should be known.'' They questioned how they ``should know'' a change 
in the charge. Twenty-two comments supported the use of estimates based 
on the prior year's actual disbursements modified by a defined CPI 
index. They also supported using actual increases or decreases, if 
known. Nineteen comments requested more explicit guidance, specifically 
questioning which CPI index to use. Five commenters requested an 
example of how to estimate a new payment for the ensuing escrow account 
computation period.
    In the final rule, the Department provides that if the servicer 
knows the charges for the subsequent escrow account computation year, 
then the servicer shall use those amounts in estimating the 
disbursement amounts. If the charge is unknown to the servicer, then 
the servicer may use an estimate based on the preceding year's charge 
as modified by an amount not exceeding the most recent year's change in 
the national Consumer Price Index for all urban consumers (CPI, all 
items). In addition, the final rule establishes procedures for 
estimating charges for new construction where the land and structure 
are unassessed.

Provisions in Mortgage Documents

    The proposed rule stated that the mortgage loan documents prevail 
if the documents prescribe escrow account limits lower than those 
prescribed in the rule. Six commenters observed that the final rule 
should permit a cushion on all escrow accounts regardless of contract 
provisions in the mortgage document. Twenty-five commenters indicated 
that the final rule should explicitly state that a one-sixth cushion 
could be established when the loan documents are silent. Many 
commenters were concerned that the language in the proposed rule would 
alter the contractual terms between borrowers, lenders, and servicers, 
and they questioned inconsistencies with standard form Fannie Mae, 
Freddie Mac, FHA, and VA security instruments. Six comments indicated 
that the final rule should pronounce common standards for contract 
types that address the cushions allowed under Fannie Mae, Freddie Mac, 
FHA, and VA contracts, using standard contract language. The joint 
comments from the States' Attorneys General noted that, ``while HUD's 
proposed rule clearly states that where contracts provide for more 
restrictive cushions than the two-month aggregate cushion, the 
contracts control, however the proposed rule leaves unnecessary 
ambiguity as to which contracts those are, and how explicit the 
contract language must be in order for the contract to take 
precedence.'' One comment also stated that pre-rule loan documents that 
violate the final rule should not have to be revised or be considered a 
violation of RESPA if the servicer complies with the final rule.
    The rule requires servicers to examine the mortgage loan documents 
to determine their escrow limits in preparing the initial escrow 
account statements. If the loan document provides that an escrow 
account may hold amounts ``up to the limits allowed by RESPA,'' HUD 
interprets this as permitting the full amount allowed by this rule. In 
the final rule, the Department clearly states that if the mortgage loan 
documents provide for lower cushion limits or less pre-accrual than the 
rule, then the documents apply. Where the mortgage documents allow 
payments to an escrow account in excess of those permitted under this 
rule, then this final rule and the statute control. Where the mortgage 
documents do not specifically establish an escrow account, whether a 
servicer may appropriately establish an escrow account is a matter for 
determination by State law.
    If the loan documents are silent on the amount of cushion or pre-
accrual limits and the servicer establishes an escrow account under 
State law, then this final rule governs unless State law provides for a 
lower amount. A lower amount would be consistent with RESPA's maximums 
and could be seen as giving greater protection to the consumer.

Aggregate Analysis

    The proposed rule mandated aggregate account analysis for all 
escrow accounts established under mortgages closed after the final 
rule's effective date. Thirteen comments supported this position. 
Twenty-eight comments opposed a mandatory aggregate accounting method 
(15 banks, 7 mortgage companies, 3 associations, and 3 attorneys). Many 
comments stressed that increased costs associated with aggregate 
analysis--redesigning software, staff training, and additional 
administrative efforts--would be passed on to borrowers as either 
higher interest rates, higher origination fees, or escrow management/
servicing fees. They also suggested that low- and moderate-income 
borrowers would be the most affected by cost increases. Four comments 
noted an inconsistency between HUD's rationale for requiring aggregate 
accounting and the conclusions in HUD's Phase II study results 
published in May 1991. They suggested that aggregate analysis could 
result in more overall funds being escrowed than currently result under 
single-item accounting. They claimed that because a majority of 
servicers currently escrow below the RESPA limitations, under this 
final rule they would raise their cushions to the maximum allowable.
    Although there will be some initial costs associated with a 
conversion to aggregate accounting, HUD believes that this cost is 
outweighed by the long-term consumer savings that will be accomplished. 
HUD believes that aggregate analysis will result in lower escrow 
balances in the long run. Moreover, the Phase II study concluded 
unambiguously that aggregate accounting results in lower escrow 
balances than single-item accounting with the same cushion and pre-
accrual practices. HUD acknowledges that servicers who have maintained 
escrow balances below RESPA's limits may increase the accounts to the 
allowable maximum amounts.
    The proposed rule provided an arithmetic example of an aggregate 
analysis computation. It also gave a detailed narrative of the steps to 
use in calculating the maximum cushion. Two comments requested that 
Step B in the calculation be simplified and Step C deleted. Many stated 
that HUD should describe the aggregate accounting method using only a 
narrative paragraph and should not attempt to set out the arithmetic 
steps to use.
    Others disagreed with HUD's calculations. For example, 38 
commenters stated that when they determine the lowest monthly trial 
balance calculations of an escrow account, they first consider 
disbursements (debits) before receipts (credits). They claim that 
borrowers often do not make their mortgage payments until the end of a 
grace period. Disbursements are often due at the first of the month. 
Because HUD did not consider the timing of payments and disbursements, 
the commenters argued that the low-point balance may be understated. 
They claim this could result in shortages and deficiencies.
    The final rule contains both narrative and arithmetic descriptions 
of the steps to be used in an escrow account analysis under either 
method. The Department believes that it is providing useful guidance to 
the industry by giving both descriptions and examples. If HUD failed to 
provide a step-by-step algorithm, some servicers might be uncertain 
about the allowable limits.
    To consider all disbursements before receipts is to effectively 
reintroduce one month pre-accrual. Under the final rule, the escrow 
account analysis is a picture of the escrow account at month's end. 
Consequently, the timing of the payments and disbursements within a 
month do not change the computations. If a servicer pays a disbursement 
before the borrower makes a monthly mortgage payment, then the servicer 
may use the allowable cushion, if necessary.

Single-Item Analysis

    Nineteen comments stated that HUD should reaffirm its past policy 
in support of single-item analysis method. They argued that Section 10 
of RESPA permits single-item analysis. HUD's previous informal 
interpretations and an opinion of the Comptroller General supported 
this view. They claim that Congress did not intend aggregate analysis 
limits to be imposed on escrow account balances.
    Other comments indicated that HUD's example in Appendix F of a 
single-item analysis was inconsistent with the methodology used by the 
majority of the industry. The commenters claimed that the industry does 
not use a trial running balance to determine single-item analysis 
limits. The commenters expressed concern that they would have to 
conform their current systems and software to the proposed single-item 
analysis during the phase-in period. They claimed that this would 
further increase costs and the burden of compliance. Five suggested 
that HUD delay the implementation of the ``new'' single-item analysis 
provisions for one year, to permit time to reprogram systems and train 
staff.
    When the Secretary issued the proposed rule, he was well aware of 
prior HUD interpretations concerning single-item analysis. Through 
informal legal opinions, HUD allowed servicers to use single-item 
analysis in calculating Section 10's limitations. HUD also issued an 
Interpretive Rule, dated January 21, 1993, in which HUD allowed single-
item analysis within Section 10's limitations. The Interpretive Rule is 
effective until the effective date of this final rule.
    HUD reconsidered its position on single-item accounting because 
HUD's Phase II report showed that aggregate accounting would result in 
lower escrow balances. When RESPA was first enacted the vast majority 
of servicers employed single-item analysis. The development of computer 
software and the increased availability of computer office equipment, 
however, makes the aggregate accounting computations easier than 
before. The statute describes the cushion as ``one-sixth of the 
estimated total amount'' of such charges. This rule represents the 
policy decision that aggregate accounting shall be the new standard.
    In reaching this decision, the Secretary has seriously considered 
the countervailing interests. Servicers have had the benefit of greater 
escrow account balances under a single-item analysis accounting than 
they would have had if an aggregate analysis were employed. On the 
other hand, borrowers have had more money tied up in escrow accounts 
under a single-item accounting practice than would have been the case 
if aggregate accounting were practiced. Because the application of 
single-item analysis almost always means that servicers collect more 
money from borrowers than would be the case if the account were 
computed on an aggregate basis, the final rule requires an aggregate 
analysis prospectively.
    During the three-year phase-in period, servicers may still use 
single-item analysis for pre-rule accounts. The proposed rule contained 
a description and an illustration of single-item analysis that some 
commenters argued inaccurately described their practices. HUD does not 
intend for servicers to develop new single-item analysis systems. 
However, any application of single-item analysis must be within Section 
10's limits as interpreted by this rule in Sec. 3500.17(d)(2). As long 
as servicers are within these limits, they may use a single-item 
accounting procedure on pre-rule accounts for three years from the 
publication date of this rule.

Completion of HUD-1 or HUD-1A Settlement Statement

    Four comments noted that the HUD settlement statements currently 
use single-item analysis at closing. They raised questions concerning 
the proper procedures for collecting the cushion at settlement after 
the effective date of this rule. Some commenters were concerned that 
aggregate accounting at settlement could cause confusion if that method 
replaced the relatively simple method of adding a two-month cushion to 
the amounts due by the initial payment date. Several commenters 
suggested that single-item analysis be permitted at closing and 
aggregate analysis be used for all post-closing escrow activity.
    In consideration of these concerns, HUD is offering two alternative 
methods for completing the HUD settlement statements during a phase-in 
period ending three years from the date of publication of this rule. 
However, one of the Department's goals in this rule is to reduce the 
amount borrowers must pay at closing into escrow accounts. HUD intends 
to implement this goal by requiring aggregate accounting practices at 
closing. The Department intends to make computer software available to 
interested persons to help make the necessary calculations.
    Under the first of the 2 methods permitted during the phase-in 
period, the settlement agent may use an aggregate accounting method to 
adjust the initial entries on the last line of the 1000 series on the 
HUD-1 or HUD-1A settlement statement. The Department anticipates that 
software and implementation materials will be generally available to 
settlement agents by the effective date of this rule. Alternatively, 
during the phase-in period the settlement agent may initially calculate 
the deposits using a single-item analysis approach, but with only a 
one-month cushion. HUD's studies indicate that a one-month cushion 
roughly yields the equivalent aggregate accounting result. This option 
is available only where aggregate accounting is not performed as part 
of the closing process. The final rule permits the servicer to provide 
the initial escrow account statement within 45 days of closing, and the 
servicer shall then adjust the escrow account at that time to an 
aggregate accounting calculation.
    The Federal Reserve Board also was concerned about how lenders 
would calculate the amount for the mortgage insurance premium cushion 
in making a Truth in Lending disclosure of the annual percentage rate. 
HUD consulted with Federal Reserve Board officials, who indicated that 
the Federal Reserve Board will issue, in conjunction with the issuance 
of this final rule, clarifying instructions for lenders and servicers 
to use in completing the HUD settlement statements and in computing the 
annual percentage rate. Whichever of the alternative methods is used 
during the phase-in period, the figures currently required by the 
Federal Reserve Board for Regulation Z purposes will still be reported, 
in the same form under which they have always been reported. This 
practice will minimize inconvenience for both the Federal Reserve Board 
and lenders under Regulation Z.
    Appendix F in the rule sets out examples of aggregate analysis. 
Appendix A contains instructions for completing the HUD-1 or HUD-1A 
settlement statements during the phase-in period.

Initial Escrow Account Statements

    The proposed rule required servicers to provide borrowers an 
initial escrow account statement at settlement. For escrow accounts 
established after settlement, the proposed rule allowed an additional 
45 days for the servicer to provide an initial escrow account statement 
to the borrowers. Fifteen commenters wanted to eliminate this 
requirement. Thirteen indicated that creating the initial escrow 
account statement is cumbersome and costly for servicers and confusing 
to borrowers. Others argued that the provisions of the proposed 
regulation that required delivery of the initial escrow account 
statement at settlement contradicted Section 10(c)(1)(B) of the 
statute. They claimed that the statute permitted up to 45 days from 
settlement within which servicers could submit initial escrow account 
statements to borrowers.
    The proposed rule did not specifically address table-funded 
transactions. Six commenters asked who would be responsible for 
preparing the initial escrow account statement in table-funded 
transactions. They noted that loan correspondents, brokers, and closing 
attorneys typically do not have the software and systems to produce the 
statement.
    Three comments asked how to compute the initial escrow deposits for 
a post-rule account. Three others suggested that the final rule 
specifically state that the settlement agent may collect funds at 
closing for items that have a disbursement date between the settlement 
and the initial payment date. Five commenters pointed out that some of 
the information on the initial escrow account statement duplicated the 
HUD-1 settlement statement. They claimed that borrowers received no 
additional benefit or disclosure from the separate statement. Four 
comments stated that HUD should provide a suggested, rather than 
required, format for the initial escrow account statement.
    In response to these comments, HUD notes that the RESPA statute as 
amended in 1990 requires servicers to provide borrowers with initial 
escrow account statements. HUD is implementing that statutory 
requirement through this final rule. In this final rule, the Department 
amends its proposed rule by expanding the timing requirements. The 
final rule permits servicers to provide the initial escrow account 
statement at settlement or within 45 days of settlement for escrow 
accounts that are established as a condition of the loan. The statute 
and rule also allow servicers to incorporate the initial escrow account 
statement in the HUD-1 or HUD-1A settlement statement. Thus, some 
servicers may avoid a purported duplication of information by including 
the initial escrow account statement in the HUD-1 settlement statement 
at closing. For escrow accounts established after settlement (and not 
as a condition of the loan), the final rule allows an additional 45 
days from the date the account is established for the servicer to 
provide an initial escrow account statement to the borrowers.
    Because of these changes, the actual servicer of the loan, rather 
than a settlement agent, is more likely to prepare the initial escrow 
account statement. HUD expects that in many table-funded transactions, 
for example, the servicer that sets up the escrow account will be 
responsible for delivering the initial escrow account statement to the 
borrowers.
    As noted above, the Department provides examples of how to compute 
the initial escrow deposits for a post-rule account. The initial escrow 
account statement is a forward-looking projection of anticipated 
activity in the account's first year. HUD's changes in the final rule 
should assure a higher degree of accuracy in the initial escrow account 
statements. In addition, borrowers are likely to find less errors or 
discrepancies when comparing later annual escrow account statements 
with the initial statement.

Annual Escrow Account Statements and Escrow Account Analyses

    HUD's December 3, 1993, proposed rule required servicers to submit 
annual escrow account statements to borrowers for every federally 
related mortgage loan for which there is an outstanding escrow account. 
In its proposed definitions, HUD defined an ``escrow account analysis'' 
as a practice of computing a trial running balance that a servicer 
performs to prepare the initial and annual escrow account statements. 
Twenty-six commenters asked HUD to clarify the difference between the 
annual escrow account statement and the escrow account analysis.
    HUD considers the annual escrow account statement to be the 
borrower's tool to check the past year's escrow account activities and 
the projections for the next year. As such, HUD believes that servicers 
need to perform an escrow account analysis to make the statements 
meaningful. An escrow account analysis, therefore, is one step in the 
process of preparing the escrow account statements.
    Twenty-two commenters stated that when preparing the escrow account 
analysis, servicers should exclude from the trial running balance 
calculations unexpected deposits to the escrow account, such as ``loss 
drafts'' (insurance payments), and anticipated or actual earnings, such 
as interest. HUD concurs and excludes these deposits from the trial 
running balance calculations. However, if there is a special assessment 
to the borrower that impacts the escrow account within the escrow 
account computation year (e.g., water purification, road or utility 
assessments or special condominium assessments), then the servicer may 
choose to conduct an escrow account analysis at the time of the 
assessment and adjust the account accordingly. Some assessments may be 
billed for periods longer than a year. For example, flood insurance or 
water purification escrow funds may be payable on a three-year cycle. 
HUD's final rule provides guidance on how to calculate the account 
limits when the account includes such payables.
    The proposed rule specified that the servicer deliver the annual 
escrow account statement to a borrower within 30 days of the conclusion 
of the escrow account computation year. Four commenters thought that 
the term escrow account computation year should be changed to escrow 
computation cycle. They believed that this name change would allow 
servicers to spread out the work load more efficiently during the year.
    Seventeen commenters advocated more flexibility in when to conduct 
the escrow analyses, especially when servicers experience delays in 
obtaining pertinent information (e.g., tax bills). These commenters 
recommended delaying the escrow analysis to provide a more meaningful 
statement, rather than performing one on schedule merely to comply with 
a regulatory requirement.
    Seven commented that the escrow analysis is generally prepared 
after the largest disbursement is made from the escrow account. Two 
commenters were not sure whether the proposed rule permitted the escrow 
account analysis to be performed on more than an annual basis.
    In response to these comments, HUD maintains a requirement of at 
least one escrow account analysis per year. Servicers are free to do 
more. The servicer will need to perform the analysis in preparing the 
annual escrow account statements. HUD retains the definition of escrow 
account computation year because it corresponds to the statute's 12 
month period reference. Through the use of short year statements, 
servicers may set the escrow account computation year to coincide with 
the largest payment in the account, normally taxes.
    Sixty-nine commenters claimed that HUD's proposed annual escrow 
account statement requirements were confusing to borrowers and costly 
for servicers to implement and prepare. (These comments came from 26 
banks, 30 mortgage companies, 7 attorneys, and 6 associations.) Three 
commenters requested elimination of the trial running balance, since it 
appeared unnecessary and confusing to borrowers. They also believed 
that the annual escrow account statements should be more general. The 
comments argued that it was too costly to develop and administer 
programs to provide tailored explanations. One software company stated 
that ``several statements on the annual statement may be impossible to 
provide using an automated system. * * * Generally, data processing 
systems are not designed to provide this type of annotated 
explanations. This type of artificial intelligence is cost 
prohibitive.'' Further, the commenters stated that the final rule 
should provide suggested, not required, disclosures and format.
    In response, the Department simplifies the format for the annual 
escrow account statement in the final rule. HUD provides sample 
statements for both single-item accounting and aggregate accounting 
practices. In each, the annual escrow account statement includes a 
historical description of what actually was paid in and out of the 
account in the previous computation year. It also contains a forward-
looking projection of anticipated activity in the account for the next 
year. The escrow account statements are prepared like bank statements, 
in a format that is familiar to the borrowers. By doing so, the 
Department intends that the borrowers will be able to better understand 
account activity.
    HUD is sensitive to the concern that the statements may be too 
specific in nature. However, some specific information is necessary to 
make the disclosure useful to borrowers. If the account has exceeded 
the RESPA limits during the year, then the servicer must explain why. 
If the mortgage documents require a lower cushion, then the servicer 
will use that amount. The example provides a checklist for servicers to 
complete to explain why an account exceeded RESPA's limits. The 
Department concludes that borrowers need this explanation; otherwise, 
over-escrowing of accounts may continue. In addition, for borrowers who 
closely monitor their escrow accounts, HUD believes that the annual 
escrow account statements will provide sufficient information to 
borrowers to save servicers time otherwise spent in responding to 
borrower inquiries.
    Twenty-one commenters suggested that the annual escrow account 
statement be divided into two separate statements: (1) An annual escrow 
account statement providing historical information that the servicers 
mail to borrowers with Internal Revenue Service (IRS) information at 
calendar year-end; and (2) an escrow analysis statement, including the 
projection of the next cycle's calculations, that the servicers deliver 
to borrowers within 30 to 60 days of completing the escrow computation 
cycle. This practice would benefit servicers by combining part of the 
annual escrow account statement with existing IRS requirements. It 
would also benefit the borrowers by providing information in a useful 
and understandable fashion.
    The Department considers these comments informative. Many servicers 
will provide two such accountings to borrowers anyway. The IRS 
information requires calendar year-end totals. The year-end statements, 
however, do not necessarily correspond with the servicer's escrow 
account computation year. At any time, however, servicers may change 
the escrow account computation year to a calendar year-end period by 
using short year statements.
    Twenty-five comments wanted HUD to exclude foreclosures and loans 
that are 60 days or more delinquent from the rule's requirements for 
annual escrow account analysis and statements. In the final rule, HUD 
provides that servicers need not submit an annual escrow account 
statement if the mortgage loan account is delinquent (30 days or more) 
or if the servicer has initiated a foreclosure action.

Short Year Annual Escrow Account Statements

    The proposed rule required the servicer to issue a short year 
annual escrow account statement to a borrower within 60 days of a loan 
payoff or 30 days of a transfer of servicing. Fifty-five commenters 
opposed these requirements, including 32 mortgage companies, 16 banks, 
3 associations, and 4 attorneys. They stated that the IRS requires such 
information at calendar-year end; thus, they claimed, HUD's requirement 
was unnecessary.
    The Department believes that servicers should provide borrowers 
with relevant information at a meaningful time, when borrowers will 
focus their attention on the information. HUD believes that borrowers 
should have the opportunity to correct escrow account errors when 
servicing is transferred or soon after loan pay-off. If servicers fail 
to deliver this information to borrowers for up to 12 months after the 
event, borrowers will be less likely to obtain corrective action of any 
errors made. Consequently, the final rule retains the short year escrow 
account statement provisions, although the Department has extended to 
60 days the time for a transferor servicer to submit a short year 
statement to the borrower.

Transfer of Servicing

    Upon the transfer of loan servicing to a new servicer, the proposed 
rule required the new servicer to perform an escrow account analysis 
before making any change to a borrower's escrow deposits. The proposed 
rule required the new servicer to submit an initial escrow account 
statement to the borrower within 45 days after establishing the new 
escrow account. Thirty-seven commenters asked HUD to eliminate this 
requirement. They questioned the benefit to the borrower and the time 
and cost involved in preparing the statement. Seven commenters 
suggested that HUD extend to at least 90 days the deadline for 
submitting the initial escrow account statement, because of integration 
issues associated with transfers of servicing. Three commenters were 
unclear whether the initial escrow account statement was required if 
the new servicer does not change the borrower's required escrow 
deposits or if the method of escrow account analysis does not change 
between servicers. Two comments stated that if the initial escrow 
account statement is required, it should be prepared by the transferor 
servicer, because that servicer performs an escrow account analysis 
before transferring the account. One comment questioned whether the 
initial escrow account statement applied to transfers of servicing 
between affiliates.
    The Department concludes that borrowers will benefit by receiving 
initial escrow account statements from new servicers under certain 
circumstances. The final rule requires a new servicer to provide a 
borrower with an initial escrow account statement if the servicer 
changes either the monthly payment amount or the accounting method 
previously used by the transferor servicer. Because post-rule accounts 
will be using aggregate accounting methods, no initial escrow account 
statement is needed for post-rule account transfers of servicing. In 
pre-rule accounts where there is a change in the escrow account 
balances, the new servicer shall use the effective date of the transfer 
of servicing to establish the new escrow account computation year. 
Where there is no change in the escrow account balances, the new 
servicer shall continue the escrow account computation year that the 
transferor servicer started. (The Department expects to publish soon a 
final rule on mortgage servicing transfers, adding a new Sec. 3500.21 
to Regulation X.)
    In response to comments, HUD extends the time for new servicers to 
deliver the initial escrow account statement from 45 to 60 days from 
the date of servicing transfer. The new servicer shall treat shortages, 
surpluses, and deficiencies in the transferred escrow account according 
to the procedures set forth in Sec. 3500.17(f). A pre-rule account 
remains a pre-rule account upon the transfer to a new servicer, as long 
as the transfer occurs before the conversion date.

Surpluses

    Eleven comments requested clarification of HUD's proposed 
``surplus'' definition. HUD's proposal defined a surplus to be an 
amount, determined at the time of escrow analysis, by which an escrow 
account balance exceeds the target balance for the account. The 
comments indicated that HUD's definition should state that a surplus is 
a balance in excess of the allowable cushion, if any. HUD disagrees. 
HUD believes that its definition in the final rule more accurately 
describes the surplus to be the excess of the current balance over the 
target balance. The target balance reflects the borrower's accrued 
payments for escrow account items and the cushion selected by the 
servicer. A servicer may choose to use no cushion or one that is less 
than the maximum set by RESPA. It is therefore incorrect to state that 
the surplus is the balance that exceeds the allowable cushion. HUD 
retains the term target balance, rather than allowable cushion, in its 
definition.
    The proposed rule required servicers to refund surpluses to a 
borrower within 30 days of the escrow analysis unless the borrower 
timely instructed the servicer to apply the surplus to the escrow 
account balance. Many commenters saw HUD's requirement as increasing 
their administrative burdens. Fifteen commenters pointed out that the 
30-day period was unrealistic. They argued that HUD should either 
extend the timeframe or eliminate the requirement.
    HUD's proposal set no dollar threshold for refunding surpluses. 
Fifty-three commenters advocated that the final rule require servicers 
to refund automatically surpluses above a minimum threshold ($25 to 
$50). This way servicers would not have to wait for the borrower's 
instructions. Thirteen others suggested that servicers be permitted 
discretion to retain a surplus below a nominal amount. Forty comments 
opposed refunding surpluses if the borrower is delinquent or in 
default. Sixteen comments stated that the rule should allow servicers 
the discretion to refund surpluses immediately or to spread out the 
payments over a 12-month period. Several comments requested 
clarification on whether the existence of a surplus violated RESPA. Two 
comments specifically stated that a servicer who handles a surplus 
according to these rules is in compliance with RESPA.
    In response to these comments, the Department has revised the final 
rule to require the servicer to refund to the borrower any surplus that 
is greater than or equal to $50. This provision responds to the 
comments concerning timing and administrative problems in obtaining 
borrower instructions. At the servicer's option, the servicer may 
refund to the borrower or credit to the borrower's escrow account a 
surplus of less than $50. Again, the servicer need not interact with 
the borrower to handle this surplus.
    HUD's final rule provides that if the servicer does not receive the 
borrower's payment within 30 days of the payment due date, then the 
servicer may retain the surplus in the escrow account pursuant to the 
terms of the mortgage loan document. It also provides that if the 
servicer has brought an action for foreclosure under the mortgage loan, 
then the servicer may retain any surplus in the escrow account 
according to the mortgage loan documents. If a servicer meets the 
provisions of this final rule, then HUD will deem the servicer in 
compliance with RESPA.

Shortages and Deficiencies

    The proposed rule defined a shortage to be the amount that the 
servicer estimates at the time of an escrow account analysis will be 
needed to meet the target balance for the escrow account. A deficiency, 
on the other hand, is the amount that a servicer has actually advanced 
to pay a disbursement from the escrow account. HUD had proposed that 
servicers allow borrowers up to 12 months to pay shortages or 
deficiencies in the escrow account. Many commenters thought HUD's 
proposal required servicers to extend interest-free loans to borrowers. 
For example, Fannie Mae stated that ``* * * this requires the servicer 
to extend what is in essence a 12-month interest-free loan to the 
borrower. We believe that this financial burden on the servicer is 
inequitable.'' Fifteen commenters wanted servicers to charge borrowers 
interest at the note rate while advances for a deficiency are 
outstanding.
    HUD received numerous suggestions to change these provisions. 
Thirty-nine commenters suggested that the rule allow servicers to 
collect shortages from borrowers within 30 days to 6 months from the 
date of the analysis. The comments indicated that servicers could 
always allow borrowers more time (12 or more months) to pay a projected 
shortage than is required by law. Sixty-six comments recommended that 
the rule allow servicers to collect deficiencies from borrowers within 
30 days to 6 months from the disbursement date. These comments also 
stated that servicers could choose to provide borrowers with more time 
than legally mandated. Another comment sought immediate payment of 
servicer advances arising from borrower-initiated changes (e.g., 
additional or optional insurance). Six comments noted that there is no 
need for a separate servicer notice to borrowers of shortages in the 
escrow account, because the annual escrow statement fulfills this 
function.
    HUD sees a distinction between a shortage and a deficiency in the 
escrow account. In a situation where the servicer has advanced its own 
funds (a deficiency), HUD believes that the servicer may collect this 
advance quickly. In the final rule, HUD provides servicers with three 
possible ways of handling borrower deficiencies that amount to less 
than one month's escrow payment:
    (1) The servicer may allow a deficiency to exist and do nothing to 
change it;
    (2) The servicer may require the borrower to pay the deficiency 
within 30 days; or
    (3) The servicer may allow the borrower to repay the deficiency in 
2 or more equal monthly payments over a period of up to 12 months.
    If the deficiency is equal to or more than one month's escrow 
payment, then the servicer may allow a deficiency to exist and do 
nothing to change it, or the servicer may allow the borrower to repay 
the deficiency in 2 or more equal monthly payments over a period of up 
to 12 months. Moreover, if the servicer does not receive the borrower's 
payment within 30 days of the payment due date, then the servicer may 
recover the deficiency pursuant to the terms of the mortgage loan 
documents.
    Because a shortage is the difference between the current escrow 
account balance and the target balance, HUD believes that shortages 
warrant different treatment than deficiencies. Borrowers' escrow 
accounts are likely to be influenced by yearly changes in taxes, 
insurance, or other items that may cause a shortage at the time of an 
escrow account analysis. At that time, servicers may easily adjust the 
borrower's monthly escrow payments for the next year. Thus, in the 
final rule, HUD provides that if the servicer's escrow account analysis 
indicates a shortage of less than one month's escrow payment, the 
servicer has three options:
    (1) The servicer may allow a shortage to exist and do nothing to 
change it;
    (2) The servicer may allow the borrower to pay the shortage amount 
within 30 days; or
    (3) The servicer may allow the borrower to pay off the shortage in 
equal monthly payments over a 12-month period.
    If the shortage is greater than or equal to one month's escrow 
account payment, then the servicer has two options: the servicer may 
allow a shortage to exist and do nothing to change it; or the servicer 
may allow the borrower to pay off the shortage in equal monthly 
payments over a 12-month period.
    An escrow account analysis may indicate a shortage at the time of 
the analysis that will produce a deficiency at a later date. This rule 
does not allow servicers to anticipate deficiencies and collect on a 
deficiency in advance. However, at the time of a deficiency, a servicer 
may conduct an escrow account analysis and seek repayment from a 
borrower according to these provisions.

Timely Payments

    In implementing Section 6(g) of RESPA, HUD had proposed that 
servicers make disbursements in a timely manner from the escrow 
account, even if the escrow account had insufficient funds for such 
payments, as long as the borrower was current in the borrower's 
principal, interest, and escrow account payments. Twenty-eight 
commenters opposed this requirement. On the other hand, Fannie Mae 
noted that ``while the proposed rule states that servicers are not 
required to make escrow account payments on delinquent accounts, Fannie 
Mae holds the servicer responsible for the timely payment of taxes and 
insurance premiums even in situations where the borrower is delinquent 
on the mortgage.''
    After considering these comments and reviewing the legislative 
history of Section 6(g) of RESPA, the Department clarifies the 
requirement. Section 3500.17(k) of this rule implements Section 6(g) of 
the statute, by requiring servicers to advance funds to make 
disbursements in a timely manner as long as the servicer receives the 
borrower's payment within 30 days of the payment due date. HUD 
clarifies that a timely payment is one in which the servicer pays the 
disbursement on or before the earlier of the deadline for available 
discounts or the deadline to avoid penalties. Upon advancing funds to 
pay a disbursement, the servicer may seek repayment from the borrower 
for the deficiency pursuant to Sec. 3500.17(f). If the servicer 
advances payments for a borrower who is in default, however, then the 
servicer may recover the deficiency pursuant to the terms of the 
mortgage loan documents. The Department expects that servicers will 
continue to make disbursements on delinquent accounts to protect their 
security interests in the mortgaged properties.

Recordkeeping

    The proposed rule established a five-year recordkeeping 
requirement. Sixteen commenters stated that this requirement would be 
expensive and burdensome. Several suggested that two years was a more 
reasonable period. Seventeen commenters requested that HUD provide a de 
minimis standard describing the information that servicers should 
retain. They wanted the final rule to specify whether servicers can 
retain records in hard-copy, electronic, or microfiche format. 
Seventeen comments requested that the rule provide examples of 
noncompliance subject to penalties.
    In the December 1993 proposed rule, HUD responded to earlier 
comments critical of HUD's specific recordkeeping provisions in the 
December 1991 proposal. In this final rule, HUD adds clarifying 
language that servicers may maintain records in hard-copy, electronic, 
microfiche, or any other format that reasonably assures retrieval. The 
Department maintains the five-year record retention provision. It is 
consistent with RESPA's other retention requirements.

Penalties

    Forty-eight commenters suggested that the final rule not reflect 
the strict liability language of the proposed rule. The majority 
believed that servicers should not be held liable for clerical errors, 
inadvertent acts, or acts of nature. They also indicated that servicers 
should not be liable for expending ``best and reasonable efforts'' in 
complying with the requirements. The comments advocated that penalties 
be based on practices and patterns of noncompliance. The MBA concurred 
and stated that ``* * * HUD should determine violations that warrant a 
monetary penalty based on a pattern or practice of noncompliance. 
Penalties would be justified in those cases where the servicer made the 
same error repeatedly.'' Ten comments suggested that the rule include a 
cure period, in which the servicer could submit a corrective statement 
to a borrower within 60 days of discovering the error. They pointed out 
that similar defenses are permitted by other consumer protection 
statutes.
    Strict liability is a term used in product liability law and HUD 
misapplied the term in the proposed rule. The final rule removes any 
reference to a strict liability standard. However, HUD continues the 
statutory distinction between unintentional and intentional violations. 
Violations do not require any proof of intent. The statute provides for 
more serious penalties in cases of a servicer's intentional disregard 
for the statute's requirements.
    As a statement of its enforcement policy, the Department is likely 
to pursue cases involving a pattern and practice of noncompliance more 
vigorously than solitary or minor transgressions of these provisions. 
HUD is less likely to enforce penalties in cases where the servicer has 
taken prompt corrective action on its own initiative.

Civil Penalties Procedures

    HUD received eight comments concerning the civil penalties 
procedures provisions. They suggested that HUD lengthen the time for 
servicers to prepare an adequate defense. The commenters suggested that 
the time to respond to a notice of intent to impose penalties be 
extended from 20 to 30 days. They wanted HUD to extend the period in 
which a servicer presents its evidence from 45 to 60 days. They also 
recommended extending the period for filing for judicial review of a 
decision from 20 to 30 days.
    In response, the Department extends from 20 to 30 days the initial 
response period to HUD's notice of intent to impose penalties. Because 
the rule permits the servicer to request additional time from the 
administrative law judge, HUD sees no need to extend the time for 
presenting evidence. Responding to comments, the final rule provides 30 
days for a party to file a petition seeking judicial review.

Financial Comments

    Seventeen commenters were concerned about the rule's effect upon 
the value of mortgage servicing rights. They estimated that servicing 
rights may be reduced in value by 3 to 20 percent. Three commenters 
requested that the final rule be applicable only to loans originated 
after the effective date, thus resulting in less impact on the value of 
servicing rights. Four stated that capital structures would be 
negatively affected for institutions with servicing rights regulated by 
government agencies (e.g., FDIC, OCC, OTS, Federal Reserve Board).
    The Department recognizes that the rule has an adverse effect on 
the pricing of mortgage servicing. HUD's issuance of the December 3, 
1993, proposed rule has already affected the value of mortgage 
servicing pricing. However, as indicated above, the Department believes 
that the three-year phase-in period somewhat tempers this effect. The 
phase-in period allows servicers to recoup the greatest value on their 
servicing rights in the early years of a mortgage loan, while the rule 
moves the industry to a simpler system that protects consumers as soon 
as practicable.

Legal Comments

    Twenty-three commenters questioned HUD's statutory authority to 
mandate interest-free loans to borrowers under RESPA. Five stated that 
the final rule should address compliance issues with individual State 
requirements. One commenter indicated that HUD left unaddressed how 
State rules take precedence or supersede the final rule. One respondent 
requested that the rule clarify whether RESPA establishes an escrow 
ceiling cushion and does not preempt State law or contracts between 
lenders and borrowers. A second stated that the final rule should 
address the impact the regulations will have on contractual 
relationships related to securitization arrangements. A third requested 
clarification of loans that are exempt from RESPA provisions pending 
HUD's final rule. Four commenters believed that the proposed rule could 
lead to an increase in escrow class action suits.
    The Department believes that it has full legal authority and 
administrative discretion to implement these escrow accounting 
regulations. Section 19(a) of RESPA empowers the Secretary to prescribe 
rules and regulations to achieve the purpose of the Act. This final 
rule reflects HUD's interpretation of the statute and HUD's reaction to 
public comments on the proposed rule. In issuing this rule, HUD 
considers the needs of borrowers and servicers and interprets the 
statute to respond to those needs. For example, in response to comments 
regarding interest-free loans, HUD recast certain provisions in the 
final rule. One of HUD's goals here is to promote Section 6's 
provisions that disbursements from escrow be made timely. At the same 
time, the final rule responds to servicers' needs for prompt 
reimbursement of their advances, and is fair to the borrower.
    Regarding the possible preemption of State laws, the Department 
recognizes that many of the States have enacted laws relating to escrow 
accounts. Section 18 of RESPA provides: ``This Act does not annul, 
alter, or affect, or exempt any person subject to the provisions of 
(RESPA) from complying with, the laws of any State with respect to 
settlement practices, except to the extent that those laws are 
inconsistent with any provision of (RESPA), and then only to the extent 
of the inconsistency.'' 12 USC 2616. Given this statutory language, and 
further statutory instruction that a state statute is not to be 
preempted if it gives greater protection to the consumer, the 
Department believes it should make specific preemption decisions on a 
case-by-case basis. The current RESPA rule (Sec. 3500.13(c)) sets forth 
provisions for requesting preemption determinations.

Conforming FHA Regulations

    Because some provisions in this final rule affect existing FHA 
regulations, this rule amends 24 CFR parts 203 and 234 to conform with 
these regulatory changes. HUD therefore amends Sec. 203.550(a) to 
clarify that the FHA mortgagee shall use the procedures contained in 
Sec. 3500.17 to compute the amount of escrow, the methods of collection 
and accounting, and the disbursement of escrow account items. HUD also 
amends Sec. 234.38 to conform with the final rule, and retains the 
language of Sec. 203.550(c) that permits FHA mortgagees to estimate 
escrow requirements based on the probable payments required for special 
assessment items, such as water purification escrow funds.

Other Matters

Environmental Impact

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.20 of the HUD regulations, the 
policies and procedures contained in this rule do not affect a physical 
structure or property and relate only to statutorily required 
accounting and reporting procedures, and, therefore, are categorically 
excluded from the requirements of the National Environmental Policy 
Act.

Executive Order 12866

    This rule constitutes a ``significant regulatory action'' as that 
term is defined in section 3(f) of Executive Order 12866 on Regulatory 
Planning and Review issued by the President on September 30, 1993. A 
preliminary review of the rule indicated that it might, as defined in 
that Order, have an annual effect on the economy of $100 million or 
more. Accordingly, a regulatory impact analysis was prepared and is 
available for review and inspection in Room 10276, Rules Docket Clerk, 
Office of the General Counsel, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule would not have a significant 
economic impact on a substantial number of small entities. The 
requirements of the proposed rule are directed toward the accounting 
procedures used in the mortgage servicing industry and the disclosure 
to consumers of related information.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this rule would not have substantial direct effects on 
States or their political subdivisions, or the relationship between the 
federal government and the States, or on the distribution of power and 
responsibilities among the various levels of government. As a result, 
the rule is not subject to review under the Order. The requirements of 
the rule are directed toward the accounting procedures used in the 
mortgage servicing industry and the disclosure to consumers of related 
information.

Executive Order 12606, the Family

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

Regulatory Agenda

    This rule was listed as item number 1615 in the Department's 
Semiannual Agenda of Regulations published on April 25, 1994, (59 FR 
20424, 20455) under Executive Order 12866 and the Regulatory 
Flexibility Act, and was requested by and submitted to the Committee on 
Banking, Housing and Urban Affairs of the Senate and the Committee on 
Banking, Finance and Urban Affairs of the House of Representatives 
under section 7(o) of the Department of Housing and Urban Development 
Act.

List of Subjects

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

24 CFR Part 234

    Condominiums, Mortgage insurance, Reporting and recordkeeping 
requirements.

24 CFR Part 3500

    Consumer protection, Housing, Mortgages, Real property acquisition, 
Reporting and recordkeeping requirements.

    For the reasons set out in the preamble, Interpretive Rule 1993-1, 
published in the Federal Register on January 21, 1993 (58 FR 5520), is 
withdrawn, and parts 203, 234, and 3500 of title 24 of the Code of 
Federal Regulations are amended as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    1. The authority citation for part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 1709, 1715b; 42 U.S.C. 3535(d).

    2. Section 203.23(a) is amended in paragraph (a)(5) by revising the 
first sentence and adding a new sentence at the end of the paragraph, 
to read as follows:


Sec. 203.23   Mortgagor's payments to include other charges.

    (a) * * *
    (5) Fire and other hazard insurance premiums, if any. * * * Such 
payments shall be held in an escrow subject to Sec. 203.550.
* * * * *
    3. Section 203.550 is amended by revising the last sentence in 
paragraph (a), removing and reserving paragraph (b), and revising 
paragraph (c), to read as follows:


Sec. 203.550   Escrow accounts.

    (a) * * * The mortgagee shall use the procedures set forth in 
Sec. 3500.17 of this title, implementing Section 10 of the Real Estate 
Settlement Procedures Act (12 U.S.C. 2609), to compute the amount of 
the escrow, the methods of collection and accounting, and the payment 
of the bills for which the money has been escrowed.
    (b) [Reserved]
    (c) In the case of escrow accounts created for purposes of 
Sec. 203.52 or Sec. 234.64 of this chapter, mortgagees may estimate 
escrow requirements based on the best information available as to 
probable payments that will be required to be made from the account on 
a periodic basis throughout the period during which the account is 
maintained.
* * * * *

PART 234--CONDOMINIUM OWNERSHIP MORTGAGE INSURANCE

    4. The authority citation for part 234 is revised to read as 
follows:

    Authority: 12 U.S.C. 1715b and 1715y; 42 U.S.C. 3535(d). Section 
234.520(a)(2)(ii) is also issued under 12 U.S.C. 1707(a).

    5. Section 234.38(a) is revised to read as follows:


Sec. 234.38   Mortgage provisions for additional payments and 
covenants.

    (a) The mortgage shall provide for such equal monthly payments by 
the mortgagor to the mortgagee as will amortize any ground or lease 
rents and the estimated amount of any taxes, special assessments, and 
any property insurance premiums that may be required by the mortgagee. 
These payments shall be held in an escrow subject to Sec. 203.550 of 
this title, which is incorporated by reference in Sec. 234.800.
* * * * *

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

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

    Authority: 12 U.S.C. 2601 et seq.

    7. Section 3500.8 is amended by adding a new paragraph (c), to read 
as follows:


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

* * * * *
    (c) Aggregate Accounting At Settlement. (1) If the settlement agent 
uses a cushion in determining the initial entries for lines 1000-1008 
of the HUD-1 or HUD-1A settlement statement, then the settlement agent 
shall make an adjustment to reflect the appropriate starting balance in 
the escrow account under the aggregate accounting method. The cushion 
using the aggregate accounting is computed according to the steps set 
out in Sec. 3500.17(d). The adjustment reflects the difference between 
the amounts collected as a cushion in the 1000 series for individual 
escrow items under the single-item accounting method and the 
permissible cushion under the aggregate accounting method. The servicer 
shall enter the aggregate adjustment amount on the last line in the 
1000 series of the HUD-1 or HUD-1A statement.
    (2) During the phase-in period, as defined in Sec. 3500.17(b), an 
alternative procedure is available. The settlement agent may initially 
calculate the 1000 series deposits for the HUD-1 and HUD-1A settlement 
statement using single-item analysis with only a one-month cushion 
(unless the mortgage loan documents indicate a smaller amount). In the 
escrow account analysis conducted within 45 days of settlement, 
however, the servicer shall adjust the escrow account to reflect the 
aggregate accounting balance. Appendix F to this part sets out examples 
of aggregate analysis. Appendix A to this part contains instructions 
for completing the HUD-1 or HUD-1A settlement statements using an 
aggregate analysis adjustment and the alternative process during the 
phase-in period.
    8. A new Sec. 3500.17 is added, to read as follows:


Sec. 3500.17   Escrow accounts.

    (a) General. This section sets out the requirements for an escrow 
account that a lender establishes in connection with a federally 
related mortgage loan. It sets limits for escrow accounts using 
calculations based on monthly payments and disbursements within a 
calendar year. If an escrow account involves biweekly or any other 
payment period, the requirements in this section shall be modified 
accordingly. Appendix H to this part provides an example of the 
transposition from monthly to biweekly accounting and Appendix J to 
this part provides an example of a 3-year accounting cycle that may be 
used in accordance with paragraph (c)(9) of this section.
    (b) Definitions. As used in this section:
    Acceptable accounting method means an accounting method that a 
servicer uses to conduct an escrow account analysis for an escrow 
account subject to the provisions of Sec. 3500.17(c).
    Aggregate (or) composite analysis, hereafter called aggregate 
analysis, means an accounting method a servicer uses in conducting an 
escrow account analysis by computing the sufficiency of escrow account 
funds by analyzing the account as a whole. Appendix F to this part sets 
forth examples of aggregate escrow account analyses.
    Annual Escrow Account Statement means a statement containing all of 
the information set forth in Sec. 3500.17(i). As noted in 
Sec. 3500.17(i), a servicer shall submit an annual escrow account 
statement to the borrower within 30 calendar days of the end of the 
escrow account computation year, after conducting an escrow account 
analysis.
    Conversion date means the date three years after the publication 
date of the rule adding this section (i.e., October 27, 1997) by which 
date all servicers shall use aggregate analysis.
    Cushion or reserve (hereafter cushion) means funds that a servicer 
may require a borrower to pay into an escrow account to cover 
unanticipated disbursements or disbursements made before the borrower's 
payments are available in the account, as limited by Sec. 3500.17(c).
    Date of establishment of an escrow account means the date the 
servicer establishes the escrow account.
    Deficiency is the amount of a negative balance in an escrow 
account. As noted in Sec. 3500.17(f), if a servicer advances funds for 
a borrower, then the servicer must perform an escrow account analysis 
before seeking repayment of the deficiency.
    Delivery means the placing of a document in the United States mail, 
first-class postage paid, addressed to the last known address of the 
recipient. Hand delivery also constitutes delivery.
    Disbursement date means the date on which the servicer actually 
pays an escrow item from the escrow account. Section 3500.17(k) 
provides that the servicer shall use as the disbursement date a date on 
or before the earlier of the deadline to take advantage of discounts, 
if available, or the deadline to avoid a penalty.
    Escrow account means any account that a servicer establishes or 
controls on behalf of a borrower to pay taxes, insurance premiums 
(including flood insurance), or other charges with respect to a 
federally related mortgage loan, including charges that the borrower 
and servicer have voluntarily agreed that the servicer should collect 
and pay. The definition encompasses any account established for this 
purpose, including a ``trust account'', ``reserve account'', ``impound 
account'', or other term in different localities. An ``escrow account'' 
includes any arrangement where the servicer adds a portion of 
borrower's payments to principal and subsequently deducts from 
principal the disbursements for escrow account items. For purposes of 
this section, the term ``escrow account'' excludes any account that is 
under the borrower's total control.
    Escrow account analysis means the accounting that a servicer 
conducts in the form of a trial running balance for an escrow account 
to:
    (1) Determine the appropriate target balances;
    (2) Compute the borrower's monthly payments for the next escrow 
account computation year and any deposits needed to establish or 
maintain the account; and
    (3) Determine whether shortages, surpluses or deficiencies exist.
    Escrow account computation year is a 12-month period that a 
servicer establishes for the escrow account beginning with the 
borrower's initial payment date. The term includes each 12-month period 
thereafter, unless a servicer chooses to issue a short year statement 
under the conditions stated in 3500.17(i)(4).
    Escrow account item or separate item means any separate expenditure 
category, such as ``taxes'' or ``insurance'', for which funds are 
collected in the escrow account for disbursement. An escrow account 
item with installment payments, such as local property taxes, remains 
one escrow account item regardless of multiple disbursement dates to 
the tax authority.
    Federally related mortgage loan has the meaning set forth in 
Sec. 3500.2.
    Initial escrow account statement means the first disclosure 
statement that the servicer delivers to the borrower concerning the 
borrower's escrow account. The initial escrow account statement shall 
meet the requirements of Sec. 3500.17(g) and be in substantially the 
format set forth in Sec. 3500.17(h).
    Installment payment means one of two or more payments payable on an 
escrow account item during an escrow account computation year. An 
example of an installment payment is where a jurisdiction bills 
quarterly for taxes.
    Mortgage loan means a federally related mortgage loan as that term 
is defined in Sec. 3500.2.
    Payment due date means the date each month when the borrower's 
monthly payment to an escrow account is due to the servicer. The 
initial payment date is the borrower's first payment due date to an 
escrow account.
    Phase-in period means the period beginning on the effective date of 
this final rule and ending on the conversion date, i.e., October, 27, 
1997], by which date all servicers shall use the aggregate accounting 
method in conducting escrow account analyses.
    Post-rule account means an escrow account established in connection 
with a federally related mortgage loan whose settlement date is on or 
after the effective date of this section.
    Pre-accrual is a practice some servicers use to require borrowers 
to deposit funds, needed for disbursement and maintenance of a cushion, 
in the escrow account some period before the disbursement date. Pre-
accrual is subject to the limitations of Sec. 3500.17(c).
    Pre-rule account is an escrow account established in connection 
with a federally related mortgage loan whose settlement date is before 
the effective date of this rule.
    Refinancing has the meaning set forth in Sec. 3500.2.
    Servicer means the person responsible for the servicing of a loan 
(including the person who makes or holds a loan if such person also 
services the loan). The term does not include:
    (1) The Federal Deposit Insurance Corporation (FDIC) or the 
Resolution Trust Corporation (RTC), in connection with assets acquired, 
assigned, sold, or transferred pursuant to section 13(c) of the Federal 
Deposit Insurance Act (12 U.S.C. 1823(c)) or as receiver or conservator 
of an insured depository institution; or
    (2) The Federal National Mortgage Corporation (FNMA); the Federal 
Home Loan Mortgage Corporation (Freddie Mac); the Resolution Trust 
Corporation (RTC), the Federal Deposit Insurance Corporation (FDIC); 
the Department of Housing and Urban Development (HUD), including the 
Government National Mortgage Association (GNMA) and the Federal Housing 
Administration (FHA); the National Credit Union Administration (NCUA); 
the Farmers Home Administration (FmHA); and the Department of Veterans 
Affairs (VA) in cases when the assignment, sale, or transfer of the 
servicing of the mortgage loan is preceded by termination of the 
contract for servicing the loan for cause, commencement of proceedings 
for bankruptcy of the servicer, or commencement of proceedings by the 
FDIC or RTC for conservatorship or receivership of the servicer (or an 
entity by which the servicer is owned or controlled).
    (3) The Federal Housing Administration (FHA), in cases where a 
mortgage insured under the National Housing Act (12 U.S.C. 1701 et 
seq.)is assigned to HUD.
    Servicing means the process of receiving any scheduled periodic 
payments from a borrower pursuant to the terms of any mortgage 
servicing loan, including amounts for escrow accounts under section 10 
of RESPA, and making the payments of principal and interest and such 
other payments with respect to the amounts received from the borrower 
to the owner of the loan or other third parties as may be required 
pursuant to the terms of the mortgage loan documents or servicing 
contract.
    Settlement has the same meaning set forth in Sec. 3500.2.
    Shortage means an amount by which a current escrow account balance 
falls short of the target balance at the time of escrow analysis.
    Single-item analysis means an accounting method servicers use in 
conducting an escrow account analysis by computing the sufficiency of 
escrow account funds by considering each escrow item separately. 
Appendix F to this part sets forth examples of single-item analysis.
    Submission (of an escrow account statement) means the delivery of 
the statement.
    Surplus means an amount by which the current escrow account balance 
exceeds the target balance for the account.
    System of recordkeeping means the servicer's method of keeping 
information that reflects the facts relating to that servicer's 
handling of the borrower's escrow account, including, but not limited 
to, the payment of amounts from the escrow account and the submission 
of initial and annual escrow account statements to borrowers.
    Target balance means the estimated month end balance in an escrow 
account that is just sufficient to cover the remaining disbursements 
from the escrow account in the escrow account computation year, taking 
into account the remaining scheduled periodic payments, and a cushion, 
if any.
    Trial running balance means the accounting process that derives the 
target balances over the course of an escrow account computation year. 
Section 3500.17(d) provides a description of the steps involved in 
performing a trial running balance.
    (c) Limits on payments to escrow accounts; acceptable accounting 
methods to determine limits.
    (1) A lender or servicer (hereafter servicer) shall not require a 
borrower to deposit into any escrow account, created in connection with 
a federally related mortgage loan, more than the following amounts:
    (i) Charges at settlement or upon creation of an escrow account. At 
the time a servicer creates an escrow account for a borrower, the 
servicer may charge the borrower an amount sufficient to pay the 
charges respecting the mortgaged property, such as taxes and insurance, 
which are attributable to the period from the date such payment(s) were 
last paid until the initial payment date. In addition, the servicer may 
charge the borrower a cushion that shall be no greater than one-sixth 
(\1/6\) of the estimated total annual payments from the escrow account.
    (ii) Charges during the life of the escrow account. Throughout the 
life of an escrow account, the servicer may charge the borrower a 
monthly sum equal to one-twelfth (\1/12\) of the total annual escrow 
payments which the servicer reasonably anticipates paying from the 
account. In addition, the servicer may add an amount to maintain a 
cushion no greater than one-sixth (\1/6\) of the estimated total annual 
payments from the account. However, if a servicer determines through an 
escrow account analysis that there is a shortage or deficiency, the 
servicer may require the borrower to pay additional deposits to make up 
the shortage or eliminate the deficiency, subject to the limitations 
set forth in Sec. 3500.17(f).
    (2) Escrow analysis at creation of escrow account. Before 
establishing an escrow account, the servicer shall conduct an escrow 
account analysis to determine the amount the borrower shall deposit 
into the escrow account, subject to the limitations of 
Sec. 3500.17(c)(1)(i) and the amount of the borrower's periodic 
payments into the escrow account, subject to the limitations of 
Sec. 3500.17(c)(1)(ii). In conducting the escrow account analysis, the 
servicer shall estimate the disbursement amounts according to 
Sec. 3500.17(c)(7). Pursuant to Sec. 3500.17(k), the servicer shall use 
a date on or before the earlier of the deadline to take advantage of 
discounts, if available, or the deadline to avoid a penalty as the 
disbursement date for the escrow item. Upon completing the initial 
escrow account analysis, the servicer shall prepare and deliver an 
initial escrow account statement to the borrower, as set forth in 
Sec. 3500.17(g). The servicer shall use the escrow account analysis to 
determine whether a surplus, shortage or deficiency exists since 
settlement and shall make any adjustments to the account pursuant to 
Sec. 3500.17(f).
    (3) Subsequent escrow account analyses. For each escrow account, 
the servicer shall conduct an escrow account analysis at the completion 
of the escrow account computation year to determine the borrower's 
monthly escrow account payments for the next computation year, subject 
to the limitations of Sec. 3500.17(c)(1)(ii). In conducting the escrow 
account analysis, the servicer shall estimate the disbursement amounts 
according to Sec. 3500.17(c)(7). Pursuant to Sec. 3500.17(k), the 
servicer shall use a date on or before the earlier of the deadline to 
take advantage of discounts, if available, or the deadline to avoid a 
penalty as the disbursement date for the escrow item. The servicer 
shall use the escrow account analysis to determine whether a surplus, 
shortage or deficiency exists and shall make any adjustments to the 
account pursuant to Sec. 3500.17(f). Upon completing an escrow account 
analysis, the servicer shall prepare and submit an annual escrow 
account statement to the borrower, as set forth in Sec. 3500.17(i).
    (4) Acceptable accounting methods to determine escrow limits. The 
following are acceptable accounting methods that servicers may use in 
conducting an escrow account analysis.
    (i) Pre-rule accounts. For pre-rule accounts, servicers may use 
either single-item analysis or aggregate-analysis during the phase-in 
period. In conducting the escrow account analysis, servicers shall use 
``month-end'' accounting. Under month-end accounting, the timing of the 
disbursements and payments within the month is irrelevant. As of the 
conversion date, all pre-rule accounts shall comply with the 
requirements for post-rule accounts in paragraph (c)(4)(ii) of this 
section. During the phase-in period, the transfer of servicing of a 
pre-rule account to another servicer does not convert the account to a 
post-rule account. After the effective date of this rule, refinancing 
transactions (as defined in Sec. 3500.2) shall comply with the 
requirements for post-rule accounts.
    (ii) Post-rule accounts. For post-rule accounts, servicers shall 
use aggregate accounting to conduct an escrow account analysis. In 
conducting the escrow account analysis, servicers shall use ``month-
end'' accounting. Under month-end accounting, the timing of the 
disbursements and payments within the month is irrelevant.
    (5) Cushion. For post-rule accounts, the cushion shall be no 
greater than one-sixth (\1/6\) of the estimated total annual 
disbursements from the escrow account using aggregate analysis 
accounting. For pre-rule accounts, the cushion may not exceed the total 
of one-sixth of the estimated annual disbursements for each escrow 
account item using single-item analysis accounting. In determining the 
cushion using single-item analysis, a servicer shall not divide an 
escrow account item into sub-accounts, even if the payee requires 
installment payments.
    (6) Restrictions on pre-accrual. For pre-rule accounts, a servicer 
shall not require any pre-accrual that results in the escrow account 
balance exceeding the limits of paragraph (c)(1) of this section. In 
addition, if the mortgage documents in a pre-rule account are silent 
about the amount of pre-accrual, the servicer shall not require in 
excess of one month of pre-accrual, subject to the additional 
limitations provided in paragraph (c)(8) of this section. For post-rule 
accounts, a servicer shall not practice pre-accrual.
    (7) Servicer estimates of disbursement amounts. To conduct an 
escrow account analysis, the servicer shall estimate the amount of 
escrow account items to be disbursed. If the servicer knows the charge 
for an escrow item in the next computation year, then the servicer 
shall use that amount in estimating disbursement amounts. If the charge 
is unknown to the servicer, the servicer may base the estimate on the 
preceding year's charge, or the preceding year's charge as modified by 
an amount not exceeding the most recent year's change in the national 
Consumer Price Index for all urban consumers (CPI, all items). In cases 
of unassessed new construction, the servicer may base an estimate on 
the assessment of comparable residential property in the market area.
    (8) Provisions in mortgage documents. The servicer shall examine 
the mortgage loan documents to determine the applicable cushion and 
limitations on pre-accrual for each escrow account. If the mortgage 
loan documents provide for lower cushion limits or less pre-accrual 
than this rule, then the terms of the loan documents apply. Where the 
terms of any mortgage loan document allow greater payments to an escrow 
account than allowed by this rule, then this rule controls the 
applicable limits. Where the mortgage loan documents do not 
specifically establish an escrow account, whether a servicer may 
establish an escrow account for the loan is a matter for determination 
by State law. If the mortgage loan document is silent on the escrow 
account limits (for cushion or pre-accrual) and a servicer establishes 
an escrow account under State law, then the limitations of this 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 this rule, 
unless an applicable State law sets a lesser amount.
    (9) Assessments for periods longer than one year. Some escrow 
account items may be billed for periods longer than one year. For 
example, servicers may need to collect flood insurance or water 
purification escrow funds for payment every three years. In such cases, 
the servicer shall estimate the borrower's payments for a full cycle of 
disbursements. For a flood insurance premium payable every 3 years, the 
servicer shall collect the payments reflecting 36 equal monthly 
amounts. For two out of the three years, however, the account balance 
may not reach its low monthly balance because the low point will be on 
a three-year cycle, as compared to an annual one. The annual escrow 
account statement shall explain this situation (see example in Appendix 
J to this part).
    (d) Methods of escrow account analysis. Paragraph (c) of this 
section prescribes acceptable accounting methods. The following sets 
forth the steps servicers shall use to determine whether their use of 
an acceptable accounting method conforms with the limitations in 
Sec. 3500.17(c)(1). The steps set forth in this section derive maximum 
limits. Servicers may use accounting procedures that result in lower 
target balances. In particular, servicers may use a cushion less than 
the permissible cushion or no cushion at all. This section does not 
require the use of a cushion.
    (1) Aggregate analysis. (i) When a servicer uses aggregate analysis 
in conducting the escrow account analysis, the target balances may not 
exceed the balances computed according to the following arithmetic 
operations:
    (A) The servicer first projects a trial balance for the account as 
a whole over the next computation year (a trial running balance). In 
doing so the servicer assumes that it will make estimated disbursements 
on or before the earlier of the deadline to take advantage of 
discounts, if available, or the deadline to avoid a penalty. The 
servicer does not use pre-accrual on these disbursement dates. The 
servicer also assumes that the borrower will make monthly payments 
equal to one-twelfth of the estimated total annual escrow account 
disbursements.
    (B) The servicer then examines the monthly trial balances and adds 
to the first monthly balance an amount just sufficient to bring the 
lowest monthly trial balance to zero, and adjusts all other monthly 
balances accordingly.
    (C) The servicer then adds to the monthly balances the permissible 
cushion. The cushion is two months of the borrower's escrow payments to 
the servicer or a lesser amount specified by State law or the mortgage 
document (net of any increases or decreases because of prior year 
shortages or surpluses, respectively).
    (ii) Lowest monthly balance. Under aggregate analysis, the lowest 
monthly target balance for the account shall be less than or equal to 
one-sixth of the estimated total annual escrow account disbursements or 
a lesser amount specified by State law or the mortgage document. The 
target balances that the servicer derives using these steps yield the 
maximum limit for the escrow account. Appendix F to this part 
illustrates these steps.
    (2) Single-item or other non-aggregate analysis method. (i) When a 
servicer uses single-item analysis or any hybrid accounting method in 
conducting an escrow account analysis during the phase-in period, the 
target balances may not exceed the balances computed according to the 
following arithmetic operations:
    (A) The servicer first projects a trial balance for each item over 
the next computation year (a trial running balance). In doing so the 
servicer assumes that it will make estimated disbursements on or before 
the earlier of the deadline to take advantage of discounts, if 
available, or the deadline to avoid a penalty. The servicer does not 
use pre-accrual on these disbursement dates. The servicer also assumes 
that the borrower will make periodic payments equal to one-twelfth of 
the estimated total annual escrow account disbursements.
    (B) The servicer then examines the monthly trial balance for each 
escrow account item and adds to the first monthly balance for each 
separate item an amount just sufficient to bring the lowest monthly 
trial balance for that item to zero, and then adjusts all other monthly 
balances accordingly.
    (C) The servicer then adds the permissible cushion, if any, to the 
monthly balance for the separate escrow account item. The permissible 
cushion is two months of escrow payments for the escrow account item 
(net of any increases or decreases because of prior year shortages or 
surpluses, respectively) or a lesser amount specified by State law or 
the mortgage document.
    (D) The servicer then examines the balances for each item to make 
certain that the lowest monthly balance for that item is less than or 
equal to one-sixth of the estimated total annual escrow account 
disbursements for that item or a lesser amount specified by State law 
or the mortgage document.
    (ii) In performing an escrow account analysis using single-item 
analysis, servicers may account for each escrow account item 
separately, but servicers shall not further divide accounts into sub-
accounts, even if the payee of a disbursement requires installment 
payments. The target balances that the servicer derives using these 
steps yield the maximum limit for the escrow account. Appendix F to 
this part illustrates these steps.
    (e) Transfer of servicing. (1) If the new servicer changes either 
the monthly payment amount or the accounting method used by the 
transferor (old) servicer, then the new servicer shall provide the 
borrower with an initial escrow account statement within 60 days of the 
date of servicing transfer.
    (i) Where a new servicer provides an initial escrow account 
statement upon the transfer of servicing, the new servicer shall use 
the effective date of the transfer of servicing to establish the new 
escrow account computation year.
    (ii) Where the new servicer retains the monthly payments and 
accounting method used by the transferor servicer, then the new 
servicer may continue to use the escrow account computation year 
established by the transferor servicer or may choose to establish a 
different computation year using a short-year statement. At the 
completion of the escrow account computation year or any short year, 
the new servicer shall perform an escrow analysis and provide the 
borrower with an annual escrow account statement.
    (2) The new servicer shall treat shortages, surpluses and 
deficiencies in the transferred escrow account according to the 
procedures set forth in Sec. 3500.17(f).
    (3) A pre-rule account remains a pre-rule account upon the transfer 
of servicing to a new servicer so long as the transfer occurs before 
the conversion date.
    (f) Shortages, surpluses, and deficiencies requirements. (1) Escrow 
account analysis. For each escrow account, the servicer shall conduct 
an escrow account analysis to determine whether a surplus, shortage or 
deficiency exists.
    (i) As noted in Secs. 3500.17(c)(2) and (3), the servicer shall 
conduct an escrow account analysis upon establishing an escrow account 
and at completion of the escrow account computation year.
    (ii) The servicer may conduct an escrow account analysis at other 
times during the escrow computation year. If a servicer advances funds 
in paying a disbursement, which is not the result of a borrower's 
payment default under the underlying mortgage document, then the 
servicer shall conduct an escrow account analysis to determine the 
extent of the deficiency before seeking repayment of the funds from the 
borrower under this paragraph (f).
    (2) Surpluses. (i) If an escrow account analysis discloses a 
surplus, the servicer shall, within 30 days from the date of the 
analysis, refund the surplus to the borrower if the surplus is greater 
than or equal to 50 dollars ($50). If the surplus is less than 50 
dollars ($50), the servicer may refund such amount to the borrower, or 
credit such amount against the next year's escrow payments.
    (ii) These provisions regarding surpluses apply if the borrower is 
current at the time of the escrow account analysis. A borrower is 
current if the servicer receives the borrower's payments within 30 days 
of the payment due date. If the servicer does not receive the 
borrower's payment within 30 days of the payment due date, then the 
servicer may retain the surplus in the escrow account pursuant to the 
terms of the mortgage loan documents.
    (3) Shortages.  (i) If an escrow account analysis discloses a 
shortage of less than one month's escrow account payment, then the 
servicer has three possible courses of action:
    (A) The servicer may allow a shortage to exist and do nothing to 
change it;
    (B) The servicer may allow the borrower to pay the shortage amount 
within 30 days; or
    (C) The servicer may allow the borrower to repay the shortage in 
equal monthly payments over a 12-month period.
    (ii) If an escrow account analysis discloses a shortage that is 
greater than or equal to one month's escrow account payment, then the 
servicer has two possible courses of action:
    (A) The servicer may allow a shortage to exist and do nothing to 
change it; or
    (B) The servicer shall allow the borrower to repay the shortage in 
equal monthly payments over a 12-month period.
    (4) Deficiency. If the escrow account analysis confirms a 
deficiency, then the servicer may require the borrower to pay 
additional monthly deposits to the account to eliminate the deficiency.
    (i) If the deficiency is less than one month's escrow account 
payment, then the servicer:
    (A) May allow the deficiency to exist and do nothing to change it;
    (B) May require the borrower to repay the deficiency within 30 
days; or
    (C) May allow the borrower to repay the deficiency in 2 or more 
equal monthly payments over a period of up to 12 months.
    (ii) If the deficiency is greater than or equal to 1 month's escrow 
account payment, the servicer may allow the deficiency to exist and do 
nothing to change it or may allow the borrower to repay the deficiency 
in 2 or more equal monthly payments over a period of up to 12 months.
    (iii) These provisions regarding deficiencies apply if the borrower 
is current at the time of the escrow account analysis. A borrower is 
current if the servicer receives the borrower's payments within 30 days 
of the payment due date. If the servicer does not receive the 
borrower's payment within 30 days of the payment due date, then the 
servicer may recover the deficiency pursuant to the terms of the 
mortgage loan documents.
    (5) Notice of Shortage or Deficiency in Escrow Account. The 
servicer shall notify the borrower at least once during the escrow 
account computation year if there is a shortage or deficiency in the 
escrow account. The notice may be part of the annual escrow account 
statement or it may be a separate document.
    (g) Initial Escrow Account Statement. (1) Submission at settlement, 
or within 45 calendar days of settlement. As noted in 
Sec. 3500.17(c)(2), the servicer shall conduct an escrow account 
analysis before establishing an escrow account to determine the amount 
the borrower shall deposit into the escrow account, subject to the 
limitations of Sec. 3500.17(c)(1)(i). After conducting the escrow 
account analysis for each escrow account, the servicer shall submit an 
initial escrow account statement to the borrower at settlement or 
within 45 calendar days of settlement for escrow accounts that are 
established as a condition of the loan.
    (i) The initial escrow account statement shall include the amount 
of the borrower's monthly mortgage payment and the portion of the 
monthly payment going into the escrow account and shall itemize the 
estimated taxes, insurance premiums, and other charges that the 
servicer reasonably anticipates to be paid from the escrow account 
during the escrow account computation year and the anticipated 
disbursement dates of those charges. The initial escrow account 
statement shall indicate the amount that the servicer selects as a 
cushion. The statement shall include a trial running balance for the 
account.
    (ii) Pursuant to Sec. 3500.17(h)(2), the servicer may incorporate 
the initial escrow account statement into the HUD-1 or HUD-1A 
settlement statement. If the servicer does not incorporate the initial 
escrow account statement into the HUD-1 or HUD-1A settlement statement, 
then the servicer shall submit the initial escrow account statement to 
the borrower as a separate document.
    (2) Time of submission of initial escrow account statement for an 
escrow account established after settlement. For escrow accounts 
established after settlement (and which are not a condition of the 
loan), a servicer shall submit an initial escrow account statement to a 
borrower within 45 calendar days of the date of establishment of the 
escrow account.
    (h) Format for initial escrow account statement. (1) The format and 
a completed example for an initial escrow account statement is set out 
in Appendix G of this part.
    (2) Incorporation of Initial Escrow Account Statement Into HUD-1 or 
HUD-1A Settlement Statement. Pursuant to Sec. 3500.9(a)(11), a servicer 
may add the initial escrow account statement to the HUD-1 or HUD-1A 
settlement statement. The servicer may include the initial escrow 
account statement in the basic text or may attach the initial escrow 
account statement as an additional page to the HUD-1 or HUD-1A 
settlement statement.
    (3) Identification of Payees. The initial escrow account statement 
need not identify a specific payee by name if it provides sufficient 
information to identify the use of the funds. For example, appropriate 
entries include: county taxes, hazard insurance, condominium dues, etc. 
If a particular payee, such as a taxing body, receives more than one 
payment during the escrow account computation year, the statement shall 
indicate each payment and disbursement date. If there are several 
taxing authorities or insurers, the statement shall identify each 
taxing body or insurer (e.g., ``City Taxes'', ``School Taxes'', 
``Hazard Insurance'', or ``Flood Insurance,'' etc.).
    (i) Annual Escrow Account Statements. For each escrow account, a 
servicer shall submit an annual escrow account statement to the 
borrower within 30 days of the completion of the escrow account 
computation year. The servicer shall conduct an escrow account analysis 
before submitting an annual escrow account statement to the borrower.
    (1) Contents of Annual Escrow Account Statement. The annual escrow 
account statement shall provide an account history, reflecting the 
activity in the escrow account during the escrow account computation 
year, and a projection of the activity in the account for the next 
year. The annual escrow account statement shall include, at a minimum, 
the following:
    (i) The amount of the borrower's current monthly mortgage payment 
and the portion of the monthly payment going into the escrow account;
    (ii) The amount of the past year's monthly mortgage payment and the 
portion of the monthly payment that went into the escrow account;
    (iii) The total amount paid into the escrow account during the past 
computation year;
    (iv) The total amount paid out of the escrow account during the 
same period for taxes, insurance premiums, and other charges;
    (v) The balance in the escrow account at the end of the period;
    (vi) An explanation of how any surplus is being handled by the 
servicer;
    (vii) An explanation of how any shortage or deficiency is to be 
paid by the borrower; and
    (viii) If applicable, the reason(s) why the estimated low monthly 
balance was not reached.
    (2) No annual statements necessary in cases of default or 
foreclosure. This paragraph contains an exemption to the provision of 
Sec. 3500.17(i)(1). If at the time the servicer conducts the escrow 
account analysis the borrower is more than 30 days overdue, then the 
servicer is exempt from the requirements of submitting an annual escrow 
account statement to the borrower under Sec. 3500.17(i). This exemption 
also applies in situations where the servicer has brought an action for 
foreclosure under the underlying mortgage loan.
    (3) Delivery with other material. The servicer may deliver the 
annual escrow account statement to the borrower with other statements 
or materials, including the Substitute 1098, which is provided for 
federal income tax purposes.
    (4) Short year statements. A servicer may issue a short year annual 
escrow account statement (``short year statement'') to change one 
escrow account computation year to another. By using a short year 
statement a servicer may adjust its production schedule or alter the 
escrow account computation year for the escrow account.
    (i) Effect of short year statement. The short year statement shall 
end the ``escrow account computation year'' for the escrow account and 
establish the beginning date of the new escrow account computation 
year. The servicer shall deliver the short year statement to the 
borrower within 60 days from the end of the short year.
    (ii) Short year statement upon servicing transfer. Upon the 
transfer of servicing, the transferor (old) servicer shall submit a 
short year statement to the borrower within 60 days of the effective 
date of transfer.
    (iii) Short year statement upon loan payoff. If a borrower pays off 
a mortgage loan during the escrow account computation year, the 
servicer shall submit a short year statement to the borrower within 60 
days after receiving the pay-off funds.
    (j) Formats for annual escrow account statement. The formats and 
completed examples for annual escrow account statements using single-
item analysis (pre-rule accounts) and aggregate analysis are set out in 
Appendix I of this part.
    (k) Timely payments. (1) If the terms of any federally related 
mortgage loan require the borrower to make payments to an escrow 
account, the servicer shall pay the disbursements in a timely manner, 
that is, by the disbursement date, so long as the borrower's payment is 
not more than 30 days overdue. In calculating the disbursement date, 
the servicer shall use a date on or before the earlier of the deadline 
to take advantage of discounts, if available, or the deadline to avoid 
a penalty.
    (2) The servicer shall advance funds to make disbursements in a 
timely manner so long as the borrower's payment is not more than 30 
days overdue. Upon advancing funds to pay a disbursement, the servicer 
may seek repayment from the borrower for the deficiency pursuant to 
Sec. 3500.17(f).
    (l) System of recordkeeping. (1) Each servicer shall keep records, 
which may involve electronic storage, microfiche storage, or any method 
of computerized storage, so long as the information is easily 
retrievable, reflecting the servicer's handling of each borrower's 
escrow account. The servicer's records shall include, but not be 
limited to, the payment of amounts into and from the escrow account and 
the submission of initial and annual escrow account statements to the 
borrower.
    (2) The servicer responsible for servicing the borrower's escrow 
account shall maintain the records for that account for a period of at 
least five years after the servicer last serviced the escrow account.
    (3) A servicer shall provide the Secretary with information 
contained in the servicer's records for a specific escrow account, or 
for a number or class of escrow accounts, within 30 days of the 
Secretary's written request for the information. The servicer shall 
convert any information contained in electronic storage, microfiche or 
computerized storage to paper copies for review by the Secretary.
    (i) To aid in investigations, the Secretary may also issue an 
administrative subpoena for the production of documents, and for the 
testimony of such witnesses as the Secretary deems advisable.
    (ii) If the subpoenaed party refuses to obey the Secretary's 
administrative subpoena, the Secretary is authorized to seek a court 
order requiring compliance with the subpoena from any United States 
district court. Failure to obey such an order of the court may be 
punished as contempt of court.
    (4) Borrowers may seek information contained in the servicer's 
records by complying with the provisions set forth in 12 U.S.C. 2605(e) 
and Sec. 3500.21(f).
    (5) After receiving a request (by letter or subpoena) from the 
Department for information relating to whether a servicer submitted an 
escrow account statement to the borrower, the servicer shall respond 
within 30 days. If the servicer is unable to provide the Department 
with such information, the Secretary shall deem that lack of 
information to be evidence of the servicer's failure to submit the 
statement to the borrower.
    (m) Penalties. (1) A servicer's failure to submit to a borrower an 
initial or annual escrow account statement meeting the requirements of 
this part shall constitute a violation of the RESPA and this section. 
For each such violation, the Secretary shall assess a civil penalty of 
50 dollars ($50), except that the total of the assessed penalties shall 
not exceed $100,000 for any one servicer for violations that occur 
during any consecutive 12-month period.
    (2) Violations described in paragraph (m)(1) of this section do not 
require any proof of intent. However, if a lender or servicer is shown 
to have intentionally disregarded the requirements that it submit the 
escrow account statement to the borrower, then the Secretary shall 
assess a civil penalty of $100 for each violation, with no limit on the 
total amount of the penalty.
    (n) Civil penalties procedures. The following procedures shall 
apply whenever the Department seeks to impose a civil money penalty for 
violation of section 10(c) of RESPA (12 U.S.C. 2609(c)):
    (1) Purpose and scope. This paragraph explains the procedures by 
which the Secretary may impose penalties under 12 U.S.C. 2609(d). These 
procedures include administrative hearings, judicial review, and 
collection of penalties. This paragraph governs penalties imposed under 
12 U.S.C. 2609(d) and, when noted, adopts those portions of 24 CFR part 
30, subpart E, that apply to all other civil penalty proceedings 
initiated by the Secretary.
    (2) Authority. The Secretary has the authority to impose civil 
penalties under section 10(d) of RESPA (12 U.S.C. 2609(d)).
    (3) Notice of intent to impose civil money penalties. Whenever the 
Secretary intends to impose a civil money penalty for violations of 
section 10(c) of RESPA (12 U.S.C. 2609(c)), the responsible program 
official, or his or her designee, shall serve a written Notice of 
Intent to Impose Civil Money Penalties (Notice of Intent) upon any 
servicer on which the Secretary intends to impose the penalty. A copy 
of the Notice of Intent must be filed with the Chief Docket Clerk, 
Office of Administrative Law Judges, at the address provided in the 
Notice of Intent. The Notice of Intent will provide:
    (i) A short, plain statement of the facts upon which the Secretary 
has determined that a civil money penalty should be imposed, including 
a brief description of the specific violations under 12 U.S.C. 2609(c) 
with which the servicer is charged and whether such violations are 
believed to be intentional or unintentional in nature, or a combination 
thereof;
    (ii) The amount of the civil money penalty that the Secretary 
intends to impose and whether the limitations in 12 U.S.C. 2609(d)(1), 
apply;
    (iii) The right of the servicer to a hearing on the record to 
appeal the Secretary's preliminary determination to impose a civil 
penalty;
    (iv) The procedures to appeal the penalty;
    (v) The consequences of failure to appeal the penalty; and
    (vi) The name, address, and telephone number of the representative 
of the Department, and the address of the Chief Docket Clerk, Office of 
Administrative Law Judges, should the servicer decide to appeal the 
penalty.
    (4) Appeal procedures. (i) Answer. To appeal the imposition of a 
penalty, a servicer shall, within 30 days after receiving service of 
the Notice of Intent, file a written Answer with the Chief Docket 
Clerk, Office of Administrative Law Judges, Department of Housing and 
Urban Development, at the address provided in the Notice of Intent. The 
Answer shall include a statement that the servicer admits, denies, or 
does not have (and is unable to obtain) sufficient information to admit 
or deny each allegation made in the Notice of Intent. A statement of 
lack of information shall have the effect of a denial. Any allegation 
that is not denied shall be deemed admitted. Failure to submit an 
Answer within the required period of time will result in a decision by 
the Administrative Law Judge based upon the Department's submission of 
evidence in the Notice of Intent.
    (ii) Submission of evidence. A servicer that receives the Notice of 
Intent has a right to present evidence. Evidence must be submitted 
within 45 calendar days from the date of service of the Notice of 
Intent, or by such other time as may be established by the 
Administrative Law Judge (ALJ). The servicer's failure to submit 
evidence within the required period of time will result in a decision 
by the Administrative Law Judge based upon the Department's submission 
of evidence in the Notice of Intent. The servicer may present evidence 
of the following:
    (A) The servicer did submit the required escrow account 
statement(s) to the borrower(s); or
    (B) Even if the servicer did not submit the required statement(s), 
that the failure was not the result of an intentional disregard of the 
requirements of the RESPA (for purposes of determining the penalty).
    (iii) Review of the record. The Administrative Law Judge will 
review the evidence submitted by the servicer, if any, and that 
submitted by the Department. The Administrative Law Judge shall make a 
determination based upon a review of the written record, except that 
the Administrative Law Judge may order an oral hearing if he or she 
finds that the determination turns on the credibility or veracity of a 
witness, or that the matter cannot be resolved by review of the 
documentary evidence. If the Administrative Law Judge decides that an 
oral hearing is appropriate, then the procedural rules set forth at 24 
CFR part 30, subpart E, shall apply, to the extent that they are not 
inconsistent with this section.
    (iv) Burden of Proof. The burden of proof or the burden of going 
forward with the evidence shall be upon the proponent of an action. The 
Department's submission of evidence that the servicer's system of 
records lacks information that the servicer submitted the escrow 
account statement(s) to the borrower(s) shall satisfy the Department's 
burden. Upon the Department's presentation of evidence of this lack of 
information in the servicer's system of records, the burden of proof 
shifts from the Secretary to the servicer to provide evidence that it 
submitted the statement(s) to the borrower.
    (v) Standard of Proof. The standard of proof shall be the 
preponderance of the evidence.
    (5) Determination of the Administrative Law Judge.
    (i) Following the hearing or the review of the written record, the 
Administrative Law Judge shall issue a decision that shall contain 
findings of fact, conclusions of law, and the amount of any penalties 
imposed. The decision shall include a determination of whether the 
servicer has failed to submit any required statements and, if so, 
whether the servicer's failure was the result of an intentional 
disregard for the law's requirements.
    (ii) The Administrative Law Judge shall issue the decision to all 
parties within 30 days of the submission of the evidence or the post-
hearing briefs, whichever is the last to occur.
    (iii) The decision of the Administrative Law Judge shall constitute 
the final decision of the Department and shall be final and binding on 
the parties.
    (6) Judicial review. (i) A person against whom the Department has 
imposed a civil money penalty under this part may obtain a review of 
the Department's final decision by filing a written petition for a 
review of the record with the appropriate United States district court.
    (ii) The petition must be filed within 30 days after the decision 
is filed with the Chief Docket Clerk, Office of Administrative Law 
Judges.
    (7) Collection of penalties.  (i) If any person fails to comply 
with the Department's final decision imposing a civil money penalty, 
the Secretary, if the time for judicial review of the decision has 
expired, may request the Attorney General to bring an action in an 
appropriate United States district court to obtain a judgment against 
the person that has failed to comply with the Department's final 
decision.
    (ii) In any such collection action, the validity and 
appropriateness of the Department's final decision imposing the civil 
penalty shall not be subject to review in the district court.
    (iii) The Secretary may obtain such other relief as may be 
available, including attorney fees and other expenses in connection 
with the collection action.
    (iv) Interest on and other charges for any unpaid penalty may be 
assessed in accordance with 31 U.S.C. 3717.
    (8) Offset. In addition to any other rights as a creditor, the 
Secretary may seek to collect a civil money penalty through 
administrative offset.
    (9) At any time before the decision of the Administrative Law 
Judge, the Secretary and the servicer may enter into an administrative 
settlement. The settlement may include provisions for interest, 
attorney's fees, and costs related to the proceeding. Such settlement 
will terminate the appearance before the Administrative Law Judge.

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

    9. Appendix A is amended by adding two new paragraphs after the 
paragraph for Lines 1000-1008 under the heading ``Line Item 
Instructions'' and by adding Appendices F, G, H, I, and J, to read as 
follows:

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

* * * * *

Line Item Instructions

* * * * *
    If the settlement agent uses a cushion in determining the initial 
entries for lines 1000-1008 of the HUD-1 or HUD-1A settlement 
statement, then the settlement agent shall make an adjustment to 
reflect the appropriate starting balance in the escrow account under an 
aggregate accounting method. The cushion using the aggregate accounting 
is computed according to the steps set out in Sec. 3500.17(d). The 
adjustment reflects the difference between the amounts collected as a 
cushion on the lines 1000-1008 for individual escrow items and the 
permissible cushion under the aggregate accounting method. The servicer 
shall enter the aggregate adjustment amount on the final line of the 
1000 series of the HUD-1 or the HUD-1A statement. The amount will 
always be $-0- or a negative number.
    During the phase-in period, as defined in Sec. 3500.17(b), an 
alternative procedure is available. If a servicer has not yet conducted 
the escrow account analysis to determine the aggregate accounting 
starting balance, the settlement agent may initially calculate the 1000 
series deposits for the HUD-1 and HUD-1A settlement statement using 
single-item analysis with a one-month cushion (unless the mortgage loan 
documents indicate a smaller amount). In the escrow account analysis 
conducted within 45 days of settlement, the servicer shall adjust the 
escrow account to reflect the aggregate accounting balance.
* * * * *

Appendix F to Part 3500--[Added]

APPENDIX F--ARITHMETIC STEPS

I. Example Illustrating Aggregate Analysis:

ASSUMPTIONS:

Disbursements:
    $360 for school taxes disbursed on September 20
    $1,200 for county property taxes:
    $500 disbursed on July 25
    $700 disbursed on December 10
Cushion: One-sixth of estimated annual disbursements
Settlement: May 15
First Payment: July 1 

                     Step 1.--Initial Trial Balance                     
------------------------------------------------------------------------
                                                     Aggregate          
                                           -----------------------------
                                              pmt       disb      bal   
------------------------------------------------------------------------
Jun.......................................         0         0         0
Jul.......................................       130       500      -370
Aug.......................................       130         0      -240
Sep.......................................       130       360      -470
Oct.......................................       130         0      -340
Nov.......................................       130         0      -210
Dec.......................................       130       700      -780
Jan.......................................       130         0      -650
Feb.......................................       130         0      -520
Mar.......................................       130         0      -390
Apr.......................................       130         0      -260
May.......................................       130         0      -130
Jun.......................................       130         0        0 
------------------------------------------------------------------------


                     Step 2.--Adjusted Trial Balance                    
       [Increase monthly balances to eliminate negative balances]       
------------------------------------------------------------------------
                                                     Aggregate          
                                           -----------------------------
                                              pmt       disb      bal   
------------------------------------------------------------------------
Jun.......................................         0         0       780
Jul.......................................       130       500       410
Aug.......................................       130         0       540
Sep.......................................       130       360       310
Oct.......................................       130         0       440
Nov.......................................       130         0       570
Dec.......................................       130       700         0
Jan.......................................       130         0       130
Feb.......................................       130         0       260
Mar.......................................       130         0       390
Apr.......................................       130         0       520
May.......................................       130         0       650
Jun.......................................       130         0      780 
------------------------------------------------------------------------


                   Step 3.--Trial Balance With Cushion                  
------------------------------------------------------------------------
                                                      Aggregate         
                                           -----------------------------
                                               pmt      disb       bal  
------------------------------------------------------------------------
Jun.......................................         0         0      1040
Jul.......................................       130       500       670
Aug.......................................       130         0       800
Sep.......................................       130       360       570
Oct.......................................       130         0       700
Nov.......................................       130         0       830
Dec.......................................       130       700       260
Jan.......................................       130         0       390
Feb.......................................       130         0       520
Mar.......................................       130         0       650
Apr.......................................       130         0       780
May.......................................       130         0       910
Jul.......................................       130         0      1040
------------------------------------------------------------------------

II. Example Illustrating Single-Item Analysis (Existing Accounts)

ASSUMPTIONS:

Disbursements:
    $360 for school taxes disbursed on September 20
    $1,200 for county property taxes:
    $500 disbursed on July 25
    $700 disbursed on December 10
Cushion: One-sixth of estimated annual disbursements
Settlement: May 15
First Payment: July 1

                                         Step 1.--Initial Trial Balance                                         
----------------------------------------------------------------------------------------------------------------
                                                                             Single--item                       
                                                     -----------------------------------------------------------
                                                                  Taxes                               pmt       
                                                     ------------------------------  School  -------------------
                                                         pmt      disb       bal      taxes     disb       bal  
----------------------------------------------------------------------------------------------------------------
Jun.................................................         0         0         0         0         0         0
Jul.................................................       100       500      -400        30         0        30
Aug.................................................       100         0      -300        30         0        60
Sep.................................................       100         0      -200        30       360      -270
Oct.................................................       100         0      -100        30         0      -240
Nov.................................................       100         0         0        30         0      -210
Dec.................................................       100       700      -600        30         0      -180
Jan.................................................       100         0      -500        30         0      -150
Feb.................................................       100         0      -400        30         0      -120
Mar.................................................       100         0      -300        30         0       -90
Apr.................................................       100         0      -200        30         0       -60
May.................................................       100         0      -100        30         0       -30
Jun.................................................       100         0         0        30         0        -0
----------------------------------------------------------------------------------------------------------------


           Step 2.--Adjusted Trial Balance (Increase Monthly Balances To Eliminate Negative Balances)           
----------------------------------------------------------------------------------------------------------------
                                                                              Single-item                       
                                                     -----------------------------------------------------------
                                                                  Taxes                     School taxes        
                                                     -----------------------------------------------------------
                                                         pmt      disb       bal       pmt      disb       bal  
----------------------------------------------------------------------------------------------------------------
Jun.................................................         0         0       600         0         0       270
Jul.................................................       100       500       200        30         0       300
Aug.................................................       100         0       300        30         0       330
Sep.................................................       100         0       400        30       360         0
Oct.................................................       100         0       500        30         0        30
Nov.................................................       100         0       600        30         0        60
Dec.................................................       100       700         0        30         0        90
Jan.................................................       100         0       100        30         0       120
Feb.................................................       100         0       200        30         0       150
Mar.................................................       100         0       300        30         0       180
Apr.................................................       100         0       400        30         0       210
May.................................................       100         0       500        30         0       240
Jun.................................................       100         0       600        30         0       270
----------------------------------------------------------------------------------------------------------------


                                       Step 3--Trial Balance With Cushion                                       
----------------------------------------------------------------------------------------------------------------
                                                                              Single-Item                       
                                                     -----------------------------------------------------------
                                                                  Taxes                     School taxes        
                                                     -----------------------------------------------------------
                                                         pmt      disb       bal       pmt      disb       bal  
----------------------------------------------------------------------------------------------------------------
Jun.................................................         0         0       800         0         0       330
Jul.................................................       100       500       400        30         0       360
Aug.................................................       100         0       500        30         0       390
Sep.................................................       100         0       600        30       360        60
Oct.................................................       100         0       700        30         0        90
Nov.................................................       100         0       800        30         0       120
Dec.................................................       100       700       200        30         0       150
Jan.................................................       100         0       300        30         0       180
Feb.................................................       100         0       400        30         0       210
Mar.................................................       100         0       500        30         0       240
Apr.................................................       100         0       600        30         0       270
May.................................................       100         0       700        30         0       300
Jun.................................................       100         0       800        30         0       330
----------------------------------------------------------------------------------------------------------------


BILLING CODE 4210-27-P

Appendix G to Part 3500--[Added]

TR26OC94.006


TR26OC94.007

Appendix H to Part 3500--[Added]

TR26OC94.008

Appendix I to Part 3500--[Added]

TR26OC94.009


TR26OC94.010


TR26OC94.011


TR26OC94.012


TR26OC94.013


TR26OC94.014


TR26OC94.015


TR26OC94.016

Appendix J to Part 3500--[Added]

TR26OC94.017

BILLING CODE 4210-27-C
    Dated: October 7, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 94-26583 Filed 10-25-94; 8:45 am]
BILLING CODE 4210-27-P