[Federal Register Volume 61, Number 171 (Tuesday, September 3, 1996)]
[Proposed Rules]
[Pages 46511-46527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22371]
Federal Register / Vol. 61, No. 171 / Tuesday, September 3, 1996 /
Proposed Rules
[[Page 46511]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500
[Docket No. FR-4079-P-01]
RIN 2502-AG75
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner Real Estate Settlement Procedures Act (Regulation X):
Escrow Accounting Procedures
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule addresses three problems that have arisen
in applying HUD's current escrow accounting rule under the Real Estate
Settlement Procedures Act (RESPA), proposes a minor additional change
to the RESPA rule, and provides public notice of certain technical
clarifications to the rule. This proposed rule includes several
appendices, which in the final rule are likely to be published as
Public Guidance Documents (rather than codified appendices), in the
interests of regulatory streamlining. However, these materials are set
forth in this proposed rule as appendices, for the convenience of
commenters during the review period.
The first problem addressed in this rule involves the application
of requirements respecting the method of servicers' disbursements from
mortgage escrow accounts where the payee (i.e., the entity to which
escrow items are owed, such as a taxing jurisdiction) offers a choice
of disbursements on an annual or installment basis. Because of
perceived ambiguities in the current rule, there have been disparities
in performance among mortgage servicers. Some servicers switched to
making annual disbursements for escrow items, such as property taxes,
where discounts for these payments were available, while other
servicers switched to installment disbursements for items where
installments were allowed. The choice of disbursement methods has
consequences for borrowers, including increasing or decreasing the
amounts required to be deposited into the escrow account at closing and
during the life of the escrow account. The disbursement method may also
have income tax ramifications, depending on the timing of disbursements
for deductible items. Because of these consequences, this rule proposes
several alternatives for addressing this problem, including, as the
preferred option, offering the borrower the choice of disbursement
method.
The second problem involves cases where the servicer anticipates
that disbursements for items such as property taxes will increase
substantially in the second year of the escrow account. Because HUD's
current escrow rule provides for calculating escrow payments based on
the projection of escrow disbursements for a 12-month period, when
escrow items increase substantially after the initial 12-month period,
the result could be that the servicer may require of the borrower a
substantial increase in monthly payments for the second year, not only
to reflect the higher disbursements, but to make up a deficiency or
shortage in the escrow account. To avoid this type of surprise for the
borrower, who may not be prepared to make the higher payments, the rule
proposes several solutions to this problem, including, as a preferred
option, offering the borrower the choice at closing of how the account
is to be calculated.
A third problem that this rule proposes to address, in the interest
of avoiding confusion, is the means of disclosure on the HUD-1 and HUD-
1A settlement forms of amounts required for the escrow account. HUD is
also proposing a minor additional change to the RESPA rule and is
clarifying existing regulations regarding matters that do not require
substantive modifications to the regulatory language.
DATES: Comment due date: November 4, 1996.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Rules Docket Clerk, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC 20410-0500. Communications should
refer to the above docket number and title. Facsimile (FAX) comments
are not acceptable. A copy of each communication submitted will be
available for public inspection and copying between 7:30 a.m. and 5:30
p.m. weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, Office
of Consumer and Regulatory Affairs, Room 5241, telephone 202-708-4560;
or, for legal questions, Richard S. Bennett, Attorney; Grant Mitchell,
Senior Attorney for RESPA; or Kenneth A. Markison, Assistant General
Counsel for GSE/RESPA, Room 9262, telephone 202-708-3137 (these are not
toll-free telephone numbers). For hearing- and speech-impaired persons,
these telephone numbers may be accessed via TTY (text telephone) by
calling the Federal Information Relay Service at 1-800-877-8339 (toll-
free). The address for each of these persons is: Department of Housing
and Urban Development, 451 Seventh Street, SW, Washington, DC 20410-
0500.
SUPPLEMENTARY INFORMATION:
I. Background
Section 10 of the Real Estate Settlement Procedures Act of 1974
(RESPA) (12 U.S.C. 2609) establishes the statutory limits on the
amounts that mortgage servicers 1 may require a borrower to
deposit into an escrow account if the servicer chooses to establish
one. (RESPA does not require the use of escrow accounts.) Section
10(a)(1) prohibits a servicer, at the time the escrow account is
created, from requiring the borrower to make payments to the escrow
account that exceed the maximum amounts calculated in accordance with
the statute. These maximum amounts are calculated by analyzing how much
money will be needed to cover disbursements for the mortgaged property,
such as taxes and insurance, and to maintain a cushion no greater than
one-sixth of the estimated total annual disbursements from the account.
Section 10(a)(2) prohibits the lender, over the rest of the life of the
escrow account, from requiring the borrower to make payments to the
escrow account that exceed the amounts allowed under RESPA. The maximum
monthly amount that may be collected from the borrower is equal to one-
twelfth of the total annual escrow disbursements that the lender
reasonably anticipates paying from that account during a year, plus the
amount necessary to maintain the one-sixth cushion. No provision of
Section 10 requires that the servicer collect the maximums allowable
under the statute; the servicer may always collect less and is not
required to collect any cushion at all.
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\1\ At times RESPA 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 proposed rule, HUD
uses the term ``servicer'' to include the lender when the lender
performs the servicing function.
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Section 10 and section 6(g) of RESPA (12 U.S.C. 2605(g)) govern the
timing of disbursements from escrow accounts. In choosing a
disbursement date, section 10 requires that the servicer follow
``normal lending practices of the lender and local custom, provided
that the selection of each such date constitutes prudent lending
practice.'' Section 6(g)
[[Page 46512]]
requires servicers to ``make payments from the escrow account for such
taxes, insurance premiums, and other charges in a timely manner as such
payments become due.''
On October 26, 1994 (59 FR 53890) (October 1994 rule), HUD
published a final rule implementing sections 6(g) and 10 of RESPA and
changes to RESPA made in section 942 of the National Affordable Housing
Act (Pub. L. 101-625, approved November 28, 1990). The effective date
of this rule was extended to May 24, 1995, as a result of a February
15, 1995, rulemaking (60 FR 8812), which also modified and clarified
the October 1994 rule, because of questions on the rule. HUD issued
further clarifications and corrections on December 19, 1994 (50 FR
65442); March 1, 1995 (60 FR 11194); and May 9, 1995 (60 FR 24734), and
published a notice of software availability on April 4, 1995 (60 FR
16985). Further, HUD's RESPA regulations were streamlined on March 26,
1996 (61 FR 13232) to comply with the President's regulatory reform
initiatives.
Today, HUD is proposing a rule primarily to address three problems
under HUD's existing escrow accounting procedures. These problems,
explained in greater detail below, are designated for purposes of
discussion as:
1. Annual vs. Installment Disbursements;
2. Payment Shock; and
3. Single-item Analysis with Aggregate Adjustment.
These problems were brought to HUD's attention by borrowers,
members of Congress, local government officials, and industry
representatives.
This proposed rule is consistent with three principles articulated
by the Secretary in the preamble to the October 1994 rule:
(1) Reduce the cost of homeownership, by ensuring that funds are
not held in escrow accounts in excess of the amounts that are necessary
to pay expenses for the mortgaged property and allowed by law;
(2) Establish reasonable, uniform practices for escrow accounting;
and
(3) Provide servicers with clear, specific guidance on the
requirements of Section 10.
With respect to the first two identified problems, HUD is proposing
to revise the escrow rules in ways that would give borrowers more
choices. For these two problems, HUD is proposing to require that
disclosures be given to borrowers so that they can make informed
choices as to their preferences. The proposal would require escrow
accounts to be maintained according to those preferences. At the same
time, HUD recognizes that providing borrowers this choice may impose
additional burdens and costs on servicers, which are frequently passed
on to borrowers. Thus, this proposed rule also highlights approaches
that have been proposed by industry representatives. HUD seeks comments
on all approaches and is also asking a number of questions that are
designed to help HUD make decisions among alternatives for the final
rule.
II. Annual vs. Installment Disbursements
A. Statement of Problem
The first problem HUD is proposing to address arises when a
servicer is confronted with the option of disbursing escrow items, such
as taxes, either in an annual lump sum or in installments during the
year. In general, payments from an escrow account in installments work
to the borrower's benefit, because, on average, they result in lower
up-front payments to establish the account (i.e., lower closing
costs).2 However, sometimes payees offer a discount to the
borrower if disbursements are made on an annual basis. These discounts
are most commonly offered by taxing jurisdictions, which may offer a
discount for annual payments of property taxes.
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\2\ The choice of installment, rather than annual, disbursements
often results in substantial reductions in up-front cash
requirements for the buyer. For example, if two equal installments
could be paid 6 months apart instead of paying the entire bill on
one of the installment dates, then homebuyers who close on their
loans less than 6 months before the date on which the entire bill
would otherwise have been due could come to settlement with 6 months
less in tax deposits to the escrow account. This results from the
accrued taxes being a half-year's taxes less for those homebuyers.
Assuming closings are evenly distributed throughout the year,
households with the option of two equal installment payments 6
months apart, will, on average, be able to reduce the average up-
front cash required at settlement by 3-months' worth of taxes. In
general, as the number of installments grows, so does the average
up-front savings.
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After publication of HUD's October 1994 rule (discussed below in
this preamble), many servicers who had been disbursing escrow payments
in installments switched to annual disbursements where discounts were
available. There were many consequences of the switch that have been
described to HUD, and other consequences that HUD speculates may have
resulted.
Most of these actual or expected consequences would affect
borrowers, and it is borrowers who have expressed the greatest concern
about this problem. After HUD issued the escrow rule, some borrowers
may have been required by their servicers to make up substantial
shortages in their escrow accounts (generally in increased monthly
payments over a year), which arose when taxes were switched from
installment disbursements to one annual lump sum disbursement. Some
borrowers with loans that were switched from installments to annual
disbursement may have faced financial hardship in meeting the higher
payments. Some borrowers may have believed that the outlay to make up
the shortage created with the switch to annual disbursements simply was
not worth the discount offered. Other borrowers who were applying for
loans may have been unable to come up with the cash required to close
as a result of the escrow account being calculated based on annual
disbursements instead of installments.
In contrast, some borrowers whose servicers switched from annual to
installment disbursements may have preferred to pay more at closing or
to have disbursements from an existing escrow account paid in annual
disbursements, in order to receive a discount and thereby reduce the
overall amount paid or to accelerate property tax deductions on their
income tax. Some of these borrowers may have lost a significant portion
of their property tax deductions for the year in which the switch was
made and may have been unhappy with that consequence.
Of course, although some borrowers may have been adversely affected
by a change in disbursement method, there may have been others who
benefited, perhaps unknowingly, from such a change. For example, a
change from installment to annual disbursements to take advantage of a
discount lowered the total tax burden for many homeowners. Similarly, a
change from annual to installment disbursements resulted in lower
escrow payments and, possibly, refunds for many homeowners. HUD has not
heard much about these positive effects. Finally, for many borrowers,
HUD's rules apparently have not resulted in any change to the
disbursement method for their escrow accounts.
Some taxing jurisdictions may also have been adversely affected by
a change in disbursement method. As a result of the servicers changing
from annual to installment disbursements, some taxing jurisdictions may
have faced an unexpected temporary shortfall in receipts of property
taxes. Other taxing jurisdictions may have found that servicers changed
from installment payments to annual disbursements; this could have
resulted in unexpected
[[Page 46513]]
changes to receipts of property taxes or could have led to shortfalls
in income tax receipts as deductions increased for the year the switch
was made.
HUD recognizes that promulgating new rules that result in switching
accounts from one disbursement method to another could again affect
borrowers and taxing jurisdictions and is seeking a way to clear up the
problem that resulted from the prior rule while minimizing any further
disruption.
B. HUD's Current Regulations
HUD's regulation at 24 CFR 3500.17(k)(1) provides: ``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.'' See also Secs. 3500.17(b)
(definition of ``disbursement date''), 3500.17(c)(2) and (c)(3), and
3500.17(d)(1)(i)(A) and (2)(i)(A). Some mortgage servicers have
interpreted this rule to require that a servicer, when offered an
option of making a disbursement from the escrow account in installments
or in an annual disbursement with a discount, choose the lump sum
annual disbursement with a discount, no matter how small the discount
is, even if the borrower and the servicer would otherwise agree to
forego the discount and have the escrow account computed for
disbursements on an installment basis.
On the other hand, other servicers have interpreted HUD's rule, in
light of preamble language, to require installments where available and
allow, but not require, annual disbursement at the servicer's
discretion where a discount is offered for annual disbursement.3
This approach is in keeping with HUD's intention that the regulations
generally favor installment payments, because in many cases they result
in lower up-front payments and lower average escrow balances for the
borrower. HUD also sought for servicers to take advantage of discounts
that would benefit borrowers.
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\3\ The preamble to the October 1994 rule explained, ``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.'' 59 FR 53893.
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In response to further questions on this issue, HUD indicated in
its February 1995 clarifications of the rule that the rule's focus had
been to deal ``with a practice, previously engaged in by some
servicers, of collecting and paying a full-year's taxes in advance,
although they were billed on an installment basis.'' 59 FR 8813. In the
preamble to a May 1995 rule, HUD stated that ``servicers were permitted
(but not required) to make disbursements on an annual basis if a
discount were available.'' The preamble explained:
[T]he Department received a number of questions regarding
circumstances in which the payee offered an option of either
installment payments or a one-time payment with a discount. The
preamble to the October 26, 1994, and February 15, 1995, rules
indicated that when a choice was available, servicers should make
disbursements on an installment basis, rather than an annual basis;
however, servicers were permitted (but not required) to make
disbursements on an annual basis if a discount were available. Once
the choice of payment basis is made, the disbursement date chosen
for that basis depends on discount and penalty dates. Section
3500.17(k) states that ``[i]n 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.'' This provision is consistent with the rule, which
is designed to avoid excessive upfront payments and balances in
escrow accounts and, therefore, favors installment payments, unless
there are penalties or discounts that make annual payments
advantageous for the consumer. Also, after settlement a servicer and
borrower are not prevented by this rule from mutually agreeing, on
an individual case basis, to a different payment basis (installment
or annual) or disbursement date.
60 FR 24734.
HUD recognizes that the rule text and the preamble language may
have created confusion. Until such time as HUD publishes a final rule
on this subject, servicers should adhere to the following approach,
consistent with HUD's prior guidance: Where a payee offers the option
of installment disbursements or a discount for annual disbursements,
the servicer should make disbursements on an installment basis, but
may, at the servicer's discretion (but is not required by RESPA to),
make annual disbursements, in order to take advantage of the discount
for the borrower; HUD encourages (but does not require) servicers to
follow the preference of the borrower. Where the payee offers the
option of either annual disbursements with no discount or installment
payments, the servicer is required to make installment payments.
C. Possible Revisions to Regulations to Address Problem
There are several rulemaking alternatives to address whether
servicers are to make installment or annual disbursements. These
alternatives propose to distinguish between escrow accounts for loans
that settle on or after the effective date of a final rule and escrow
accounts for loans that settle or settled before the effective date of
a final rule.
Each alternative proposes that once a disbursement method has been
selected in accordance with the requirements of the alternative,
servicers would be prohibited from switching disbursement methods
without the borrower's consent. This would mean that even where one
servicer acquires servicing from another servicer, the second servicer
would be required to apply the same disbursement method as the first
servicer, as long as that option is offered by the payee, unless the
borrower consents to changing disbursement methods. The reason for this
approach is that many loans shifted disbursement dates as a result of
the 1994 rule. HUD seeks to develop an approach with the minimum
negative impact for borrowers, servicers, and third parties, such as
taxing jurisdictions. HUD is concerned that, if the approach adopted
results in a large number of additional shifts in the way escrows are
disbursed, HUD will create new problems while attempting to solve old
ones. HUD believes the approach proposed, if ultimately adopted, would
be the approach that would minimize disruption.
If borrowers could be involuntarily switched from annual
disbursements to installment disbursements as a result of a transfer of
servicing or unilateral change by the servicer, some borrowers would
face consequences they did not desire. A switch could result in a
surplus that a servicer would be required to return to a borrower, but
could also reduce the amount of the borrower's tax deduction for escrow
items, such as property taxes, in the year of the switch. If a borrower
could be involuntarily switched from installment disbursements to
annual disbursements as a result of a transfer of servicing or
unilateral change by the servicer, the transfer or change could
increase the tax deductions for escrow items such as property taxes in
the year of the switch, but could result in shortages for many
borrowers.
The approach of prohibiting a servicer from switching disbursement
methods without the borrower's consent, including requiring a servicer
to use the disbursement method used by the former servicer when there
is a transfer of servicing, does not mean that the borrower would have
to consent to a transfer of servicing or would have veto authority over
such a transfer. Transfer of servicing is governed by section 6 of
RESPA and regulations at 24 CFR 3500.21. However, this approach would
mean that a borrower would have to consent to a change in the
disbursement
[[Page 46514]]
method, including a change proposed by a subsequent servicer. HUD seeks
comments on whether this policy would adversely affect the value, and
efficiency of the transfer, of servicing rights.
This proposed rule contains the main substance of proposed rule
language to implement the various alternatives discussed. Additional
conforming amendments to the rule, appropriate to whichever alternative
is ultimately adopted, would be required.
Alternative 1: Consumer Choice
New loans. For escrow accounts on any loan closed on or after the
effective date of a final rule, servicers would be required to give
borrowers the choice of making disbursements of property taxes on an
installment or on an annual basis, when those options are offered by
the taxing jurisdiction. HUD's proposal does not currently address the
choice between installments and annual disbursements for other escrow
items, because the question has only been raised to HUD in the context
of property taxes; however, HUD would consider addressing other escrow
items, depending on comments received.4
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\4\ If the servicer is given a choice between installment or
annual disbursements for other escrow items (such as property or
hazard insurance), HUD's rule would require the servicer to make
disbursements by a date that avoids a penalty, but the servicer
would otherwise be free to make disbursements on such date as
complies with normal lending practice of the lender and local
custom, provided that the selection of each such date constitutes
prudent lending practice.
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This alternative would require servicers, at some time before
settlement, to provide a disclosure form (in the format of Appendix F)
to borrowers whose property taxes will be paid from an escrow account
and whose taxing jurisdictions offer the choice between disbursements
on an installment or an annual basis. The form indicates some of the
advantages and disadvantages to the borrower of installment and annual
disbursements and asks the borrower to make a choice between the two
methods. If the borrower does not make a choice, the servicer will be
required to make installment disbursements of property taxes.
This alternative also provides that once the consumer has made a
choice (or installments are required because the consumer has failed to
make a choice), the servicer and subsequent servicers are prohibited
from changing the method of disbursement for property taxes, as long as
the taxing jurisdiction offers a choice, without the borrower's prior
written consent.
Existing loans. For loans that settled prior to the effective date
of a final rule, the servicer and subsequent servicers would be
prohibited from changing the method of disbursement for property taxes
without the borrower's prior written consent where the taxing
jurisdiction offers a choice between installments and annual
disbursements. In addition, no later than the first escrow analysis for
such escrow accounts performed after the effective date of a final
rule, servicers would be required to offer borrowers, in writing, an
opportunity to switch from one method of disbursement for property
taxes to another.
This approach provides the greatest flexibility to the borrower.
However, it may impose higher costs on servicers; servicers will likely
need two different disbursement systems to reflect the disbursement
preferences of borrowers.
Alternative 2: Servicer Flexibility
Under this alternative, HUD would revise the rule to provide that a
servicer must make disbursements by a date that avoids a penalty, but
the servicer is otherwise free to make disbursements on such date as
complies with normal lending practice of the lender and local custom,
provided that the selection of each such date constitutes prudent
lending practice. Under this alternative, once the servicer has made a
choice of the disbursement method, the servicer and subsequent
servicers are prohibited from changing the method of disbursement, as
long as a choice continues to exist in the taxing jurisdiction, without
the borrower's prior written consent.
The benefit of this alternative is that it is the least-intrusive
regulatory approach for HUD to take. In addition, it provides
flexibility to servicers. This alternative would also leave servicers
free to accommodate borrowers with a particular preference, as long as
the borrower's preference is in accordance with normal lending practice
of the lender and local custom and constitutes prudent lending
practice. The disadvantage of this alternative is that it would not
guarantee that servicers would accommodate the preferences of
individual borrowers and, therefore, provides less choice for
borrowers.
Alternative 3: Keep, But Clarify, Current Requirements
Under this alternative, HUD would clear up any inconsistencies
between the regulatory text and the earlier preamble language that have
created confusion, as discussed above in this preamble. The rule would
be revised to provide that, generally, servicers must make
disbursements from escrow accounts on an installment basis, where
payees offer that option as an alternative to annual disbursements.
Where a payee offers the option of installment disbursements or a
discount for annual disbursements, the servicer may, at the servicer's
discretion (but would not be required as a result of RESPA to), make
annual disbursements, in order to take advantage of the discount for
the borrower. Where the payee offers the option of annual disbursements
with no discount or installment payments, the servicer would be
required to make installment payments. Where a payee offers the option
of installment disbursements or a discount for annual disbursements,
the rule would provide that HUD encourages (but does not require)
servicers to follow the preference of the borrower on whether to make
disbursements on an annual or installment basis.
In addition, the servicer and subsequent servicers are prohibited
from changing the method of disbursement, as long as a choice continues
to exist in the taxing jurisdiction, without the borrower's prior
written consent.
The advantage of this option is that, like Alternative 2 (discussed
above in this preamble), it provides flexibility to servicers. It would
also allow servicers to accommodate borrowers with a particular
preference. The disadvantage of this alternative is that it would not
guarantee that servicers would accommodate the preferences of
individual borrowers, providing less choice for borrowers.
D. Questions for Commenters
While the description of each alternative discussed under the
heading ``Annual vs. Installment Disbursements'' in this preamble,
indicates some of the possible advantages and disadvantages, there
could be other alternatives, as well as unanticipated negative
consequences for the industry, borrowers, taxing authorities, or
others. HUD seeks comments from the public on which, if any, of these
alternative approaches should result from this rulemaking, or whether
other permissible approaches under RESPA would better serve the
interests of the public and the intent of the statute. HUD also invites
commenters to comment on HUD's proposed regulatory language and to
submit specific regulatory language to implement their proposals.
HUD is particularly interested in comments on the following issues:
1. How are servicers currently addressing the problem of setting
the appropriate disbursement date when
[[Page 46515]]
given a choice of annual or installment disbursements?
2. What would be the impact of changing the requirements on
particular servicers operating under existing RESPA regulations,
particularly with respect to any changes in the requirements for loans
settled before the effective date of a final rule?
3. What are the discounts obtained by servicers for borrowers? How
large are the discounts? When must disbursements be made in order to
receive the discounts?
4. What would be the impact on servicers of requiring them to
provide borrowers with a choice? Should this be limited to a one-time
choice at closing or should the borrower be free to switch disbursement
methods during the life of the loan, and, if so, how often and under
what circumstances?
5. What are the relative benefits and disadvantages of an approach
that treats loans that settle on or after the effective date of a final
rule differently from loans that have settled before the effective date
of a final rule--e.g., minimizing the need for a servicer to switch
from one method to another for existing loans, but potentially
requiring servicers to use different disbursement methods for different
borrowers within a single taxing authority?
6. Should the size of an available discount matter and, if so, how?
Should HUD provide that once the discount meets a certain percentage or
other threshold that: (a) Annual disbursements with a discount must be
used; (b) it becomes the borrower's choice whether to make
disbursements in that manner; or (c) it becomes the servicer's choice
whether to make disbursements in that manner? Should the threshold that
determines whether to take the discount be tied to a particular market
rate that varies over time, e.g., some percentage above or below the
discount rate, the rate on 3-month Treasury Bills, etc.? Should a
``reasonable servicer'' standard be applied, i.e., allowing a servicer
to choose whether to take advantage of the discount if a reasonable
person would make such a decision with his or her own money?
7. If an approach is adopted in which the borrower's preference for
installments or annual disbursements is controlling, when should the
servicer give the borrower the disclosure? If the borrower is required
to designate which option is preferred before loan approval, how can
the borrower be protected from pressure to select an option that is
merely the lender's preference and not necessarily in the borrower's
best interest? Because the method selected could affect escrow payments
due at closing and each month thereafter, what timing would be
necessary for the servicer to prepare the closing documents and perform
related work? How will the option selected affect underwriting?
8. If an approach is adopted in which the borrower's preference for
installments or annual disbursements is controlling, should HUD
prescribe a disclosure format as proposed? Is the information HUD
proposes to provide on the disclosure format appropriate for providing
the borrower with a fair and informed choice?
9. If an approach is adopted in which the borrower's preference for
installments or annual disbursements is controlling, what period of
time is needed for the servicer to change the disbursement method?
10. The issue of annual or installment disbursements most often
arises in the context of property taxes. If an approach is adopted in
which the borrower's preference for installments or annual
disbursements is controlling, should this approach apply only to
disbursements for property taxes, as proposed, or should it extend to
other escrow items for which a choice between installments and annual
disbursements may be offered? What should be the rule for other escrow
items when a choice is offered?
11. What rules should apply to loans that settle before the
effective date of a final rule? What rules should apply to loans that
settle after the effective date of the final rule, once those loans
have settled? What rules should apply when there is a transfer of
servicing?
III. Payment Shock
A. Statement of Problem
Another problem HUD is proposing to address arises when
disbursements for escrow items such as property tax disbursements are
expected by the servicer to be much higher in the second year of the
escrow account than in the first year. As a result, the borrower will
be faced with a substantial increase in the monthly escrow payment
during the second year and, possibly, a lump sum payment to eliminate a
deficiency from the account.5 For purposes of this rule, a
substantial increase is defined as an increase of 50 percent or more in
the monthly escrow payment between the payment under the initial escrow
accounting and the payment in the second year of the escrow account. A
substantial increase in property taxes in the second year often occurs
in cases of new construction. In many jurisdictions, the taxes the
locality charges for the first year are based on the assessed value of
the unimproved property, while for the second year the taxes are based
on the improved value. A substantial increase in payments may also
occur where a tax disbursement that would normally appear on the
projection for the coming year is paid prior to the borrower's first
regular payment, i.e., these regularly occurring taxes do not appear in
the projection. Reassessments after a property is sold may also cause a
substantial second year increase. While the servicer could alert the
borrower at closing that an increase will occur, if the servicer does
not, the borrower may be unpleasantly surprised by the increase.
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\5\ The increase in the monthly payment can be broken down into
two components. Any time an escrow account disbursement increases,
it will have the effect of raising the monthly borrower escrow
payment by approximately one-twelfth of that increase. In addition,
the projection for the coming year shows what the target balance
(accruals plus the cushion) should be at the beginning of the coming
year. To the extent that expected disbursements in the second year
exceed what they were in the first, the beginning target balance for
the second year may be in excess of the actual balance at the end of
the first year. If so, then there is a shortage to be made up as
well. If the 12-month approach is taken to eliminate the shortage,
then monthly payments will also rise by approximately one-twelfth of
the shortage. If a cushion is used, the payment increases will be
slightly higher, until the cushion is built up.
---------------------------------------------------------------------------
This situation results in several problems. Disclosures received at
closing show low payment amounts throughout the first year when, in
fact, the escrow payment will substantially increase for the second
year, or even during the first year if a short year statement is issued
at the point when the higher disbursement shows up in the 12-month
projection.6 Some borrowers may be unable to meet the increased
escrow payments because the shortage will raise payments even more. A
customer relations issue may be created for servicers who have to
explain to borrowers why the payment is increased so much.
---------------------------------------------------------------------------
\6\ HUD regulations at 24 CFR 3500.17(f)(1) (i) and (ii) provide
that, aside from conducting an escrow account analysis when an
escrow account is established and at completion of the escrow
account computation year, a servicer may conduct an escrow account
analysis at other times. The escrow account analyses conducted at
other times result in short-year statements.
---------------------------------------------------------------------------
These concerns have come largely from industry representatives who
have responded to numerous borrower inquiries and complaints about
increases in escrow payments to reflect higher disbursements and make
up shortages. Mortgage servicers have indicated that they would like to
avoid any payment change in subsequent years by collecting more money
in the first year of servicing.
[[Page 46516]]
B. Analysis Under HUD's Current Regulations
Consistent with Section 10 of RESPA, HUD regulations specify the
maximum amount that a servicer may legally require borrowers to deposit
in escrow accounts. HUD regulations prescribe that in conducting an
escrow account analysis, the servicer considers only the disbursements
that are expected to come due for a 12-month period. See, e.g.,
Secs. 3500.17(b) (definition of ``escrow account computation year'')
and 3500.17(c) (limits on payments to escrow accounts). While the
servicer can take into account expected changes to disbursements over
the 12-month period,7 even if the servicer knows that payments
from an escrow account will substantially increase at a time more than
12 months in the future, the servicer cannot, when preparing the
initial escrow account statement, calculate the borrower's payments to
cover the expected increases. However, HUD's existing regulations
(3500.17(f)(1)(ii)) allow the servicer to perform short year
statements. The regulations also allow borrowers to make additional
escrow payments voluntarily to avoid a shortage in the following year.
HUD's existing regulations provide that if the borrower makes such
additional payments, they must normally be returned to the borrower if
they result in a surplus the next time the escrow account analysis is
performed. See 59 FR 53893 (voluntarily escrowed funds not excluded
from the trial running balance calculations).8 If the additional
payments do not result in a surplus the next time the escrow account
analysis is performed (i.e., where disbursements will substantially
increase), the additional payments do not have to be returned to the
borrower.
---------------------------------------------------------------------------
\7\ HUD's current regulations address the issue of estimating
disbursement amounts for the 12-month computation year:
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 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.
24 CFR 3500.17(c)(7).
\8\ Surpluses generated by voluntary borrower prepayments
(frequently of principal, interest, and escrow account amounts) do
not constitute a violation of the escrow account limits, even if
they remain in the account in the next escrow account computation
year. 60 FR 8813.
---------------------------------------------------------------------------
C. Possible Revisions to Regulations to Address Problem
There are many possible ways to respond to the Payment Shock
problem identified. Just as in the case of the Annual vs. Installment
Disbursements problem discussed above in this preamble, the Secretary
believes that providing the consumer with information to make an
informed choice, and allowing the consumer's choice to control, is
likely the best approach for addressing this problem. Set forth below
are three alternatives, some of which contain options within the
alternatives. This proposed rule contains the main substance of
proposed regulatory language to implement the various alternatives
discussed. Additional conforming amendments to the regulations would be
required, consistent with whichever alternative is ultimately adopted.
Alternative 1: Consumer Choice
Under this alternative, when the servicer expects that the bills
paid out of the escrow account will increase substantially after the
first year, the servicer would provide to the borrower, at some time
prior to closing, a written disclosure in the format of appendix G to
this proposed rule or a similar format. The borrower would make a
choice from several accounting options for his or her account on a
format that would indicate, under each option, the amount due at
closing; the monthly escrow payments in the first, second, and third
years; and the corresponding surpluses anticipated at the end of the
first year.9 The borrower would therefore have the opportunity to
make a voluntary choice to limit payment changes in the second year of
the escrow account. As would be explained on the disclosure format, if
the borrower did not make a choice, the accounting method would
``default'' to the method prescribed under the current regulations
(which may result in substantially increased payments in the second
year). Once an escrow accounting method is selected by choice or
default, that method may not be changed without the consent of the
borrower, even if the servicing rights are transferred to another
servicer.
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\9\ Whether disbursements from escrow accounts will be made on
an annual or installment basis and whether there is a discount for
annual disbursement will affect the numbers to be filled in and,
potentially, the number of calculations on the Escrow Accounting
Method Selection Format.
---------------------------------------------------------------------------
Under this alternative, the following accounting methods
(illustrated in ``The Payment Shock Problem,'' Appendix H-1 to this
proposed rule) would be presented to the borrower for his or her
selection:
Method A. Analysis of the account using the accounting method
required under the current rule, which results in a shortage at the end
of the first year and higher payments in the second year.
Method B. Analysis of the account using an accounting method that
has the following characteristics:
--Requires an initial deposit of $0 into the escrow account at closing;
--Requires a monthly payment in the first year equal to one-twelfth of
the estimated total annual disbursements from the escrow account for
the second year;
--Causes surpluses or smaller shortages at the end of the first year,
which causes escrow payments to increase in the second year less than
under Method A or not at all.
Method C. Analysis of the account using an alternative accounting
method 10 that has the following characteristics:
\10\ The Mortgage Bankers Association indicated to HUD that it
favors this alternative in correspondence to HUD dated April 10,
1996.
---------------------------------------------------------------------------
--Requires an initial deposit into the escrow account at closing
greater than the initial deposits required under Method B;
--Requires the same monthly payment during the first year as under
Method B, which is greater than under Method A;
--Generates month-end balances such that the lowest month-end balance
for the first year equals one-sixth of the estimated total annual
disbursements for the second year (the initial deposit is not
considered in finding the lowest month-end balance);
--Requires an initial deposit into escrow at closing greater than the
initial deposits required under Method B;
--Generates even larger balances at the end of the first year than
under Method B, eliminating shortages and increasing surpluses that
must be returned to the borrower;
--Causes no increase in escrow payments in the second year.
Note: If the consumer selects Methods B or C, the amounts held
in escrow could be greater than allowed under Section 10. In order
to permit these options, the Secretary would invoke his exemption
authority under section 19(a) of RESPA, 12 U.S.C. 2617.
Alternative 2: Make No Change
Under this alternative, even where the servicer expects that the
bills paid out of the escrow account will increase substantially after
the first year, the current requirements for escrow
[[Page 46517]]
analysis would continue to apply. This alternative would not
specifically prevent the problems of shortages at the end of the first
year of the escrow account and substantial escrow payment increases in
the second year as a result of large increases in escrow disbursements
during the second year of servicing. However, under the existing rule,
servicers may disclose the problem to borrowers, and borrowers may make
voluntary overpayments to escrow accounts. Servicers may also calculate
short-year statements. Thus, under the existing rule, some methods are
available to alleviate the payment shock problem, although they are not
required.
Alternative 3: Mandate First Year Overpayment
Under this alternative, when the servicer expects that the bills
paid out of the escrow account will increase substantially after the
first year, HUD would require the servicer to calculate the escrow
account under a procedure that has the characteristics described under
Alternative 1, Method C, described above (illustrated in ``The Payment
Shock Problem,'' Appendix H-2 to this proposed rule). This approach
would result in requiring amounts held in escrow to be greater than
allowed under Section 10. The Secretary could, however, mandate the use
of this escrow accounting method pursuant to his exemption authority
under section 19(a) of RESPA, 12 U.S.C. 2617.
D. Questions for Commenters
HUD seeks comments from the public on which, if any, of these
alternative approaches should result from this rulemaking, or whether
other permissible approaches would better serve the interests of the
public and the intent of the statute. Other possible alternatives on
which HUD would welcome comment include:
1. As variations on Alternative 2, either:
(A) Require servicers to disclose to borrowers that it is
anticipated that they will have a substantial payment increase in the
second year, so borrowers will be less surprised when such an increase
occurs, but do not require servicers to indicate specifically to
borrowers methods of avoiding the shortage; or
(B) Require servicers to disclose to borrowers that it is
anticipated that they will have a substantial payment increase in the
second year and to inform borrowers of the amount of the expected
shortage at the end of the first year and of the opportunity to make
additional payments to escrow ahead of schedule to avoid Payment Shock.
2. As a variation on Alternative 1, Method C, calculate the cushion
as one-sixth of the estimated annual disbursements for the first year,
instead of 2 months of the escrow payments for the first year.
3. For each new account for which it is anticipated that there will
be a substantial payment increase in the second year for one or more
escrow items, allow the servicer, with the consent of the borrower, the
option of calculating the escrow payments on a 24-month basis. This
would allow the servicer to look ahead to the second year and estimate
the payment that would be due, thereby mitigating the deficiency or
shortage after the first year, leaving a smaller deficiency or shortage
after the second year. (Using an escrow account period of more than one
year has precedent. See the treatment of flood insurance and water
purification escrow funds in Sec. 3500.17(c)(9).) Under this option,
since the amounts held in escrow would be greater than allowed under
Section 10, it would be necessary for the Secretary to invoke his
exemption authority under section 19(a) of RESPA, 12 U.S.C. 2617.
HUD invites commenters to submit specific regulatory language to
implement their proposals and to comment on HUD's proposed regulatory
language. HUD is also interested in comments on the following issues:
1. How are servicers dealing with payment increases in the second
year under the current rule?
2. How should mortgage servicers determine whether bills paid out
of escrow accounts are expected to increase substantially after the
first year? Is it appropriate to define a substantial increase as an
increase of 50 percent or more in the monthly escrow payment between
the payment under the initial escrow accounting and the payment in the
second year of the escrow account, and is it appropriate for this
threshold to trigger additional requirements? What method should be
used in calculating the expected payments?
3. What, if any, impact would there be in changing the requirements
regarding payment increases on servicers operating under existing RESPA
regulations?
4. What, if any, impact would there be on servicers if they are
required to provide borrowers a one-time choice at closing? What would
be the impact on servicers of requiring them to provide borrowers a
choice at other times? What would be the burden in having different
procedures for different borrowers?
5. If the consumer choice option is adopted, what should be the
timing of the servicer's inquiry to the borrower and the borrower's
response? If the borrower is required to designate before loan approval
which option he or she prefers, would the borrower be pressured into
selecting an option that may not be in the borrower's best interest?
Because the method selected could affect escrow payments due at closing
and each month thereafter, what timing would be sufficient for the
closing agent to prepare the closing documents and perform related
work? How would the option selected affect underwriting?
6. If the consumer choice option is adopted, should HUD prescribe a
disclosure format as proposed? Is the information HUD is proposing to
provide on the disclosure format appropriate?
7. Should there be limits on the borrower's opportunity to switch
escrow accounting methods? How frequently should the borrower be
allowed to change methods and under what circumstances? Should the
borrower be allowed to make only a one-time choice at closing?
8. Should any alternatives be offered to borrowers whose escrow
payments are not expected to increase substantially after the first
year?
IV. Single-Item Analysis With Aggregate Adjustment Problem
A. Statement of Problem and HUD's Current Regulations
The October 1994 escrow rule established a uniform nationwide
standard accounting method known as aggregate accounting. This replaced
the common method of accounting in the industry--treating each escrow
account item as a separate or single item. The amounts on the HUD-1 in
the 1000 series historically were shown in a single-item mode--that is,
the reserve amount for each separate escrow account item was listed.
When the October 1994 rule was being developed, Federal Reserve
Board staff indicated that it needed a single-item amount for private
mortgage insurance (PMI) reserves in order to make annual percentage
rate (APR) calculations under the Truth In Lending Act. For this
reason, and in an effort to avoid altering the basic format of the HUD-
1 or HUD-1A in the October 1994 rule, the Department required that an
aggregate adjustment (either zero or a negative number) be made after
each individual item was listed in the 1000 series, so that the reserve
amount for escrow account items conformed to the aggregate accounting
method. Before the October 1994 escrow rule, Section L of
[[Page 46518]]
the HUD-1 and HUD-1A only showed positive numbers, that is, payments
that were being allocated to various settlement costs. After
publication of the October 1994 final rule, the Department received
complaints that the itemization of the reserve amounts with an
aggregate adjustment was confusing and the information was not useful
to borrowers. Settlement agents and others indicated that individual
itemization of reserves in the 1000 series imposed an additional
paperwork and explanation burden, when the only relevant number for
calculations is the aggregate deposit amount.
B. Possible Revisions to Address Problem
This rule proposes a method of correcting the problem: HUD would no
longer require the single-item listing of escrow deposits on the HUD-1
or HUD-1A. The rule would create a new option in the instructions for
the 1000 series of these forms to reflect the aggregate deposit. As
proposed, the settlement agent could also continue to itemize the 1000-
series reserves, at the settlement agent's discretion. If the charges
are not itemized, an asterisk (*) would have to be placed next to each
item in the 1000 series for which a reserve is taken. The amount
collected would be described as ``Aggregate Escrow Deposit for Items
Marked (*) Above'' on a line at the end of the 1000 series. In the
discussion ``Clarifications of Existing Rule'' in Part V of this
preamble, HUD has made clear that entries on the Good Faith Estimate
may be based on single-item analysis, with a maximum 1-month cushion.
The rule is proposed to be amended to make clear that the use of the
estimating method remains available after the end of the phase-in
period (October 24, 1997).
Federal Reserve Board staff has indicated that it generally concurs
with this approach, inasmuch as the PMI number for APR calculations is
otherwise available. HUD seeks comments from the public on this
proposal, as well as other approaches that would be permissible under
RESPA and might better serve the interests of the public and the intent
of the statute. HUD also invites commenters to submit specific
regulatory language to implement their proposals.
V. Additional Proposed Change
HUD proposes to add information to the Good Faith Estimate format
to help make purchasers of pre-1978 residential dwellings aware that,
pursuant to 42 U.S.C. 4852d (implemented by HUD in regulations
published on March 6, 1996, 61 FR 9064), they have the right to arrange
for a timely paint inspection or risk assessment for the presence of
lead-based paint or lead-based paint hazards before becoming obligated
under a sales contract. Generally, a prospective purchaser has 10 days
to conduct such a lead-based paint evaluation of the property. A
prospective purchaser, however, may waive in writing the opportunity to
conduct this evaluation. Therefore, HUD proposes to add language to the
Good Faith Estimate format (appendix C) to reference a lead-based paint
inspection or risk assessment and to add a reference to such
inspections or assessments in the instructions for completing the 1300
series of the HUD-1 or HUD-1A. HUD anticipates that a more detailed
explanation of purchasers' rights in this regard will be contained in
the next revision of the HUD Settlement Costs booklet.
VI. Clarifications to Existing Rule
The following paragraphs discuss clarifications of the escrow rule
that do not require substantive modifications to language in the
existing provisions. These clarifications are in response to questions
that have been raised about the escrow rule.
(a) Question: Does the rule permit a cushion to be taken on private
mortgage insurance (PMI) premium payments?
Answer: Yes. Nothing in the rule distinguishes these payments from
any other payments into the escrow account and, thus, a cushion may be
based on such payments. The question arises because Federal Housing
Administration (FHA) program rules do prohibit a cushion on the FHA
Mortgage Insurance Premium (MIP), but the FHA limitation is applicable
only to the FHA mortgage insurance.
(b) Question: During the phase-in period under the escrow rule for
accounts existing prior to May 24, 1995, there is an alternative
approach permitted for disclosing potential escrow charges under
Sec. 3500.8(c)(2), involving the use of single-item analysis with a 1-
month cushion. In the final rule of February 15, 1995 (60 FR 8812), the
clarifications indicated that for Good Faith Estimate purposes, as well
as for the HUD-1 or HUD-1A, a single-item analysis with a maximum 1-
month cushion is acceptable. See 60 FR at 8812 and 8813. Is the single-
item analysis with a 1-month-cushion approach acceptable on the Good
Faith Estimate, even when the aggregate approach is subsequently used
on the HUD-1 or HUD-1A, and will this be true after the phase-in period
ends?
Answer: Yes. The good faith estimate is an estimate and HUD does
not impose strict methodologies for delivering information that
frequently is unavailable or difficult to obtain. As long as the
estimates are developed in good faith, the use of single-item analysis
with a maximum 1-month cushion to establish a range or amount for Good
Faith Estimate purposes will be acceptable. The Good Faith Estimate
instructions in Sec. 3500.7(c)(2) are proposed to be amended to clarify
that this method of estimation is available after the phase-in period
has passed.
(c) Question: Appendix E assumes that the same cushion applies to
all escrow items. However, lenders may prefer to use, for instance, a
2-month cushion for hazard insurance and a 1-month cushion for property
taxes. Is that permissible?
Answer: Yes. The rule does not require that the cushion be the same
fraction of annual anticipated disbursements for each escrow item,
provided, of course, that no cushion exceeds the limit of 2 months'
disbursements.
(d) Question: When filling out the HUD-1, it is necessary to
calculate the aggregate adjustment so that the amount the borrower has
to pay into the escrow account at closing will not exceed the RESPA
limits (which are defined in terms of aggregate accounting, whereas the
rest of the 1000 series of the HUD-1 is reported using single-item
accounting). The aggregate adjustment is the difference between the
deposit calculated under the aggregate accounting method and the sum of
the deposits that would be calculated using single-item accounting.
Must the same cushion be used when making the aggregate calculations as
was used when making the single-item calculations?
Answer: Yes. So, for example, if a 1-month cushion were taken for
taxes and a 2-month cushion were taken for insurance in making the
single-item entries, then the cushion in making the aggregate
calculations would be the sum of one-twelfth of the projected taxes and
one-sixth of the projected insurance.
Other Matters
Paperwork Reduction Act Statement
The proposed information collection requirements contained in
Sec. 3500.17 and Appendices A and C of this rule will be submitted to
the Office of Management and Budget (OMB) for review in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
(a) In accordance with 5 CFR 1320.5(a)(1)(iv), the Department is
setting forth the following concerning the proposed collection of
information:
[[Page 46519]]
(1) Title of the information collection proposal: Escrow account
tax disbursement method disclosure; escrow account tax calculation
procedure disclosure; and changes to lines pertaining to lead-based
paint risk assessments or inspections in settlement statements and good
faith estimates.
(2) Summary of the collection of information: The escrow account
tax disbursement method disclosure will allow the consumer to choose
whether taxes are paid on an annual, a semiannual, or other basis. The
escrow account tax calculation procedure disclosure allows consumers to
choose the procedure that is used to calculate the escrow account, when
it is anticipated that the second-year charges for an item will be
substantially higher than the first-year charges.
(3) Description of the need for the information and its proposed
use: (i) Escrow account tax disbursement method disclosure. The Real
Estate Settlement Procedures Act (RESPA) at 12 U.S.C. 2609 provides for
escrow accounts. The implementing regulations at 24 CFR 3500.17(k)
provide 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. Consequently, some
lenders changed disbursement methods and some borrowers were adversely
affected by the change. The proposed rule suggests three alternatives
in addressing this problem. One alternative will require an escrow tax
disbursement method disclosure which will allow the consumer to choose
whether taxes are paid on annual, semi-annual or other basis. The other
two alternatives do not require a new disclosure.
(ii) Escrow account tax calculation procedure disclosure. Another
problem the rule addresses is where the charges for an item are
expected to be substantially higher the second year than in the first
year. The increased charges may result in payment shock as well as a
deficiency in the escrow account and substantially increased escrow
payments the following year. For example, in the case of new
construction, the real estate tax amount may be estimated on the
unimproved value of the property. Frequently, borrowers are then
required to pay taxes based on the improved value of the property.
Current regulations limit the amount that the lender may require
the borrower to deposit in an escrow account at settlement and the
amount the lender may require the borrower to maintain in an account.
The regulations at 24 CFR 3500.17 prescribe the method for determining
these amounts. The proposed rule offers three alternative solutions.
One alternative requires a disclosure that allows the consumer to
choose the procedure for calculating escrow payments. Another
alternative would require lenders to calculate the escrow under a new
procedure which is also a consumer choice under the first alternative.
Both of these alternatives would require lenders to make adjustments to
escrow calculation software. The third alternative does not require an
additional burden.
(iii) Changes for lead-based paint. In addition, information is
proposed to be added in the Good Faith Estimate format to make
purchasers of pre-1978 residential dwellings aware that, pursuant to 42
U.S.C. 4852d, they have the right to arrange for a lead-based paint
inspection or risk assessment.
(4) Description of the likely respondents, including the estimated
number of likely respondents, and proposed frequency of response to the
collection of information: The 2,000 respondents for both disclosures
are mortgage lenders/servicers. (i) It is estimated that respondents
must give a one-time disclosure to 34.9 million borrowers who establish
or maintain mortgage loan escrow accounts. (ii) It is estimated that
respondents must give a one-time disclosure to 1 million borrowers who
are identified as having a substantially increased tax charge the
second year of the loan. (iii) Settlement statements and good faith
estimates currently provide for inclusion of costs associated for lead-
based paint inspection costs, but not as a discrete line item. The
number of respondents will not change as a result of this rule.
(5) Estimate of the total reporting and recordkeeping burden that
will result from the collection of information: (There is no additional
burden expected to result from specifying a discrete line for lead-
based paint risk assessment or inspection costs in the settlement
statements (appendix A) or good faith estimate format (appendix C).)
Reporting Burden
----------------------------------------------------------------------------------------------------------------
Est. ave.
Reference Number of respondents Frequency response Annual burden
of response time (hrs.) hrs.
----------------------------------------------------------------------------------------------------------------
Disbursement Disclosure............... 34.9 mill.................... 1 0.0833 2,908,332
Method C Calculation.................. 2,000........................ 1 10 20,000
Calculation and Disclosure (Borrower 1.0 mill..................... 1 0.3333 333,000
Choice).
----------------------------------------------------------------------------------------------------------------
Recordkeeping Burden
------------------------------------------------------------------------
Annual
No. recordkeepers Hrs. per burden
recordkeeper hours
------------------------------------------------------------------------
Disbursement Disclosure: 2,000............... 1,454 2,908,000
Calculation Disclosure: 2,000................ 42 84,000
--------------------------
Total Burden Hours..................... ............ 6,253,332
------------------------------------------------------------------------
(b) In accordance with 5 CFR 1320.8(d)(1), the Department is
soliciting comments from members of the public and affected agencies
concerning the proposed collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
[[Page 46520]]
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond; including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
Interested persons are invited to submit comments regarding the
information collection requirements in this proposal. Under the
provisions of 5 CFR part 1320, OMB is required to make a decision
concerning this collection of information between 30 and 60 days after
today's publication date. Therefore, a comment on the information
collection requirements is best assured of having its full effect if
OMB receives the comment within 30 days of today's publication. This
time frame does not affect the deadline for comments to the agency on
the proposed rule, however. Comments must refer to the proposal by name
and docket number (FR-4079) and must be sent to:
Joseph F. Lackey, Jr., HUD Desk Officer, Office of Management and
Budget, New Executive Office Building, Washington, DC 20503
and
Reports Liaison Officer, Office of the Assistant Secretary for Housing,
Federal Housing Commissioner, Department of Housing and Urban
Development, 451--7th Street, SW, Room 9116, Washington, DC 20410
Status: Extension of currently approved collection (2502-0501).
Executive Order 12866
The Office of Management and Budget reviewed this proposed rule
under Executive Order 12866, Regulatory Planning and Review. Any
changes made to the rule as a result of that review are clearly
identified in the docket file, which is available for public inspection
at the Office of the Rules Docket Clerk, Office of General Counsel,
Room 10276, Department of Housing and Urban Development, 451 Seventh
Street, SW, Washington, DC 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 proposed rule does not have a
significant economic impact on a substantial number of small entities.
There are no anticompetitive discriminatory aspects of this proposed
rule with regard to small entities, nor are there any unusual
procedures that would need to be complied with by small entities. The
requirements of RESPA must be uniformly adhered to by all lenders and
servicers. To the extent that small entities are affected by any of the
provisions in the proposed rule, the impact is expected to be
relatively insignificant and will be reviewed in developing the final
rule.
However, this proposed rule describes possible alternative
requirements and seeks comments to help the Department make a final
decision regarding these alternatives. Although a complete and thorough
analysis of all the possible permutations in the rule is impractical,
the proposed rule provides sufficient information for the public to
provide the Department with informed comments and, to the extent
feasible, otherwise addresses areas that would be included in a
regulatory flexibility analysis.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations in 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969 (42 U.S.C. 4332). The finding is available for public inspection
during regular business hours in the Office of the General Counsel,
Rules Docket Clerk, room 10276, 451 Seventh Street, SW, Washington, DC
20410.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in this proposed rule will not have substantial direct
effects on States or their political subdivisions, or the relationship
between the Federal Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
As a result, the rule is not subject to review under the Order.
Promulgation of this rule expands coverage of the applicable regulatory
requirements pursuant to statutory direction.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this proposed rule does
not have potential for significant impact on family formation,
maintenance, and general well-being, and, thus, is not subject to
review under the order. No significant change in existing HUD policies
or programs will result from promulgation of this rule, as those
policies and programs relate to family concerns.
List of Subjects in 24 CFR Part 3500
Consumer protection, Condominiums, Housing, Mortgages, Mortgage
servicing, Reporting and Recordkeeping requirements.
For the reasons stated in the preamble, part 3500 of Title 24 of
the Code of Federal Regulations is proposed to be amended as follows.
PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT
1. The authority citation for part 3500 continues to read as
follows:
Authority: 12 U.S.C. 2601 et seq.; 42 U.S.C. 3535(d).
2. Appendix A is amended in Section L under the text heading ``Line
Item Instructions'' as follows:
a. By revising the paragraph beginning with the phrase ``Lines 1301
and 1302'';
b. In the paragraph beginning with the phrase ``Lines 1303-1305'',
by removing the number ``1303'' and adding in its place the number
``1304''; and
c. By adding a new paragraph after the paragraph beginning with the
phrase ``Lines 1301 and 1302'', to read as follows:
Appendix A to Part 3500--Instructions for Completing HUD-1 and HUD-1A
Settlement Statements; Sample HUD-1 and HUD-1A Statements
* * * * *
Lines 1301 and 1302 are used for fees for survey, pest
inspection, radon inspection, or other similar inspections.
Line 1303 is used for lead-based paint hazard risk assessments,
lead-based paint inspections, or other lead-based paint evaluations.
* * * * *
3. Appendix C, Sample Form of Good Faith Estimate, is amended in
the chart by adding a new row, with three columns, after the row with
the phrase ``Pest inspection......'' in the first column, to read as
follows:
Appendix C to Part 3500--Sample Form of Good Faith Estimate
* * * * *
[[Page 46521]]
------------------------------------------------------------------------
Item \2\ HUD-1 or HUD-1A Amount or range
------------------------------------------------------------------------
* * * *
* * *
Lead-based paint inspection....... 1303 $
* * * *
* * *
------------------------------------------------------------------------
\2\ Footnote remains unchanged.
Annual Vs. Installment Disbursements [Items 4-5]
4. Section 3500.17 is amended by revising the definition of
``disbursement date'' in paragraph (b) and by revising paragraphs
(c)(2) and (3), to read as follows:
Sec. 3500.17 Escrow accounts.
* * * * *
(b) * * *
Disbursement date means the date on which the servicer actually
pays an escrow item from the escrow account.
* * * * *
(c) * * *
(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 paragraph
(c)(1)(i) of this section and the amount of the borrower's periodic
payments into the escrow account, subject to the limitations of
paragraph (c)(1)(ii) of this section. In conducting the escrow account
analysis, the servicer shall estimate the disbursement amounts
according to paragraph (c)(7) of this section. Pursuant to paragraph
(k) of this section, the servicer shall use a date on or before 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 paragraph (g) of this section. 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 paragraph (f) of this section.
(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 paragraph (c)(1)(ii) of this section. In
conducting the escrow account analysis, the servicer shall estimate the
disbursement amounts according to paragraph (c)(7) of this section.
Pursuant to paragraph (k) of this section, the servicer shall use a
date on or before 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 paragraph (f)
of this section. Upon completing an escrow account analysis, the
servicer shall prepare and submit an annual escrow account statement to
the borrower, as set forth in paragraph (i) of this section.
* * * * *
5. Section 3500.17 is further amended and, if applicable, Appendix
F is added to part 3500 in accordance with one of the following
alternatives:
a. Under ALTERNATIVE 1 (Consumer Choice): By revising paragraph (k)
and adding Appendix F to part 3500, to read as follows; or
b. Under ALTERNATIVE 2 (Servicer Flexibility): By revising
paragraph (k), to read as follows; or
c. Under ALTERNATIVE 3 (Keep, But Clarify, Current Requirements):
By revising paragraph (k), to read as follows:
Sec. 3500.17 Escrow accounts.
* * * * *
[Alternative 1 (Consumer Choice)]
(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, on or before the deadline to avoid a penalty, as long as the
borrower's payment is not more than 30 days overdue.
(2) The servicer shall advance funds to make disbursements in a
timely manner, as 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
paragraph (f) of this section.
(3) For those borrowers whose property taxes will be paid from an
escrow account where the applicable taxing jurisdiction offers the
choice between disbursements on an installment or an annual basis, at
some time before closing the servicer shall provide to the borrower an
Escrow Account Property Tax Disbursement Alternatives Selection sheet
in the format of Appendix F to this part and shall provide the borrower
with an opportunity to make a selection.
(4) For a loan that settles on or after [INSERT EFFECTIVE DATE OF
FINAL RULE], when the taxing jurisdiction offers the servicer the
option of making disbursements for property taxes on an installment or
an annual basis, the servicer must make disbursements for property
taxes on an installment basis, unless the borrower has indicated on the
Escrow Account Property Tax Disbursement Alternatives Selection sheet
that disbursements for property taxes are to be made on an annual
basis. The servicer and subsequent servicers are prohibited from
changing the method of disbursement for property taxes from the method
the borrower selected on the Escrow Account Property Tax Disbursement
Alternatives Selection sheet, without the borrower's prior written
consent.
(5) For a loan that has settled prior to [INSERT EFFECTIVE DATE OF
FINAL RULE], when the taxing jurisdiction offers the servicer the
option of making disbursements for property taxes on an installment or
an annual basis, the servicer and subsequent servicers are prohibited
from changing the method of disbursement for property taxes from the
method that was used on [INSERT DATE OF PUBLICATION OF FINAL RULE] or
the date of settlement (whichever is later), without the borrower's
prior written consent, as long as such method of disbursement complies
with normal lending practice of the lender and local custom and
constitutes prudent lending practice. In addition, no later than the
first escrow account analysis performed after [INSERT EFFECTIVE DATE OF
FINAL RULE], a servicer shall offer a borrower, in writing, the
opportunity to switch from one disbursement method for property taxes
to the other.
(6) If the payee for escrow items other than property taxes offers
the servicer
[[Page 46522]]
the option of making disbursements on an installment or an annual
basis, the servicer must make disbursements by a date that avoids a
penalty, but may otherwise make disbursements on either an installment
or an annual basis as the servicer prefers, as long as such method of
disbursement complies with normal lending practice of the lender and
local custom and constitutes prudent lending practice.
* * * * *
Appendix F--Escrow Account Property Tax Disbursement Alternatives
Selection Format
Your property taxes will be disbursed out of your escrow account
by your loan servicer. Your jurisdiction provides the option of
paying the property taxes in installment payments spread out over
the year, or in one annual lump sum payment.
You are being offered alternative methods for these property
taxes to be paid. They are described below.
As shown by the choices below, if you choose installment
payments, the amount you have to deposit into your escrow account at
closing may be less. On the other hand, if you choose annual
payments, the total amount of property taxes you will pay may be
less if your taxing jurisdiction provides a discount for annual
payments. The alternative you choose could also affect the amount of
your tax deductions during the first year of the loan, if you
itemize--you may wish to consult a tax advisor.
If you do not make a selection, disbursements will be made on an
installment basis.
Escrow Account Property Tax Disbursement Alternatives
------------------------------------------------------------------------
Installment
payments Annual payments
------------------------------------------------------------------------
Property tax bill for next 12 ________......... ________
months.
Due at closing..................... ________......... ________
Monthly escrow payment first year.. ________......... ________
------------------------------------------------------------------------
I prefer the indicated option (check one and sign below)
{time} Installment Payments
{time} Annual Payments
----------------------------------------------------------------------
Borrower's Signature
[Or Alternative 2 (Servicer Flexibility)]
(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, on or before the deadline to avoid a penalty, as long as the
borrower's payment is not more than 30 days overdue.
(2) The servicer shall advance funds to make disbursements in a
timely manner as 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
paragraph (f) of this section.
(3) If the payee for escrow items (including property taxes) offers
the servicer the option of making disbursements on an installment basis
or a lump sum annual basis, the servicer must make disbursements by a
date that avoids a penalty, but may otherwise make disbursements on
either an installment basis or a lump sum annual basis as the servicer
prefers, as long as such method of disbursement complies with normal
lending practice of the lender and local custom and constitutes prudent
lending practice.
(4) The servicer and subsequent servicers are prohibited from
changing the method of disbursement as long as a choice continues to
exist, without the borrower's prior written consent.
* * * * *
[Or Alternative 3 (Keep, But Clarify, Current Requirements)]
(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, on or before the deadline to avoid a penalty, as long as the
borrower's payment is not more than 30 days overdue.
(2) The servicer shall advance funds to make disbursements in a
timely manner as 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
paragraph (f) of this section.
(3) If the payee for escrow items (including property taxes) offers
the servicer the option of making disbursements on an installment or a
lump sum annual basis, the servicer shall make disbursements by a date
that avoids a penalty. If such payee does not offer a discount for
disbursements on a lump sum annual basis, the servicer must make
disbursements on an installment basis. If, however, the payee offers a
discount for disbursements on a lump sum annual basis, the servicer
may, at the servicer's discretion (but is not required by RESPA to),
make lump sum annual disbursements in order to take advantage of the
discount for the borrower, as long as such method of disbursement
selected by the servicer complies with normal lending practice of the
lender and local custom and constitutes prudent lending practice. Where
the payee offers the option of installment disbursements or a discount
for lump sum annual disbursements, HUD encourages, but does not
require, the servicer to follow the preference of the borrower as to
whether to make disbursements on a lump sum annual or installment
basis, if such preference is known to the servicer.
(4) The servicer and subsequent servicers for an escrow account are
prohibited from changing the method of disbursement as long as a choice
of disbursement methods exists, without the borrower's prior written
consent.
* * * * *
Payment Shock [Item 6]
6. Except with respect to Alternative 2 in this amendatory
instruction, Sec. 3500.17 is further amended and, if applicable,
appendices are added to part 3500, in accordance with either
Alternative 1 or Alternative 3, as follows:
a. Under ALTERNATIVE 1 (Consumer Choice): By adding, in
alphabetical order, a definition of ``Substantial increase''; by
revising the introductory text of paragraph (c); by revising paragraph
(d); by adding new paragraphs to be designated later; and by adding
Appendices G and H-1, to read as follows; or
b. ALTERNATIVE 2 (Make No Change); or
c. Under ALTERNATIVE 3 (Mandate First Year Overpayment): By adding,
in alphabetical order, in paragraph (b), a definition of ``Substantial
increase''; by revising the introductory text of paragraph (c); by
revising paragraph (d); by adding new paragraphs, to be designated
later; and by adding Appendix H-2, to read as follows:
Sec. 3500.17 Escrow accounts.
* * * * *
Alternative 1 (Consumer Choice)
(b) * * *
Substantial increase means an increase of 50 percent or more in the
monthly escrow payment in the second year of an escrow account is
projected as compared to the payment under the initial escrow
accounting.
* * * * *
(c) Limits on payments to escrow accounts; acceptable accounting
methods to determine limits. Except as otherwise provided in paragraph
(__) of this section, the following applies:
* * * * *
(d) Methods of escrow account analysis. Paragraph (c) of this
section
[[Page 46523]]
prescribes acceptable accounting methods except as otherwise provided
in paragraph (__) of this section. The following sets forth the steps
servicers shall use to determine whether their use of an acceptable
accounting method conforms with the limitations in paragraph (c)(1) of
this section. 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.
* * * * *
(__) Rules of special applicability when servicer expects a
substantial increase in bills paid out of escrow account after the
first year for loans that settle on or after [INSERT EFFECTIVE DATE OF
FINAL RULE].
(X) Opportunity for Selection of Escrow Account Method. When a
servicer expects that there will be a substantial increase in the bills
paid out of an escrow account after the first year, at some time before
closing, the servicer shall provide to the borrower an Escrow
Accounting Method Selection sheet in the format of Appendix G to this
part and shall provide the borrower with an opportunity to make a
selection. The servicer must perform the escrow accounting in
accordance with the method selected by the borrower. If the borrower
does not make a selection, the servicer must perform the escrow
accounting in accordance with Method A.
(XX) No Change in Escrow Accounting Method without Borrower
Consent. (1) Once an escrow accounting method is determined by the
process in paragraph (X) of this section, the servicer and subsequent
servicers are prohibited from changing the escrow accounting method
unless either paragraph (__)(XX) (i) or (ii) applies:
(i) The borrower provides his or her prior written consent; or
(ii) The servicer no longer projects that there will be a
substantial increase in bills paid out of the escrow account after the
12-month period covered in the projection for the coming year.
(2) If the servicer changes escrow account methods in reliance on
paragraph (__)(XX)(ii) of this section, the servicer may switch only to
the escrow accounting procedure in paragraph (d) of this section.
(XXX) Limits on payments to escrow accounts; acceptable accounting
methods to determine limits when servicer expects substantial increase
in bills paid out of escrow account after the first year for loans
which settle on or after [INSERT EFFECTIVE DATE OF RULE]. When the
servicer expects a substantial increase in bills paid out of the escrow
account after the first year, the servicer may deviate from the
requirements of paragraph (c) of this section to the extent necessary
to comply with paragraph (XXXX) of this section.
(XXXX) Methods of escrow account analysis for the initial statement
when the servicer expects a substantial increase in bills paid out of
the escrow account after the first year. When the servicer expects a
substantial increase in the bills paid out of the escrow account after
the first year, the servicer shall use the following steps in producing
the projection for the initial statement:
(1) Method A. When a servicer uses Method A in conducting the
initial escrow account analysis, paragraph (d) of this section applies.
(2) Method B. When a servicer uses Method B in conducting the
initial escrow account analysis, the target balances may not exceed the
balances computed according to the following arithmetic operations: The
servicer projects a trial balance for the account as a whole over the
next computation year (a trial running balance) with a beginning
balance of 0. The servicer may include as disbursements only those
amounts that are expected to be paid in the 12-month period covered by
the projection. In doing so, the servicer assumes that it will make
estimated disbursements on or before the deadline to avoid a penalty.
The servicer does not use pre-accrual on the 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 for the second year.
(3) Method C. When a servicer uses Method C in conducting the
initial escrow account analysis, the target balances may not exceed the
balances computed according to the following arithmetic operations:
(i) The servicer first projects a trial balance for the account as
a whole over the next computation year (a trial running balance). The
servicer may include as disbursements only those amounts that are
expected to be paid in the 12-month period covered by the projection.
In doing so, the servicer assumes that it will make estimated
disbursements on or before 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 for the second year.
(ii) The servicer then examines the monthly trial balances and adds
to the initial deposit an amount just sufficient to bring the lowest
monthly trial balance (not considering the initial deposit) to zero,
and adjusts all other monthly balances and the initial deposit
accordingly.
(iii) The servicer then adds to the initial deposit the permissible
cushion. The cushion is one-sixth of the estimated total annual escrow
account disbursements for the second year or a lesser amount specified
by State law or the mortgage document.
(4) The steps set forth in this paragraph (XXXX) 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 paragraph (XXXX)
does not require the use of a cushion.
* * * * *
Appendix G--Sample Escrow Accounting Method Selection Format
The bills paid out of your escrow account are expected to
increase substantially after the first year. Under normal escrow
practices, your monthly escrow payment in the second year could be
much higher than in the first, both to pay the larger bills and to
make up for a shortage at the end of the first year. (See Method A.)
You may voluntarily choose to make higher payments during the first
year to reduce or eliminate the monthly payment increase in the
second year. (See Methods B or C.) You are being offered alternative
escrow payment schedules. They are described below. If you do not
make a selection, Method A will be used.
Escrow Account Alternatives
----------------------------------------------------------------------------------------------------------------
Method A Method B Method C
----------------------------------------------------------------------------------------------------------------
Due at closing........................ __________............. __________............. __________
Monthly escrow payment first year..... __________............. __________............. __________
Estimated surplus refunded at end of __________............. __________............. __________
first year.
Estimated monthly escrow payment __________............. __________............. __________
second year.
[[Page 46524]]
Estimated monthly escrow payment third __________............. __________............. __________
year.
----------------------------------------------------------------------------------------------------------------
I prefer the indicated method (check one and sign below)
A {time}
B {time}
C {time}
----------------------------------------------------------------------
Borrower's Signature
Appendix H-1--The Payment Shock Problem
Instructions and Sample Mathematical Calculations for Completing Escrow
Accounting Method Selection Format
Assumptions
Disbursements
Year 1
$720 for insurance--disbursed in April
$288 for property taxes--disbursed in November
Year 2
$720 for insurance--disbursed in April
$2,880 for property taxes--disbursed in November
First Payment: June 15
Method A
[Demonstrates calculation for completing Method A of Escrow
Accounting Method Selection Format (Appendix G).]
Assumption: Cushion selected by servicer equals one-sixth of
estimated total annual disbursements.
Step 1.--Projection for Year 1
See 24 CFR 3500.17(k) for instructions and Appendix E to Part
3500 for sample calculation (example below uses aggregate analysis).
------------------------------------------------------------------------
Year 1 Payment Disburs Balance
------------------------------------------------------------------------
Initial deposit: 252
Jun........................................ 84 0 336
Jul........................................ 84 0 420
Aug........................................ 84 0 504
Sep........................................ 84 0 588
Oct........................................ 84 0 672
Nov........................................ 84 288 468
Dec........................................ 84 0 552
Jan........................................ 84 0 636
Feb........................................ 84 0 720
Mar........................................ 84 0 804
Apr........................................ 84 720 168
May........................................ 84 0 252
------------------------------------------------------------------------
Step 2.--Projection for Year 2
------------------------------------------------------------------------
Year 2 Payment Disburs Balance
------------------------------------------------------------------------
Starting balance: 1680
Jun........................................ 300 0 1980
Jul........................................ 300 0 2280
Aug........................................ 300 0 2580
Sep........................................ 300 0 2880
Oct........................................ 300 0 3180
Nov........................................ 300 2880 600
Dec........................................ 300 0 900
Jan........................................ 300 0 1200
Feb........................................ 300 0 1500
Mar........................................ 300 0 1800
Apr........................................ 300 720 1380
May........................................ 300 0 1680
------------------------------------------------------------------------
Shortage (or surplus) = Desired starting balance--Actual starting
balance
= 1680-252
= 1428
Additional Monthly Escrow Payment = Shortage/12
= 1428/12
= 119
Monthly escrow payment = Shortage/12 + Disbursements/12
= 119 + 300
= 419
Step 3.--Projection for Year 3
Same as year 2. Since there is no shortage or surplus, the
monthly payment is $300 per month.
Method A Summary To Appear on Disclosure
Due at closing = $252
Monthly escrow payment first year = $84/month
Estimated surplus refunded at end of first year = $0
Estimated monthly escrow payment second year = $419
Estimated monthly escrow payment third year = $300
Method B
[Demonstrates calculation for completing Method B of Escrow
Accounting Method Selection Format (Appendix G).]
Assumption: On the initial statement, the initial deposit equals
$0 and the monthly deposit equals \1/12\ of second year's estimated
total annual disbursements. Any subsequent analysis uses the escrow
accounting technique in 24 CFR 3500.17(c)(3).
Step 1.--Projection for Year 1
------------------------------------------------------------------------
Year 1 Payment Disburs Balance
------------------------------------------------------------------------
Initial deposit: 0
Jun........................................ 300 0 300
Jul........................................ 300 0 600
Aug........................................ 300 0 900
Sep........................................ 300 0 1200
Oct........................................ 300 0 1500
Nov........................................ 300 288 1512
Dec........................................ 300 0 1812
Jan........................................ 300 0 2112
Feb........................................ 300 0 2412
Mar........................................ 300 0 2712
Apr........................................ 300 720 2292
May........................................ 300 0 2592
------------------------------------------------------------------------
Step 2.--Projection for Year 2
Projection same as for Method A.
Shortage/Surplus = Desired starting balance - Actual balance
= 1680-2592
= -912 (912 surplus)
This $912 surplus is refunded to borrower at end of Year 1.
Thus, the borrower starts Year 2 with the desired starting balance
of 1680 and the monthly payment is $300.
Step 3.--Projection for Year 3
Same as year 2. Since there is no shortage or surplus, the
monthly payment is $300 per month.
Method B Summary To Appear on Disclosure
Due at closing = $0
Monthly escrow payment first year = $300/month
Estimated surplus refunded at end of first year = $912
Estimated monthly escrow payment second year = $300
Estimated monthly escrow payment third year = $300
Method C
[Demonstrates calculation for completing Method C of Escrow
Accounting Method Selection Format (Appendix G).]
Assumption: On the initial statement, the cushion selected by
servicer equals \1/6\ of estimated total annual disbursements for
the second year and the Monthly deposit equals \1/12\ of estimated
total annual disbursements for the second year. Any subsequent
analysis uses the escrow accounting technique in 24 CFR
3500.17(c)(3).
Step 1.--Projection for Year 1
------------------------------------------------------------------------
Year 1 Payment Disburs Balance
------------------------------------------------------------------------
Initial deposit: 300
Jan........................................ 300 0 600
Feb........................................ 300 0 900
Mar........................................ 300 0 1200
Apr........................................ 300 0 1500
May........................................ 300 0 1800
Jun........................................ 300 288 1812
Jul........................................ 300 0 2112
Aug........................................ 300 0 2412
Sep........................................ 300 0 2712
Oct........................................ 300 0 3012
Nov........................................ 300 720 2592
Dec........................................ 300 0 2892
------------------------------------------------------------------------
[[Page 46525]]
Step 2.--Projection for Year 2
Projection same as for methods A and B.
Shortage/Surplus = Desired starting balance - Actual balance
= 1680-2892
= -1212 (1212 surplus)
This $1212 surplus is refunded to borrower at end of Year 1.
Thus, the borrower starts Year 2 with the desired starting balance
of $1680 and the monthly payment is $300.
Step 3.--Projection for Year 3
Same as year 2. Since there is no shortage or surplus, the
monthly payment is $300 per month.
Method C Summary To Appear on Disclosure
Due at closing = $300
Monthly escrow payment first year = $300/month
Estimated surplus refunded at end of first year = $1212
Estimated monthly escrow payment second year = $300
Estimated monthly escrow payment third year = $300
Comparative Illustrations
1. The escrow account methods for the example shown in the text,
with insurance disbursed in the eleventh month and taxes disbursed
in the sixth month of the escrow cycle, are shown below:
------------------------------------------------------------------------
Methods
--------------------------
A B C
------------------------------------------------------------------------
Due at closing............................... 252 0 300
Monthly escrow payment first year............ 84 300 300
Estimated surplus refunded at end of first
year........................................ 0 912 1212
Estimated monthly escrow payment second year. 419 300 300
Estimated monthly escrow payment third year.. 300 300 300
------------------------------------------------------------------------
2. The following set of options shows the resulting values if,
as before, insurance were disbursed in the eleventh month of the
escrow cycle, but taxes were disbursed in the first rather than the
sixth month of the escrow cycle. Note how payments change as the
month in which the taxes are disbursed changes and all other factors
remain constant.
------------------------------------------------------------------------
Methods
--------------------------
A B C
------------------------------------------------------------------------
Due at closing............................... 372 0 588
Monthly escrow payment first year............ 84 300 300
Estimated surplus refunded at end of first
year........................................ 0 0 0
Estimated monthly escrow payment second year. 534 349 300
Estimated monthly escrow payment third year.. 300 300 300
------------------------------------------------------------------------
3. The final set of options shows the resulting values if, as
before, insurance were disbursed in the eleventh month of the escrow
cycle, but taxes were disbursed in the last month of the escrow
cycle.
------------------------------------------------------------------------
Methods
--------------------------
A B C
------------------------------------------------------------------------
Due at closing............................... 168 0 300
Monthly escrow payment first year............ 84 300 300
Estimated surplus refunded at end of first
year........................................ 0 1992 2292
Estimated monthly escrow payment second year. 336 300 300
Estimated monthly escrow payment third year.. 330 300 300
------------------------------------------------------------------------
[or Alternative 3 (Mandate First Year Overpayment)]
(b) * * *
Substantial increase means an increase of 50 percent or more in the
monthly escrow payment in the second year of an escrow account is
projected as compared to the payment under the initial escrow
accounting.
* * * * *
(c) Limits on payments to escrow accounts; acceptable accounting
methods to determine limits. Except as provided in paragraph (__) of
this section, the following applies:
* * * * *
(d) Methods of escrow account analysis. Paragraph (c) of this
section prescribes acceptable accounting methods except as otherwise
provided in paragraph (__) of this section. The following sets forth
the steps servicers shall use to determine whether their use of an
acceptable accounting method conforms with the limitations in paragraph
(c)(1) of this section. 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.
* * * * *
(__) Rules of special applicability where servicer expects
substantial increase in bills paid out of escrow account after the
first year for loans which settle on or after [INSERT EFFECTIVE DATE OF
FINAL RULE].
(X) Limits on payments to escrow accounts; acceptable accounting
methods to determine limits when servicer expects substantial increase
in bills paid out of escrow account after the first year for loans
which settle on or after [INSERT EFFECTIVE DATE OF FINAL RULE]. When
the servicer expects a substantial increase in bills paid out of escrow
account after the first year, the servicer may deviate from the
requirements of paragraph (c) of this section to the extent necessary
to comply with paragraph (XX) of this section.
(XX) Methods of escrow account analysis for the initial statement
when the servicer expects a substantial increase in the bills paid out
of the escrow account after the first year. When the servicer expects a
substantial increase in the bills paid out of the escrow account after
the first year, the servicer shall use the following steps in producing
the projection for the initial statement:
(1) When a servicer uses this method of escrow accounting in
conducting the initial escrow account analysis, the target balances may
not exceed the balances computed according to the following arithmetic
operations:
(i) The servicer first projects a trial balance for the account as
a whole over the next computation year (a trial running balance). The
servicer may include as disbursements only those amounts that are
expected to be paid in the 12-month period covered by the projection.
In doing so, the servicer assumes that it will make estimated
disbursements on or before 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 for the second year.
(ii) The servicer then examines the monthly trial balances and adds
to the initial deposit an amount just sufficient to bring the lowest
monthly trial balance (not considering the initial deposit) to zero,
and adjusts all other monthly
[[Page 46526]]
balances and the initial deposit accordingly.
(iii) The servicer then adds to the initial deposit the permissible
cushion. The cushion is one-sixth of the estimated total annual escrow
account disbursements for the second year or a lesser amount specified
by State law or the mortgage document.
(2) The steps set forth in this paragraph (XX) 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 paragraph (XX) does
not require the use of a cushion.
* * * * *
Appendix H-2
The Payment Shock Problem
Instructions and Sample Mathematical Calculations for Alternative
Escrow Accounting Method
Assumptions
Disbursements:
Year 1
$720 for insurance--disbursed in April
$288 for property taxes--disbursed in November
Year 2
$720 for insurance--disbursed in April
$2,880 for property taxes--disbursed in November
First Payment: June 15
Assumption: On the initial statement, the cushion selected by
servicer equals \1/6\ of estimated total annual disbursements for
the second year and the Monthly deposit equals \1/12\ of estimated
total annual disbursements for the second year. Any subsequent
analysis uses the escrow accounting technique in 24 CFR
3500.17(c)(3).
Step 1.--Projection for Year 1
------------------------------------------------------------------------
Year 1 Payment Disburs Balance
------------------------------------------------------------------------
Initial deposit ....... ....... 300
Jan........................................ 300 0 600
Feb........................................ 300 0 900
Mar........................................ 300 0 1200
Apr........................................ 300 0 1500
May........................................ 300 0 1800
Jun........................................ 300 288 1812
Jul........................................ 300 0 2112
Aug........................................ 300 0 2412
Sep........................................ 300 0 2712
Oct........................................ 300 0 3012
Nov........................................ 300 720 2592
Dec........................................ 300 0 2892
------------------------------------------------------------------------
Step 2.--Projection for Year 2
------------------------------------------------------------------------
Year 2 Payment Disburs Balance
------------------------------------------------------------------------
Starting balance: ....... ....... 1680
Jun........................................ 300 0 1980
Jul........................................ 300 0 2280
Aug........................................ 300 0 2580
Sep........................................ 300 0 2880
Oct........................................ 300 0 3180
Nov........................................ 300 2880 600
Dec........................................ 300 0 900
Jan........................................ 300 0 1200
Feb........................................ 300 0 1500
Mar........................................ 300 0 1800
Apr........................................ 300 720 1380
May........................................ 300 0 1680
------------------------------------------------------------------------
Shortage/Surplus = Desired starting balance-Actual balance
= 1680-2892
= -1212 (1212 surplus)
This $1212 surplus is refunded to borrower at end of Year 1.
Thus, the borrower starts Year 2 with the desired starting balance
of $1680 and the monthly payment is $300.
Step 3.--Projection for Year 3
Same as year 2. Since there is no shortage or surplus, the
monthly payment is $300 per month.
Single-Item Analysis With Aggregate Adjustment Problem [Items 7-9]
7. Section 3500.7 is amended by revising paragraph (c)(2), to read
as follows:
Sec. 3500.7 Good Faith Estimate.
* * * * *
(c) * * *
(2) The borrower will normally pay or incur at or before
settlement, based upon common practice in the locality of the mortgaged
property. Each such estimate must be made in good faith and bear a
reasonable relationship to the charge a borrower is likely to be
required to pay at settlement and must be based upon experience in the
locality of the mortgaged property. Reserves to be deposited with the
lenders for the 1000 series in the HUD-1 and HUD-1A may be estimated
using a 1-month single item amount for each item. For each charge for
which the lender requires a particular settlement service provider to
be used, the lender shall make its estimate based upon the lender's
knowledge of the amounts charged by such provider.
8. Section 3500.8 is amended by revising paragraph (c), to read as
follows:
Sec. 3500.8 Use of HUD-1 and HUD-1A settlement statements.
* * * * *
(c) Aggregate Accounting At Settlement. Servicers may choose Option
1 or Option 2 of this paragraph:
(1) Option 1. The servicer may choose the method in either
paragraph (c)(1)(i) or (ii) of this section:
(i) After computing individual deposits in the 1000 series using
single-item accounting, the servicer shall make an adjustment based on
aggregate accounting. This adjustment equals the difference in the
deposit required under aggregate accounting and the sum of the deposits
required under single-item accounting, with both sets of calculations
using the same cushion. The computation steps for both accounting
methods are set out in Sec. 3500.17(d). The adjustment will always be a
negative number or zero (-0-). The settlement agent shall enter the
aggregate adjustment amount on a line at the end of the 1000 series of
the HUD-1 or HUD-1A statement.
(ii) 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 maximum 1-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 A to this part contains instructions for completing the HUD-1
or HUD-1A settlement statements using single item analysis with an
aggregate adjustment and the alternative process during the phase-in
period. Appendix E to this part illustrates the arithmetic steps for
aggregate analysis.
(2) Option 2. The servicer may complete the aggregate computation,
as set forth in 24 CFR 3500.17(d), and record the aggregate deposit by
inserting the words ``Aggregate Escrow Deposit for Items Marked (*)
Above'' on a line at the end of the 1000 series and placing the total
on that line. While no individual deposits are to be recorded on the
other lines of the 1000 series, an asterisk (*) shall be placed next to
each item in the 1000 series for which a reserve has been collected.
9. Appendix A is amended in Section L, under the text heading
``Line Item Instructions,'' by revising in the discussion of ``Lines
1000-1008'' the second paragraph and the second sentence of the third
paragraph and by adding a new fourth paragraph, to read as follows:
Appendix A to Part 3500--Instructions for Completing HUD-1 and HUD-1A
Settlement Statements; Sample HUD-1 and HUD-1A Statements
* * * * *
Lines 1000-1008. * * *
The servicer shall pick Option 1 or Option 2. Option 1. After
itemizing individual deposits in the 1000 series using single-item
[[Page 46527]]
accounting, the settlement agent shall make an adjustment based on
an aggregate analysis to reflect the difference between the deposit
required under aggregate accounting and the sum of the deposits
required under single-item accounting, with both sets of
calculations using the same cushion. The computation steps for both
accounting methods are set out in 24 CFR 3500.17(d). The adjustment
will always be either a negative number or zero (-0-). The servicer
shall enter the aggregate adjustment amount on a final line in the
1000 series of the HUD-1 or HUD-1A statement.
* * * 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 maximum 1-month cushion (unless the mortgage loan
documents indicate a smaller amount). * * *
Option 2. The servicer may complete the aggregate computation,
as set forth in 24 CFR 3500.17(d), and record the aggregate deposit
by inserting the words ``Aggregate Escrow Deposit for Items Marked
(*) Above'' on a line at the end of the 1000 series and placing the
total on that line. While no individual deposits are to be recorded
on the other lines of the 1000 series, an asterisk (*) shall be
placed next to each item in the 1000 series for which a reserve has
been collected.
* * * * *
Dated: July 5, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 96-22371 Filed 8-30-96; 8:45 am]
BILLING CODE 4210-27-P
