RESPA & HUDs Regulation X

Basic Compliance Rules

Session Outline
Background Information Coverage/Exemptions Section 8 Issues
RESPA Referral Fees 2006 HUD Settlement Agreements Policy Statement Violation Examples

Pre-Closing Disclosures Closing Disclosures

HUD-1 Escrow

Post-Closing
Annual Escrow Statement Notice of Sale or Transfer of Servicing
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Background
RESPA passed by Congress in 1974 Authority to issue regulations assigned to HUD HUD promulgated Regulation X to implement the law HUD and DOJ can investigate and bring enforcement actions
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Background
Bank supervisory agencies review compliance in exams Violations are subject to enforcement under FIRREA Section 8 Violations

Background
Originally, applied only to purchase money mortgage loans and had three purposes:
To require advance disclosure of settlement charges To prohibit certain referral fees and kickbacks
(Section 8 Violations)

To limit escrow amounts required for taxes & insurances

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Background
In 1990, Congress added two more requirements: To provide disclosures when mortgage servicing rights are transferred To provide annual escrow account statements by servicers to borrowers

Background
In 1992, RESPAs coverage expanded to include all 1st mortgages on 1-4 family homes (not just purchase money mortgages) In 1994, Coverage was further expanded to include loans secured by junior liens as well as those secured by first mortgages
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RESPA Coverage and Exemptions

Coverage/Exemptions
Coverage
Any loan secured by a 1st or subordinate lien on a 1 4 family residential mortgage (unless it is exempt) Includes any Federally Related Mortgage Loan

Coverage/Exemptions
Exemptions:
1. Loans on property of 25 acres or more
Purpose does not matter Use of property does not matter Size (acreage) is the trigger to the exemption

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Coverage/Exemptions
Exemptions:
2. Business Purpose Loans
Extensions of credit for business, commercial, or agricultural purpose Business purpose is defined in Regulation Z (See Reg Z Commentary Section 226.3(a)(1) )
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Coverage/Exemptions
Exemptions:
3. Temporary Financing
Loans for a term of 2 years or less
Loans for more than 2 years are not exempt, even if temporary

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Coverage/Exemptions
3. Temporary Financing (cont.)
Exemption includes construction
Unless proceeds will be converted to permanent financing But not if loan will be used to transfer title to the first user Any commitment for permanent financing voids this exemption

Bridge loans and swing loans are exempt as temporary financing

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Coverage/Exemptions
Exemptions:
4. Vacant land
Loan secured by unimproved land is exempt But not if proceeds will be used for improvements

5. Assumptions
Assumptions without lender approval are exempt

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Coverage/Exemptions
Exemptions:
6. Loan conversions
Conversion to different terms that are consistent with original mortgage
Only if no new note is required Even if you charge a fee for the conversion Modifications are treated like loan conversions

Use Regulation Z as a guide

If the terms are comparable to the original terms or more favorable to the customer, or at the customers request, its likely a conversion
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Coverage/Exemptions
Exemptions:
7. Secondary Market Transactions
Bona fide transfers are exempt: table funding is not When a mortgage loan is made, someone must be the creditor subject to RESPA disclosure rules
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Coverage/Exemptions
Generally
Any Federally Related Mortgage Loan must be subject to RESPA at some point Structuring a loan as a sale doesnt get the transaction out from RESPA coverage

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Section 8 - RESPA

Prohibition Against Kickbacks and Unearned Fees

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Section 8 - RESPA
Section 8A
No referral fees

Section 8B
No splitting of charges except for actual services performed Violations of this part are considered a felony (subject to $10,000 fine, 1 year prison term, treble damages, & attorneys fees)

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Section 8 - RESPA
Basic Rules RESPA prohibits:
a. Compensation for referrals
Referrals are defined as having no value

b. Business arrangements that create costs for the consumer

Avoid duplicate charges, duplicate services, and unnecessary services

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RESPA - Referral Fees

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RESPA - Referral Fees

Regulation X 3500.14(b) Any referral of a settlement service is not a compensable service, except as set forth in section 3500.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement-service business
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RESPA - Referral Fees

RESPA permits some payments that are justified by work performed:
1. Payment to an attorney for services actually rendered 2. Payment by a title company to its agent for services actually performed for issuing title insurance 3. Payment by a lender to agent or contractor for services actually performed in originating the loan

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RESPA - Referral Fees

RESPA permits some payments that are justified by work performed: (cont)
4. Payment to employees by the employer a. There cannot be pass-through payments for referrals b. Non-lending employees may be compensated by their employer for referrals

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RESPA - Referral Fees

RESPA permits some payments that are justified by work performed: (cont)
5. Payments for bona fide salary or compensation for goods or services actually performed 6. Normal promotional and educational activities not conditioned upon referral of business 7. Payment under cooperative brokerage and referral arrangements when parties are acting in real estate brokerage capacity.

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2006 HUD Settlement Agreements

Section 8 Violations

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2006 HUD Settlement Agreements

1. Grasso Appraisal Services (Mass.)Section 8A
Company paid for and/or subsidized the purchase of restaurant gift certificates for East West Mort. Co. in exchange for the referral of business. Settlement: $4,000 paid to U.S. Treasury

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2006 HUD Settlement Agreements

2. R. Norman Peters & his law firm of Peters & Sowydra (Mass.) - Section 8A
Peters paid for and/or subsidized the purchase of tickets & premium seating to Bo Sox baseball game, tickets for New Eng. Patriots event, rest. gift certs. & lunch for all East West Mortgage Co. emps. in exchange for referral of business. Settlement: $7,500 paid to U.S. Treasury
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2006 HUD Settlement Agreements

3.Shea Homes Homes Ltd. Ptnrshp. (Calf.) Section 8A and Shea & Shea Insurance
HUDs position is that a captive title reinsurance arrangement whereby payments to the reinsurer are not bona fide and exceed the value of the reinsurance would violate Section 8A of RESPA, especially from an entity or affiliate of an entity that is in a position to refer business to the primary title insurer. Settlement: $950,000 paid to U.S. Treasury + no new arrangements + will cease writing new captive title reinsurance business
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 4.

2006 HUD Settlement Agreements

William Lyon Homes (Calf.) - Section 8A and Duxford Title Reinsurance, Inc.

HUDs position is that a captive title reinsurance arrangement whereby payments to the reinsurer are not bona fide and exceed the value of the reinsurance would violate Section 8A of RESPA, especially from an entity or affiliate of an entity that is in a position to refer business to the primary title insurer. Settlement: $850,000 paid to U.S. Treasury + no new arrangements + will cease writing new captive title reinsurance business

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Policy Statement

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Policy Statement
HUD Issues Policy Statement 3/1/99 - Link
Triggered by Mortgage Yield Spread Premium issue

Holds Mortgage Industry to a 2 part test:

1. Goods or facilities must be furnished or services must actually be performed. 2. Compensation for goods or services must commensurate with their value.

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Policy Statement
Policy Statement does not legally resolve the issue regarding Yield Spread Premiums. To meet the 2 part test threshold, must take the application & perform 5 additional of 14 services. HUD was challenged in court and reissued another statement asserting the same criteria on 10/18/01.
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Policy Statement

Settlement Services
Any service provided in connection with settlement
Taking an application Bringing a borrower and lender together Obtaining verifications Appraisals Title search Preparing documents Conducting closing Making the loan

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Section 8 Violations

Examples
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Section 8 Violation Examples

Discuss examples of Section 8 violations
Splitting of fees Up-charging Rental Space Compensation of employees

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RESPA Disclosures

Pre-Closing Disclosures
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RESPA Disclosures
Pre Closing Disclosures
Special Information Booklet Good Faith Estimate Mortgage Servicing Transfer Disclosure Affiliated Business Arrangement Disclosure

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Important Definitions HUD Regulation X

Sidebar Issue
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RESPA - Definition
Application
A submission of a borrower's financial information in anticipation of a credit decision whether written or computer generated relating to a federallyrelated mortgage loan.

If no property is specified, then it is not considered

an application - it's a prequalification.

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RESPA - Definition
Business Day
Business day means a day on which the offices of the business entity are open to the public for carrying on substantially all of the entity's business functions.

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Special Information Booklet

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Special Information Booklet

Purpose:
Designed to help applicants understand the homebuying, financing & settlement processes Required for purchase money applications unless declined within 3 business days
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Special Information Booklet

Booklet must be provided within three business days after receipt of a written application Current version must be used (Sept. 97)

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Good Faith Estimate

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Good Faith Estimate (GFE)

Purpose
Provides applicants with info regarding which settlement services will be required and how much the charge for each of those services is likely to be. GFE must be provided within three business days after receipt of a written application unless application is declined within 3 days from application.
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Good Faith Estimate (GFE)

Appendix C in Regulation X provides a model form using the required terms. Estimate must bear a reasonable relationship to the charges a borrower is likely to pay at settlement. Lenders may substitute GFE for Itemization of Amount Financed required by Regulation Z for mortgage loans subject to RESPA.
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Good Faith Estimate (GFE)

HUD has made a proposal to attach liability to this disclosure similar to Reg Z. Either create tolerance for accuracy compared to HUD 1 actual costs or Lender guarantee closing costs on front end. Alphonso Jackson replaces Mel Martinez as HUD Secretary of Housing & proposal is tabled.

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Mortgage Servicing Transfer Disclosure

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Mortgage Servicing Transfer Disclosure Purpose:

Informs the applicant of the likelihood that servicing (collection of payments) will be sold or transferred to another institution. There are 5 parts to this disclosure:
Transfer Practices and Requirements Complaint Resolution Damages and Costs Servicing Transfer Estimates by Original Lender Customer Acknowledgement
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Mortgage Servicing Transfer Disclosure Original Requirements:

Disclosure must be provided for 1st lien loans Historical data had to be updated by March 31 of each calendar year.

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Mortgage Servicing Transfer Disclosure

Timing Requirement:
If the application is taken face-to-face, provide the disclosure at the time of application. If the application is taken in a manner other than face-to-face, provide the disclosure within 3 business days.

Mandatory Customer Acknowledgement Disclosure must be retained for 5 years

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Mortgage Servicing Transfer Disclosure

Congress Changes the Law
9/30/96 Congress amended RESPA to eliminate hist. data & acknowledgement HUD proposes amended to Regulation X to implement 1996 requirements but never finalizes proposed regulation. 7/29/02 proposes revision to Regulation X and provides interim rule: .However, in the meantime, the Section 6 language in the statute may be provided in conjunction with the GFE 53

Mortgage Servicing Transfer Disclosure

Section 6
Each person who makes a federally related mortgage loan shall disclose to each person who applies for the loan, at the time of application for the loan, whether the servicing of the loan may be assigned, sold, or transferred to any other person at any time while the loan is outstanding.

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Mortgage Servicing Transfer Disclosure

Current requirements:
3500.21(b)(1) - Servicing disclosure statement must be given within 3 business days 3500.21(b)(3)(I) - Servicing disclosure statement must disclose whether servicing may be assigned, sold, or transferred

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Affiliated Business Arrangement

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Affiliated Business Arrangement

Disclosure Purpose
Informs borrower of any affiliated relationship that exists between the lender and service provider Name & address of provider and service they are providing $ charge for that service

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Affiliated Business Arrangement

ABA Exists
When a company refers a settlement service to a provider with whom the company has an affiliate relationship and that company benefits financially from the referral of business. If an affiliated business arrangement exists, then the lender is limited to requiring an appraiser, attorney or credit bureau.
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Affiliated Relationship
Affiliated relationship exists:

When one business entity has effective control over another by virtue of a partnership or other agreement Or by a parent to subsidiary relationship or where the two entities are under common control of a third entity. Or in which the referring company owns 1% or more of the company providing the settlement service.

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Affiliated Business Arrangement

Disclosure
Disclosure must be provided:
If the application is made during a face-to-face meeting, at time of referral. If the application is by telephone, (affiliation may be given orally) followed by the written disclosure within 3 days. If the application is received in writing or electronic media, the disclosure must be provided at that time or before the referral is given. Customer acknowledgement of the disclosure is required and 5 year retention required
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Closing - RESPA

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Disclosures
Disclosures at Closing
HUD 1/ 1A Settlement Statement Initial Escrow Account Disclosure

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HUD 1/1A Settlement Statement

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Uniform Settlement Statement Form (HUD-1 or HUD-1A)

HUD 1 represents the final version of the settlement costs in a transaction. Use the HUD-1 Statement when there is a buyer and a seller or HUD-1A may be used when there is no seller (HUD 1 may always be used) Charges should be properly disclosed for both borrower and seller* Means that charges should be separately itemized
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Uniform Settlement Statement Form (HUD-1 or HUD-1A)

Charges paid outside of closing must be labeled POC but not included in the totals. The name of any 3rd party was the recipient of a fee must be disclosed. Must be provided at or prior to settlement.
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Uniform Settlement Statement Form (HUD-1 or HUD-1A)

HUD-1 or HUD-1A must be available for inspection by the borrower at least one business day before settlement. Lenders are prohibited from charging fees for the preparation of: HUD1/1A, TIL statement or escrow account disclosures.

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Escrow Accounts

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Escrow Accounts
What is an Escrow Account?

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Escrow Accounts
Definition
a separate bank account segregated from the banks own funds in which the bank is required by state law to deposit all monies collected for clients AKA Trust, Reserve or Impound Account

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Escrow Accounts
What kinds of payments would a servicer make from an Escrow account?

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Escrow Accounts
Hazard Insurance Flood Insurance Guarantee Insurance (PMI or Government) Various Types of Taxes

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Escrow Accounts
Why would a bank condition a loan or require a borrower to pay amounts into an escrow account?

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Escrow Accounts
To protect its interest in the collateral i.e. avoid tax liens and/or ensure that hazard policy premiums are paid

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Escrow Accounts
If your bank engages in this activity, there are requirements, restrictions, and limitations outlined in Section 3500.17 of Regulation X and Section 10(C)(1) of RESPA Civil Liability as well

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Escrow Accounts
Prior to establishing an escrow account:
An escrow account analysis must be performed to determine amounts the borrower will deposit into the account

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Escrow Accounts
To establish an account, the following limitations must be followed: 3500.17(c)(1)(I)
collect an amount that is sufficient to bring taxes and insurance premiums current select a cushion that does not exceed 1/6th of each annual outlay must use the aggregate accounting method to determine amounts that are collected at closing
(All accounts established after October 27, 1997)
3500.17(b)

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Escrow Accounts
During the life of an account:
3500.17(k)(1)

Servicers are limited to collect monthly payments that do not exceed 1/12th of each annual outlay amount Must refund surpluses > $50 within 30 days of the annual escrow analysis

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Escrow Accounts
During the life of an account:
3500.17(k)(1)

Servicer must pay outlays in a timely manner in order to avoid any penalty Payments may not be more than 30 days overdue to keep the borrower current

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Escrow Accounts
During the life of an account: 3500.17(k)(1)
Discounts and additional fees HUD encourages the servicer to follow customer preference, but does not require payments to be made so as to earn discounts.

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Escrow Accounts
The institution must furnish the borrower with an initial statement within 45 days upon establishing an escrow account - 3500.17(g)(1)

The initial statement must contain:

3500.17(g)(1)(I)

amount of the monthly payment (PITI) amount of the monthly payment that will be deposited into the escrow account

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Escrow Accounts
The initial statement must contain:
3500.17(g)(1)(I)

amounts of outlay(s) that will be paid from the escrow account cushion, if any, selected by the servicer trial running balance

Recordkeeping requirement for 5 years after the account is last serviced 3500.17(l)(2)
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Escrow Accounts
Review RESPAs Appendix E Example

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Escrow Accounts
Use HUDs Aggregate Accounting Method & 3 Step Process to compute a Trial Balance with Cushion This analysis is used to help in the preparation of the Initial Escrow Account Statement

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Escrow Accounts
Exercise # 1 Loan Scenario: Settlement Date: May 15 First Payment Date: July 1 Projected Outlays:
School Taxes (Paid Sept. 20) County Taxes (Paid July 25 $500 & Dec.10 $700) Total Annual Outlays $360 $1,200 $1,560

Monthly Deposits to Account = $1,560 / 12 = $130 per month Servicer Selects a 2 Month Cushion
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Escrow Accounts
Step 1 - Initial Trial Balance
Month June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Payment 0 130 130 130 130 130 130 130 130 130 130 130 130 Disbursement 500 360 Balance 0 -370 -240 -470 -340 -210 -780* High Deficit -650 -520 -390 -260 -130 0 85

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Escrow Accounts
Step 2 - Adjusted Trial Balance
Month June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Payment 0 130 130 130 130 130 130 130 130 130 130 130 130 Disbursement 500 360 Balance 780 410 540 310 440 570 0 130 260 390 520 650 780 86

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Escrow Accounts
Step 3 - Trial Balance with Cushion
Month June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Payment 0 130 130 130 130 130 130 130 130 130 130 130 130 Disbursement 500 360 Balance 1040 670 800 570 700 830 260 390 520 650 780 910 1040
High Deficit (780) + 2 Month Cushion (260) = 1040 (Opening Statement Balance)

700

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Initial Escrow Account Statement Calculation

Performed a forecast/projection of amounts deposited into the account aka inflows and amounts paid out of the account aka outflows Computed a two month cushion Used the Aggregate Accounting Method and HUDs 3 Step Process to: Compute a trial balance with cushion These funds will be collected at closing and represent the opening balance of the initial escrow account statement
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Escrow Accounts
Use HUDs Single Item Accounting Method & 3 Step Process to compute a Trial Balance with Cushion This analysis is used to help in the preparation of the HUD 1 Settlement Statement

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Single Item Accounting Method

Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Paid on: Sept. 20 $360 Dep. 0 30 30 30 30 30 30 30 30 30 30 30 30 Outlay

School Taxes

County Property Taxes

Outlays 500

Paid on July 25 and on Dec. 10 $1,200 Bal. 0 <400> <300> <200> <100> 0 <600>* <500> <400> <300> <200> <100> 0

Bal. Dep. 0 0 30 100 60 100 360 <270>* 100 <240> 100 <210> 100 <180> 100 <150> 100 <120> 100 <90> 100 <60> 100 <30> 100 0 100 High Deficits: $270 + $600 2 Mos.Cushion: $60 + $200 $330 + $800 = $1,130

700

Trial Balance with Cushion using the Single Item Accounting Method

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Initial Escrow Account Calculation

Trial Balance with Cushion: Single Item Accounting Method: $1,130 *
*Used

on the HUD 1 Settlement

Aggregate Accounting Method: $1,040 **

**Amount collected at closing & <$90>

Used as Starting Balance on Initial Escrow Account Statement $90 = Aggregate Accounting Adjustment used on the HUD 1 Settlement Statement

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Post Closing - RESPA

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RESPA / Regulation X

Disclosures: Post Closing

Annual Escrow Account Statement Notice of sale or transfer of servicing Hello - Goodbye, if applicable.

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Annual Escrow Account Statement

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Annual Escrow Account Statement

Must be provided within 30 days at the end of the annual escrow accounting computation year 3500.17(I) Contents of disclosure is similar to Initial Statement but shows actual amounts paid from the account and addresses overages and shortages 3500.17(I)(1)(I) thru (viii)

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Annual Escrow Account Statement

Refer to Handout Example

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Annual Escrow Account Disclosure

Example: (see page 1)
Delivery required within 30 days of the Escrow Accounting Computation Year Servicer is escrowing for: hazard insurance, & various taxes (county, city, & school district) Analysis included a period of May 03 thru April 04 - Statement must be provided within 30 days Borrower received a refund of $1,145.77 (anticipated overage)
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Annual Escrow Account Disclosure

Example: continued
Refund in March 04 resulted in a balance at the end of the escrow accounting computation year (April 04) of $625.77 (see page 1) The analysis for the next 12 month period revealed an anticipated shortage in the account

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Annual Escrow Account Disclosure

Example: continued
Shortage was projected for the coming 12 month period Based on Annual Disbursements of: (see page 2) Hazard Insurance = $ 650.00
County Tax = 658.62 City Tax = 621.73 School Taxes = 923.10 Total = $2,853.45 divided by 12 = $237.80/month Two month cushion = 2 x $237.80 = 475.60

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Annual Escrow Account Disclosure

Example: continued
Shortage was projected for the coming 12 month period: Using Aggregate Accounting Method & 3 step process, the projected balance needed to begin the next annual escrow accounting computation year was:

Ending Balance = $625.77 4/04 High Deficit Balance = 325.28 12/04 Two Month Cushion = 475.60 $1,426.65 = Projected balance needed to begin next escrow acctg. computation year
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Annual Escrow Account Disclosure

Example: continued
Projected Balance needed to begin next escrow cycle
= $1,426.65 (page 2) Balance at the end of previous cycle = $625.77 (page 1) Projected Shortage = $800.88 (page 3) Shortage ($800.88) divided by 12 = $66.74/month (page 3) $12.60 Other = Life Insurance Premiums collected monthly with regular payment and remitted monthly to company

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Annual Escrow Account Disclosure

Old Payment: $571.15 Prin & Int 261.41 Escr. Pmt + 12.60 Cred Life $845.16 (page 1) New Payment: $571.15 Prin & Int 237.80 Escr. Pmt 66.74 Escr Short +12.60 Cred Life $888.29 (page 3)

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Notice of Sale or Transfer of Servicing

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Disclosures

Post-Closing Disclosures

Notice of Transfer of Servicing Hello - Goodbye Annual Escrow Account Disclosures

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Notice of Sale or Transfer of Servicing

Transferee (the new servicer) must provide notice not more than 15 days after the effective date of the transfer of servicing;

Transferor (the old servicer) must provide a notice not less than 15 days before the effective date of the transfer.

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Notice of Sale or Transfer of Servicing

Option for transferor and transferee to combine notices into one notice which must be provided not less than15 days before the effective date of the transfer. Special circumstances allow for the notices to be given within 30 days after the effective date of the transfer of servicing

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Notice of Sale or Transfer of Servicing

Refer to Examples
Hello Letter Goodbye Letter

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Thanks for Your Time

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