[Federal Register Volume 60, Number 89 (Tuesday, May 9, 1995)]
[Rules and Regulations]
[Pages 24734-24741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11313]




[[Page 24733]]

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Part VII





Department of Housing and Urban Development





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24 CFR Part 3500



Real Estate Settlement Procedures Act (Regulation X); Escrow Accounting 
Procedures: Correcting Amendment and Clarifications; Final Rule

Federal Register / Vol. 60, No. 89 / Tuesday, May 9, 1995 / Rules and 
Regulations 
[[Page 24734]] 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Part 3500

[Docket No. R-95-1688; FR-3255-F-08]
RIN 2502-AF77


Real Estate Settlement Procedures Act (Regulation X); Escrow 
Accounting Procedures: Correcting Amendment and Clarifications

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

ACTION: Correcting amendment and clarifications of final rule.

-----------------------------------------------------------------------

SUMMARY: On October 26, 1994, HUD published a final rule establishing 
escrow accounting procedures under Sections 6(g) and 10 of the Real 
Estate Settlement Procedures Act. The final rule was modified on 
February 15, 1995, and the effective date was changed to May 24, 1995. 
Today's issuance corrects references in Sec. 3500.8(c)(1) and in 
Appendix A regarding responsibilities of servicers and settlement 
agents. This issuance also explains a reference in the commentary of 
the February 15 modification to a borrower's discretionary payments, 
such as credit life insurance, in relation to escrow accounts. Several 
appendices have been revised to illustrate how payments for credit life 
insurance and similar discretionary payments should be referenced. In 
addition, the issuance clarifies certain situations involving 
installment payments and discounts or penalties.

EFFECTIVE DATE: May 24, 1995.

FOR FURTHER INFORMATION CONTACT: William Reid, Research Economist, 
Office of Policy Development and Research, Room 8212, phone (202) 708-
0421); the TDD number is (202) 708-4594. For legal questions, contact: 
Grant E. Mitchell, Senior Attorney for RESPA, Room 9262, phone (202) 
708-1552, or Kenneth A. Markison, Assistant General Counsel for 
Government-Sponsored Enterprises/RESPA, Room 9262, phone (202) 708-
3137. (The telephone numbers are not toll-free.) The address for all of 
the above persons is: Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410-0500.

SUPPLEMENTARY INFORMATION: On October 26, 1994 (59 FR 53890), HUD 
published a final rule establishing, in 24 CFR 3500.17, escrow 
accounting procedures under Sections 6(g) and 10 of the Real Estate 
Settlement Procedures Act (12 U.S.C. 2605(g) and 2609) (RESPA). The 
final rule was modified on February 15, 1995 (60 FR 8812), and is 
effective on May 24, 1995. Other corrections were published on December 
19, 1994 (59 FR 65442), and March 1, 1995 (60 FR 11194), and a notice 
of software availability was published on April 4, 1995 (60 FR 16985).
    This technical correction amends Sec. 3500.8 and the related line 
item instructions of Appendix A of 24 CFR part 3500, regarding 
responsibilities of servicers and settlement agents in the computation 
of aggregate adjustments. This correction clarifies that the lender or 
servicer will normally provide instructions to the settlement agent for 
closing.
    Second, the February 15, 1995, issuance contained a commentary that 
included a reference to credit life insurance (see 60 FR at 8813, first 
column), as follows:

    (d) [Page 53902, Sec. 3500.17(b), Definitions, ``Escrow account 
item''.] Are certain payments that may enter and leave the account 
within the same month, such as FHA monthly premiums, private 
mortgage insurance, or credit life insurance, considered to be 
escrow account items?
    Answer: Yes. All items in the account are included so that the 
projected low monthly balance is zero (-0-) at the end of Step 2 in 
the Appendix I examples.* * *

    The Department received a number of comments regarding the 
inclusion of the term ``credit life insurance'' in a description of 
items that might enter and leave the account in the same month, and 
questions about whether this reference meant that any discretionary 
payment by a borrower was subject to all of the provisions of the 
escrow accounting rule. In response to those inquiries, the Department 
is clarifying that there are only two circumstances in which credit 
life insurance or similar payments would be considered to be ``in the 
escrow account'': (1) when the payment is for insurance required by the 
lender as a condition of the loan (and therefore is within the 
definition of ``settlement service'' in Sec. 3500.2); or (2) when the 
servicer chooses to place the discretionary payment into the escrow 
account and pays the item from such account. In any other circumstance 
the borrower's discretionary payment is not considered to be an escrow 
account item.
    In reviewing this matter, the Department has also concluded that if 
the discretionary payments were not notated, the statement histories 
would be confusing for borrowers who normally pay their principal, 
interest, escrow, and discretionary payments with a single check or 
wire transfer. Therefore, where discretionary payments are received, 
the Department has developed language to be added to the initial and 
annual account statements. This language is being added by this 
issuance in a new Sec. 3500.17(o).
    In addition, the 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.

List of Subjects in 24 CFR Part 3500

    Consumer protection, Condominiums, Housing, Mortgages, Mortgage 
servicing, Reporting and recordkeeping requirements.

    Accordingly, 24 CFR part 3500 is corrected by making the following 
correcting amendments:

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. Section 3500.8 is amended by revising paragraph (c)(1), to read 
as follows: [[Page 24735]] 


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

* * * * *
    (c) * * *
    (1) After itemizing 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. 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 final line in the 1000 
series of the HUD-1 or HUD-1A statement.
* * * * *
    3. Section 3500.17 is amended by adding paragraph (o), to read as 
follows:


Sec. 3500.17  Escrow accounts.

* * * * *
    (o) Discretionary payments. Any borrower's discretionary payment 
(such as credit life or disability insurance) made as part of a monthly 
mortgage payment is to be noted on the initial and annual statements. 
If a discretionary payment is established or terminated during the 
escrow account computation year, this change should be noted on the 
next annual statement. A discretionary payment is not part of the 
escrow account unless the payment is required by the lender, in 
accordance with the definition of ``settlement service'' in 
Sec. 3500.2, or the servicer chooses to place the discretionary payment 
in the escrow account. If a servicer has not established an escrow 
account for a federally related mortgage loan and only receives 
payments for discretionary items, this section is not applicable.
    4. In Appendix A to part 3500, the second paragraph for lines 1000-
1008 under the head ``Line Item Instructions'' is revised, to read as 
follows:

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

* * * * *

Line Item Instructions

* * * * *
    Lines 1000-1008. * * *
    After itemizing 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 
between the deposit required under aggregate accounting and the sum 
of the deposits required under single-item accounting. 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 final line in the 1000 series of the HUD-1 or 
HUD-1A statement.

    5. Appendix G-2, ``Initial Escrow Account Disclosure Statement--
Example,'' is amended by substituting the phrase ``WILL BE'' for the 
word ``WAS'' in the last sentence, and Appendices G-1, I-1, I-2, I-5, 
and I-6 are revised, to read as follows:

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BILLING CODE 4210-27-C [[Page 24741]] 
    Dated: May 2, 1995.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 95-11313 Filed 5-8-95; 8:45 am]
BILLING CODE 4210-27-P