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

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 § 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

§ 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, § 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 § 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

§ 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:
Federal Register / Vol. 60, No. 89 / Tuesday, May 9, 1995 / Rules and Regulations 24735

§ 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

§ 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:

§ 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

§ 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

§ 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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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]

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