1. State Examiner Training Implemented through HUD’s Regulation X
BASIC RESPA
Implemented through
HUD’s
Regulation X
Federal Reserve Bank Atlanta & Richmond

2. Objectives We will review the following: Background of RESPA
Kickback Rules of Section 8
Pre-closing Disclosures
Closing Disclosures
Post-closing Disclosure

3. Background
Real Estate Settlement Procedures Act (RESPA) passed by Congress in 1974
HUD designated to write the regulation to implement the law
HUD Regulation X implements RESPA

4. Background Purchase Money mortgage loans only Three purposes:
Require advance disclosure of settlement charges
Prohibit certain referral fees and “kickbacks”
(Section 8 Violations)
Limit escrow amounts required for taxes and insurance

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

6. Background
In 1992, RESPA’s 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

7. Section 8 Violations
kickbacks

8. Section 8 Violations Section 8A Section 8B
No referral fees
Section 8B
No splitting of charges except for actual services performed
Violations are considered a felony
subject to $10,000 fine
1 year prison term
treble damages
attorney’s fees

9. Section 8 Violations Mortgage Yield Spread Premiums March 1, 1999
HUD Issues Policy Statement on the legality of payments by lenders to mortgage brokers under the RESPA
Holds Mortgage Industry to a 2 part test:
Goods or facilities must be furnished or services must actually be performed
Compensation for goods or services must commensurate with their value.

10. HUD’s Policy Statements
2 part test threshold - the broker must:
Take the application
Perform 5 of 14 additional services.
October 18, 2001
HUD was challenged in court and reissued another statement asserting the same criteria
The Policy Statement does not legally resolve the issue regarding “Yield Spread Premiums”.

11. Section 8 Violations
Examples of Section 8 violations

12. RESPA Disclosures

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

14. Disclosures In the news: HUD’s Proposal - Meaningful “GFE”
Mortgage Servicing Disclosure Violations

15. Special Information Booklet
Isn’t that special

16. Special Information Booklet
Purpose
Designed to help applicants understand the home buying, financing & settlement processes
Timing
Required to be provided on:
Purchase money applications
Unless declined within 3 business days

17. Special Information Booklet
Internal Review
Determine that booklet is provided:
Within three business days
After receipt of a written application
Determine that current version is being used (Sept. ’97)

18. Good Faith Estimate

19. GFE Definition Application
A submission of a borrower’s financial information in anticipation of a credit decision whether written or computer generated relating to a federally-related mortgage loan
If no property is specified, then it is not considered an application
It's a prequalification.

20. GFE 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.

21. Good Faith Estimate (“GFE”)
Purpose
Provides applicants with information regarding which settlement services will be required and how much the charge for each of those services is likely to be.
Timing
The GFE should be provided within three business days after receipt of a written application
Not required if the application is declined within 3 days from application.

22. Good Faith Estimate (“GFE”)
Internal Review
Review form for the required terms as outlined in Appendix C of HUD Regulation X
The estimates must bear a “reasonable relationship” to the charge 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.

23. Good Faith Estimate (“GFE”)
HUD Proposal
HUD makes proposal to attach liability to 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.

24. Mortgage Servicing Transfer Disclosure

25. 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

26. 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.

27. 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

28. Mortgage Servicing Transfer Disclosure
Congress Changes the Law
September 30, 1996
Congress amended RESPA to eliminate hist. data & acknowledgement
HUD Proposes Amendments
HUD proposes to amend Regulation X to implement 1996 requirements but never finalizes proposed regulation
July 29, 2003
HUD proposes revisions 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………”

29. 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.”

30. Mortgage Servicing Transfer Disclosure
Current requirements
(b)(1)
Servicing disclosure statement must be given within 3 business days
(b)(3)(I)
Servicing disclosure statement must disclose whether servicing may be assigned, sold, or transferred

31. Affiliated Business Arrangement

32. Affiliated Business Disclosure
Purpose
The disclosure informs borrowers of any affiliated relationship that exists between the lender and service provider
Disclosure Information
Provided on a separate paper
The name & address of service provider
Describes the service they are providing
Lists the cost ( $) for that service

33. Affiliated Relationship
Affiliated Relationship 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 so, the lender is limited to requiring an:
Appraiser
Attorney
Credit Bureau.

34. Affiliated Relationship
Affiliated Relationship Exists When:
One business entity has effective control over another by virtue of a partnership or other agreement or
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.

35. Affiliated Business Disclosure
Timing of Disclosure
Face-to-face application
no later than the time of each referral
if the lender requires use of a particular provider
at the time of loan application, except that
where a lender makes the referral to a borrower, the referral may be satisfied at the time that the good faith estimate is provided
Telephone application????
affiliation may be given orally
followed by the written disclosure within 3 days.

36. Affiliated Business Disclosure
Record Retention
Customer acknowledgement of the disclosure is required and must be retained for 5 years

37. Closing - RESPA

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

39. Uniform Settlement Statement
HUD-1 Hud-1A
Uniform Settlement Statement

40. HUD-1 or HUD-1A
Determine if the financial institution uses the current HUD-1 or HUD-1A, as appropriate
HUD –1 may always be used
Review HUD-1 to see that charges are properly disclosed for both borrower and seller

41. HUD-1 or HUD-1A Required Disclosures Timing for Disclosure
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.
Timing for Disclosure
Must be provided at or prior to settlement.

42. HUD-1 or HUD-1A Timing for Disclosure
HUD-1 or HUD-1A must be available for inspection by the borrower at least one business day before settlement.

43. Charging for Disclosures
Lenders are prohibited from charging fees for the preparation of: HUD1/1A, TIL statement or escrow account disclosures.

44. Escrow Accounts

45. Escrow Accounts
Does you bank escrows for taxes and insurance premiums?
Refer to p.2 of the HUD 1 Statement series

46. Escrow Accounts
What is an Escrow Account?

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

48. Escrow Accounts
What kinds of payments would a servicer make from an Escrow account?
Hazard Insurance
Flood Insurance
Guarantee Insurance (PMI or Government)
Various Types of Taxes

49. Escrow Accounts
Why would a bank condition a loan or require a borrower to pay amounts into an escrow account?
To protect its interest in the collateral i.e. avoid tax liens or ensure that hazard policy premiums are paid

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

51. 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

52. Escrow Accounts
To establish an account, the following limitations must be followed: (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
(b)

53. 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 escrow analysis statement

54. 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

55. 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.

56. Escrow Accounts Initial Escrow Account Statement
amount of the monthly payment (PITI)
amount of the monthly payment that will be deposited into the escrow account
(g)(1)(I)
amounts of outlay(s) that will be paid from the escrow account (estimated taxes & insurance, etc.)
cushion, if any, selected by the servicer
trial running balance

57. Escrow Accounts Timing Record Retention
The bank must furnish the borrower with an initial disclosure within 45 days upon establishing an escrow account (g)(1)
Record Retention
Recordkeeping requirement for 5 years after the account is last serviced
(l)(2)

58. Escrow Exercise
Review In-Class Exercise
RESPA’s Appendix E Example

59. Escrow Exercise
Use HUD’s 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

60. Escrow Exercise Exercise Loan Scenario: Settlement Date: May 15
First Payment Date: July 1
Projected Outlays:
School Taxes (Paid Sept. 20) $360
County Taxes (Paid July 25 $500
& Dec.10 $700) $1,200
Total Annual Outlays $1,560
Monthly Deposits to Account = $1,560 / 12 =
$130 per month
Servicer Selects a 2 Month Cushion

61. Escrow Exercise Step 1 - Initial Trial Balance
Month Payment Disbursement Balance
June
July
August
September
October
November
December *
January
February
March
April
May
June
* = High Deficit

62. Escrow Exercise Step 2 - Adjusted Trial Balance
Month Payment Disbursement Balance
June
July
August
September
October
November
December
January
February
March
April
May
June

63. Escrow Exercise Step 3 - Trial Balance with Cushion
Month Payment Disbursement Balance
June
July
August
September
October
November
December
January
February
March
April
May
June
High Deficit (780) Month Cushion (260) = (Opening Statement Balance)

64. Single Item Accounting Method
Escrow Exercise
Single Item Accounting Method
School Taxes County Property Taxes
Paid on: Sept Paid on July 25 and on Dec. 10
$ $1,200
Dep Outlay Bal Dep Outlays Bal.
Jun
Jul <400>
Aug <300>
Sept <270>* <200>
Oct <240> <100>
Nov <210>
Dec <180> <600>*
Jan <150> <500>
Feb <120> <400>
Mar <90> <300>
Apr <60> <200>
May <30> <100>
Jun
High Deficits: $ $600
2 Mos.Cushion: $ $200
$ $800 = $1,130 Trial Balance with Cushion using the Single Item Accounting Method

65. Escrow Exercise 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

66. Post Closing - RESPA

67. RESPA / Regulation X Disclosures: Post Closing
Annual Escrow Account Statement
Notice of sale or transfer of servicing - “Hello - Goodbye”, if applicable.

68. Annual Escrow Account Statement

69. Annual Escrow Statement
Contents
Disclosure is similar to Initial Statement
(I)(1)(I) thru (viii)
However, it shows actual amounts paid from the account and addresses overages and shortages
Timing
Must be provided within 30 days at the end of the annual escrow accounting computation year
(I)

70. Notice of Sale or Transfer of Servicing Hello Goodbye

71. 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.

72. 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

73. Questions