(This is a three part series on The Real Estate Settlement Procedures Act (RESPA) reprinted from the January – March 1999 issues of The Cash Flow Connection Newsletter. RESPA has changed quite a bit since that time so please visit www.hud.gov for updated information.)
The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute which has drastically changed the sale, closing, and lending practices relating to residential real estate transactions since it’s enactment in 1974. If you have bought a home or obtained a loan in the past 25 years you have undoubtedly signed one of the numerous disclosures required under this federal regulation. But how does it affect the cash flow professional working with private mortgages? A general overview of this far reaching law will assist in this determination.
The primary purpose of RESPA was to effect certain changes in the settlement process of residential real estate transactions to assist consumers in becoming better shoppers for settlement services. It also intended to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. Additionally, RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.
RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business involving a federally related mortgage loan. It also prohibits fee splitting and/or any person from giving or accepting any part of a charge for services that are not actually performed. An example of fee splitting would be a lender charging the borrower $250 for an appraisal with an actual cost of $200. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company as a condition of sale. Section 10 of RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. Section 6 provides borrowers with important consumer protections relating to the servicing of their loans.
DISCLOSURES: AT THE TIME OF LOAN APPLICATION
When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers the following at the time of application or by mail within three business days of receiving the application:
- A Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only).
- A Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use of a particular settlement provider, then the lender must disclose this requirement on the GFE.
- A Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution.
DISCLOSURES BEFORE SETTLEMENT (CLOSING) OCCURS
An Affiliated Business Arrangement (AfBA) Disclosure is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest.
The referring party must give the AfBA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider’s charges. Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender’s interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.
The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.
DISCLOSURES AT SETTLEMENT
The HUD-1 Settlement statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and seller attend settlement, the HUD-1 should be mailed or delivered as soon as practical after settlement.
The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges, if any, anticipated to be paid from the escrow account during the first twelve months of the loan. It lists the escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.
DISCLOSURES AFTER SETTLEMENT
Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual escrow account statement summarizes all escrow account deposits and payments during the servicer’s twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.
A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower’s loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.
APPLICATION OF RESPA
Generally, RESPA covers transactions involving a federally related mortgage loan (first or subordinate position) placed on a one-to-four family residential real estate property (including condos, co-ops, mobile homes sold with real property, and certain time shares). A federally related mortgage loan includes most conventional and/or government sponsored loans (FHA, VA, etc) involving home purchase loans, assumptions, refinances, property improvement loans, equity lines of credit, and reverse mortgages.
RESPA does not typically apply to an all cash sale, temporary construction financing, a sale where the individual home seller takes back the mortgage, a rental property transaction, or any other business purpose transaction. However, it is important to note that RESPA may apply to certain individual home sellers that take back a mortgage should they exceed a specified number of transactions and/or an aggregate dollar amount during any given year.
Since most private mortgage purchases involve an individual seller that has provided owner financing on a one-time basis, a cash flow professional may wonder why they should familiarize themselves with the RESPA statute. The reasons are plentiful:
- Maintain RESPA compliance by knowing when the statute is applicable or a non-issue
- Become aware of important RESPA elements that could potentially become a template for future regulation in related industries.
- Enhance professionalism by gaining awareness of laws that affect other real estate professionals with whom you may conduct business.
- Develop a system which models certain requirements relating to escrow account servicing and the transfer of servicing rights when purchasing accounts to hold for interim or long term investment.
This final point will serve as a basis for the next two articles in our three part series on the Real Estate Settlement Procedures Act. For more information on RESPA you can review the actual statute on the internet at www.hud.gov
RESPA and Escrow Accounts
(Reprinted from the February 1999 issue of The Cash Flow Connection Newsletter)
The Real Estate Settlement Procedures Act (RESPA) of 1974 enacted significant reforms in the settlement process involving federally related mortgage loans (see the January 1999 issue of CFC for a detailed definition). This article will further explore the specific requirements pertaining to escrow accounts, also known as reserves or impounds. While owner-financed private mortgages are generally precluded from RESPA, many investors and servicers of these notes wisely model their escrow procedures after RESPA requirements to maintain fair and sound business practices.
Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements. The Department published escrow account regulations in October 1994, with an effective date of May 1995. The regulations required lenders to adopt the aggregate accounting method for newly established accounts. Lenders have until October 1997, for previously established accounts.
Section 10 of RESPA limits the amount of money that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. RESPA also requires the lender to provide initial and annual escrow account statements. The Department of housing and urban Development (HUD) published escrow account regulations in October 1994 with an effective date of May 1995. The regulations required lenders to adopt the aggregate accounting method for newly established accounts, with an extension until October 1997 for previously established accounts.
During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year.
The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower.
FREQUENTLY ASKED QUESTIONS ABOUT ESCROW ACCOUNTS
Did the new accounting method require increases to escrow payments? NO
The new accounting method generally requires borrowers to maintain a lesser amount in the account than the single-item method predominately used by lenders. However, many lenders chose to increase the escrow account cushion to the maximum allowed by law.
Did the regulations establish a new escrow account cushion? NO
Since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lessor amount, the lessor amount prevails.
Does RESPA require lenders to maintain an escrow account and/or cushion? NO
It is the lender’s decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. Furthermore, neither the RESPA statute nor regulations require the lender to maintain a cushion.T
Can HUD require lenders to pay interest on escrow accounts? NO
In past years, legislation was introduced in Congress that would have required lenders to pay interest on escrow account balances, but it never passed. Some states do require interest to be paid on escrow account funds, but many do not.
Are lenders required to pay taxes on an annual basis if a discount is offered to the consumer? NO
Some lender have interpreted the regulations to require that taxes should be paid on an annual basis rather than a semi-annual basis, when a discount is available to the consumer. The Department clarified by comment in the Federal Register on May 9, 1995, that lenders were permitted (but not required) to make disbursements on an annual basis if a discount was available.
What is the disbursement date for paying escrow account items?
The rule states that the disbursement date for an escrow account item is a date on or before the earlier of either a deadline to take advantage of discounts, if available, or the deadline to avoid a penalty. The consumer and servicer in some cases may agree to an even earlier date than would normally be necessary to deliver the payment on time, if there are good reasons, such as letting the consumer get a federal income tax deduction.
How should the maximum amount allowed in an escrow account be calculated?
The following steps and example should help estimate the amount of money that may be required to put into either a new or existing account under aggregate accounting:
List all the payment amounts for items that will be paid out of the escrow account, and when they must be paid for the next 12 months (e.g., taxes- $1200 — $500 paid July 25 and $700 paid December 10; hazard insurance — $360 paid September 20).
If there is a payment like flood insurance, which is paid every 3 years, use a projected trial balance over that three-year period.
Divide this total amount by 12 monthly payments ($1560 divided by 12 = $130).
Create a trial running balance for the next 12 months listing all payments to the escrow account and all payments out of the account according to when these items are paid.
Increase all the monthly balances to bring the lowest point in the account (December -$780) up to 0.
pmt dis 3) bal 4) bal Jun 0 780 Jul 130 500 -370 410 Aug 130 0 -240 540 Sep 130 360 -470 310 Oct 130 0 -340 440 Nov 130 0 -210 570 Dec 130 700 -780 * 0 * Jan 130 0 -650 130 Feb 130 0 -520 260 Mar 130 0 -390 390 Apr 130 0 -260 520 May 130 0 -130 650 Jun 130 0 0 780
Add any cushion your lender requires to the monthly balances. The cushion may be a maximum of 1/6 of the total escrow charges (1/6 of $1560 = $260).
pmt dis bal Jun 1040 Jul 130 500 670 Aug 130 0 800 Sep 130 360 570 Oct 130 0 700 Nov 130 0 830 Dec 130 700 260 * Jan 130 0 390 Feb 130 0 520 Mar 130 0 650 Apr 130 300 780 May 130 0 910 Jun 130 0 1040
In this example, $1040 is the maximum amount the lender should require in the account. The account should fall to the cushion at least once during the year. In this example, it is in December ($260).
New Accounts — In this example, if the settlement date was May 15 and the first payment was due in July, $1040 would be the maximum amount that could be required to place in an escrow account. If your lender requires less than the maximum cushion, the amount would be less.
Existing Aggregate Accounts — In this example, during escrow analysis, the lender would compare the required amount of $1040 to the actual balance in the account in June. For example:
If the balance is $1076, there is a surplus of $36. The lender may choose to apply any surplus less than $50 to future payments, reducing the monthly escrow payment to $127, or may choose to return the surplus to the payor.
If the balance is $1090, there is a surplus of $50. The lender must return any surplus of $50 or more to payor within 30 days of the analysis.
If the balance was $940, there is a shortage of $100. This amount is less than one month’s escrow payment and the lender may ask the payor to pay this amount within 30 day or may spread it out over a year.
If the balance was $800, there is a shortage of $240. The lender must spread the collection over at least 12 months. If the lender spreads the shortage over 12 months, the monthly escrow payment would increase to $150.
If there is a deficiency in the account (where the lender has to use his own funds to pay a bill), the payor may have to reimburse the lender sooner than over 12 months. If the deficiency is less than one monthly escrow payment, the lender may require the payor to repay the lender in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the lender may require the payor to repay the amount over 2-12 months.
For more information on RESPA you can review the actual statute on the Internet at www.hud.gov
RESPA AND THE TRANSFER OF SERVICING RIGHTS
(Reprinted from the March 1999 issue of The Cash Flow Connection Newsletter)
The Real Estate Settlement Procedures Act (RESPA) of 1974 enacted significant reforms in the settlement process involving federally related mortgage loans (see the January 1999 issue for a detailed definition). This article will further explore the specific requirements pertaining to the transfer of servicing rights. While owner financed private mortgages are generally precluded from RESPA, many investors and servicers of these notes wisely model their servicing procedures after RESPA requirements to maintain fair and sound business practices.
Section 2605 sets forth requirements pertaining to the servicing of federally related mortgage loans. Generally, a servicer is defined as the entity responsible for servicing the mortgage (i.e. collecting payments and applying to principal, interest, and escrows pursuant to the terms of the mortgage). The servicer can be the holder or owner of the mortgage or a third independent servicing company. Servicing rights can be sold or transferred which is usually the case when the mortgage itself is sold. While RESPA does not require the borrower’s permission to sell or transfer servicing, it does require notification to the borrower by the old and new servicer with specific requirements regarding the content of the notification.
Notice by Transferor
The existing servicer must notify the borrower in writing of any assignment, sale, or transfer of the servicing. This notice, commonly referred to as a good-bye letter, must be provided within 15 days prior to the effective date. The effective date is the date on which the mortgage payment of a borrower is first due to the new servicer.
The new servicer must also send written notification of the transfer to the borrower. Commonly referred to as a hello letter, this notice must be made to the borrower not more than 15 days after the effective date.
The time requirement for both the “good-bye” and “hello” notification is extended to 30 days after the effective date when the transfer is preceded by:
A) termination of the servicing contract for cause
B) commencement of proceedings for bankruptcy of the servicer; or
C) commencement of proceeding by the FDIC or RTC for receivership of the servicer.
Contents of Servicing Transfer Notices
The separate notice sent by the existing and new servicer must both contain the following:
(A) The effective date of transfer of the servicing.
(B) The name, address, and toll-free or collect call telephone number of the transferee (new) servicer.
(C) A toll-free or collect call telephone number for (i) an individual employed by the transferor (existing) servicer, or (ii) the department of the transferor servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing.
(D) The name and toll-free or collect call telephone number for (i) an individual employed by the transferee servicer, or (ii) the department of the transferee servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing.
(E) The date on which the transferor servicer who is servicing the mortgage loan before the assignment, sale, or transfer will cease to accept payments relating to the loan and the date on which the transferee servicer will begin to accept such payments.
(F) Any information concerning the effect the transfer may have, if any, on the terms of or the continued availability of mortgage life or disability insurance or any other type of optional insurance and what action, if any, the borrower must take to maintain coverage.
(G) A statement that the assignment, sale, or transfer of the servicing of the mortgage loan does not affect any term or condition of the security instruments other than terms directly related to the servicing of such loan.
Treatment of Payments During Transfer Period
During a 60-day period, beginning on the effective date of transfer of the servicing, a late fee may not be imposed on the borrower with respect to any payment and no such payment may be treated as late for any other purposes, if the payment is received by the transferor servicer (rather than the new servicer who should properly receive payment) before the due date of that payment.
Duty of Servicer to Respond to Inquiries
If any servicer receives a qualified written request from the borrower for information relating to the servicing of such loan, the servicer is required to provide a written response acknowledging receipt of the correspondence within 20 business days. Within 60 business days, the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. During this 60 day period, a servicer may not provide information regarding any overdue payment that is in dispute, to any consumer reporting agency.
This completes our three part series on the Real Estate Settlement Procedures Act based on information in 1999. Nothing in this article is intended to be legal, financial or tax advice. Please seek the counsel of qualified legal, financial, or tax advisors. For more information and updates you can review the actual statue on the Internet at www.hud.gov