Each depositor insured to at least $250,000 per insured bank



Home > News & Events > Inactive Financial Institution Letters 




Inactive Financial Institution Letters 


[Federal Register: May 9, 1997 (Volume 62, Number 90)]
[Proposed Rules]
[Page 25739-25749]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09my97-37]

[[Page 25739]]

_______________________________________________________________________

Part V

Department of Housing and Urban Development

_______________________________________________________________________

24 CFR Part 3500

Amendments to Real Estate Settlement Procedures Act Regulation:
Exemption for Employer Payments to Employees Who Make Like-Provider
Referrals and Other Amendments; Proposed Rule

[[Page 25740]]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-4173-P-01]
RIN 2502-AG88


Amendments to Real Estate Settlement Procedures Act Regulation:
Exemption for Employer Payments to Employees Who Make Like-Provider
Referrals and Other Amendments; Proposed Rule

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

ACTION: Proposed rule.

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

SUMMARY: In this proposed rule, the Department is seeking comments on a
new exemption under Regulation X, its regulation implementing the Real
Estate Settlement Procedures Act of 1974 (RESPA). The exemption would
allow payments by an employer to its own bona fide employees for the
referral of settlement service business to an affiliated settlement
service provider, provided that the settlement service business that is
referred is the same category of settlement service as provided by the
employer of the employee making the referral, the employee makes the
affiliated business arrangement disclosure as provided in 24 CFR
3500.15, and the employee making the referral does not perform any
other category of settlement service in the same transaction.
    This rule also proposes to implement two amendments to RESPA in
recent legislation. One concerns referrals of settlement service
business through telemarketing, in writing, or through electronic
media. The other concerns mortgage servicing sales or transfers. The
rule also describes additional technical corrections and clarifications
the Department intends to make at a later date.

DATES: Comment due date: July 8, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Rules Docket Clerk, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW., Washington, DC 20410-0500. Communications should
refer to the above docket number and title. Facsimile (FAX) comments
are not acceptable. A copy of each communication submitted will be
available for public inspection and copying between 7:30 a.m. and 5:30
p.m. weekdays at the above address.
    The Department also invites interested persons to submit comments
on the proposed information collection requirements in Sec. 3500.15(b)
of this proposed rule. Comments should refer to the above docket number
and title, and should be sent to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Attention: Desk
Officer for HUD, Washington, DC 20503.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, Office
of Consumer and Regulatory Affairs, Room 9146, telephone (202) 708-
4560; or,
for legal questions, Kenneth A. Markison, Assistant General Counsel for
GSE/RESPA, Grant E. Mitchell, Senior Attorney for RESPA, or Richard S.
Bennett, Attorney, Office of General Counsel, Room 9262, telephone
(202) 708-1550. (The telephone numbers are not toll-free.) For hearing-
and speech-impaired persons, these numbers may be accessed via TTY
(text telephone) by calling the Federal Information Relay Service at 1-
800-877-8339. The address for the above-listed persons is: Department
of Housing and Urban Development, 451 Seventh Street, SW., Washington,
DC 20410.

SUPPLEMENTARY INFORMATION:

I. Background

    In the final rule published on June 7, 1996 (61 FR 29238) entitled
``Amendments to Regulation X, the Real Estate Settlement Procedures
Act: Withdrawal of Employer-Employee and Computer Loan Origination
Systems (CLOs) Exemptions,'' the Department withdrew a broad exemption
for payments by employers to their own employees for any referral
activities (24 CFR 3500.14(g)(1)(vii)). In its place, the rule
established three narrower exemptions for employer payments to
employees: (1) One for managerial employees (Sec. 3500.14(g)(1)(viii)
of the June 7 rule); (2) One for employees who do not perform
settlement services in any transaction (Sec. 3500.14(g)(1)(ix) of the
June 7 rule); and (3) A provision clarifying that ``[a] payment by an
employer to its own bona fide employee for generating business for that
employer'' is permissible (Sec. 3500.14(g)(1)(vii) of the June 7 rule).
The rule was to have become effective on October 7, 1996, 120 days from
publication. (Note: The June 7 rule was corrected and revised on August
12, 1996 (61 FR 41944).)
    Section 2103 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, (Title II of the Omnibus Consolidated
Appropriations Act, 1997) (Pub. L. 104-208; approved September 30,
1996) (the Act) was signed by the President on September 30, 1996. The
Act delayed the effective date of the provisions of the Department's
June 7, 1996 final RESPA rule concerning payments to employees by their
employers to no earlier than July 31, 1997.
    Although not required by the Act, on October 4, 1996 (61 FR 51782),
the Department delayed temporarily the effective date of the entire
June 7 final rule, as corrected and revised on August 12, 1996. The
reason for the delay was to provide the Department with an opportunity
to analyze the Act and develop an appropriate time schedule for
establishing the effective dates of the various provisions of the June
7 rule, as revised August 12.
    On November 4, 1996 (61 FR 56624), the Department published another
notice in the Federal Register announcing that, consistent with the
Act, the Department would shortly publish a revised final rule that
would make effective those provisions of the June 7 final rule that are
unaffected by the delay provisions of the legislation. On November 15,
1996 (61 FR 58472), the Department published a final rule in the
Federal Register making effective certain portions of the June 7 final
rule and August 12 technical revisions that were not delayed by the
Act. The November 15, 1996 final rule put into effect those portions of
the June 7 final rule dealing with Computer Loan Origination (CLO)
Systems. The November 15 final rule thereby effectuated the withdrawal
of the CLO exemption and the elimination of the CLO Fee Disclosure
form. It also put into effect the revised Appendix D to part 3500 as
published August 12, 1996. Further, it made several technical revisions
and corrections to Regulation X.
    This proposed rule furthers the plans indicated in the November 4,
1996 notice to move forward as expeditiously as possible, subject to
the requirements of the Act, to establish new rules addressing employer
payments to employees in lieu of the former broad exemption. It also
proposes, in conjunction with putting into effect the revisions in the
June 7 rule concerning employer payments to employees, to establish a
new exemption. This exemption would allow payments by an employer to
its own bona fide employees for the referral of settlement service
business to an affiliated settlement service provider, under the
following conditions: (1) The settlement service business that is
referred is the same category of settlement service as provided by the
employer of the employee making the referral; (2) The employee makes
the affiliated business

[[Page 25741]]

arrangement disclosure in accordance with 24 CFR 3500.15; and (3) The
employee does not perform any other category of settlement service in
the same transaction. The Department anticipates that this new
exemption will become effective at the same time as the Department
makes the changes that were delayed by the Act (i.e., eliminating the
exemption for payments by an employer to its employees for referral
activities, currently codified as 24 CFR 3500.14(g)(1)(vii), and
substituting the more limited exemptions that the June 7 rule would
have codified as 24 CFR 3500.14(g)(1)(vii)-(ix))). The Act does not
permit the Department to make those changes before July 31, 1997, or to
announce an effective date for those provisions more than 180 days
before the effective date.
    The Department also anticipates making the following technical
clarifications and corrections to those provisions of the June 7 rule,
as part of the final rule that will make those provisions effective
subject to the requirements of the Act:
    (1) A technical clarification indicating that under the managerial
exemption (Sec. 3500.14(g)(1)(viii) of the June 7 rule), a manager not
routinely performing settlement services may still receive compensation
under the exemption if either: (1) The total value of the services
provided by the manager does not exceed 5 percent of the annual income
to the office or unit for which the manager is responsible attributable
to RESPA-covered transactions, or (2) the manager performs settlement
services in no more than three RESPA-covered transactions.
    (2) A technical clarification indicating that in using the term
``in any transaction'' in the exemption for employees who do not
perform settlement services (Sec. 3500.14(g)(1)(ix) of the June 7
rule), the Department did not intend that an employee who has stopped
providing settlement services, an employee who changes jobs and no
longer provides settlement services, or a new employee is forever
prohibited from receiving compensation for referrals.
    (3) A technical correction redesignating ``Controlled Business
Arrangements'' as ``Affiliated Business Arrangements'' or ``AfBAs,''
reflecting the change in terminology in section 2103(c) of the Act.
    (4) A technical correction relating to the timing of providing the
AfBA disclosure, to conform the language of the regulation and Appendix
B more closely to the statutory language as revised in section 2103(d)
of the Act, to provide consistently that the AfBA disclosure statement
must be provided in accordance with Sec. 3500.15(b).
    This proposed rule also proposes to implement amendments to RESPA
contained in the Act. One amendment concerns referrals through
telemarketing and electronic media. The other amendment concerns
mortgage servicing sales, assignments, or transfers under section 6 of
RESPA.
    Finally, the proposed rule proposes some changes in response to
section 2101 of the Act. In that section, Congress mandated that the
Department and the Federal Reserve Board (the Board) work together to
``simplify and improve'' the disclosures given in a mortgage
transaction subject to the Truth in Lending Act (TILA) and RESPA, and
to create a unified format to satisfy the requirements of both
statutes. On December 31, 1996, the Department and the Board published
an Advance Notice of Proposed Rulemaking (ANPR) on Improvement of
Disclosures Under RESPA and TILA (61 FR 69055), in order to solicit
suggestions from the public regarding possible ways to simplify and
improve disclosures required under the statutes. The Department
received 82 comments from all sectors of the industry in response to
the ANPR. The preamble of this rule describes how the Department
proposes to incorporate some of the suggestions and recommendations
generated by the ANPR into this proposed rule. The Department
anticipates that other suggestions could be incorporated into
subsequent rulemaking.
    The Department believes, however, that significant simplification
may only be possible through legislative changes and will work with the
Board in making recommendations towards that end. Under the Act,
Congress has required that the Department and the Board recommend any
legislation that would be necessary to accomplish the objectives of
simplifying and improving the disclosures subject to TILA and RESPA.
Both agencies are currently considering several approaches to
streamlining the disclosure requirements.

II. Proposed Exemption for Like-Provider Referrals

A. Description of Problem

    The Department published a proposed rule on July 21, 1994 (59 FR
37360) to revise Regulation X. During the comment period on the
Department's July 21, 1994 proposed rule, some commenters raised
concern that the Department's proposed withdrawal of the broad
exemption for employer payments to employees for referrals and its
replacement with narrower exemptions would unduly restrict compensation
of bank employees for making referrals to mortgage banking affiliates.
A major trade association for the banking industry, for example, raised
concern that while a banker could compensate its employee for the
referral of mortgage loan business to a mortgage lending division
within the bank, a banker would be prohibited from compensating an
employee for the referral of a bank customer to a mortgage banking
affiliate of the bank or a mortgage banking subsidiary of the parent
holding company.
    The trade association urged the Department to reconsider making
such a distinction in its final rule, arguing that the distinction
lacked justification or merit and, in essence, was solely based on the
structure of the bank and the location of the mortgage lending function
within the banking institution. The trade association explained that
the proposed rule would penalize banks, their affiliates, holding
companies, boards of directors, officers, and employees solely because
of their corporate structures, which ``are specifically authorized by
statute, implemented by state or Federal bank regulatory authorities
and constantly monitored and examined for safety and soundness and
compliance purposes.'' The trade association argued:

    From the consumer's perspective, the location of this mortgage
lending activity within the banking institution's family of
companies is irrelevant. The consumer's objective is to obtain a
mortgage loan. To the consumer and the bank, this is the business of
banking whether it takes place within the bank or as part of the
banking institution's corporate family.

    Since the Department's promulgation of its final rule on June 7,
1996, withdrawing the broader exemption and establishing more limited
exemptions, similar concerns have been echoed by others. A mortgage
lending subsidiary of a diversified financial services company
indicated that for various business and regulatory reasons, it offers
its services through more than one corporate entity. It argued that
bank branch personnel should be able to receive compensation for
referring customers who enter the branch and inquire about a first
mortgage loan to the mortgage lending subsidiary. It pointed out that
there is no danger of adverse steering since the customer is provided
the controlled business disclosure (now referred to as the Affiliated
Business Arrangement Disclosure Statement or AfBA Disclosure
Statement), which alerts the

[[Page 25742]]

customer that he or she is dealing with the mortgage lending
subsidiary; from the customer's perspective, the loan is still from the
bank.
    A major bank made essentially the same arguments. It faulted the
June 7 rule for failing to accommodate the practice of referral of loan
business by a lender to its affiliate. In a letter to the Department,
the bank stated:
    We believe that when a consumer comes to [the bank] to inquire
about mortgage financing, whether to purchase a home or refinance an
existing mortgage, the consumer has come to us because of our name
and reputation. Whether contact is made in person at a branch
office, by phone, or over the Internet, the consumer expects to
learn about [bank] loan products that meet his or her financing
needs, regardless of whether such loans are marketed, originated or
serviced by different * * * legal entities. It makes little or no
difference to our borrowers which * * * subsidiary originates their
loans or whether their original contact was a loan officer employed
by a different subsidiary. * * *
    Without a change to the final rule, we will be forced into a
costly reorganization to create a permissible compensation
structure. We would either have to staff each branch with one or
more mortgage lending division loan officers, or originate and book
mortgage loans in each branch where the initial inquiry was made. In
either case, any potential economies would be eliminated without
adding value or convenience for our customers.

B. Proposed Solution

    Under the June 7 rule, if a bank customer asks a loan officer who
provides settlement services in any transaction about a type of loan
that the bank does not make, but which the bank's affiliate does make,
the bank would have been precluded from compensating the loan officer
for making the referral to the appropriate affiliate. However, the June
7 rule would have created an exemption to the prohibition against
referral fees for employer payments to employees who do not perform
settlement services in any transaction and who refer settlement service
business to an affiliate, so long as the controlled business
arrangement disclosure is provided. Thus, an employee of a bank could
have referred a bank customer to a mortgage banking affiliate of the
bank or a mortgage banking subsidiary of the parent holding company and
could have received referral-based compensation. The only restrictions
would have been that the controlled business arrangement disclosure
would have to be provided, and, if the employee was to be compensated
for the referral, the employee could not be one who performed
settlement services in any residential real estate transaction covered
by RESPA. (Part V(B) of this preamble discusses the meaning of ``in any
transaction.'')
    In light of certain of the expressed concerns, the Department is
proposing to exercise its exemption authority under RESPA, to add a new
exemption to section 8 of RESPA's prohibition against kickbacks and
unearned fees. The Secretary has authority to create exemptions under
section 19(a) of RESPA for classes of transactions as may be necessary
to achieve the purposes of RESPA (12 U.S.C. 2617(a)). In addition,
under section 8(c)(5) of RESPA, the Secretary may create regulatory
exemptions for ``such other payments or classes of payments,'' after
consulting with various Federal agencies (12 U.S.C. 2607(c)(5)). The
exemption to be created under this proposed rule, like the exemptions
promulgated June 7, would be issued pursuant to the Secretary's clear
authority to create reasonable exemptions to further the purposes of
RESPA.
    Under the proposed exemption, Sec. 3500.14(g)(1) would be amended
by adding an exemption for a payment by an employer to its bona fide
employee for referring settlement service business to a settlement
service provider that has an affiliate relationship with the employer,
or in which the employer has a direct or beneficial ownership interest
of more than 1 percent, if the following conditions are met:
    1. The settlement service business that is referred is the same
category of settlement service that the employer of the employee making
the referral provides;
    2. The employee provides to the person being referred the
affiliated business arrangement disclosure in accordance with
Sec. 3500.15(b); and
    3. The employee making the referral does not perform any other
category of settlement service in the same transaction.
    The rule would specify that, for purposes of this exemption, each
paragraph in the definition of ``settlement service'' provided in 24
CFR 3500.2(b) (excluding paragraphs (b)(15) and (b)(16) of that
definition), as it is proposed to be revised, constitutes a separate
``category of settlement service.'' Some ``categories of settlement
services'' to which this exemption might commonly apply would include
originating mortgage loans, providing services involving hazard
insurance, and providing title services.
    While the rendering of services by a real estate agent or real
estate broker is a settlement service (see paragraph (b)(15) of the
definition of ``settlement service'' in Sec. 3500.2 as proposed to be
revised), referrals from one real estate agent or broker to another are
generally exempt pursuant to section 8(c)(3) of RESPA (12 U.S.C.
2607(c)(3)) and 24 CFR 3500.14(g)(1)(v) of the RESPA regulations.
Because the section 8(c)(3) exemption already exists, the referral of
services by a real estate agent or real estate broker to another real
estate agent or real estate broker is not included under the new
exemption. In addition, real estate agents are usually independent
contractors, and thus would not be considered ``employees'' eligible
for this exemption for employer payments to employees.
    In addition, paragraph (b)(16) of the definition of ``settlement
service'' in Sec. 3500.2 as proposed to be revised includes as a
settlement service ``other services for which a settlement service
provider requires a borrower or seller to pay.'' This catchall,
however, is too open-ended to apply to the new exemption proposed.
Commenters are encouraged to provide examples of other settlement
services that would qualify under paragraph (b)(16). The Department
will consider the examples submitted and possibly add them to the list
of categories of settlement services enumerated in the definition so
that referrals of such services may qualify for the new exemption
proposed.
    As with the exemptions contained in the June 7 rule, this
additional exemption only pertains to bona fide employees. Individuals
may not be hired on a part-time basis to make referrals because of
their access to consumers as settlement service providers and then be
compensated for such referrals. Sham employment arrangements are also
prohibited. See 61 FR 29243 (column 3). Moreover, the exemption does
not affect the prohibition in 24 CFR 3500.14(b) against the entity to
which business is referred from compensating the affiliate or the
employee of the affiliate making the referral.
    It is anticipated that when the Department makes this proposed rule
final, it will do so in a rule that will also make effective the
changes to the exemptions for employer payments to employees as
contained in the June 7 rule, subject to any further technical
corrections or clarifications to such exemptions that the Department
may announce. The language of the June 7 rule and the technical
corrections and clarifications are not republished here, since the
Department is not requesting comments on them.

[[Page 25743]]

C. Questions for Commenters

    The Department is particularly interested in comments on the
following issues:
    1. What potential disadvantages or dangers, if any, would the
exemption for employer payments to employees who make like-provider
referrals pose for consumers? As summarized above, it has been argued
by members of the settlement service industry that in the types of
referrals covered by the proposed rule, there is little danger of
adverse steering or adverse consequences to customers. However, the
Department would like to hear from those with other views, including
those with additional bases in support of such an exemption.
    2. The Department seeks comments on whether a potential danger is
created for consumers that, through the design of compensation systems,
the exemption could cause greater steering of consumers to products
that are more profitable for the entity making or receiving the
referral, but that are not necessarily in the consumer's best interest.
For example, a loan officer of a lender that makes home equity loans
might receive a $50 bonus for every home equity loan closed. In
contrast, the same loan officer might receive a $100 bonus for
referring a customer who inquires about a home equity loan to an
affiliate of the lender that will refinance the primary mortgage, or
$150 if he or she could originate the refinance of the primary mortgage
in the name of the affiliate (and do only a minimum of work regarding
origination of the loan). Please comment on whether this exemption
would create a danger that consumers will be steered for reasons other
than what is in their best interest, and if so, how this danger may be
lessened or eliminated. Also comment on whether not creating this
exemption would create different dangers for consumers, such as
situations in which consumers who would benefit from referrals will not
be referred because some employees who would be in a position to make
referrals would not be compensated for doing so.
    3. What are the advantages and disadvantages of limiting the
exemption to those employees who do not perform any other category of
settlement service in the same transaction, as proposed? Should the
Department narrow the exemption by limiting it to those employees who
do not perform any settlement service in the same transaction?
    4. The Department recognizes that there could be some overlap among
the 16 categories in the proposed rule. What refinements of the
categories would ensure that the purposes of the exemption are
fulfilled? Does the Department's proposal provide adequate guidance as
to what is the ``same category of settlement service?'' How could this
point be clarified further? What specific categories of settlement
services would fall under paragraph (b)(16) of the definition of
``settlement service'' in Sec. 3500.2 (``provision of any other
services for which a settlement service provider requires a borrower or
seller to pay''), as it is proposed to be revised?
    5. Since the concerns which resulted in this proposed new exemption
came mainly from lenders, should the Department narrow the scope of the
exemption being proposed to apply only to lenders? What problems would
other settlement service providers face if the exemption were limited
in this fashion?
    6. The exemption, as proposed, would not apply in situations in
which a bank that does not originate any mortgage loans refers
customers seeking mortgage loans to the bank's mortgage lending
subsidiary. In such cases, the referring bank does not originate
mortgage loans, and thus does not perform settlement service business
in the same category as the business being referred. Should the
exemption be expanded to allow compensation for such referrals?

III. Referrals Involving Telemarketing and Electronic Media

    This proposed rule would revise Sec. 3500.15(b)(1) of the RESPA
regulations to conform to changes to RESPA made in section 2103(d) of
the Act. Section 2103(d) of the Act primarily amended section
8(c)(4)(A) of RESPA (12 U.S.C. 2607(c)(4)(A)) to establish special
procedures for disclosures of affiliated business arrangements in
conjunction with referrals in which the telephone or electronic media
are used in marketing. The proposed rule would set forth the new
provisions regarding the timing of providing the disclosure, the
methods of providing the disclosure, and the evidence needed to
substantiate that the disclosure was provided.
    The proposed rule would, consistent with the Department's prior
rules, require that the Affiliated Business Arrangement Disclosure
Statement be provided in writing on a separate piece of paper, and in
the format set forth in Appendix D to part 3500. In proposing to revise
Sec. 3500.15(b)(1) to be consistent with the Act, the Department is
also proposing to clarify the required elements of a proper affiliated
business disclosure, as provided in Appendix D, which specifically
includes the requirement that the disclosure contain an acknowledgement
for the person being referred to sign. It also specifies that the
person making the referral must request that the person being referred
sign the disclosure promptly and return it to the affiliate making the
referral or a designated addressee, and must provide information on
where to send the signed disclosure.
    Consistent with the Act, the proposed rule provides that, in the
case of a face-to-face referral or a referral made in writing or by
electronic media, the written disclosure must be provided at or before
the time of the referral. In the case of a referral made by telephone,
an abbreviated verbal disclosure also must be made during the telephone
referral that, in clear and understandable language: (1) Specifies the
nature of the relationship (explaining the ownership and financial
interest) between the entity making the referral and the entity
performing settlement services (or business incident thereto); (2)
explains that because of this relationship, this referral may provide a
financial or other benefit to the referring party; (3) states that the
existence of this relationship does not require that the person being
referred use the provider to whom he or she is being referred as a
condition of settlement of the loan, or purchase, sale, or refinance of
the property, as applicable; and (4) advises that a written disclosure
will be provided within 3 business days. Different timing provisions
for providing the written disclosure are contained in
Sec. 3500.15(b)(2) (iii)-(iv) of this proposed rule. These exceptions,
which are simply a continuation of exceptions contained in prior rules
regarding provision of such disclosure, involve referrals by a lender
and situations involving an attorney or law firm that requires a client
to use a particular title insurance agent or company.
    Consistent with the Act, in all cases the person being referred
must sign the disclosure. The person being referred should sign the
disclosure at the time that the disclosure is provided. If the person
being referred chooses not to sign the disclosure at the time that the
disclosure is provided, the signature of the person being referred must
be obtained at or before closing or settlement.
    The proposed rule also provides that if a notation was made at the
time that the disclosure was provided, in a written, electronic, or
similar system of records maintained in the regular course of business,
that notation may be used as evidence that the disclosure was provided
at the time of the referral. Such a notation is to include a statement
that the person being referred

[[Page 25744]]

chose not to sign the disclosure at the time that it was provided. The
existence of such a notation, however, does not substitute for
obtaining a signature at or before closing or settlement. In the case
of a face-to-face referral, if the person being referred chooses not to
sign the disclosure at the time that the disclosure is provided, such
notation is mandatory.

IV. Sales or Transfers of Mortgage Servicing

    This proposed rule also proposes to revise the RESPA regulations to
reflect an amendment to section 6 of RESPA, set forth in section
2103(a) of the Act. Section 6(a), as amended, requires disclosure to
applicants regarding the possibility of the assignment, sale, or
transfer of the rights to service the applicant's federally related
mortgage loan. Prior to the amendment, section 6 also provided that an
applicant for a mortgage loan had to be provided a disclosure of the
lender's historical practice in assigning, selling, and transferring
servicing of loans, or, as an alternative to providing the historical
data, a statement that the lender had previously sold servicing. A
signed acknowledgment of receipt of the disclosure statement was also
required in the applicant's loan file. The Act eliminates the
historical data provisions and the acknowledgment requirement.
    This proposed rule would implement the statutory amendment by
striking language in Sec. 3500.21 to make it consistent with the
statutory amendment. The rule proposes to revise Appendix MS-1 to part
3500, the model Servicing Disclosure Statement format, to conform to
the amendment. This proposed rule recognizes that certain entities do
not undertake loan servicing and, therefore, transfer servicing before
the first payment is due; the disclosure format may so state. The
disclosure format in its revised form would be published in the Code of
Federal Regulations for the convenience of compliance by affected
parties. In response to comments received pursuant to the ANPR urging
the Department to consolidate the Mortgage Servicing Disclosure with
other RESPA forms, the proposed rule furthers section 2101 of the Act
by proposing to clarify that the format language may also be included
as part of the Good Faith Estimate.
    The Department is interested in comments addressing alternative
approaches to implementing the statutory language while protecting
consumers. In connection with the report to Congress which the
Department is developing pursuant to section 2101 of the Act, which
will contain the Department's recommendations for statutory amendments,
the Department is also considering whether the disclosure might be
combined with other RESPA or Truth In Lending Act (TILA) disclosures,
consistent with section 2101 of the Act. In addition, if commenters
propose that the Department should continue to require more information
in the disclosure than in the format proposed, they should address what
the Department's authority to do so would be in light of the statutory
amendment in section 2103(a) of the Act.
    In a related matter, section 2103(e) establishes a 3-year
limitation on the time aggrieved borrowers or classes of borrowers
could bring actions under section 6 of RESPA. Inasmuch as this
limitation is longer than the statute of limitations for other actions
by individuals under RESPA (1 year), a new paragraph (f)(1)(iv) would
be added to Sec. 3500.21 of the regulations to highlight this
provision.

V. Additional Technical Corrections and Clarifications Contemplated

    In addition to the proposed revisions described in the preceding
portions of this preamble, the Department intends that when it makes
effective the provisions of the June 7 rule amending RESPA regulations
concerning employer payments to employees, the Department will make
further technical corrections and clarifications to the June 7 rule.
While these technical corrections and clarifications are described
below for informational purposes, the text is not published here, since
the Department is not requesting comments on them.

A. Routine Dealing

    The Department has been asked about language in the preamble and in
Appendix B, ``Illustrations of the Requirements of RESPA,'' regarding
the definition of a managerial employee as an ``employee * * * who does
not routinely deal directly with consumers * * *.'' This definition
applies to the exemption for employer payments to managerial employees
(Sec. 3500.14(g)(1)(viii) of the June 7 rule). In the preamble to the
Department's June 7, 1996 rule (61 FR 29245; bottom of middle column)
the Department stated, ``HUD intends this phrase (`does not routinely')
to allow a managerial employee who performs and is compensated for
occasional settlement services (not more than three transactions a
year) to be eligible for the exemption.'' The last sentence of Appendix
B, illustration 12 of the June 7 rule also contained a statement
referring to this three-transaction guideline.
    Following publication of the June 7 rule, the Department has found
that setting as a guide a fixed, maximum number of transactions for all
managers under the Department's rule would unduly interfere with the
functioning of offices. Roles and functions are not rigidly specified
and because of departures, absences for illnesses, or other reasons, a
manager may be called upon to complete transactions in process or
otherwise become involved in troublesome transactions, in addition to
any personal transactions the manager might otherwise undertake.
Accordingly, the Department agrees that a manager who does not
routinely deal with the public may perform greater than three
transactions and still remain eligible for the managerial exemption. A
more appropriate guideline is that a manager not routinely performing
settlement services may still receive compensation under the exemption
if either: (1) the total value of the services provided by the manager
does not exceed 5 percent of the annual income to the office or unit
for which the manager is responsible attributable to RESPA-covered
transactions, or (2) the manager performs settlement services in no
more than three RESPA-covered transactions.
    In publishing the final rule, the Department will clarify this
point.

B. In Any Transaction

    The final rule will put into effect the exemption promulgated in
the June 7 rule to the otherwise applicable prohibition against
kickbacks and unearned fees. The exemption applies in affiliate
relationships and allows payments made to employees who do not perform
settlement services ``in any transaction'' and who provide the
disclosure statement (24 CFR 3500.14(g)(1)(ix)). The use of the term
``in any transaction'' has created concern for some affiliated
settlement service providers regarding the breadth of the restriction.
    The Department sought to provide this exemption to those who were
not currently involved in the provision of settlement services.
Therefore, when the Department puts this exemption into effect in the
final rule, it will clarify that it does not intend, by the use of the
term ``in any transaction,'' that if an employee performs settlement
services one time in his or her life, he or she shall forever lose the
ability to receive payments pursuant to this exemption. Rather, in
publishing the final rule the Department will clarify that it intends
the ``in any transaction'' language to

[[Page 25745]]

allow an employee who has performed settlement services in the past to
qualify for the exemption in any of the following types of
circumstances:
    1. No longer providing settlement services. This type of
circumstance involves an employee who has not performed settlement
services for his or her current employer (in the same job position) in
any transaction for 1 year or more. OR
    2. An employee who changes jobs. This type of circumstance involves
an employee who performed settlement services for his or her employer
in the past but, although still employed by the same employer, changes
jobs so that he or she no longer holds the former position and does not
perform settlement services in the new position. OR
    3. A new employee. This type of circumstance involves an employee
who performed settlement services for another employer on a past job,
but no longer holds that job or works for that employer, and does not
perform settlement services on his or her current job for the new
employer.
    In publishing the final rule the Department also will clarify that,
as explained in the preamble to the June 7 rule (61 FR 29243), under
all these circumstances, the employment relationship must be bona fide
and not a sham designed to facilitate kickbacks among affiliated
companies. Otherwise, the exemption will not apply.

C. ``Affiliated Business Arrangement''

    The Department will make a technical correction required by an
amendment to RESPA in section 2103(c) of the Act. That legislation
redesignated ``Controlled Business Arrangements'' as ``Affiliated
Business Arrangements'' or ``AfBAs.'' The final rule will incorporate
into the RESPA rules the term ``affiliated business arrangement''
instead of the term ``controlled business arrangement'' used in the
June 7 rule, completing the process of changing the terminology begun
in the November 15, 1996 rule (61 FR 58472).

D. Timing of Affiliated Business Arrangement Disclosure

    The Department will make a technical correction relating to the
timing of providing the AfBA disclosure. The June 7 rule used
inconsistent language to describe when the disclosure was to be
provided. (See 24 CFR 3500.14(g)(1)(ix)(A)(2) (``before the
referral''); 24 CFR 3500.15(b)(1) (``prior to the referral,'' ``no
later than the time of each referral,''); Appendix B, illustration 11
(``at or before the time that the referral is made''); Appendix B,
illustration 12 (``at the time of the referral'').) The Department will
conform the language of the regulation and Appendix B more closely to
the statutory language as revised in section 2103(d) of the Act, to
provide consistently that the AfBA disclosure statement must be
provided in accordance with Sec. 3500.15(b).
    Section 3500.15(b) sets forth the applicable time frames for
providing the disclosure. This provision requires, in the case of a
face-to-face referral or a referral made in writing or by electronic
media, providing a written disclosure at or before the time of the
referral, except in cases of a referral by a lender or situations
involving an attorney or law firm that requires a client to use a
particular title insurance agent. In the case of a telephone referral,
a written disclosure must be provided within 3 business days after the
referral by telephone and an abbreviated verbal disclosure must be made
during the telephone referral. The change that will be included in the
final rule will eliminate the use of inconsistent terminology and will
conform the description of the timing for providing the disclosure to
be consistent with section 8(c)(4) of RESPA, as amended by section
2103(d) of the Act.

Findings and Certifications

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this proposed
rule under Executive Order 12866, Regulatory Planning and Review,
issued by the President on September 30, 1993. OMB determined that this
rule is a ``significant regulatory action,'' as defined in section 3(f)
of the Order (although not economically significant, as provided in
section 3(f)(1) of the Order). Any changes made in this rule subsequent
to its submission to OMB are identified in the docket file, which is
available for public inspection between 7:30 a.m. and 5:30 p.m.
weekdays in the Office of the Rules Docket Clerk, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC.

Paperwork Reduction Act

    The information collection requirements contained in
Sec. 3500.15(b) prior to this proposed rule have been approved by the
Office of Management and Budget (OMB) under the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501-3520), and assigned OMB control number 2502-
0516. In securing that approval, the Department had estimated that the
annual reporting and recordkeeping hour burden would be 240,000 hours
(2.4 million annual responses at 6 minutes per response). The
provisions of Sec. 3500.15(b) of this proposed rule regarding the
Affiliated Business Arrangement Disclosure would simply clarify the
timing and the methods of providing the disclosure, and the evidence
needed to substantiate that the disclosure was provided, in
circumstances in which the referral is made over the telephone or
through electronic media. The Department does not anticipate that the
provisions of Sec. 3500.15(b) of this proposed rule will increase the
number of annual burden hours described above. The Department has,
however, submitted the information collection requirements in
Sec. 3500.15(b) of this proposed rule to OMB for review under the
Paperwork Reduction Act and the procedures set forth in 5 CFR part
1320. As required by the Paperwork Reduction Act, interested persons
are invited to submit comments according to the instructions in the
DATES and ADDRESSES sections in the preamble of this proposed rule. The
Department specifically requests comments on the following:
    (1) Whether the proposed collection of information is necessary for
the proper performance of the functions of the Department, including
whether the information will have practical utility;
    (2) The accuracy of the Department's estimate of the burden of the
proposed collection of information;
    (3) How to enhance the quality, utility, and clarity of the
information to be collected; and
    (4) How to minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
    The information collection requirements in Sec. 3500.21 of this
proposed rule also have been approved by OMB, and assigned OMB control
number 2502-0458. The rule does not propose to make changes to the
information collection requirements set forth in Sec. 3500.21. The rule
proposes to make changes to the Servicing Disclosure Statement format
described in this section, but this format is a model format and is not
required to be used. The OMB approval number for this section is also
in the process of being renewed in accordance with the procedures set
forth in OMB's regulations implementing the Paperwork Reduction Act of
1995 and codified at 5 CFR part 1320.

[[Page 25746]]

Environmental Impact

    In accordance with 24 CFR 50.19(c)(1) of the Department's
regulations, published in a final rule on September 27, 1996 (61 FR
50914), this proposed rule does not direct, provide for assistance or
loan and mortgage insurance for, or otherwise govern or regulate
property acquisition, disposition, lease, rehabilitation, alteration,
demolition, or new construction, or set out or provide for standards
for construction or construction materials, manufactured housing, or
occupancy. Therefore, this proposed rule is categorically excluded from
the requirements of the National Environmental Policy Act.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this proposed rule before publication and
by approving it certifies that this rule would not have a significant
economic impact on a substantial number of small entities, other than
those impacts specifically required to be applied universally by the
RESPA statute. In this proposed rule, the Department strives to provide
flexible requirements in order to reduce any burden on small entities.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in this proposed rule would not have substantial direct
effects on States or their political subdivisions, or the relationship
between the Federal Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
As a result, the proposed rule is not subject to review under the
Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal
agencies to assess the effects of their regulatory actions on State,
local, and tribal governments, and the private sector. This rule does
not impose any Federal mandates on any State, local, or tribal
governments, or on the private sector, within the meaning of the UMRA.

List of Subjects in 24 CFR Part 3500

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

    Accordingly, for the reasons set out in the preamble, part 3500 of
Title 24 of the Code of Federal Regulations is proposed to be amended
as follows:

PART 3500--REAL ESTATE SETTLEMENT PROCEDURES ACT

    1. The authority citation for 24 CFR part 3500 continues to read as
follows:

    Authority: 12 U.S.C. 2601 et seq.; 42 U.S.C. 3535(d).

    2. In Sec. 3500.2, paragraph (b) is amended by revising the
definition of ``Settlement service'' to read as follows:

Sec. 3500.2  Definitions.

* * * * *
    (b) * * *
    Settlement service means any service provided in connection with a
prospective or actual settlement, including any one or more of the
following:
    (1) Origination of a federally related mortgage loan (including,
but not limited to, the taking of loan applications, loan processing,
and the underwriting and funding of such loans), or rendering of
services by a mortgage broker (including counseling, taking of
applications, obtaining verifications and appraisals, and other loan
processing and origination services, and communicating with the
borrower and lender);
    (2) Provision of title services, including title searches, title
examinations, abstract preparation, insurability determinations, and
the issuance of title commitments and title insurance policies;
    (3) Rendering of services by an attorney;
    (4) Preparation of documents, including notarization, delivery, and
recordation;
    (5) Rendering of credit reports;
    (6) Rendering of appraisals;
    (7) Rendering of inspections, including inspections required by
applicable law or any inspections required by the sales contract or
mortgage documents prior to transfer of title;
    (8) Conducting of settlement by a settlement agent and any related
services;
    (9) Provision of services involving mortgage insurance;
    (10) Provision of services involving hazard or other casualty
insurance;
    (11) Provision of services involving flood insurance;
    (12) Provision of services involving homeowner's warranties;
    (13) Provision of services involving mortgage life, disability, or
similar insurance designed to pay a mortgage loan upon disability or
death of a borrower, but only if such insurance is required by the
lender as a condition of the loan;
    (14) Provision of services involving real property taxes or any
other assessments or charges on the real property;
    (15) Rendering of services by a real estate agent or real estate
broker; and
    (16) Provision of any other services for which a settlement service
provider requires a borrower or seller to pay.
* * * * *
    3. Section 3500.14 is amended by adding and reserving new
paragraphs (g)(1)(viii) and (g)(1)(ix), and by adding a new paragraph
(g)(1)(x), to read as follows:

Sec. 3500.14  Prohibition against kickbacks and unearned fees.

* * * * *
    (g) * * *
    (1) * * *
    (viii) [Reserved]
    (ix) [Reserved]
    (x)(A) A payment by an employer to its bona fide employee for the
referral of settlement service business to a settlement service
provider that has an affiliate relationship with the employer or in
which the employer has a direct or beneficial ownership interest of
more than 1 percent, if the following conditions are met:
    (1) The settlement service business that is referred is the same
category of settlement service that the employer of the employee making
the referral provides;
    (2) The employee provides to the person being referred the
affiliated business arrangement disclosure in accordance with
Sec. 3500.15; and
    (3) The employee making the referral does not perform any other
category of settlement service (including a service described by
paragraph (b)(15) or (b)(16) of the definition of ``Settlement
service'' in Sec. 3500.2(b)) in the same transaction.
    (B) For purposes of this paragraph (g)(1)(x), each service
described in the definition of ``Settlement service'' in Sec. 3500.2
(b)(1) through (b)(15) constitutes a different category of settlement
service that may qualify for this exemption.
* * * * *
    4. Section 3500.15 is amended by revising paragraph (b)(1); by
redesignating paragraphs (b)(2) and (b)(3) as paragraphs (b)(5) and
(b)(6), respectively; and by adding new paragraphs (b)(2) through
(b)(4); to read as follows:

Sec. 3500.15  Affiliated business arrangements.

* * * * *

[[Page 25747]]

    (b) * * *
    (1) The person making a referral provides to each person being
referred a written disclosure on a separate piece of paper, in the
format of the Affiliated Business Arrangement Disclosure Statement set
forth in Appendix D to this part. The person making the referral must
request that the person being referred sign the disclosure promptly and
return it to the affiliate making the referral or a designated
addressee, and must provide information on where to send the signed
disclosure. The disclosure shall:
    (i) Specify the nature of the relationship (explaining the
ownership and financial interest) between the person performing
settlement services (or business incident thereto) and the person
making the referral;
    (ii) Describe the estimated charge or range of charges (using the
same terminology, as far as practical, as Section L of the HUD-1 or
HUD-1A settlement statement) generally made by the provider of
settlement services; and
    (iii) Include an acknowledgement for the person being referred to
sign.
    (2) The person making the referral shall provide the disclosure in
accordance with the following timetable:
    (i) In the case of a face-to-face referral or a referral made in
writing or by electronic media, at or before the time of the referral,
except as provided in paragraph (b)(2)(iii) or (b)(2)(iv) of this
section;
    (ii) In the case of a referral made by telephone, within 3 business
days after the referral by telephone, except as provided in paragraph
(b)(2)(iii) or (b)(2)(iv) of this section. In the case of a referral
made by telephone, an abbreviated verbal disclosure also must be made
during the telephone referral that, in clear and understandable
language:
    (A) Specifies the nature of the relationship (explaining the
ownership and financial interest) between the entity making the
referral and the entity performing settlement services (or business
incident thereto);
    (B) Explains that because of this relationship, this referral may
provide a financial or other benefit to the referring party;
    (C) States that the existence of this relationship does not mean
that the person being referred must use the provider to whom he or she
is being referred as a condition of settlement of the loan, or
purchase, sale, or refinance of the property, as applicable; and
    (D) Advises that a written disclosure will be provided within 3
business days.
    (iii) In the case of a referral by a lender (including a referral
by a lender to an affiliated lender) the disclosure may be provided at
the time that the good faith estimate required under section 5(c) of
RESPA (12 U.S.C. 2604) is provided.
    (iv) In the case of an attorney or law firm that requires a client
to use a particular title insurance agent, the attorney or law firm
shall provide the written disclosure no later than the time the
attorney or law firm is engaged by the client.
    (3)(i) Signature. In all cases, the person being referred must sign
the disclosure. The person being referred should sign the disclosure at
the time that the disclosure is provided. If the person being referred
chooses not to sign the disclosure at the time that the disclosure is
provided, the signature of the person being referred must be obtained
at or before closing or settlement.
    (ii) Other evidence of compliance. The existence of a notation
having been made, at the time that the disclosure was provided, in a
written, electronic, or similar system of records maintained in the
regular course of business, which includes a notation of the fact that
the person being referred chose not to sign the disclosure at the time
that it was provided, may be used as evidence that the disclosure was
provided at the time of the referral, but does not substitute for
obtaining a signature in accordance with paragraph (b)(3)(i) of this
section. In the case of a face-to-face referral, if the person being
referred chooses not to sign the disclosure at the time that the
disclosure is provided, such notation is mandatory.
    (4) Failure to comply with the disclosure requirements of this
section may be overcome if the person making a referral can prove by a
preponderance of the evidence that procedures reasonably adopted to
result in compliance with these conditions have been maintained and
that any failure to comply with these conditions was unintentional and
the result of a bona fide error. An error of legal judgment with
respect to a person's obligations under RESPA is not a bona fide error.
Administrative and judicial interpretations of section 130(c) of the
Truth in Lending Act (15 U.S.C. 1640(c)) shall not be binding
interpretations of the preceding sentence or section 8(d)(3) of RESPA
(12 U.S.C. 2607(d)(3)).
* * * * *
    5. Section 3500.21 is amended by revising paragraphs (b) and (c);
and by adding a new paragraph (f)(1)(iv); to read as follows:

Sec. 3500.21  Mortgage servicing transfers.

* * * * *
    (b) Servicing Disclosure Statement; Requirements. (1) At the time
an application for a mortgage servicing loan is submitted, or within 3
business days after submission of the application, the lender, mortgage
broker who anticipates using table funding, or dealer who anticipates a
first lien dealer loan shall provide to each person who applies for
such a loan a Servicing Disclosure Statement. A format for the
Servicing Disclosure Statement appears as Appendix MS-1 to this part.
The specific language of the Servicing Disclosure Statement is not
required to be used, and the statement may be included in the Good
Faith Estimate required under Sec. 3500.7(a), so long as the title
``SERVICING DISCLOSURE STATEMENT'' is used. The information set forth
in ``Instructions to Preparer'' on the Servicing Disclosure Statement
need not be included with the information given to applicants, and
material in square brackets is optional or alternative language. The
model format may be annotated with additional information that
clarifies or enhances the model language. The lender, table funding
mortgage broker, or dealer should use the language that best describes
the particular circumstances.
    (2) The Servicing Disclosure Statement must indicate whether the
servicing of the loan may be assigned, sold, or transferred to any
other person at any time while the loan is outstanding. If the lender,
table funding mortgage broker, or dealer in a first lien dealer loan
does not engage in the servicing of any mortgage loans, the disclosure
may consist of a statement that such entity intends to assign, sell, or
transfer servicing of the loan before the first loan payment is due.
    (c) Servicing Disclosure Statement; Delivery. The lender, table
funding mortgage broker, or dealer that anticipates a first lien dealer
loan shall deliver Servicing Disclosure Statements to each applicant
for a mortgage servicing loan at the time of application, or by placing
it in the mail with prepaid first-class postage within 3 business days
from receipt of the application. In the event the borrower is denied
credit within the 3-business day period, no servicing disclosure
statement is required to be delivered. If co-applicants indicate the
same address on their application, one copy delivered to that address
is sufficient. If different addresses are shown by co-applicants on the
application, a copy must be delivered to each of the co-applicants.
* * * * *

[[Page 25748]]

    (f) * * *
    (1) * * *
    (iv) Limitation on time of action. Any action pursuant to this
section must be brought within 3 years from the date of the occurrence
of the violation.
* * * * *
    6. Appendix B to part 3500 is amended by adding a new illustration
15 at the end of the appendix, to read as follows:

Appendix B to Part 3500--Illustrations of Requirements of RESPA

* * * * *
    15. Facts: A, a bank, is affiliated with, B, a mortgage banking
company. A customer walks into the bank, A, and asks F, A's loan
officer, about getting a mortgage loan to purchase a house. While A
makes home equity loans, A does not make first mortgage loans. Thus,
F refers the customer to B, the mortgage banking affiliate, takes an
application, and provides the customer with the affiliated business
arrangement disclosure statement. F receives a payment from his
employer, A, for making the referral. F does not perform any other
category of settlement service in this transaction.
    Comments: Under Sec. 3500.14(g)(1)(x), employers may pay their
own bona fide employees for the referral of settlement service
business to a settlement service provider that has an affiliate
relationship with the employer or in which the employer has a direct
or beneficial ownership interest of more than 1 percent, if the
following conditions are met:
    (1) The settlement service business that is referred is the same
category of settlement service that the employer of the employee
making the referral provides;
    (2) The employee provides to the person being referred the
affiliated business arrangement disclosure in accordance with
Sec. 3500.15; and
    (3) The employee making the referral does not perform any other
category of settlement service in the same transaction.
    Employees who perform settlement services in other transactions
may still qualify for the exemption.
    In this case, the settlement service business that is referred
is originating a mortgage loan, and the business entity for which
the employee works also provides this service. Thus, the same
category of settlement service is being referred as is performed by
the employer of the employee making the referral. (Categories of
settlement services that may qualify for this exemption are listed
in the definition of ``Settlement services'' in Sec. 3500.2 (b)(1)
through (b)(15).) Also, the employee provides the affiliated
business disclosure in accordance with Sec. 3500.15. While this
particular employee takes an application, he does not perform any
other category of settlement service in this transaction.
    Thus, in the circumstances described, the employee may receive
the referral fee for making the referral without violating RESPA.

    7. Appendix MS-1 to part 3500 is revised to read as follows:

BILLING CODE 4210-27-P

[[Page 25749]]

[GRAPHIC] [TIFF OMITTED] TP09MY97.003

    Dated: February 13, 1997.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.

[FR Doc. 97-12081 Filed 5-8-97; 8:45 am]
BILLING CODE 4210-27-C
Last Updated 07/17/1999 communications@fdic.gov