On January 21, 1998, the Department of Housing and Urban Development ("HUD") published its Final Rule in regard to various amendments to the Real Estate Settlement Procedures Act ("RESPA"), including escrow accounting procedures. The effective date of the Final Rule is February 20, 1998.

The issues addressed in the Final Rule include disbursement of tax escrows on an annual or installment basis; "payment shock" on loans where the property taxes will substantially increase after the first year of escrow (new construction); placement of lead-based paint inspection fees on HUD-1 or HUD-1A; and compliance with aggregate adjustments on good faith estimates.

Annual or installment property tax disbursements

If the taxing jurisdiction neither offers a discount for disbursements on a lump-sum annual basis nor imposes any additional charge or fee for installment disbursements, the servicer must make disbursements on an installment basis, unless the servicer and the borrower agree otherwise. If, however, the taxing jurisdiction offers a discount for disbursements on a lump-sum annual basis or imposes any additional charge or fee for installment disbursements, the servicer may, at the servicer’s discretion (but is not required by RESPA), make lump-sum annual disbursements, as long as such method of disbursement complies with the requirements of RESPA §3500.17(k)(1) and (k)(2). RESPA does not require a servicer to follow the preference of the borrower.

Notwithstanding the above, the Final Rule also provides that a servicer and a borrower may mutually agree on an individual case basis to a different disbursement basis than the Rule otherwise provides.

Stated in other terms, for property taxes only, the servicer should add up the total payments associated with disbursing annually and compare that amount to the total payments associated with disbursing in installments; in making these calculations, the servicer should take into account any applicable discounts or service charges. If the total amount associated with disbursing property taxes annually is greater than or equal to the total amount associated with disbursing in installments, the servicer must disburse the property taxes in installments except when the servicer and borrower mutually agree otherwise. If, however, the total amount for disbursing the property taxes in installments is greater than the total amount for disbursing them annually, the servicer may, but is not required by RESPA to, disburse them annually. The servicer is encouraged, but not required, to follow the preference of the borrower.

These rules on property taxes do not apply to any other types of escrows included in the escrow account such as mortgage insurance, hazard insurance, etc. The only requirement regarding other escrow items such as hazard insurance is that the servicer is required to make the disbursement by a date that avoids a penalty; otherwise, a servicer is only required to follow normal lending practices, local custom and prudent lending practices.

Payment Shock

The Final Rule basically keeps the current rules in force. However, HUD has promulgated a "Consumer Disclosure for Voluntary Escrow Account Payments" which it advises be given in connection with those loans where payment shock may occur, such as new construction.

The form is attached as an exhibit to this memo. Further, the Final Rule makes it clear that if voluntary, a servicer or originator may set up the escrows for the first year in an amount higher than what the escrow analysis would allow, so long as the higher escrows are in fact voluntary.

All lenders may want to commence using this form in connection with their application process. Should you desire that this form be a part of your closing package, please contact the appropriate office and inform the Manager that you wish this form to be included in your closing package. Again, this form is voluntary and is not a required use.

The form is a voluntary agreement for the first-year escrow account, although successive agreements are allowed and could be executed. After covering the anticipated shortage for the second year, the provisions of RESPA regarding shortages, surpluses and deficiencies will continue to apply and may not be changed by any voluntary agreement. Thus, the concept is only good for the projected shortages for the year following the first escrow year.

Single Item Analysis with Aggregate Adjustment on HUD-1 and HUD-1A

The Final Rule continues to adopt the rule that on the HUD-1 or the HUD-1A, the escrows will be reflected as single items and an aggregate adjustment placed in the 1000 Series. The present practice should be continued; however, lenders may continue to estimate the reserve requirements on the good-faith estimate by using single-item accounting with no more than a one-month cushion.

Lead-Based Paint Inspection Fees

Lenders should continue to disclose a lead-based paint inspection fee on the HUD-1 or HUD-1A if a lead-based paint inspection fee is either (i) required by the lender, whether paid outside of settlement, in which case "POC" should be used at settlement, or (2) paid for at settlement. The lead-based paint inspection fee should be reflected on the HUD-1 or HUD-1A on Lines 1301 and 1302 or any other available blank line in the 1300 Series of the HUD-1 or HUD-1A.

Should you have questions regarding this memorandum, please do not hesitate to contact an attorney in one of our offices near you.

Consumer Disclosure For Voluntary Escrow Account Payments

The bills paid out of your escrow account are expected to increase substantially after the first year [because ------]. Under normal escrow practices, your monthly escrow payment in the second year could be much higher than in the first.

You may voluntarily choose to make higher payments during the first year to reduce or eliminate the monthly payment increase in the second year. If you are interested in doing this, contact ________________________.

Instructions To Preparer: You are encouraged to provide this document to borrowers when you anticipate a substantial increase in bills paid out of the escrow account after the first year of the loan. Explanation of the reason for the increase is recommended. The document may be delivered separately or combined with the Initial Escrow Account Statement. In the blank provided, insert the contact for further information, including the mailing address, fax number, e-mail address, and/or telephone number of the contact who will provide further information on making voluntary overpayments during the first year. The terms Areserve@ or Aimpound@ may be substituted for the terms Aescrow account@ or Aescrow@ to reflect local usage. These Instructions To Preparer should not appear on the form.