Section Short Title; Designation as Enumerated Consumer Law

Transcription

1 This is the third f a series f user guides that will be published by Mrrisn & Ferster. The user guides prvide an in depth discussin n specific tpics raised by the Ddd-Frank Act. Fr ur Ddd-Frank verview and brief alerts, please see ur dedicated website at: gulatry-refrm/. Intrductin This is a user guide fr the mrtgage servicing-related prvisins f the Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act ( Ddd-Frank Act ). Mre specifically, it cvers Subtitle E (Mrtgage Servicing) and Subtitle G (Mrtgage Reslutin and Mdificatin) f Title XIV f the Ddd-Frank Act, which are part f the Mrtgage Refrm and Anti-Predatry Lending Act. Subtitle A (Residential Mrtgage Lan Originatin Standards), Subtitle B (Minimum Standards fr Mrtgages), Subtitle C (High-Cst Mrtgages), Subtitle D (Office f Husing Cunseling), and Subtitle F (Appraisal Activities) f Title XIV f the Ddd-Frank Act are cvered by ur separate mrtgage riginatin user guide that was previusly issued. Subtitle H (Miscellaneus Prvisins) f Title XIV requires varius surveys and prvides fr a number f husing-related grants. Because Subtitle H is expected t be f minimal interest t mrtgage servicers, it is nt cvered by this user guide. Use f this Guide This guide is designed fr use by executives and managers wh are respnsible fr the mrtgage servicing activities f banks, savings assciatins, and mrtgage cmpanies. It is intended t be a reference piece that prvides pragmatic slutins fr the implementatin f the mrtgage servicing prvisins f the Ddd-Frank Act. When regulatins are issued fr the mrtgage servicing prvisins f the Ddd-Frank Act, the guidance prvided by this guide will need t be refined accrdingly. This guide des nt prvide legal advice and shuld nt be relied upn as such. 1 Attrney Advertising

2 Organizatin f this Guide Fr ease f reference, this guide will be rganized by the varius subtitles and sectins f Title XIV f the Ddd- Frank Act. With each prvisin, we summarize the new law, discuss its linkages t existing law, and analyze sme f the mre imprtant ramificatins fr mrtgage servicers. Nte that certain federal agencies cnsumer prtectin authrities under the Enumerated Cnsumer Laws will eventually be transferred t the new Bureau f Cnsumer Financial Prtectin ( Bureau ). These transfers f authrity are nt reflected in this guide. The Enumerated Cnsumer Laws are listed in 1002(12) f the Ddd- Frank Act. Sectin Shrt Title; Designatin as Enumerated Cnsumer Law (a) Shrt Title- This title may be cited as the `Mrtgage Refrm and Anti-Predatry Lending Act'. (b) Designatin as Enumerated Cnsumer Law Under the Purview f the Bureau f Cnsumer Financial Prtectin- Subtitles A, B, C, and E and sectins 1471, 1472, 1475, and 1476, and the amendments made by such subtitles and sectins, shall be enumerated cnsumer laws, as defined in sectin 1002, and cme under the purview f the Bureau f Cnsumer Financial Prtectin fr purpses f title X, including the transfer f functins and persnnel under subtitle F f title X and the savings prvisins f such subtitle. (c) Regulatins; Effective Date- (1) REGULATIONS- The regulatins required t be prescribed under this title r the amendments made by this title shall-- (A) be prescribed in final frm befre the end f the 18-mnth perid beginning n the designated transfer date; and (B) take effect nt later than 12 mnths after the date f issuance f the regulatins in final frm. (2) EFFECTIVE DATE ESTABLISHED BY RULE- Except as prvided in paragraph (3), a sectin, r prvisin theref, f this title shall take effect n the date n which the final regulatins implementing such sectin, r prvisin, take effect. (3) EFFECTIVE DATE- A sectin f this title fr which regulatins have nt been issued n the date that is 18 mnths after the designated transfer date shall take effect n such date. Analysis. Sectin 1400 is a husekeeping sectin that des the fllwing: Designatin as Enumerated Cnsumer Law Under the Purview f the Bureau f Cnsumer Financial Prtectin. Subtitles A (Residential Mrtgage Lan Originatin Standards), B (Minimum Standards fr Mrtgages), C (High- Cst Mrtgages), and E (Mrtgage Servicing), and 1471 (prperty appraisal requirements), 1472 (appraiser independence requirements), 1475 (Real Estate Settlement Prcedures Act f 1974 ( RESPA ) prvisins relating t appraisal fees), and 1476 (Gvernment Accuntability Office ( GAO ) study regarding effectiveness f varius appraisal methds) are designated as enumerated cnsumer laws that cme under the jurisdictin f the new Bureau. This means that the Bureau will issue the implementing regulatins fr these prvisins and will have enfrcement authrity with respect t these prvisins fr depsitry institutins with mre than $10 billin f assets, mrtgage-related businesses, and certain larger participants in financial services. Regulatins; Effective Date. Regulatins t implement Title XIV must be issued in final frm within 18 mnths fllwing the designated transfer date. The regulatins must take effect within 12 mnths after they are issued. Hwever, if final regulatins have nt been issued within 18 mnths fllwing the designated transfer date, the crrespnding statutry prvisins will becme effective at that time. Given the lack f details in many f the statutry prvisins, this wuld result in havc. As a result, the Bureau and ther federal banking agencies shuld be well mtivated t issue the implementing regulatins prir t the 18-mnth deadline. The designated transfer date is defined in 1062 f the Ddd-Frank Act. The designated transfer date will be established by the Treasury Secretary, fllwing cnsultatin with ther federal fficials, within 60 days fllwing enactment f the Ddd-Frank Act n July 21, The designated transfer date will be n earlier than 180 days, and n later than 12 mnths, fllwing enactment. The Treasury Secretary can establish a designated transfer date beynd the 12-mnth perid by fllwing certain prcedures, but the designated transfer date may nt be mre than 18 mnths fllwing enactment. These rather lengthy timeframes reflect Cngress 2 Attrney Advertising

3 recgnitin that it will take cnsiderable time t rganize the Bureau, which will be respnsible fr issuing a large number f regulatins. Subtitle E Mrtgage Servicing Sectin Escrw and Impund Accunts Relating t Certain Cnsumer Credit Transactins (a) In General- Chapter 2 f the Truth in Lending Act (15 U.S.C et seq.) is amended by inserting after sectin 129C (as added by sectin 1411) the fllwing new sectin: `Sec. 129D. Escrw r impund accunts relating t certain cnsumer credit transactins `(a) In General- Except as prvided in subsectin (b), (c), (d), r (e), a creditr, in cnnectin with the cnsummatin f a cnsumer credit transactin secured by a first lien n the principal dwelling f the cnsumer, ther than a cnsumer credit transactin under an pen end credit plan r a reverse mrtgage, shall establish, befre the cnsummatin f such transactin, an escrw r impund accunt fr the payment f taxes and hazard insurance, and, if applicable, fld insurance, mrtgage insurance, grund rents, and any ther required peridic payments r premiums with respect t the prperty r the lan terms, as prvided in, and in accrdance with, this sectin. `(b) When Required- N impund, trust, r ther type f accunt fr the payment f prperty taxes, insurance premiums, r ther purpses relating t the prperty may be required as a cnditin f a real prperty sale cntract r a lan secured by a first deed f trust r mrtgage n the principal dwelling f the cnsumer, ther than a cnsumer credit transactin under an pen end credit plan r a reverse mrtgage, except when-- `(1) any such impund, trust, r ther type f escrw r impund accunt fr such purpses is required by Federal r State law; `(2) a lan is made, guaranteed, r insured by a State r Federal gvernmental lending r insuring agency; `(3) the transactin is secured by a first mrtgage r lien n the cnsumer's principal dwelling having an riginal principal bligatin amunt that-- `(A) des nt exceed the amunt f the maximum limitatin n the riginal principal bligatin f mrtgage in effect fr a residence f the applicable size, as f the date such interest rate set, pursuant t the sixth sentence f sectin 305(a)(2) the Federal Hme Lan Mrtgage Crpratin Act (12 U.S.C. 1454(a)(2)), and the annual percentage rate will exceed the average prime ffer rate as defined in sectin 129C by 1.5 r mre percentage pints; r `(B) exceeds the amunt f the maximum limitatin n the riginal principal bligatin f mrtgage in effect fr a residence f the applicable size, as f the date such interest rate set, pursuant t the sixth sentence f sectin 305(a)(2) the Federal Hme Lan Mrtgage Crpratin Act (12 U.S.C. 1454(a)(2)), and the annual percentage rate will exceed the average prime ffer rate as defined in sectin 129C by 2.5 r mre percentage pints; r `(4) s required pursuant t regulatin. `(c) Exemptins- The Bard may, by regulatin, exempt frm the requirements f subsectin (a) a creditr that-- `(1) perates predminantly in rural r underserved areas; `(2) tgether with all affiliates, has ttal annual mrtgage lan riginatins that d nt exceed a limit set by the Bard; `(3) retains its mrtgage lan riginatins in prtfli; and `(4) meets any asset size threshld and any ther criteria the Bard may establish, cnsistent with the purpses f this subtitle. `(d) Duratin f Mandatry Escrw r Impund Accunt- An escrw r impund accunt established pursuant t subsectin (b) shall remain in existence fr a minimum perid f 5 years, beginning with the date f the cnsummatin f the lan, unless and until-- `(1) such brrwer has sufficient equity in the dwelling securing the cnsumer credit transactin s as t n lnger be required t maintain private mrtgage insurance; `(2) such brrwer is delinquent; `(3) such brrwer therwise has nt cmplied with the legal bligatin, as established by rule; r `(4) the underlying mrtgage establishing the accunt is terminated. `(e) Limited Exemptins fr Lans Secured by Shares in a Cperative r in Which an Assciatin Must Maintain a Master Insurance Plicy- Escrw accunts need nt be established fr lans secured by shares in a cperative. Insurance premiums need nt be included in escrw accunts fr lans secured by dwellings r units, where the brrwer must jin an assciatin as a cnditin f wnership, and that assciatin has an bligatin t the dwelling r unit wners t maintain a master plicy insuring the dwellings r units. `(f) Clarificatin n Escrw Accunts fr Lans Nt Meeting Statutry Test- Fr mrtgages nt cvered by the requirements f subsectin (b), n prvisin f this sectin shall be cnstrued as precluding the establishment f an impund, trust, r ther type f accunt fr the payment f prperty taxes, insurance premiums, r ther purpses relating t the prperty-- `(1) n terms mutually agreeable t the parties t the lan; `(2) at the discretin f the lender r servicer, as prvided by the cntract between the lender r servicer and the brrwer; r 3 Attrney Advertising

4 `(3) pursuant t the requirements fr the escrwing f fld insurance payments fr regulated lending institutins in sectin 102(d) f the Fld Disaster Prtectin Act f `(g) Administratin f Mandatry Escrw r Impund Accunts- `(1) IN GENERAL- Except as may therwise be prvided fr in this title r in regulatins prescribed by the Bard, escrw r impund accunts established pursuant t subsectin (b) shall be established in a federally insured depsitry institutin r credit unin. `(2) ADMINISTRATION- Except as prvided in this sectin r regulatins prescribed under this sectin, an escrw r impund accunt subject t this sectin shall be administered in accrdance with-- `(A) the Real Estate Settlement Prcedures Act f 1974 and regulatins prescribed under such Act; `(B) the Fld Disaster Prtectin Act f 1973 and regulatins prescribed under such Act; and `(C) the law f the State, if applicable, where the real prperty securing the cnsumer credit transactin is lcated. `(3) APPLICABILITY OF PAYMENT OF INTEREST- If prescribed by applicable State r Federal law, each creditr shall pay interest t the cnsumer n the amunt held in any impund, trust, r escrw accunt that is subject t this sectin in the manner as prescribed by that applicable State r Federal law. `(4) PENALTY COORDINATION WITH RESPA- Any actin r missin n the part f any persn which cnstitutes a vilatin f the Real Estate Settlement Prcedures Act f 1974 r any regulatin prescribed under such Act fr which the persn has paid any fine, civil mney penalty, r ther damages shall nt give rise t any additinal fine, civil mney penalty, r ther damages under this sectin, unless the actin r missin als cnstitutes a direct vilatin f this sectin. `(h) Disclsures Relating t Mandatry Escrw r Impund Accunt- In the case f any impund, trust, r escrw accunt that is required under subsectin (b), the creditr shall disclse by written ntice t the cnsumer at least 3 business days befre the cnsummatin f the cnsumer credit transactin giving rise t such accunt r in accrdance with timeframes established in prescribed regulatins the fllwing infrmatin: `(1) The fact that an escrw r impund accunt will be established at cnsummatin f the transactin. `(2) The amunt required at clsing t initially fund the escrw r impund accunt. `(3) The amunt, in the initial year after the cnsummatin f the transactin, f the estimated taxes and hazard insurance, including fld insurance, if applicable, and any ther required peridic payments r premiums that reflects, as apprpriate, either the taxable assessed value f the real prperty securing the transactin, including the value f any imprvements n the prperty r t be cnstructed n the prperty (whether r nt such cnstructin will be financed frm the prceeds f the transactin) r the replacement csts f the prperty. `(4) The estimated mnthly amunt payable t be escrwed fr taxes, hazard insurance (including fld insurance, if applicable) and any ther required peridic payments r premiums. `(5) The fact that, if the cnsumer chses t terminate the accunt in the future, the cnsumer will becme respnsible fr the payment f all taxes, hazard insurance, and fld insurance, if applicable, as well as any ther required peridic payments r premiums n the prperty unless a new escrw r impund accunt is established. `(6) Such ther infrmatin as the Bard determines necessary fr the prtectin f the cnsumer. `(i) Definitins- Fr purpses f this sectin, the fllwing definitins shall apply: `(1) FLOOD INSURANCE- The term `fld insurance' means fld insurance cverage prvided under the natinal fld insurance prgram pursuant t the Natinal Fld Insurance Act f `(2) HAZARD INSURANCE- The term `hazard insurance' shall have the same meaning as prvided fr `hazard insurance', `casualty insurance', `hmewner's insurance', r ther similar term under the law f the State where the real prperty securing the cnsumer credit transactin is lcated.'. (b) Exemptins and Mdificatins- The Bard may prescribe rules that revise, add t, r subtract frm the criteria f sectin 129D(b) f the Truth in Lending Act if the Bard determines that such rules are in the interest f cnsumers and in the public interest. (c) Clerical Amendment- The table f sectins fr chapter 2 f the Truth in Lending Act is amended by inserting after the item relating t sectin 129C (as added by sectin 1411) the fllwing new item: `129D. Escrw r impund accunts relating t certain cnsumer credit transactins.'. Analysis. Sectin 1461 adds a new 129D t the federal Truth in Lending Act ( TILA ), and requires escrw r impund accunts fr certain cnsumer credit transactins. In General. A creditr in a cnsumer credit transactin that is secured by a first lien n the cnsumer s principal dwelling is required t establish, befre the cnsummatin f the transactin, an escrw r impund accunt fr the payment f taxes, hazard insurance, fld insurance, mrtgage insurance, grund rents, and any ther peridic payment relating t the prperty r the lan ( escrw accunt ). The escrw accunt requirement des 4 Attrney Advertising

5 nt apply t reverse mrtgages r t pen-end credit plans. There are varius ther exceptins discussed belw. This is very similar t an existing Federal Reserve Bard ( Bard ) regulatin at 12 C.F.R (b)(3). Hwever, while 129D applies t all cnsumer credit transactins secured by first liens n principal dwellings, the Bard s existing regulatin applies nly t a higher-priced mrtgage lan that is a first lien n a cnsumer s principal dwelling. Cnsumer Credit. Cnsumer credit means credit that is ffered r extended t a cnsumer primarily fr persnal, family r husehld purpses. See 12 C.F.R (a)(12) and Paragraph 226.2(a)(12)-1 f the Regulatin Z Cmmentary. An extensin f credit primarily fr business, cmmercial r agricultural purpses, and an extensin f credit t a crpratin r ther brrwer that is nt a natural persn, are exempt. See 12 C.F.R (a) and Paragraphs f the Regulatin Z Cmmentary. Principal Dwelling. A dwelling means a residential structure that cntains 1-4 units, whether r nt the structure is attached t real prperty. Examples include cndminium units, cperative units, mbile hmes, and trailers r bats used as residences. See 12 C.F.R (a)(19) and Paragraphs 226.2(a)(19)-1-3 f the Regulatin Z Cmmentary. Fr this purpse, Paragraph (b)(3)(i)-1 f the Regulatin Z Cmmentary indicates that principal dwelling will be defined by reference t the definitins in Paragraphs 226.2(a)(19), 226.2(a)(24)-3, (a)(1)-5, 6 and (a)(1)-3, 4 f the Regulatin Z Cmmentary. The basic rule is that a persn can have nly ne principal dwelling at a time, thereby excluding vacatin r secnd hmes. If a cnsumer buys r builds a new dwelling that will becme his/her principal dwelling within ne year r upn the cmpletin f cnstructin, the new dwelling is cnsidered the principal dwelling fr purpses f applying the definitin t a particular transactin. Hwever, if the cnsumer acquires r cnstructs a new principal dwelling, any lan secured by the current principal dwelling is subject t the TILA/Regulatin Z right f rescissin. When Required. Sectin 129D(b) identifies the exclusive circumstances under which an escrw accunt may be required fr a real prperty sale cntract r lan secured by a first lien n the cnsumer s principal dwelling, as fllws: When the escrw accunt is required by federal r state law. Sme state laws permit, but d nt require, escrw accunts fr certain lans. See, e.g., Califrnia Civil Cde 2954, which allws, but des nt require, the impsitin f escrw accunts under seven defined circumstances. This type f state law wuld nt be cvered by this mandatry escrw accunt requirement. Hwever, even when an escrw accunt is nt mandatry under 129D, 129D allws the lender r servicer t require an escrw accunt in its discretin, as prvided in a cntract between the parties. See 129D(f), discussed belw. Thus, whenever this Califrnia statute allws the lender t impse an escrw accunt, the lender may d s, assuming that this is prvided fr in its cntract with the brrwer. When the lan is made, guaranteed, r insured by a state r federal gvernmental lending r insuring agency. An example wuld be certain FHA lan prgrams. When the riginal principal amunt f the transactin is less than r equal t the applicable Freddie Mac cnfrming lan limit, and the Annual Percentage Rate ( APR ) will exceed the Average Prime Offer Rate by 1.5 r mre percentage pints. 5 Attrney Advertising

6 The Average Prime Offer Rate is defined in 129C f TILA, as amended by the Ddd-Frank Act, t mean the average prime ffer rate fr a cmparable transactin as f the date n which the interest rate is set, as published by the Bard. The Bard s existing regulatin fr higher-priced mrtgage lans defines Average Prime Offer Rate in mre detail at 12 C.F.R (a)(2) and Paragraph (a)(2) f the Regulatin Z Cmmentary. (There is a similar definitin in Regulatin C at 12 C.F.R (a)(12)(ii) and Cmment 203.4(a)(12)(ii)-1 f the Regulatin C Cmmentary.) Infrmatin regarding the Bard s publicatin f the Average Prime Offer Rate is set frth at Paragraph (a)(2)-4 f the Regulatin Z Cmmentary. There is n explanatin f hw a creditr determines when the interest rate is set fr this purpse. There are analgus cncepts detailed in Paragraph (a)(2)-3 f the Regulatin Z Cmmentary fr higher-priced mrtgage lans and in Regulatin C, Appendix A, at I.G.2., and these generally refer t the last date that the interest rate is lcked r set befre cnsummatin. The Bard may emply the same principles here. When the riginal principal amunt f the transactin is greater than the applicable Freddie Mac cnfrming lan limit, and the APR will exceed the Average Prime Offer Rate by 2.5 r mre percentage pints. See abve fr a discussin f the Average Prime Offer Rate. The tests based n the cmparisn f the APR and the Average Prime Offer Rate are different than the Bard s current test fr a higher-priced mrtgage lan. The current test treats a lan as a higherpriced mrtgage lan if the APR will exceed the Average Prime Offer Rate by 1.5 r mre percentage pints fr a first lien, r by 3.5 r mre percentage pints fr a subrdinate lien. See 12 C.F.R (a)(1). Hwever, n August 16, 2010, the Bard issued a prpsal t amend its mandatry escrw accunt requirement set frth at (b)(3) f Regulatin Z. Under the prpsed amendment, a first lien lan that is a jumb lan that is, a lan with a principal balance at cnsummatin that exceeds the maximum principal bligatin in effect as f the date that the interest rate is set fr the lan t be eligible fr purchase by Freddie Mac will be subject t the mandatry escrw accunt rule nly if the APR exceeds the Average Prime Offer Rate fr a cmparable transactin as f the date that the interest rate is set by 2.5% r mre. If put int final frm, the Bard s prpsal will cnfrm the mandatry escrw accunt rule fr first lien higher-priced mrtgage lans in Regulatin Z t the rule mandated by 1461 f the Ddd-Frank Act. Fr a mre detailed discussin relating t the Bard s prpsal, see When required by regulatin. This presumably refers t a regulatin f the Bard. Exemptins. Sectin 129D(c) authrizes the Bard t exempt a creditr frm the mandatry escrw accunt requirement if the creditr: (i) perates predminantly in rural r underserved areas; (ii) tgether with its affiliates, des nt have annual mrtgage lan riginatins that exceed a threshld t be set by the Bard; (iii) retains its mrtgage lans in prtfli; and (iv) meets any asset size r ther criteria that the Bard sets. This exceptin is s narrw that it was likely designed t fit a particular creditr r small grup f creditrs. This exceptin may be designed fr the same creditr(s) that are given the benefits f the special balln payment exemptin frm the definitin f a qualified mrtgage in 1412 f the Ddd-Frank Act. This is discussed in mre detail in ur separate mrtgage riginatin user guide that was previusly issued. 6 Attrney Advertising

7 Duratin f Mandatry Escrw r Impund Accunt. If the escrw accunt is required by the new statute, then it must be kept in place fr a minimum f five years. See 129D(d). There are fur exceptins: The brrwer has sufficient equity in the prperty s that he/she is n lnger required t maintain private mrtgage insurance. Presumably, this is a reference t the prvisins in the Hmewners Prtectin Act f 1998 ( HPA ) that gvern when private mrtgage insurance may be terminated r cancelled (r, if applicable, when private mrtgage insurance may be terminated under a prtected state law that allws earlier terminatin r terminatin when a higher principal balance is achieved). See 12 U.S.C. 4902, In general, the HPA allws a mrtgagr t request cancellatin f private mrtgage insurance when the cancellatin date is reached (e.g., when the lan is scheduled t reach, r des reach, a lan-t-value rati ( LTV ) f 80%, based n the riginal value), and requires terminatin f private mrtgage insurance when the terminatin date is reached (e.g., when the lan is first scheduled t reach a LTV f 78%, based n the riginal value). If the private mrtgage insurance is nt sner cancelled r terminated, it must nt be permitted t cntinue beynd the first day f the mnth immediately fllwing the date that is the midpint f the amrtizatin perid f the lan (i.e., the pint in time that is halfway thrugh the perid that begins n the first day f the amrtizatin perid established when the lan is cnsummated and ending upn the cmpletin f the entire perid when the mrtgage is scheduled t be amrtized). There are varius cnditins and exceptins. See 12 U.S.C The brrwer is delinquent. The brrwer therwise has nt cmplied with the terms f the lan r real prperty sale cntract, as established in the Bard s rules. Presumably, the Bard s rules will identify the type f defaults that are sufficient s as t relieve the lan frm its escrw accunt maintenance bligatin. Cmpare: 129 f TILA, as amended by the Ddd- Frank Act, which allws acceleratins f high-cst mrtgages when there has been a material vilatin f a prvisin f the lan dcuments ther than the payment schedule. The mrtgage has been terminated. The five-year perid fr mandatry escrws is characterized as a minimum perid, suggesting that the Bard may required a lnger perid by regulatin r that a creditr may require a lnger perid under the terms f the lan cntract. In cntrast, the Bard s existing mandatry escrw accunt rule fr higher-priced mrtgage lans authrizes the creditr r servicer t cancel the escrw accunt if the cnsumer requests cancellatin in a dated written request that is received n earlier than 365 days after cnsummatin f the lan. See 12 C.F.R (b)(3)(iii). Limited Exemptins fr Lans Secured by Shares in a Cperative r in Which an Assciatin Must Maintain a Master Insurance Plicy. Sectin 129D(e) prvides tw limited exemptins frm the mandatry escrw accunt requirement. First, an escrw accunt need nt be established fr lans secured by shares in a cperative. This is the same as the exemptin fund in the Bard s existing rule fr higher-priced mrtgage lans. See 12 C.F.R (b)(ii)(A). The wrding f this exemptin need nt be established indicates that the creditr can nevertheless require escrw accunts fr lans secured by shares in a cperative. 7 Attrney Advertising

8 Secnd, insurance premiums need nt be included in an escrw accunt fr a lan secured by dwellings r units where the brrwer must jin an assciatin as a cnditin f wnership, and the assciatin has an bligatin t the wners t maintain a master insurance plicy fr the dwellings r units. This is brader than the exemptin fund in the Bard s existing rule fr higher-priced mrtgage lans, which is limited t cndminium units. See 12 C.F.R (b)(ii)(B). The new prvisin in 129D(e) wuld als apply t ther types f wnership, such as certain planned unit develpments. Nte that this exemptin is limited t prperty insurance. If an escrw accunt is therwise required, it will still be required fr prperty taxes, mrtgage insurance, and ther assessments. This is cnsistent with the Bard s existing rule fr higher-priced mrtgage lans. See Paragraph (b)(3)(ii)(B)-1 f the Regulatin Z Cmmentary. If the insurance exemptin is utilized, the creditr r servicer shuld determine that the master insurance plicy meets its requirements and prvides sufficient cverage. The wrding f this exemptin need nt be included indicates that the creditr has the discretin t require that insurance be included in the escrw accunts fr these lans. Clarificatin n Escrw Accunts fr Lans Nt Meeting Statutry Test. If an escrw accunt is nt mandatry as set frth abve, 129D(f) clarifies that 129D des nt prhibit the impsitin f an escrw accunt in any f the fllwing circumstances: On terms mutually agreeable t the parties t the lan. This indicates that the parties t the lan can vluntarily agree t establish an escrw accunt. The reference t the parties t the lan presumably includes the riginal creditr, any assignee f the lan, and any lan servicer. Prir t the establishment f a vluntary escrw accunt, it wuld be prudent t prvide a disclsure t the brrwer explaining that the escrw accunt is nt required, and t btain (i) the brrwer s written acknwledgment f that fact, and (ii) the brrwer s written cnsent t the establishment f the vluntary escrw accunt. The Bard s existing regulatin fr higher-priced mrtgage lans is silent regarding the establishment f vluntary escrw accunts, but nthing in that regulatin wuld preclude vluntary escrw accunts. Many state laws that limit the circumstances under which a creditr may impse an escrw accunt cntain a similar exceptin fr vluntary escrw accunts, althugh these ften require certain disclsures t the brrwer. See, e.g., Califrnia Civil Cde When the creditr r servicer, in its discretin, requires the establishment f an escrw accunt. The cntract between the lender r servicer and the brrwer must prvide fr the escrw accunt. Hwever, if state r ther applicable law prhibits the establishment f the escrw accunt (and the escrw accunt is nt required by 129D), then the escrw accunt may nt be established. Fr example, Califrnia Civil Cde 2954 allws, but des nt require, the establishment f an escrw accunt in seven situatins. The Califrnia statute des nt allw escrw accunts in any ther situatins. If the escrw accunt is nt required by 129D, a creditr subject t the Califrnia statute may require an escrw accunt in these seven situatins (assuming that the cntract between the parties s prvides), but n thers. As nted, the cntract between the lender r servicer and the brrwer must prvide fr the escrw accunt. The standard Fannie Mae/Freddie Mac mrtgage instrument cntains a prvisin that requires 8 Attrney Advertising

9 the brrwer t make payments int an escrw accunt, unless this is waived by the lender. Even if the mrtgage instrument des nt cntain escrw accunt prvisins, a stand-alne escrw accunt agreement shuld be sufficient. Under the escrw rules fr fld insurance that apply t regulated lending institutins. Fr example, the fld insurance regulatin f the Office f the Cmptrller f the Currency ( OCC ) states that if a bank requires that any taxes, insurance premiums, r ther items be escrwed fr a lan secured by residential imprved real estate r a mbile hme, and the lan was made, increased, extended r renewed n r after Octber 1, 1996, then fld insurance premiums als must be escrwed. See 12 C.F.R Administratin f Mandatry Escrw r Impund Accunts. Sectin 129D(g) gverns the administratin f mandatry escrw accunts. These prvisins d nt apply t vluntary escrw accunts, but state law may impse ther administrative requirements. See, e.g., Califrnia Civil Cde 2955, which gverns the investment f escrw funds. In General. Escrw accunts must be maintained in a federally insured depsitry institutin, unless Title XIV r the Bard s regulatins prvide therwise. Title XIV des nt prvide therwise, and the Bard s regulatins are unlikely t prvide therwise. See 129D(g)(1). If a lan servicer maintains tax and insurance escrw funds in an mnibus accunt at a depsitry institutin whse accunts are insured by the Federal Depsit Insurance Crpratin ( FDIC ), the depsit insurance is gverned by 12 C.F.R (a), (d). This sectin states that, fr accunts maintained by a mrtgage servicer in a custdial r ther fiduciary capacity, which are cmprised f payments by mrtgagrs f taxes and insurance premiums, the funds f each individual mrtgagr are added tgether with ther funds held by r fr the benefit f the same mrtgagr at the same depsitry institutin, and the ttal amunt is insured t the standard maximum depsit insurance amunt (currently, $250,000). Administratin. Under 129D(g)(2), a mandatry escrw accunt must be administered in accrdance with: RESPA (12 U.S.C. 2605(g), 2609, 2610) and the U.S. Department f Husing and Urban Develpment s ( HUD ) Regulatin X (24 C.F.R , , (g)). This prvides a brad framewrk fr the administratin f escrw accunts, including limitatins n the amunt f escrw payments; timely disbursements; escrw analyses; transfers f servicing; shrtages, surpluses, and deficiency requirements; escrw accunt statements; requirements fr timely payments; recrdkeeping; penalties; and discretinary payments. In additin, it is impermissible t charge a fee fr the preparatin r distributin f escrw accunt statements. The Fld Disaster Prtectin Act f 1973 (42 U.S.C. 4012a(d)) and the regulatins prescribed under that Act. This gverns the mandatry escrwing f fld insurance premiums if any ther items are required t be escrwed. See, e.g., the OCC regulatin at 12 C.F.R. 22.5, discussed in mre detail abve. The applicable laws f the state in which the real prperty securing the transactin is lcated. See, e.g., Califrnia Civil Cde 2955(c), which requires a lender that depsits escrw funds in an ut-f-state depsitry institutin t make available in Califrnia the bks, recrds, and files pertaining t the accunts t the apprpriate state regulatry department r agency, r pay the reasnable expenses fr travel and ldging incurred by the regulatry department r agency in rder t cnduct an examinatin at an ut-f-state lcatin. Hwever, t the extent that the state law is incnsistent with 129D, it wuld be preempted. 9 Attrney Advertising

10 Fr example, Califrnia Civil Cde 2955(a) authrizes a lender t place escrw funds in nndepsitry institutin investments in Califrnia, which wuld be preempted given its incnsistency with 129D(g)(1), discussed abve. Applicability f Payment f Interest. The creditr is required t pay interest n the escrw accunt funds if this is required by applicable state r federal law. Interest is t be paid in the manner prescribed by applicable state r federal law. See 129D(g)(3). Many states have laws that require the payment f interest n escrw accunt funds. See, e.g., Califrnia Civil Cde (a), which requires the payment f at least 2 percent simple interest per annum. Sectin 129D(g)(3) als requires that the interest be paid in the manner as prescribed by applicable state r federal law. Fr example, Califrnia Civil Cde (a) states that [s]uch interest shall be credited t the brrwer s accunt annually r upn terminatin f such accunt, whichever is earlier. Further, Califrnia Civil Cde (b) prhibits the impsitin f any fee r charge in cnnectin with the maintenance r disbursement f [escrw] mney... that will result in an interest rate f less than 2 percent per annum being paid n the mneys s received. Fr many years, state laws requiring the payment f interest n escrw accunt funds have been preempted by the regulatins f the Office f Thrift Supervisin ( OTS ) and OCC with respect t federal savings banks and natinal banks, respectively. See 12 C.F.R (b)(6) (OTS) and 12 C.F.R. 34.4(a)(6) (OCC). See als, e.g., OTS Chief Cunsel Opinin P (Octber 6, 2003). Given the new federal preemptin rules relating t OCC and OTS regulatins set frth in 1044 and 1046 f the Ddd-Frank Act, it is n lnger prudent t rely upn the preemptive effects f these regulatins. The preemptin issues are discussed in mre detail in the federal preemptin user guide that we have issued. The requirement t pay interest n escrw accunt funds as required by applicable state and federal law is, by the terms f 129D(g)(3), limited t escrw accunts that are subject t this sectin. This clearly cvers escrw accunts that are mandatry under 129D. Hwever, 129D(f) clarifies that 129D des nt preclude the establishment f nn-mandatry escrw accunts, raising the questin f whether this reference is sufficient t cause nn-mandatry escrw accunts t als be treated as subject t this sectin. Because 129D(f) des nt actually regulate nn-mandatry escrw accunts, the better reading is that nn-mandatry escrw accunts are nt subject t this sectin, and that 129D(g)(3) is limited t escrw accunts that must be established in accrdance with 129D. Hwever, ther state and federal laws may still directly require the payment f interest n any nn-mandatry escrw accunts. Penalty Crdinatin with RESPA. Sectin 129D(g)(4) is designed t preclude the payment f duplicative penalties fr vilatins f 129D and RESPA. Specifically, 129D(g)(4) states that if a persn has vilated RESPA r HUD Regulatin X and has paid any fine, civil mney penalties, r ther damages as a result, the same actin r missin that gave rise t the RESPA/Regulatin X vilatin shall nt give rise t any additinal fine, civil mney penalties, r ther damages under 129D, unless the actin r missin als cnstitutes a direct vilatin f 129D. A vilatin f the RESPA/Regulatin X escrw accunt rules subjects a servicer t penalties. See 12 U.S.C. 2609(d) and 24 C.F.R (m), (n). The actins r missins that cnstitute a vilatin f the RESPA/Regulatin X escrw accunt rules wuld als vilate 129D(g)(2), which states that an escrw accunt must be administered in accrdance with RESPA and Regulatin X. Sectin 129D(g)(4) precludes the recvery f any additinal fine, civil mney penalties, r ther damages under 129D fr that vilatin. Hwever, 129D(g)(4) des nt preclude the recvery f any additinal fine, civil mney penalties, r ther damages fr an actin r missin that als cnstitutes a direct vilatin f 129D. 10 Attrney Advertising

11 This wuld include, fr example, a failure t maintain an escrw accunt fr at least five years, as required by 129D(d). Disclsures Relating t Mandatry Escrw r Impund Accunt. If an escrw accunt is mandatry under 129D(b), then the creditr is required t prvide a written disclsure t the cnsumer. The disclsure must be prvided at least three business days befre the cnsummatin f the transactin. Hwever, the Bard may establish a different timeframe in its implementing regulatins. See 129D(h). Cnsummatin ccurs at the time that that a cnsumer becmes cntractually bligated n a credit transactin. See 12 C.F.R (a)(13). This typically ccurs when the cnsumer signs his/her lan dcuments. Fr purpses f 129D(h), a business day means a day n which the creditr s ffices are pen t the public fr carrying n substantially all f its business functins. See 12 C.F.R (a)(6). In this regard, Paragraph 226.2(a)(6)-1 f the Regulatin Z Cmmentary prvides as fllws: Activities that indicate that the creditr is pen fr substantially all f its business functins include the availability f persnnel t make lan disbursements, t pen new accunts, and t handle credit transactin inquiries. Activities that indicate that the creditr is nt pen fr substantially all f its business functins include a retailer s merely accepting credit cards fr purchases r a bank s having its custmer-service windws pen nly fr limited purpses such as depsits and withdrawals, bill paying, and related services. Nte that this disclsure is required nly fr mandatry escrws under 129D(b). The disclsure is nt required fr nn-mandatry escrw accunts, althugh ther laws may require certain disclsures fr thse accunts. While the statute states that the disclsure must be written, any written disclsure required by TILA can be prvided electrnically in accrdance with the Electrnic Signatures in Glbal and Natinal Cmmerce Act ( E-SIGN Act ), 15 U.S.C et seq. Als see 12 C.F.R (a)(1)(iii) and (a)(1). If a disclsure (fr purpses f the E-SIGN Act, a recrd ) nrmally must be prvided in writing, it can instead be prvided electrnically if the cnsumer has affirmatively cnsented t electrnic delivery and has nt withdrawn that cnsent. Prir t cnsenting, the cnsumer must be prvided with a clear and cnspicuus statement: (i) infrming the cnsumer f (A) any right r ptin t receive the recrd in a paper r nn-electrnic frm, and (B) the right t withdraw his/her cnsent t electrnic delivery, plus any related cnditins, cnsequences r fees; (ii) infrming the cnsumer whether the cnsent applies nly t a particular transactin r t identified categries f recrds; (iii) describing the prcedures the cnsumer must use t withdraw his/her cnsent and t update infrmatin needed t cntact the cnsumer electrnically; and (iv) infrming the cnsumer hw, after the cnsent, he/she can btain a paper cpy f the electrnic recrd upn request, and whether any fee will be charged fr the paper cpy. Als, prir t cnsenting, the cnsumer must receive a statement f the hardware and sftware requirements fr access t and retentin f the electrnic recrds, and the cnsumer must cnsent, r cnfirm his/her cnsent, electrnically in a manner that reasnably demnstrates that he/she can access infrmatin in the electrnic frm in which the recrds in questin will be prvided. If, after cnsent is given, a change in the hardware r sftware requirements creates a material risk that the cnsumer will nt be able t access r retain the recrds, it is necessary t prvide the cnsumer with a statement f the revised requirements, and a statement f the right t withdraw the cnsent withut fees and withut any impsitin f cnditins r cnsequences nt disclsed as set frth abve. At that pint, an electrnic cnsent must be btained nce again as described abve. See 15 U.S.C. 7001(c). The infrmatin that must be disclsed includes the fllwing: The fact that an escrw accunt will be established at cnsummatin f the transactin. 11 Attrney Advertising

12 Fr this purpse, cnsummatin is likely t be interpreted t mean the clsing f the transactin rather than the technical Regulatin Z definitin discussed abve. The amunt that must be prvided at clsing fr the initial funding f the escrw accunt. The estimated amunt f the varius escrw items that will be required fr the first year f the transactin. These are t be based, as apprpriate, upn the taxable assessed value f the real prperty (including any imprvements t be cnstructed, whether r nt financed by the transactin) r the replacement csts f the prperty. This disclsure is in additin t the initial escrw accunt statement that must be prvided t the brrwer at settlement r within 45 days f settlement. See 24 C.F.R (g). The initial escrw accunt statement is t reflect the initial escrw accunt analysis required by 24 C.F.R (c)(2). The calculatin f estimates f disbursements is gverned by 24 C.F.R (c)(7). In general, this subsectin requires the servicer t use actual disbursement numbers if these are knwn t the servicer. If the actual disbursement numbers are unknwn, the servicer is t base the estimated disbursement n the preceding year s charge, r the preceding year s charge as mdified by an amunt nt exceeding the mst recent year s change in the natinal Cnsumer Price Index fr all urban cnsumers. In the case f unassessed new cnstructin, the servicer is t base the estimated disbursements n the assessment f cmparable residential prperty in the market area. There wuld be an bvius risk f cnsumer cnfusin if the numbers in the 129D(h) disclsure did nt square up with the numbers in the initial escrw accunt statement. Hpefully, the Bard s regulatins fr 129D(h) will require calculatins that are cnsistent with thse mandated by the initial escrw accunt analysis required by 24 C.F.R (c)(2). The estimated mnthly amunt t be escrwed. See cmments immediately abve regarding cnsistency with the initial escrw accunt analysis required by 24 C.F.R (c)(2). The fact that if the cnsumer subsequently terminates the escrw accunt, he/she will be required t pay the varius escrw items directly (unless a new escrw accunt is established). The initial escrw accunt must be established fr a minimum f five years. See 129D(d), discussed abve. Any ther infrmatin required by the Bard t prtect the cnsumer. Definitins. Tw definitins are prvided by 129D(i), as fllws. Fld Insurance. This term is defined by reference t the fld insurance cverage prvided under the Natinal Fld Insurance Act f Hazard Insurance. This term means hazard insurance, casualty insurance, hmewners insurance, r similar term, as defined under state law in the state where the real prperty securing the transactin is lcated. Since 129D als applies t dwellings that are nt real prperty (e.g., mbile hmes), this definitin creates sme ambiguity regarding the definitin f hazard insurance fr nn-real prperty lans. The Bard s regulatins shuld reslve this ambiguity, mst likely by referencing the definitin under applicable state law fr these lans as well. 12 Attrney Advertising

13 Des hazard insurance include insurance that is nt required by the lender as a cnditin f btaining credit (e.g., earthquake insurance r debt-prtectin insurance)? The statute des nt answer this questin. Under the Bard s existing regulatin fr higher-priced mrtgage lans, escrw accunts are nt required fr such ptinal insurance cverages. See Paragraph (b)(3)(i)-3 f the Regulatin Z Cmmentary. The Bard is likely t fllw the same apprach in its regulatins under 129D. Exemptins and Mdificatins. Sectin 1461(b) authrizes the Bard t issue rules that revise, add t, r subtract frm the criteria fr requiring escrw accunts under 129D(b). T d s, the Bard must determine that this is in the interests f cnsumers and in the public interest. Sectin Disclsure Ntice Required fr Cnsumers Wh Waive Escrw Services Sectin 129D f the Truth in Lending Act (as added by sectin 1461) is amended by adding at the end the fllwing new subsectin: `(j) Disclsure Ntice Required fr Cnsumers Wh Waive Escrw Services- `(1) IN GENERAL- If-- `(A) an impund, trust, r ther type f accunt fr the payment f prperty taxes, insurance premiums, r ther purpses relating t real prperty securing a cnsumer credit transactin is nt established in cnnectin with the transactin; r `(B) a cnsumer chses, and prvides written ntice t the creditr r servicer f such chice, at any time after such an accunt is established in cnnectin with any such transactin and in accrdance with any statute, regulatin, r cntractual agreement, t clse such accunt, the creditr r servicer shall prvide a timely and clearly written disclsure t the cnsumer that advises the cnsumer f the respnsibilities f the cnsumer and implicatins fr the cnsumer in the absence f any such accunt. `(2) DISCLOSURE REQUIREMENTS- Any disclsure prvided t a cnsumer under paragraph (1) shall include the fllwing: `(A) Infrmatin cncerning any applicable fees r csts assciated with either the nn-establishment f any such accunt at the time f the transactin, r any subsequent clsure f any such accunt. `(B) A clear and prminent statement that the cnsumer is respnsible fr persnally and directly paying the nn-escrwed items, in additin t paying the mrtgage lan payment, in the absence f any such accunt, and the fact that the csts fr taxes, insurance, and related fees can be substantial. `(C) A clear explanatin f the cnsequences f any failure t pay nn-escrwed items, including the pssible requirement fr the frced placement f insurance by the creditr r servicer and the ptentially higher cst (including any ptential cmmissin payments t the servicer) r reduced cverage fr the cnsumer in the event f any such creditr-placed insurance. `(D) Such ther infrmatin as the Bard determines necessary fr the prtectin f the cnsumer.'. Analysis. Sectin 1462 adds a new subjectin (j) t 129D fr cnsumers wh waive an escrw accunt. In General. 129D(j) applies in tw situatins. First, where an escrw accunt is nt established fr a cnsumer credit transactin secured by real prperty. Secnd, where an escrw accunt was established fr a cnsumer credit transactin secured by real prperty, but the cnsumer is chsing t cancel that accunt in accrdance with applicable law r a cntract (and gives written ntice f the cancellatin). In either instance, the creditr r servicer is required t prvide a timely and clearly written disclsure that tells the cnsumer his/her respnsibilities and the implicatins f nt having an escrw accunt. This new sectin reflects Cngress belief that escrw accunts are gd. Where an escrw accunt is nt required in accrdance with 129D(b) f TILA (discussed abve), Cngress wishes the cnsumer t have sufficient infrmatin regarding the ramificatins f waiving r terminating an escrw accunt. The scpe f 129D(j) is different than the scpe f 129D(b). While 129D(j) cvers a cnsumer credit transactin secured by any lien n real prperty, 129D(b) cvers a cnsumer credit transactin secured by a first lien n a principal dwelling. (Dwellings can include bth real prperty and ther prperty, such as mbile hmes.) In additin, 129D(j) applies t bth clsed-end and pen-end credit, as well as reverse mrtgages. 13 Attrney Advertising

14 In cntrast, 129D(b) excludes bth pen-end credit and reverse mrtgages. Thus, depending upn the transactin, either 129D(b) r 129D(j), r bth, will apply. In ther instances, neither sectin will apply. The Bard s implementing regulatins are likely t prvide mre detail regarding the timing f this new disclsure. Disclsure Requirements. The new disclsure must include the fllwing: Infrmatin regarding any fees r csts invlved in the nn-establishment f an escrw accunt r the clsing f the escrw accunt. Sme lenders charge an escrw accunt waiver fee t brrwers wh d nt establish escrw accunts. Unless (i) the lender has the right under applicable state r federal law t require an escrw accunt in the first instance, and (ii) applicable state r federal law des nt mandate the establishment f an escrw accunt, it wuld nt appear that the lender has a legal basis fr impsing such a fee (unless applicable state r federal law prvides therwise). A clear and prminent statement that the cnsumer must persnally and directly pay the varius nnescrwed items if an escrw accunt is nt established, and that this is in additin t his/her regular mrtgage lan payment. In additin, there must be a disclsure that the cst fr the varius items can be substantial. Regulatin Z disclsures generally must meet a clear and cnspicuus standard. See, e.g., 12 C.F.R (a)(1)(i) and (a)(1). The Bard will need t clarify what, if anything, mre is required t meet the clear and prminent standard mandated by this subsectin. A clear explanatin f the cnsequences f failing t pay the nn-escrwed items. This includes the pssible frce placement f insurance and the ptentially higher csts (including servicer cmmissins) and/r reduced cverage f the frce-placed insurance. The cnsequences f failing t pay the nn-escrwed items will depend upn the nature f thse items. Fr example, the cnsequences f failing t pay assessments may be a lien n the prperty while the cnsequences f failing t pay mrtgage insurance may be a freclsure f the lan. In sme instances, the cnsequences f failing t pay a nn-escrwed item will differ frm ne jurisdictin t the next. Fr example, while the failure t pay prperty taxes rdinarily results in a tax lien n the prperty, in many jurisdictins it may als result in the assessment f interest and penalties. Any ther infrmatin that the Bard deems necessary t prtect the cnsumer. Sectin Real Estate Settlement Prcedures Act f 1974 Amendments (a) Servicer Prhibitins- Sectin 6 f the Real Estate Settlement Prcedures Act f 1974 (12 U.S.C. 2605) is amended by adding at the end the fllwing new subsectins: `(k) Servicer Prhibitins- `(1) IN GENERAL- A servicer f a federally related mrtgage shall nt-- `(A) btain frce-placed hazard insurance unless there is a reasnable basis t believe the brrwer has failed t cmply with the lan cntract's requirements t maintain prperty insurance; `(B) charge fees fr respnding t valid qualified written requests (as defined in regulatins which the Bureau f Cnsumer Financial Prtectin shall prescribe) under this sectin; `(C) fail t take timely actin t respnd t a brrwer's requests t crrect errrs relating t allcatin f payments, final balances fr purpses f paying ff the lan, r aviding freclsure, r ther standard servicer's duties; `(D) fail t respnd within 10 business days t a request frm a brrwer t prvide the identity, address, and ther relevant cntact infrmatin abut the wner r assignee f the lan; r 14 Attrney Advertising

15 `(E) fail t cmply with any ther bligatin fund by the Bureau f Cnsumer Financial Prtectin, by regulatin, t be apprpriate t carry ut the cnsumer prtectin purpses f this Act. `(2) FORCE-PLACED INSURANCE DEFINED- Fr purpses f this subsectin and subsectins (l) and (m), the term `frce-placed insurance' means hazard insurance cverage btained by a servicer f a federally related mrtgage when the brrwer has failed t maintain r renew hazard insurance n such prperty as required f the brrwer under the terms f the mrtgage. `(l) Requirements fr Frce-placed Insurance- A servicer f a federally related mrtgage shall nt be cnstrued as having a reasnable basis fr btaining frce-placed insurance unless the requirements f this subsectin have been met. `(1) WRITTEN NOTICES TO BORROWER- A servicer may nt impse any charge n any brrwer fr frce-placed insurance with respect t any prperty securing a federally related mrtgage unless-- `(A) the servicer has sent, by first-class mail, a written ntice t the brrwer cntaining-- `(i) a reminder f the brrwer's bligatin t maintain hazard insurance n the prperty securing the federally related mrtgage; `(ii) a statement that the servicer des nt have evidence f insurance cverage f such prperty; `(iii) a clear and cnspicuus statement f the prcedures by which the brrwer may demnstrate that the brrwer already has insurance cverage; and `(iv) a statement that the servicer may btain such cverage at the brrwer's expense if the brrwer des nt prvide such demnstratin f the brrwer's existing cverage in a timely manner; `(B) the servicer has sent, by first-class mail, a secnd written ntice, at least 30 days after the mailing f the ntice under subparagraph (A) that cntains all the infrmatin described in each clause f such subparagraph; and `(C) the servicer has nt received frm the brrwer any demnstratin f hazard insurance cverage fr the prperty securing the mrtgage by the end f the 15-day perid beginning n the date the ntice under subparagraph (B) was sent by the servicer. `(2) SUFFICIENCY OF DEMONSTRATION- A servicer f a federally related mrtgage shall accept any reasnable frm f written cnfirmatin frm a brrwer f existing insurance cverage, which shall include the existing insurance plicy number alng with the identity f, and cntact infrmatin fr, the insurance cmpany r agent, r as therwise required by the Bureau f Cnsumer Financial Prtectin. `(3) TERMINATION OF FORCE-PLACED INSURANCE- Within 15 days f the receipt by a servicer f cnfirmatin f a brrwer's existing insurance cverage, the servicer shall-- `(A) terminate the frce-placed insurance; and `(B) refund t the cnsumer all frce-placed insurance premiums paid by the brrwer during any perid during which the brrwer's insurance cverage and the frce-placed insurance cverage were each in effect, and any related fees charged t the cnsumer's accunt with respect t the frce-placed insurance during such perid. `(4) CLARIFICATION WITH RESPECT TO FLOOD DISASTER PROTECTION ACT- N prvisin f this sectin shall be cnstrued as prhibiting a servicer frm prviding simultaneus r cncurrent ntice f a lack f fld insurance pursuant t sectin 102(e) f the Fld Disaster Prtectin Act f `(m) Limitatins n Frce-placed Insurance Charges- All charges, apart frm charges subject t State regulatin as the business f insurance, related t frce-placed insurance impsed n the brrwer by r thrugh the servicer shall be bna fide and reasnable.'. (b) Increase in Penalty Amunts- Sectin 6(f) f the Real Estate Settlement Prcedures Act f 1974 (12 U.S.C. 2605(f)) is amended-- (1) in paragraphs (1)(B) and (2)(B), by striking `$1,000' each place such term appears and inserting `$2,000'; and (2) in paragraph (2)(B)(i), by striking `$500,000' and inserting `$1,000,000'. (c) Decrease in Respnse Times- Sectin 6(e) f the Real Estate Settlement Prcedures Act f 1974 (12 U.S.C. 2605(e)) is amended-- (1) in paragraph (1)(A), by striking `20 days' and inserting `5 days'; (2) in paragraph (2), by striking `60 days' and inserting `30 days'; and (3) by adding at the end the fllwing new paragraph: `(4) LIMITED EXTENSION OF RESPONSE TIME- The 30-day perid described in paragraph (2) may be extended fr nt mre than 15 days if, befre the end f such 30-day perid, the servicer ntifies the brrwer f the extensin and the reasns fr the delay in respnding.'. (d) Prmpt Refund f Escrw Accunts Upn Payff- Sectin 6(g) f the Real Estate Settlement Prcedures Act f 1974 (12 U.S.C. 2605(g)) is amended by adding at the end the fllwing new sentence: `Any balance in any such accunt that is within the servicer's cntrl at the time the lan is paid ff shall be prmptly returned t the brrwer within 20 business days r credited t a similar accunt fr a new mrtgage lan t the brrwer with the same lender.'. 15 Attrney Advertising

16 Analysis. Sectin 1463 mdifies 6 f RESPA t impse new respnsibilities n lan servicers relating t frceplaced insurance, qualified written requests, respnses t brrwers, and refunds f escrw funds upn lan payff. The penalties under 6 have als been increased. Servicer Prhibitins. Sectin 1463(a) adds a new 6(k) f RESPA, which establishes a list f prhibited actins fr servicers f federally related mrtgage lans. Sectin 6(k) applies t servicers f federally related mrtgage lans, a term that includes first lien lans, subrdinate lien lans, clsed-end lans, and pen-end lans. See 24 C.F.R The term excludes lans fr a business, cmmercial, r agricultural purpse (as defined in Regulatin Z at 12 C.F.R (a)(1)); temprary financing, such as a cnstructin lan f less than tw years (but the exemptin des nt apply if the lan is used fr, r may be cnverted t, permanent financing by the same lender r is used t finance a transfer f title t the first user) r bridge lan; lan n vacant land, unless a structure r manufactured hme will be cnstructed r placed n the prperty within tw years, r a lan n a structure r manufactured hme t be placed n the prperty will be secured by a lien n the prperty; any assumptin in which the lender des nt have the right t expressly apprve a subsequent persn as the brrwer n the lan; a lan cnversin t different terms that are cnsistent with the riginal mrtgage, s lng as a new nte is nt required; and certain bna fide secndary market transactins (but excluding table-funded transactins). See 24 C.F.R In General. The prhibited actins are as fllws: Frce-Placed Insurance. A servicer may nt frce-place hazard insurance unless there is a reasnable basis t believe that the brrwer has failed t maintain hazard insurance as required by the lan cntract. Whether there is a reasnable basis is gverned by new 6(l) f RESPA, discussed belw. See discussin under Frce-Placed Insurance Defined, belw, regarding what is included in the terms f the cntract. This is undubtedly the same as the lan cntract referenced abve. Fees fr Qualified Written Requests ( QWRs ). A servicer may nt charge fees fr respnding t valid QWRs. The Bureau s regulatins will define a qualified written request. The duty f lan servicers t respnd t QWRs is already gverned by 6(e) f RESPA and HUD Regulatin X at 24 C.F.R (e). Cllectively, the statute and regulatin prvide a detailed set f bligatins relating t the servicer s receipt f QWRs, respnse t QWRs, and prtectin f the brrwer s credit rating. Sectin 6(e) is silent regarding the impsitin f fees fr respnding t QWRs. Sme brrwers (r their lawyers) have rutinely deluged servicers with vluminus and burdensme infrmatin requests styled as QWRs t thwart the cllectin prcess r in an effrt t generate liability fr nn-cmpliance with the QWR rules under 6(f) f RESPA and 24 C.F.R (f). Sme servicers have respnded by impsing fees fr respnding t QWRs. New 6(k) will prhibit thse fees. While the term qualified written request is already defined in 6(e)(1)(B) f RESPA and 24 C.F.R (e)(2), new 6(k) states that the Bureau will define the term in its regulatins. Currently, the QWR prcess is limited by 24 C.F.R (e)(1) t mrtgage servicing lans, which means a federally related mrtgage lan that is secured by a first lien. See 24 C.F.R (a). A mrtgage servicing lan als excludes pen-end lines f credit (e.g., hme equity line plans) cvered by TILA and Regulatin Z, presumably because thse pen-end lines are already subject t a detailed bdy f errr reslutin prcedures (see 16 Attrney Advertising

17 15 U.S.C and 12 C.F.R ). Given that 6(k) is, by its terms, applicable t the mre bradly defined federally related mrtgage lans (see discussin abve), it is pssible that the Bureau will define the term qualified written request in a manner that expands the QWR prcess t all federally related mrtgage lans. Expansin f the QWR prcess t penend lines wuld be particularly burdensme, because this wuld require servicers t cmply with bth the QWR prcess and Regulatin Z s errr reslutin prcedures. Crrectin f Errr Requests. A servicer may nt fail t take timely actin t respnd t a brrwer s request t crrect errrs relating t: (i) allcatin f payments; (ii) final balances fr purpses f lan payffs; (iii) final balances fr purpses f aviding freclsure; r (iv) ther standard servicer s duties. A brrwer s request t crrect any f the freging errrs wuld, if prperly submitted in writing, cnstitute a qualified written request under the existing QWR prcess set frth at 6(e) f RESPA and HUD Regulatin X at 24 C.F.R (e). This subsectin establishes a parallel bligatin t respnd t brrwer inquiries relating t the servicing f the lan. The mst significant differences are (i) the existing QWR prcess is currently limited t mrtgage servicing lans (described abve), whereas this new prcess applies t any federally related mrtgage lan (e.g., including subrdinate lien lans and pen-end hme equity lines) and (ii) the new prcess is nt limited t written requests, suggesting that the servicer will be required t respnd t ral requests. This will be very burdensme fr servicers. It is pssible that the implementing regulatins will establish a streamlined mechanism fr cmpliance with bth the QWR prcess and this new prcess. The implementing regulatins will likely establish specific timeframes fr respnses t brrwer requests under the new prcess. These timeframes are unlikely t be mre generus than the parallel timeframes cntained in 6(e) f RESPA fr respnding t QWRs. The QWR timeframes have been dramatically shrtened by 1463(c) f the Ddd-Frank Act, as discussed belw. Cntact Infrmatin Requests. A servicer may nt fail t respnd within 10 business days t a brrwer request fr the identity, address, and ther relevant cntact infrmatin abut the wner r assignee f the lan. A request fr cntact infrmatin under this new prvisin is unlikely t cnstitute a QWR under 24 C.F.R (e)(2)(i) because the request des nt relate t an alleged errr in the brrwer s accunt r infrmatin relating t the servicing f the lan. Accrdingly, this new prvisin des nt verlap with the QWR prcess. This new requirement has sme lse parallel in 131(g) f TILA, which requires the new creditr hlding a mrtgage lan t prvide a ntice t the cnsumer that cntains, amng ther things, the identity, address, and telephne number f the cvered persn wh wns the mrtgage lan. See 74 Fed. Reg. 60,143, 60,152 (Nvember 20, 2009) and 12 C.F.R (d)(1). 1 Hwever, while the 131(g) ntice must be prvided by the new wner f the lan, the new prcess cntemplated by 6(k) f RESPA will require the servicer t prvide upt-date cntact infrmatin abut the current wner r assignee f the lan. This may be extremely burdensme fr sme servicers, which will nt have this infrmatin readily at hand. Servicers will need t make apprpriate arrangements s that they will have access t this infrmatin. 1 On August 16, 2010, the Bard issued a final rule that requires a disclsure relating t the acquisitin f legal title t a mrtgage lan. See discussin at 17 Attrney Advertising

18 This new prcess is nt limited t written requests fr cntact infrmatin, suggesting that the servicer will be required t respnd t ral requests. This will be very burdensme fr servicers. Under HUD Regulatin X, a business day is defined t mean a day n which the ffices f the business entity are pen t the public fr carrying n substantially all f the entity s business functins. See 24 C.F.R (b). Other Obligatins. A servicer als will be required t cmply with any ther bligatins fund by the Bureau t be apprpriate t carry ut the cnsumer prtectin purpses f RESPA. The Bureau will prescribe these bligatins by regulatin. The cnsumer prtectin purpses f RESPA are t change the real estate settlement prcess fr residential real estate in a manner that will result in: (i) mre effective advance disclsure t hme buyers and sellers f settlement csts; (ii) the eliminatin f kickbacks r referral fees that tend t unnecessarily increase settlement csts; (iii) a reductin f the amunts that hme buyers must pay t fund escrw accunts; and (iv) a significant refrm and mdernizatin f lcal recrdkeeping f land title infrmatin. See 12 U.S.C While these purpses are nt as far-reaching as thse cntained in sme ther cnsumer prtectin statutes, they are sufficiently brad t prvide cver fr extensive rulemaking by the Bureau. Frce-Placed Insurance Defined. Sectin 6(k)(2) f RESPA defines frce-placed insurance fr purpses f 6(k), (l) and (m) t mean hazard insurance that a servicer f a federally related mrtgage lan btains when the brrwer fails t maintain r renew that insurance as required by the terms f the mrtgage. The term hazard insurance is nt defined fr purpses f 6(k)(2). HUD Regulatin X als des nt define the term, but its definitin f settlement service in 24 C.F.R references the prviding f hazard, fld, r ther casualty insurance r hmewner s warranties. The separate reference t hazard and fld insurance suggests that frce-placed insurance des nt include the frceplacement f fld insurance. This result wuld make sense given the fact that the Fld Disaster Prtectin Act f 1973 already cntains a detailed prcedure fr the frce-placement f fld insurance if the brrwer fails t maintain it as required by law. See 42 U.S.C. 4012a(e). There are implementing regulatins fr this requirement. See, e.g., 12 C.F.R (OCC regulatin). Sectin 6(l)(4) f RESPA, discussed belw, further supprts the cnclusin that the frce-placement prvisins f 6(k)(2) d nt apply t fld insurance. The terms f the mrtgage is als an undefined term. While this undubtedly includes the mrtgage instrument (which typically cntains detailed prvisins relating t the maintenance f hazard insurance), the term shuld be sufficiently brad t include the separate hazard insurance requirements dcumentatin that mrtgage lenders ften enter int with their brrwers. Requirements fr Frce-Placed Insurance. Sectin 1463(a) adds a new 6(l) t RESPA, which identifies the steps that a servicer must take t demnstrate a reasnable basis fr frce-placing hazard insurance. As discussed abve, 6(k) f RESPA states that a servicer may nt frce-place hazard insurance unless there is a reasnable basis t believe the brrwer has failed t maintain hazard insurance as required by the lan cntract. Althugh the wrding in the tw subsectins is smewhat different, the standard is undubtedly the same. Written Ntices t Brrwer. The servicer must d the fllwing befre it impses any charge n a brrwer fr frce-placed insurance. 18 Attrney Advertising

19 The term any charge will be read bradly. It will include the premium fr the insurance itself as well as any related fees. First Written Ntice. The servicer must send tw written ntices t the brrwer. The first written ntice must be sent by first-class mail and must cntain: (i) a reminder f the brrwer s bligatin t maintain hazard insurance n the prperty; (ii) a statement that the servicer des nt have evidence f the insurance cverage; (iii) a clear and cnspicuus statement f the prcedures that the brrwer must fllw t demnstrate that he/she already has insurance cverage; and (iv) a statement that the servicer may btain insurance cverage, at the brrwer s expense, if the brrwer des nt demnstrate, in a timely manner, that he/she des have insurance cverage. Nthing in the statute precludes the servicer frm prviding additinal infrmatin. Fr example, the ntice culd tell the brrwer the cst f the frce-placed insurance, the amunt f any fees that will be impsed, and the time at which the frce-placed insurance will be impsed. The ntice culd als explain the cnsequences if the brrwer prvides his/her wn plicy f insurance after the servicer frce-places, as mre fully described under Terminatin f Frce- Placed Insurance, belw. The descriptin f the prcedures that the brrwer must fllw t demnstrate that he/she already has insurance cverage must be clear and cnspicuus, a disclsure standard that is nt defined. This disclsure standard is als used in existing HUD Regulatin X at 24 C.F.R (f)(6), but is nt defined there either. The clear and cnspicuus disclsure standard is used in TILA and Regulatin Z, where it is defined t mean a reasnably understandable frm. See Paragraphs 226.5(a)(1)-1 and (a)(1)-1 f the Regulatin Z Cmmentary. It is pssible that the Bureau will emply a similar definitin here. While the statute states that the ntice must be written, any written disclsure r ntice required by RESPA can be prvided electrnically in accrdance with the E-SIGN Act. See als 24 C.F.R The E-SIGN Act is briefly discussed at 1461, abve. Secnd Written Ntice. The secnd written ntice must be sent by first-class mail and must cntain all f the same infrmatin that is required by the first written ntice. The secnd written ntice must be sent at least 30 days after the mailing f the first written ntice. N Demnstratin f Hazard Insurance Cverage. The servicer must nt have received any demnstratin f hazard insurance cverage (as discussed belw) by the end f 15 days after the date that the secnd written ntice was mailed. If the servicer has received any demnstratin f hazard insurance cverage within that time perid, then it cannt frce-place the insurance. Example f Frce-Placement Time Line. If the first written ntice is mailed n March 1, the snest that the secnd written ntice can be mailed is March 31 (i.e., 30 days after the first written ntice was mailed n March 1). Assume that the secnd written ntice is mailed n April 1. If s, the brrwer wuld have until the end f April 16 t demnstrate that he/she has hazard insurance (i.e., 15 days fllwing April 1). As a practical matter, this means that the servicer wuld nt be able t frce-place the insurance until the next day, April 17. The prcess fr frce-placing hazard insurance is similar t, but mre detailed than, the prcess fr frce-placing fld insurance. If a lender r servicer f a designated lan determines that the building r mbile hme and any persnal prperty securing the lan are nt cvered by fld insurance, r the amunt f fld insurance is insufficient, the lender r its servicer must ntify 19 Attrney Advertising

20 the brrwer that he/she must btain sufficient fld insurance. If the brrwer fails t d s within 45 days after ntificatin, then the lender r servicer must frce-place the fld insurance. The brrwer may be charged fr the insurance premium plus the fees incurred in purchasing the insurance. See, e.g., 12 C.F.R (OCC regulatin). In practice, mst servicers already fllw a prcess f advance brrwer ntificatin befre they frce-place hazard insurance. This usually invlves ntice t the brrwer, giving the brrwer 60 days t btain the insurance n his/her wn, and refunding any frce-placed insurance premiums fr any perid f time after the effective date f the brrwer s btaining f insurance cverage. See, e.g., the Fannie Mae Single Family Servicing Guide, Part II, Chapter 6. Sufficiency f Demnstratin. As discussed abve, the servicer cannt frce-place the hazard insurance if the brrwer makes a demnstratin f hazard insurance cverage during the requisite time perid. Sectin 6(l)(2) f RESPA nw states that the servicer must accept any reasnable frm f written cnfirmatin frm a brrwer f existing insurance cverage. The statute states that this includes the existing insurance plicy number tgether with the identity and cntact infrmatin fr either the insurance cmpany r the insurance agent. The statute states that this als includes any ther reasnable frm f written cnfirmatin required by the Bureau. Histrically, mst servicers have used strict requirements fr determining whether there was sufficient evidence f renewed hazard insurance cverage, such as receipt f an insurance certificate. Under the new standard set frth in 6(l)(2) f RESPA, the brrwer need nly prvide the servicer with the existing plicy number and minimal cntact infrmatin fr either the insurance issuer r agent. Once the brrwer has dne s, the implicatin is that the burden shifts t the servicer. That is, the servicer must cntact the insurance cmpany r agent, as applicable, and determine whether the hazard insurance plicy has been renewed and whether its terms remain sufficient. If the Bureau identifies ther methds fr cnfirming the renewal f the hazard insurance plicy, the servicer will be required t fllw thse as well. Nte that the demnstratin f hazard insurance cverage must be written. The servicer is nt required t accept an ral cmmunicatin f the necessary infrmatin. Hwever, it wuld be prudent fr the servicer t instruct a brrwer wh seeks t prvide this infrmatin rally n hw t prvide the infrmatin in an acceptable written frm. Ideally, the servicer will develp a script fr its custmer servicer representatives t use in these situatins. Terminatin f Frce-Placed Insurance. If a servicer frce-places hazard insurance, the brrwer can at any time prvide cnfirmatin t the servicer that he/she has existing hazard insurance cverage. Within 15 days f the servicer s receipt f this cnfirmatin, the servicer must (i) terminate the frceplaced insurance and (ii) refund all frce-placed insurance premiums and related fees paid by the brrwer fr any perid when bth the frce-placed insurance and the brrwer-prvided insurance were in effect. See 6(l)(3) f RESPA. This terminatin and refund bligatin is cnsistent with standard industry practice. The duty t refund, rather than credit, may require a change in sme servicers peratins. The duty t refund related fees wuld include any late charges fr nn-payment f the frce-placed insurance premiums nce the brrwer-prvided insurance was in place. Clarificatin with Respect t Fld Disaster Prtectin Act. Sectin 6(l)(4) f RESPA states what might therwise be bvius that nthing in 6(l) is t be interpreted t prhibit the servicer frm prviding a simultaneus r cncurrent ntice t the brrwer if the brrwer has failed t btain required fld insurance under the Fld Disaster Prtectin Act f 1973, r if the amunt f the fld insurance is insufficient. 20 Attrney Advertising