On Oct. 26, the Department of Housing and Urban Development issued its final escrow accounting rule. Promulgated pursuant to the Real Estate Settlement Procedures Act, the rule was intended to provide "clear and specific" guidelines on escrow accounting procedures. It also, however, imposes daunting burdens on those rushing to meet its April 24 compliance deadline.
In the meantime, the Federal Reserve Board has proposed a Truth-in- Lending Commentary update designed partly to address the aftermath of the 11th Circuit's decision in Rodash v. AIB Mortgage Co. The proposal falls purposely short, however, of absolving lenders of all post-Rodash exposure and raises almost as many issues as it resolves.
To nobody's surprise, HUD's final rule requires servicers to use the aggregate accounting method on all "federally related mortgage loans" settled after April 24, 1995 (post-rule accounts). For loans settled before that date (pre-rule accounts), servicers may use line-item accounting until Oct. 27, 1997. The rule includes step-by-step instructions for calculating escrows under each method.
The new rule incorporates the two-month cushion permitted by statute but prohibits pre-accruals on post-rule accounts and severely limits such practices on pre-rule accounts. It also mandates the handling of shortages, surpluses, and deficiencies, prescribes procedures for servicing transfers and loan payoffs, and imposes extensive initial and annual disclosure requirements.
Prompted largely by computer service bureaus' difficulty in meeting the latter requirements, HUD is considering amendments to the rule, to be published later this month. As of this writing, however, HUD is not expected to postpone the April 24 effective date.
Perhaps most notably, the new rule generally does not preempt more restrictive state laws and loan documents. It sets only a federal maximum on the amounts that may be escrowed. Thus, if either the loan documents or state law prohibit line-item accounting or provide for less pre-accrual or cushions than permitted under the federal rule, those laws and contracts prevail.
Similarly, if either the documents or state law provide greater consumer protection as to surpluses, shortages, or deficiencies, those documents and state law apply. Even the rule's disclosure requirements do not preempt state escrow disclosure provisions unless compliance with the latter would prevent adherence to the former.
While servicers have generally welcomed the new regulations as providing some much needed clarification to Respa, they are also becoming increasingly overwhelmed by the tasks before them.
First, servicers must analyze their portfolios and determine whether to convert immediately to the aggregate accounting method or continue to employ line-item accounting during the three-year conversion period.
However, to utilize the three-year phase-in, servicers must first confirm that the underlying documents would permit the line-item method. In addition, servicers should conduct an expansive review of their documents and state law to ensure compliance with any restrictions on pre-accruals and cushions and to identify all provisions pertaining to surpluses, shortages, and deficiencies.
This will be particularly burdensome for those servicing portfolios composed of a myriad of loan types or those with limited systemic ability to identify and categorize documents. (A review of just six of the most commonly serviced forms suggests several possible combinations of variables.) One servicer has estimated that it must review more than 3,000 loan documents.
In addition to conducting a contractual audit, servicers must analyze their servicing programs and processes to ensure adherence to the new rule requirements. If a servicer chooses the three-year phase-in, it must implement procedures to support the dual accounting methods and prepare for the ultimate conversion.
Servicers must also design and implement procedures for complying with the initial and annual disclosure requirements. Proper and consistent interface between front-end and back-end operations will be a must. Servicers must further formulate policies and procedures for handling servicing transfers, acquisitions of servicing portfolios, and master and subservicing rights and obligations.
Finally, servicers must train their production, servicing, and other personnel on all aspects of the new rule and its implications for their operations. The ability to promptly and accurately respond to consumer and regulatory inquiries will be essential to avoiding future problems.
Next: The Fed's Truth-in-Lending Commentary
Mr. Oliver is a partner and co-director and Ms. Albon is manager of the national mortgage finance group at KPMG Peat Marwick, Washington.