After a year of mulling over industry complaints and tinkering with its regulatory options, HUD has finally put the finishing touches its long@ awaited Respa mortgage servicing escrow accounting rule and mortgage bankers are finding the final version much more palatable.
The rule, which win come under Section 6 of the Real Estate Settlement procedures Act and is likely to be published in the Federal Register Oct. 1, is set to take effect 180 days after publication, making it effective in April 1995 provided it meets that publication time frame.
The final rule revealed no major surprises, said Sheila Wray-Green, senior director of loan administration, Mortgage Bankers Association. HUD made a number of clarifications she believes will eliminate some of the ambiguity the mortgage lending industry identified when the proposed rule was published in December 1993.
"They [HUD] have taken a much more even-handed approach toward handling shortages, deficiencies and surpluses," Wray-Green said. "The proposed rule would have required [servicers] to, in effect, grant borrowers a 12-month, interest-free loan when shortages arise."
The new final rule amends that provision to allow servicers to collect deficiencies in excess of one month's payment in at least two - but no more 12 - equal monthly payments. The rule, however, defines shortages differently, and the amended rule will allow servicers to collect shortages of less than one month immediately or in two or more installments in a period of up to 12 months.
Another revision that was equally gratifying to mortgage servicers occurred when HUD decided to alter its rule on escrow account surpluses. Under December's proposed rule, an escrow account surplus was require to be refunded to a borrower within days of the escrow analysis, unless borrower requested the surplus be credited to the account, which service claimed would create a serious administrative burden.
The rule would force many service to begin doling out refund checks which the postage costs actually exceed the amount returned to the borrower, Wray-Green said, adding that many of those checks would never even get cashed." As a compromise HUD revised the rule's surplus provision to allows servicers to retain an credit surpluses of less than $50 to the escrow account. It would also require the servicer to automatically refund any amount in excess of $50; the servicer would also have the option of refunding any amount less than $50 at an time.
During the comment period for the proposed rule, HUD was inundated with complaints from mortgage companies, banks and attorneys decrying the rule's proposed 180-day phase-in period. Many of those commenters asked instead for a phase-in period of between 12 months and 18 months.
HUD said that while it recognized that a 180-day phase-in period was "demanding," it determined that "anticipated savings to consumers strongly militate in favor of putting this rule in effect as quickly as possible." The department also said that because the mortgage servicing and software industries were alerted of HUD's intention to convert to the aggregate method in December 1993, the development of necessary systems is achievable within the given time frame.
The MBA said that some servicers have already switched to the aggregate method, most notably Countrywide Funding and GMAC Mortgage Corp., but smaller servicers would have a more difficult time making the transfer. For them, the MBA plans a series of workshops in November in Denver, Atlanta and Los Angeles aimed at educating servicers on the nuances of the final rule and how best to implement the provisions for their specific institutions.
Other concerns were brought up as well. States, attorneys general commented that some "profiteering" lenders might circumvent the rule's limits "by charging consumers annual maintenance fees" for escrow accounts, a point that HUD wouldn't discount. But while HUD thought it possible, it also said it lacked the authority "to ban all demonstrable junk fees." It warned, however, that it would be monitoring the mortgage servicing industry and, "if necessary, will add additional specific prohibitions."
Although the aggregate analysis method requirement and its relatively short implementation period still won't win HUD many friends in the mortgage servicing industry, Wray-Green believes that if the rule prevents the proliferation of over-escrowing class-action lawsuits, the industry will accept the final rule, despite the inconveniences.
Some of the changes HUD made to the final rule include:
* General instructions for adjusting for escrow payments made biweekly - or other schedules - are now part of the final rule;
* Revising the definition for "annual escrow account statement" so there is no requirement for the statement to be based on an escrow account analysis, although an annual statement may follow such analysis. The statement must also be submitted to the borrower annually;
* Clarified that servicers are explicitly permitted to make escrow payments by the due date, regardless of local customs. HUD noted that commenters, including Fannie Mae, had asked for a clarification of the rule's definition of "dispersement dates," and that the revised definition allows dispersements to occur on or before either the last date on which the item can be paid without losing an available discount, or on the last date which the item can be paid without penalty. Neither date necessarily coincides with the due date set by the payee;
* Changed the definition of the proposed rule's "payment date" to "payment due date" in the final rule. HUD said the change was made to avoid confusion with the dispersement date;
* Added a clarification to the rule's term "anticipated due date" to avoid confusion with dispersement date and date due on the initial escrow account statement, and
* Added a new definition for refinance transactions in Section 3500.2 that must be applied to determine whether a transaction is a refi requiring post-rule treatment, or only a modification to the mortgage document that wouldn't require such treatment.