Regulation X

Key Takeaways

• Regulation X is codified at 12 CFR Part 1024 and is the rule that implements the Real Estate Settlement Procedures Act.
• RESPA rulemaking and enforcement moved from HUD to the Consumer Financial Protection Bureau on July 21, 2011, so current Regulation X is a CFPB rule and material naming HUD as the RESPA regulator is out of date.
• Regulation X prohibits referral fees and unearned fee splits: no person may give or accept a fee, kickback, or thing of value under an agreement that settlement service business will be referred.
• Regulation X caps the escrow cushion at one-sixth of the estimated total annual disbursements from the account, which works out to about two months of escrow payments.

What It Means

Regulation X is the federal rulebook that turns the Real Estate Settlement Procedures Act into operating instructions. RESPA is the statute passed by Congress. Regulation X, codified at 12 CFR Part 1024, is the regulation that tells lenders, servicers, and settlement agents what to do about it. Four areas of it reach a broker's desk constantly: disclosure of settlement costs, limits on escrow accounts, mortgage servicing duties including loss mitigation, and the prohibitions on kickbacks and unearned fees.

The name confuses students because the regulator changed midstream. Congress moved RESPA rulemaking and enforcement from HUD to the Consumer Financial Protection Bureau in 2011, so anything describing RESPA as a HUD rule predates that shift. Regulation X also travels with a sibling. Regulation Z implements the Truth in Lending Act, and the two were joined at the disclosure level into the Loan Estimate and Closing Disclosure forms. That pairing is the fastest way to sort exam questions. A referral arrangement or an escrow shortage is a Regulation X problem, while an annual percentage rate or a finance charge is a Regulation Z problem.

How It Works in Washington

Regulation X is federal, so it applies in Washington the way it applies anywhere, but Washington licenses the people who carry it out at the closing table. RCW 18.44.021 makes it "unlawful for any person to engage in business as an escrow agent by performing escrows or any of the functions of an escrow agent ... within this state or with respect to transactions that involve personal property or real property located in this state unless such person possesses a valid license issued by the director." Chapter 18.44 RCW carries the exemptions, including banks, attorneys acting within their law practice, title insurance companies, and real estate firms and brokers who take no compensation for the escrow services. In practice a Washington closing is run by a licensed escrow agent, a title company, or an attorney, and that party hands out the Regulation X disclosures.

Two Regulation X numbers turn up in Washington files every week. 12 CFR 1024.17 requires the servicer to submit an initial escrow account statement to the borrower at settlement or within 45 calendar days of settlement, and holds the cushion to no more than one-sixth of the estimated total annual disbursements from the Escrow account. 12 CFR 1024.14 is the one that ends careers. No person may give and no person may accept any fee, kickback, or thing of value under an agreement or understanding that settlement service business will be referred, and no one may take a portion, split, or percentage of a settlement service charge "other than for services actually performed."

Example

Sonia Vega closes on a $525,000 house in Vancouver, Washington on March 10. Her lender escrows taxes and insurance: county property taxes of $5,400 a year and a homeowners policy of $1,800 a year, so annual disbursements total $7,200, or $600 a month. Regulation X caps the cushion at one-sixth of $7,200, which is $1,200, the equivalent of two monthly payments. The escrow agent hands Sonia her initial escrow account statement at the table, well inside the 45-day window in 12 CFR 1024.17.

Two weeks later a local escrow firm offers Sonia's broker $500 for every client she steers to it. That is the classic 12 CFR 1024.14 problem: a thing of value given under an understanding that settlement service business will be referred. It remains a violation even if the escrow firm's own fee is perfectly reasonable, because the $500 buys the referral rather than a service performed. The broker's correct move is to give Sonia several escrow choices and take nothing for the recommendation.

Common Mistakes and Exam Traps

• RESPA is the statute and Regulation X is the implementing regulation. A question asking which regulation implements RESPA wants Regulation X.
• Regulation Z implements the Truth in Lending Act, not RESPA. Finance charge and annual percentage rate questions belong to Regulation Z, while referral fee and escrow questions belong to Regulation X.
• HUD administered RESPA before July 21, 2011. Since then the Consumer Financial Protection Bureau has held the rulemaking and enforcement authority, so an answer naming HUD as the current RESPA regulator is dated.
• The one-sixth escrow cushion is a ceiling, not a required deposit. It is the most the servicer may hold as a cushion, which is roughly two months of escrow payments.