SERVICING DISCLOSURE STATEMENT NOTICE TO FIRST LIEN MORTGAGE LOAN APPLICANTS: THE RIGHT TO COLLECT YOUR MORTGAGE LOAN PAYMENTS MAY BE TRANSFERRED

SERVICING DISCLOSURE STATEMENT NOTICE TO FIRST LIEN MORTGAGE LOAN APPLICANTS: THE RIGHT TO COLLECT YOUR MORTGAGE LOAN PAYMENTS MAY BE TRANSFERRED

You are applying for a mortgage loan covered by the Real Estate Settlement Procedures Act (RESPA) (12
U.S.C. 2601 et seq.). RESPA gives you certain rights under Federal law. This statement describes whether the
servicing for this loan may be transferred to a different loan servicer. ``Servicing'' refers to collecting your
principal, interest, and escrow payments, if any, as well as sending any monthly or annual statements, tracking
account balances, and handling other aspects of your loan. You will be given advance notice before a transfer
occurs.

Servicing Transfer Information

[We may assign, sell, or transfer the servicing of your loan while the loan is outstanding.]

[or]

[We do not service mortgage loans of the type for which you applied. We intend to assign, sell, or transfer the
servicing of your mortgage loan before the first payment is due.]

[or]

[The loan for which you have applied will be serviced at this financial institution and we do not intend to sell,
transfer, or assign the servicing of the loan.]

Method of Delivery

The creditor/lender, authorized “table funding” mortgage broker, or qualifying dealer that anticipates a first lien
dealer loan is to deliver the Servicing Disclosure Statement within 3 business days from receipt of the
application by hand delivery; by placing it in the U. S. Mail; or, if the applicant agrees, by fax, e-mail, or other
electronic means. In the event the consumer/borrower is denied credit within the three business-days (as
defined), no Servicing Disclosure Statement is required. If co-applicants indicate the same address for each in
their loan applications, one copy delivered to that address is sufficient. If co-applicants (consumers/borrowers)
show different addresses on their loan applications, a copy of the Servicing Disclosure Statement is to be
delivered to the separate address identified for each of the co-applicants.

Loan Servicing Agreement

In loans made by depository institutions or licensed creditors/lenders, the loan servicing function is either an
independent operation or part of the overall operation of the creditor/lender. The objective of the loan servicing
operation is to achieve the yield on the mortgage loan investment expected by the creditor/lender; to the extent
possible protect the mortgage loan investment from loss; and to provide good, prompt, and acceptable service
to the consumer/borrower. A loan servicer should have a written agreement with its principal, the
creditor/lender for whom the servicer is acting as an agent and fiduciary (Business and Professions Code
Section 10131(d); Civil Code Section 2295 et seq.; and Financial Code Section 50003(h)(6), (k)(4), (q), and
(x)).

The servicing agreement should describe the servicer’s responsibilities and define the compensation for the
performance of the services contemplated. This is applicable even if the servicing operation is part of the
creditor/lender’s organization. The servicing agreement may discuss collections, forwarding of payments, late
charges, defaults, foreclosures, insurance coverage, etc. Written loan servicing agreements are recommended in
every fact situation. When loan servicing under a real estate broker’s license, a written agreement is required by
applicable law (Business and Professions Code Section 10233).

Monthly Collections

A major problem in loan servicing is the flood of payments arriving during the first ten days of each month.
Two possible solutions are:

■ Computerized processing of loan payments; or,

■ Staggering loan payment schedules so that some payments are due on the first or 10th of the month,
while others are due on the 15th or 20th, etc.

Delinquencies

Loan servicing software is available to quickly identify loan delinquencies and establish the length of delay in
the receipt of the periodic payments. These software applications are capable of identifying and delivering

various notices to consumers/borrowers including pre-notice of default, notice of default and notice of trustee’s
sale. Recently, amendments to applicable California law require alteration of the software applications and an
expanded understanding of loan modifications, forbearances, and foreclosures on the part of loan servicers
(Civil Code Sections 2923.5, 2923.52, 2923.53, 2923.54, 2923.55, 2923.6, and 2924 et seq.).

Escrow (Impound) Account Statement

Background

The fifth disclosure statement required by RESPA is the Initial Escrow (Impound) Account Statement, which
describes an escrow (impound) account established by a creditor/lender in connection with federally related
mortgage loans. Generally, an escrow (impound) account relies on calculations based upon monthly payments
and disbursements within a calendar year. Should an escrow (impound) account be subject to biweekly or other
periodic payment periods, the escrow (impound) account must be modified accordingly. HUD publishes several
guidance documents for use by creditors/lenders and their loan servicers. The HUD Public Guidance
Documents include, “Biweekly Payments – Example”; “Annual Escrow Account Disclosure Statement –
Example”; and a “Consumer Disclosure for Voluntary Escrow Account Payments”. These publications provide
model disclosure formats that are encouraged although not required and are to be combined with the Initial
Escrow Account Statement (24 CFR Section 3500.17(a) and (g)).

Escrow (Impound) Account Required for “Higher Cost/Priced Mortgage Loans”

It is expressly prohibited for a creditor/lender to extend credit in a form of a loan secured by a first lien on a
consumer’s/borrower’s principal dwelling if the loan is a “Higher Cost/Priced Mortgage Loan” (as previously
defined in this Chapter), unless an escrow (impound) account is established for the payment of property taxes
and mortgage and property related insurance premiums required by the creditor/lender. The escrow (impound)
account is required in connection with qualifying loan applications received on or after April 1, 2010 (12 CFR
Section 226.35 and 24 CFR Section 3500.17(a)).

Definition of a “Higher Cost/Priced Mortgage Loan”

As previously defined in this Chapter, a “Higher Cost/Priced Mortgage Loan” is a consumer credit transaction
secured by the consumer's/borrower’s principal dwelling with an annual percentage rate that exceeds the
average prime offer rate for a comparable transaction. Concurrent reference to the prime offer rate for
conventional loans available in the market place is required to establish whether the contemplated mortgage
loan interest rate meets the defined criteria to be a “Higher Cost/Priced Mortgage Loan”. If the mortgage loan
interest rate is set by 1.5 or more percentage points greater than for loans secured by a first lien on a dwelling or
by 3.5 or more percentage points greater than for loans secured by a subordinate lien on a dwelling; the loan fits
the aforesaid criteria (12 CFR Section 226.35 and Financial Code Section 4995(a)).

To establish the prime offer rate for a comparable transaction, the Federal Reserve Bank (FRB) is a reference
source for such rates applicable to conventional loans available in the market place secured by a deed of trust or
mortgage recorded in senior position. As previously indicated, the FRB publishes weekly the H-15 Federal
Reserve Statistical Release that includes prime offer rates for senior conventional loans
(http://www.federalreserve.gov/releases/h15/update/). As previously noted in this Chapter, “Higher
Cost/Priced Mortgage Loans” are also referred to in Section 35 of TILA and in California law (12 CFR Section
226.35 and Financial Code Section 4995 et seq.).

Escrow (Impound) Account Defined

An escrow (impound) account is any account that a creditor/lender or servicer establishes or controls on behalf
of a borrower to pay taxes, mortgage or property related insurance premiums (including flood insurance), or
other charges with respect to a federally related mortgage loan. This account may also include charges that the
consumer/borrower and creditor/lender (loan servicer) have voluntarily agreed that the servicer may collect and
pay. The term “servicer” or “loan servicer” applies in this section interchangeably with the term creditor/lender.
The loan servicer may be the creditor/lender or an agent of the creditor/lender or of a subsequent holder of the
promissory note and deed of trust or mortgage that evidences and secures the debt/loan subject to the escrow
(impound) account (24 CFR Section 3500.17(b)).

Exemptions

An escrow (impound) account need not be established for mortgage or property related insurance coverage,
unless the insurance is required by the creditor/lender or loan servicer. For example, neither earthquake

insurance coverage nor debt-protection insurance coverage is typically required by the creditor/lender, but are
options available to the consumer/borrower. Escrow (impound) accounts are not required for mortgage or
property related insurance premiums when the residential mortgage loan is secured by shares in a cooperative
or by condominium units, provided the condominium owners’ association is obligated to maintain a master
policy extending such insurance coverage. The master policy would extend coverage to each condominium unit
representing the separate interests of the individual owners/members of the common interest developments (12
CFR Section 226.35(b)(3)(ii)).

However, an escrow (impound) account for the payment of property taxes for each condominium unit (the
separate interest) individually assessed is still required. Regarding loans secured by manufactured housing
permanently affixed to the security real property, the establishment of an escrow (impound) account is not
required until October 1, 2010 (12 CFR Section 226.35(b)(3)(i) and (ii)).

Therefore, the following applies if the residential mortgage loan is a “Higher Cost/Priced Mortgage Loan”:

■ The loan application date is on or after April 1, 2010;

■ The loan is a first lien against the security property;

■ The property is the consumer’s/borrower's principal dwelling; and,

■ The property is a single family dwelling, a condominium unit, or a dwelling within a planned unit
development (and a manufactured home permanently affixed to the security property after October 10,
2010); then an initial escrow (impound) account statement must be provided to the consumer/borrower
(12 CFR Section 225.35(b)(3)(i) and (ii) and 24 CFR Section 3500.17(b), (g), and (h)).

Such a statement is also required if the loan is FHA insured or VA indemnified or a conventional loan with a
loan-to-value ratio such an escrow (impound) account is imposed by the creditor/lender (or loan servicer) or the
governmental agency or enterprise involved with the contemplated transaction.

Incorporation of Initial Escrow (Impound) Account Statement in HUD-1 or HUD-1A

The creditor/lender (servicer) may incorporate or direct that the initial escrow (impound) account statement be
incorporated into the HUD–1 or HUD–1A settlement statement. If the creditor/lender (servicer) does not
incorporate the initial escrow account statement into the HUD–1 or HUD–1A settlement statement, then the
creditor/lender (the loan servicer) shall submit the initial escrow account statement to the consumer/borrower as
a separate document (24 CFR Section 3500.17(h)(2)).

Delivery of Initial Escrow (Impound) Account Statement

The creditor/lender (servicer) is to perform an initial escrow (impound) account analysis to determine the
amount the consumer/borrower is to deposit into the escrow (impound) account. After conducting the escrow
(impound) account analysis, the creditor/lender (servicer) is to submit an initial escrow (impound) account
statement to the consumer/borrower at settlement or loan closing, or within 45 calendar days of settlement or
the close of escrow. The creditor/lender (servicer) may deliver the statement by placing the document in the U.
S. Mail, first-class postage paid, addressed to the last known address of the consumer/borrower or by hand
delivering it to the consumer/borrower. Generally, the last known address of the consumer/borrower will be set
forth in the loan application or in the security instrument, i.e., the deed of trust or mortgage (24 CFR Section
3500.17(g) and (h)).

The initial escrow (impound) account statement is to include the amount of the consumer’s/borrower's total
monthly mortgage payment, i.e., principal and interest, and the portion of the monthly payment allocated to the
amount necessary for the payment of property taxes and the required mortgage or property related insurance
coverage when each becomes due and payable. An itemization of the estimated property taxes, mortgage and
property related insurance premiums, and other charges the (creditor/lender) servicer reasonably anticipates for
discretionary items authorized by the consumer/borrower to be paid from the escrow (impound) account during
the escrow account computation year and the anticipated disbursement dates of each of those charges shall be
included. This computation is to occur annually thereafter. The initial escrow (impound) account statement

shall also indicate the amount that the (creditor/lender) servicer selects as a cushion. The statement is to include
a trial running balance for the account (24 CFR Section 3500.17(b), (c), (d), (f), (g), (h), (i), and (j)).

Escrow Account Analysis and Computation at Creation

Before establishing an escrow (impound) account, the creditor/lender must conduct an escrow account analysis
to determine the amount the consumer/borrower must deposit into the escrow (impound) account, and the
amount of the consumer’s/borrower's periodic payments into the escrow. In conducting the escrow (impound)
account analysis, the creditor/lender (servicer) must estimate the disbursement amounts by calculating the
amounts sufficient to pay property taxes and mortgage and property related insurance premiums when each
become due (24 CFR Section 3500.17(b)).

The “amount sufficient to pay” is computed so that the lowest month end target balance projected for the
escrow (impound) account computation year is zero (–0–). The target balance is the estimated month-end
balance in an escrow (impound) account that is sufficient to cover the remaining disbursements from the
account in the escrow computation year, taking into account the remaining scheduled periodic payments, and a
minimum cushion, if any (24 CFR Section 3500.17(b), (c), (g), (h), and (i)(4)).

When establishing the escrow (impound) account, a year is the 12-month period the creditor/lender (loan
servicer) utilizes beginning with the consumer’s/borrower's initial payment date. If an escrow (impound)
account involves biweekly or any other payment period, the account statement is to be modified accordingly
(24 CFR Section 3500.17(b) and (i) (4)).

In addition, the creditor/lender (loan servicer) may charge the consumer/borrower an amount sufficient to
maintain an authorized minimum cushion. A cushion or reserve means funds that a creditor/lender may require
a consumer/borrower to pay into an escrow (impound) account to cover unanticipated disbursements or
disbursements made before the consumer/borrower's payments are available in the escrow (impound) account.
The cushion cannot be greater than one-sixth (1/6) of the estimated total annual payments from the escrow
(impound) account. However, before establishing the amount of the cushion, the creditor/lender (loan servicer)
must consider the mortgage loan documents. If the mortgage loan documents provide for lower cushion limits,
then the terms of the loan documents control (24 CFR Section 3500.17(c), (d), and (f)).

Subsequent Escrow (Impound) Account Analyses

For each escrow (impound) account, the creditor/lender (loan servicer) must conduct an escrow account
analysis at the completion of the “escrow account computation year” to determine the borrower's monthly
escrow (impound) account payments for the next computation year, subject to the limitations as set forth in
applicable law. In conducting the escrow (impound) account analysis, the creditor/lender (loan servicer) must
estimate the disbursement amounts, and is to use a date on or before the deadline to avoid penalties for the
failure to timely disburse an escrow item. The creditor/lender (loan servicer) must use the escrow account
analysis to determine whether a surplus, shortage, or deficiency exists, and must make any required adjustments
to the escrow (impound) account to address the foregoing. Upon completing an escrow account analysis, the
servicer must prepare and submit an annual escrow account statement to the consumer/borrower (24 CFR
Section 3500.17(b), (c), (d) and (f)).

Some escrow (impound) accounts may include items billed for periods longer than one year. For example, in
residential mortgage loans where flood insurance coverage is necessary, creditors/lenders (loan servicers) may
need to collect flood insurance or “water purification” escrow funds for subsequent payment every three years.
The creditor/lender (loan servicer) is to estimate the escrow payments for the consumer/borrower in
contemplation of a full cycle of disbursements. For a flood insurance premium payable every three years, the
servicer shall collect the payments reflecting 36 equal monthly amounts. The annual escrow (impound) account
statement shall explain this situation. An example is included in the HUD Public Guidance Document entitled
“Annual Escrow Account Disclosure Statement—Example” (24 CFR Sections 3500.3 and 3500.17(b), (c), (d),
and (f)).

Transfer of Loan Servicing

When loan servicing is transferred to a new servicer and such servicer changes either the monthly payment
amount or the accounting method used for the escrow (impound) account by the previous servicer, the new
servicer is to provide the consumer/borrower with an initial escrow account statement within 60 days of the

date of transfer. The new loan servicer shall treat shortages, surpluses, and deficiencies in the transferred
escrow (impound) account in accordance with applicable law (24 CFR Section 3500.17(b), (c), (d), (e), and
(f)).

Format for Initial Escrow (Impound) Account Statement

The format and a completed example for an initial escrow account statement are set out in the HUD Public
Guidance Documents entitled, “Initial Escrow Account Disclosure Statement—Format” and “Initial Escrow
Account Disclosure Statement—Example”, available on the HUD website at www.hud.gov.