INITIAL ESCROW ACCOUNT DISCLOSURE STATEMENT

INITIAL ESCROW ACCOUNT DISCLOSURE STATEMENT

THIS IS AN ESTIMATE OF ACTIVITY IN YOUR ESCROW ACCOUNT DURING THE COMING YEAR BASED ON PAYMENTS ANTICIPATED TO BE MADE FROM YOUR ACCOUNT.

Month Payments to Payments from Description Escrow Account Escrow Account Escrow Account Balance

Initial deposit: ……………………………………………………………………………………..$

[A filled-out format follows.]

(PLEASE KEEP THIS STATEMENT FOR COMPARISON WITH THE ACTUAL ACTIVITY IN
YOUR ACCOUNT AT THE END OF THE ESCROW ACCOUNTING COMPUTATION YEAR.)

Cushion selected by servicer: $ .

[YOUR MONTHLY MORTGAGE PAYMENT FOR THE COMING YEAR WILL BE $ ,

OF WHICH $ WILL BE FOR PRINCIPAL AND INTEREST, $ WILL GO INTO

YOUR ESCROW ACCOUNT, AND $ WILL BE FOR DISCRETIONARY ITEMS (SUCH

AS LIFE INSURANCE, DISABILITY INSURANCE) THAT YOU CHOSE TO BE INCLUDED WITH
YOUR MONTHLY PAYMENT.]

[YOUR FIRST MONTHLY MORTGAGE PAYMENT FOR THE COMING YEAR WILL BE $ ,
OF WHICH $ WILL BE FOR PRINCIPAL AND INTEREST, $ WILL GO INTO YOUR

ESCROW ACCOUNT, AND $ WILL BE FOR DISCRETIONARY ITEMS (SUCH AS LIFE

INSURANCE, DISABILITY INSURANCE) THAT YOU CHOSE TO BE INCLUDED WITH YOUR
MONTHLY PAYMENT. THE TERMS OF YOUR LOAN MAY RESULT IN CHANGES TO THE
MONTHLY PRINCIPAL AND INTEREST PAYMENTS DURING THE YEAR.]

California Requirements for Escrow (Impound) Accounts

Funds held by the beneficiary/lender/mortgagee of a deed of trust or mortgage in an impound account for the
payment of property taxes, insurance premiums or other purposes relating to the security property are to be

retained and deposited in authorized California depository institutions. If funds in the impound accounts are
invested (as authorized by applicable law), such funds are to be only invested with California residences or
businesses (i.e., branches or subsidiaries of the businesses located in this state). The foregoing requirement is
subject to certain exemptions depending upon the identity and status of the creditor/lender (Civil Code Section
2955).

When a depository institution or a creditor/lender (as defined) makes a loan or purchases a promissory note
secured by a deed of trust or mortgage on real property located in this state (containing 1 to 4 residential units),
and the institution or creditor/lender creates an impound account for the payment of property taxes, insurance
premiums, or for other purposes related to the security property; a minimum of at least 2% simple interest per
annum shall be paid to the consumer/borrower on the funds maintained in the impound account. No fees or
charges are allowed for the maintenance or disbursements of monies received in advance in accordance with
the provisions of the escrow (impound) account. An exemption from the payment of the 2% simple interest is
provided for moneys that are required by state or federal regulation to be placed in non-interest bearing trust
fund accounts. This exemption does not apply to banks (Civil Code Section 2954.8).

Moneys maintained in escrow (impound) accounts represent trust funds held by loan servicers as agents of
identified principals. Real estate brokers are required to place such moneys into trust accounts to be established
and maintained in accordance with the Real Estate Law. Generally, real estate brokers when acting as
mortgage brokers (MLBs/MLOs) maintain trust funds in non-interest bearing accounts. However, if interest is
to be paid and disbursed in connection with the trust funds held, the trust accounts are to be segregated by each
principal for whom the funds are being held (Business and Professions Code Section 10145 and 10 CCR,
Chapter 6, Section 2830.1 et seq.).

Affiliated Business Arrangements

The sixth disclosure that may be required in transactions subject to RESPA is in connection with Affiliated
Business Arrangements (ABAs or AFBAs), formerly called Controlled Business Arrangements. ABAs occur
when affiliated service providers refer consumers/borrowers to each other in transactions subject to RESPA.
ABAs include entities with a defined percentage of common ownership. This common ownership may be held
by shareholders or by an entity common to both (e.g., a holding company). ABAs also apply to associated
relationships where one entity exercises control over, or shares control with the other (i.e., by joint venture,
partnership or, in certain fact situations, a common business plan). If one service provider benefits financially
by referring borrowers to another service provider, the cautious approach is to assume that the referral is subject
to ABA disclosures (24 CFR Section 3500.15(a), (b), and (c)).

Unless the affiliated entities or associated relationships occur pursuant to an acceptable division of labor or
services agreement, the ABA must function through a separate entity that may not be a division of either of the
affiliated parties. HUD has required adequately capitalized separate entities to be either corporations or
partnerships. Depending upon the activities of the service provider and unless a professional license is required
(as defined), it is possible under California law to structure separate entities as Limited Liability Companies
(LLCs) or Limited Liability Partnerships (LLPs). The preferred option is that of a corporation. The separate
entity must accept its own business risk, obtain licensing as required; and have, among other attributes, its own
facilities, management, and employees (24 CFR Section 3500.15(b) and (c)).

An ABA, whether a separate entity or structured pursuant to an acceptable division of labor agreement, may
receive payment for performing compensable loan services when engaged in loan originations subject to
RESPA. HUD has made it clear that sham entities will not be recognized and considered ploys for avoiding the
unauthorized payment of referral fees. The only thing of value that may be received from an ABA (other than
payments of fees, salaries, compensation or other forms of payment authorized pursuant to 24 CFR Section
3500.14(g)) is a return on an ownership interest or through a franchise relationship from the affiliated entity.
This may include bona fide dividends and distributions of capital or equity. Bona fide business loans, advances,
and capital or equity contributions among entitles in an affiliated relationship are not prohibited so long as they
are for ordinary business purposes and are not for fees for referral of settlement services, or fees that are
unearned (24 CFR Section 3500.15(a), (b), and (c)).

A return on ownership interests does not include any payment that has as a basis of calculation no apparent
business motive other than distinguishing among recipients payments predicated on the amount of the actual,

estimated, or anticipated referrals. Further, payments that vary according to the relative amount of referrals by
different recipients of similar payments; or that are based on an ownership, partnership, or a joint venture share
that has been adjusted for previous relative referrals by recipients of similar payments are also excluded from
the definition of a return on an ownership interest (24 CFR Section 3500.15(b)(3)).

When a face-to-face interview occurs with or when a written or electronic referral is offered to a
consumer/borrower, the ABA disclosure must be delivered at or before the time of the referral and the
creditor/lender must keep a record of the delivery to the consumer/borrower. The ABA disclosure must be in a
separate writing and may be delivered at the time the GFE is completed and delivered (whether separately or
with disclosures required pursuant to TILA). After a face-to-face interview, the creditor/lender must attempt to
obtain a written receipt from the consumer/borrower for the ABA disclosure. If the consumer/borrower refuses
to sign the receipt, the creditor/lender must note the refusal in the business records which must be maintained
for this purpose for five years after the date of execution (24 CFR 3500.15(b) and (d)).

If an ABA referral is made telephonically, the substance of the ABA disclosure must be given during the
conversation, together with an explanation that a separate written disclosure will follow within three business
days of the conversation. A record of the telephone discussion and mailing of the ABA disclosure must be
included in the records of the creditor/lender. Further, if a referral is made by a creditor/lender to an affiliated
creditor/lender, the ABA disclosure is to be delivered to the borrower at the time of the referral or no later than
three business days thereafter. The earliest point for delivery of the ABA disclosure is when the booklet
entitled, “Shopping for Your Home Loan, HUD’s Settlement Cost Booklet” is delivered. Again, the
creditor/lender should retain a record of this as well as any other delivery of the ABA disclosure (24 CFR
Section 3500.15(b) and (c)).

When a referral is made by an attorney or law firm to a client who is a consumer/borrower to a particular title
insurance agent, the ABA disclosure must be provided no latter than at the time the attorney or law firm is
engaged by the client. A creditor/lender may require the use of a particular provider of settlement services or a
business incident thereto when the provider is an attorney, credit reporting agency, or a real estate appraiser
chosen to represent the interests of the creditor/lender in the real estate transaction (24 CFR Section
3500.15(b)(1) and (2)).

Prohibition against Kickbacks and Unearned Fees

No person is to give and no person may accept any fee, kickback or other thing of value pursuant to any
agreement or understanding, oral or otherwise, in connection with a settlement service involving a federally
related mortgage loan transaction for the referral of such service to any other person (including an entity). A
thing of value is defined broadly to include, among others: moneys; things; discounts; salaries; commissions;
duplicate payments of a charge; stock; dividends; distributions of partnership profits; franchise royalties; credits
representing moneys that may be paid at a future date; the opportunity to participate in a money-making
program; payment of retained or increased earnings; increased equity in a parent or subsidiary; special bank
deposits or accounts; special or unusual banking terms; services, sales, or rentals at special prices or rates
including free rates, leases or rental payments based all or in part on the amount of business referred; providing
trips or the payment of expenses of another person; or reductions in credit against existing obligations.

HUD indicates the term “payment” as used in the context of the prohibition against kickbacks and unearned
fees is intended to be synonymous with the giving and receiving of any “thing of value” and does not require
the transferring of money from one person or entity to another. The payment of fees or other compensation
(including thing of value) must be reasonably related to the value of the goods and facilities provided and of the
services rendered (24 CFR Section 3500.14 and .15).

Division of Labor Agreements

In February 1995, HUD responded by letter to an inquiry from the Independent Banker’s Association of
American (IBAA) regarding agreements dividing loan origination services and compensation between IBAA
members and other service providers. HUD provided an opinion letter which allowed division of labor or
service agreements between service providers in certain fact situations. Before this letter, HUD generally
refused to recognize any cooperative mortgage brokerage agreements in loan transactions subject to RESPA.
Mortgage loan brokers (MLBs/MLOs) may now share the performance of compensable services when
originating RESPA loans.

A written agreement is necessary between mortgage brokers (MLBs/MLOs) describing the services each will
perform. Each MLB/MLO must perform at least six identifiable functions (e.g., 5 plus the loan application for
the broker representing the borrower). The division of compensation among cooperating brokers
(MLBs/MLOs) must be reasonably related to the value of the services each performs. Likewise, agreements
between brokers (MLBs/MLOs) and creditors/lenders to share origination functions must be based upon
performance of compensable services for fees that are reasonably related to the value of the services provided.
Such agreements will not work in transactions that are FHA insured.

Cooperating Brokers (MLBs/MLOs)

RESPA contemplates the parties to a loan transaction would include the creditor/lender, a mortgage broker, a
borrower, and a security property. RESPA did not contemplate the use of two mortgage brokers
(MLBs/MLOs) in the same loan transaction. Notwithstanding the foregoing, on February 14, 1995, HUD issued
a letter to the IBAA in response to inquiries regarding cooperative brokering arrangements. The letter
described when compensation paid to more than one mortgage broker in a loan transaction subject to RESPA
would not be in violation of Section 8 (i.e., a "Division of Labor"). This letter provided a "safe harbor" to
creditors/lenders and to mortgage brokers (12 USC Section 2601 et seq. and 24 CFR Section 3500 et seq.). In
the IBAA letter, HUD identified the following services typically performed in the "origination" of a federally
related mortgage loan:

(a) Taking information from the Borrower and filling out the loan application;

(b) Analyzing the prospective Borrower's income and debt and pre-qualifying the prospective Borrower to
determine the maximum mortgage that the prospective Borrower can afford;

(c) Educating the prospective Borrower in the home buying and financing process, advising the Borrower
about the different types of loan products available, and demonstrating how closing costs and monthly
payments could vary under each product;

(d) Collecting financial information (tax returns, bank statements) and other related documents that are part
of the application process;

(e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);

(f) Initiating/ordering requests for mortgage and other loan verifications;

(g) Initiating/ordering appraisals;

(h) Initiating/ordering inspections or engineering reports;

(i) Providing disclosures (truth in lending, good faith estimate, others) to the Borrower;

(j) Assisting the Borrower in understanding and clearing credit problems;

(k) Maintaining regular contact with the Borrower, Realtors, Lender, between application and closing to
apprise them of the status of the application and gather any additional information as needed;

(l) Ordering legal documents;

(m) Determining whether the Security Property was located in a flood zone or ordering such service; and,

(n) Participating in the loan closing” (24 CFR Section 3500.14(b), (c), (d), (e), (f), and (g)).

HUD indicates it would generally be satisfied that no RESPA violation had occurred if it found that:

“The lender's agent or contractor (i.e., mortgage broker or cooperating broker) took the application information
under item (a);

The mortgage broker or cooperating broker performed at least five additional items on the list above, i.e., (a)
through (n); and,

The fees imposed by mortgage brokers are reasonably related to the value of the services performed.”

When two mortgage brokers (MLBs/MLOS) act in a loan transaction subject to RESPA, the mortgage broker
who solicited and/or initially undertook to represent the consumer/borrower to procure a creditor/lender to

extend credit and make a loan are the agents and fiduciaries of the consumer/borrower. The mortgage broker
(MLB/MLO) may perform (among others) each of the services described in (a) through (n) above. The
mortgage broker (MLB/MLO) may also delegate to a cooperating broker (as the subagent) the performance of
some of the aforedescribed settlement services. When such delegation lawfully occurs, and the
consumer/borrower acknowledges and consents to the appointment of the cooperating broker, the latter
becomes the subagent and fiduciary of the consumer/borrower and may be for certain limited purposes the
agent of the delegating mortgage broker (Business and Professions Code Sections 10176(d) and 10177(q); Civil
Code Sections 2295 et seq., 2349 et seq., and 2923.1; and Financial Code Sections 4979.5, 4995(c) and (d) and
4995.3(c)).

When one mortgage broker (MLB/MLO) performs the settlement services of taking the loan application plus
five additional items, the other mortgage broker (MLB/MLO) must perform each of the remaining items on the
list included in the IBAA letter. Accordingly, the settlement services to be performed by each mortgage broker
must be memorialized in writing in a document executed by both mortgage brokers (MLBs/MLOs). HUD is
particularly concerned the additional services of the second mortgage broker (MLB/MLO) are not limited to
"counseling-type" activities that result in unauthorized "steering" of the consumer/borrower. To engage in
meaningful counseling and to avoid "steering", the "counseling-type" services, i.e., (b), (c), (d), (j), and (k) on
the list in the IBAA letter when performed by the mortgage broker (MLB/MLO) must meet the following
standards:

■ “The "counseling" gave the Borrowers the opportunity to consider products from at least three
different approved lender(s);

■ The broker performing the "counseling" is to receive the same compensation regardless of which
approved lender(s)' product is ultimately selected; and,

■ Any payment made for the ‘counseling-type’ services is reasonably related to the value of the services
performed and not based on the amount of loan business referred.”

Bona Fide HUD Employee Exemptions

In 1997 HUD modified the limitations imposed on payment of referral fees or fee-splitting in RESPA loan
transactions. The modifications apply to payments which are made by employers to bona fide employees,
(recipients of W-2 tax forms). The employer/employee relationship must be neither a sham nor established on a
temporary basis to circumvent the intent of the regulation. HUD has outlined the following general exemptions
for payments made by employers to bona fide employees:

■ Payments for generating business for the employer, or for providing services in the loan origination
process;

■ Payments to marketing employees and managerial employees (employees not providing services) for
referrals to the employer or another provider within an ABA. (The latter must include an ABA notice);
and,

■ Payments to managerial employees based upon criteria relating to performance, as long as the
payments are not on a per loan basis” (24 CFR Section 3500.14(f) and (g)).

Independent Contractor Limitations

Independent contractor relationships are not subject to the same exemptions. Accordingly, loan representatives
who are independent contractors of a mortgage firm must be licensed and registered as MLBs/MLOs and are to
perform compensable loan services to be compensated in RESPA loan transactions. The compensation paid to
independent contractors must be reasonably related to the services they provide and should be evidenced by a
division of labor agreement between the mortgage firm and its independent contractors (24 CFR Section
3500.14(b), (c), (d), (e), (f), and (g)).

Affiliated Business Disclosure Statement Format

To:

From:

Property:

Date:

This is to give you notice that [referring party] has a business relationship with [settlement services
providers(s)]. [Describe the nature of the relationship between the referring party and the providers(s),
including percentage of ownership interest, if applicable.] Because of this relationship, this referral may provide
[referring party] a financial or other benefit.

[A.] Set forth below is the estimated charge or range of charges for the settlement services listed. You are NOT
required to use the listed provider(s) as a condition for [settlement of your loan on] [or] [purchase, sale, or
refinance of] the subject property. THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE
PROVIDERS AVAILABLE WITH SIMILAR SERVICES. YOU ARE FREE TO SHOP AROUND TO
DETERMINE THAT YOU ARE RECEIVING THE BEST SERVICES AND THE BEST RATE FOR THESE SERVICES.

[provider and settlement service] [charge or range of charges]

[B.] Set forth below is the estimated charge or range of charges for the settlement services of an attorney, credit
reporting agency, or real estate appraiser that we, as your lender, will require you to use, as a condition of your
loan on this property, to represent our interests in the transaction.

[provider and settlement service][charge or range of charges]