by Amy Kleinschmit, Director of Compliance

Then came the Dodd-Frank Act on July 21, 2010.  Several of the provisions of the Dodd-Frank Act expanded upon elements of the 2008 HOEPA Final Rules.  Sections 1461 and 1462 of the Dodd-Frank Act create new TILA section 129D, 15 U.S.C. 1639d, which substantially codifies Regulation Z’s escrow requirement for higher-priced mortgage loans but lengthens the period for which escrow accounts are required, adjusts the rate threshold for determining whether escrow accounts are required for “jumbo loans,” whose principal amounts exceed the maximum eligible for purchase by the Federal Home Loan Mortgage Corporation (Freddie Mac), and adds two disclosure requirements. (NOTE – this final rules does not include these disclosure requirements, however, expect them later this year when the CFPB issues their final rules on other disclosure requirements.)

Effective Date: The rule is effective June 1, 2013.  Its requirements apply to transactions for which creditors receive applications on or after that date.

Final Rule and CFPB summary: http://www.consumerfinance.gov/regulations/escrow-requirements-under-the-truth-in-lending-act-regulation-z/

A “higher-priced mortgage loan” is defined as “a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set: (i) By 1.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; (ii) By 2.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; or (iii) By 3.5 or more percentage points for loans secured by a subordinate lien.” §1026.35(a)(1)

Similar to current requirements, a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer’s principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer’s default or other credit loss. “Principal dwelling” includes structures that are classified as personal property under State law, for example, if a consumer uses a manufactured home, boat or trailer as their principal dwelling and it is being used to secure a first lien that meets the definition of a “higher-priced mortgage loan” then an escrow account would need to be established.

The final rule extends the period that an escrow account is required from 1 year to 5 years. A creditor or servicer may cancel an escrow account that is required under this part only upon the earlier of the termination of the underlying debt obligation; or the receipt no earlier than five years after consummation of a consumer’s request to cancel the escrow account. However, the creditor/servicer cannot cancel the escrow account even at the consumer’s request unless the unpaid principal balance is less than 80 percent of the original value of the property securing the underlying debt obligation and the consumer currently is not delinquent or in default on the underlying debt obligation.

Exemptions to this escrow account requirement include a transaction secured by shares in a cooperative; a transaction to finance the initial construction of a dwelling; a temporary or “bridge” loan with a loan term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months; or a reverse mortgage transaction subject to § 1026.33(c). The exemptions under previous regulatory language included an exemption for home equity line of credit subject to § 1026.40, however, this was removed with the revision of the definition of “higher-priced mortgage loan” which specifies that they are closed-end loans.

The final rule also expands the exemption that insurance premiums discussed above are not required to be included in escrow accounts for loans secured by dwellings in condominiums, to also include planned unit developments, or other common interest communities in which dwelling ownership requires participation in a governing association, where the governing association has an obligation to the dwelling owner to maintain a master policy insuring all dwellings.

This final rule also adds an exemption for escrow requirements for creditors in “rural” or “underserved” that meet certain criteria. At the time of consummation, the creditor must meet these requirements:

·         During the preceding calendar year, the creditor extended more than 50 percent of its total “covered transactions”, secured by a first lien, on properties that are located in counties designated either “rural” or “underserved” by the Bureau;

·         During the preceding calendar year, the creditor and its affiliates together originated 500 or fewer covered transactions, secured by a first lien; and

·         As of the end of the preceding calendar year, the creditor had total assets of less than $2,000,000,000; and

·         Neither the creditor nor its affiliate maintains an escrow account of the type described under this final rule for any extension of consumer credit secured by real property or a dwelling that the creditor or its affiliate currently services, other than:

(1)                         Escrow accounts established for first-lien higher-priced mortgage loans on or after April 1, 2010, and before June 1, 2013; or

(2)                         Escrow accounts established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure.”

With regard to the last criteria, that neither the creditor nor its affiliate maintains an escrow account, there are two exceptions. First, on and after June 1, 2013, creditors, together with their affiliates, that establish new escrow accounts, other than those described for distressed consumers, do not qualify for the rural/underserved exemption. Creditors, together with their affiliates, that continue to maintain escrow accounts established between April 1, 2010, and June 1, 2013, still qualify for the exemption so long as they do not establish new escrow accounts for transactions consummated on or after June 1, 2013. An escrow account established after consummation for a distressed consumer does not count for purposes of the last criteria of the exemption discussed above. Distressed consumers are consumers who are working with the creditor or servicer to attempt to bring the loan into a current status through a modification, deferral, or other accommodation to the consumer. However, a creditor, together with its affiliates, that establishes escrow accounts after consummation as a regular business practice, regardless of whether consumers are in distress, does not qualify for the rural/underserved exception.

“Covered transaction” as used in the above exemption for creditors is actually defined under the new §1026.43(b)(1) which is found in a separate final rule that was issued at this same time as this final rule (look for a summary of that final rule in an upcoming Memo) Under the new §1026.43(b)(1) a “Covered transaction means a consumer credit transaction that is secured by a dwelling, as defined in § 1026.2(a)(19), including any real property attached to a dwelling, other than a transaction exempt from coverage under paragraph (a) of this section.”

A county is “rural” during a calendar year if it is neither in a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area, as those terms are defined by the U.S. Office of Management and Budget and applied under currently applicable Urban Influence Codes (UICs), established by the United States Department of Agriculture’s Economic Research Service (USDA-ERS). A county is “underserved” during a calendar year if, according to Home Mortgage Disclosure Act (HMDA) data for that year, no more than two creditors extend covered transactions, as defined in § 1026.43(b)(1), secured by a first lien five or more times in the county. The CPFB will publish a list of counties that qualify as “underserved” or “rural” that creditors can rely on as a safe harbor.

Exception to the “rural” or “underserved” exemption – an escrow account is required for any first-lien higher-priced mortgage loan that, at consummation, is subject to a commitment to be acquired by a person that does not satisfy the conditions for the rural/underserved exemption, unless the loan meets other exemptions such as a transaction secured by shares in a cooperative or a transaction to finance the initial construction of a dwelling.  A creditor may make a mortgage loan that will be transferred or sold to a purchaser pursuant to an agreement that has been entered into at or before the time the loan is consummated. Even if a creditor is otherwise eligible for the rural/underserved exemption, a first-lien higher-priced mortgage loan that will be acquired by a purchaser pursuant to such a commitment is subject to the requirement to establish an escrow account before consummation unless the purchaser is also eligible for the rural/underserved exemption. The escrow requirement applies to any such transaction, whether the forward commitment provides for the purchase and sale of the specific transaction or for the purchase and sale of mortgage obligations with certain prescribed criteria that the transaction meets.

Should you have any questions or concerns on this or any other compliance topic, please do not hesitate to contact Amy Kleinschmit at akleinschmit@cuad.coop or 701.214.9721.