Compliance Bulletin

CFPB Issues Escrow Rule for Higher Priced Mortgage Loans
March 4, 2013

The Consumer Financial Protection Bureau (“CFPB”) issued a final rule (“Rule”) implementing Sections 1461 and 1462 of the Dodd Frank Act, which amends the requirements for maintaining escrow accounts in connection with higher-priced mortgage loans (“HPMLs”). The Rule is part of a broader package of rulemaking by the CFPB on mortgage lending covering borrowers’ ability to repay, high-cost (HOEPA) mortgages, loan originator compensation, appraisals, and servicing.

Among other things, Sections 1461 and 1462 establish a minimum period for which escrows must be held and create a rate threshold for jumbo loans. Under the existing escrow account rule, creditors must establish an escrow account for payment of property taxes and required mortgage insurance premiums prior to consummating an HPML.  The Rule revises the CFPB’s 12 CFR § 1026.35 and adds new comments.

An HPML is a closed-end consumer credit transaction secured by the consumer’s principal dwelling where the annual percentage rate exceeds the average prime offer rate (1) for a comparable transaction by: (i) 1.5% or more for conforming loans; (ii) 2.5% or more for jumbo loans (the principal balance does not exceed the maximum amount eligible for purchase by Freddie Mac); or (iii) 3.5% or more for a loan secured by a subordinate lien (2).

The Rule extends from one to five years the period of time that the escrow account must be maintained. Thus, a creditor or servicer may terminate an escrow account (if not earlier cancelled due to termination of the debt) after a consumer’s request to do so if received no earlier than five years after consummation, (3)  but only if the unpaid principal balance is less than 80% of the original value of the secured property and the loan is current (4).  

The term “original value” means the lesser of the property’s sales price (as shown in the sales contract) or its appraised value at consummation. In determining whether the unpaid principal balance meets the 80% test, any amount secured by a subordinate lien is included which the creditor “has reason to know.” (5) A creditor or servicer may rely on a consumer’s written certification that the equity in the property is unencumbered by a subordinate lien, “unless it has actual knowledge to the contrary.” (6) 

Exemptions

An exemption from the escrow requirement is available to a creditor if the following conditions are met as of the time the loan is consummated:

• during the preceding calendar year, the creditor extended more than half of its total covered transactions secured by a first lien on properties that are located in counties designated either “rural” or “underserved” by the CFPB (7);
• during the preceding calendar year, the creditor and its affiliates together originated 500 or fewer “covered transactions” secured by a first lien;
• as of the end of the preceding calendar year, the creditor had total assets of less than $2 billion; and
• neither the creditor nor its affiliate maintains such escrow accounts for other dwelling-secured consumer credit other than: (i) escrow accounts established for first-lien HPMLs on or after April 1, 2010, and before June 1, 2013; or (ii) escrow accounts established after consummation as an accommodation to distressed consumers (8) to assist such consumers in avoiding default or foreclosure (9).

For purposes of the exemption, a covered transaction is a consumer credit transaction that is secured by a dwelling (including any real property attached to a dwelling) but excluding home equity lines of credit, timeshare loans, reverse mortgages, temporary or bridge loan of 12 months or less, and certain construction loans of 12 months or less (10).
A county is considered to be “rural” if it is neither in a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area, as defined by the Office of Management and Budget and the U.S. Department of Agriculture (11).  A county is “underserved” if no more than two creditors extend first-lien covered transactions five or more times in the county during a calendar year, according to HMDA data (12). The CFPB will publish a list of such counties that are deemed rural or underserved for a particular calendar year by the end of each year. The list may be relied upon by a creditor to determine whether a county qualifies for purposes of applying the exemption (13).  

The exemption does not apply where the HPML will be acquired by a purchaser pursuant to a forward commitment. A forward commitment is an agreement entered into by the creditor at or before consummation where a purchaser is committed to acquire the loan after consummation, unless the purchaser is also exempt or the transaction itself is exempt (e.g., it is a HELOC, reverse mortgage, etc.). This provision applies whether the forward commitment refers to the purchase of specific loans or those with criteria that the HPML satisfies.   See also § 35(b)(2)(ii) and comments 35(b)(2)(ii)-2 and 3 regarding an exception for insurance required under master policies by condominiums, planned unit developments, or other common interest communities.

The Rule is effective June 1, 2013.

(1) 12 CFR § 1026.35(a)(2): “Average prime offer rate” means an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. The CFPB publishes average prime offer rates for a broad range of types of transactions in a table updated at least weekly as well as the methodology it uses to derive these rates. (All citations are to Part 12 of the Code of Federal Regulations).
(2) § 1026.35(a)(1).
(3) § 35(b)(3)(i). Comment 35(b)-2 states that this requirement does not affect a creditor’s right or obligation (whether contractual or legal) to offer or require an escrow account after the minimum period.
(4) § 35(b)(3)(ii).
(5) Comment 35(b)(3)-3.   
(6) Comment 35(b)(3)-2.
(7) See comment 35(b)(2)(iii)-1.i for illustrations. 
(8) A “distressed consumer” is one who is working with the creditor or servicer to attempt to bring the loan current that involves some accommodation to the consumer. Comment 35(b)(2)(iii)(D)(2)-1.
(9) The CFPB explained in the preamble to the Rule that if a creditor already has the capacity to maintain escrow accounts, then it does not need the exemption. See comment 35(b)(2)(iii)-1.iv for what constitutes maintaining an escrow account.
(10) A covered transaction is defined in § 1026.43(b)(1).
(11) § 35(b)(2)(iv)(A).
(12) § 35(b)(2)(iv)(B).
(13) See comments 35(b)(2)(iv)-1.i and 1.ii.

The information contained in this CBA Legal Notes is not intended to constitute, and should not be received as, legal advice.  Please consult with your counsel for more detailed information applicable to your institution.

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