Impound Accounts Allowed For “Higher Priced Mortgage Loans”
August 17, 2009
A new California law, SB 633, sponsored by the California Bankers Association, has been enacted to allow lenders to require establishment of an impound account on loans made in compliance with the requirements for a “higher priced mortgage loan” within the meaning of the Federal Reserve Board’s Regulation Z, which implements the Truth in Lending Act.
Under the existing state law codified at Civil Code Section 2954, a lender may not impose impound accounts except under specified circumstances .
In July last year the Federal Reserve Board issued a final rule amending the home mortgage provisions of Regulation Z (“Rule”) . The Rule, which has an effective date of April 1, 2010 for site-built homes, and October 1, 2010 for manufactured homes, established a new category of loans called a “higher-priced mortgage loan.” This is defined as a consumer loan secured by the consumer’s principal dwelling with an APR that exceeds a market-based index rate by 1.5% or more.
One of the new requirements pertaining to higher-priced mortgage loans is the establishment of an escrow account for taxes and insurance. The requirement covers not just first liens on a consumer’s principal dwelling but also structures classified as personal property, such as a mobile home, boat or a trailer used as the consumer’s principal dwelling. The escrow requirement does not apply to loans secured by shares in a cooperative that pays property tax and insurance premiums and passes the costs on to individual unit owners. An escrow account for insurance (but not taxes) is not required for condominium units if the condominium association is required to maintain a master policy of insurance. A creditor or servicer may permit a consumer to cancel the escrow account only after one year in response to a consumer’s dated written request.
For purposes of determining whether a loan is covered, Regulation Z provides that a transaction’s APR is compared to the average prime offer rate as of the date the interest rate is locked (before consummation of the loan). Nevertheless, a loans’ contractual APR might not be established until after the underwriting process has been completed. Creditors may need to build in a “cushion” against the uncertainty by setting their internal threshold lower than the threshold in the regulation. Thus, to avoid the possibility of violating Regulation Z by failing to classify a loan as a higher priced mortgage loan, creditors may over-classify loans as such.
Because of CBA’s concern that Section 2954 is not sufficiently flexible to cover these situations (an impound account may be imposed if “required” by a regulatory authority), the revised code will allow impound accounts where a loan is made in compliance with the requirements for higher priced mortgage loans under Regulation Z, whether or not the loan is a higher priced mortgage loan. Additionally, an impound account is allowed if the loan is refinanced or modified in connection with a creditor’s homeownership preservation program or where it participates in such a program sponsored by a federal, state, or local government authority or a nonprofit organization. This broad language is intended to include the myriad of programs at all levels of government already adopted or under consideration currently or in the future.
This change represents a shift in attitude toward impound accounts from the time that the existing statute was enacted. Then, many believed that imposition of escrow accounts only benefited creditors and that the accounts could be administered improperly to the detriment of borrowers. However, now it is recognized that impound accounts can help borrowers understand the true costs of owning a home.
The change becomes effective on January 1, 2010. If you have any questions, please contact Kevin Gould, lead lobbyist on the bill.
- The circumstances are: (1) the account is required by a state or federal regulatory authority; (2) the loan is made, guaranteed, or insured by a state or federal governmental lending or insuring agency; (3) the borrower fails to pay two consecutive tax installments on the property; (4) the original principal amount is (i) at least 90% of the sale price (if the property is sold) or is (ii) at least 90% of the property’s appraised value; or (5) the combined principal amount of all loans secured by the property exceeds 80% of the appraised value. Civil Code Section 2954.
- See CBA Regulatory Compliance Bulletins dated July 28, 2008 and August 14, 2008. The Federal Reserve’s preamble and text of the Rule can be viewed at http://www.occ.treas.gov/fr/fedregister/73fr44522.pdf.
The information contained in this CBA Regulatory Compliance Bulletin 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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