Big Mortgage Escrows: Be prepared for the CFPB’s new escrow rules for higher-priced mortgages
In addition to other regulatory changes affecting how mortgage lenders have to handle escrow requirements, the Dodd-Frank Wall Street Reform Act amended Regulation Z (the Truth in Lending Act) to require creditors to establish escrow accounts for higher-priced mortgage loans secured by a first lien on a principal dwelling which are not otherwise exempt under the rule. In January, the Consumer Financial Protection Bureau issued additional Regulation Z rules for escrow accounts. As such, the TILA Escrow Rule became effective for loan applications received on or after June 1, 2013. It determined that a loan is “higher-priced” if:
- it is a first-lien mortgage with an Annual Percentage Rate that exceeds the Average Prime Offer Rate (APOR) by 1.5 percentage points or more; or
- it is a first-lien mortgage with an APR that exceeds the APOR by 2.5 percentage points or more, if the principal amount of the mortgage exceeds Freddie Mac’s limit for mortgages it will purchase (primarily jumbo loans) that is in effect as of the date the interest rate for the transaction is set.
Regulation Z requirements
The Dodd-Frank Act amended Regulation Z to require servicers to establish escrow accounts for higher-priced mortgage loans secured by a first lien on a principal dwelling. Regulation Z escrow rule changes are effective for loan applications received on or after June 1, 2013. When escrow accounts are required under the new rules, they must be established and maintained under the Regulation X rules discussed above.
Servicers must address the following key requirements for covered loans:
- Establish and maintain an escrow account for a first-lien higher-priced mortgage loan for at least five years; and
- Maintain the escrow account until one of the following occurs: 1) the underlying debt obligation is terminated or 2) after the five-year period, the consumer requests that the escrow account be canceled.
The Regulation Z amendments also clarify that servicers do not have to escrow insurance payments for homeowners in common interest communities where the governing body is required to purchase master insurance policies. The changes also exempt from the escrow requirement loans made by small lenders that operate predominantly in rural or underserved counties, as long as the lenders are not subject to forward commitments for sale to nonexempt creditors.
Regulation Z exemptions
Under the TILA Escrow Rule, escrow accounts do not need to be established for:
- transactions secured by shares in a cooperative;
- transactions to finance the initial construction of a dwelling;
- temporary or “bridge” transactions with terms of 12 months or less;
- reverse mortgages;
- subordinate liens;
- open-end credit (such as a home equity line of credit); or
- insurance premiums the consumer purchases that you do not require.
Loans held in portfolio by an organization that operates predominantly in rural or underserved counties and meets certain size and operational criteria may be exempt from the TILA Escrow Rule. The CFPB has issued lists of recognized rural or underserved counties that meet the definition.
Regulation Z—best practices
- Conduct a review of loans now to determine if your community bank must offer escrow accounts under the new Regulation Z rules or if it is exempt. If your bank’s loans are covered by the new rules, significant system changes, disclosure forms and training may be required by your bank. Revising policies, procedures and controls may also be necessary.
- Conduct regular staff training on escrow requirements, and include the TILA rules even if your bank is not currently covered. Staff training will be important to identify and remedy any compliance gaps.
- Conduct periodic compliance reviews and audits that include tests for TILA coverage.
Mary Thorson and Kris Welch are vice presidents with Chartwell Compliance.