Financial Institutions Prepare for Implementation—CFPB Issues Rules to Strengthen Protections for High-Cost Mortgages

The tide is beginning to turn on numerous proposals issued by the Consumer Financial Protection Bureau (“CFPB”) to revise and enhance consumer protections for residential mortgage loans. The changes are pursuant to requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In January 2013, the CFPB issued final rules to strengthen consumer protections for high-cost mortgages and to provide consumers with information about homeownership counseling. The CFPB also finalized a rule that requires escrow accounts be established for a minimum of five years for certain higher-priced mortgage loans. The issuances include revisions to The Home Ownership and Equity Protection Act (“HOEPA”) and a final rule regarding the consumer’s ability to repay. The rule about the consumer’s ability to repay is accompanied by a proposal for comment on certain amendments to the final rule, including exemptions for certain nonprofit creditors and certain homeownership stabilization programs and an additional definition of a qualified mortgage for certain loans made and held in portfolio by small creditors. The effective dates of the changes are:

June 1, 2013 For extension of minimum escrow account maintenance; Exemption from escrow requirements for small creditors operating in rural or underserved areas; Exemption from escrowing for insurance premiums (but not for property taxes).

January 10, 2014 For revision of HOEPA coverage tests; Restrictions on loan terms; Home counseling-related requirements.

January 10, 2014 For rules regarding the consumer’s ability to repay.

Changes to Escrow Requirements and Exempt Transactions

First up for implementation are the escrow rule changes. Because of the sixmonth period before the June 1, 2013, effective date, banks must take action now to identify affected policies, procedures, and systems, and begin planning the transition to the revised rules.


The final rule has three main elements:

  1. The rule amends existing regulations that require creditors to establish and maintain escrow accounts for at least one year after originating a “higher-priced mortgage loan” to require generally that the escrow accounts be maintained for at least five years.
  2. The rule creates an exemption from the escrow requirement for small creditors that operate predominately in rural or underserved areas. Specifically, to be eligible for the exemption, a creditor must: (1) make more than half of its first-lien mortgages in rural or underserved areas; (2) have an asset size less than $2 billion; (3) together with its affiliates, have originated 500 or fewer first-lien mortgages during the preceding calendar year; and, (4) together with its affiliates, not escrow for any mortgage it or its affiliates currently services, except in limited instances.Under the rule, an eligible creditor need not establish escrow accounts for mortgages intended at consummation to be held in the creditor’s portfolio, but must establish accounts at consummation for mortgages that are subject to a forward commitment to be purchased by an investor that does not itself qualify for the exemption.
  3. Finally, the rule expands upon an existing exemption from escrowing for insurance premiums (though not for property taxes) for condominium units to extend the partial exemption to other situations in which an individual consumer’s property is covered by a master insurance policy.


A creditor must escrow for property taxes and insurance. Except for the exempt transactions listed below, 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.

The revised rules provide for certain transactions to be exempt from the new escrow requirements. An escrow account need not be established for:

Key Definitions Bearing on the Escrow Rule Changes

It is important to know the definitions of the key terms used to determine the coverage of the new rules. Section 1026.35(a) Definitions include definitions of key terms for Regulation Z Subpart E – Special Rules for Certain Home Mortgage Transactions, including the following:

“Higher-priced mortgage loan” means 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:

“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 the CFPB uses to derive these rates.

High-Cost Mortgage and Homeownership Counseling Amendments

The CFPB issued this final rule to implement the Dodd-Frank amendments to the Truth in Lending Act and the Real Estate Settlement Procedures Act. The final rule amends Regulation Z (Truth in Lending) by expanding the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 (“HOEPA”), revising and expanding the tests for coverage under HOEPA, and imposing additional restrictions on mortgages that are covered by HOEPA, including a pre-loan counseling requirement.

Expansion of HOEPA Coverage

Under the final rule, most types of mortgage loans secured by a consumer’s principal dwelling, including purchasemoney mortgages, refinances, closedend home-equity loans, and open-end credit plans (i.e., home equity lines of credit or HELOCs) are potentially subject to HOEPA coverage. The final rule retains the exemption from HOEPA coverage for reverse mortgages.

In addition, the final rule adds exemptions from HOEPA coverage for three types of loans that the Bureau believes do not present the same risk of abuse as other mortgage loans:

New HOEPA Coverage Test Guidelines

The final rule implements revisions to HOEPA’s coverage tests by providing that a transaction is a high-cost mortgage if any of the following tests is met:

The final rule also provides guidance on how to apply the various coverage tests, such as how to determine the applicable average prime offer rate and how to calculate points and fees.

Restrictions on Loan Terms 

The final high-cost mortgage rule:

Ability to Repay and qualified Mortgage Standards

The final rule amends Regulation Z, which implements the Truth in Lending Act (“TILA”). Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final rule implements sections of the DoddFrank Act.

Ability to Repay Requirements

The final rule regarding the consumer’s ability to repay and:

Concurrent Proposal for Comment

The final rule on ability to repay is accompanied by a concurrent proposal to further amend Regulation Z. The Dodd-Frank Act requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The CFPB is proposing certain amendments to the final rule implementing these requirements, including exemptions for certain nonprofit creditors and certain homeownership stabilization programs and an additional definition of a qualified mortgage for certain loans made and held in portfolio by small creditors. The CFPB is also seeking feedback on whether additional clarification is needed regarding the inclusion of loan originator compensation in the points and fees calculation.

As the CFPB incrementally finalizes proposals launched over the past 18 months, it is critical that banks evaluate the impact the final rules will have on policies, procedures, and systems changes that are affected. Bank management should ensure that the members of the Board of Directors are apprised of the changing requirements, resource implications and compliance risks effected by these regulatory challenges.

Mary Thorson has over 28 years of experience in bank and non-bank regulatory compliance, training, and financial institution program reviews and examinations. Ms. Thorson has developed a broad and deep portfolio of technical expertise that spans consumer protection, lending, deposits, operations, privacy, third-party management, collections, and anti-money laundering/anti-terrorist financing laws and regulations.

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