Friday, May 17, 2013

Is Your Institution Prepared for New Escrow Requirements for Higher-Priced Mortgages?

Beginning June 1, 2013, financial institutions originating higher-priced mortgage loans (HPMLs) on residential structures will have to extend escrow account durations for consumers under a final rule issued by the Consumer Financial Protection Bureau (CFPB).

Driven by the CFPB’s mission to strengthen consumer protection, the new rules are designed to help:
  • Prevent consumers from purchasing homes they can’t afford due to taxes and insurance not being taken into account at the time of purchase
  • Avoid unexpected cost shock for consumers by spreading tax and insurance costs over a year instead of a burdensome lump sum
  • Minimizing foreclosure rates for first-lien, higher-priced mortgages

What Are the New Rule Changes?

The final rule, resulting from amendments to the Truth in Lending Act (Regulation Z) established by the Dodd-Frank Act, lengthens the time frame for which an escrow account should be maintained for HPMLs. It will now be extended to a minimum of five years, up from the current requirement of one year. Consumers will have the opportunity to remove the escrow after this five-year time allotment if they have not been delinquent in payments and the loan value is less than 80 percent of the original property value.

Be aware that having additional years of the escrow account will impact the costs associated to extending maintenance.

Although the new rule will apply to many, not every creditor and transaction will be impacted by the escrow account modifications. The rule defines and expands upon several exemptions, including:

Transaction Exemptions – The following transactions are exempt from obliging to the statute’s escrow requirements:

  • Loans on cooperative properties
  • Construction loans that do not include permanent financing
  • Temporary or bridge loans with terms less than 12 months
  • Reverse mortgages
  • Subordinate liens
  • Open-end credit (home equity lines of credit)
  • Insurance premiums purchased by the consumer, but not required by the creditor
Creditor Exemptions – Creditors who operate in predominantly rural or underserved areas are exempt if they:

  • Made more than 50 percent of first-lien covered transactions in rural or underserved counties
  • Combined with affiliates, completed less than 500 first-lien loans in the preceding calendar year
  • Have total assets fewer than $2 billion, adjusted annually for inflation
  • Generally do not escrow for mortgage obligations they or their affiliates currently service
  • Hold the consumer’s loan in their portfolio
Existing Exemption Expansion – Expanding on existing exemptions related to escrowing insurance premiums for condominium units, the new rule includes an exemption for instances where an individual’s policy is covered by a master insurance policy.

How to Prepare for the Changes

With any regulatory change come adjustments. To avoid penalties and potential punitive damage claims by consumers related to ineffectively implementing the regulation, be proactive in accommodating the change at your financial institution by:

  • Developing and implementing systematic changes and business practices to ensure escrow accounts for HPMLs are not waived in the first five years
  • Training impacted departments and staff on the new requirements and related new procedures
  • Evaluating the need to outsource escrowing to a third-party servicing firm to help minimize internal resources’ time and related cost
Even if your institution is exempt from this rule, but still escrows for higher-priced mortgages today, you may need to rethink your current escrow program to accommodate applications received on or after June 1, 2013, to remain exempt.

To learn more about what you can do to prepare for the regulatory change, contact Doeren Mayhew.

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