In January 2013, the Consumer Financial Protection Bureau (“CFPB”) issued its final mortgage escrow account rule (“Escrow Rule”).
The Escrow Rule requires lenders to establish escrow accounts for certain mortgage transactions to help ensure that consumers set aside funds to pay for certain expenses (property taxes, premiums for homeowners insurance, and other mortgage-related insurance). The Escrow Rule only affects certain “higher-priced” mortgage loans (“HPML”) that have a rate based on interest, points, and other loan terms that are higher than the levels established in the rule. An HPML is defined as a consumer credit transaction secured by a principal dwelling where the annual percentage rate (“APR”) exceeds the average prime offer rate for comparable transactions by 1.5% or more for conforming loans, 2.5% or more for jumbo loans or 3.5% or more for a loan secured by a subordinate lien.
The Escrow Rule lengthens the time that mandatory escrow accounts must be maintained on higher-priced mortgages from one year to five years. The lender may not cancel required escrow accounts except upon termination of the loan or when the consumer requests cancellation no earlier than five years after consummation. The escrow account may not be cancelled unless the unpaid principal balance is less than 80% of the property’s original value and the consumer is not delinquent or in default.
Lenders meeting certain conditions are exempt from the Escrow Rule. The four conditions, all of which must be met, are as follows: (a) the lender makes more than half of its first-lien mortgages in rural or underserved areas (the CFPB will be publishing a list of counties considered to be such areas); (b) the lender and its affiliates make 500 or fewer mortgage loans per year; (c) the lender has assets of less than $2 billion; and (d) the lender generally doesn’t hold escrow accounts for any of its current mortgage customers. Regarding the latter condition, lenders can maintain escrow accounts and still fall under the exemption if the escrow accounts were established for first-lien HPML’s after April 1, 2010 and before June 1, 2013 or were established after consummation as an accommodation to assist distressed consumers in avoiding default or foreclosure.
If a lender meets all four conditions but plans to sell a loan to another company (i.e., the loan will be acquired pursuant to a forward commitment) and the other company does not meet the requirements, the lender must establish an escrow account if the loan is an HPML.
The Escrow Rule will become effective June 1, 2013. A copy of the rule can be found here.