The Federal Reserve has issued a final rule to implement a provision of the Dodd-Frank Act that amends the federal Truth in Lending Act to increase the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien, “jumbo” home mortgage loans. Under the final rule issued on February 23, which amends Regulation Z, the escrow requirement will apply to first-lien jumbo loans only if the loan’s APR is 2.5 percentage points or more above the average prime offer rate. A jumbo loan is a loan exceeding the conforming loan-size limit for purchase by Freddie Mac. The current maximum principal obligation for a mortgage loan to be eligible for purchase in 2011 by Freddie Mac is $417,000 for a single-family property that is not located in a designated high-cost area. Higher limits apply to mortgage loans secured by properties with two to four residential units. The APR threshold for non-jumbo loans remains unchanged at 1.5 percentage points above the average prime offer rate for a comparable transaction. Raising the APR threshold applicable to jumbo loans eliminates the mandatory escrow requirement for loans with an APR above the existing threshold but below the new threshold. Creditors may, at their option, elect to continue to use the 1.5 percentage point threshold for jumbo loans, but they are not required to do so. The final rule is effective for covered loans for which the creditor receives an application on or after April 1, 2011.
Notes: In connection with the final rule issued on February 23, the Federal Reserve requested public comment on a proposed amendment to Regulation Z to revise the escrow account requirements for certain higher-priced home mortgage loans. The proposal would implement a requirement under the Dodd-Frank Act to lengthen the time for which a mandatory escrow account established for a higher-priced mortgage loan must be maintained. The Federal Reserve’s proposal would expand the minimum period for mandatory escrow accounts for first-lien, higher-priced mortgage loans from one to five years, and longer under certain circumstances, such as when the loan is delinquent or in default. A higher-priced mortgage loan is a home loan secured by the borrower’s principal dwelling with an APR that exceeds the average prime offer rate for a comparable transaction by 1.5 or more percentage points for first lien loans, or by 3.5 or more percentage points for subordinate lien loans. The proposal also would implement new consumer disclosure requirements contained in the Dodd-Frank Act. Disclosures explaining, as applicable, how the escrow account works or the effects of not having an escrow account would be required at least three business days before closing a home mortgage loan. The proposed rule also would require disclosures to consumers at least three business days before an escrow account is closed. Comments on the proposed rule will be due within 60 days after publication in the Federal Register, which is expected shortly.