Effective June 1, 2013
The Consumer Financial Protection Agency (CFPB) has issued a final rule to implement provisions of the Dodd-Frank Act to strengthen the rules that require escrow accounts be established for certain mortgage transactions. This new final rule lengthens the period of time from one year to five years that escrow accounts must be maintained for “higher-priced” mortgages and creates an exemption to the escrow requirement for small financial institutions that operate primarily in rural or underserved areas. Last of all, the rule expands an existing exemption from escrowing for insurance premiums for condominiums to other situations where an individual consumer’s property is protected by a master insurance policy.
Summary of Changes
Duration of Required Escrow Accounts
Since 2010, financial institutions have generally been required to establish and maintain escrow accounts for property taxes and premiums for mortgage-related insurance when originating a “higher-priced” mortgage secured by a first lien on a principal dwelling. A “higher-priced” mortgage is, with certain exceptions, a closed end transaction secured by the borrower’s principal dwelling where the annual percentage rate (APR) exceeds the average prime offer rate for a comparable transaction by 1.5 or more percentage point for first lien transactions, by 2.5 or more percentage points for a first lien mortgage if the principal amount of the loan at consummation is considered a “jumbo” mortgage as defined by FHLMC, or by more than 3.5 or more percentage points for subordinate liens. The current rule requires that these escrow accounts be maintained for a period of not less than one year. This new rule extends that period to five years.
Transaction-Type Exceptions to the Required Escrow Accounts
The new rule identifies certain “higher-priced” mortgages that are exempt from the escrow requirement. These situations are:
- Transactions secured by shares in cooperatives;
- Transactions to finance the initial construction of a dwelling;
- Temporary or “bridge” loans with terms of 12 months or less; and
- Reverse mortgage loans.
Partial Exception for Condominiums and Similar Situations
Currently, escrow accounts for “higher-priced” mortgages that are secured by condominiums do not need to include premiums for property and casualty insurance that is covered under a master insurance policy. The new rule expands this partial exemption to any other type of property ownership where the governing association is required to maintain a master insurance policy.
Exemption for Lenders Who Predominately Operate in Rural or Underserved Areas
The new rule provides that lenders are exempt from the escrow requirement for “higher-priced” mortgages that meet the following three criteria:
- In the preceding calendar year, the lender made more than 50% of its first-lien covered mortgages in counties designate by the CFPB as “rural”;
- Together with all affiliates extended 500 or fewer first-lien mortgages in the preceding calendar year; and
- Have total assets of less than $2 billion, adjusted annually for inflation.
Eligible lenders do not need to establish escrow accounts for “higher-priced” mortgages they intend to hold in their portfolio (based on the intent at the time the loan is consummated). It should be noted, however, that escrow accounts must be established for “higher priced” mortgages if, at consummation, the loan is subject to a commitment to be purchased by a party that does not satisfy the above conditions, unless the loan transaction is otherwise exempt based on the specific transaction type.
The CFPB will publish on an annual basis a list of the counties that qualify as rural or underserved.
Cancellation of the Escrow Account
Lastly, the final rule states that the lender may cancel an escrow account upon the earlier of the termination of the underlying loan or receipt of a borrower’s request to cancel the escrow account as long as that request is made after the first five years of the loan. In addition, the outstanding loan balance must be less than 80% of the original value of the property and the loan cannot be delinquent or in default before the escrow account can be cancelled.
The full text of the rule can be found at: https://www.federalregister.gov/articles/2013/01/22/2013-00734/escrow-requirements-under-the-truth-in-lending-act-regulation-z