On January 10, 2013, the CFPB issued a Final Rule to implement changes made by the Dodd-Frank Act that extend the length of time that an escrow account must be maintained on certain higher-priced mortgages (“Final Escrow Rule”). The Final Escrow Rule takes effect on June 1, 2013.
Currently under Regulation Z, creditors are required to establish escrow accounts for closed-end, higher-priced mortgage loans secured by a first lien on a consumer’s principal dwelling for a minimum of one (1) year. The Final Escrow Rule amends the regulation to require generally that the accounts be maintained for at least five (5) years. A “higher-priced mortgage loan” generally is triggered by the following thresholds: (a) 1.5 percentage points above the average prime offer rate (“APOR”) for first-lien transactions; (b) 2.5 percentage points above the APOR for “jumbo” transactions; and (c) 3.5 percentage points above the APOR for subordinate-lien transactions. Despite the trigger for subordinate-lien transactions, only loans secured by first-liens on a consumer’s principal dwelling are subject to the mandatory escrow account requirement.
The mandatory escrow account may be cancelled upon the termination of the underlying debt obligation, including by repayment, refinancing, rescission and foreclosure. In addition, the creditor may cancel the escrow upon the receipt of a consumer’s request to cancel the escrow account at least five (5) years after closing; provided, however (a) the unpaid principal balance is less than 80% of the original value of the property securing the underlying debt obligation, and (b) the consumer currently is not delinquent or in default on the underlying debt obligation.
The Final Escrow 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: (a) make more than half of its first-lien mortgages in rural or underserved areas; (b) have an asset size less than $2 billion; (c) together with its affiliates, have originated 500 or fewer first-lien mortgages during the preceding calendar year; and (c) together with its affiliates, not escrow for any mortgage it or its affiliates currently services, except in limited instances. Under the Final Escrow Rule, eligible creditors need not establish escrow accounts for mortgages intended at closing to be held in portfolio, but must establish accounts at closing for mortgages that are subject to a forward commitment to be purchased by an investor that does not itself qualify for the exemption.
The escrow requirement will continue not to apply to open-end loans, loans secured by shares in a cooperative, loans to finance the initial construction of a dwelling, temporary or “bridge” loans with a loan term of twelve (12) months or less, or reverse mortgages. In addition, the Final Escrow 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.
The Federal Reserve Board’s (“Board”) proposed rule to implement these requirements also proposed implementing two new disclosure requirements regarding escrow accounts as outlined in the Dodd-Frank Act. See 76 Fed. Reg. 11598 (Mar. 2, 2011). However, on November 23, 2012, the CFPB published a final rule that delays the implementation of certain disclosure requirements contained in Title XIV of the Dodd-Frank Act, including those related to escrow accounts. See 77 Fed. Reg. 70105 (Nov. 23, 2012). Consequently, the disclosure portions of the Board’s escrow proposal are not included in the Final Escrow Rule and will be the subject of future rulemaking by the CFPB.