Exemptions for Escrow Accounts for Higher Priced Mortgage Loans

by Nancy Castiglione, CRCM

The Consumer Financial Protection Bureau has finalized an amendment to Regulation Z adding a new exemption to the requirement to escrow for taxes and insurance for Higher-Priced Mortgage Loans (HPMLs). If your institution is an insured depository institution or insured credit union that makes HPMLs, affected personnel should be alerted to the changes affecting escrow provisions.
The training is going to take the traditional WHO, WHAT, WHERE, WHEN, WHY and HOW approach, starting with WHAT.

WHAT
What did the Bureau do? The Bureau added a new exemption to the requirement to escrow for taxes and insurance for HPMLs. In addition to the current exemption for small creditors with total assets of less than $2.23 billion, make no more than 2,000 covered transactions, serve a rural or underserved area, and do not maintain escrow accounts for other extensions of credit except as permitted, the new exemption defines a new category of lender with the following criteria:

  • Institution’s assets not to exceed $10 billion as of December 31 as of the preceding calendar year (or as of December 31 of either of the two preceding calendar years if the loan application was received in the current year before April 1)
  • Institution, together with its affiliates, extended no more than 1,000 covered transactions secured by a first lien on a principal dwelling during the preceding calendar year (or during either of the two preceding calendar years if the loan application was received in the current year before April 1)
  • Institution extended at least one covered transaction secured by a first lien on property located in a rural or underserved area during the preceding calendar year (or during either of two preceding calendar years if the loan application was received before April 1)
  • Neither the institution nor its affiliates maintain an escrow account for taxes and insurance for any consumer loan secured by real property or a dwelling that it services other than escrow accounts established for HPMLs during the period between April 1, 2010, to June 17, 2021, or escrow accounts established after consummation as an accommodation for distressed consumers to assist in avoiding default or foreclosure



WHY
The Bureau was required to adopt the amendment as a result of a provision in the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, which made a number of changes to existing banking regulatory requirements to give financial institutions some relief from Dodd-Frank Act compliance burdens.

WHO
The new exemption only applies to insured depository institutions and insured credit unions. Not all creditors, such as mortgage companies, may take advantage of the new exemption.

WHEN
The amendment takes effect on February 17, 2021 (the date of publication in the Federal Register). Because the amendment provides for a new exemption and not a new requirement, there is no delayed effective date or transition period. However, the Bureau did modify the time period that applies to both the current and new exemption provision that affects creditors that established escrow accounts for first-lien HPMLs during the time period on or after April 1, 2010, and before May 1, 2016. The new end date of that time period is June 17, 2021.

HOW
To determine whether an institution qualifies for the new exemption the first step is to determine if the institution meets the asset threshold. If the institution’s total assets (not including affiliates) does not exceed $10 billion as of December 31 for the preceding calendar year (or for either of the two preceding calendar years in the case of loan applications received before April 1 of the current year), the institution qualifies under the asset threshold test. The three-month transition period for loan applications received before April 1 is provided for institutions that need time to adjust to a loss of exemption due to an increase in asset size at year-end.

Examples:



The institution must also determine how to calculate the number of qualifying covered transactions toward the maximum threshold of 1,000 in the preceding calendar year. The number of qualifying covered transactions must be aggregated for the institution with all of its affiliates (unlike the asset threshold, which only applies to the institution). Qualifying covered transactions are those that are secured by a first lien on a principal dwelling. This type of qualifying covered transaction differs from that which is required to meet the 2,000 per-year threshold under the existing small creditor exemption.

An institution, together with its affiliates, that made no more than 1,000 covered transactions secured by a first lien on a principal dwelling during the preceding calendar year (or during either of the two preceding calendar years in the case of loan applications received before April 1 of the current year) meets the exemption threshold for the number of transactions for the current year.

.

Examples:



The new exemption is subject to the same provision that applies to the existing exemption that makes the escrow requirement applicable to any forward commitment. The exemption would not be “transferable” to the purchaser unless the purchaser is also eligible under the exemption qualifications.

WHERE
To get more information about HPMLs and the escrow exemption, the CFPB website includes an updated small entity guide, executive summary, and rural and underserved areas information Rules governing escrows for higher priced mortgages | Consumer Financial Protection Bureau (consumerfinance.gov).

Copyright © 2021 Compliance Action. Originally appeared in Compliance Action Vol. 25, No. 10, 2/28/2021

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