TILA Escrow Requirements for High Priced Mortgage Loans (12 CFR )

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1 TILA Escrow Requirements for High Priced Mortgage Loans (12 CFR ) The Consumer Financial Protection Bureau s (CFPB) mortgage rules include new escrow account requirements for higher-priced mortgage loans secured by a first lien on a principal dwelling. Effective Dates: June 1, 2013 and January 1, 2014 for certain amendments. October 31, 2013 For the latest information please see CUNA s eguide to Federal Laws and Regulations Colleen Kelly Regulatory Compliance CREDIT UNION NATIONAL ASSOCIATION

2 1 TABLE OF CONTENTS Small Creditor Exemption 2 Types of Mortgages Covered 2 Escrow Account Requirements for HPML 2 Important Definitions 3 Cancellation of Escrow Accounts 6 Exemptions and Exceptions 6 Rural and Underserved Status 8 Disclosures 10

3 2 Small Creditor Exemption If at closing a credit union meets ALL of the following criteria, an escrow account does not need to be created for a HPML: (1) During the preceding calendar year, (effective January 1, 2014: (1) During any of the three preceding calendar years) the credit union extended more than 50 percent of its total covered transactions, secured by a first lien, on properties that are located in counties designated either "rural" or "underserved," as defined in this rule; (2) During the preceding calendar year, the credit union and its affiliates together originated 500 or fewer covered transactions, secured by a first lien; (3) As of the end of the preceding calendar year, the credit union had total assets of less than $2 billion (this threshold will adjust automatically every year by the CFPB); and (4) Neither the credit union nor its affiliates maintain an escrow account for any extension of consumer credit secured by real property or a dwelling that the credit union or its affiliates currently service, with exceptions. For more information on these exemptions see Exemptions & Exceptions in this report. Types of Mortgages Covered The TILA Escrow rules apply generally to first-lien, higher-priced mortgage loans secured by a member s principal dwelling. Exceptions: subordinate liens, open-end credit (such as a home equity line of credit), shares in a cooperative, financing of initial construction of a dwelling, temporary or bridge loans with terms of 12 months or less and reverse mortgages. How to administer an escrow account: See Section 6 of RESPA, 12 USC 2605, and Regulation X, 12 CFR for information on how escrow accounts must be administered. Escrow Account Requirements for HPML The Dodd-Frank Act includes these new requirements in order to help ensure that consumers set aside funds to pay property taxes, and premiums for homeowners insurance, and other mortgage-related insurance required by the creditor. The following changes apply to escrow accounts for higher-priced mortgage loans;

4 3 Existing regulations require creditors to establish and maintain escrow accounts for at least one year after originating a higher-priced mortgage loan. The new rule extends this mandatory period to at least five years. The rule creates a new exemption from these escrow requirements for creditors with less than $2 billion in assets, that operate predominantly in rural or underserved areas, that make less than 500 mortgage loans per year and do not regularly maintain escrow accounts. The rule expands an existing exemption for insurance premiums for condominium units to also include loans secured by dwellings in planned unit developments, or other common interest communities in which ownership requires participation in a governing association, where the governing association has an obligation to the owners to maintain a master policy insuring all dwellings. A credit union may not extend a higher-priced mortgage loan secured by a first lien on a member s principal dwelling unless an escrow account is established before closing. The escrow account must be maintain for at least 5 years. The escrow account will be used for payment of property taxes and premiums for mortgage-related insurance required by the credit union, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the credit union against the member s default or other credit loss. According to the CFPB s Official Interpretation of the rule, this provision does not require that an escrow account be established for premiums for mortgage-related insurance that the credit union does not require in connection with the credit transaction, such as earthquake insurance or credit life insurance, even if the member voluntarily obtains such insurance. Additionally, this provision does not affect a credit union s ability, right, or obligation, according to the terms of the mortgage loan or applicable law, to offer or require an escrow account for a transaction that is not a HPML and subject to this section of the rule. Additionally, although the rule establishes minimum durations for which escrow accounts must be maintained. This requirement does not affect a creditor's right or obligation, according to the terms of the legal obligation or applicable law, to offer or require an escrow account beyond the minimum required duration. Important Definitions When dealing with regulations it is often said that the devil is in the detail. With the new escrow rule it is probably more accurate to say that the devil is in the definitions. To determine the impact this new rule will have on your mortgage program or whether you may be exempt, you need to first understand the definitions of several significant definitions:

5 4 Average Prime Offer Rate (APOR): An annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. The CFPB publishes average prime offer rates for a broad range of types of transactions in a table updated at least weekly. According to the CFPB, additional guidance on determination of average prime offer rates is provided in the Official Commentary under Regulation C, the publication entitled A Guide to HMDA Reporting: Getting it Right!, and the relevant Frequently Asked Questions on HMDA compliance posted on the FFIEC s website. Construction-to-Permanent Loans: According to the CFPB s Official Interpretation of the rule, the escrow account requirements do not apply to a transaction to finance the initial construction of a dwelling. However, it may apply to permanent financing that replaces a construction loan, whether the permanent financing is extended by the same or a different creditor. When a construction loan may be permanently financed by the same creditor, the rule permits the creditor to give either one combined disclosure for both the construction financing and the permanent financing, or a separate set of disclosures for each of the two phases as though they were two separate transactions. Which disclosure option a creditor chooses does not affect the determination of whether the permanent phase of the transaction requires an escrow account. When the creditor discloses the two phases as separate transactions, the annual percentage rate for the permanent phase must be compared to the average prime offer rate for a transaction that is comparable to the permanent financing to determine whether the transaction is a higher-priced mortgage loan. When the creditor discloses the two phases as a single transaction, a single annual percentage rate, reflecting the appropriate charges from both phases, must be calculated for the transaction in accordance with (a)(1) and appendix D to part 1026 of Regulation Z. This annual percentage rate must be compared to the average prime offer rate for a transaction that is comparable to the permanent financing to determine the transaction is a higherpriced mortgage loan. If the transaction is determined to be a higher-priced mortgage loan, only the permanent phase is required to establish and maintain an escrow account, and the period for which the escrow account must remain in place is measured from the time the conversion to the permanent phase financing occurs.] Covered Transaction: A consumer credit transaction that is secured by a dwelling, including any real property attached to a dwelling, other than: (1) A home equity line of credit; (2) A mortgage transaction secured by a consumer s interest in a timeshare plan; (3) A reverse mortgage; (4) A temporary or bridge loan with a term of 12 months or less, such as a loan to finance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months or a loan to finance the initial construction of a dwelling; or (5) A construction phase of 12 months or less of a construction-to-permanent loan. Dwelling: A residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence. The CFPB clarifies that this definition includes structures that are classified as personal property under State law. For example, an escrow account must be

6 5 established on a higher-priced mortgage loan secured by a first lien on a manufactured home, boat, or trailer used as a consumers principal dwelling. Escrow Account: Any account that a servicer establishes or controls on behalf of a borrower to pay taxes, insurance premiums (including flood insurance), or other charges with respect to a federally related mortgage loan, including charges that the borrower and servicer have voluntarily agreed that the servicer should collect and pay. The definition encompasses any account established for this purpose, including a trust account, reserve account, impound account or other terms in different localities. An escrow account includes any arrangement where the servicer adds a portion of the borrower s payments to principal and subsequently deducts from principal the disbursement for escrow account items. The term does not include accounts that are under the borrower s total control. Higher-priced mortgage loan: A closed-end consumer credit transaction secured by the consumer's principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set: (1) by 1.5 or more percentage points for loans secured by a first lien with a principal amount at closing that does not exceed the maximum principal amount eligible for purchase by Freddie Mac; (2) by 2.5 or more percentage points for loans secured by a first lien with a principal amount at closing that exceeds the maximum principal amount eligible for purchase by Freddie Mac; (3) by 3.5 or more percentage points for loans secured by a subordinate lien. The CFPB explains that the table of average prime offer rates published by the Bureau indicates how to identify the comparable transaction. The Bureau also clarifies that in instances when a creditor sets the interest rate initially and then re-sets it at a different level before consummation, the creditor should use the last date the interest rate is set before consummation. Rural: If, during a calendar year, a county is neither in a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area, as those terms are defined by the U.S. Office of Management and Budget and as they are applied under currently applicable Urban Influence Codes (UICs), established by the United States Department of Agriculture's Economic Research Service (USDA-ERS). Safe Harbor: A creditor may rely as a safe harbor on the list of counties published by the Bureau to determine whether a county qualifies as "rural" for a particular calendar year. For example, if a creditor originated 90 covered transactions secured by a first lien during 2011, 2012, or 2013, the creditor meets this condition for an exemption in 2014 if at least 46 of those transactions in one of those three calendar years are secured by first liens on properties that are located in such counties Underserved: If during a calendar year, according to Home Mortgage Disclosure Act (HMDA) data for that year, no more than two creditors extended covered transactions, secured by a first lien, five or more times in the county.

7 6 Safe Harbor: A credit union may rely as a safe harbor on the list of counties published by the Bureau to determine whether a county qualifies as underserved for a particular calendar year. For example, if a creditor originated 90 covered transactions secured by a first lien during 2011, 2012, or 2013, the creditor meets this condition for an exemption in 2014 if at least 46 of those transactions in one of those three calendar years are secured by first liens on properties that are located in such counties Cancellation of Escrow Accounts A credit union may cancel an escrow account only upon the earlier of: Termination of the mortgage loan; methods by which an underlying debt obligation may be terminated include, among other things, repayment, refinancing, rescission, and foreclosure; or When the credit union receives, no earlier than five years after closing, a request by the borrower to cancel the escrow account. As long as the unpaid principal balance is less than 80% of the original value of the property and the borrower is not currently delinquent or in default. According to the CFPB s Official Interpretation of the rule, the term "original value" means the lesser of the sales price reflected in the sales contract for the property, if any, or the appraised value of the property at the time the transaction was consummated. In determining whether the unpaid principal balance has reached less than 80 percent of the original value of the property securing the underlying debt, the creditor or servicer shall count any subordinate lien of which it has reason to know. If the member certifies in writing that the equity in the property securing the underlying debt obligation is unencumbered by a subordinate lien, the creditor or servicer may rely upon the certification in making its determination unless it has actual knowledge to the contrary. Exemptions & Exceptions An escrow account does not need to be created for: A transaction secured by shares in a cooperative; A transaction to finance the initial construction of a dwelling; A temporary or bridge loan with a loan term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months; A reverse mortgage; By credit unions that, at closing, meet the following conditions:

8 7 o During (effective January 1, 2014 any of the three preceding calendar years ) the preceding calendar year, the credit union extended more than 50% of its total covered transactions, secured by a first lien, on properties that are located in counties that are either rural or underserved as defined in this rule.(for additional guidance see Rural & Underserved Status in this report); o During the preceding calendar year, the credit union and its affiliates together originated 500 or fewer covered transactions, secured by a first lien; o As of the end of the preceding calendar year, the credit union had total assets of less than $2 billion, credit unions that had total assets of less than $2 billion on December 31, 2012, satisfy this criterion for purposes of the exemption during (this threshold will adjust automatically every year by the CFPB); and Neither the credit union nor its affiliates maintain an escrow account for any extension of consumer credit secured by real property or a dwelling that the credit union or its affiliates currently service, except for: o Escrow accounts established for first-lien higher-priced mortgage loans on or after April 1, 2010, and before January 1, 2013 (January 1, 2014). According to the CFPB, creditors, together with their affiliates, that continue to maintain escrow accounts established between April 1, 2010, and January 1, 2014, still qualify for the exemption so long as they do not establish new escrow accounts for transactions consummated on or after January 1, 2014, other than for the exceptions. Once a credit union or its affiliate begins escrowing for loans currently serviced (other than for the exceptions), the credit union and its affiliate become ineligible for the exemption while the escrowing continues. So, as long as a credit union (or its affiliate) services and maintains escrow accounts for any mortgage loans (other than the exceptions), the credit union will not be eligible for the exemption for any higher-priced mortgage loan it may make. or o Escrow accounts established after closing as an accommodation to distressed borrowers to assist in avoiding default or foreclosure. Distressed borrowers are members who are working with the credit union or servicer to attempt to bring the loan into a current status through a modification, deferral, or other accommodation to the borrower. A credit union, together with its affiliates, that establishes escrow accounts after consummation as a regular business practice, regardless of whether members are in distress, does not qualify for the exception.

9 8 A credit union or its affiliate "maintains" an escrow account only if it services a mortgage loan for which an escrow account has been established at least through the due date of the second periodic payment under the terms of the legal obligation. NOTE: Forward Commitment: If a first-lien higher-priced mortgage is committed, at closing, to be acquired by a person that does not satisfy these conditions, then this exemption does not apply and an escrow account must be established. According to the CFPB, a creditor may make a mortgage loan that will be transferred or sold to a purchaser according to an agreement that has been entered into at or before the time the loan is consummated. Such an agreement is sometimes known as a "forward commitment." Even if a credit union otherwise meets the four criteria for the rural or underserved exemption, first-lien higherpriced mortgage loans that will be acquired by a purchaser according to a forward commitment is required to establish an escrow account under this rule unless the purchaser also meets the four criteria in the exemption, or the transaction is otherwise exempt. The escrow requirement applies to any such transaction, whether the forward commitment provides for the purchase and sale of the specific transaction or for the purchase and sale of mortgage obligations with certain prescribed criteria that the transaction meets. For example, assume a creditor that qualifies for the exemption makes a higherpriced mortgage loan that meets the purchase criteria of an investor with which the credit union has an agreement to sell such mortgage obligations after consummation. If the investor is ineligible for the exemption, an escrow account must be established for the transaction before consummation unless the transaction is otherwise exempt (such as a reverse mortgage or home equity line of credit). Excepted Premiums - Common Interest Communities (condos): Insurance premiums for mortgage related insurance required by the credit union for loans secured by dwellings in condominiums, planned unit developments, or other common interest communities in which ownership requires participation in a governing association, where the governing association has an obligation to the owners to maintain a master policy insuring all dwellings. Rural and Underserved Status The CFPB clarifies in the Official Interpretation to the regulations that a county is considered to be "rural" or "underserved" for purposes of this rule if it satisfies either of the two tests. The Bureau applies both tests to each county in the U.S. If a county satisfies either test, the Bureau will include the county on a published list of "rural" or "underserved" counties for a particular calendar year. To facilitate compliance with appraisals requirements in (c ), the Bureau will also create a list of only those counties that are "rural", but excluding those that are only "underserved." The Bureau will post on its public Web site the applicable lists for each calendar year by the end of that year, thus permitting credit unions to ascertain the availability to them of the exemption during the following year. For 2012, however, the list will be published before June 1, A credit union may rely as a safe harbor on the lists of counties published by the Bureau to determine whether a county qualifies as "rural" or "underserved" for a particular calendar year. A credit union's originations of first-lien covered

10 9 transactions in such counties during that year are considered in determining whether the creditor satisfies the condition and therefore will be eligible for the exemption during the following calendar year. A county is rural during a calendar year if it is neither in a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area. These areas are defined by the Office of Management and Budget and applied under currently applicable Urban Influence Codes (UICs), established by the United States Department of Agriculture's Economic Research Service (USDA- ERS). Accordingly, adjacent has the meaning applied by the USDA-ERS in determining a county s UIC; as so applied, adjacent entails a county not only being physically contiguous with a metropolitan statistical area but also meeting certain minimum population commuting patterns. Specifically, the Bureau classifies a county as "rural" if the USDA-ERS categorizes the county under UIC 4, 6, 7, 8, 9, 10, 11, or 12. Descriptions of UICs are available on the USDA-ERS website at A county for which there is no currently applicable UIC (because the county has been created since the USDA-ERS last categorized counties) is rural only if all counties from which the new county s land was taken are themselves rural under currently applicable UICs. A county is underserved during a calendar year if, according to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar year, no more than two creditors extended first-lien covered transactions, five or more times in the county. Specifically, a county is "underserved" if, in the applicable calendar year's public HMDA aggregate dataset, no more than two creditors have reported five or more first-lien covered transactions with HMDA geocoding that places the properties in that county. For purposes of this determination, because only covered transactions are counted, all first-lien originations (and only first-lien originations) reported in the HMDA data are counted except those for which the owner-occupancy status is reported as "Not owner-occupied" (HMDA code 2), the property type is reported as "Multifamily" (HMDA code 3), the applicant's or co- applicant's race is reported as "Not applicable" (HMDA code 7), or the applicant's or co- applicant's sex is reported as "Not applicable" (HMDA code 4). The most recent HMDA data are available at Examples: A county is considered rural for a given calendar year based on the most recent available UIC designations, which are updated by the USDA-ERS once every ten years. (i) Assume a credit union makes first-lien covered transactions in County X during calendar year 2014, and the most recent UIC designations have been published in the second quarter of To determine rural status for County X during calendar year 2014, the credit union will use the 2013 UIC designations. However, to determine total status for County X during 2012 or 2013, the credit union would use the UIC designations last published in (ii) Assume a credit union makes first-lien covered transactions in County Y during calendar year 2013, and the most recent HMDA data is for calendar year 2012, published in the third quarter of To

11 10 determine underserved status for County Y in calendar year 2013 for the purposes of qualifying for the exemption in calendar year 2014, the creditor will use the 2012 HMDA data. Disclosures The proposed rule included a new section that would have required disclosures for the establishment, as well as the non-establishment, of an escrow account in connection with a mortgage secured by a first lien, but not a subordinate lien. In November 2012, the CFPB delayed the implementation of certain disclosures, including these escrow disclosures. Expect to see these disclosures later this year.

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