Issued in January, the Escrow Requirements under the Truth-in-Lending Act Final Rule (Rule) seemed straightforward. It was clear from a quick read that the Rule lengthens the time for which a mandatory escrow account established for a Higher-Priced Mortgage Loan (HPML) must be maintained. The Rule also creates an exemption for small creditors that operate predominately in rural or underserved areas and expands upon an exemption from escrowing for insurance premiums for condominiums by extending the exemption to other similar situations.
A closer read shows that this regulatory change has a greater impact than appears on the surface. The Rule revises the definition of an HPML. The Rule also removes the ability-to-repay requirement and existing restrictions on prepayment penalties. Then, on April 12, the Consumer Financial Protection Bureau (CFPB) issued a proposal containing amendments to the Rule. The proposal clarifies the exemption for creditors operating in rural or underserved areas and restores the ability to pay requirements and restrictions on prepayment penalties.
Do you feel like you need help keeping everything straight? Here’s a summary of the Rule, which is effective for applications received on or after June 1, 2013:
The definition of HPML will be revised
Under the Rule, an HPML is a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate (APR) that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by:
►1.5 percent or more for first lien loans that do not exceed the Freddie Mac conforming loan limit in effect as of the date the interest rate is set;
►2.5 percent or more for first lien loans that exceed the Freddie Mac conforming loan limit in effect as of the date the interest rate is set; or
►3.5 percent or more for subordinate lien loans.
Currently, the jumbo loan threshold applies only to the mandatory escrow account requirements; however, beginning June 1, the jumbo threshold will become part of the definition.
The requirement to establish escrow accounts for HPMLs will change
The Rule lengthens the time, from one year to five, for which a mandatory escrow account established for a HPML must be maintained. The Rule also creates an exemption for small creditors that operate predominately in rural or underserved areas and expands upon an existing exemption from escrowing for insurance premiums for condominium units to extend the exemption to other situations in which a consumer’s property is covered by a master insurance policy.
Other requirements relating to HPMLs may change
As it stands today, the Rule deletes the prepayment penalty and ability-to-repay rules applicable to HPMLs. However, the CFPB has issued a proposed amendment to the Rule that would ensure these protections remain in place until the effective date of the Ability-to-Repay rule, which expands these protections to apply to most mortgage transactions.
The CFPB has acknowledged that “certainty regarding compliance is a matter of some urgency,” and plans to make both the Rule and any amendments effective June 1.
Laurie Spira is chief compliance officer with Torrance, Calif.-based DocMagic Inc. She may be reached by phone at (800) 649-1362, ext. 6446 or e-mail [email protected]