Certain depository institutions and insured credit unions are no longer required to establish escrow accounts for certain higher-priced mortgage loans (HPML), according to a July 2, 2020 proposal from the Consumer Financial Protection Bureau (CFPB). After the conclusion of the 60-day comment period, the proposal will be formally published in the Federal Register on or about September 1, 2020.
For certain banks and credit unions, this proposed rule represents a significant regulatory reprieve. Escrowing for taxes and insurance can be a heavy burden for smaller lenders and limits the credit choices for their customer base. Let’s take a closer look at the existing regulations and what is changing for affected institutions.
Current HPML escrow requirement
Under Regulation Z of TILA, a financial institution that services residential mortgage loans must retain an escrow account for payment of real estate taxes and homeowner’s insurance on HPML. TILA defines an HPML as 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:
- By 1.5 or more percentage points for fixed rate mortgage loans;
- By 2.5 or more percentage points for adjustable rate mortgage loans; or
- By 3.5 or more percentage points for loans secured by a subordinate lien.
Proposed escrow exemption for HPMLs
The Economic Growth, Regulatory Relief and Consumer Protection (Economic Growth) Act of 2018 requires CFPB to ease regulations on financial institutions originally passed as part of 2010’s Dodd-Frank Act. The Economic Growth Act directs the CFPB to implement an exemption from the mandatory HPML escrow account requirement for certain institutions.
The proposed rule would exempt from the Regulation Z HPML escrow requirement any loan made by an insured depository institution or insured credit union and secured by a first lien on the principal dwelling of a consumer if:
- The institution has assets of $10 billion or less (increase from $2 billion);
- The institution and its affiliates originated 1,000 or fewer loans (decrease from 2,000) secured by a first lien on a principal dwelling during the preceding calendar year; and
- Certain existing HPML escrow exemption criteria are met:
- The institution and any of its affiliates do not maintain escrow accounts on mortgage loans, exclusive of escrow accounts established (i) for a first lien HPML for which the application was received on or after April 1, 2010 and before May 1, 2016 (to be revised to 30 days after final rule is published in the Federal Register), or (ii) as an accommodation to a distressed consumer to assist the consumer in avoiding default or foreclosure; and
- During the preceding calendar year or, for applications received before April 1 of the current year, during either of the two preceding calendar years, extended a first lien covered transaction on property located in a rural or underserved area.
Impact on institutions
This proposal increases the asset exemption threshold and decreases the loan originations threshold, suggesting that the intention was to exempt larger institutions with a smaller mortgage lending businesses that do not benefit from economies of scale in providing escrow accounts.
CFPB proposes a three-month grace period for the annually applied requirements for the escrow exemption under TILA. The grace period would allow exempt creditors to continue using the exemption for three months after they exceed a threshold in the previous year, allowing a transition period to facilitate compliance.
Have questions about this proposal and its impact on your institution? RKL’s Financial Services Industry Group includes a team of dedicated compliance experts with experience helping banks and credit unions maintain compliance with this and other regulatory requirements. Contact your RKL advisor or reach out through the form below.
