Escrow Requirements Regulation Z
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When is the final rule effective?
June 1, 2013
Which loans are affected by the rule?
The Escrow rule applies to Higher-Priced Mortgage Loans (HPMLs) secured by a first lien on a borrower's principal dwelling for loans originated by creditors that do not qualify for the overall (small creditor) escrow exemption listed below.
Which loans are specifically excluded by the rule?
Escrow accounts are not required for transactions 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 less than 12 months, and reverse mortgages.
In addition, loans secured by condominiums, planned unit developments, and other common interest communities where the governing associations maintains a master insurance policy are required to escrow for taxes but not insurance premiums.
There is an overall exemption allowed for small creditors that operate predominately in rural or underserved areas (view preliminary list of rural and underserved counties for 2013).
For creditors located in a rural or underserved area, an escrow accounts on HPMLs is not required if the following four conditions are met:
- More than 50 percent of the creditors covered transactions were extended in a rural or underserved area during the last calendar year.
- The creditor and its affiliates originated 500 or fewer first-lien mortgages in the preceding calendar year.
- The creditor has assets of less than $2 billion.
- The creditor and its affiliates, does not maintain escrow accounts for any mortgage it services, except in limited instances. These instances include, escrow accounts established for HPMLs originated on or after April 1, 2010, and before June 1, 2013; and/or escrow accounts established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure.
What steps does a non-exempt financial institution need to consider when applying the new rule to its procedures?
- Determine if the loan (excluding loans exempt from the rule as listed above) is an HPML – HMPLs are defined as 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, 2.5, 3.5 or more percentage points based on lien position and loan amount.
- Determine if loan is secured by a first lien on consumer's principal dwelling.
- If numbers 1 and 2 above apply to the loan, the financial institution needs to establish an escrow account before consummation for payment of property taxes (on all properties) and premiums for mortgage-related insurance (except if covered under a master insurance policy governing an association) required by the creditor.
- A financial institution must maintain the escrow account for at least 5 years after originating the HPML and can cancel after five years upon the consumer's request if the following are met:
- The unpaid principal balance is less than 80 percent of the original value of the property securing the underlying debt obligation
- The consumer currently is not delinquent or in default on the underlying debt obligation