On June 1, 2013, the Consumer Financial Protection Bureau’s Escrow Requirement will go into effect, The rule, which requires certain creditors to create escrow accounts for a minimum of five years for higher-priced mortgage loans (HPMLs), also exempts HPMLs made by certain small creditors that operate predominantly in rural or underserved counties from meeting this requirement. Lenders that work in rural or under-served areas will be exempt from the escrow changes, provided they meet certain other criteria, the CFPB said.
The CFPB will define rural counties by using the U.S. Department of Agriculture Economic Research Service’s urban influence codes. The under-served counties are defined by data collected under the Home Mortgage Disclosure Act.
According to David Reiss, professor of law at Brooklyn Law School, the text of the Dodd-Frank Act itself requires the five-year escrow period be implemented.
Specifically, the CFPB’s rule implements sections 1461 and 1462 of the Dodd Frank Act, which amends the requirements for maintaining escrow accounts in connection with higher-priced mortgage loans.
“CFPB has indicated that it is trying to have a coordinated roll out of new mortgage regulations and this is part of that roll out,” Reiss says. “Creditors will benefit from the float on the aggregate escrow accounts—a small amount for each individual homeowner but potentially a meaningful amount for creditors, particularly if interest rates rise to their historic average or higher in coming years.”
Per the rule, a creditor may not cancel escrow accounts required under the rule except with the termination of the loan or the receipt of a consumer’s request to cancel the escrow account no sooner than five years after it was established, whichever happens first. The CFPB’s rule also states that the creditor may not cancel the escrow account unless the unpaid principal balance is less than 80 percent of the property’s original valueand the consumer is not delinquent or in default on the loan at the time of the request.
One key aspect of the rule involves the exempting small creditors who operate primarily in rural or underserved areas. According to the CFPB, to qualify for the exemption, a creditor must:
- Make more than half of its first-lien mortgages on properties located in counties that are designated either “rural” or “underserved” by the CFPB
- Have had assets of less than $2 billion at the end of the preceding calendar year
- Have originated, together with its affiliates, 500 or fewer covered, first-lien transactions during the preceding calendar year
- Together with its affiliates, not maintain escrows for property taxes or insurance for any mortgage it or its affiliate currently services, except when the escrow account was established for a first-lien, higher-priced mortgage loan between April 1, 2010 and before June 1, 2013
- Escrow accounts established after consummation as an accommodation to assist distressed consumers in avoiding default or foreclosure
One outcome of the escrow requirement as it pertains to creditors is the marginal cost of maintaining escrows for five years instead of one. “To some extent, creditors may be able to pass along the increased cost of the longer escrow term to homeowners,” Reiss says. “This is a rule that is probably good for homeowners and creditors in the aggregate.”
To read the CFPB Escrows rule in its entirety, visit http://www.consumerfinance.gov/regulations/escrow-requirements-under-the-truth-in-lending-act-regulation-z/