In response to the recent mortgage crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that, among other things, expanded protections for consumers receiving higher-priced mortgage loans. Before passage of the Dodd-Frank Act, creditors were required under rules issued by the Federal Reserve Board to set up and administer escrow accounts for a minimum of one year for property taxes and required mortgage-related insurance premiums for higher-priced mortgage loans secured by a first lien on a principal dwelling. This one-year escrow requirement became effective on April 1, 2010, for transactions secured by site-built homes, and on October 1, 2010, for transactions secured by manufactured housing. This small entity compliance guide discusses the Escrow Requirements under the Truth in Lending Act (Regulation Z) Rule (January 2013 Final Rule) and subsequent amendments to the rule. This rule implements statutory changes made by the DoddFrank Act that lengthen the time creditors must collect and manage escrows for higher-priced mortgage loans. The rule is generally referred to in this guide as the TILA Higher Priced Mortgage Loans (HPML) Escrow Rule. The TILA HPML Escrow Rule helps ensure consumers set aside funds to pay property taxes, homeowner’s insurance premiums, and other mortgage-related insurance required by the creditor. The final TILA HPML Escrow Rule, which took effect for applications received on or after June 1, 2013, has three main elements:
1. After you originate a higher-priced mortgage loan secured by a first lien on a principal dwelling, you must establish and maintain an escrow account for at least five years regardless of loan-to-value ratio. You must maintain the escrow account until one of the following occurs: 1) the underlying debt obligation is terminated or 2) after the five-year period, the consumer requests that the escrow account be canceled. However, if you are canceling the escrow account at the consumer’s request, the loan’s unpaid principal balance must be less than 80 percent of the original value of the property securing the underlying debt obligation, and the consumer must not be currently delinquent or in default on the underlying obligation.
2. You do not have to escrow for insurance premiums for homeowners whose properties are located in condominiums, planned unit developments, and other common interest communities where the homeowners must participate in governing associations that are required to purchase master insurance policies.
3. If you operate predominantly in rural or underserved areas and meet certain asset size and other requirements, you may be eligible for an exemption from this rule for certain loans you hold in portfolio.
I. What is the purpose of this guide?
The purpose of this guide is to provide an easy-to-use summary of the TILA HPML Escrow Rule. This guide also highlights issues that small creditors and their business partners might find helpful to consider when implementing the rule.
This guide also meets the requirements of Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, which requires the Bureau to issue a small entity compliance guide to help small businesses comply with the new regulation.
The Bureau believes that responsible creditors were already escrowing as required by the existing escrow provisions of Regulation Z implemented in 2008 by the Federal Reserve Board. You will find the final rule does not expand the universe of transactions to which you must apply the escrow requirements. In fact, it creates an exemption for certain loans made by certain creditors operating predominantly in rural or underserved counties, thus reducing the compliance burden for creditors that meet the exemption’s prerequisites.
Moreover, the final rule provides additional compliance burden relief for creditors by expanding the partial exemption in the existing rule for condominiums to other property types where the governing association has an obligation to maintain a master policy insuring all dwellings, such as planned unit developments.
The compliance burden on creditors for maintaining escrow accounts for additional time for loans where no exemptions apply should be minimal. Since creditors are already maintaining escrow accounts for a larger set of transactions for a shorter period of time under the current rule, the Bureau anticipates that to comply with this rule, many creditors will generally have to make only modest changes to their servicing systems and processes, internal controls, subservicer contracts, or other aspects of their business operations.
The guide summarizes the TILA HPML Escrow Rule, but it is not a substitute for the rule. Only the rule and its Official Interpretations (also known as Commentary) can provide complete and definitive information regarding its requirements. The discussions below provide citations to the sections of the rule on the subject being discussed. Keep in mind that the Official Interpretations, which provide detailed explanations of many of the rule’s requirements, are found after the text of the rule and its appendices. The interpretations are arranged by rule section and paragraph for ease of use. The complete rule, including the Official Interpretations, is available at http://www.consumerfinance.gov/regulations/escrow-requirements-under-thetruth-in-lending-act-regulation-z/.
Additionally, the CFPB has issued additional rules to amend and clarify provisions in the January 2013 Final Rule: the May 2013 Final Rule and the October 2013 Final Rule.
The focus of this guide is the TILA HPML Escrow Rule. This guide does not discuss other federal or state laws that may apply to the maintenance and administration of escrow accounts or other rules to implement other requirements of the Dodd-Frank Act.
At the end of this guide, there is more information about how to read the rule and a list of additional resources.