Reg Z Revisited, Again

Still more clarification is needed on the Fed’s Reg Z changes.

May 18, 2011

Many people believe the number of stars in the universe is infinite. As the Federal Reserve keeps issuing new rules, it seems that the number of Regulation Z changes is approaching that same number.

The Fed issued a final Reg Z rule in February regarding escrow requirements for jumbo mortgages (those exceeding $417,000). It also requested comments on a Reg Z proposed rule, issued simultaneously, which would revise escrow account requirements for certain mortgages.

In July 2008, the Fed issued final rules requiring creditors to establish escrow accounts for first-lien, higher-priced mortgages. The escrow requirement was effective April 1, 2010, for mortgages secured by site-built homes, and Oct. 1, 2010, for loans secured by manufactured housing.

The final rule implements a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that increases the annual percentage rate (APR) threshold used to determine whether a mortgage lender must establish an escrow account for property taxes and insurance for a first-lien jumbo mortgage.

A first-lien mortgage is considered higher-priced if its APR is 1.5 percentage points or more above the current average prime offer rate. Under this final rule, the escrow requirement applies to first-lien jumbo loans only if the loan’s APR is 2.5 percentage points or more above the average prime offer rate.

The APR threshold for nonjumbo loans remains unchanged at 1.5 percentage points above the prime offer rate. The final rule is effective for applications received on or after April 1, 2011, for mortgages secured by a first lien on a borrower’s principal dwelling. The final rule doesn’t apply to home equity lines of credit, loans to finance the initial construction of a dwelling, temporary (“bridge”) loans with a term of 12 months or less, or reverse mortgages.

The proposed rule would expand the minimum period for mandatory escrow accounts for first-lien, higher-priced mortgages from one to five years, and longer under certain circumstances, such as when the loan is delinquent or in default.

The rule would provide an exemption from the escrow requirement for creditors that operate in “rural or underserved” counties, have annual originations of 100 or fewer first-lien mortgages, and don’t escrow for any mortgages they service.

The rule would also extend the partial exemption for loans secured by a condominium unit to planned unit developments and other similar property types that have governing associations that maintain a master insurance policy.

The proposal would establish two new disclosure requirements contained in the Dodd-Frank Act. These disclosures must be provided for closed-end loans secured by a first lien on real property or a dwelling. “Real property” includes vacant and unimproved land; “dwelling” includes a principal dwelling, vacation and second homes, and mobile homes, boats, and trailers used as residences.

The first of these disclosures would be required at least three business days before consummation of a mortgage for which an escrow account will be established. The disclosure would:

  • Explain what an escrow account is and how it works;
  • State the risks of not having an escrow account; and
  • State the estimated amount of the first year’s disbursements, the amount to fund the escrow account initially, and the amount of the borrower’s regular mortgage payments to be paid into the escrow account.

The second disclosure would be required when a mortgage is entered into without an escrow account or when an escrow account on an existing mortgage is canceled. This disclosure must be delivered at least three business days before loan consummation or cancelation of the existing escrow account, as applicable.

The disclosure would explain what an escrow account is, how it operates, and the risk of not having an escrow account. It would disclose the potential consequences to the borrower of failing to pay certain costs, such as real estate taxes and homeowner’s insurance in the absence of an escrow account.

The comment deadline is May 2.

MICHAEL McLAIN is assistant general counsel and senior compliance counsel for the Credit Union National Association. Contact him at 608-231-4185.