Although the bulk of the Consumer Financial Protection Bureau’s new mortgage rules won’t take effect until next year, lenders are already preparing for three Regulation Z—Truth in Lending Act—changes that will kick in on June 1 (CU Mag 3/13, p. 54). The three provisions include:
1. A prohibition on single premium credit insurance;
2. A prohibition on mandatory arbitration clauses; and
3. Changes to required escrow accounts for higher-priced mortgage loans.
Single premium insurance
The CFPB’s mortgage lending originator (MLO) compensation rule— part of the broader changes coming in January 2014—prohibits the financing of any premiums or fees for credit insurance in connection with a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by a consumer’s principal dwelling).
“Credit insurance” includes: credit life, credit disability, credit unemployment, or credit property insurance, or any other accident, loss-of-income, life, or health insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract.
Single premium credit insurance will be allowed only where the single premium is paid separately from the loan (that is, not financed as part of the loan), and where the product is paid in full each month, according to David Tomar, attorney with CUNA Mutual Group.
Tomar also clarified that:
The rule applies to all closed-end loans secured by any residence (primary or vacation), and openend loans secured by the consumer’s primary residence;
The prohibition doesn’t apply to payment protection charges calculated and paid in full monthly;
The rule contains a limited exception for credit unemployment insurance where the premiums are reasonable, the lender doesn’t receive any direct or indirect compensation in connection with the premiums, the premiums are paid under “another insurance contract” (i.e., presumably one sold outside the loan transaction), and the premiums aren’t paid to an affiliate of the lender; and
The prohibition doesn’t affect existing single premium payment protection business.
Because the CFPB strives for a flexible and proactive regulatory system, Tomar notes, it might adjust its position on issues to reflect changes in the financial marketplace.
Mandatory arbitration clauses
In addition to regulating MLO compensation practices and qualification standards, the CFPB’s mortgage originator rule prohibits including mandatory arbitration clauses in residential mortgage and home equity line of credit agreements.
So, creditors can’t require borrowers to submit disputes to arbitration or other non judicial procedures rather than filing a lawsuit in court. But the rule doesn’t prohibit the parties from agreeing to use arbitration to settle a dispute after one arises.
Escrow account requirements
Reg Z currently requires creditors to establish escrow accounts for higher priced mortgage loans secured by a first lien on a borrower’s principal dwelling.
The new rule lengthens the time—from one year to five years— creditors must maintain a mandatory escrow account.
The rule also exempts credit unions with less than $2 billion in assets that operate predominantly in rural or underserved areas and meet certain criteria.
NEXT: The devil is in the definitions
The devil is in the definitions
When dealing with regulations, people oft en say the “devil is in the details.” With the new escrow rule, it’s probably more accurate to say that the “devil is in the definitions.”
To determine the impact this rule will have on your mortgage program or whether you might be exempt, first understand the definitions of “higher-priced mortgage,” “dwelling,” “rural,” and “underserved.”
“Higher-priced mortgage” refers to a closed-end loan secured by the borrower’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction by:
1.5 or more percentage points for principal amounts that don’t exceed Freddie Mac limits (currently $417,000 for most areas of the country);
2.5 or more percentage points for principal amounts that exceed Freddie Mac limits (“jumbo loans”); or
3.5 or more percentage points for loans secured by a subordinate lien.
“Dwelling” includes not only a house or apartment, but also boats and trailers used as the borrower’s primary residence.
A county is considered “rural” if, during a calendar year, the county is neither in a metropolitan statistical area nor in a micropolitan statistical area adjacent to a metropolitan statistical area. The CFPB will list affected counties on its website.
A county is considered “underserved” if, during a calendar year, no more than two creditors have extended five or more mortgage loans secured by a first lien in the county. Again, the CFPB will list these counties.
Once your credit union decides to close a higher-priced mortgage, determine whether any of the exemptions apply.
Transactions secured by shares in a cooperative never required escrow accounts. Also not requiring escrow accounts are:
Transactions to finance the initial construction of a dwelling;
Temporary or “bridge” loans with terms of 12 months or less; or
The new rule adds another exemption to this list. If your credit union meets the following conditions, your higher-priced mortgage will be exempt from the mandatory escrow requirements:
During the preceding calendar year, more than 50% of your total mortgage loans, secured by a first lien, are on properties located in counties designated as either “rural” or “underserved” by the CFPB;
During the preceding calendar year, your credit union and its affiliates together originated 500 or fewer mortgage loans secured by a first lien;
As of the end of the preceding calendar year, you had total assets of less than $2 billion (the CFPB will adjust this threshold automatically every year); and
Neither your credit union nor its affiliates maintain an escrow account for any extension of consumer credit secured by real property or a dwelling that the credit union or its affiliates currently service, except for escrow accounts established for firstlien, higher-priced mortgage loans between April 1, 2010 and June 1, 2013; or escrow accounts established after closing to help distressed borrowers avoid default or foreclosure.
There’s an exception to the exemption: If, before closing, the credit union agreed to sell a firstlien, higher-priced mortgage to an entity that doesn’t satisfy these conditions, this exemption won’t apply and you must establish an escrow account.
Canceling an escrow account
A credit union may cancel an escrow account only upon the earlier of termination of the mortgage loan or when the credit union receives, no earlier than five years after closing, a request by the borrower to cancel the escrow account—so long as the unpaid principal balance is less than 80% of the original value of the property and the borrower isn’t delinquent or in default.
The CFPB delayed the implementation of three proposed escrow disclosure requirements in November 2012, but expect the agency to finalize rules for the following three circumstances later this year:
1. When you establish an escrow account;
2. When you don’t establish an escrow account; and
3. When you cancel an escrow account.
Find more information under “Mortgage Lending Regulations—2013” in CUNA’s e-Guide to Federal Laws and Regulations (cuna.org, select “compliance”).
COLLEEN KELLY is CUNA’s federal regulatory counsel and VALERIE MOSS is CUNA’s senior director of compliance analysis. Contact CUNA’s compliance team at email@example.com