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 andVALERIE MOSSis CUNA’s senior director of compliance analysis. Contact CUNA’s compliance team at firstname.lastname@example.org.