On February 17, 2021, the CFPB published a final rule to implement a requirement of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The final rule exempts certain insured depository institutions and insured credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans (HPMLs). The final rule also removed some obsolete text and made technical corrections. These new changes are effective on the date of publication in the Federal Register.
We can think of this as two separate exemptions: the original small creditor exemption and the new insured institution exemption.
Generally, a higher-priced mortgage loan is a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate (APR) that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set by:
- 1.5 percentage points or more for a first-lien transaction at or below the Freddie Mac conforming loan limit.
- 2.5 percentage points or more for a first-lien transaction above the Freddie Mac conforming loan limit (i.e., Jumbo); or
- 3.5 percentage points or more for a subordinate-lien transaction.
This new final rule adds an insured institution exemption from the HPML Escrow Rule which exempts transactions by certain insured depository institutions and insured credit unions. In other words, the escrow requirement does not apply to any loan made by an insured depository institution or insured credit union and secured by a first lien on the principal dwelling of a consumer if:
- As of the preceding December 31st, or, if the application for the transaction was received before April 1 of the current calendar year, as of either of the two preceding December 31sts, the insured depository institution or insured credit union had assets of $10,000,000,000 or less, adjusted annually for inflation.
- During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor and its affiliates together extended no more than 1,000 covered transactions secured by a first lien on a principal dwelling.
It is important to note the previous criteria did not go away. The annually adjusted $2 billion asset threshold and 2,000 covered transactions, the small creditor exemption, are still in place. These new exemptions are directed to insured depository institutions and credit unions. Another important tidbit: these elements are all “and” and not “or.” The dollar amount and transaction thresholds, as well as the items in the bullets below, all must be met in order to qualify for the exemption.
The existing exemption criteria below remain in place and apply to both the small creditor and insured institution thresholds:
- If the institution originated at least one covered transaction secured by a first lien on a property located in a rural or underserved area.
- Loans originated by the institution will not be sold/held in portfolio, unless the loan is otherwise exempt (for example, it is a reverse mortgage) or the acquirer is also eligible for either the small creditor or the insured institution exemption; and
- The institution and its affiliates do not maintain an escrow for HPMLs unless:
- the escrow was established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure, or
- the escrow was established at a time when the institution may have been required by the regulation to do so, which would have occurred for an HPML escrow account on or after April 1, 2010 to June 17, 2021 (note the extension of the date from May 1, 2016).
It is important to note the exemption is lost if an escrow is established for other than a distressed customer (after consummation). Establish one escrow account = no exemption.
One Catch-22 for consideration: if a Bank does not meet the exemption requirements for a mandatory escrow for flood insurance, they essentially would not meet the requirement for HPML as they would have to implement escrows for something other than distressed customers. Those flood insurance exemptions are $1,000,000,000 in assets and on or before July 6, 2012; was not required to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.
The CFPB has additional resources on their website, including an Executive Summary, an unofficial redline copy of the regulation and a revised Small Entity Compliance Guide.
TCA will be reviewing the rule more closely and will communicate any other observations. TCA is A Better Way to comply with Regulation Z and all the compliance rules. Contact us at [email protected] or (800) 934-7347.