More Regulation Z rules go into effect on April 1, 2010

4/1/2010

By Fran Sponsler, CRCM, CCBCO

Just when we thought we couldn’t possibly have another regulatory rule change, the Federal Reserve Board amended Regulation Z and implemented new rules under the Home Equity Protection Act (HOEPA) which become effective on April 1, 2010. Escrow requirements become effective on all qualifying loans for which a written application is received on or after April 1, 2010. However, loans secured by manufactured homes have an extended effective date of October 1, 2010. Below are some other issues related to escrow requirements.

What is a qualifying loan for escrow purposes?

A qualifying loan for escrow purposes are loans that have been categorized as higher-priced mortgages (HPMLs). A higher-priced mortgage loan is any mortgage (purchase-money or non-purchase-money) secured by a consumer’s principal dwelling, extended for a consumer purpose, with an annual percentage rate exceeding the “average prime offer rate” on prime loans (published by the Federal Reserve) by at least 1.50 percentage points for first-lien loans and 3.50 percentage points for subordinate-lien loans.

When are you required to escrow?

A mortgage lender is prohibited from originating a higher-priced mortgage loan secured by first lien without establishing an escrow account for property taxes and premiums for mortgage-related insurance required by the mortgage lender. Mortgage-related insurance includes insurance against loss of or damage to the property securing the loan, against liability arising out of the ownership or use of the property, or protecting the mortgage lender against the consumer’s default or other credit loss. A mortgage lender is permitted to offer the borrower an opportunity to cancel the escrow account, but such cancellation can occur only in response to a written request from the consumer received by the mortgage lender no earlier than one year after consummation.

Are there any exemptions?

Yes. Regulation Z allows two exemptions from this general prohibition. A mortgage lender is not required to (1) establish an escrow account for mortgage loans secured by a cooperative, or (2) escrow for mortgage-related insurance premiums for mortgage loans secured by a condominium where the condominium association has an obligation to the condominium unit owners to maintain a master policy insuring condominium units.

For more information please see the following:

http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum09/examiners_desk.html