CFPB Escrow Account Rules for HPMLs 

The first of the new mortgage regulations from the Consumer Financial Protection Bureau (CFPB) — amending Regulation Z's escrow account requirements for Higher-Priced Mortgage Loans (HPMLs) — goes into effect on June 1 (the other mortgage rules are not effective until January of next year).  

The rule makes three major changes to the existing HPML escrow account rules:   

• Mandatory escrow accounts for HPMLs secured by a first lien on a principal dwelling will be required for a full five years, rather than the current 365 days.
• Small creditors that operate predominately in rural or underserved areas will be exempted from the escrow requirement.
• The rule expands on the current exemption from escrowing insurance premiums for condominium units to cover other situations in which a master insurance policy covers an individual consumer's property.

Read the rule, read the Small Entity Compliance Guide, view the CFPB's video guide, view the CFPB's list of rural and underserved counties, and view the CFPB's webpage on the rule.

Also, the CFPB recently issued a clarifying amendment of the rule, unrelated to the escrow provisions discussed above. The amendment ensures that the existing HPML protections regarding assessments of a consumer's ability to repay and prepayment penalties stay in effect until the new HPML requirements (in a separate rule from these escrow provisions) become effective on January 10, 2014.

Note that the HPML escrow account rule raises special issues for Illinois banks, which also are subject to the Illinois Mortgage Escrow Account Act.

Section 5 of the Illinois Mortgage Escrow Account Act grants borrowers the right to terminate their escrow accounts when the principal of a loan is paid down to 65% of the original loan amount (with some exceptions). Lenders must provide a notice of this right at the loan closing and when a loan reaches the 65% threshold.

However, the CFPB's rule for HPMLs requires an escrow account to be maintained for the first five years of the loan, irrespective of the loan's principal balance (with no notice requirements).

Below is a comparison of the Illinois law and the federal rule:   

To the extent that the federal HPML escrow account rule conflicts with the Illinois requirements, the CFPB's informal guidance indicates that the federal rule preempts the Illinois law. This has several ramifications for HPMLs in Illinois: 

• A borrower's right to terminate an escrow account under Illinois law (after paying the mortgage down to 65%) will not apply if the loan is an HPML and the criteria in the federal rules are operative. An HPML loan that is less than five years old that has an unpaid principal balance of less than 65% still must have an escrow account in place. 

• Note that the Illinois law does not require that an escrow account be maintained. Rather, unlike the federal rules, the Illinois law addresses when the lender requires the escrow account, in which case it simply grants the borrower the right to terminate the escrow account after the principal balance is paid down to 65%. If a borrower qualifies for terminating the escrow account under the federal rules, nothing in the Illinois law prevents the borrower from terminating the escrow. 

• Nothing in the federal rule prevents a lender from imposing more stringent contractual requirements on escrow accounts. But the Illinois law would prevent a bank from forcing a borrower to keep an escrow account in place after the mortgage is paid down to 65% of the original amount.

Also, note that lenders may need to revise their current Mortgage Escrow Account Act notice (required by Illinois at the closing and when the principal balance is paid down to 65%). An Illinois notice that does not recognize the federal HPML rule will confuse HPML borrowers if it fails to state that an escrow account for an HPML may not be terminated even after its principal balance has been paid down to 65% or less, if the loan is less than five years old or the other criteria in the federal rule are operative.

ACTION ITEM: Does your bank want to use one notice for all loan types, or separate notices for non-HPML and HPMLs?

If using the same notice form for all loans, your bank should state which type of loan is applicable for that particular borrower. The notice provisions applicable to HPMLs should state that the escrow account must be maintained for a minimum of five years and may be closed only if the unpaid principal balance is less than 80% of the original value of the mortgaged property (including subordinate liens in the calculation) and if the customer is not delinquent or in default on the loan. The provisions applicable to non-HPMLs may remain the same as the disclosures used by your bank today.

If using separate notice forms for non-HPMLs and HPMLs, the HPML notice should state the information noted above, while your non-HPML notice may remain the same as the one used by your bank today.