We believe that a small creditor would be subject to Regulation Z’s escrow requirement when refinancing an HPML, unless an exception applies, as discussed below. However, the HPML escrow requirement would not apply to the refinancing of a commercial purpose loan, since the HPML regulations apply only to consumer loans.

Regulation Z defines an HPML, in part, as “a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate . . .” Since a refinancing is considered “a new transaction” under Regulation Z, we believe that a refinancing of an HPML generally would be subject to the escrow requirement.

Under Regulation Z, a creditor may not extend an HPML “secured by a first lien on a consumer’s principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor.” However, Regulation Z exempts from this requirement loans secured by shares in a cooperative, loans financing the initial construction of a dwelling, bridge loans with terms of twelve months or less, reverse mortgage loans and loans secured by condominium units where a governing association is obligated to maintain a master policy insuring all units.

Additionally, small creditors may qualify for an exemption from the HPML escrow requirement for loans held in their portfolio if they operate in a rural or underserved area, meet certain asset size and lending requirements, and (with limited exceptions) do not maintain property tax or mortgage-related insurance escrow accounts for loans secured by real property that they or their affiliates currently service.

For resources related to our guidance, please see:

• Regulation Z, 12 CFR 1026.35(a)(1) (“‘Higher-priced mortgage loan’ means a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set:

(i) By 1.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac;

(ii) By 2.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; . . .”)

• Regulation Z, 12 CFR 1026.20(a) (“A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer.”)

• Regulation Z, 12 CFR 1026.35(b)(1) (“Except as provided in paragraph (b)(2) of this section, a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer’s principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's default or other credit loss. . . .”)

• Regulation Z, 12 CFR 1026.35(b)(2) (“Notwithstanding paragraph (b)(1) of this section: (i) An escrow account need not be established for:

(A) A transaction secured by shares in a cooperative;

(B) A transaction to finance the initial construction of a dwelling;

(C) A temporary or ‘bridge’ loan with a loan term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months; or

(D) A reverse mortgage transaction subject to § 1026.33.

• (ii) Insurance premiums described in paragraph (b)(1) of this section need not be included in escrow accounts for loans secured by dwellings in condominiums, planned unit developments, or other common interest communities in which dwelling ownership requires participation in a governing association, where the governing association has an obligation to the dwelling owners to maintain a master policy insuring all dwellings.”)

• Regulation Z, 12 CFR 1026.35(b)(2)(iii) (“Except as provided in paragraph (b)(2)(v) of this section, an escrow account need not be established for a transaction if, at the time of consummation:

(A) 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 extended a covered transaction, as defined by § 1026.43(b)(1), secured by a first lien on a property that is located in an area that is either ‘rural’ or ‘underserved,’ as set forth in paragraph (b)(2)(iv) of this section;

(B) 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 2,000 covered transactions, as defined by § 1026.43(b)(1), secured by first liens, that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person;

(C) 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 creditor and its affiliates that regularly extended covered transactions, as defined by § 1026.43(b)(1), secured by first liens, together, had total assets of less than $2,000,000,000; this asset threshold shall adjust automatically each year, based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million dollars (see comment 35(b)(2)(iii)-1.iii for the applicable threshold); and

(D) Neither the creditor nor its affiliate maintains an escrow account of the type described in paragraph (b)(1) of this section for any extension of consumer credit secured by real property or a dwelling that the creditor or its affiliate currently services, other than:

• (1) Escrow accounts established for first-lien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before May 1, 2016; or
• (2) Escrow accounts established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure.”)

• CFPB, Small Entity Compliance Guide, TILA Higher-Priced Mortgage Loans (HPML) Escrow Rule (March 2016), printed page 16 (“If your organization is eligible for the exemption for small creditors operating in a rural or underserved area, but you originate a loan under a forward commitment for sale (i.e., your organization will not hold the loan in portfolio), you must establish an escrow account unless the loan is otherwise exempt (for example, it is a reverse mortgage) or the acquirer is also eligible for the exemption. (§ 1026.35(b)(2)(v)).”)