No, we do not believe you need to determine whether an existing loan would be considered an HPML when merely modifying, and not refinancing, the loan. However, you are correct that you would need to make this determination if the loan is refinanced — unless an exception applies, as discussed below.

The Federal Reserve Board added the escrow requirements for HPMLs in 2008, before the CFPB took over rulemaking authority for Regulation Z. The Federal Reserve Board’s 2008 final rule indicated that the escrow requirement for HPMLs would apply only to “new transactions.” Although the CFPB now has rulemaking authority over Regulation Z, we do not believe that the modification of an existing loan would be considered a “new transaction” under Regulation Z — unlike a refinancing. Consequently, we do not believe you would be required to determine whether an existing loan is an HPML when modifying the loan.

If you instead decide to refinance the loan, you would have to provide new disclosures and impose an escrow requirement if the loan is an HPML — provided an exception does not apply.

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 . . . .” 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;

(iii) By 3.5 or more percentage points for loans secured by a subordinate lien.”)

• Truth in Lending Final Rule, 73 Fed. Reg. 44521, 44595 (July 30, 2008) (“Sometimes a change in the terms of an existing obligation constitutes a refinancing, which is a new transaction requiring new disclosures. . . . A refinancing or assumption is covered by a provision of the final rule if the transaction occurs on or after that provision's effective date. For example, if a creditor receives an application for a refinancing on or after October 1, 2009, and the refinancing is consummated on October 15, 2009, the provision restricting prepayment penalties in § 226.35(b)(2) applies, but the escrow requirement in § 226.35(b)(3) would not apply because the escrow provision is only effective for new transactions where the application is received on or after April 1, 2010 . . . “)

• Truth in Lending Final Rule, 73 Fed. Reg. 44521, 44604 (July 30, 2008) (Section 226.35(b)(3), “Except as provided in paragraph (b)(3)(ii) of this section, a creditor may not extend a loan secured by a first lien on a 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 1026.20(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 June 17,
     2021; or

     (2) Escrow accounts established after consummation as an accommodation to
     distressed consumers to assist such consumers in avoiding default or
     foreclosure.”)