It has been over seven weeks since the Agencies (FRB, OCC, FDIC, NCUA, and FCA) issued a joint final rule to modify existing flood regulations. And until this week the Agencies had inconsistent opinions about how the small lender escrow exception will apply to lenders that were required to escrow under Regulation Z’s Higher Priced Mortgage Loan (HPML) rules. This week we learned some good news – it appears we now have a consensus among the Agencies.
We initially addressed this issue on July, 22, 2015 in an article titled, “Flood Rule Conundrum: Does Your Financial Institution Qualify for the Small Lender Exception” linked here. The article was a result of many small lenders asking us whether the requirement to escrow under the Higher Priced Mortgage Loan (HPML) rules, which was effective April 1, 2010, precludes them from utilizing the small lender escrow exception under the new flood rules because they were required to escrow prior to July 6, 2012 (enactment of the Biggert-Waters Act) threshold.
During our research, we reached out to the Agencies for their opinion. As of the date of the article, “Flood Rule Conundrum: Does Your Financial Institution Qualify for the Small Lender Exception,” the Agencies had differing opinions. The OCC, FDIC, FRB, and NCUA all agreed that if a creditor escrowed prior to July 6, 2012 due to the HPML rules it would not preclude that creditor from utilizing the small lender escrow exception within the flood rules because there is the option to cancel the escrow account. The FDIC, however, indicated that a creditor would not be eligible for the small lender escrow exception under the new flood rules if, prior to July 6, 2012, the creditor had escrowed as required under the HPML rules.
Some of the best news we have heard in a while is that there seems to be a consensus among the Agencies on this issue. The FDIC now agrees that the requirement to escrow for HPMLs does not result in the loss of the escrow exception for a small lender that made an HPML prior to July 6, 2012, because under the HPML rules escrow accounts may be canceled at a certain point and, therefore, escrow coverage is not required for the entire term of the loan.
None of the Agencies have made an official statement on this issue. However, with the numerous regulations financial institutions are trying their best to wade through, even unofficial good news – in the form of this consensus among the Agencies – is a much needed reprieve for small lenders from yet another regulatory requirement. Let’s hope the Agencies stick with this interpretation and make it official.
Written by Robin Cooper