WHAT’S UP WITH ESCROWS

On February 23, 2011 the Federal Reserve Board issued a final rule and requested public comment on a second rule under Regulation Z to revise the escrow account requirements for certain home mortgage loans. The revisions to the regulation, which implements the Truth in Lending Act (TILA), are being made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The final rule implements a provision of the Dodd-Frank Act that increases the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien, “jumbo” mortgage loans. Jumbo loans are loans exceeding the conforming loan-size limit for purchase by Freddie Mac, which is currently $417,000.
Final Rule
The Board issued final rules in July 2008 requiring creditors to establish escrow accounts for first-lien higher-priced mortgage loans.

  • Under the original rule a first-lien mortgage is considered a higher-priced mortgage loan if its APR is 1.5 percentage points or more above the current average prime offer rate.
  • Under the final rule, the escrow requirement applies to first-lien jumbo loans only if the loan’s APR is 2.5 percentage points or more above the average prime offer rate.
  • The APR threshold for non-jumbo loans remains unchanged.
  • The final rule is effective for covered loans for which the creditor receives an application on or after April 1, 2011.

Proposed Rule
The Board also proposed a rule that:

  • Expands the minimum period for mandatory escrow accounts for first-lien, higher-priced mortgage loans from one to five years, and longer under certain circumstances, such as when the loan is delinquent or in default;
  • Provides an exemption from the escrow requirement for certain creditors that operate in “rural or underserved” counties;
  • Implements new disclosure requirements contained in the Dodd-Frank Act. Disclosures would be required at least three business days before consummation of a mortgage loan to explain how the escrow account works or the effects of not having an escrow account if one is not being established;
  • Require consumers to receive disclosures three days before an escrow account is closed.
  • The Board is soliciting comment on the proposed rule for 60 days after publication in the Federal Register, which is expected shortly.

The constant changes continue.

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