Among other final rules published on January 10, 2013, the CFPB issued its final mortgage escrow account rule under a section of the Dodd-Frank Act relating to the establishment of mandatory escrow accounts on higher-priced mortgage loans. The final rule is effective June 1, 2013.

The practical effect of this rule on higher-priced mortgages may be limited. Under the CFPB’s final “Ability-to-Repay” rule, a qualified mortgage that is not a higher-priced loan will be entitled to safe harbor, and a qualified mortgage that is a higher-priced loan will be entitled to only a rebuttable presumption of compliance. As a result, the market for higher-priced mortgage loans may be limited, at least initially.

The revisions to the regulation lengthen the time that mandatory escrow accounts must be maintained on higher-priced mortgage loans from one year to five years and exempt certain types of transactions from the escrow requirement.

A creditor or servicer may not cancel escrow accounts required under the rule except upon either the termination of the loan or receipt of a consumer’s request to cancel the escrow account no earlier than five years after consummation, whichever happens first. The creditor or servicer may not cancel the escrow account unless the unpaid principal balance is less than 80 percent of the security property’s original value and the consumer is not delinquent or in default on the loan at the time of the request.Exempted from the rule are small creditors operating primarily in rural or underserved areas. To qualify for the exemption, a creditor must:

• Make more than half of its first-lien mortgages on properties located in counties that are designated either “rural” or “underserved” by the CFPB
• Have had assets of less than $2 billion at the end of the preceding calendar year
• Have originated, together with its affiliates, 500 or fewer covered, first-lien transactions during the preceding calendar year
• Together with its affiliates, not maintain escrows for property taxes or insurance for any mortgage it or its affiliate currently services, except in these instances:
  • Escrow accounts established for first-lien, higher-priced mortgage loans after April 1, 2010, and before June 1, 2013
  • Escrow accounts established after consummation as an accommodation to assist distressed consumers in avoiding default or foreclosure

Creditors who originate mortgages subject to a forward commitment for purchase by an investor that does not qualify for a small creditor exemption would be required to establish escrow accounts at consummation.

The rule also expands the existing exemption from escrowing for condominium unit insurance premiums to other circumstances in which the property is covered by a master insurance policy, such as planned-unit developments or other common-interest communities.

Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of Ballard Spahr’s Consumer Financial Services Group, which produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right.

We will be closely monitoring the CFPB’s implementation of the new mortgage escrow account rule. For more information, contact Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, John D. Socknat at 202.661.2253 or socknatj@ballardspahr.com, Michael S. Waldron at 202.661.2234 or waldronm@ballardspahr.com, or Stanley D. Mabbitt at 602.798.5456 or mabbitts@ballardspahr.com.