Higher Priced Mortgage Loans - Escrow Requirements

by Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group.

Our Regulatory Compliance Outlook column appears monthly in the National Mortgage Professional Magazine, considered one of the country’s premier mortgage industry publications.

In July 2008, the Federal Reserve Board approved a final rule, which amends Regulation Z (Truth in Lending Act) and was adopted under the Home Ownership and Equity Protection Act (HOEPA). At the time, we published an Advisory Bulletin that discussed various features of the revised Regulation Z.

Our Library contains additional Advisory Bulletins on this subject.

The new rule addressed and defined “higher-priced” mortgage loans (HPML), a new category of mortgage loans, while also providing additional protection to consumers.[i]

Most requirements of the rule were to be implemented on October 1, 2009.

Four key protections were provided to consumers:

Borrower Ability. Lenders must take a borrower’s ability to repay the loan from income and assets other than the home's value into account when making the loan.

Verification of Income/Assets. Lenders must verify the income and assets they rely upon to determine repayment ability.

Prepayment Penalty. Prepayment penalties are prohibited if the mortgage payments can change in the first four years; and, for other higher-priced loans a prepayment penalty period cannot last for more than two years.

Escrow Accounts. Lenders must establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

HPML Calculation

Determining if a loan is an HPML origination requires a calculation using a specific “survey-based index,” as follows:

Survey-Based Index The rule establishes a category of “higher-priced mortgage loans” secured by a consumer's principal dwelling, defined as a first-lien mortgage that has an annual percentage rate (APR) that is 1.5 percentage points or more above the “average prime offer rate,” or, if the loan is a subordinate-lien loan, 3.5 percentage points above this survey-based index. The average prime offer rate index is based on a survey published by Freddie Mac, and can be found on Freddie Mac’s website at the following tab: Weekly Primary Mortgage Market Survey

The rule's definition of an HPML origination captures virtually all loans in the subprime market, but generally excludes loans in the prime market.

Effective Date: April 1, 2010

The escrow account requirement must be implemented on April 1, 2010. This deferral of the requirement until April 1, 2010 was given in order to provide originators sufficient time to set up escrow account procedures. Lenders must become familiar with federal and state escrow account requirements.

Implementation Dates

Effective April 1, 2010, lenders will be required to set up an escrow account for residential real estate secured HPMLs.

Effective October 1, 2010, lenders will be required to set up an escrow account for non-real estate secured (principal dwelling) HPMLs (for example, Manufactured Homes).

Escrow Requirements

Effective with the dates indicated above for the respective types of HPMLs, a lender must set up an escrow account for loans subject to the HPML escrow requirements. Escrow mandates only affect first lien transactions. (Exception: escrow is not required for a condominium, if the condominium association maintains a master policy that covers the individual condominium units for items such as homeowner’s insurance and property taxes.)

The HPML origination’s escrow account must be set up to pay items such as property taxes and premiums for mortgage-related insurance (such as homeowner’s insurance) that the lender has required.

RESPA Requirements

Escrow requirements under federal law, such as under the Real Estate Settlement Procedures Act (RESPA), must be implemented. RESPA provides detailed escrow requirements, escrow account calculation methodologies, and also some model forms.[ii]

Some Salient RESPA Requirements for Escrow Accounts

• Disclosure of the initial escrow account statement at the time an escrow account is established.

• Annual escrow account disclosure.

• Certain limitations on how the escrow account is funded, ensuring that the account is not “overfunded” with the borrower’s money.

State Requirements

State law places further requirements on escrow accounts. Some states exceed RESPA’s mandates in limiting the amount of the “escrow cushion.” Additionally, state law might require the lender to pay interest on the amount in the escrow account.

---

[i] Compliance with the new rules, other than the escrow requirement, is mandatory for all applications received on or after October 1, 2009. The escrow requirement has an effective date of April 1, 2010 for site-built homes, and October 1, 2010 for manufactured homes.

[ii] See 24 CFR 3500.17, RESPA’s Escrow Requirements section, for further information on RESPA escrow requirements. The Department of Housing and Urban Development (HUD) publishes a number of Public Guidance Documents that illustrate the proper way to fund and manage an escrow account.

“Intent to Proceed” and the New Good Faith Estimate

by Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group.

Our Regulatory Compliance Outlook column is published monthly in the National Mortgage Professional Magazine.

Since the introduction of the new Good Faith Estimate (GFE), several readers of this monthly column have written to me about their concern regarding HUD’s new requirement for a waiting period to elapse before collecting fees from the consumer, other than the credit report fee.

HUD has taken the recently revised Federal Reserve Board Truth-in-Lending (TILA) regulations – which limit fees, charged in connection with early disclosures, and defines the timely provision of the disclosures – and incorporates this rule into a way of permitting the borrower to shop for a mortgage loan without paying upfront fees that, in HUD’s view, impede shopping. That TILA rule, simply stated, is that creditors are not permitted to impose a fee on a consumer in connection with the consumer’s application for a mortgage before the consumer has received the TILA disclosure. The Federal Reserve Board makes an exception that allows imposition of a fee that is bona fide and reasonable in amount for obtaining the consumer’s credit history. (73 FR 44522, July 30, 2008)

HUD has a public policy goal of creating a “circumstance” where consumers can shop for a mortgage loan without paying significant upfront fees that may impede shopping. Consequently, HUD has in effect adopted the Federal Reserve Board’s rule, limiting the charge originators may impose on consumers for delivery of the GFE.

Intent to Proceed

A loan originator is expressly not permitted to charge, as a condition of providing a GFE, any fee for an appraisal, inspection, or similar settlement service.

To be clear, the loan originator may not accept payment from the consumer – except for the payment of a credit report fee – in any form whatsoever, such as by a post-dated check or an unprocessed credit card impression, or any other kind of payment method which could constitute constructive receipt of payment.

Furthermore, and significantly, HUD has imposed an additional requirement that affects the collection of fees from a consumer: the loan originator may collect fees beyond the cost of a credit report for origination-related services only after a loan applicant both receives a GFE and indicates an intention to proceed with the loan covered by the GFE.

Two Requirements

Note the two requirements:

(1) the delivery of the GFE to the loan applicant, and

(2) the loan applicant’s notification of an intention to proceed with the loan covered by the GFE.

It is not until both conditions are satisfied that a loan originator may collect fees from a loan applicant for services, other than the cost of obtaining a credit report.

Thus, a loan originator must issue a GFE no later than 3 business days after the loan originator receives an application or information sufficient to complete an application AND must be notified of the loan applicant’s intent to proceed before collecting fees, with the exception of the credit report fee.

Remedy

There is a remedy and we have counseled our clients to implement it for their residential mortgage loan applications.

Either by written or verbal methods, our clients now use a form, entitled INTENT TO PROCEED WITH MORTGAGE LOAN APPLICATION.

The written form, subtitled Applicant(s) Certification, contains the following written affirmations, is signed by the loan applicant, and returned with the application package (alternatively, the loan applicant may contact the loan officer to offer verbal affirmations):

• The initial Good Faith Estimate has been provided within three business days of the application date (business days, excluding Sundays and specified, legal Holidays).
• The initial Good Faith Estimate was received.
• I/We intend to proceed with the loan application based on the initial Good Faith Estimate.
• Other than a credit report fee, no fees were charged prior to receiving the Good Faith Estimate.

The third bullet contains the essential words about the applicant’s intention to proceed with the loan application based on the initial Good Faith Estimate.

The verbal form, subtitled Loan Originator Certification, is used by loan officers and requires their signed attestation, and contains the following verbal affirmations:

• The initial Good Faith Estimate was provided to the Applicant(s) within three business days of the application date (business days, excluding Sundays and specified, legal Holidays).
• The Applicant(s) received the initial Good Faith Estimate.
• The Applicant(s) intend to proceed with the loan application based on the initial Good Faith Estimate.
• Other than a credit report fee, no fees were charged to the Applicant(s) prior to receiving the Good Faith Estimate.

It is important that a statement on both the Applicant(s) Certification and Loan Originator Certification forms include, but not be limited to, further indicating that the subject form itself is not a loan commitment; the loan originator cannot guaranty acceptance into any loan program, specific loan terms, or conditions; and the loan application is subject to credit approval, acceptable property appraisal, title report, and satisfactory completion of conditions stated in commitment or approval letter.