Effective April 1, 2010 - Escrows required on Higher-Priced Mortgage Loans

C.F.R. Section 226.35 (see (b)(3)), which applies only to first lien higher-priced loans, will soon require an escrow account be established for property taxes and premiums for mortgage-related insurance mandated by the lender or creditor, such as hazard, liability and credit insurance. A Higher Priced Mortgage Loan (HPML) is a first-lien loan 1.5 percentage points above the average prime offer rate (APOR) as computed from the Freddie Mac Primary Mortgage Market Survey (PMMS). For second-lien loans, the trigger is 3.5 percentage points above the APOR. While the definition of a higher-priced loan is limited to a loan that secures the consumer’s principal dwelling, the term "dwelling" also includes structures considered personal property under state law, such as mobile homes, boats and trailers when used as the consumer’s principal dwelling.

The escrow requirement applies only to taxes and mortgage-related insurance "required" by the lender. Therefore, premiums for optional insurance products obtained by the consumer need not be escrowed. The Fed also exempted from the escrow requirements, loans secured by shares in a co-op. In addition, for loans secured by condominiums, insurance premiums need not be escrowed where the condominium association must maintain a master policy to insure the units. A lender or servicer may allow a consumer to cancel an escrow account only if the lender or servicer receives a dated written request from the consumer no earlier than 365 days after consummation.

This provision was also promulgated under Section 129(l) of TILA; therefore, a violation would appear to subject a lender to liability for the enhanced HOEPA penalties. However, a violation will not extend the rescission period.

The escrow requirements are effective for applications received on or after April 1, 2010, with an additional delayed effective date of October 1, 2010 for applications for loans secured by manufactured housing.