Update on Higher-Priced Mortgage Loans (HPML)
In news for consumers and lenders alike, in 2008 the Bureau of Consumer Financial Protection provided a distinction for a class of higher-priced loans termed Higher-Priced Mortgage Loans (HPMLs) specifically for the protection of consumers. To qualify for the protections and additional regulations afforded to HPMLs, the difference between the loan APR and the Fed’s actual interest rate at the time (as reported on the APOR Index) must exceed 1.5 or more percentage points on First Liens (first mortgage) or 3.5 or more percentage points on Subordinate Liens (subsequent mortgages).
However, starting June 1, 2013, The Bureau of Consumer Financial Protection will be rolling out an additional rule under Escrow Requirements in the Truth in Lending Act (TILA). The rule, which amends Regulation Z of the Truth in Lending Act, will lengthen the required period that mandatory escrow accounts must be maintained, putting extra stringencies on creditors engaging in the financing of HPMLs. The purpose of this rule is to implement provisions of the Dodd-Frank Act to strengthen consumer protection. The requirement of establishing a five-year minimum on escrow accounts for certain mortgage transactions aims at ensuring consumers set aside the appropriate funds necessary to pay property taxes, homeowners insurance premiums, and other required mortgage-related insurances required by the creditor.
While this rule places extra burdens on certain creditors, the new rule exempts some “small servicers” and certain types of transactions from these added escrow requirements. Chief among the transactions shielded from the added regulations are those “…extended by creditors that operate predominantly in rural or underserved areas, have assets below a certain threshold, and do not maintain escrow accounts on mortgage obligations they currently service.” These added exemptions and regulations should be taken seriously and should factor into creditor APR calculations. It is therefore essential to consult your escrow professional on the distinction of your loan and its implications when securing financing for any commercial or residential purchases.