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CFPB Issues Final Rule For Escrow Accounts

The CFPB issued its final rule for escrow accounts on January 10, 2013. The rule applies to higher-priced mortgage loans. The final rule extends the length of time for which escrow accounts for higher-priced mortgage loans must be maintained, and provides exceptions for qualifying institutions, communities such as condominiums, initial construction loans and bridge loans.

Beginning on June 1, 2013, escrow accounts for higher priced mortgage loans must be maintained for five years. This is a change from the current one year requirement. Additionally, the rule established limitations on the cancellation of an escrow account. An escrow account may only be cancelled under certain circumstances. In addition to cancellation upon termination of the underlying debt, the account may be cancelled after five years from origination only upon the customer’s request. The customer’s request may be approved if the principal balance is less than 80% of the original value of the property securing the loan and the customer is not currently delinquent on the loan. If those two conditions are not met, then the cancellation must be delayed.

The final rule provides for several exceptions. The first is an exception for creditors that “operate predominately” in rural or underserved markets. In order to take advantage of this exception, a creditor must: (1) originate more than half of its first-lien mortgages in rural or underserved areas; (2) have less than $2 billion in assets; (3) have originated no more than 500 first-lien mortgages in the preceding calendar year; and (4) not escrow for any mortgage it currently services, except in limited instances. It is important to note that even if a creditor meets the requirements for this exception, an escrow account must be established if, at origination, the loan is subject to a commitment to be sold to a creditor that does not meet the requirements for this exception.

There is also an exception in place for “common interest communities” such as condominiums in which participation in a governing association is a requirement to home ownership, as well as for financing the construction of a dwelling, and bridge loans with terms of twelve months or less.

The final rule will apply to applications received on or after June 1, 2013.