Authored by RSM US LLP

In January 2021, the Consumer Financial Protection Bureau (CFPB) issued a final rule to implement a requirement of 2018’s Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The final rule exempts certain insured depository institutions and insured credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans (HPMLs).

Prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Board of Governors of the Federal Reserve System issued a rule requiring, among other things, the establishment of escrow accounts for payment of property taxes and insurance for certain “higher-priced mortgage loans,” a category which the board defined to capture what it deemed to be subprime loans. This rule was intended to reduce consumer and systemic risks by requiring the subprime market to structure loans and disclose their pricing similarly to the prime market.

The CFPB proposes that the amendments included in this proposal take effect for mortgage applications received by an exempt institution on the date of the final rule’s publication in the Federal Register. Under section 553(d) of the Administrative Procedure Act (APA), the required publication or service of a substantive rule must be made not less than 30 days before its effective date except for certain instances, including when a substantive rule grants or recognizes an exemption or relieves a restriction. The proposed rule therefore would lead to a final rule that would be a substantive rule that would grant an exemption and relieve requirements and restrictions. Thus, the CFPB proposes to make the final rule effective on the same day as publication.

What are the changes?

Regulation Z, 12 CFR part 1026, implements the Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., and includes a requirement that creditors establish an escrow account for certain HPMLs, and also provides for certain exemptions from this requirement. In the EGRRCPA, Congress directed the CFPB to issue regulations to add a new exemption from TILA’s escrow requirement that exempts transactions by certain insured depository institutions and insured credit unions. This final rule implements the EGRRCPA section 108 statutory directive, removes certain obsolete text from the Official Interpretations to Regulation Z (commentary), and also corrects prior inadvertent deletions from and two scrivener’s errors in existing commentary. New § 1026.35(b)(2)(vi) exempts from the Regulation Z HPML escrow requirement any loan made by an insured depository institution or insured credit union and secured by a first lien on the principal dwelling of a consumer if:

  1. The institution has assets of $10 billion or less
  2. The institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year
  3. Certain of the existing HPML escrow exemption criteria are met, as described below

Cost and benefits

In evaluating the potential benefits, costs and impacts of the proposal, the CFPB takes as a baseline the existing regulations requiring the establishment of escrow accounts for HPMLs and the existing exemption from these regulations. The proposed rule would create a new exemption so that some entities that are currently subject to the regulations requiring the establishing of escrow accounts for HPMLs would no longer be subject to those regulations. Therefore, the baseline for the analysis of the proposed rule is those entities remaining subject to those requirements.

Of entities that currently exist, the proposed rule would have a direct effect mainly on those entities that are not currently exempt and would become exempt under the proposal. The CFPB estimates that in the 2018 HMDA data there are 147 insured depositories or insured credit unions with assets between $2 billion and $10 billion that originated at least one mortgage in a rural or underserved area and originated fewer than 1,000 mortgages secured by a first lien on a primary dwelling, and so are likely to be affected by the proposed rule. Together, these depositories reported originating 69,519 mortgages in 2018. The CFPB estimates that less than 3,000 of these were HPMLs.

What’s in it for the consumer?

For consumers with HPMLs originated by affected insured depository institutions and insured credit unions, the main effect of the proposed rule would be that those institutions would no longer be required to provide escrow accounts for HPMLs. As mentioned previously, the CFPB estimates that fewer than 3,000 HPMLs were originated in 2018 by institutions likely to be affected by the rule. Institutions that would be affected by the proposed rule could choose to provide or not provide escrow accounts. If affected institutions decide not to provide escrow accounts, then consumers who would have escrow accounts under the baseline would instead not have escrow accounts. Affected consumers would experience both benefits and costs as a result of the proposed rule. These benefits and costs would vary across consumers.  The benefits to consumers of not having mortgage escrow accounts include:

  1. More budgetary flexibility
  2. Interest earnings
  3. Potentially lower prices
  4. Greater access to credit resulting from lower mortgage servicing costs

What’s in it for affected creditors?

For affected creditors, the main effect of the proposed rule is that they would no longer be required to establish and maintain escrow accounts for HPMLs. Per the CFPB, of the 147 institutions that are likely to be affected by the proposed rule, 101 were not exempt under EGRRCPA from reporting average prime offer rate (APOR) spreads. Of these 101, less than 80 originated at least one HPML in 2018.

The main benefit of the rule on affected entities would be cost savings. There are startup and operational costs of providing escrow accounts. For more information, see the CFPB’s final rule.