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Digging deeper into CFPB escrow rules

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The launch of the qualified mortgage rule last week overshadowed some of the Consumer Financial Protection Bureau's other regulatory revisions—one of them being the rule governing escrow accounts.

Escrow accounts are generally created to set aside funds to cover property taxes, homeowners' insurance premiums and other mortgage-related insurance premiums.  

The CFPB released its revised escrow account rules, saying originators of higher-priced mortgages will have to establish and maintain escrow accounts for at least five years, a much longer duration when compared to the current one-year requirement. The final escrow rule takes effect June 1, 2013. 

The law firm of Ballard Spahr analyzed the revised escrow rule, noting "a creditor or servicer may not cancel escrow accounts required under the rule except upon either the termination of the loan or receipt of a consumer’s request to cancel the escrow account no earlier than five years after consummation, whichever happens first."

In addition, a creditor or servicer cannot cancel an escrow account unless the unpaid principal balance is less than 80% of the property's original value and the consumer is not late or in default at the time of the cancellation request.

The revised rule includes exemptions for small creditors operating mostly in rural or underserved areas.

Creditors eligible for the rural or small creditor exemption have to make more than half of their first-lien mortgages in rural and underserved areas; maintain an asset size that is under $2 billion and originate 500 or fewer first-lien mortgages at their home office and affiliates within a calendar year. In addition, an exemption is allotted if a creditor and its affiliates currently do not have escrow accounts for property taxes or insurance for any mortgage currently serviced, except for in these limited situations:

  1. Escrow accounts established for first-lien, higher-priced mortgage loans after April 1, 2010, and before June 1, 2013
  2. Escrow accounts established after consummation as an accommodation to assist distressed consumers in avoiding default or foreclosure

The revised rule also expands an existing exemption for condo units by noting other property types already covered by master insurance policies do not have to set more insurance funds aside in escrow. This expansion would apply to planned-unit or common-interest communities.

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