Regulation Z and Mortgage Escrow Accounting Rules
Issued by the Board of Governors of the Federal Reserve System to implement the federal Truth in Lending Act, which is contained in Title I of the Consumer Credit Protection Act of 1968, as amended (15 U.S.C. 1601 et seq.), Regulation Z promotes the informed use of consumer credit by requiring disclosures about its terms and cost. Among many other provisions, it imposes limitations on home-equity plans and mortgages, and prohibits certain acts or practices in connection with credit secured by a consumer’s principal dwelling.
In response to the 2008 mortgage crisis and using its rulemaking authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA), the Federal Reserve Board amended the regulation. On July 14, 2008 the Fed published final revisions to Regulation Z, which, for the most part, took effect on October 1, 2009.
But one amendment addresses the concern that some lenders misled borrowers about the affordability of the monthly mortgage payment by not requiring an escrow account for property taxes and insurance. This practice enabled lenders to quote a lower monthly payment to borrowers relative to competing lenders who did require escrow accounts.
It was determined that the requirement that all lenders must escrow taxes and insurance on certain loans would place a significant burden on those institutions that do not currently escrow and those that only require escrows on loans sold in the secondary market, and therefore do not have any experience managing escrow accounts. Therefore the effective date of the escrow provisions was set at April 1, 2010, with an extension to October 1, 2010 for manufactured homes.
The new regulation requires escrow accounts for all “higher-priced” first-lien mortgages secured by a borrower’s principal dwelling. A loan qualifies as higher-priced if it is:
A consumer-purpose loan secured by a consumer’s principal dwelling;
With an annual percentage rate that exceeds the average prime offer rate for a comparable transaction by 1.5 points for first-lien loans or 3.5 points for subordinate lien loans, as of the date the interest rate is set.
After the first year, a borrower can ask the lender to opt out of the escrow account, but the lender has the right to reject the request.
Financial institutions offering loans qualifying as higher-priced mortgage loans will be required to provide escrow accounts for those loans. Setting up the systems necessary to collect and administer escrow accounts will present challenges for financial institutions planning to make higher-cost loans after the final rule’s effective date.
What You Should Know About Regulation Z Escrow Requirements
As of April 1, 2010, on first-lien and higher-priced loans, escrow must be offered to the borrower. Attempting to avoid this by lowering rates or not offering certain types of loans may not be cost effective. Every MLO needs to get professional training to know:
On which loans escrow rules will apply.
How to handle an escrow shortage, surplus, or deficiency.
How to perform the initial analysis for proper escrow amounts
What must be included in the initial disclosure, annual statements, and short-year statements.
Escrow disclosure procedures on the HUD statement.
Regulation Z violations can be serious federal crimes. Ignorance is not a defense to a Truth in Lending Act violation. Education is required to ensure complete compliance with all lending requirements. The only way to protect yourself is to get the professional training you need to ensure compliance with all state and federal laws including Regulation Z