January 28, 2013
TIPS BULLETIN #13-11
To:
Subject:
All Credit Unions
Changes to Mandatory Escrow Account Rule for Higher-Priced
Mortgage Loans
The material in this publication is provided for educational and informational purposes only, and does not constitute legal or financial advice. Use of any
material or information in this publication should never be a substitute for seeking the advice of an attorney or a certified public accountant.
The CFPB issued a final rule that amends Regulation Z (Truth in Lending) to implement certain
amendments to the Truth in Lending Act made by the Dodd-Frank Act. The rule implements
statutory changes that lengthen the time for which a mandatory escrow account established for
a higher-priced mortgage loan must be maintained. The rule also exempts certain transactions
from the statute’s escrow requirement.
Effective Date: June 1, 2013. The new or amended requirements apply to transactions for
which creditors receive applications on or after that date.
Regulation Z requires creditors to establish escrow accounts for higher-priced mortgage loans
secured by a first lien on a principal dwelling.
“Higher-priced mortgage loan” means a closed-end consumer credit transaction secured by the
consumer's principal dwelling with an annual percentage rate that exceeds the average prime
offer rate for a comparable transaction as of the date the interest rate is set:
i.
ii.
iii.
By 1.5 or more percentage points for loans secured by a first lien with a principal
obligation at consummation that does not exceed the limit in effect as of the date the
transaction's interest rate is set for the maximum principal obligation eligible for purchase
by Freddie Mac;
By 2.5 or more percentage points for loans secured by a first lien with a principal
obligation at consummation that exceeds the limit in effect as of the date the
transaction's interest rate is set for the maximum principal obligation eligible for purchase
by Freddie Mac; or
By 3.5 or more percentage points for loans secured by a subordinate lien.
“Average prime offer rate” means an annual percentage rate that is derived from average
interest rates, points, and other loan pricing terms currently offered to consumers by a
representative sample of creditors for mortgage transactions that have low-risk pricing
characteristics. The Bureau publishes average prime offer rates for a broad range of types of
transactions in a table updated at least weekly as well as the methodology the Bureau uses to
derive these rates.
January 28, 2013
Summary of Changes

The rule will require creditors to establish and maintain escrow accounts for at least five
years after originating a “higher-priced mortgage loan.” (Currently, the rule requires that
the escrow accounts be maintained for at least one year.)

The rule creates an exemption from the escrow requirement for small creditors that
operate predominately in rural or underserved areas.
Specifically, to be eligible for the exemption, a creditor must:
1) make more than half of its first-lien mortgages in rural or underserved areas;
2) have an asset size less than $2 billion;
3) together with its affiliates, have originated 500 or fewer first-lien mortgages
during the preceding calendar year; and
4) together with its affiliates, not escrow for any mortgage it or its affiliates currently
services, except in limited instances.
Under the rule, eligible creditors need not establish escrow accounts for mortgages
intended at consummation to be held in portfolio, but must establish accounts at
consummation for mortgages that are subject to a forward commitment to be purchased
by an investor that does not itself qualify for the exemption.

Finally, the rule expands upon an existing exemption from escrowing for insurance
premiums (though not for property taxes) for condominium units to extend the partial
exemption to other situations in which an individual consumer’s property is covered by a
master insurance policy.
CFPB-Escrow Requirements under the Truth in Lending Act (Regulation Z)
Questions
If you have any questions regarding this information, please contact the Research and Information’s tollfree hotline at 877.243.5728.
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