Predatory Lending: The High Cost Mortgage Disclosure
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March 28, 2014 (revised)
VIII. Escrow Accounts
The Home Ownership and Equity Protection Act of 1994 (HOEPA) is a federal anti-predatory lending law that imposes disclosure requirements and other restrictions on certain high cost loans. California also has its own generally more stringent California Covered Loan Law (CCLL) discussed in the C.A.R. legal article, Predatory Lending: The California Covered Loan Law. However, HOEPA does not contain a loan amount limitation while the CCLL does. HOEPA applies to refinances and closed-end credit loans secured by a consumer's principal dwelling if the APR or points and fees exceed a certain percentage. HOEPA, at passage (i.e. in 1994), did not apply to purchase money loans, initial construction loans, reverse mortgages or open-end credit plans.
Title XIV of the federal Dodd-Frank Wall Street Reform and Protection Act, Pub. L. No. 111-203, commonly known as the "Dodd Frank Act" made significant changes to HOEPA. These changes went into effect on January 10, 2014. These changes extends HOEPA to cover most types of mortgage loans secured by a consumer's principal dwelling, including purchase-money mortgages, refinances, closed-end home-equity loans, and open-end credit plans (i.e., home equity lines of credit or HELOCS).
Q 1. What type of transaction does HOEPA regulate?
A HOEPA regulates a high-cost mortgage, which is a "consumer credit transaction" that is secured by the consumer's principal dwelling if (12 C.F.R. § 1026.32(a)(1)):
" The annual percentage rate applicable to the transaction will exceed the average prime offer rate by more than 6.5 percentage points for a first-lien loan, or by 8.5 percentage points for a first-lien loan if the dwelling is personal property and the loan amount is less than $50,000, or 8.5 percentage points for a subordinate-lien loan (12 C.F.R. § 1026.32(a)(1)(i)); or
" The total points and fees payable by the consumer exceeds 5 percent of the total loan amount for a transaction with a loan amount of $20,000 or more, or the lesser of 8 percent of the total loan amount or $1,000 for a transaction with a loan amount of less than $20,000 (12 C.F.R. § 1026.32(a)(1)(ii)); or
" Under the terms of the loan contract or open-end credit agreement, the creditor can charge a prepayment penalty more than 36 months after consummation, or prepayment penalties that can exceed, in total, more than 2 percent of the amount prepaid (12 C.F.R. § 1026.32(a)(1)(iii)).
HOEPA does not apply to: (a) reverse mortgages; (b) a transaction to finance the initial construction of a dwelling; (c) a transaction originated by a Housing Finance Agency, where the Housing Finance Agency is the creditor; or (d) transaction originated pursuant to the United States Department of Agriculture's Rural Development Section 502 Direct Loan Program. (12 C.F.R. § 1026.32(a)(2)).
Q 2. How is the term "consumer" defined?
A The adjective "consumer" in "consumer credit transaction" is defined as a credit transaction offered or extended to a "natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes." (15 U.S.C. § 1602(i)).
Q 3. How is the term "creditor" defined?
A Any person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable. (12 C.F.R. § 1026.2(a)(17)(i)). To regularly extend credit, a person will have to originate either 2 or more high-cost mortgages in any 12-month period, or 1 or more such mortgages through a mortgage broker. (12 C.F.R. § 1026.2(a)(17)(v)).
4. How is the term "open-end credit" defined?
A Open-end credit is consumer credit that is extended by a creditor under a plan in which: (a) the creditor reasonably contemplates repeated transactions; (b) the creditor may impose a finance charge from time to time on an outstanding unpaid balance; and (c) the amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid. (12 C.F.R. § 1026.2(a)(20)).
5. How is the term "closed-end credit" defined?
A Closed-end credit is any consumer credit that is not open-end credit (see Q4 for definition of open-end credit). (12 C.F.R. § 1026.2(a)(10)).
6. Must a creditor comply with HOEPA for all refinances secured by a consumer's principal dwelling?
A HOEPA currently only applies to consumer credit (see Q2). Consumer credit means credit offered or extended to a consumer primarily for personal, family or household purposes. (12 C.F.R. § 1026.2(a)(12)). Refinancing occurs when an existing loan obligation is satisfied and replaced by a new obligation undertaken by the same consumer. (12 C.F.R. § 1026.20(a)). Thus, a refinancing is a new offering or extension of credit and as such, a creditor who offers or extends a refinancing will have to comply with HOEPA if the refinancing results in a high-cost mortgage.
However, a restructuring or modification agreement is typically not a new offering or extension of credit, and as such is typically exempt from HOEPA. This is especially true if the restructuring or modification results only in a change in the payment schedule following a borrowers' default or delinquency (Scott v. Wells Fargo Home Mortg. Inc., 326 F. Supp. 2d 709 (E.D.Va. 2003)).
Q 7. What must a creditor do to comply with HOEPA's disclosure requirements?
A For loans subject to HOEPA, a creditor, as defined in Question 3, must do the following:
Provide a notice containing the following disclosure: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan." (15 U.S.C. § 1639(a)(1); 12 C.F.R. § 1026.32(c)(1).)
" State the annual percentage rate (15 U.S.C. § 1639(a)(2); 12 C.F.R. § 1026.32(c)(2)).
" State the amount of the regular monthly (or other periodic) payment. (Note: For variable rate transactions, the lender must include a statement that the interest rate and monthly payment may increase, and the amount of the maximum monthly payment.) (15 U.S.C. § 1639(a)(2); 12 C.F.R. § 1026.32(c)(3) and (4).)
" State the balloon payment (when balloon payment permitted--see Question 12) (12 C.F.R. § 1026.32(c)(3)).
Amount borrowed/credit limit disclosure:
For closed-end credit the disclosure shall include the total amount the consumer will borrow, and where the amount borrowed includes financed charges (see Question 12 for prohibitions on finance charges), that fact shall be stated and grouped together with the disclosure of the amount borrowed. (12 C.F.R. § 1026.32(c)(5)(i)). For an open-end credit plan, the disclosure shall include the credit limit for the plan when the account is opened. (12 C.F.R. § 1026.32(c)(5)(ii)).
Regular payment/balloon payment disclosure for open-end credit:
" The disclosure shall include an example showing the first minimum periodic payment for the draw period, first minimum periodic payment for any repayment period, and the balance outstanding at the beginning of any repayment period (12 C.F.R. § 1026.32(c)(3)(ii)(A);
" If the agreement provides for a balloon payment (when balloon payment is permitted - see Question 12), a disclosure of that fact and an example showing the amount of the balloon payment (12 C.F.R. § 1026.32(c)(3)(ii)(B));
" A statement that the example payments show the first minimum periodic payments at the current annual percentage rate if the consumer borrows the maximum credit available when the account is opened and does not obtain any additional extensions of credit (12 C.F.R. § 1026.32(c)(3)(ii)(C)); and
" A statement that the example payments are not the consumer's actual payments and that the actual minimum periodic payments will depend on the amount the consumer borrows, the interest rate applicable to that period, and whether the consumer pays more than the required minimum periodic payment (12 C.F.R. § 1026.32(c)(3)(ii)(D)).
8. When must a creditor provide HOEPA's disclosure?
A The creditor shall provide the disclosures at least three business days prior to consummation or account opening of a high-cost mortgage. (12 C.F.R. § 1026.31(c)(1)).
However, a consumer may, after receiving the disclosure, modify or waive the three-day waiting period between delivery of those disclosures and consummation if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency. The consumer will have to give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and has the signature of all the consumers entitled to the waiting period. (12 C.F.R. § 1026.31(c)(1)(iii)).
9. Must the disclosures be made in writing?
A The disclosures must be made "clearly and conspicuously" in writing (12 C.F.R. § 1026.31(b)).
10. What must creditors do if there are changes to the terms that make the disclosures inaccurate?
A After providing the required disclosures and prior to consummation or account opening, if the creditor changes any term that makes the disclosures inaccurate, new disclosures shall be provided that comply with HOEPA. (12 C.F.R. § 1026.31(c)(1)(i)). These new disclosures could be made by telephone (see Question 11).
Furthermore, if a HOEPA disclosure is corrected, a new rescission notice may have to be sent, giving the borrower three days to rescind. There is conflicting case law on this point with Smith v. Wells Fargo Credit Corp., 713 F. Supp. 354 stating that a new rescission notice must be sent and Colanzi v. Savings First Mortg., LLC, 2007 WL 3407134 stating that a new rescission notice does not have to be sent.
11. When can a creditor provide disclosures by telephone?
A A creditor can make revised disclosures (see Question 10) by telephone if the consumer initiates the change and at consummation: (a) the creditor provides new written disclosures; and (b) the consumer and creditor sign a statement that the new disclosures were provided by telephone at least three days prior to consummation. (12 C.F.R. § 1026.31(c)(1)((ii)).
Q 12. What are the limitations on credit terms under HOEPA?
A Creditors are prohibited from including some of the following terms or are subject to the following restrictions on loans covered by this law:
(1) Balloon Payment
No balloon payments are permitted for a loan term of fewer than 5 years. In other words, the repayment schedule of a loan with a term of less than 5 years must fully amortize the outstanding principal balance through regular periodic payments. An exception is made for mortgage loans with maturities of less than one year, if the purpose of the loan is a "bridge" loan connected with the acquisition or construction of a principal dwelling. (12 C.F.R. § 1026.32(d)(1).)
As of January 10, 2014, for closed-end credit, a high-cost mortgage cannot have a payment schedule with a payment that is more than two times a regular periodic payment. (12 C.F.R. § 1026.32(d)(1)(i)). This prohibition does not apply to: (a) a mortgage with a payment schedule that is adjusted to the seasonal or irregular income of the consumer; (b) a loan with maturity of 12 months or less, if the loan is a "bridge" loan connected with the acquisition or construction of a dwelling intended to become the consumer's principal dwelling; or (c) a loan that is a qualified mortgage (qualified mortgages are mortgages that meet certain requirements which prohibit or limit risky features that are thought to have harmed consumers during the mortgage crisis - see 12 C.F.R. § 1026.43(e) or the Regulation Z - Ability to Repay Standard for Loans Q&A). (12 C.F.R. § 1026.32(d)(1)(ii)).
For open-end credit, a high-cost mortgage cannot have a payment schedule with a payment that is more than two times a regular periodic payment. However, if the terms of the open-end credit plan provide for a repayment period during which no further draws may be taken, the balloon payment limitation does not apply to any adjustment in the regular periodic payment that results solely from the credit plan's transition from the draw period to the repayment period. (12 C.F.R. § 1026.32(d)(1)(iii)).
(2) Negative Amortization
Payment schedules with regular periodic payments that cause the principal balance to increase are prohibited. This law is directed to payments that do not cover the full amount of interest due. (15 U.S.C. § 1639(f); 12 C.F.R. § 1026.32(d)(2).)
(3) Increased Interest Rate
Creditors cannot increase the interest rate after default. However, creditors can change the rate of variable rate loans where the rate is tied to an index and the index increases after a default. (15 U.S.C. § 1639(d); 12 C.F.R. § 1026.32(d)(4).)
This law restricts how creditors may calculate rebates of interest when a loan is accelerated due to a consumer's default (15 U.S.C. § 1639(d); 12 C.F.R. § 1026.32(d)(5)).
(5) Prepayment Penalties
Creditors are barred from including a prepayment penalty on closed-end and open-end credit transactions except if the penalty is a borrower waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction's principal or terminates the open-end credit plan sooner than 36 months after consummation or account opening. (12 C.F.R. § 1026.32(d)(6)).
(6) Repayment Ability
For open-end credit, a creditor shall not open a plan for a consumer where credit is or will be extended without regard to the consumer's repayment ability as of account opening. For closed-end credit, a creditor shall not extend credit unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan. There is an exemption for temporary or "bridge" loans with terms of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months. (12 C.F.R. § 1026.34(a)(4)).
(7) Prepaid (Advance) Payments
Creditors cannot include terms under which more than two periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the consumer (15 U.S.C. § 1639(g); 12 C.F.R. § 1026.32(d)(3)).
(8) Home Improvement Contractor Payment
Creditors cannot make a payment to a contractor under a home improvement contract from the loan proceeds unless (1) it is in the form of an instrument payable to the consumer or payable to both the consumer and the contractor, or (2) the payment is made by a third party escrow at the consumer's election in accordance with a written agreement signed by the consumer, the creditor, and the contractor before the date of payment (15 U.S.C. § 1639(i); 12 C.F.R. § 1026.34(a)(1)).
(9) Due on Demand Clause
Creditors cannot include a due-on-demand provisions that permits the creditor to terminate the loan in advance of the original maturity date and to demand repayment of the entire outstanding balance except (1) if there is fraud or material misrepresentation by the consumer in connection with the loan; (2) if the consumer fails to meet the repayment terms of the agreement; or (3) there is an action or inaction by the consumer that adversely affects the creditor's security (the secured principal dwelling) (12 C.F.R. § 1026.32(d)(8)).
(10) Refinancings Within One Year
Creditors and assignees cannot refinance any loan within one year of having already extended credit subject to HOEPA to the same borrower, if the refinancing will result in a high-cost mortgage, unless the refinancing is in the borrower's interest (12 C.F.R. § 1026.34(a)(3)).
(11) Notice to Assignee of Mortgage
Creditors cannot sell or otherwise assign a mortgage without furnishing the following statement to the purchaser or assignee: "Notice: This is a mortgage subject to special rules under the Federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the consumer could assert against the creditor." (12 C.F.R. § 1026.34(a)(2)).
(12) Recommended Default
A creditor or mortgage broker may not recommend or encourage a default of a debt prior to and in connection with the consummation or account opening of a high-cost mortgage that refinances all or any portion of such existing debt. (12 C.F.R. § 1026.34(a)(6)).
(13) Modification and Deferral Fees
A creditor, successor-in-interest or assignee may not charge a consumer any fee to modify, renew, extend or amend a high-cost mortgage, or to defer any payment due under the terms of such mortgage. (12 C.F.R. § 1026.34(a)(7)).
(14) Late Fees
Any late payment charge must be specifically permitted by the terms of the loan contract or open-end credit agreement. Furthermore, the late fee may not exceed 4 percent of the amount of the payment past due, and no such charge may be imposed more than once for a single late payment. (12 C.F.R. § 1026.34(a)(8)(i)).
Also, a late payment charge may only be imposed if the payment is not received by the end of the 15-day period beginning on the date the payment is due or, in the case where the interest is paid in advance, the end of the 30-day period beginning on the date the payment is due. (12 C.F.R. § 1026.34(a)(8)(ii)).
(15) Payoff Statements
A creditor or servicer may not charge a fee for providing a statement of the amount due to pay off the outstanding balance to the consumer or a person authorized by the consumer to obtain such information. (12 C.F.R. § 1026.34(a)(9)(i)). Moreover, a payoff statement shall be provided within five business days after receiving a request for such statement. (12 C.F.R. § 1026.34(a)(9)(v)).
However, a creditor or servicer may charge a processing fee to cover the costs of providing a payoff statement by fax or courier, provided that the creditor or servicer: (a) discloses to the consumer that payoff statements are available by a method other than by fax or courier without charge; and (b) makes payoff statement available to a consumer by a method other than fax or courier without charge. (12 C.F.R. § 1026.34(a)(9)(ii)&(iii)). Finally, a creditor or servicer that has provided a payoff statement to a consumer four times during a calendar year may charge a reasonable fee for providing any more payoff statements during that calendar year. (12 C.F.R. § 1026.34(a)(9)(iv)).
(16) Financing of Points and Fees
A creditor may not finance charges that are required to be included in the calculation of points and fees. There is an exception for credit insurance premiums or debt cancellation or suspension fees if: (a) they are required to be included in points and fees; and (b) are calculated and paid in full on a monthly basis. (12 C.F.R. § 1026.34(a)(10)).
A creditor shall not structure any transaction that is otherwise a high-cost mortgage in a form, for the purpose, and with the intent to evade the requirements of a high-cost mortgage. (12 C.F.R. § 1026.34(b)).
Q 13. Is there a certification of counseling requirement for loans covered by HOEPA?
A Yes, a creditor shall not extend a high-cost mortgage to a consumer unless the creditor receives written certification that the consumer has obtained counseling on the advisability of the mortgage from a counselor that is approved to provide such counseling by the Secretary of the U.S. Department of Housing and Urban Development or, if permitted by the Secretary, by a State housing finance authority. (12 C.F.R. § 1026.34(a)(5)(i)).
14. When must the counseling occur?
A The counseling must occur after the consumer receives either the good faith estimate or the disclosures required for home equity plans. (12 C.F.R. § 1026.34(a)(5)(ii)). Home equity plan disclosures are required at the time an application is provided to the consumer or within 3 business days following receipt of consumer's application for applications contained in magazines or other publications, or when the application is received by telephone or through an intermediary agent or broker. (12 C.F.R. § 1026.40(b)).
15. Can the counselor be employed or affiliated with the creditor?
A No, the counselor cannot be employed by or affiliated with the creditor. (12 C.F.R. § 1026.34(a)(5)(iii)).
16. What information must be included in the certification?
A The certification of counseling must include (12 C.F.R. § 1026.34(a)(5)(iv)):
" The name(s) of the consumer(s) who obtained counseling;
" The date(s) of counseling;
" The name and address of the counselor;
" A statement that the counsumer(s) received counseling on the advisability of the high-cost mortgage based on the terms provided in either the good faith estimate or the disclosures required for home equity ("HELOC") plans - if neither the good faith estimate or HELOC disclosures is provided then the required statement will state that the consumer received counseling on the advisability of the high-cost mortgage based on the terms of certain HOEPA disclosures (i.e. HOEPA disclosures based on §1026.32(c)); and
" A statement that the counselor has verified that the consumer(s) received disclosures required by either HOEPA (i.e. HOEPA disclosures based on §1026.32(c)) or the Real Estate Settlement Procedures Act.
17. Can a creditor pay for the counseling fees?
A Yes the creditor may pay the fees of a counselor or counseling organization, however, the creditor may not condition the payment of such fees on the consummation or account-opening of a mortgage transaction. Also, if a consumer withdraws a high-cost mortgage application, a creditor may not condition payment of counselor fees on the receipt of the certification. However, a creditor may confirm that a counselor has provided counseling to the consumer prior to paying the fee of a counselor. (12 C.F.R. § 1026.34(a)(5)(v)).
18. Can a creditor steer a consumer to a specific counselor?
A No, a creditor that extends a high-cost mortgage shall not steer or otherwise direct a consumer to choose a particular counselor or counseling organization for the required counseling. (12 C.F.R. § 1026.34(a)(5)(vi)).
19. Is a creditor required to provide a list of homeownership counseling organizations (list)?
A The creditor is only required to provide a list of homeownership counseling organizations if the creditor is a lender, mortgage broker, or dealer and the transaction falls under the Real Estate Settlement Procedures Act (RESPA). (12 C.F.R. § 1024.20(a)).
However, there is no requirement to provide a list of homeownership counseling organizations for either reverse mortgage transactions or timeshare plans. (12 C.F.R. § 1024.20(c)(1)&(2)). Also, there is no requirement to provide a list if the lender denies the application or the loan applicant withdraws the application within three business days after receipt of either loan application or information sufficient to complete a loan application. (12 C.F.R. § 1024.20(a)(5)).
20. What transactions fall under RESPA?
A RESPA applies to all federally related mortgage loans (12 C.F.R. § 1024.5(a)). In general a federally related mortgage loan is a loan on a residential 1-4 unit property: (a) from a lender that is either regulated by or whose deposits or accounts are insured by any agency of the federal government; (b) the loan is made in whole or in part, or is insured, guaranteed, supplemented, or assisted in any way by the Department of Housing and Urban Development or any other agency of the Federal Government; (c) the loan is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a financial institution from which the loan is to be purchased by the Federal Home Loan Mortgage Corporation; or (d) from a creditor who: (i) regularly extends credit which is payable in more than four installments or for which a finance charge is or may be required; and (ii) makes or invests in residential real estate loans aggregating more than $1,000,000 per year. For a complete definition, please go to 12 C.F.R. § 1024.2(b), and for a complete list of exemptions, please see 12 C.F.R. § 1024.5(b).
21. When must the list be provided?
A The list must be provided no later than three business days after receipt of a loan application, or information sufficient to complete an application. (12 C.F.R. § 1024.20(a)).
For home-equity line of credit, the list must be provided either at the time an application is provided to the consumer, or within three business days following receipt of a consumer's application in the case of: (a) applications contained in magazines or other publications; or (b) applications received by telephone or through an intermediary agent or broker. (12 C.F.R. § 1024.20(b)).
22. Must the list be provided in writing?
A Yes, the list must be provided in writing that is clear and conspicuous. (12 C.F.R. § 1024.20(a)).
23. Where must the list that is provided be obtained from?
A The list that is provided must be obtained no earlier than 30 days prior to the time when the list is provided to the loan applicant from either: (a) the website maintained by the Bureau of Consumer Financial Protection (CFPB) -(http://www.consumerfinance.gov/find-a-housing-counselor/); or (b) data made available by either the CFPB or HUD for lenders to use to comply with this rule. (12 C.F.R. § 1024.20(a)).
Q 24. What are the penalties for noncompliance with HOEPA?
A Some of the penalties for violation of HOEPA are as follows:
In a case where the consumer is determined to have a right of rescission, the penalty would be the costs of the legal action and reasonable attorney fees as determined by the court. (Note: Such an action can be brought in a federal district court or a state court of competent jurisdiction within one year from the date of violation.) Since the rescission period doesn't start until all material disclosures have been given, this means that a failure to give the HOEPA disclosures may make the loan rescindable for 3 years from the date of consummation (15 U.S.C. § 1635(f)). Consumers have a right to rescind credit transactions in which a security interest is or will be retained or acquired in a consumer's principal dwelling. (12 C.F.R. § 1026.23(a)(1)). However, a residential mortgage transaction (i.e. purchase money loan used to finance acquisition or initial construction of consumer's principal dwelling - see 12 C.F.R. § 1026.2(a)(24)) and a refinancing by the same creditor of an extension of credit already secured by the consumer's principal dwelling are exempt from the rescission rules. (12 C.F.R. § 1026.23(f)).
In a case of a failure to provide the necessary disclosures to an individual consumer, the penalty would be an amount equal to the total of finance charges and fees paid by the consumer, unless the creditor can demonstrate that the failure is not material (15 U.S.C. § 1640(a)(4)). (Note: The state Attorney General may bring an action in an appropriate court no later than three years after the alleged violation (15 U.S.C. § 1640(e)).
In a class action, the court must consider, among other relevant factors, the amount of any actual damages awarded, the frequency and persistence of failures of compliance, the creditor's resources, the number of persons adversely affected, and the extent to which the failure was intentional (15 U.S.C. § 1640(a)).
Q 25. Is there an appraisal requirement for loans that fall under HOEPA?
A No, there is not a requirement for a creditor to obtain a written appraisal for loans that fall under HOEPA. However, there is such a requirement for higher-priced mortgage loans.
26. What is a higher-priced mortgage loan?
A A higher-priced mortgage loan is 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 by: (a) 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 for the maximum principal obligation eligible for purchase by Freddie Mac; (b) 2.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that exceeds the limit for the maximum principal obligation eligible for purchase by Freddie Mac; or (c) 3.5 or more percentage points for loans secured by a subordinate lien. (12 C.F.R. § 1026.35(a)(1)).
27. Do all loans that fall under HOEPA qualify as a higher-priced mortgage loan?
A No, as it is possible for the total points and fees to be high (see Q1) without the loan having interest rates above the average prime offer rate (see Q26). Furthermore, although the definition of high-cost mortgage has been extended to include open-end credit, open-end credit does not qualify as higher-priced mortgage loan. Therefore, an open-end credit that qualifies as a high-cost mortgage will not qualify as a higher-priced mortgage.
28. What are the appraisal requirements for higher-priced mortgage loans?
A A creditor should not extend a higher-priced mortgage loan to a consumer without obtaining, prior to consummation, a written appraisal of the property to be mortgaged (see Q33 for exempt transactions). Furthermore, the appraisal must be performed by a certified or licensed appraiser who conducts a physical visit of the interior of the property that will secure the transaction. (12 C.F.R. § 1026.35(c)(3)(i)).
29. Are there any additional appraisal requirements for higher-priced mortgage loans for flipped properties?
A Yes, a creditor will have to conduct two appraisals that each meet the requirements stated in Q28 before extension of a higher-priced mortgage loan, if: (a) the seller acquired the property 90 or fewer days prior to the date of the consumer's agreement to acquire the property and the price in the consumer's agreement to acquire the property exceeds the seller's acquisition price by more than 10 percent; or (b) the seller acquired the property 91 to 180 days prior to the date of the consumer's agreement to acquire the property and the price in the consumer's agreement to acquire the property exceeds the seller's acquisition price by more than 20 percent. (12 C.F.R. § 1026.35(c)(4)(i) & (iii)).
Furthermore, the two required appraisals may not be performed by the same certified or licensed appraiser. (12 C.F.R. § 1026.35(c)(4)(ii)). Also, one of the two appraisals must include an analysis of the difference between the price the seller acquired the property and the price that the consumer is obligated to pay to acquire the property, and this analysis shall include the changes in market condition between those two dates (i.e. the date the seller acquired property and the date of the consumer's agreement to acquire the property) and any improvements made to the property between those two dates. (12 C.F.R. § 1026.35(c)(4)(iv)). Finally, the creditor may charge the consumer for only one of the two appraisals. 12 C.F.R. § 1026.35(c)(4)(v)).
30. Are there any exceptions to the extra appraisal requirements for flipped properties?
A Yes, along with the transactions mentioned in Q33, the additional appraisal required for flipped properties shall not apply to extensions of credit that finance a consumer's acquisition of property: (a) from a local, State or Federal government agency; (b) from a person who acquired title through foreclosure, deed-in-lieu, or other similar judicial or non-judicial procedure as a result of the person's exercise of rights as the holder of a defaulted mortgage loan; (c) from a non-profit entity as part of a local, State, or Federal government program under which the non-profit entity is permitted to acquire title to single-family properties for resale from a seller who acquired title through foreclosure, deed-in-lieu, or other similar judicial or non-judicial procedure; (d) from a person who acquired title by inheritance or pursuant to a court order of dissolution of marriage, civil union, or domestic partnership, or of partition of joint or marital assets to which the seller was a party; (e) from an employer or relocation agency in connection with the relocation of an employee; (f) from a servicemember who received deployment or permanent change of station order after the servicemember purchased the property; (g) located in an area designated by the President as a federal disaster area if the Federal financial institutions regulatory agencies waives certain rights; or (h) located in a rural county. (12 C.F.R. § 1026.35(c)(4)(i) & (vii)).
31. Are there any appraisal disclosures required for higher-priced mortgage?
A Yes, a creditor shall disclose the following statement, in writing, to a consumer who applies for a higher-priced mortgage loan: "We may order an appraisal to determine the property's value and charge you for this appraisal. We will give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost." It should be noted that the Equal Credit Opportunity Act (ECOA) has a similar appraisal disclosure requirement, and should a creditor deliver a disclosure that is in compliance with ECOA, then that creditor is deemed to have satisfied this disclosure requirement. (12 C.F.R. § 1026.35(c)(5)(i)).
This disclosure shall be delivered no later than the third business day after the creditor receives the consumer's application for a higher-priced mortgage loan. Also, for a loan that becomes a higher-priced mortgage loan afterwards, the disclosure shall be delivered not later than the third business day after the creditor determines that the loan is a higher-priced mortgage. (12 C.F.R. § 1026.35(c)(5)(ii)).
32. Are creditors required to provide free copies of appraisals to consumers?
A Yes, creditors are required to provide consumers with a free copy of any written appraisal performed in connection with a higher-priced mortgage loan. (12 C.F.R. § 1026.35(c)(6)(i) & (iv)). The copy of the appraisal shall be delivered no later than three business days prior to the consummation of the loan, or in the case of a loan that is not consummated, no later than 30 days after the creditor determines that the loan will not be consummated. (12 C.F.R. § 1026.35(c)(6)(ii)). A creditor may provide the disclosure in electronic form, subject to compliance with the consumer consent and other applicable provisions of the E-Sign Act. (12 C.F.R. § 1026.35(c)(6)(iii)).
33. Are there any exceptions to the rules that require all creditors who extend higher-priced mortgage loans to perform written appraisals and provide the appraisal disclosures and free copies of appraisals?
A Yes, the requirements for appraisals, disclosures of appraisals, and free copies of appraisals, in connection with higher-priced mortgage loans are not required for the following types of transactions: (a) qualified mortgages; (b) extension of credit equal to or less than the threshold amount for Urban Wage Earners and Clerical Workers*; (c) mortgages secured by mobile home, manufactured home, boat, or trailer; (d) financing the initial construction of a dwelling; (e) bridge loan for principal dwellings with a maturity of 12 months or less; (f) reverse mortgages; (g) certain extension of credit that results in a refinancing secured by a first lien. (12 C.F.R. § 1026.35(c)(2), (c)(4)(i), (c)(5)(i) & (c)(6)(i)).
*From January 18, 2014 to December 31, 2014, the threshold amount for Urban Wage Earners and Clerical Workers is $25,000. (Official Staff Commentary § 1026.35(c)(2)(ii)).
VIII. Escrow Accounts
Q 34. Is there a requirement to establish an escrow account for loans that fall under HOEPA?
A No, there is not a requirement for a creditor to ensure that an escrow account is established for loans that fall under HOEPA. However, there is such a requirement for higher-priced mortgage loans (see Q26 for definition).
35. What are the escrow requirements for higher-priced mortgage loans?
A A creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer's principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor. (12 C.F.R. § 1026.35(b)(1)). Examples of mortgage-related insurance required by creditors, include insurance: (i) against loss of or damage to property; (ii) against liability arising out of the ownership or use of the property; or (iii) protecting the creditor against the consumer's default or other credit loss. (12 C.F.R. § 1026.35(b)(1)).
36. What is the definition of the term "escrow account"?
A Escrow account means any account that a servicer establishes or controls on behalf of a borrower to pay taxes, insurance premiums (including flood insurance), or other charges with respect to a federally related mortgage loan (see Q20 for definition), including charges that the borrower and servicer have voluntarily agreed that the servicer should collect and pay. (12 C.F.R. § 1026.35(b)(1)).
Furthermore, an escrow account also includes any arrangement where the servicer adds a portion of the borrower's payments to principal and subsequently deducts from principal the disbursements for escrow account items. Finally, an escrow account excludes any account that is under the borrower's total control. (12 C.F.R. § 1026.35(b)(1)).
37. Are there any exceptions to the requirement to establish an escrow account?
A Yes, the requirement to establish an escrow account does not apply to: (a) transaction secured by shares in a cooperative; (b) transaction to finance the initial construction of a dwelling; (c) temporary or bridge loan; (d) reverse mortgage. (12 C.F.R. § 1026.35(b)(2)(i)).
38. Are there any exceptions to the requirement to establish an escrow account for creditors that predominately serve rural/underserved areas?
A Yes, there is an exception for creditors that predominately serve rural or underserved areas. However, to be eligible for this exception the creditor will have to meet the following requirements as of the time of consummation (Official Interpretations to TILA § 1026.35(b)(2)(iii)):
A. During any of the three preceding calendar years, the creditor extended more than 50% of its total covered transactions (i.e. consumer credit transaction secured by a dwelling) secured by a first lien on properties that are located in counties that are either rural or underserved (12 C.F.R. § 1026.35(b)(2)(iii)(A));
B. During the preceding calendar year, the creditor and its affiliates together originated 500 or fewer covered transactions secured by a first lien (12 C.F.R. § 1026.35(b)(2)(iii)(B));
C. As of the end of the preceding calendar year, the creditor had total assets of less than $2B (this number increases with inflation) (12 C.F.R. § 1026.35(b)(2)(iii)(C)); and
D. Neither the creditor nor its affiliate can currently be maintaining an escrow account for any extension of consumer credit secured by a dwelling that the creditor or its affiliate currently services, other than: (1) escrow accounts established between April 1, 2010 and January 1, 2014; or (2) escrow accounts established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure. (12 C.F.R. § 1026.35(b)(2)(iii)(D)).
Finally, this exception does not apply to any loan that, at consummation, is subject to a commitment to be acquired by a person that would not satisfy the requirements for this exception. (12 C.F.R. § 1026.35(b)(2)(v)).
39. Are there any exceptions to the requirement to establish an escrow account for insurance premiums for mortgage-related insurance that is required by the creditor?
A Yes, insurance premiums do not have to be included in escrow accounts for loans secured by dwellings in condominiums, planned unit developments, or other common interest communities in which: (i) dwelling ownership requires participation in a governing association; and (ii) the governing association has an obligation to the dwelling owners to maintain a master policy insuring all dwellings. (12 C.F.R. § 1026.35(b)(2)(ii)).
40. When can a creditor or servicer cancel an escrow account?
A A creditor or servicer may cancel an escrow account only upon the earlier of:
1. Termination of the underlying debt obligation (12 C.F.R. § 1026.35(b)(3)(i)(A)); or
2. Receipt no earlier than five years after consummation of a consumer's request to cancel the escrow account (12 C.F.R. § 1026.35(b)(3)(i)(B)) if the following conditions are satisfied:
a. the unpaid principal balance is less than 80% of the original value of the property securing the underlying debt obligation; and
b. the consumer currently is not delinquent or in default on the underlying debt obligation (12 C.F.R. § 1026.35(b)(3)(ii)).
Q 41. Where can readers get more information?
A This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit car.org.
Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at (213) 739-8282, Monday through Friday, 9 a.m. to 6 p.m. and Saturday, 10 a.m. to 2 p.m. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739-8350 to receive expedited service. Members may also submit online requests to speak with an attorney on the Member Legal Hotline by going to http://www.car.org/legal/legal-hotline-access/. Written correspondence should be addressed to:
CALIFORNIA ASSOCIATION OF REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, CA 90020
The information contained herein is believed accurate as of July 25, 2013. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney. Revised by Sanjay Wagle, Esq. and Jeffrey Aba-Onu, Esq.
Copyright© 2013 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Permission is granted to C.A.R. members to reprint this material in hardcopy or PDF format only for personal use or with individual clients. This material may not be used or reproduced for commercial purposes. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R Legal Department. All rights reserved.