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Aug 28, 2009
Categories: Home-Secured Lending Consumer Lending

HOEPA - Section 226.35 - Higher-Priced Mortgage Loans - Cont'd

Posted by Steve Van Beek

Yesterday's blog posting discussed the creation of the new "higher-priced mortgage loans" category, and today we will take a look at some of the restrictions and requirements that come with that special category of loans.

Higher-priced mortgages will be under the following restrictions:

Repayment Ability.  Higher-priced mortgage loans will be subject to the same repayment ability requirement that "Section 32" loans - which Sarah discussed earlier this week.  The key is to realize that Section 226.35(b)(1) simply indicates that credit unions must verify repayment ability as provided in 12 C.F.R. 226.34(a)(4).  So, refer to that section when looking for how to determine repayment ability (including the very, very useful official staff commentary).

Prepayment Penalties.  As you are aware, FCUs are already prohibited from charging prepayment penalties.  However, if you are a state-chartered credit union - be sure to analyze these restrictions:

"(2) Prepayment penalties. A loan may not include a penalty described by §226.32(d)(6) unless:
(i) The penalty is otherwise permitted by law, including §226.32(d)(7) if the loan is a mortgage transaction described in §226.32(a); and
(ii) Under the terms of the loan—
(A) The penalty will not apply after the two-year period following consummation;
(B) The penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor; and
(C) The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation."

A key here is to realize that these restrictions - which had already applied to "Section 32" mortgages - have been strengthened.  Be sure you review any prepayment penalties your credit union may offer to make sure it will still be allowed when the stronger requirements go into place after October 1, 2009.

Escrow Requirement.  This requirement applies to loans secured by a first lien on a principal dwelling.  In short, credit unions will not be able to extend a higher-priced mortgage loan unless they escrow for for property taxes and mortgage-related insurance.  Mortgage-related insurance includes "insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's default or other credit loss."  This blog post contains a link to a great resource from the Philadelphia Federal Reserve Bank on escrow requirements.

Compliance Dates.  The escrow requirement has an effective date of April 1, 2010.  Loans secured by manufactured houses have an extended deadline of October 1, 2010.

Cancellation.  The credit union can allow the member to cancel the escrow account only if one year has passed from consummation of the mortgage and the member submits a dated, written request to cancel the escrow account.  Keep in mind that the request to cancel must come from the member and can not be signed at consummation to apply in the future.  Rather, the written request must be signed, dated and submitted by the member after the one year period has expired.

Again, this escrow requirement applies to higher-priced mortgage loans secured by a first lien on a principal dwelling.  Footnote 99 to the Final Rule (page 42 of the PDF) reiterates the definition of dwelling for Regulation Z:

"99 Regulation Z currently defines a dwelling to include manufactured housing. See § 226.2(a)(19).  Official staff commentary § 226.2(a)(19) states that mobile homes, boats and trailers are dwellings if they are in fact used as residences; § 226.2(b) clarifies that the definition of ‘‘dwelling’’ includes any residential structure, whether or not it is real property under state law; §§ 226.15(a)(1)–5 and 226.23(a)(1)–3 make clear that a dwelling may include structures that are considered personal property under state laws (e.g., mobile home, trailer or houseboat) and draws no distinction between personal property loans and real property loans. "

The official staff commentary includes similar language:

"35(b)(3) Escrows. 
Paragraph 35(b)(3)(i). 
1. Section 226.35(b)(3) applies to principal dwellings, including structures that are classified as personal property under state law. For example, an escrow account must be established on a higher-priced mortgage loan secured by a first-lien on a mobile home, boat or a trailer used as the consumer’s principal dwelling. See the commentary under §§ 226.2(a)(19), 226.2(a)(24), 226.15 and 226.23. Section 226.35(b)(3) also applies to higher-priced mortgage loans secured by a first lien on a condominium or a cooperative unit if it is in fact used as principal residence."

Limited Exemptions for Cooperatives and certain Condominium units.  Escrow accounts do not need to be established for loans secured by shares in a cooperative.  

For loans secured by condominium units, the exemption is smaller - it only excludes the requirement to escrow for mortgage-related insurance premiums if the condominium association has an obligation to maintain a master policy insuring condominium units.  However, even if this exception applies there is still a requirement to establish an escrow account for property taxes.

Have a great weekend!

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