Source: https://lonestarlandlaw.com/federal-regulations-of-higher-priced-mortgage-loans/
Timestamp: 2020-08-14 16:55:21
Document Index: 749116427

Matched Legal Cases: ['art 226', 'art 226', 'ART 226', '§226', '§226', '§226']

Federal Regulations of Higher-Priced Mortgage loans - LoneStarLandLaw.com
Federal Regulations of “Higher-Priced Mortgage loans”
Certain home loans have been defined by the Federal Reserve as being “higher-priced mortgage loans” because (in part) the annual percentage rate charged on such loans exceeds the average prime rate by 1.5% for a first lien or 3.5% for a subordinate lien. Rules in this area are particularly important in the area of owner-financed transactions since the APR is usually higher than in conventional or FHA financing. Specifically, if the loan application date is later than April 1, 2010; if the loan will be a first or subordinate lien on a one-to-four family residence; the property will be owner occupied; and if the APR exceeds the amounts stated above, then such a loan is classified as a higher-priced mortgage loan and new law applies.
Applicable law is Regulation Z (12 CFR Part 226), specifically Section 226.35 which is set forth in full at the end of this article. The higher-priced mortgage loan regulations are sometimes referred to as “HPML regs” and such loans are often called “Section 35 loans” or “HPML loans.” Section 226.35, entitled “Prohibited Acts or Practices in Connection with Higher-Priced Mortgage Loans,” became effective October 1, 2009 except for rules requiring collection of an escrow which became effective April 1, 2010.
The HPML regs are part of a wave of federal regulation designed to curb abuses in the owner finance industry which contributed to the accumulation of bad loans in lenders’ portfolios and the subsequent collapse of the national real estate market. Among the new laws is Dodd-Frank, which requires that a residential seller/lender in an owner-financed transaction perform due diligence in order to determine that the buyer/borrower has the ability to repay the loan; the federal S.A.F.E. Act (implemented in Texas Finance Code Ch.180 as the “Texas Secure and Fair Enforcement for Mortgage Licensing Act of 2009” or “T-S.A.F.E.”) which requires that a seller/lender of one-to-four family residence in an owner-financed transaction have a residential mortgage loan origination (RMLO) license issued by the Texas Savings and Mortgage Lending Department; a new Texas requirement that the seller give both the existing lienholder and the buyer a 7 day written notice prior to closing a transaction with an existing loan in place; and burdensome rules relating to contracts for deed and other executory contracts contained in Texas Property Code Sec. 5.061 et seq.
Texas was formerly the wild west of seller financing. Recall the practice of “red flagging” rural lots? Those days are long gone.
The seller in an owner-financed transaction subject to HPML regs must establish an escrow account. Sec. 226.35(b)(3)(i) states that “a creditor may not extend a loan secured by a first lien on a 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, such as 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 regulation requires that an escrow account be established before “consummation for payment of property taxes and premiums.” When does such consummation occur? The language is unclear, but it is reasonable to interpret “consummation” in this context as the shift to the buyer of the obligation to pay ad valorem taxes and insurance premiums – and this occurs at closing. At the very least, therefore, an escrow account should be established at closing.
A common practice is to provide for an escrow that commences with the first monthly payment. This would not appear to comply with Sec. 226.35(b)(3)(i) since the escrow was not established at closing – an escrow account, after all, cannot be commenced with a zero balance. As a practical matter, therefore, it may therefore be necessary to open an escrow at closing with deposit by the buyer of an initial escrow amount, even if that amount is nominal.
What if a buyer wants to terminate the required escrow? This appears to be permissible according to Sec. 226.35(b)(3)(iii) which states that a “creditor or servicer may permit a consumer to cancel the escrow account required in paragraph (b)(3)(i) of this section only in response to a consumer’s dated written request to cancel the escrow account that is received no earlier than 365 days after consummation.” Must a seller/lender comply with such a request? The statute’s use of the word “may” rather “must” suggests that the seller may decline a buyer’s request to terminate the escrow.
The Role of Third-Party Servicers
The higher-priced mortgage loan rules (Regulation Z – 12 CFR Part 226) are, along with the S.A.F.E. Act and Dodd Frank, part of a federal trend to impose nationwide regulations upon certain lending practices as they relate to owner finance. Texas, once the haven for easy money, now finds itself in the same highly-regulated environment as everyone else.
Copyright © 2013 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, https://www.LoneStarLandLaw.com
EXHIBIT: AMENDMENT TO REGULATION Z (12 CFR PART 226)
(3) Notwithstanding paragraph (a)(1) of this section, the term “higher-priced mortgage loan” does not include a transaction to finance the initial construction of a dwelling, a temporary or “bridge” loan with a term 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, a reverse-mortgage transaction subject to §226.33, or a home equity line of credit subject to §226.5b.
(iv) Definition of escrow account. For purposes of this section, “escrow account” shall have the same meaning as in 24 CFR 3500.17(b) as amended.
(4) Evasion; open-end credit. In connection with credit secured by a consumer’s principal dwelling that does not meet the definition of open-end credit in §226.2(a)(20), a creditor shall not structure a home-secured loan as an open-end plan to evade the requirements of this section.
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