[MCCompliance]

I am reviewing the new flood insurance rules and would like some thoughts on the escrow requirement.

We have a mortgage division that originates and sells loans on the secondary market. Some of these loans have PMI and therefore have escrow due to investor requirements. We also have some loans held in portfolio, however none of these have escrow. We do not have any HPMLs.

We have assets under one billion and I am looking at the small lender exemption where it states “…was not required under Federal law to… escrow account for the entire term of the loan..” Since PMI drops off at a certain point and the escrow may be cancelled, do we qualify for the small lender exemption due to the escrow not being required for the entire term of the loan? Escrow is optional on the other loans sold, but we do not require it.

[kowsley]

I believe based on the review of your question that your financial institution would be exempt under the small lender exemption. As it states in the Final Rule:

The FDPA, as amended, states that the small lender exception is available only if, on or before July 6, 2012, the institution: (i) was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of the loan, in the case of a loan secured by residential improved real estate or a mobile home; and (ii) did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for loans secured by residential improved real estate or a mobile home.

As you see further on page 49 of the Final Rule:
Commenters also requested clarification on whether the small lender exception is available if the lender maintains escrows only on a borrower’s request or if the policy of consistently and uniformly requiring escrow accounts comes at the behest of a third party. Regarding the former situation, the Agencies note that the FDPA and the Agencies’ regulations state that the condition is based on a lender having a policy of requiring the escrow accounts. Therefore, if the lender is only maintaining escrows based on borrowers’ requests, the Agencies do not believe this to be a policy of uniformly or consistently requiring escrow. With respect to the situation involving a third party, the Agencies believe that under the FDPA and the Agencies’ regulations, it is irrelevant why the lender is requiring the escrow so long as there is a policy of uniformly or consistently requiring borrowers to escrow.

Because your financial institution is only maintaining escrows for a portion of the loan term for specific mortgages being sold on the secondary market and it is not normal policy to require escrows “consistently and uniformly” then I believe you do qualify under the Small Lender Exemption.

[Author]

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