Tag Archives: Dodd Frank

Reiss on CFPB’s New Escrow Rules

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The CFPB Journal interviewed me here about the new five year escrow requirement for Higher-Priced Mortgage Loans (HPMLs):

According to David Reiss, professor of law at Brooklyn Law School, the text of the Dodd-Frank Act itself requires the five-year escrow period be implemented.

Specifically, the CFPB’s rule implements sections 1461 and 1462 of the Dodd Frank Act, which amends the requirements for maintaining escrow accounts in connection with higher-priced mortgage loans.

“CFPB has indicated that it is trying to have a coordinated roll out of new mortgage regulations and this is part of that roll out,” Reiss says. “Creditors will benefit from the float on the aggregate escrow accounts—a small amount for each individual homeowner but potentially a meaningful amount for creditors, particularly if interest rates rise to their historic average or higher in coming years.”

Per the rule, a creditor may not cancel escrow accounts required under the rule except with the termination of the loan or the receipt of a consumer’s request to cancel the escrow account no sooner than five years after it was established, whichever happens first.  The CFPB’s rule also states that the creditor may not cancel the escrow account unless the unpaid principal balance is less than 80 percent of the property’s original value and the consumer is not delinquent or in default on the loan at the time of the request.

One key aspect of the rule involves the exempting small creditors who operate primarily in rural or underserved areas. According to the CFPB, to qualify for the exemption, a creditor must:

  • Make more than half of its first-lien mortgages on properties located in counties that are designated either “rural” or “underserved” by the CFPB
  •  Have had assets of less than $2 billion at the end of the preceding calendar year
  •  Have originated, together with its affiliates, 500 or fewer covered, first-lien transactions during the preceding calendar year
  • Together with its affiliates, not maintain escrows for property taxes or insurance for any mortgage it or its affiliate currently services, except when the escrow account was established for a first-lien, higher-priced mortgage loan between April 1, 2010 and before June 1, 2013
  • Escrow accounts established after consummation as an accommodation to assist distressed consumers in avoiding default or foreclosure

One outcome of the escrow requirement as it pertains to creditors is the marginal cost of maintaining escrows for five years instead of one. “To some extent, creditors may be able to pass along the increased cost of the longer escrow term to homeowners,” Reiss says. “This is a rule that is probably good for homeowners and creditors in the aggregate.”

The GAO’s Take on The FHA

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The Government Accountability Office issued an update to its 2013 HIGH-RISK SERIES.  It had this to say about the Federal Housing Administration:

a new challenge for the markets has also evolved as the decline in private sector participation in housing finance that began with the 2007-2009 financial crisis has resulted in much greater activity by FHA, whose single-family loan insurance portfolio has grown from about $300 billion in 2007 to more than $1.1 trillion in 2012. Although required to maintain capital reserves equal to at least 2 percent of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured. As a result, we are modifying this high-risk area to include FHA and acknowledge the need for actions beyond those already taken to help restore FHA’s financial soundness and define its future role. One such action would be to determine the economic conditions that FHA’s primary insurance fund would be expected to withstand without drawing on the Treasury. Recent events suggest that the 2-percent capital requirement may not be adequate to avoid the need for Treasury support under severe stress scenarios. Additionally, actions to reform GSEs and to implement mortgage market reforms in the Dodd-Frank Act will need to consider the potential impacts on FHA’s risk exposure. (25)

Discussion about the FHA is getting in high gear, in large part because of Ed Pinto.  I expect to take up the issue of the FHA’s appropriate role in the housing market over the coming months and will offer an alternative vision to his.

GAO Report on Challenges for Financial Regulatory Reform

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The GAO has issued a report, Financial Regulatory Reform:  Regulators Have Faced Challenges Finalizing Key Reforms and Unaddressed Areas Pose Potential Risks.  The report notes that

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A variety of challenges have affected regulators’ progress in executing rulemaking requirements intended to implement the act’s reforms. Regulators to whom we spoke indicated that the primary challenges affecting the pace of implementing the act’s reforms include the number and complexity of the rulemakings required and the time spent coordinating with regulators and others. In addition, some regulators identified additional challenges, including extensive industry involvement through comment letters and litigation resulting from rulemakings, concurrently starting up a new regulatory body and assuming oversight responsibilities, and resource constraints.  (23)

These challenges are only compounded by the recent court decision that throws CFPB rulemaking into a pit of uncertaintly.  While the decision addresses the legality of NLRB recess appointments, it clearly implicates the appointment of Richard Cordray as the Director of the CFPB.  This has serious consequences for Bureau rulemaking which cannot be occur without a Bureau Director being in place.  (See Dodd-Frank section 1022(b)(1), codified at 12 U.S.C. section 5512(b)(1))