Don’t Overlook the Higher-Priced Mortgage Rule

Review mortgage lending policies and procedures to ensure compliance with new Reg Z amendments.

June 17, 2013
/ PRINT / ShareShare / Text Size +

This month the recent amendments to the rules affecting higher-priced mortgages take effect. Before we look at the actual amendments, however, let’s review the evolution of these mortgages.

The concept of higher-priced mortgages has actually been around since 2008 when the Federal Reserve proposed amendments to Regulation Z. At that time, the Fed was looking for ways to use its authority under Reg Z and the Home Ownership and Equity Protection Act (HOEPA) to address some of the concerns that led to the collapse of the housing market.

The ultimate goal of these proposed amendments was to protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices while preserving responsible lending and sustainable home ownership.

To protect consumers, the Fed introduced a new category of mortgages—the higher-priced mortgage. The Fed also applied additional protections concerning a person’s ability to repay, prepayment penalties, and escrow requirements for first liens on these mortgages.CU Directors Newsletter

This new category of loans and protections basically applied to all closed-end loans secured by a consumer’s principal dwelling that met a certain threshold.

To calculate the threshold, you review the loan’s annual percentage rate (APR) in relation to an index, also known as the Average Prime Offer Rate (APOR). The CFPB now publishes this index weekly (the Fed used to publish it).

The Fed’s final rule establishing higher-priced mortgage requirements was effective Oct. 1, 2009, with the escrow component effective April 1, 2010. So that means these loans have been around since 2009.

Let’s take a closer look at the amendments, which went into effect June 1, 2013, and what to consider.

An index controls what determines a higher-priced mortgage. The new definition of a higher-priced mortgage is a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an APR that exceeds the APOR by:

This new definition simply adds the threshold requirements for jumbo loans to the current definition. Because the definition has changed slightly, it would be advantageous to review your mortgage lending policies and procedures.

First, you want to ensure that you’ve clearly outlined the higher-priced mortgage category in policies and procedures. And second, you want to be sure staff is verifying your closed-end mortgages’ APRs in relation to the APOR thresholds.

The APOR is available on the Federal Financial Institutions Examination Council's website.

Next, determine if your policies and procedures adequately address the restrictions related to underwriting a higher-priced mortgage. Your loan officers must consider repayment ability, prepayment penalties (if applicable), and escrow. Find the rules related to these restrictions in Truth in Lending Section 1026.35.

Please note that the recent amendments lengthen the time in which you must maintain a mandatory escrow account for first lien higher-priced mortgages. Previously, one year was the required minimum period.

Effective June 1, 2013, the minimum period for an escrow account will be the later of five years, or when the unpaid principal balance is less than 80% of the original value and the consumer isn’t delinquent or in default.

You might be thinking, what if we don’t escrow? Well, if you meet all four of these requirements you’re exempt from the mandatory escrow requirement:

Remember, you must meet all four of these factors to be exempt from the escrow requirement.

So, if you overlooked the higher-priced mortgage rules for the past few years, there’s no better time than now to comply with and implement these new changes.

The next amendment to these rules—related to appraisals—is scheduled right around the corner: on Jan. 18, 2014.






JAMI WEEMS is a senior compliance officer with PolicyWorks LLC.

Post a comment to this story


What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive