Consumer Protections for Higher-Priced Mortgages
There are special consumer protections for higher-priced mortgages. High-priced mortgage loans (HPMLs) are 1st-lien home mortgages (other than jumbo loans), home equity loans, or home equity lines of credit where the annual percentage rate (APR) exceeds the Average Prime Offer Rate (APOR), as published by the Consumer Financial Protection Bureau (CFPR), by least 6.5%. The corresponding percentage rate is 8.5% for jumbo loans, where the principal balance exceeds the maximum allowed for loan purchases by Freddie Mac. For subordinate lien mortgages, the APR must be less than the APOR + 8.5%.
High-cost loans also include loans of less than $50,000 for dwellings considered personal property, such as a manufactured or a mobile home, that is not also secured by real estate and where the APR exceeds 8.5% of the APOR. High-cost loans also include loans of less than $20,000, where the fees and points exceed the lesser of 8% of the loan amount or $1000; for a loan of $20,000 or more, points and fees cannot exceed 5%.
Borrowers of HPMLs must receive:
- clear explanations of the cost, terms, and associated fees of the loan before accepting the loan
- certified housing counseling about the high cost mortgage
Additionally, the following fees and charges cannot be added to an HPML:
- prepayment penalties for early loan payoff
- balloon payments
- late fees exceeding 4% of the regular payment
- loan modification fees
- payoff statement fees
If the interest rate on higher-cost mortgages is at least 1.5% above the APOR, typically paid by borrowers with very good credit, then:
- the property must be appraised by a certified or licensed appraiser
- the appraiser must be able to do a walk-through of the property
- the lender must provide free copies of the appraisals at least 3 days before the loan closing
An additional appraisal, paid by the lender, using a different appraiser, is required for a home that is being flipped — if the home was bought less than 90 days earlier and the sales price is at least 10% more than the purchase price, or if the seller bought the property within the previous 91 to 180 days and the sale price is at least 20% more than the purchase price. The lender is not permitted to charge for the 2nd appraisal. The 2nd appraisal must use a different appraiser, and the appraiser must note the difference between the sales price and the purchase price, changes in market conditions that may justify the price difference over the short time, and the property improvements that would justify the increased price. However, flips in rural areas are exempt from the above rules. A 2nd appraisal is not required if the property is purchased:
- from a federal, state, or local government agency
- from a person to acquire title through judicial or nonjudicial procedures, such as through a foreclosure
- from a person who inherited the property or acquired it because of divorce
- from an employer or relocation agency for property acquired from an employee; or
- from a service member who sold because of a deployment for a permanent change of station order shortly after buying the property
Additionally, a 2nd appraisal is not required if the property is located in a presidentially declared disaster area or if the property is located in a rural county, as designated by the US Department of Agriculture Economic Research Service.
The appraiser rules do not apply to high-cost mortgages for:
- qualified mortgages
- reverse mortgages
- mortgages secured by manufactured homes
- new home construction loans
- bridge loans with terms not exceeding 12 months
- loans not exceeding $25,000
- certain refinance mortgages
- loans for boats, trailers, and mobile homes other than manufactured homes
The CFPB also has a booklet summarizing the federal rules regarding new mortgages: Shopping for a New Mortgage? What You Can Expect under Federal Rules.
Escrow Account Requirements
Payments to the mortgage lenders will often include payments for real estate taxes and homeowners insurance that are held in a separate escrow account, so that the lender can be sure that his collateral will be protected and that no higher priority tax liens will be assessed on the property. For higher-priced loans, lenders must collect these escrow payments for at least the 1st 5 years of the loan term. However, if the home is in a homeowners association, which generally carries insurance for all of the properties in the association, then only real estate taxes have to be paid into an escrow account. Properties that are typically included in a homeowners association include condominiums and planned unit developments.
Lenders are not required to receive escrow payments if they satisfy the following:
- The lender lends in rural areas or places where there are few lenders.
- The lender, including all of its affiliates, does not originate more than 500 mortgages per year.
- The lender's assets are less than $2 billion.
- The lender or its affiliates do not have escrow accounts for the mortgages that they currently service.
Even if the lender satisfies the above requirements, it will still have to set up an escrow account for higher-priced mortgages it plans to sell to a company that does not meet the requirements.
The escrow account rule does not apply to:
- reverse mortgages
- open-end credit lines, such as the home equity line of credit
- mortgages secured by a subordinate mortgage lien
- bridge loans for terms not exceeding 12 months
- loans to finance the construction of a dwelling