I am unsure if we need to start escrowing or not. We are considered a small servicer. We have a few HPMLs on our books where we escrow plus a handful of escrow that we have established because a borrower was getting behind on insurance and taxes constantly. We do sell loans to the secondary market in which we service and have escrows for some of these.

Because we service secondary market loans in which we have escrow accounts established, does this mean that we no longer qualify for the exemption and have to escrow? Any guidance is appreciated. Thx

I was wondering the same thing but found this thread... http://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Number=2021861&page=all ... that seems to suggest everyone that makes HPML or escrows at all is on the hook to escrow (that's how I read the responses, anyway).

I approached my EIC (OCC bank) and got no good guidance other than the official statements. So I guess we're all in on escrow...

That is kinda what I was figuring too. Thanks for the info!

There's a lot of if's, and'd and but's to the small bank exemption. Here's a portion of an article we are in the process of writing on this topic:

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A lender with less than $1 billion in assets may qualify for the small bank exemption. If, on or before July 6, 2012, they met the following:

(i) The lender did not have a policy of consistently and uniformly requiring an escrow accounts; and,

(ii) The lender was not required to escrow under Federal or State law for the entire term of the loan.

Item (i) is self-explanatory. As long the lender did not have standard practice of requiring escrows on any loans then they are exempt from these escrow requirements. This exemption cannot be lost due to voluntary escrows. The final rule states “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.”

Now lets look at (ii). It states “was not required under Federal or State law.” The Federal requirement is referring to Higher Priced Mortgage Loans (HPML). If a bank only escrows for first lien HPML loans, the small bank exception could still apply as long as the escrow account is not required for the entire term of the loan. However, there may be additional escrow requirements under your specific State Law.

The “entire term of the loan” statement can be a little confusing. Back in July 2012, when the BWA was introduced, the escrow requirement on HPMLs was only for one year. Therefore if you had a five-year HPML but only required the escrow for one year, the exemption would still apply to your bank. However, if you required the escrow to last for the entire term of the loan, you do not qualify for the exemption.
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I hope that helps.

Thanks. We only established escrow for HMPLs (and even these we tried to avoid so we didn't have to escrow), but these are 5 year balloon loans so we would (I guess in a way) escrow them the whole term. (I also don't think that we give them any notice that they can cancel their escrow account) Should we be doing this? We have continued to escrow for the few that were voluntary, and I assume will continue to until the loan is paid off or the customer requests it to be cancelled (but I don't this is a problem according to the rule). We have many escrows on sold loans that we service. Does servicing them make them "ours" for being required to escrow flood premiums, and cause us to not qualify as a small servicer?
We have many REMs that are located in a flood zone so this will affect us substantially. Part of me wouldn't mind escrowing because then we would not have to baby-sit so much...but again, it will be a lot more escrow accounts for us to maintain.

these are 5 year balloon loans so we would (I guess in a way) escrow them the whole term.
If that's what you were doing prior to 7/6/12, then you don't qualify for the small bank exemption.

(I also don't think that we give them any notice that they can cancel their escrow account) Should we be doing this?
It's not necessary that you inform borrowers of this. You could have, but aren't required to.

Prior to July 6, 2012 we had a few HPML's however didn't escrow (don't ask). In reading the requirements it appears that we ill be exempt - we are definitely under $1 Billion.

I agree Skittles. (and I won't ask)

Like Truff said in another thread - you can't make management do anything.

Thanks David. That's how I was leaning, but wanted to verify with an expert.

I have a question about Extensions with regard to these escrow requirements (and everything else that MIRE affects). If we do a simple payment extension with no adjustments to the back end of the loan, would the escrow requirement kick in? To clarify, this may be done for someone who cannot make one payment on time. We would not be extending the end of the loan term.

Thank you.

The “entire term of the loan” statement can be a little confusing. Back in July 2012, when the BWA was introduced, the escrow requirement on HPMLs was only for one year. Therefore if you had a five-year HPML but only required the escrow for one year, the exemption would still apply to your bank. However, if you required the escrow to last for the entire term of the loan, you do not qualify for the exemption.
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David, following up on your statement above we have HPMLs and when we set up the escrow for the loan we have kept it for the full term so it looks like we won't meet the exemption. My question is if we are not exempt then do we have to send a letter to all our 1st lien residential customers that have loans outstanding as of January 1, 2016 and offer them escrows?

If you don't qualify for the escrow exemption, you'll need to notify applicable borrowers no later than 6/30/16. You don't have to start notifying existing borrowers on 1/1/16. You will need to start escrowing for flood insurance on applicable loans that you MIRE on 1/1/16 and after.

I've seen a bit of buzz that there's disagreement (the FDIC, surprise, surprise, on one side, and the other prudential regulators on the other) on the whole flood escrow question and the entire debate that we had on this issue a couple of months back.

What if we have been requiring to escrow for HPMLs AND give the borrowers an option to escrow for non-HPMLs? Would that consider as 'uniformly and consistently?' We do meet the less than $1B but not sure about the other criteria.

When they issue a final rule and it is so complex, it makes me so nervous that I am going to interpret it wrong.

Good questions, but no one knows the answers. We need more guidance on this to give you an accurate reply.

I also have a question about the "consistently and uniformly requiring" caveat. If a creditor only has a handful of loans in the portfolio in which escrow was required (investor requirements, PMI company requirements, e.g.), but the majority of the portfolio is made up of loans in which escrow was not required, does that imply that the creditor had a policy of "consistently and uniformly requiring" escrow accounts, therefore disqualifying the lender from the small creditor exemption?

From the bottom of page 47 and top of page 48 of the June 2015 Final Rule:

Commenters also requested clarification on whether the small lender exception is available if . . . if the policy of consistently and uniformly requiring escrow accounts comes at the behest of 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.

IOW, it doesn't matter WHY you required an escrow (investor, PMI company, etc.). If you required escrows, you required escrows and the final rule basically says you don't qualify for the exception.

However, if you're asking "how many escrow account establishes a policy of consistently and uniformly requiring escrow accounts?" there's no guidance. I would get some numbers together (to define what a "handful of loans" is) and run it by your regulators.

Yes, your last paragraph hits the nail on the head as to my question. Short of any official guidance, I guess it will be up to our regulator do decide if "consistently and uniformly" means the escrow requirement policy applied to every loan or even a single loan in the portfolio.

I have this exact same question. Any more recent thoughts or comments from regulators?

The small bank exception cannot be lost our to voluntary escrows.

The Interagency Flood Insurance Regulatory Update webinar today provided more information (some out of the blue!) on the Small Lender Exception... specifically concerning the impact of HPML as well as escrows established for the secondary market.

1. The question was asked whether or not a creditor that only escrows for HPMLs will lose the SLE. The answer is NO, because of that "term of the loan" requirement. (Since HPMLs can have escrows cancelled after a certain amount of time.) Further, just because a creditor escrows (only) for HPMLs does NOT put them in the category of "having a policy of consistently and uniformly requiring" an escrow. Bottom line: If you only escrow for HPMLs, you can keep the SLE (assuming you meet the asset size test).

2. Next, the question was asked whether or not a creditor that escrows at the behest of a 3rd party and/or for the secondary market will lose the SLE. This answer got interesting. An FDIC representative answered, and said:

- If the creditor sells the loan AND transfers the servicing, then it can keep the SLE.
- If the creditor sells the loan but KEEPS the servicing, then it loses the SLE. (!)

This answer really surprised me, because this is the first interpretation I've heard to this effect. I've not heard the servicing / not servicing component as a relevant factor to the issue. Wow!!

3. Bonus info: This doesn't have to do with the SLE, but is another surprise... the panel said that forced placed policies can be used to satisfy sufficient flood coverage for new loans! I've always thought a new loan (or any MIRE, for that matter), cannot occur if the loan is under a MPPP / force placed policy. But they said it can. Wow!!!

The archive of this webinar is supposed to be posted this afternoon. I encourage you to check it out too... I plan to do so, to make sure I didn't misunderstand these particular answers. The link for the archive is supposed to be this , although it isn't working right now.

The Q&A about HPML and secondary market escrowing impacts on the Small Lender Exception are around the 45 minute mark, while the force placed coverage sufficiency issue for subsequent MIREs is around the 55 minute mark.

I am so glad I wasn't hearing things on the secondary market escrow answer. Thank you for confirming what I thought I heard.

I'll was surprised with these answers as well. Unfortunately for us, we have been over $1 Billion in assets for the last two years so we won't fall under the small servicer exemption. But the answer about being able to refi or other MIRE event with force placed coverage is good to know. I'd like to see official interpretations to back these answers up, because an examiner might not accept the "I heard it on a webinar" response, even if the webinar was put on by the regulatory agencies.

I thought the comment on the force placed coverage being acceptable in a MIRE event was a bit crazy. I had never read anything that made me believe that was acceptable.
From the OCC Handbook:
Forced placement is not appropriate when an institution makes, increases,
extends, or renews a loan, because flood insurance coverage is required prior
to closing.

Thank you Rebekah. I was not able to listen to the webinar, but 2 of our consultants did and they confirm your analysis.

I'm happy to hear:
2. Next, the question was asked whether or not a creditor that escrows at the behest of a 3rd party and/or for the secondary market will lose the SLE. This answer got interesting. An FDIC representative answered, and said:
- If the creditor sells the loan AND transfers the servicing, then it can keep the SLE.
- If the creditor sells the loan but KEEPS the servicing, then it loses the SLE. (!) shocked

What's strange about this is contradiction of the section-by-section analysis of the Final Rule. On page 49, it states:
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.

So the phone webinar overrides what was printed in the final rule? I like it, but it would be great if they put this in writing.

#3 is a shocker. Again, are we to take their verbal word as the truth even thought it contradicts a FFIEC FAQ?