Monday, December 4, 2023 | Back issues
Courthouse News Service Courthouse News Service

Fed Wants More Changes|in Sub-Prime Loan Rules

WASHINGTON (CN) - Creditors providing their clients with subprime loans secured by a lien on their home would have to maintain escrow accounts for five years rather than one year, under a rule proposed by the Board of Governors of the Federal Reserve System.

The change would implement sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act meant to limit the amount of credit certain consumers can secure.

The extended escrow holding period would be applied to higher-priced mortgage loans, defined by the board as "a transaction secured by a consumer's principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction by 1.5 or more percentage points for loans secured by a first lien, or by 3.5 or more percentage points for loans secured by a subordinate lien."

The escrow accounts are used to secure payments for taxes and mortgage insurance premiums on the property being purchased. Exemptions to the five year holding period would be granted on a limited basis in areas that are considered rural or underserved by financial institutions and would require a full disclosure to the consumer on the risks involved in not paying the expenses the escrow accounts are meant to cover.

In a related action, the board raised the interest rate that triggers the creation of escrow accounts for "jumbo" loans to 2.5 percentage points or more above the average prime rate.

Jumbo loans are those that exceed the amount Freddie Mac is authorized to purchase a mortgage which is currently set at $417,000.

Categories / Uncategorized

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.