Will someone please explain the Small Creditor QM thresholds for HPML and how that effects the requirement for escrows? Does this mean we use 3.5% to also determine if escrow is required?

There is no separate HPML threshold for small creditors. You would use a rate spread of 1.5% or greater on first liens; 2.5% or greater for first lien jumbo loans; and 3.5% or greater for subordinate liens to determine if the HPML requirements, including the escrow requirements, apply.

To determine whether a transaction is a higher-priced covered transaction, you generally use a rate spread of 1.5% or greater for first liens or 3.5% or greater for subordinate liens. First lien small creditor portfolio and balloon payment loans use a rate spread of 3.5% or greater to determine if the transaction is a higher-priced covered transaction. You need to know if a transaction is higher-priced to calculate the ability to repay and it is used to determine whether a QM receives a safe harbor or rebuttable presumption of compliance.

Are you saying the 3.5% applies only to the small creditor balloon loans?

The HPML thresholds apply across the Board - there are no different thresholds for small creditors.

As for the threshold for determining a higher-priced covered transaction, small creditors are unique in that they receive the 3.5% threshold for first lien small creditor and balloon payment QM's.

As a small creditor, you may be exempt from having to establish escrow accounts (see 1026.35(b)(2)(iii). But the HPML thresholds are the same for you as for everyone else.

John, In this context is a small creditor one with less than $2 Billion and 500 loans, irrespective of the rural or underserved area? What I mean is that we are small but not rural, so would the 3.5% apply for escrow? Thanks.

Now I'm confused. HPML thresholds are not the same as higher-priced covered transactions thresholds??? Could you explain this?

This is the way I explained it to my staff. It sounds more confusing than it is. We are a small creditor but are only setting our LOS up with the 1.50/3.50 tests.

Section 35 - HPML is the 1.50 and 3.50 test - must escrow period

Section 43 - QM, as a small creditor the APR can exceed the APOR by 3.50 and still have the presumption of compliance for ATR/QM purposes, however the 1.5/3.5 is still used for the escrow requirement.

CFPB Guide - page 27
The type of presumption of compliance for a QM depends on whether it is higher-priced. Qualified Mortgages under the General and Temporary definitions are considered higher-priced if they have an APR that exceeds the APOR by 1.5 percentage points or more for first-lien loans and 3.5 percentage points or more for subordinate-lien loans. Small Creditor and Balloon-Payment QMs are considered higher-priced if they have an APR that exceeds the APOR by 3.5 percentage points or more for both first-lien and subordinate-lien loans.(See “What makes a QM loan higher-priced?” on page 29.)

This special definition of higher-priced for Small Creditor and Balloon-Payment QMs only determines whether a loan has a safe harbor or rebuttable presumption of compliance with the ATR requirements. It does not affect whether a loan is a “higher-priced mortgage loan” (HPML) under other Bureau rules and does not exempt a loan from other requirements for HPMLs.

Not that it matters a lot in this discussion, but the $2 billion asset size threshold has just been increased to $2.028 billion, effective 1/1/14.

I didnt see this listed in the responses but the escrow requirement for HPML is on first liens. The 3.5% threshold is subordinate liens.



(b) Escrow accounts. (1) Requirement to escrow for property taxes and insurance. Except as provided in paragraph (b)(2) of this section, a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer's principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's default or other credit loss. For purposes of this paragraph (b), the term "escrow account" has the same meaning as under Regulation X (12 CFR 1024.17(b)), as amended.

I am now very confused and hope that someone can tell me if a small creditor must escrow on HPMLs when the spread exceeds 1.5 or 3.5% on first liens.

Without it being a Jumbo loan, yes. The threshold for HPML is 1.5% for first liens.

The exemptions are below:

(2) Exemptions. Notwithstanding paragraph (b)(1) of this section:

(i) An escrow account need not be established for:

(A) A transaction secured by shares in a cooperative;

(B) A transaction to finance the initial construction of a dwelling;

(C) A temporary or "bridge" loan with a loan term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months; or

(D) A reverse mortgage transaction subject to § 1026.33.

If you meet the small creditor exemption in 1026.35(b)(2)(iii) you would not have to escrow for HPMLs.

However note that the criteria are connected by ands and not ors, therefore you have to meet all the criteria to qualify for the exemption.

And the exemptions are less than $2.028 Billion in assets and less than 500 loans being serviced, correct? The rural or underserved areas portion does not come into play here, correct?

It looks like that's the first criteria you have to meet (50% or more in rural/underserved counties)...but the expanded the county list out 3 years instead of current to cover more FI's in that exclusion.

A) During any of the three preceding calendar years, the creditor extended more than 50 percent of its total covered transactions, as defined by § 1026.43(b)(1), secured by a first lien, on properties that are located in counties that are either "rural" or "underserved," as set forth in paragraph (b)(2)(iv) of this section;

I think we're talking rural/underserved also.

First, don't confuse small creditor status under the ATR/QM rules with the exemptions from escrow requirements. The QM qualifications for small creditors refer to the second and third of the four criteria that have to be met for HPML escrow exemptions (to the first, second and third criteria for QMs under 1026.43(f) once the temporary balloon payment QM provision for small creditors under 1026.43(e)(6) expires).

But to be exempt from the HPML escrow requirement, you have to meet ALL FOUR of the criteria at 1026.35(b)(2)(iii), but you need to consider .35(b)(2)(v) as well.

If a small creditor does not meet all 4 criteria I understand that escrow is required on HPMLs but I still don't clearly understand if the excrow for 1st lien is at the 1.5 or 3.5 percent level. Could someone please answer this?

This goes to the definition of an HPML. There are three APR tiers, the third of which addresses subordinate liens. A first-lien loan on a consumer's principal dwelling is an HPML if the APR exceeds the APOR by 1.5 percentage points or more for non-jumbo loans. Jumbo first-lien loans on a consumer's principal dwelling are HPMLs if the APR exceeds the APOR by 2.5 percentage points or more.

If the loan is an HPML, escrow is required unless the creditor meets the four criteria in 1026.35(b)(2)(iii) and there is no commitment to sell the loan to a party that doesn't meet those criteria.

I copied this post from research that I read:

New Rule from Consumer Financial Protection Bureau

The CFPB recently announced a modification to this rule which (becomes law on Jan. 10, 2014) in which the margin may be increased to 3.5% if the institution qualifies as a small creditor. To qualify as a small creditor, the institution must have less than $2B in assets AND must have originated less than 500 mortgages in the past year.


As usual I am behind in the ball game and can't wrap my head around this fact on a loan I am having to review...you guys know how I have to have simple to grasp

We are indeed a small creditor. We will escrow for this loan. First Lien, Primary Residence.

That being said when I calculate on the FFIEC website and get my rate spread of 3.33 and subtract this from my apr 6.89 my total is 3.56. Since we are considered a small creditor then instead of adding 1.5, I can now add 3.5 and my APOR is 7.06, which makes my APR greater than my APOR therefore not an HPML?

Am I understanding correctly?
Thanks as always!

bump please Thanks

KTMite: Go to the start of this thread and read down. There is no special trigger for HPML status for small creditors. Period. As a small creditor you may qualify for an exemption from the escrow requirements for HPMLs, but that exemption has nothing to do with the rate charged on the loan.

Thanks John...that is indeed the way I interpreted the rule, but the closing dept here interpreted the rule as we add 3.5 instead of 1.5 to the 3.56 rate making our APOR 7.06 therefore making it not a HPML so I just wanted to double check one more time on my thinking.

Thanks again

Closing department needs to review the key portion of 1026.35(a). The only place that 3.5% appears is for subordinate lien loans. It has nothing to do with small creditor status.

The small creditor status may give the lender an "out" from the HPML escrow requirements under 1026.35(b)(2)(iii).

Is a bank a small creditor for purposes of HPCT status, if the bank is less than $2+billion threshold and originated less than 500 first lien loans? Therefore, the threshold for first lien non-primary dwelling is 3.5% for small creditors?