Special Rules for Higher-Priced Mortgage Loans Marci A. VanAdestine Edward J. Heiser, Jr. Ken R. Nowakowski Lisa M. Lawless Tim H. Posnanski Whyte Hirschboeck Dudek, S.C. 555 E. Wells St., Suite 1900 Milwaukee, WI 53202

Definition of Higher-Priced Mortgage Loan (“HPML”) A.Closed-end; B.Secured by consumer’s principal dwelling; C.APR exceeds Average Prime Offer Rate (APOR) 1.By 1.5% or more for loans less than or equal to $417,000; 2.By 2.5% or more for loans greater than $417,000; or 3.By 3.5% or more for loans secured by a subordinate lien. 1

Definition of Higher-Priced Mortgage Loan (“HPMPL”) Examples of APOR (average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics) On 9/9/13 – Fixed, 15-year mortgage: 3.69% Fixed, 30-year mortgage: 4.63% Variable, 15-year mortgage: 3.9% Variable, 30-year mortgage: 3.9% On 9/13/10 – Fixed, 15-year mortgage: 3.92% Fixed, 30-year mortgage: 4.41% Variable, 15- year mortgage: 4.15% Variable, 30-year mortgage: 4.15% On 9/10/07 – Fixed, 15-year mortgage: 6.23% Fixed, 30-year mortgage: 6.51% Variable, 15-year mortgage: 6.84% Variable, 30-year mortgage: 6.84% On 9/13/04 – Fixed, 15-year mortgage: 5.34% Fixed, 30-year mortgage: 5.9% Variable, 15-year mortgage: 5.76% Variable, 30-year mortgage: 5.76% 2

This means that, as of last week, the following loans were HPMLS: 15-year fixed rate mortgage with an interest rate of 5.19% 30-year fixed rate mortgage with an interest rate of 6.13% If you made a loan like this last week, your loan was an HPML. 3 Definition of Higher-Priced Mortgage Loan (“HPML”)

Exemptions from definition of HPML: 1)Reverse Mortgage; 2)Loans secured by shares in co-op; 3)Transaction to finance initial construction of a dwelling (but does not exempt construction to permanent financing – if the transaction is disclosed as one transaction, use that APR to compare – if the transaction is disclosed as two separate transactions, use the APR from the permanent phase); and 4)Bridge loan with a loan term of 12 months (ex: loan to purchase a new dwelling where consumer plans to sell current dwelling within 12 months). 4

Escrow Accounts On All HPMLs A creditor may not extend an HPML secured by a first lien unless an escrow account is established before consummation of the loan for payment of property taxes and mortgage-related insurance On most mortgage loans it the default already to establish an escrow account to pay for taxes and mortgage-related insurance? 5

Escrow Accounts On All HPMLs 1)Mortgage-related insurance: insurance against loss of or damage to property, or insurance protecting the creditor against the consumer’s default or other credit loss, or against liability arising out of the ownership or use of the property. 1)Limited exemption for mortgage-related insurance: condos or other planned unit development in which dwelling ownership requires participation in a governing association in which that governing association has an obligation to maintain a master policy insuring all dwellings. 6

Escrow Accounts On All HPMLs Cancellation of Escrow Account 1)Creditor shall not cancel an escrow account unless: a)Unpaid principal balance is < 80% of the original value (lesser of sales price reflected in sales contract or appraised value of property at time of consummation) of mortgaged property; and b)The consumer is currently not delinquent or in default of debt; and c)At least five years have passed since the consummation of loan. OR a)The debt has been terminated (e.g., by repayment, refinancing, rescission, and foreclosure). 7

Certain Creditors Exempted from Rule A. During any of the three preceding calendar years, creditor extended more than 50% of its total covered transactions, secured by a first lien, on property that are located in rural or underserved counties (as designated by the Bureau); The rural and underserved counties in Wisconsin according to the 2014 list posted by Bureau (33 of state’s 72 counties): Adams County; Ashland County; Barron County; Bayfield County; Buffalo County; Burnett County; Clark County; Crawford County; Door County; Florence County; Forest County; Green Lake County; Iron County; Jackson County; Juneau County; Lafayette County; Langlade County; Marquette County; Monroe County; Oneida County; Pepin County; Polk County; Price County; Richland County; Rusk County; Sawyer County; Taylor County; Trempealeau County; Vernon County; Vilas County; Washburn County; Waupaca County; Waushara County 8

Certain Creditors Exempted from Rule B.During preceding calendar year, creditor and its affiliates together originated 500 or fewer cover transactions secured by a first lien; C.As of the end of the preceding calendar year, the creditor had total assets of less than $2 billion; and D.Neither the creditor nor its affiliate maintain an escrow account for any extension of consumer credit secured by real property or a dwelling that the creditor or its affiliate services, other than: 1)Escrow accounts established for HPMLs on or after 4/1/2010 and before 1/1/2014 2)Escrow accounts established after consummation to assist distressed consumers from default or foreclosure. If a creditor is exempt, but the loan is subject to a commitment from an investor or other creditor that is not exempt, the loan is not exempt from establishment of an escrow account as set forth in the rule. 9

Benefits and Costs to Consumers Benefits: – Convenience of paying one bill – Budgeting device – Lower probability of default/possible foreclosure Costs: – Foregoing interest – Increased prices from creditors passing through charges – Potentially less access to credit 10

Benefits and Costs to Creditors Benefits – Assurance that consumers have met obligations – Potential for interest earnings in escrow account Costs – Startup and operational costs – Others you can think of? 11

What’s Next? Required Disclosures (delayed with other proposed disclosure rules): -First disclosure: 3 days before consummation of transaction, among other information, providing an explanation as to what an escrow account is, how it works, and an estimated amount of first year’s disbursements and amount to be paid at consummation -Second disclosure: 3 days before consummation or cancellation of escrow account, providing an explanation as to why no escrow account is required or it is being cancelled and risks of a non- escrowed account. 12

What’s Next? “All inclusive” finance charge – change the threshold for HPMLs? CFPB recognizes that “[t]his in turn could cause more such transactions to become subject to” HPML and HOEPA rules. It claims that this consequence was “not the intent of the more inclusive finance charge proposal.” It has tabled the all-inclusive finance charge for the time being. Watch in the future for perhaps a “transaction coverage rate” or other calculations not seen by the consumers for purposes of determining loans subject HOEPA and HPML. 13

Whyte Hirschboeck Dudek S.C. presentations should not be construed as legal advice for any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other presentation or publication without the prior written consent of WHD. To request reprint permission for any of our presentations, please contact the author directly. 14