Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators. This video discusses the disclosures requirements for higher-priced consumer mortgage loans. For course credit toward renewing your NMLS license, visit firsttuesday.us.
Section 35 disclosures for higher-priced mortgages
A separate disclosure requirement for higher-priced mortgage loans (HPMLs), also known as Section 35 mortgages, was added to the Home Ownership and Equity Protection Act (HOEPA) in 2008.
Section 35 higher-priced mortgages, and section 32 high-priced mortgages, have unique disclosure guidelines. These disclosures are not interchangeable with other mortgage restrictions and disclosure rules.
A mortgage lender establishing a Section 35 impound account must make the following disclosures to the borrower at least three business days before origination, including:
- an impound account will be established upon closing of the loan;
- the amount of the deposit required at closing to fund the impound account;
- the amount of the estimated taxes and insurance premiums to be deposited in the impound account during the first year after origination;
- the amount estimated as the monthly deposit into the impound account; and
- the borrower, on terminating the impound account, is responsible for making all payments on property taxes and insurance premiums. [15 USC §1639d(h)]
A mortgage lender originating a Section 35 higher-priced consumer mortgage must analyze the borrower’s ability to repay the mortgage. The standard applied is to be consistent with other consumer credit transactions secured by the borrower’s dwelling. [12 CFR §1026.34(a)(4)]
A Section 35 mortgage is a closed-end loan — a fixed rate or adjustable rate mortgage (FRM or ARM). The security for a Section 35 mortgage, like all mortgages originated to fund a consumer purpose, is a one-to-four unit owner-occupied residential property — or personal property used as the borrower’s principal residence, called a dwelling.
Further, the distinguishing feature of a Section 35 mortgage is that its annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable origination by more than:
- 1.5% for mortgages secured by a first lien on the borrower’s home with a loan amount conforming to Freddie Mac’s loan limit (i.e., conforming loans);
- 2.5% for mortgages secured by a first lien on the borrower’s home with a loan amount exceeding Freddie Mac’s conforming loan limit (i.e., jumbo loans); and
- 3.5% for loans secured by a subordinate lien on the borrower’s home. [12 CFR §1026.35(a)(1)]
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Impound account required
When originating a Section 35 higher-priced mortgage, the lender must establish an impound account for the homeowner. The impound account provision calls for the homeowner to deposit in the account property taxes, insurance premiums and any other periodic payment associated with the property or mortgage. [12 CFR §1026.35(b)(1)]
So long as the mortgage remains unpaid, the Section 35 the borrower may not cancel the impound account earlier than five years after origination of the mortgage. [12 CFR §1026.35(b)(3)(i)]
Further, the Section 35 impound account may not be cancelled while:
- the loan is delinquent; or
- the loan-to-value ratio (LTV) is 80% or higher based on the value of the property when the mortgage was originated. [12 CFR §1026.35(b)(3)(ii)]
Impound accounts are optional for Section 35 mortgages which:
- are secured by shares in a cooperative;
- finance the initial construction of a dwelling;
- are temporary bridge loans with a term of 12 months or less; or
- are reverse mortgages. [12 CFR §1026.35(b)(2)(i)]
Impound accounts are also optional when the lender is designated a small lender. A mortgage lender qualifies as a small lender when:
- during the previous year, the lender originated one or more consumer mortgages secured by a first lien on a property in a rural or underserved area;
- during the preceding year, the lender and its affiliates originated 2,000 or fewer consumer mortgages secured by a first lien that were sold or committed to be sold on origination;
- at the end of the preceding calendar year, the lender had assets of less than the statutory threshold (in 2022, the threshold is $2.336 billion); and
- the lender and its affiliates do not maintain impound accounts established on higher-priced mortgage loans (Section 35 mortgages) except:
- for Section 35 mortgage applications received between April 1, 2010 and June 17, 2021; or
- for escrow accounts established to help distressed borrowers avoid default and foreclosure. [12 CFR §1026.43(e)(5)(i)(D); 12 CFR §1026.35(b)(2)(iii)]
Properties subject to membership in a homeowner’s association (HOA) obligated to provide a master insurance policy do not require the deposit of these insurance premiums into the escrow account. [12 CFR §1026.35(b)(2)(ii)]
The lender must pay the borrower interest in accordance with applicable state or federal law for any amount held in the impound account.
Unlawful subversion
A lender may not subvert the rules for a Section 35 loan by structuring a closed-end credit transaction (FRM or ARM) as an open-end credit transaction, such as a HELOC or reverse mortgage. [12 CFR §1026.35(d)]
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