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Federal Register / Vol. 86, No. 30 / Wednesday, February 17, 2021 / Rules and Regulations
in this group.69 One commenter who argued against the general escrow requirement reported that none of its customers defaulted on property taxes or insurance payments, but that commenter currently provides escrow accounts for its customers with HPMLs, and so the commenter provided little evidence regarding tax and insurance default rates when escrows are not established. As discussed previously, some consumers may assign no benefit to escrow accounts, or even consider the budgeting and commitment aspects of escrow accounts to be a cost to them.
Finally, escrow accounts may make it easier for consumers to shop for mortgages by reducing the number of payments consumers have to compare.
Consumers considering mortgages without escrow accounts may not be fully aware of the costs they would be assuming and may end up paying more on mortgage and housing costs than they want, need, or can afford. Research suggests that some consumers make suboptimal decisions when obtaining a mortgage, in part because of the difficulty of comparing different mortgage options across a large number of dimensions, and that consumers presented with simpler mortgage choices make better decisions.70 For example, if a consumer compares a monthly mortgage payment that includes an escrow payment, as most consumer mortgages do, with a payment that does not include an escrow payment, the consumer may mistakenly believe the non-escrow loan is less expensive, even though the non-escrow loan may in fact be more expensive. In practice, the magnitude and frequency of these mistakes likely depend in part on the effectiveness of cost disclosures consumers receive while shopping for mortgages. As one commenter noted, estimated insurance and tax payments must be disclosed under existing regulations.

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2. Costs and Benefits to Affected Creditors For affected creditors, the main effect of the final rule is that they will no longer be required to establish and maintain escrow accounts for HPMLs.
As described in part VII.D above, the 69 Moulton et al., supra note 67. See also Nathan B. Anderson & Jane K. Dokko, Liquidity Problems and Early Payment Default Among Subprime Mortgages, Finance and Economics Discussion Series, Federal Reserve Board 2011, http
www.federalreserve.gov/pubs/feds/2011/201109/
201109pap.pdf.
70 Susan E. Woodward & Robert E. Hall, Consumer Confusion in the Mortgage Market:
Evidence of Less than a Perfectly Transparent and Competitive Market, Am. Econ. Rev.: Papers &
Proceedings, 1002, 51115 2010.

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Bureau estimates that fewer than 3,000
HPMLs were originated in 2019 by institutions likely to be impacted by the rule. Of the 154 institutions that are likely to be impacted by the final rule as described above, 103 were not exempt under the EGRRCPA from reporting APOR rate spreads. Of these 103, no more than 70 originated at least one HPML in 2019.
The main benefit of the rule on affected entities will be cost savings.
There are startup and operational costs of providing escrow accounts.
Operational costs of maintaining escrow accounts for a given time period such as a year can be divided into costs associated with maintaining any escrow account for that time period and marginal costs associated with maintaining each escrow account for that time period. The cost of maintaining software to analyze escrow accounts for underor overpayments is an example of the former. Because the entities affected by the rule are small and do not originate large numbers of mortgages, this kind of cost will not be spread among many loans. The perletter cost of mailing consumers escrow statements is an example of the latter.
The Bureau does not have data to estimate these costs.
The startup costs associated with creating the infrastructure to establish and maintain escrow accounts may be substantial. However, many creditors who will not be required to establish and maintain escrow accounts under the final rule are currently required to do so under the existing regulation. These creditors have already paid these startup costs and will therefore not benefit from lower startup costs under the final rule.
However, the final rule will lower startup costs for new firms that enter the market. The final rule will also lower startup costs for insured depositories and insured credit unions that are sufficiently small that they are currently exempt from mortgage escrow requirements under the existing regulation, but that will grow in size such that they would no longer be exempt under the existing regulation, but will still be exempt under the final rule.
Affected creditors could still provide escrow accounts for consumers if they choose to do so. Therefore, the final rule will not impose any cost on creditors.
However, the benefits to firms of the final rule will be partially offset by forgoing the benefits of providing escrow accounts. The two main benefits to creditors of providing escrow accounts to consumers are 1 decreased default risk for consumers, and 2 the
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loss of interest income from escrow accounts.
As noted previously, research suggests that escrow accounts reduce mortgage default rates.71 Eliminating escrow accounts may therefore increase default rates, offsetting some of the benefits to creditors of lower servicing costs.72 In the event of major damage to the property, the creditor might end up with little or nothing if the homeowner had not been paying home insurance premiums. If the homeowner had not been paying taxes, there might be a claim or lien on the property interfering with the creditors ability to access the full collateral. Therefore, the costs to creditors of foreclosures may be especially severe in the case of homeowners without mortgage escrow accounts.
The other cost to creditors of eliminating escrow accounts is the interest that they otherwise would have earned on escrow account balances.
Depending on the State, creditors might not be required to pay interest on the money in the escrow account or might be required to pay a fixed interest rate that is less than the market rate.73 The Bureau does not have the data to determine the interest that creditors earn on escrow account balances, but numerical examples may be illustrative.
One commenter reported earning interest of around 0.1 percent on escrow account balances. Assuming a 0 percent annual interest rate, the servicer earns no interest because of escrow. Assuming a 5 percent annual interest rate and a mortgage account with property tax and insurance payments of $2,500 every six months, the servicer earns about $65 a year in interest because of escrow.
The Bureau does not have the data to estimate the benefits of lower default rates or escrow account interest for creditors. However, the Bureau believes that for most lenders the marginal benefits of maintaining escrow accounts outweigh the marginal costs, on average, because in the current market lenders and servicers often do not relieve consumers of the obligation to have escrow accounts unless those consumers meet requirements related to credit scores, home equity, and other measures of default risk. In addition, 71 See Moulton et al., supra note 67; see also Anderson & Dokko, supra note 69.
72 Because of this potential, many creditors currently verify that consumers without escrow accounts make the required insurance and tax payments. The final rule may increase these monitoring costs for creditors by increasing the number of consumers without escrow accounts, even if many of these consumers do not default.
73 Some States may require interest rates that are higher than market rates, imposing a cost on creditors who provide escrow accounts.

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