Under the facts you gave us, we see two separate violations: (1) a violation of Regulation Z’s requirement to escrow higher-priced mortgage loans, at least for the first 365 days, and (2) a violation of the prohibition on unfair, deceptive, or abusive acts or practices in relation to consumer financial products and services. The Regulation Z violation is, as you state, not curable, as banks are strictly required to set up the escrow account “before consummation” of the loan. 12 CFR 1026.35(b)(3). And, we would not recommend trying to set up an escrow account after the fact; such an effort could be potentially seen as fraudulent and as even more unfair to your customer.

In enacting the HPML escrow requirement, the Federal Reserve Board specifically identified making a HPML loan without an escrow account as an “unfair” practice (raising UDAAP concerns). In doing so, the Board uses the “unfair” definition codified by Dodd-Frank: a practice is unfair if it causes consumers “substantial injury,” “not reasonably avoidable,” and “not outweighed by countervailing benefits to consumers or to competition.” 12 USC 5531(c). As explained in the Supplementary Information to the HPML rules, failing to escrow allows the bank to compete unfairly for subprime customers while increasing the risk that such customers will have to pay for costly force-placed insurance or will be foreclosed on for unpaid property taxes. 73 Fed. Reg. 44522, 44558 (July 30, 2008) (emphasis in bold added):

Rather, subprime consumers, whether they would wish to escrow or not, face a market where competitive forces have prevented significant numbers of creditors from offering escrows at all. In such a market, consumers suffer significant injury, especially, but not only, those who are not experienced handling property taxes and insurance on their own and are therefore least able to avoid these injuries. The Board finds that these injuries outweigh the costs to consumers of offering them escrows. For these reasons, the Board finds that it is unfair for a creditor to make a higher-priced mortgage loan without presenting the consumer a genuine opportunity to escrow.

Therefore, any corrective measure that removes the loan from the subprime world would address these concerns best (for example, by lowering the rate so that the loan is no longer a HPML).

You also may want to double-check that the loan was indeed a higher-priced mortgage loan and that it closed after the regulation’s effective date of October 1, 2009, as the regulation does not apply retroactively to loans closed before that date.