Topic: Escrow Accounts
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Is there an escrow requirement when a small lender refinances a higher-priced mortgage loan (HPML)? We have a loan for which an escrow was not established at origination that now qualifies as an HPML. Also, would the HPML escrow requirement apply to the refinancing of a business purpose loan secured by a principal dwelling?
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We believe that a small creditor would be subject to Regulation Z’s escrow requirement when refinancing an HPML, unless an exception applies, as discussed below. However, the HPML escrow requirement would not apply to the refinancing of a commercial purpose loan, since the HPML regulations apply only to consumer loans. Regulation Z defines an HPML,…
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Do the escrow requirements for higher-priced mortgage loans (HPML) apply to both property taxes and insurance? Or can a borrower with an HPML escrow only for taxes?
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Regulation Z’s escrow requirements for HPMLs generally apply to both property taxes and insurance, subject to the exceptions below. Regulation Z provides that a creditor may not extend an HPML “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…
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We originated a residential mortgage loan at some point after 1994 and before January 1, 2016 (we don’t know the exact date). At the time the loan was made, we established an escrow account for real estate taxes, homeowner’s insurance, and flood insurance, but we do not know whether we required this escrow account or the borrower voluntarily decided to establish the escrow account. The borrower has now asked to terminate the escrow account so that they can pay these items directly. Can we terminate the flood insurance escrow, since the loan was originated before mandatory flood escrows were required? We do not qualify for the small lender exception, and the loan has not been extended, renewed or increased since it was originated.
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Yes, we believe you may terminate the flood insurance escrow for a loan that was originated before January 1, 2016, provided that you have not made, increased, extended or renewed the loan since it was originated (i.e., no “M.I.R.E.” events have occurred). You are correct that flood insurance escrows are mandatory for the duration of…
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We require escrow accounts for higher-priced mortgage loans (HPMLs) but not for other residential mortgage loans. Must we provide the Illinois Mortgage Escrow Account Act notice for those non-HPMLs if we maintain the right to establish escrow accounts under certain circumstances? Does the Mortgage Escrow Account Act apply only to purchase transactions (as opposed to the permanent phase of a bridge loan or a construction loan)? For HPMLs, if a borrower asks to cancel the escrow account after five years and we reject this request, do we have to allow the borrower to cancel the escrow account when 65% of the loan payments have been made? Also, does the Mortgage Escrow Account Act supersede Fannie Mae’s escrow account guidelines for non-HPML loans that we service?
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The Illinois Mortgage Escrow Account Act (Act) notice generally is required at the closing of any mortgage loan made for the purpose of purchasing a single-family owner occupied residential property. Consequently, we believe your bank should provide this notice at every loan closing for a single-family owner occupied residential property in which your bank retains…
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What type of escrow account statement must be provided to a customer when a loan is paid off?
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When a borrower pays off a “federally related mortgage loan” (essentially any non-construction residential loan made by your bank), the servicer is required to provide the borrower with a “short year” annual escrow account statement (a “short year statement”) within sixty days after receiving the payoff funds. A short year statement must contain each of…
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We have a customer who applied for a home equity loan secured by a first lien. Our mortgage system alerted us that the loan is a higher-priced mortgage loan (HPML). We are aware that under Regulation Z, a lender may not extend an HPML unless an escrow account is established for the payment of property taxes and insurance, and the escrow account must be maintained for at least five years. However, our loan department has advised that under Illinois law the escrow account may be discontinued when the loan balance has been paid down to 65% of the original balance. Does this apply to HPMLs?
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No, for HPMLs, federal law generally requires that escrow accounts remain in place for five years, even when Illinois law otherwise would permit the borrower to terminate the escrow account. You are correct that under Regulation Z, a lender generally cannot extend an HPML secured by a first lien on a consumer’s principal dwelling unless…
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When we force-place an escrow account to pay property taxes, are there any rules governing when we may change the payment amount to include the additional amount covering property taxes? For example, should we send notice no less than thirty days prior to the next payment date?
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No, we are not aware of any rules governing how long a lender must wait before imposing a change in a loan payment amount after establishing an escrow account for property taxes without the borrower’s consent. Consequently, we recommend establishing a reasonable period for providing notice of the payment amount change, after reviewing the terms…
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We have a first mortgage loan that we originated in 2013, so it was exempt from the escrow requirements for flood insurance that became effective in 2016. We now are planning to extend a home equity line of credit (HELOC) to the borrower secured by a second mortgage on the property. I know HELOCs are exempt from the escrow requirement for flood insurance, but since we are advancing new money to the same borrower, are we required to have the customer escrow funds for flood insurance for the first mortgage?
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No, we do not believe that extending a home equity line of credit secured by residential improved real estate will trigger the flood insurance escrow requirements for this borrower. In general, a lender must escrow flood insurance premiums for residential mortgage loans that are made, increased, extended or renewed on or after January 1, 2016.…
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Our trust department serves as trustee for various escrow accounts as a holder of documents, not funds. In a typical transaction, we receive paperwork to hold from an attorney’s office for the sale of a property either to a business or individual. We release the documents once the sale is completed. Do we need to collect beneficial ownership information related to these escrow accounts and if so, for whom?
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Yes, we believe your bank should collect beneficial ownership information from the attorney’s office that is opening the escrow accounts, provided the attorney’s office is a “legal entity customer” as defined in FinCEN’s customer due diligence (CDD) final rule. However, your bank is not required to obtain beneficial ownership information regarding the clients whose documents…
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Does Illinois require interest to accrue on customers’ mortgage escrow accounts?
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Illinois law does not require interest to accrue on mortgage escrow accounts, but an Illinois law requires a bank to allow certain customers to open an interest-bearing time deposit account in lieu of an escrow account. For purchase-money loans secured by owner-occupied single-family homes, the Illinois Mortgage Escrow Account Act requires mortgage lenders to provide…