Topic: Escrow Accounts
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We recently received an application for a home purchase loan where the current owner qualifies for senior and veteran property tax exemptions, but the applicant would not. This will be a higher-priced mortgage loan, so we will escrow for property insurance and property tax payments. Due to the current exemptions, the applicant would not have to pay property taxes for a year or more after purchasing the home. Should we state on the initial escrow analysis, Loan Estimate (LE) and Closing Disclosure (CD) that we will require an escrow account for property taxes? Should we list the estimated taxes and amount for prepaid taxes as zero on the LE and CD? We do calculate estimated taxes in order to complete our ability-to-repay analysis, based on a formula provided by our local county assessor’s office.
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Yes, your bank must disclose that an escrow account is required on the CD. Your bank may choose to disclose the estimated future property taxes on page 1 of the LE, but this is not required. Other than that, there is no clear place in the LE, CD or initial escrow analysis to disclose the…
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We are making a higher-priced mortgage loan for the purchase of a mobile home that will not be located in a mobile home park. The borrower is leasing the underlying land, which will not secure the loan. The mobile home will be taxed as real property on the landowner’s tax bill, so the borrower will not owe any property taxes. Are we still required to escrow for taxes? We will be setting up an escrow account for property insurance payments.
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We recommend setting up an escrow account for the borrower, even though the escrow account will not be used to collect funds for property tax payments. Before consummating a higher-priced mortgage loan, the creditor must establish an escrow account “for payment of property taxes and premiums for mortgage-related insurance required by the creditor.” We believe…
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We discovered that we have not been sending the right to terminate notice required by Mortgage Escrow Account Act (Act) when a mortgage loan balance is reduced to 65% of its original amount. Should we review all loans covered by this act and send the notice to all qualifying loans, even if the current mortgage is well below 65% of its original amount? Additionally, if a customer requests to cancel escrow, we deny the request if there is one instance of a thirty day delinquency in the previous year. Does this practice conflict with the Act?
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We recommend consulting with legal counsel before sending out notices that are untimely under the Mortgage Escrow Account Act (Act). Your bank potentially is liable to each customer for the actual damages (or losses) they incurred by your bank’s failure to send the notices at the time required by the Act. Your current practice of…
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We provide a copy of Section 5 of the Mortgage Escrow Account Act at mortgage loan closings. Are we required to also provide a separate notice when the mortgage loan balance is reduced to 65% of the original loan amount?
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Yes, the Mortgage Escrow Account Act requires banks and other mortgage lenders to provide borrowers with two notices of the right to terminate their escrow accounts: first, at the mortgage loan closing, and second, when the mortgage loan balance is reduced to 65% of the original amount. For resources related to our guidance, please see:…
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Our mortgage escrow department issued a $1,300 check for homeowners insurance that has not been deposited by the insurance company. The house securing the mortgage loan was sold about one month after the check was issued, but we do not know whether all or a portion of the check amount is refundable due to the sale of the house. The borrower has since died, and his son and daughter have asked us to issue a check to them for the $1,300 amount. What should we do?
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We recommend contacting the insurance company to inquire about the status of the check and to determine what amount of the check is refundable to your former borrower’s estate. In any event, if the loan has remained current and there is a surplus of over $50 in the mortgage loan escrow account, that surplus should…
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I am working on an in-house real estate purchase loan, and the borrower does not want an escrow account. We just pulled a flood report, and the property does require flood insurance. In Illinois, must we escrow the flood insurance (using the FFIEC rate spread calculator, the rate is low enough so that it appears we do not have to escrow taxes and insurance)? Also, if we do have to escrow just for the flood insurance, do we need to send out another Loan Estimate?
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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. Since your bank is under $1 billion in assets, you might qualify for the small lender exemption from the flood insurance escrow requirement. To qualify for that exemption, you…
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Are we required to escrow for property taxes and insurance for our higher-priced mortgage loans? We qualify as a small creditor serving a rural or underserved area. However, we have started escrowing for flood insurance premiums under the new flood insurance escrow requirements that went into effect on January 1, 2016. Does that disqualify us from small creditor status?
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Yes, we have confirmed with the CFPB that escrowing flood insurance premiums will disqualify your institution from small creditor status. This is due to an apparent oversight in the interaction between the interagency flood insurance escrow rule and the higher-priced mortgage escrow rule. Under the CFPB’s higher-priced mortgage escrow rule, small creditors must meet four…
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We provide the escrow disclosure required by the Mortgage Escrow Account Act for all mortgage closings, whether purchases or refinances. Are we required to provide this for refinances, or only for purchase transactions?
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We believe that the escrow disclosure required by the Mortgage Escrow Account Act is required only for purchase transactions. The Act’s requirements, including the escrow disclosure requirement, apply only to mortgage lenders that are extending a loan or servicing a loan “for the purpose of enabling another to purchase a residence” (specifically, a “single-family owner…
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If we modify a mortgage loan with escrow, is the 65% Illinois Mortgage Escrow Account Act notice requirement calculated based on the original loan amount, or the loan amount as of the modification?
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The 65% trigger is based on the original loan amount. The Illinois Mortgage Escrow Account Act requires lenders to notify borrowers when the “mortgage is reduced to 65% of its original amount by payments of the borrower . . . .” The fact that the loan has been modified will not change the trigger. For…
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Can we charge a cancellation fee when customers elect to terminate their escrow accounts? What about a fee to obtain the current property value when customers cancel their private mortgage insurance (PMI)?
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We are not aware of any law or regulation that prevents you from charging either fee. Regarding the escrow cancellation fee, the Illinois Mortgage Escrow Account Act does not address whether a mortgage lender may charge a fee for terminating an escrow account at the consumer’s request (e.g., when the when the mortgage is reduced…