Topic: Higher-Priced Mortgage Loans (HPMLs)
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In the next few years we may have some escrow accounts for loans in which the mortgage amount will be reduced to 65% of its original amount. Are we required to provide a notice? Are there model disclosures or verbiage available?
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Yes, the Illinois Mortgage Escrow Account Act (MEAA) requires two notices to be delivered to customers at two different times — one notice at the loan’s closing, and a second notice when the mortgage actually is reduced to 65% of its original amount by timely payments of the borrower (provided the borrower is otherwise not…
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We have a higher-priced mortgage loan that is in foreclosure. There are not enough funds in the escrow account to pay the hazard insurance policy premiums. Do we have to keep paying the premiums? The borrower has not responded to our notices about the escrow account shortage or a request to discuss the possibility of finding a cheaper insurance policy. We qualify as a small servicer, but we typically do not force place hazard insurance because we have a blanket insurance policy to protect our collateral interest whenever a borrower’s hazard insurance policy lapses.
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No, neither federal nor state law requires your bank to continue paying the premiums or to force-place the insurance. However, you should review the terms of both your loan documents and your blanket policy to ensure that you haven’t committed to force-place insurance before making a claim against the blanket policy. Regulation X requires your…
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A customer obtained a higher-priced residential mortgage loan in 2011. The borrower has never requested to cancel the escrow account. Two years ago, the borrower entered into a contract for deed with a buyer for the home securing the loan. The customer provided proof that he canceled his homeowner’s insurance policy and that the buyer had obtained a new policy and was paying the premiums. But we never updated our system, and we continued to deduct insurance payments from the borrower’s loan payments and place them in escrow, without paying out any insurance premiums. Now there is an excess of funds in the escrow account, and we are facing two issues. First, can we terminate the escrow account? The borrower is in a nursing home, appears to be incapacitated and has executed a power of attorney, but the agent under the power of attorney has refused to terminate the escrow fund. Second, can we use the excess funds in the escrow account for the borrower’s loan payment, which is now overdue?
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While we address your specific questions below, we strongly recommend consulting with an attorney, as your bank could face liability under the Real Estate Settlement Procedures Act (RESPA), and possibly other laws, for the failure to discontinue collecting amounts for the cancelled homeowner’s insurance. Additionally, if the property securing the loan is subject to a…
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Under the Illinois Mortgage Escrow Account Act, do we have to wait until a loan reaches 65% of the original balance before we can cancel an escrow account? We have a customer who has requested cancellation of their escrow account, although they have not yet paid down the balance to 65%, and we would like to accommodate this request.
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Yes, we believe that a bank may terminate an escrow account on the borrower’s request before the outstanding mortgage loan balance is reduced to 65% of the original loan amount, provided that an escrow account is not otherwise required. An escrow account may be otherwise required, for example, “in conjunction with mortgages insured, guaranteed, supplemented,…
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At a recent seminar, we were told that we were required to escrow for flood insurance starting January 1, 2016. As a “small lender” under the FDIC flood insurance rules, aren’t we exempt from that requirement? Before 2012, we never had a policy of regularly requiring escrow for any charges. However, now we require escrow for taxes and insurance for higher-priced mortgage loans (HPMLs). Do we lose our “small lender” exemption if we escrow for taxes and insurance for HPMLs, even if we are well under the asset threshold? Also, is an investment purpose loan secured by a 1-4 family residence exempt from escrow requirements?
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No, if your bank began escrowing for taxes and insurance after 2012, your bank will not lose its “small lender” exemption from the general requirement to escrow flood insurance premiums for residential mortgage loans that are made, increased, extended or renewed on or after January 1, 2016. A small lender is exempt from the flood…
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If we are required to escrow for flood insurance premiums on residential mortgage loans under the interagency flood insurance rules, are we obligated to escrow for taxes and insurance on those loans? We understand that we are required to escrow for taxes and insurance for higher-priced mortgage loans.
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No, we do not believe that being required to escrow for flood insurance premiums under the flood insurance rules obligates a lender to escrow for other charges, such as taxes or insurance. In an interagency webinar on the flood insurance rules, the federal banking agencies clarified that a lender is not obligated to escrow for…
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Can we set a minimum interest amount required for all loans, which would be charged if a customer pays off a loan without accruing the minimum interest amount? If so, can we set up our system to automatically impose that charge?
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While minimum interest charges are permitted for many loans, such charges could be considered prepayment penalties, which are prohibited for certain types of loans. Consequently, we do not recommend setting up your loan system to automatically impose this charge on all loans, without distinguishing loan types for which this charge is prohibited. In general, there…
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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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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…